sbbp_Current Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2020

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

 

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Ordinary shares, par value $0.01 per share

 

SBBP

 

The Nasdaq Global Select Market

 

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 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 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

 

 

 

 

Non-Accelerated Filer

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

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.

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

As of May 1, 2020, there were 54,247,501 ordinary shares of the registrant issued and outstanding

 

 

Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I. 

Financial Information

1

 

 

 

Item 1. 

Financial Statements

1

 

Consolidated Balance Sheets as of March 31, 2020  and December 31, 2019

1

 

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 

2

 

Consolidated Statements of Stockholders’ Equity

3

 

Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2020 and 2019

4

 

Notes to the Unaudited Consolidated Financial Statements

5

 

 

 

Item 2. 

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

14

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4. 

Controls and Procedures

21

 

 

 

PART II. 

Other Information

22

 

 

 

Item 1. 

Legal Proceedings

22

Item 1A. 

Risk Factors

22

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3. 

Defaults Upon Senior Securities

23

Item 4. 

Mine Safety Disclosures

23

Item 5. 

Other Information

23

Item 6. 

Exhibits

24

 

 

 

SIGNATURES 

25

 

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, 

    

 

2020

 

2019

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

56,554

 

$

57,032

 

Marketable securities

 

6,293

 

 

21,072

 

Accounts receivable

 

2,690

 

 

2,289

 

Inventory

 

1,343

 

 

1,993

 

Prepaid expenses and other current assets

 

1,078

 

 

1,157

 

Total current assets

 

67,958

 

 

83,543

 

Property and equipment, net

 

270

 

 

291

 

Right of use asset, net

 

744

 

 

789

 

Intangible asset, net

 

23,855

 

 

25,110

 

Goodwill

 

7,256

 

 

7,256

 

Other assets

 

977

 

 

649

 

Total assets

$

101,060

 

$

117,638

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

5,285

 

$

3,331

 

Accrued and other current liabilities

 

18,513

 

 

20,962

 

Total current liabilities

 

23,798

 

 

24,293

 

Warrant liability

 

3,547

 

 

4,127

 

Supply agreement liability, noncurrent

 

11,556

 

 

15,947

 

Other long-term liabilities

 

980

 

 

1,080

 

Total liabilities

 

39,881

 

 

45,447

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Deferred shares, $1.098 par value, 40,000 shares authorized, issued and outstanding at March 31, 2020 and December 31, 2019

 

44

 

 

44

 

Ordinary shares, $0.01 par value, 600,000,000 shares authorized at March 31, 2020 and December 31, 2019; 54,247,501 and 54,205,852 shares issued and outstanding at March 31, 2020 and December 31, 2019

 

542

 

 

542

 

Additional paid-in capital

 

333,768

 

 

332,085

 

Accumulated deficit

 

(273,181)

 

 

(260,483)

 

Accumulated other comprehensive income

 

 6

 

 

 3

 

Total stockholders’ equity

 

61,179

 

 

72,191

 

Total liabilities and stockholders’ equity

$

101,060

 

$

117,638

 

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

1

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31 

 

 

    

2020

    

2019

    

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

6,663

 

$

4,333

 

Royalty revenue

 

 

11

 

 

10

 

Total revenues

 

 

6,674

 

 

4,343

 

 

 

 

 

 

 

 

 

Cost and expenses:

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible asset)

 

$

969

 

$

813

 

Selling, general and administrative

 

 

10,403

 

 

12,100

 

Research and development

 

 

7,552

 

 

6,583

 

Amortization of intangible asset

 

 

1,256

 

 

1,256

 

Total cost and expenses

 

 

20,180

 

 

20,752

 

Operating loss

 

 

(13,506)

 

 

(16,409)

 

Other income (expenses), net:

 

 

 

 

 

 

 

Unrealized gain (loss) on fair value of warrants

 

 

580

 

 

(1,820)

 

Income from field services agreement

 

 

 —

 

 

2,016

 

Expense from field services agreement

 

 

 —

 

 

(2,229)

 

Other income, net

 

 

228

 

 

685

 

Total other income (expenses), net

 

 

808

 

 

(1,348)

 

Loss before income taxes

 

 

(12,698)

 

 

(17,757)

 

Income tax expense

 

 

 —

 

 

(677)

 

Net loss

 

$

(12,698)

 

$

(18,434)

 

Other comprehensive income

 

 

 

 

 

 

 

    Unrealized gain on marketable securities

 

 

 3

 

 

 —

 

Comprehensive loss

 

$

(12,695)

 

$

(18,434)

 

 

 

 

 

 

 

 

 

Net loss attributable to ordinary shareholders:

 

 

 

 

 

 

 

Basic

 

$

(12,698)

 

$

(18,434)

 

Diluted

 

$

(13,278)

 

$

(18,434)

 

Net loss per share attributable to ordinary shareholders:

 

 

 

 

 

 

 

Basic

 

$

(0.23)

 

$

(0.34)

 

Diluted

 

$

(0.24)

 

$

(0.34)

 

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

 

 

 

 

 

 

 

Basic

 

 

54,231,024

 

 

54,155,034

 

Diluted

 

 

54,444,681

 

 

54,155,034

 

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

2

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Strongbridge Biopharma plc Shareholders

 

 

    

 

    

 

 

 

 

 

Additional

    

 

 

    

Accumulated Other

    

Total

 

 

 

Ordinary Shares

 

Deferred Shares

 

Paid-In

 

Accumulated

 

Comprehensive

 

Shareholders’

 

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

 

Deficit

 

Income

 

Equity

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2019

 

54,205,852

 

$

542

 

 —

 

$

44

 

$

332,085

 

$

(260,483)

 

 

 3

 

$

72,191

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(12,698)

 

 

 —

 

 

(12,698)

 

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,751

 

 

 —

 

 

 —

 

 

1,751

 

Ordinary shares issued, net of shares withheld for employee taxes

 

41,649

 

 

*

 

 —

 

 

 —

 

 

(68)

 

 

 —

 

 

 —

 

 

(68)

 

Unrealized gain on marketable securities

 

 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

 

 

 3

 

Balance—March 31, 2020

 

54,247,501

 

$

542

 

 —

 

$

44

 

$

333,768

 

$

(273,181)

 

 

 6

 

$

61,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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, 

 

 

 

2020

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(12,698)

 

$

(18,434)

 

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

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

(580)

 

 

1,820

 

Stock-based compensation

 

 

1,751

 

 

2,323

 

Amortization of intangible asset

 

 

1,256

 

 

1,256

 

Accretion of discounts on marketable securities

 

 

(48)

 

 

 —

 

Depreciation

 

 

21

 

 

18

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(401)

 

 

(2,290)

 

Inventory

 

 

101

 

 

(649)

 

Prepaid expenses and other current assets

 

 

79

 

 

1,510

 

Other assets

 

 

266

 

 

(1,210)

 

Accounts payable

 

 

1,954

 

 

539

 

Accrued and other liabilities

 

 

(6,941)

 

 

(3,191)

 

Net cash used in operating activities

 

 

(15,240)

 

 

(18,308)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 —

 

 

(15)

 

Maturities of marketable securities

 

 

14,830

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

14,830

 

 

(15)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

 —

 

 

166

 

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

 

 

(68)

 

 

(27)

 

Net cash (used in) provided by financing activities

 

 

(68)

 

 

139

 

Net decrease in cash and cash equivalents

 

 

(478)

 

 

(18,184)

 

Cash and cash equivalents—beginning of period

 

 

57,032

 

 

122,490

 

Cash and cash equivalents—end of period

 

$

56,554

 

$

104,306

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

 

Changes in unrealized gain on marketable securities

 

$

 3

 

$

 —

 

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.

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 levoketoconazole and veldoreotide have received orphan designation from the FDA and the European Medicines Agency (“EMA”).

In January 2018, Strongbridge Ireland Limited, 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 Limited 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. (“NNI”), a subsidiary of Novo, pursuant to which NNI funded 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. Novo also purchased 5.2 million of our ordinary shares at a purchase price of $7.00 per share. In December 2019, we reached an agreement with Novo to terminate the services agreement. We received a $6 million payment in connection with such termination and we no longer provide services to Novo.

Liquidity

We believe that our cash, cash equivalents and marketable securities of $62.8 million at March 31, 2020 will be sufficient to allow us to fund planned operations for at least 12 months beyond the issuance date of these unaudited consolidated 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. 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

5

Table of Contents

financial statements.  Actual results could differ from those estimates. Results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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, 2019 filed with the U.S. Securities and Exchange Commission on February 28, 2020 (the “2019 Annual Report”). Our significant accounting policies are described in Note 2 of the notes to the audited consolidated financial statements included in our 2019 Annual Report. Since the date of those financial statements, there have been no changes to our significant accounting policies.

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. Because 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 are comprised 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. 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.

Cash, cash equivalents and marketable securities

We consider all short‑term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of account balances at banks and money market accounts, respectively.

We invest our excess cash balances in marketable securities of highly rated financial institutions.  We seek to diversify our investments and limit the amount of investment concentrations for individual institutions, maturities and investment types. We classify marketable debt securities as available-for-sale and, accordingly, record such securities at fair value. We classify these securities as current assets as these investments are intended to be available to us for use in funding current operations. There were no marketable securities with a maturity of greater than one year as of March 31, 2020.

Unrealized gains and losses on marketable debt securities are recorded as a separate component of accumulated other comprehensive income (loss) included in stockholders’ equity.

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 equity-classified warrants.

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of March 31, 2020 and 2019, as they would be anti-dilutive:

 

 

 

 

 

 

 

 

March 31, 

 

 

2020

2019

Warrants

 

 

1,803,253

 

6,833,253

Stock options issued and outstanding

    

 

10,334,368

 

10,205,851

Unvested RSUs

 

 

925,800

 

758,850

 

7

Table of Contents

Recent accounting pronouncements – not yet adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded through net income instead of directly reducing the amortized cost of the investment under the current other-than-temporary impairment model. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for SEC filers, excluding smaller reporting companies, who have until fiscal years beginning after December 15, 2022. We do not expect the adoption of this standard to have a significant impact on our financial statements or internal controls.

 

 

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 the Customer. Transfer of control occurs upon receipt of the product by the Customer.  We expense incremental costs related to the set-up of contracts with the Customer 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

8

Table of Contents

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 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, 2019, manufacturers of pharmaceutical products are responsible for 70% 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 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.

 

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, 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.

9

Table of Contents

We did not have any transfers between the different levels.

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, 2020

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Cash equivalents

 

 

56,078

 

 

 —

 

 

 —

 

 

56,078

 

Marketable securities

 

 

 

 

6,293

 

 

 

 

6,293

 

Total assets

 

$

56,078

 

$

6,293

 

$

 —

 

$

62,371

 

Warrant liability

 

 

 

 

 —

 

 

3,547

 

 

3,547

 

Total liabilities

 

$

 —

 

$

 —

 

$

3,547

 

$

3,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Cash equivalents

 

 

56,544

 

 

 —

 

 

 —

 

 

56,544

 

Marketable securities

 

 

 —

 

 

21,072

 

 

 —

 

 

21,072

 

Total assets

 

$

56,544

 

$

21,072

 

$

 —

 

$

77,616

 

Warrant liability

 

 

 

 

 —

 

 

4,127

 

 

4,127

 

Total liabilities

 

$

 —

 

$

 —

 

$

4,127

 

$

4,127

 

 

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

 

 

 

 

 

    

 

As of March 31, 2020

Balance as of December 31, 2019

 

$

4,127

Unrealized gain on fair value of warrants for three months ended March 31, 2020

 

 

(580)

Balance as of March 31, 2020

 

$

3,547

 

 

 

5. Marketable securities

Marketable securities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

Amortized Cost

 

Net Unrealized Gain

 

Fair Value

Commercial paper

 

$

3,293

 

$

 —

 

$

3,293

U.S. treasury securities

 

 

2,994

 

 

 6

 

 

3,000

Total marketable securities

 

$

6,287

 

$

 6

 

$

6,293

 

 

6. Intangible asset and goodwill

The following represents the balance of our intangible asset and goodwill as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

Beginning of Period

 

Amortization

 

End of Period

 

Keveyis

 

$

25,110

 

$

(1,256)

 

$

23,855

 

Goodwill

 

 

7,256

 

 

 —

 

 

7,256

 

Total

 

$

32,366

 

$

(1,256)

 

$

31,111

 

 

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

10

Table of Contents

Pursuant to the terms of the Asset Purchase Agreement and Supply Agreement that we entered into with Taro in December 2016, 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 is being reduced as we purchase inventory over the term of the Supply Agreement that we entered into with Taro.  In addition, we incurred transaction costs of $2.4 million. The 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 the three months ended March 31, 2020 and three months ended March 31, 2019, respectively.

7. Accrued and other current liabilities

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

Consulting and professional fees

 

$

5,640

 

$

4,335

 

Supply agreement - current portion

 

 

4,391

 

 

2,773

 

Accrued sales allowances

 

 

2,229

 

 

2,990

 

Employee compensation

 

 

2,078

 

 

4,452

 

Accrued taxes

 

 

1,892

 

 

1,892

 

Severance

 

 

1,088

 

 

2,968

 

Lease liability - current portion

 

 

384

 

 

374

 

Accrued royalties

 

 

302

 

 

806

 

Other

 

 

509

 

 

372

 

Total accrued liabilities

 

$

18,513

 

$

20,962

 

 

 

8. 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, 2020, our remaining obligation was $19.0 million. Our Supply Agreement with Taro 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 also 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

11

Table of Contents

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.

 

 

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.

We did not incur income any tax expense for the three months ended March 31, 2020.

10. Warrants

Warrants

Our outstanding warrants as of March 31, 2020 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

 

    

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

Exercise

    

Expiration

    

Warrants

    

Warrants

 

March 31, 

 

 

 

Classification

 

Price

 

Date

 

Issued

 

Exercised

 

2020

 

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, 2020, 1,374,528 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, 2020, 561,158 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

12

Table of Contents

became effective on September 3, 2015.  As of March 31, 2020, 271,029 shares are available for issuance pursuant to the Non‑Employee Director Plan.

A summary of our outstanding stock options as of March 31, 2020 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, 2020

 

9,192,684

 

$

6.58

 

5.96

 

$

164

 

Granted

 

2,393,000

 

$

2.97

 

 

 

 

 

 

Forfeited and cancelled

 

(1,133,316)

 

$

10.66

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

Outstanding—March 31, 2020

 

10,452,368

 

$

5.31

 

2.01

 

$

104

 

Vested and exercisable—March 31, 2020

 

5,100,335

 

$

6.86

 

5.39

 

$

 6

 

 

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, 

 

 

2020

    

2019

Selling, general and administrative

 

$

1,270

 

$

1,811

Research and development

 

 

481

 

 

512

Total stock-based compensation

 

$

1,751

 

$

2,323

As of March 31, 2020, the total unrecognized compensation expense related to unvested stock options is $12.4 million, which we expect to recognize over an estimated weighted‑average period of 2.89 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, 

 

 

     

2020

     

2019

 

Expected term (in years)

 

6.07

 

6.09

 

Risk-free interest rate

 

1.47%-1.48%

 

2.47%-2.61%

 

Expected volatility

 

78.15%-78.21%

 

80.00%-80.85%

 

Dividend rate

 

—%

 

—%

 

 

Restricted stock units

We grant RSUs to employees and to members of our board of directors.  RSUs that are granted to employees vest two years from the date of issuance, provided that the employee is employed by us on such vesting date. RSUs that are granted to directors, vest on the one-year anniversary of the grant date, provided that the director continues to serve as a member of the board of directors continuously from the grant date through such one-year anniversary. All RSUs will

13

Table of Contents

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 employee’s or director’s tax withholding obligations. The RSUs will cease to be outstanding upon the issuance of ordinary shares upon vesting. We recorded expense, which is included in the stock-based compensation table above, of $0.5 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the total unrecognized compensation expense related to unvested RSUs is $1.6 million, which we expect to recognize over an estimated weighted‑average period of 1.21 years.

A summary of our unvested RSUs as of March 31, 2020 is as follows:

 

 

 

 

 

 

Number of

 

 

 

Shares

 

Outstanding—January 1, 2020

 

791,350

 

Granted

 

212,650

 

Forfeited

 

(17,200)

 

Vested

 

(61,000)

 

Unvested—March 31, 2020

 

925,800

 

 

 

 

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 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, 2019 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, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020. 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, expected market growth and the anticipated effects of the coronavirus (COVID-19) pandemic on our business, operating results and financial condition 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 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.

14

Table of Contents

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 2019 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.

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.

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. Both levoketoconazole and veldoreotide have received orphan designation from the FDA and the European Medicines Agency (“EMA”).

In January 2018, Strongbridge Ireland Limited, 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 Limited 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. (“NNI”), a subsidiary of Novo, pursuant to which NNI funded 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. Novo also purchased 5.2 million of our ordinary shares at a purchase price of $7.00 per share. In December 2019, we reached an agreement with Novo to terminate the services agreement. We received a $6 million payment in connection with such termination and we no longer provide services to Novo. 

Recent Developments

COVID-19 emerged in Asia at the end of calendar year 2019. On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption in the financial markets.

 

While the COVID-19 outbreak did not have a material impact on our business, financial condition or results of operations for the three months ended March 31, 2020, we have experienced business disruptions as a result of the outbreak.  For example, all of our employees are currently working remotely from home, we have suspended all travel for business, and our field teams are no longer able to visit physicians.

 

We continue to monitor the impacts of COVID-19 on the global economy and on our business operations. However, at this time, it is difficult to predict how long the potential operational impacts of COVID-19 will remain in effect or to what degree they will impact our operations and financial results. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition, as well as our ability to execute our business strategies and initiatives in their respective expected time frames.

 

15

Table of Contents

Financial Operations Overview

The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.

Product Sales, net

Revenues from sales of our products 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 by us and the patients’ payors. 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 our customer) or a current liability (if the amount is payable to a party other than our 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. For a complete discussion of accounting for net product revenue, see Note 3, "Revenue recognition" to our consolidated financial statements.

Cost of Sales

Cost of sales includes third-party acquisition costs, third-party warehousing and product distribution charges.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include personnel costs, costs for outside professional services and other allocated expenses. Personnel costs consist of salaries, bonuses, benefits, travel and stock‑based compensation. Outside professional services consist of legal, accounting and audit services, commercial evaluation and strategy services, sales, market access, marketing, investor relations, public relations, recruiting and other consulting services.

Research and Development Expenses

We expense all research and development costs as incurred. Our research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, including:

·

personnel‑related costs, such as salaries, bonuses, benefits, travel and other related expenses, including stock‑based compensation;

·

expenses incurred under our agreements with contract research organizations (CROs), clinical sites, contract laboratories, medical institutions and consultants that plan and conduct our preclinical studies and clinical trials. We recognize costs for each grant project, preclinical study or clinical trial that we conduct based on our evaluation of the progress to completion, including the use of information and data provided to us by our external research and development vendors and clinical sites;

·

costs associated with regulatory filings; and

·

costs of acquiring preclinical study and clinical trial materials, and costs associated with formulation, process development and statistical analysis.

We do not allocate personnel‑related research and development costs, including stock‑based compensation or other indirect costs, to specific programs, as they are deployed across multiple projects under development.

16

Table of Contents

Amortization of Intangible Asset

Amortization of intangible asset relates to the amortization of our product rights to Keveyis. This intangible asset is being amortized over an eight-year period using the straight-line method.

Other Income (Expense), Net

Other income (expense), net, consists of unrealized gain on the remeasurement of the fair value of warrant liability, interest income generated from our cash and cash equivalents, foreign exchange gains and losses and gains and losses on investments.  In 2019, we recorded income and expenses relating to our service agreement with NNI to fund the costs of 23 of our field-based employees who provided full-time ongoing services to NNI, including the promotion of Macrilen in the United States.

Critical Accounting Policies and Significant Judgments and Estimates

This management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated 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 expenses incurred during the reporting periods. 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. Actual results may differ from these estimates under different assumptions or conditions.  

We believe there have been no significant changes in our critical accounting policies and significant judgments and estimates as discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Annual Report.

17

Table of Contents

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019.

The following table sets forth our results of operations for the three months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change

 

 

&nb