ACORDA THERAPEUTICS INC, 10-Q filed on 11/9/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2015
Oct. 31, 2015
Document and Entity Information
 
 
Entity Registrant Name
ACORDA THERAPEUTICS INC 
 
Entity Central Index Key
0001008848 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2015 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
43,155,369 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 89,837 
$ 182,170 
Restricted cash
1,139 
1,205 
Short-term investments
233,593 
125,448 
Trade accounts receivable, net of allowances of $911 and $771, as of September 30, 2015 and December 31, 2014, respectively
31,755 
32,211 
Prepaid expenses
13,876 
15,523 
Finished goods inventory held by the Company
46,838 
26,256 
Finished goods inventory held by others
 
581 
Deferred tax asset
4,967 
18,420 
Other current assets
7,563 
7,324 
Total current assets
429,568 
409,138 
Property and equipment, net of accumulated depreciation
42,415 
46,090 
Goodwill
183,636 
182,952 
Intangible assets, net of accumulated amortization
431,279 
432,822 
Non-current portion of deferred cost of license revenue
3,064 
3,540 
Restricted cash
4,809 
 
Other assets
5,507 
6,137 
Total assets
1,100,278 
1,080,679 
Current liabilities:
 
 
Accounts payable
14,005 
17,751 
Accrued expenses and other current liabilities
68,472 
56,118 
Deferred product revenue-Zanaflex
 
29,420 
Current portion of deferred license revenue
9,057 
9,057 
Current portion of revenue interest liability
561 
893 
Current portion of convertible notes payable
1,144 
1,144 
Total current liabilities
93,239 
114,383 
Convertible senior notes (due 2021)
293,492 
287,699 
Acquired Contingent consideration
60,000 
52,600 
Non-current portion of deferred license revenue
43,777 
50,570 
Non-current portion of convertible notes payable
1,091 
2,184 
Deferred tax liability
24,568 
23,885 
Other non-current liabilities
9,223 
9,103 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, $0.001 par value. Authorized 80,000,000 shares at September 30, 2015 and December 31, 2014; issued and outstanding 42,889,088 and 41,883,843 shares, including those held in treasury, as of September 30, 2015 and December 31, 2014, respectively
43 
42 
Treasury stock at cost (12,420 shares at September 30, 2015 and December 31, 2014)
(329)
(329)
Additional paid-in capital
793,774 
761,026 
Accumulated deficit
(218,557)
(220,410)
Accumulated other comprehensive loss
(43)
(74)
Total stockholders' equity
574,888 
540,255 
Total liabilities and stockholders' equity
$ 1,100,278 
$ 1,080,679 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Consolidated Balance Sheets
 
 
Trade accounts receivable, allowances (in dollars)
$ 911 
$ 771 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, Authorized shares
80,000,000 
80,000,000 
Common stock, issued shares
42,889,088 
41,883,843 
Common stock, outstanding shares
42,889,088 
41,883,843 
Treasury stock, shares
12,420 
12,420 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Revenues:
 
 
 
 
Net product revenues
$ 141,330 
$ 98,481 
$ 342,394 
$ 262,662 
Royalty revenues
4,605 
5,216 
12,571 
14,153 
License revenue
2,264 
2,264 
6,793 
6,793 
Total net revenues
148,199 
105,961 
361,758 
283,608 
Costs and expenses:
 
 
 
 
Cost of sales
24,741 
20,575 
65,896 
55,004 
Cost of license revenue
159 
159 
476 
476 
Research and development
43,356 
16,578 
105,221 
47,548 
Selling, general and administrative
51,056 
47,820 
152,645 
145,357 
Changes in fair value of acquired contingent consideration
3,200 
 
7,400 
 
Total operating expenses
122,512 
85,132 
331,638 
248,385 
Operating income
25,687 
20,829 
30,120 
35,223 
Other expense (net):
 
 
 
 
Interest and amortization of debt discount expense
(4,037)
(4,597)
(12,098)
(5,116)
Interest income
120 
257 
281 
596 
Other (expense) income
(59)
 
411 
 
Total other expense (net)
(3,976)
(4,340)
(11,406)
(4,520)
Income before taxes
21,711 
16,489 
18,714 
30,703 
Provision for income taxes
(17,770)
(4,536)
(16,861)
(13,361)
Net income
$ 3,941 
$ 11,953 
$ 1,853 
$ 17,342 
Net income per share-basic (in dollars per share)
$ 0.09 
$ 0.29 
$ 0.04 
$ 0.42 
Net income per share-diluted (in dollars per share)
$ 0.09 
$ 0.28 
$ 0.04 
$ 0.41 
Weighted average common shares outstanding used in computing net income per share-basic (in shares)
42,174 
41,094 
42,097 
41,022 
Weighted average common shares outstanding used in computing net income per share-diluted (in shares)
43,432 
42,365 
43,434 
42,346 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 3,941 
$ 11,953 
$ 1,853 
$ 17,342 
Other comprehensive income:
 
 
 
 
Unrealized gains on available for sale securities, net of tax
17 
69 
31 
129 
Other comprehensive income, net of tax
17 
69 
31 
129 
Comprehensive income
$ 3,958 
$ 12,022 
$ 1,884 
$ 17,471 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Cash flows from operating activities:
 
 
Net income
$ 1,853 
$ 17,342 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Recognition of deferred product revenue- Zanaflex
(22,186)
 
Share-based compensation expense
24,748 
20,644 
Amortization of net premiums and discounts on investments
2,372 
3,099 
Amortization of debt discount and debt issuance costs
6,383 
2,226 
Amortization of revenue interest issuance cost
15 
19 
Depreciation and amortization expense
11,153 
5,375 
Change in acquired contingent consideration obligation
7,400 
 
Gain on put/call liability
 
(147)
Deferred tax provision
16,861 
13,441 
Changes in assets and liabilities:
 
 
Decrease in accounts receivable
455 
5,992 
Decrease (increase) in prepaid expenses and other current assets
1,408 
(2,515)
Increase in inventory held by the Company
(20,582)
(1,111)
Decrease in inventory held by others
581 
67 
Decrease in non-current portion of deferred cost of license revenue
476 
476 
Decrease in other assets
25 
25 
(Decrease) increase in accounts payable, accrued expenses, other current liabilities
(2,158)
5,732 
(Decrease) increase in revenue interest liability interest payable
(124)
25 
Decrease in non-current portion of deferred license revenue
(6,793)
(6,793)
Increase in other non-current liabilities
 
27 
Decrease in deferred product revenue-Zanaflex
(988)
(2,575)
(Increase) decrease in restricted cash
(4,743)
83 
Net cash provided by operating activities
16,156 
61,432 
Cash flows from investing activities:
 
 
Purchases of property and equipment
(5,025)
(2,330)
Purchases of intangible assets
(781)
(1,577)
Purchases of investments
(359,968)
(580,381)
Proceeds from maturities of investments
249,500 
183,500 
Net cash used in investing activities
(116,274)
(400,788)
Cash flows from financing activities:
 
 
Proceeds from issuance of convertible senior notes
 
345,000 
Debt issuance costs
 
(7,516)
Proceeds from issuance of common stock and option exercises
8,000 
7,628 
Repayments of revenue interest liability
(215)
(452)
Net cash provided by financing activities
7,785 
344,660 
Net (decrease) increase in cash and cash equivalents
(92,333)
5,304 
Cash and cash equivalents at beginning of period
182,170 
48,037 
Cash and cash equivalents at end of period
89,837 
53,341 
Supplemental disclosure:
 
 
Cash paid for interest
4,279 
1,153 
Cash paid for taxes
$ 2,152 
$ 1,829 
Organization and Business Activities
Organization and Business Activities

 

(1) Organization and Business Activities

 

Acorda Therapeutics, Inc. (“Acorda” or the “Company”) is a biopharmaceutical company dedicated to the identification, development and commercialization of novel therapies that restore function and improve the lives of people with neurological disorders.

 

Management is responsible for the accompanying unaudited interim consolidated financial statements and the related information included in the notes to the consolidated financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, including normal recurring adjustments necessary for the fair presentation of the Company’s financial position and results of operations and cash flows for the periods presented. Results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K for such year, as filed with the Securities and Exchange Commission (the SEC).

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

 

(2) Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the results of operations of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The consolidated financial statements include certain amounts that are based on management’s best estimates and judgments.  Estimates are used in determining such items as provisions for rebates and incentives, chargebacks, returns and other sales allowances, depreciable/amortizable lives, asset impairments, excess inventory, valuation allowance on deferred taxes, purchase price allocations and amounts recorded for contingencies and accruals.  Because of the uncertainties inherent in such estimates, actual results may differ from these estimates.  Management periodically evaluates estimates used in the preparation of the consolidated financial statements for reasonableness.

 

The use of forecasted financial information is inherent in many of our accounting estimates, including but not limited to, determining the estimated fair value of goodwill, intangible assets and contingent consideration, matching intangible amortization to underlying benefits (e.g. sales and cash inflows), establishing and evaluating inventory reserves, and evaluating the need for valuation allowances for deferred tax assets.  Such forecasted financial information is comprised of numerous assumptions regarding our future revenues, cash flows, and operational results.  Management believes that its financial forecasts are reasonable and appropriate based upon current facts and circumstances.  Because of the inherent nature of forecasts, however, actual results may differ from these forecasts.  Management regularly reviews the information related to these forecasts and adjusts the carrying amounts of the applicable assets and liabilities prospectively when actual results differ from previous estimates.

 

Investments

 

Short-term investments consist of US Treasury bonds. The Company classifies marketable securities available to fund current operations as short-term investments in current assets on its consolidated balance sheets. Marketable securities are classified as long-term investments in long-term assets on the consolidated balance sheets if the Company has the ability and intent to hold them and such holding period is longer than one year. The Company classifies its short-term investments as available-for-sale. Available-for-sale securities are recorded at the fair value of the investments based on quoted market prices.

 

Unrealized holding gains and losses on available-for-sale securities, which are determined to be temporary, are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss.

 

Premiums and discounts on investments are amortized over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. Amortized premiums and discounts, dividend and interest income and realized gains and losses are included in interest income.

 

Accumulated Other Comprehensive Loss

 

The Company’s accumulated other comprehensive loss is comprised of unrealized gains and losses on available for sale securities and is recorded and presented net of income tax.

 

Revenue Recognition

 

Ampyra

 

Ampyra is available only through a network of specialty pharmacy providers that provide the medication to patients by mail; Kaiser Permanente, which distributes Ampyra to patients through a closed network of on-site pharmacies; and ASD Specialty Healthcare, Inc. (an AmerisourceBergen affiliate), which distributes Ampyra to the U.S. Bureau of Prisons, the U.S. Department of Defense, the U.S. Department of Veterans Affairs, or VA, and other federal agencies. Ampyra is not available in retail pharmacies. The Company does not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the Company, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about the sale of the product, and collectability is reasonably assured. The Company recognizes product sales of Ampyra following receipt of product by a network of specialty pharmacy providers, Kaiser Permanente, and ASD Specialty Healthcare, Inc. The specialty pharmacy providers, Kaiser Permanente, and ASD Specialty Healthcare, Inc. are contractually obligated to hold no more than an agreed number of days of inventory, ranging from 10 to 30 calendar days.

 

The Company’s net revenues represent total revenues less allowances for customer credits, including estimated discounts, rebates, and chargebacks. These allowances are recorded for cash consideration given by a vendor to a customer that is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, are characterized as a reduction of revenue. At the time product is shipped to specialty pharmacies, Kaiser Permanente and ASD Specialty Healthcare, Inc., an adjustment is recorded for estimated discounts, rebates and chargebacks. These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Allowances for discounts, rebates and chargebacks are established based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.  Product shipping and handling costs are included in cost of sales.  The Company does not accept returns of Ampyra with the exception of product damages that occur during shipping.

 

Zanaflex

 

The Company applies the revenue recognition guidance in Accounting Standards Codification (ASC) 605-15-25, which among other criteria requires that future returns can be reasonably estimated in order to recognize revenue.  Prior to the three-month period ended September 30, 2015, the Company accounted for Zanaflex tablet and capsule (Zanaflex products) shipments using a deferred revenue recognition model (sell-through). Under the deferred revenue recognition model, the Company did not recognize revenue upon product shipment.  For product shipments, the Company invoiced the wholesaler, recorded deferred revenue at gross invoice sales price, and classified the cost basis of the product held by the wholesaler as a separate component of inventory. The Company recognized revenue when prescribed to the end-user, on a first-in first-out (FIFO) basis. The Company’s revenue to be recognized was based on the estimated prescription demand, based on pharmacy sales for its products using third-party information, including third-party market research data. The Company’s sales and revenue recognition reflected the Company’s estimate of actual product prescribed to the end-user.  Beginning in the third quarter of 2015, the Company is recognizing sales for Zanaflex products when the product is shipped to its wholesale distributors (sell-in), as the Company believes there is now sufficient history to reasonably estimate expected returns.  For the three-month period ended September 30, 2015, the Company recognized a one-time increase in net revenue of $22.2 million, representing previously deferred product sales as of June 30, 2015, net of an allowance for estimated returns.

 

The Company’s net revenues represent total revenues less allowances for customer credits, including estimated discounts, rebates, chargebacks and returns. These allowances are recorded for cash consideration given by a vendor to a customer that is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, are characterized as a reduction of revenue. At the time product is shipped to the wholesale distributors, an allowance is recorded for estimated discounts, rebates, chargebacks and returns.  These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances.  Allowances for discounts, rebates, chargebacks and returns are established based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products. Product shipping and handling costs are included in cost of sales.

 

Qutenza

 

Qutenza is distributed in the United States by Besse Medical, Inc., a specialty distributor that furnishes the medication to physician offices; and by ASD Specialty Healthcare, Inc., a specialty distributor that furnishes the medication to hospitals and clinics. The Company does not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the Company, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about the sale of the product, and the amount of returns can be reasonably estimated and collectability is reasonably assured. This means that, for Qutenza, the Company recognizes product sales following receipt of product by its specialty distributors.

 

The Company’s net revenues represent total revenues less allowances for customer credits, including estimated rebates, chargebacks, and returns. These allowances are recorded for cash consideration given by a vendor to a customer that is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, are characterized as a reduction of revenue. At the time product is shipped, an adjustment is recorded for estimated rebates, chargebacks, and returns. These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Allowances for rebates, chargebacks, and returns are established based on the contractual terms with customers, historical trends, as well as expectations about the market for the product and anticipated introduction of competitive products.  Product shipping and handling costs are included in cost of sales.

 

Milestones and royalties

 

In order to determine the revenue recognition for contingent milestones, the Company evaluates the contingent milestones using the criteria as provided by the Financial Accounting Standards Boards (FASB) guidance on the milestone method of revenue recognition. At the inception of a collaboration agreement, the Company evaluates if payments are substantive.  The criteria requires that (i) the Company determines if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from the Company’s activities to achieve the milestone, (ii) the milestone be related to past performance, and (iii) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement.  If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved. Royalties are recognized as earned in accordance with the terms of various research and collaboration agreements.

 

In-Process Research and Development

 

The cost of in-process research and development (IPR&D) acquired directly in a transaction other than a business combination is capitalized if the projects have an alternative future use; otherwise they are expensed. The fair values of IPR&D projects acquired in business combinations are capitalized. Several methods may be used to determine the estimated fair value of the IPR&D acquired in a business combination. The Company utilizes the “income method”, and uses estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense recognized in the statement of operations. These assets are tested at least annually or sooner when a triggering event occurs that could indicate a potential impairment.

 

Contingent Consideration

 

The Company records contingent consideration as part of its business acquisitions.  Contingent consideration is recognized at fair value as of the date of acquisition and recorded as a liability on the consolidated balance sheet.  The contingent consideration is re-valued on a quarterly basis using a probability weighted discounted cash-flow approach until fulfillment or expiration of the contingency.  Changes in the fair value of the contingent consideration are recognized in the statement of operations.

 

Goodwill

 

Goodwill represents the amount of consideration paid in excess of the fair value of net assets acquired as a result of the Company’s business acquisitions accounted for using the acquisition method of accounting.  Goodwill is not amortized and is subject to impairment testing on an annual basis or when a triggering event occurs that may indicate the carrying value of the goodwill is impaired.

 

Collaborations

 

The Company recognizes collaboration revenues and expenses by analyzing each element of the agreement to determine if it shall be accounted for as a separate element or single unit of accounting. If an element shall be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for that element are applied to determine when revenue shall be recognized. If an element shall not be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for the bundled group of elements are applied to determine when revenue shall be recognized. Payments received in excess of revenues recognized are recorded as deferred revenue until such time as the revenue recognition criteria have been met.

 

Concentration of Credit Risk

 

The Company’s principal direct customers as of September 30, 2015 were a network of specialty pharmacies, Kaiser Permanente, and ASD Specialty Healthcare, Inc. for Ampyra, wholesale pharmaceutical distributors for Zanaflex Capsules and Zanaflex tablets, and two specialty distributors for Qutenza. The Company periodically assesses the financial strength of these customers and establishes allowances for anticipated losses, if necessary. Four customers individually accounted for more than 10% of the Company’s product revenue for the nine-month periods ended September 30, 2015 and 2014.  Three and four customers individually accounted for more than 10% of the Company’s accounts receivable as of September 30, 2015 and December 31, 2014, respectively. The Company’s net product revenues are generated in the United States.

 

Segment and Geographic Information

 

The Company is managed and operated as one business which is focused on the identification, development and commercialization of novel therapies to improve the lives of people with neurological disorders. The entire business is managed by a single management team that reports to the Chief Executive Officer. The Company does not operate separate lines of business with respect to any of its products or product candidates and the Company does not prepare discrete financial information with respect to separate products or product candidates or by location.  Accordingly, the Company views its business as one reportable operating segment. Net product revenues reported to date are derived from sales of Ampyra, Zanaflex and Qutenza in the United States.

 

Subsequent Events

 

Subsequent events are defined as those events or transactions that occur after the balance sheet date, but before the financial statements are filed with the Securities and Exchange Commission. The Company completed an evaluation of the impact of any subsequent events through the date these financial statements were issued, and determined there were no subsequent events requiring disclosure in or requiring adjustment to these financial statements.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).  This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance.  In July 2015, the FASB decided to defer the effective date of the new revenue standard for interim and annual periods beginning after December 15, 2017 (previously December 15, 2016).  The change will allow public entities to adopt the new standard as early as the original public entity effective date (i.e. annual reporting periods beginning after December 15, 2016 and interim periods therein).  Early adoption prior to that date will not be permitted.  ASU 2014-09 allows for either full retrospective or modified retrospective adoption.  The Company is evaluating the transition method that will be elected and the potential effects of adopting the provisions of ASU No. 2014-09.

 

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern.  ASU 2014-05 is effective for annual reporting periods ending after December 15, 2016 with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.  ASU-2014-15 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015, with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements or results of operations.

 

On June 12, 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. With regard to fair value measurement disclosures, ASU 2015-10 clarified that, for nonrecurring measurements estimated at a date during the reporting period other than the end of the reporting period, an entity should clearly indicate that the fair value information presented is not as of the period’s end as well as the date or period that the measurement was taken. This change was effective immediately upon issuance of ASU 2015-10.  The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements or disclosures.

 

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which requires the measurement of inventory at the lower of cost and net realizable value.  ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods therein with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements or results of operations.

 

In September 2015, the FASB issued Accounting Standards update 2015-16, Business Combinations (Topic 805):   Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the period in which the adjustment amount is determined.  The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  In addition the acquirer is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  This guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and requires prospective application. Early adoption is permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements or results of operations.

Acquisitions
Acquisitions

 

(3) Acquisitions

 

Civitas Therapeutics, Inc. Acquisition

 

On October 22, 2014, the Company completed the acquisition of Civitas Therapeutics, Inc., a Delaware corporation (Civitas).  As a result of the acquisition, the Company acquired global rights to CVT-301, a Phase 3 treatment candidate for OFF episodes of Parkinson’s disease.  The acquisition of Civitas also included rights to Civitas’s proprietary ARCUS pulmonary delivery technology, which management believes has potential applications in multiple disease areas, and a subleased manufacturing facility in Chelsea, Massachusetts with commercial-scale capabilities.  The approximately 90,000 square foot facility also includes office and laboratory space.  Approximately 45 Civitas employees based at the Chelsea facility joined the Acorda workforce in connection with the acquisition.

 

The Civitas acquisition was completed under an Agreement and Plan of Merger, dated as of September 24, 2014 (the Merger Agreement), by and among Acorda, Five A Acquisition Corporation, a Delaware corporation and its wholly-owned subsidiary (Merger Sub), Civitas and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the security holders’ representative (SRS).  Pursuant to the terms of the Merger Agreement, Merger Sub has merged with and into Civitas, which is the surviving corporation in the Merger and which is continuing as a wholly-owned subsidiary of Acorda under the Civitas name.

 

Pursuant to the terms of the Merger Agreement, aggregate merger consideration was $525 million plus $4.5 million in Civitas transaction costs paid by the Company.  Additionally and pursuant to the Merger Agreement, upon consummation of the merger, $39.375 million of the aggregate merger consideration was deposited into escrow to secure representation and warranty indemnification obligations of Civitas and Civitas’ security holders.  The escrow amount was released in the fourth quarter of 2015 in accordance with the Merger Agreement.  The transaction was financed with cash on hand.  The Company incurred approximately $7.2 million of its own transactions costs related to legal, valuation and other professional and consulting fees associated with the acquisition.  These transaction costs have been expensed as selling, general and administrative expenses in the year ended December 31, 2014.

 

The fair value of consideration transferred as of the acquisition date of October 22, 2014 totaled approximately $529.5 million summarized as follows:

 

(In thousands)

 

 

 

Cash paid

 

$

524,201 

 

Extinguishment of long-term debt

 

5,325 

 

 

 

 

 

Fair value of consideration transferred

 

$

529,526 

 

 

 

 

 

 

 

In accordance with the acquisition method of accounting, the Company allocated the purchase price to the estimated fair values of the identifiable assets acquired and liabilities assumed, with any excess allocated to goodwill.  The fair value of acquired IPR&D is classified as an indefinite lived intangible asset until the successful completion or abandonment of the associated research and development efforts.  The Company accounted for the transaction as a business combination.  The results of Civitas’ operations have been included in the consolidated statements of operations from the date of acquisition.

 

Acquired contingent consideration represents the estimated fair value of certain royalty payments due under a prior acquisition agreement between Alkermes and Civitas pertaining to sales of licensed products using the ARCUS technology.  The estimated fair value of the acquired contingent consideration was determined by applying a probability adjusted, discounted cash flow approach based on estimated future sales expected from CVT-301, a phase 3 candidate for the treatment of OFF episodes of Parkinson’s disease and CVT-427, a pre-clinical development stage product.  CVT-427 is an inhaled triptan intended to provide relief from acute migraine episodes by using the ARCUS delivery system.

 

Goodwill represents the amount of the purchase price paid in excess of the estimated fair value of the assets acquired and liabilities assumed.  The goodwill recorded as part of the acquisition is primarily related to establishing a deferred tax liability for the IPR&D intangible assets which have no tax basis and, therefore, will not result in a future tax deduction.

 

The following table presents the final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date of October 22, 2014:

 

(In thousands)

 

 

 

Current assets

 

$

54,911

 

Property and equipment

 

27,913

 

Identifiable intangible assets:

 

 

 

In-process research and development

 

423,000

 

Other non-current assets

 

1,002

 

Current liabilities

 

(6,154

)

Contingent consideration

 

(50,400

)

Deferred taxes

 

(103,317

)

Other non-current liabilities

 

(1,065

)

 

 

 

 

 

 

 

 

Fair value of acquired assets and liabilities

 

345,890

 

Goodwill

 

183,636

 

 

 

 

 

 

 

 

 

Aggregate purchase price

 

529,526

 

Amount paid to extinguish long-term debt

 

(5,325

)

 

 

 

 

 

 

 

 

Cash Paid

 

$

524,201

 

 

 

 

 

 

 

 

 

 

 

 

In the three-month period ended September 30, 2015, the Company completed its purchase price allocation for the Civitas acquisition which resulted in an increase of approximately $0.7 million to the provisional amount recorded for deferred tax liabilities, resulting in an increase to goodwill.

 

The following table presents the changes to the goodwill balance associated with the completion of the accounting for the Civitas acquisition:

 

(In thousands)

 

 

 

Goodwill – balance at October 22, 2014

 

$

182,952 

 

Increase to goodwill for final adjustment to deferred taxes

 

684 

 

 

 

 

 

 

 

 

 

Goodwill – balance at September 30, 2015

 

$

183,636 

 

 

 

 

 

 

 

 

 

 

 

 

Pro-Forma Financial Information Associated with the Civitas Acquisition (Unaudited)

 

The following table summarizes certain supplemental pro forma financial information for the three and nine-month periods ended September 30, 2015 and 2014 as if the acquisition of Civitas had occurred as of January 1, 2013.  The unaudited pro forma financial information for the three and nine-month periods ended September 30, 2014 reflects (i) the impact to depreciation expense based on fair value adjustments to the property, plant and equipment acquired from Civitas; (ii) the effect to interest expense on a loan Civitas entered into at March 31, 2014; and (iii) the income tax benefit from Civitas net loss at the Company’s effective income tax rate at September 30, 2014.  The unaudited pro forma financial information was prepared for comparative purposes only and is not necessarily indicative of what would have occurred had the acquisition been made at that time or of results which may occur in the future.

 

 

 

For the Three-Month Period ended

 

For the Three-Month Period ended

 

 

 

September 30, 2015

 

September 30, 2014

 

(In thousands)

 

Reported

 

Pro Forma

 

Reported

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

148,199

 

$

148,199

 

$

105,961

 

$

105,961

 

Net income (loss)

 

3,941

 

3,941

 

11,953

 

(10,288

)

 

 

 

For the Nine-Month Period ended

 

For the Nine-Month Period ended

 

 

 

September 30, 2015

 

September 30, 2014

 

(In thousands)

 

Reported

 

Pro Forma

 

Reported

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

361,758

 

$

361,758

 

$

283,608

 

$

283,608

 

Net income (loss)

 

1,853

 

1,853

 

17,342

 

(13,733

)

 

Share-based Compensation
Share Based Compensation

 

(4) Share-based Compensation

 

During the three-month periods ended September 30, 2015 and 2014, the Company recognized share-based compensation expense of $8.9 million and $7.3 million, respectively. During the nine-month periods ended September 30, 2015 and 2014, the Company recognized share-based compensation expense of $24.7 million and $20.6 million, respectively.  Activity in options and restricted stock during the nine-month period ended September 30, 2015 and related balances outstanding as of that date are reflected below. The weighted average fair value per share of options granted to employees for the three-month periods ended September 30, 2015 and 2014 were approximately $14.74 and $14.88, respectively.  The weighted average fair value per share of options granted to employees for the nine-month periods ended September 30, 2015 and 2014 were approximately $15.89 and $18.04, respectively.

 

The following table summarizes share-based compensation expense included within the consolidated statements of operations:

 

 

 

For the three-month

 

For the nine-month

 

 

 

period ended September 30,

 

period ended September 30,

 

(In millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

2.2 

 

$

1.5 

 

$

6.2 

 

$

4.1 

 

Selling, general and administrative

 

6.7 

 

5.8 

 

18.5 

 

16.5 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8.9 

 

$

7.3 

 

$

24.7 

 

$

20.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A summary of share-based compensation activity for the nine-month period ended September 30, 2015 is presented below:

 

Stock Option Activity

 

 

 

Number of Shares
(In thousands)

 

Weighted Average
Exercise Price

 

Weighted Average
Remaining
Contractual
Term

 

Intrinsic Value
(In thousands)

 

Balance at January 1, 2015

 

7,787

 

$

29.05

 

 

 

 

 

Granted

 

1,561

 

35.42

 

 

 

 

 

Cancelled

 

(261

)

34.75

 

 

 

 

 

Exercised

 

(327

)

24.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2015

 

8,760

 

$

30.19

 

6.7

 

$

14,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2015

 

8,655

 

$

30.12

 

6.7

 

$

14,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable at September 30, 2015

 

5,202

 

$

27.05

 

5.4

 

$

14,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Activity

 

(In thousands)
Restricted Stock

 

Number of Shares

 

Nonvested at January 1, 2015

 

502

 

Granted

 

219

 

Vested

 

(17

)

Forfeited

 

(30

)

 

 

 

 

Nonvested at September 30, 2015

 

674

 

 

 

 

 

 

Unrecognized compensation cost for unvested stock options and restricted stock awards as of September 30, 2015 totaled $66.0 million and is expected to be recognized over a weighted average period of approximately 2.5 years.

Earnings Per Share
Earnings Per Share

 

(5) Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 2015 and 2014:

 

(In thousands, except per share data)

 

Three-month
period ended
September 30,
2015

 

Three-month
period ended
September 30,
2014

 

Nine-month
period ended
September 30,
2015

 

Nine-month
period ended
September 30,
2014

 

Basic and diluted

 

 

 

 

 

 

 

 

 

Net income

 

$

3,941 

 

$

11,953 

 

$

1,853 

 

$

17,342 

 

Weighted average common shares outstanding used in computing net income per share—basic

 

42,174 

 

41,094 

 

42,097 

 

41,022 

 

Plus: net effect of dilutive stock options and restricted common shares

 

1,258 

 

1,271 

 

1,337 

 

1,324 

 

Weighted average common shares outstanding used in computing net income per share—diluted

 

43,432 

 

42,365 

 

43,434 

 

42,346 

 

Net income per share—basic

 

$

0.09 

 

$

0.29 

 

$

0.04 

 

$

0.42 

 

Net income per share—diluted

 

$

0.09 

 

$

0.28 

 

$

0.04 

 

$

0.41 

 

 

The difference between basic and diluted shares is that diluted shares include the dilutive effect of the assumed exercise of outstanding securities. The Company’s stock options and unvested shares of restricted common stock could have the most significant impact on diluted shares.

 

Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company’s common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.

 

The following amounts were not included in the calculation of net income per diluted share because their effects were anti-dilutive:

 

(In thousands)

 

Three-month
period ended
September 30,
2015

 

Three-month
period ended
September 30,
2014

 

Nine-month
period ended
September 30,
2015

 

Nine-month
period ended
September 30,
2014

 

Denominator

 

 

 

 

 

 

 

 

 

Stock options and restricted common shares

 

4,630 

 

4,380 

 

4,517 

 

3,959 

 

Convertible note — Saints Capital

 

19 

 

29 

 

19 

 

29 

 

 

Additionally, the impact of the convertible debt was determined to be anti-dilutive and excluded from the calculation of net income per diluted share for the three and nine-month periods ended September 30, 2015 and 2014.

Income Taxes
Income Taxes

 

(6) Income Taxes

 

For the three-month periods ended September 30, 2015 and 2014, the Company recorded a $17.8 million and $4.5 million provision for income taxes, respectively based upon its estimated tax liability for the year.  For the nine-month periods ended September 30, 2015 and 2014, the Company recorded a $16.9 million and $13.4 million provision for income taxes, respectively, based upon its estimated tax liability for the year. The provision for income taxes is based on federal, state and Puerto Rico income taxes. The effective income tax rates for the Company for the three-month periods ended September 30, 2015 and 2014 were 82% and 28%, respectively.  The effective income tax rates for the Company for the nine-month periods ended September 30, 2015 and 2014 were 90% and 44%, respectively.  The variances in the effective tax rates for the three and nine-month periods ended September 30, 2015 as compared to the three and nine-month periods ended September 30, 2014 were due primarily to the non-deductible $8.75 million payment in July 2015 to the former equity holders of Neuronex.  As a result of the Federal research and development tax credit not being extended during the first three quarters of 2015, the Company was not able to receive a benefit in the effective tax rate for this in 2015. The Company, however, was able to receive a benefit in the effective tax rate for 2015 for the Massachusetts state research and development tax credit in addition to the Federal orphan drug credit.

 

The Company continues to evaluate the realizability of its deferred tax assets and liabilities on a periodic basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development. Any changes to the valuation allowance or deferred tax assets and liabilities in the future would impact the Company’s income taxes.

Fair Value Measurements
Fair Value Measurements

 

(7) Fair Value Measurements

 

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. The Company’s Level 1 assets consist of time deposits and investments in a Treasury money market fund and the Company’s Level 2 assets consist of high-quality government bonds and are valued using observable market prices.  The Company’s Level 3 liabilities represent acquired contingent consideration related to the acquisition of Civitas and are valued using a probability weighted discounted cash flow valuation approach.  No changes in valuation techniques occurred during the three or nine-month periods ended September 30, 2015.  The estimated fair values of all of our financial instruments approximate their carrying values at September 30, 2015, except for the fair value of the Company’s convertible senior notes, which was approximately $314.4 million as of September 30, 2015.  The Company estimates the fair value of its notes utilizing market quotations for the debt (Level 2).

 

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2015

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

Cash equivalents

 

$

50,142 

 

$

 

$

 

Short-term investments

 

 

233,593 

 

 

 

 

 

 

 

 

 

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

60,000 

 

Put/call liability

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

Cash equivalents

 

$

149,754 

 

$

 

$

 

Short-term investments

 

 

125,448 

 

 

 

 

 

 

 

 

 

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

52,600 

 

Put/call liability

 

 

 

 

 

The following table presents additional information about liabilities measured at fair value on a recurring basis and for which the Company utilizes Level 3 inputs to determine fair value.

 

Acquired contingent consideration

 

(In thousands)

 

Three-month
period ended
September 30,
2015

 

Three-month
period ended
September 30,
2014

 

Nine-month
period ended
September 30,
2015

 

Nine-month
period ended
September 30,
2014

 

Acquired contingent consideration:

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

56,800 

 

$

 

$

52,600 

 

$

 

Fair value change to contingent consideration (unrealized) included in the statement of operations

 

3,200 

 

 

7,400 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

60,000 

 

$

 

$

60,000 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company estimates the fair value of its acquired contingent consideration using a probability weighted discounted cash flow valuation approach based on estimated future sales expected from CVT-301, a phase 3 candidate for the treatment of OFF episodes of Parkinson’s disease and CVT-427, a pre-clinical development stage product.  CVT-427 is an inhaled triptan intended to provide relief from acute migraine episodes using the ARCUS delivery system. Using this approach, expected future cash flows are calculated over the expected life of the agreement, are discounted, and then exercise scenario probabilities are applied. Some of the more significant assumptions made in the valuation include (i) the estimated CVT-301 and CVT 427 revenue forecasts, (ii) probabilities of success, and (iii) discount periods and rate. The probability of achievement of revenue milestones ranged from 28.5% to 70% with milestone payment outcomes ranging from $0 to $60 million in the aggregate for CVT-301 and CVT-427.  The valuation is performed quarterly.  Gains and losses are included in the statement of operations.  For the three-month period ended September 30, 2015, changes in the fair value of the acquired contingent consideration were due to the re-calculation of cash flows for the passage of time.  For the nine-month period ended September 30, 2015, changes in the fair value of the acquired contingent consideration were due to the re-calculation of cash flows for the passage of time and updates to certain other estimated assumptions.

 

The acquired contingent consideration is classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market.  If different assumptions were used for the various inputs to the valuation approach, including but not limited to, assumptions involving probability adjusted sales estimates for CVT-301 and CVT-427 and estimated discount rates, the estimated fair value could be significantly higher or lower than the fair value we determined.

Investments
Investments

 

(8) Investments

 

The Company has determined that all of its investments are classified as available-for-sale. Available-for-sale securities are carried at fair value with interest on these securities included in interest income and are recorded based primarily on quoted market prices.  Available-for-sale securities consisted of the following:

 

(In thousands)

 

Amortized
Cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair
value

 

September 30, 2015

 

 

 

 

 

 

 

 

 

US Treasury bonds

 

$

233,539

 

$

57

 

$

(3

)

$

233,593

 

December 31, 2014

 

 

 

 

 

 

 

 

 

US Treasury bonds

 

125,443

 

14

 

(9

)

125,448

 

 

The contractual maturities of short-term available-for-sale debt securities at September 30, 2015 and December 31, 2014 are greater than 3 months but less than 1 year.  The Company has determined that there were no other-than-temporary declines in the fair values of its investments as of September 30, 2015.

 

Short-term investments with maturities of three months or less from date of purchase have been classified as cash equivalents, and amounted to $50.1 million and $149.8 million as of September 30, 2015 and December 31, 2014, respectively.

 

Unrealized holding gains and losses are reported within accumulated other comprehensive income (AOCI) in the statements of comprehensive income.  The changes in AOCI associated with the unrealized holding gains on available-for-sale investments during the nine-month period ended September 30, 2015, were as follows (in thousands):

 

(In thousands)

 

Net Unrealized
Gains (Losses) on
Marketable
Securities

 

Balance at December 31, 2014

 

$

(74

)

Other comprehensive income before reclassifications:

 

31

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

 

Net current period other comprehensive income

 

31

 

 

 

 

 

Balance at September 30, 2015

 

$

(43

)

 

 

 

 

 

 

Collaborations, Alliances, and Other Agreements
Collaborations, Alliances and Other Agreements

 

(9) Collaborations, Alliances, and Other Agreements

 

Biogen

 

On June 30, 2009, the Company entered into an exclusive collaboration and license agreement with Biogen International GmbH (formerly Biogen Idec International GmbH), or Biogen to develop and commercialize Ampyra (known as Fampyra outside the U.S.) in markets outside the United States (the “Collaboration Agreement”). Under the Collaboration Agreement, Biogen was granted the exclusive right to commercialize Ampyra and other products containing aminopyridines developed under that agreement in all countries outside of the United States, which grant includes a sublicense of the Company’s rights under an existing license agreement between the Company and Alkermes plc (Alkermes), formerly Elan Corporation, plc (Elan). Biogen has responsibility for regulatory activities and future clinical development of Fampyra in ex-U.S. markets worldwide. The Company also entered into a related supply agreement with Biogen (the “Supply Agreement”), pursuant to which the Company will supply Biogen with its requirements for the licensed products through the Company’s existing supply agreement with Alkermes.

 

Under the Collaboration Agreement, the Company was entitled to an upfront payment of $110.0 million as of June 30, 2009, which was received in July 2009, and a $25.0 million milestone payment upon approval of the product in the European Union, which was received in August 2011. The Company is also entitled to receive additional payments of up to $10.0 million based on the successful achievement of future regulatory milestones and up to $365.0 million based on the successful achievement of future sales milestones. Due to the uncertainty surrounding the achievement of the future regulatory and sales milestones, these payments will not be recognized as revenue unless and until they are earned. The

 

 

Company is not able to reasonably predict if and when the milestones will be achieved. Under the Collaboration Agreement, Biogen will be required to make double-digit tiered royalty payments to the Company on ex-U.S. sales. In addition, the consideration that Biogen will pay for licensed products under the Supply Agreement will reflect the price owed to the Company’s suppliers under its supply arrangements with Alkermes or other suppliers for ex-U.S. sales. The Company and Biogen may also carry out future joint development activities regarding licensed product under a cost-sharing arrangement. Under the terms of the Collaboration Agreement, the Company, in part through its participation in joint committees with Biogen, will participate in overseeing the development and commercialization of Ampyra and other licensed products in markets outside the United States pursuant to that agreement. Acorda will continue to develop and commercialize Ampyra independently in the United States.

 

As of June 30, 2009, the Company recorded deferred revenue of $110.0 million for the upfront payment from Biogen under the Collaboration Agreement. Also, as a result of such payment to Acorda, a payment of $7.7 million was made to Alkermes and recorded as a deferred expense.

 

The Company considered the following deliverables with respect to the revenue recognition of the $110.0 million upfront payment:  (1) the license to use the Company’s technology, (2) the Collaboration Agreement to develop and commercialize licensed product in all countries outside the U.S., and (3) the Supply Agreement. Due to the inherent uncertainty in obtaining regulatory approval, the applicability of the Supply Agreement is outside the control of the Company and Biogen. Accordingly, the Company has determined the Supply Agreement is a contingent deliverable at the onset of the agreement.  As a result, the Company has determined the Supply Agreement does not meet the definition of a deliverable that needs to be accounted for at the inception of the arrangement. The Company has also determined that there is no significant and incremental discount related to the supply agreement since Biogen will pay the same amount for inventory that the Company would pay and the Company effectively acts as a middle man in the arrangement for which it adds no significant value due to various factors such as the Company does not have any manufacturing capabilities or other know-how with respect to the manufacturing process.

 

The Company has determined that the identified non-contingent deliverables (deliverables 1 and 2 immediately preceding) would have no value on a standalone basis if they were sold separately by a vendor and the customer could not resell the delivered items on a standalone basis, nor does the Company have objective and reliable evidence of fair value for the deliverables. Accordingly, the non-contingent deliverables are treated as one unit of accounting.  As a result, the Company will recognize the non-refundable upfront payment from Biogen as revenue and the associated payment to Alkermes as expense ratably over the estimated term of regulatory exclusivity for the licensed products under the Collaboration Agreement as the Company had determined this was the most probable expected benefit period. The Company recognized $2.3 million and $6.8 million in license revenue, a portion of the $110.0 million received from Biogen, and $0.2 million and $0.5 million in cost of license revenue, a portion of the $7.7 million paid to Alkermes, during the three and nine-month periods ended September 30, 2015 and 2014, respectively.  The Company currently estimates the recognition period to be approximately 12 years from the date of the Collaboration Agreement.

 

As part of its ex-U.S. license agreement, Biogen owes Acorda royalties based on ex-U.S. net sales, and milestones based on ex-U.S. regulatory approval and new indications.  These milestones included a $25.0 million payment for approval of the product in the European Union which was recorded and paid in the three-month period ended September 30, 2011. Based on Acorda’s worldwide license and supply agreement with Alkermes, Alkermes received 7% of this milestone payment from Acorda during the same period.  For revenue recognition purposes, the Company has determined this milestone to be substantive in accordance with applicable accounting guidance related to milestone revenue.  Substantive uncertainty existed at the inception of the arrangement as to whether the milestone would be achieved because of the numerous variables, such as the high rate of failure inherent in the research and development of new products and the uncertainty involved with obtaining regulatory approval. Biogen leveraged Acorda’s U.S. Ampyra study results that contributed to the regulatory approval process. Therefore, the milestone was achieved based in part on Acorda’s past performance.  The milestone was also reasonable relative to all deliverable and payment terms of the collaboration arrangement. Therefore, the payment was recognized in its entirety as revenue and the cost of the milestone revenue was recognized in its entirety as an expense during the three-month period ended September 30, 2011. The Company recognized $2.5 million in royalty revenue, respectively, for the three-month periods ended September 30, 2015 and 2014 and $7.3 million and $7.7 million for the nine-month periods ended September 30, 2015 and 2014, respectively, related to ex-U.S. sales of Fampyra by Biogen.

 

Actavis/Watson

 

The Company has an agreement with Watson Pharma, Inc., a subsidiary of Actavis, Inc. (formerly Watson Pharmaceuticals, Inc.), to market tizanidine hydrochloride capsules, an authorized generic version of Zanaflex Capsules which was launched in February 2012.  In accordance with the agreement, the Company receives a royalty based on Watson’s gross margin, as defined by the agreement, of the authorized generic product. During the three-month periods ended September 30, 2015 and 2014, the Company recognized royalty revenue of $2.1 million and $2.7 million, respectively, related to the gross margin of the Zanaflex Capsule authorized generic.  During the three-month periods ended September 30, 2015 and 2014, the Company also recognized revenue and a corresponding cost of sales of $1.0 million and $1.3 million, respectively, related to the purchase and sale of the related Zanaflex Capsule authorized generic product to Actavis, which is recorded in net product revenues and cost of sales.

 

During the nine-month periods ended September 30, 2015 and 2014, the Company recognized royalty revenue of $5.3 million and $6.4 million, respectively, related to the gross margin of the Zanaflex Capsule authorized generic.  During the nine-month periods ended September 30, 2015 and 2014, the Company also recognized revenue and a corresponding cost of sales of $2.5 million and $3.4 million, respectively, related to the purchase and sale of the related Zanaflex Capsule authorized generic product to Actavis, which is recorded in net product revenues and cost of sales.

 

Neuronex

 

In December 2012, the Company acquired Neuronex, Inc., a privately-held development stage pharmaceutical company (Neuronex) developing Plumiaz (our trade name for Diazepam Nasal Spray).  Plumiaz is a proprietary nasal spray formulation of diazepam that we are developing under Section 505(b)(2) of the Food, Drug and Cosmetic Act as an acute treatment for selected, refractory patients with epilepsy, on stable regimens of antiepileptic drugs, or AEDs, who experience intermittent bouts of increased seizure activity also known as seizure clusters or acute repetitive seizures, or ARS.

 

The Company completed the acquisition pursuant to a merger agreement with Neuronex and Moise A. Khayrallah, acting as the Stockholders’ Representative on behalf of the former Neuronex equity holders.  In July 2015, the Company entered into an amendment to the merger agreement (Amendment) with Mr. Khayrallah, as Stockholders’ Representative.  Pursuant to the Amendment, the Stockholders’ Representative, acting on behalf of the former Neuronex equity holders, agreed to certain modifications to the Company’s future contingent payment obligations regarding the development and potential commercialization of Plumiaz, described below.  In consideration of those modifications, pursuant to the Amendment the Company paid the former Neuronex equity holders $8.75 million in the three-month period ended September 30, 2015.

 

Under the terms of the Neuronex merger agreement, the Company made an upfront payment of $2.0 million in February 2012.  The Company also paid $1.5 million during the twelve-month period ended December 31, 2012 pursuant to a commitment under the agreement to fund research to prepare for the Plumiaz pre-NDA meeting with the FDA.  In December 2012, the Company completed the acquisition by paying $6.8 million to former Neuronex equity holders less a $0.3 million holdback provision.  After adjustment for Neuronex’s working capital upon closing of the acquisition, approximately $0.1 million of the holdback amount was remaining as of December 31, 2013.  This balance was paid to the former equity holders of Neuronex pursuant to the merger agreement in February 2014.

 

Under the merger agreement, the former equity holders of Neuronex will be entitled to receive payments from the Company, in addition to payments the Company has already made under the merger agreement, upon the achievement of specified regulatory, manufacturing-related, and sales milestones with respect to Diazepam Nasal Spray products (Plumiaz).  Pursuant to the merger agreement as amended by the Amendment, the Company is obligated to pay (i) up to $3 million in specified regulatory and manufacturing-related milestone payments, a reduction from up to $18 million in such payments that were originally specified in the merger agreement, and (ii) up to $100 million upon the achievement of specified sales milestones, a reduction from up to $105 million in such payments that were originally specified in the merger agreement. Under the merger agreement, the former equity holders of Neuronex will also be entitled to receive tiered royalty-like earnout payments on worldwide net sales of Diazepam Nasal Spray products (Plumiaz), if any.  The rates for these payments pursuant to the merger agreement originally ranged from the upper single digits to lower double digits, but were modified pursuant to the Amendment and now range from the mid-single digits to mid double digits.  These payments are payable on a country-by-country basis until the earlier to occur of ten years after the first commercial sale of a product in such country and the entry of generic competition in such country as defined in the Agreement.

 

The patent and other intellectual property and other rights relating to Diazepam Nasal Spray products are licensed from SK Biopharmaceuticals Co., Ltd. (SK).  Pursuant to the SK license, which granted worldwide rights to Neuronex, except certain specified Asian countries, the Company’s subsidiary Neuronex is obligated to pay SK up to $8 million upon the achievement of specified development milestones with respect to the Diazepam Nasal Spray product (including a $1 million payment that was triggered during the three-month period ending September 30, 2013 upon the FDA’s acceptance for review of the first NDA for Plumiaz and paid during the three-month period ending December 31, 2013), and up to $3 million upon the achievement of specified sales milestones with respect to the Diazepam Nasal Spray product.  Also, Neuronex is obligated to pay SK a tiered, mid-single digit royalty on net sales of Diazepam Nasal Spray products.

 

The Company evaluated the initial acquisition transaction based upon the guidance of ASC 805, Business Combinations, and concluded that it only acquired inputs and did not acquire any processes.  The Company needed to develop its own processes in order to produce an output. Therefore the Company accounted for the transaction as an asset acquisition and accordingly the $2.0 million upfront payment, $1.5 million in research funding and $6.8 million of closing consideration net of tangible net assets acquired of $3.7 million which were primarily the taxable amount of net operating loss carryforwards, were expensed as research and development expense during the twelve-month period ended December 31, 2012.

Commitments and Contingencies
Commitments and Contingencies

 

(10) Commitments and Contingencies

 

A summary of the Company’s commitments and contingencies was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Company’s long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business.

 

In March 2015, Civitas exercised its right to extend the term of a sublease for five additional years, until December 31, 2020, and Civitas retains the right to further extend the sublease beyond that date for another five year period.  The base rent is currently $0.7 million per year.  For each extension period, the economic terms of the sublease will be determined by a process set forth in the sublease, and Civitas will be required to provide a letter of credit in an amount equal to the full five-year lease obligation for each lease extension period and additional security.  Alkermes leases the building pursuant to an overlease with H&N Associates, LLC, and has extension rights pursuant to the overlease that correspond to Civitas’ extension rights under the sublease. Alkermes has exercised a five-year extension option under the overlease that corresponds with Civitas’ exercise of its five year extension option under the sublease.  Pursuant to the sublease, Civitas has agreed to comply with all of Alkermes’s obligations under the overlease.

 

The Company is currently party to various legal proceedings which are principally patent litigation matters. The Company has assessed such legal proceedings and does not believe that it is probable that a liability has been incurred or that the amount of any potential liability or range of losses can be reasonably estimated. As a result, the Company did not record any loss contingencies for any of these matters. While it is not possible to determine the outcome of these matters the Company believes that the resolution of all such matters will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to the Company’s consolidated results of operations in any one accounting period.  Litigation expenses are expensed as incurred.

 

Summary of Significant Accounting Policies (Policies)

 

Principles of Consolidation

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the results of operations of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The consolidated financial statements include certain amounts that are based on management’s best estimates and judgments.  Estimates are used in determining such items as provisions for rebates and incentives, chargebacks, returns and other sales allowances, depreciable/amortizable lives, asset impairments, excess inventory, valuation allowance on deferred taxes, purchase price allocations and amounts recorded for contingencies and accruals.  Because of the uncertainties inherent in such estimates, actual results may differ from these estimates.  Management periodically evaluates estimates used in the preparation of the consolidated financial statements for reasonableness.

 

The use of forecasted financial information is inherent in many of our accounting estimates, including but not limited to, determining the estimated fair value of goodwill, intangible assets and contingent consideration, matching intangible amortization to underlying benefits (e.g. sales and cash inflows), establishing and evaluating inventory reserves, and evaluating the need for valuation allowances for deferred tax assets.  Such forecasted financial information is comprised of numerous assumptions regarding our future revenues, cash flows, and operational results.  Management believes that its financial forecasts are reasonable and appropriate based upon current facts and circumstances.  Because of the inherent nature of forecasts, however, actual results may differ from these forecasts.  Management regularly reviews the information related to these forecasts and adjusts the carrying amounts of the applicable assets and liabilities prospectively when actual results differ from previous estimates.

 

 

Investments

 

Short-term investments consist of US Treasury bonds. The Company classifies marketable securities available to fund current operations as short-term investments in current assets on its consolidated balance sheets. Marketable securities are classified as long-term investments in long-term assets on the consolidated balance sheets if the Company has the ability and intent to hold them and such holding period is longer than one year. The Company classifies its short-term investments as available-for-sale. Available-for-sale securities are recorded at the fair value of the investments based on quoted market prices.

 

Unrealized holding gains and losses on available-for-sale securities, which are determined to be temporary, are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss.

 

Premiums and discounts on investments are amortized over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. Amortized premiums and discounts, dividend and interest income and realized gains and losses are included in interest income.

 

Accumulated Other Comprehensive Loss

 

The Company’s accumulated other comprehensive loss is comprised of unrealized gains and losses on available for sale securities and is recorded and presented net of income tax.

 

Revenue Recognition

 

Ampyra

 

Ampyra is available only through a network of specialty pharmacy providers that provide the medication to patients by mail; Kaiser Permanente, which distributes Ampyra to patients through a closed network of on-site pharmacies; and ASD Specialty Healthcare, Inc. (an AmerisourceBergen affiliate), which distributes Ampyra to the U.S. Bureau of Prisons, the U.S. Department of Defense, the U.S. Department of Veterans Affairs, or VA, and other federal agencies. Ampyra is not available in retail pharmacies. The Company does not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the Company, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about the sale of the product, and collectability is reasonably assured. The Company recognizes product sales of Ampyra following receipt of product by a network of specialty pharmacy providers, Kaiser Permanente, and ASD Specialty Healthcare, Inc. The specialty pharmacy providers, Kaiser Permanente, and ASD Specialty Healthcare, Inc. are contractually obligated to hold no more than an agreed number of days of inventory, ranging from 10 to 30 calendar days.

 

The Company’s net revenues represent total revenues less allowances for customer credits, including estimated discounts, rebates, and chargebacks. These allowances are recorded for cash consideration given by a vendor to a customer that is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, are characterized as a reduction of revenue. At the time product is shipped to specialty pharmacies, Kaiser Permanente and ASD Specialty Healthcare, Inc., an adjustment is recorded for estimated discounts, rebates and chargebacks. These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Allowances for discounts, rebates and chargebacks are established based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.  Product shipping and handling costs are included in cost of sales.  The Company does not accept returns of Ampyra with the exception of product damages that occur during shipping.

 

Zanaflex

 

The Company applies the revenue recognition guidance in Accounting Standards Codification (ASC) 605-15-25, which among other criteria requires that future returns can be reasonably estimated in order to recognize revenue.  Prior to the three-month period ended September 30, 2015, the Company accounted for Zanaflex tablet and capsule (Zanaflex products) shipments using a deferred revenue recognition model (sell-through). Under the deferred revenue recognition model, the Company did not recognize revenue upon product shipment.  For product shipments, the Company invoiced the wholesaler, recorded deferred revenue at gross invoice sales price, and classified the cost basis of the product held by the wholesaler as a separate component of inventory. The Company recognized revenue when prescribed to the end-user, on a first-in first-out (FIFO) basis. The Company’s revenue to be recognized was based on the estimated prescription demand, based on pharmacy sales for its products using third-party information, including third-party market research data. The Company’s sales and revenue recognition reflected the Company’s estimate of actual product prescribed to the end-user.  Beginning in the third quarter of 2015, the Company is recognizing sales for Zanaflex products when the product is shipped to its wholesale distributors (sell-in), as the Company believes there is now sufficient history to reasonably estimate expected returns.  For the three-month period ended September 30, 2015, the Company recognized a one-time increase in net revenue of $22.2 million, representing previously deferred product sales as of June 30, 2015, net of an allowance for estimated returns.

 

The Company’s net revenues represent total revenues less allowances for customer credits, including estimated discounts, rebates, chargebacks and returns. These allowances are recorded for cash consideration given by a vendor to a customer that is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, are characterized as a reduction of revenue. At the time product is shipped to the wholesale distributors, an allowance is recorded for estimated discounts, rebates, chargebacks and returns.  These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances.  Allowances for discounts, rebates, chargebacks and returns are established based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products. Product shipping and handling costs are included in cost of sales.

 

Qutenza

 

Qutenza is distributed in the United States by Besse Medical, Inc., a specialty distributor that furnishes the medication to physician offices; and by ASD Specialty Healthcare, Inc., a specialty distributor that furnishes the medication to hospitals and clinics. The Company does not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the Company, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about the sale of the product, and the amount of returns can be reasonably estimated and collectability is reasonably assured. This means that, for Qutenza, the Company recognizes product sales following receipt of product by its specialty distributors.

 

The Company’s net revenues represent total revenues less allowances for customer credits, including estimated rebates, chargebacks, and returns. These allowances are recorded for cash consideration given by a vendor to a customer that is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, are characterized as a reduction of revenue. At the time product is shipped, an adjustment is recorded for estimated rebates, chargebacks, and returns. These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Allowances for rebates, chargebacks, and returns are established based on the contractual terms with customers, historical trends, as well as expectations about the market for the product and anticipated introduction of competitive products.  Product shipping and handling costs are included in cost of sales.

 

Milestones and royalties

 

In order to determine the revenue recognition for contingent milestones, the Company evaluates the contingent milestones using the criteria as provided by the Financial Accounting Standards Boards (FASB) guidance on the milestone method of revenue recognition. At the inception of a collaboration agreement, the Company evaluates if payments are substantive.  The criteria requires that (i) the Company determines if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from the Company’s activities to achieve the milestone, (ii) the milestone be related to past performance, and (iii) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement.  If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved. Royalties are recognized as earned in accordance with the terms of various research and collaboration agreements.

 

In-Process Research and Development

 

The cost of in-process research and development (IPR&D) acquired directly in a transaction other than a business combination is capitalized if the projects have an alternative future use; otherwise they are expensed. The fair values of IPR&D projects acquired in business combinations are capitalized. Several methods may be used to determine the estimated fair value of the IPR&D acquired in a business combination. The Company utilizes the “income method”, and uses estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense recognized in the statement of operations. These assets are tested at least annually or sooner when a triggering event occurs that could indicate a potential impairment.

 

Contingent Consideration

 

The Company records contingent consideration as part of its business acquisitions.  Contingent consideration is recognized at fair value as of the date of acquisition and recorded as a liability on the consolidated balance sheet.  The contingent consideration is re-valued on a quarterly basis using a probability weighted discounted cash-flow approach until fulfillment or expiration of the contingency.  Changes in the fair value of the contingent consideration are recognized in the statement of operations.

 

Goodwill

 

Goodwill represents the amount of consideration paid in excess of the fair value of net assets acquired as a result of the Company’s business acquisitions accounted for using the acquisition method of accounting.  Goodwill is not amortized and is subject to impairment testing on an annual basis or when a triggering event occurs that may indicate the carrying value of the goodwill is impaired.

 

Collaborations

 

The Company recognizes collaboration revenues and expenses by analyzing each element of the agreement to determine if it shall be accounted for as a separate element or single unit of accounting. If an element shall be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for that element are applied to determine when revenue shall be recognized. If an element shall not be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for the bundled group of elements are applied to determine when revenue shall be recognized. Payments received in excess of revenues recognized are recorded as deferred revenue until such time as the revenue recognition criteria have been met.

 

 

Concentration of Credit Risk

 

The Company’s principal direct customers as of September 30, 2015 were a network of specialty pharmacies, Kaiser Permanente, and ASD Specialty Healthcare, Inc. for Ampyra, wholesale pharmaceutical distributors for Zanaflex Capsules and Zanaflex tablets, and two specialty distributors for Qutenza. The Company periodically assesses the financial strength of these customers and establishes allowances for anticipated losses, if necessary. Four customers individually accounted for more than 10% of the Company’s product revenue for the nine-month periods ended September 30, 2015 and 2014.  Three and four customers individually accounted for more than 10% of the Company’s accounts receivable as of September 30, 2015 and December 31, 2014, respectively. The Company’s net product revenues are generated in the United States.

 

Segment and Geographic Information

 

The Company is managed and operated as one business which is focused on the identification, development and commercialization of novel therapies to improve the lives of people with neurological disorders. The entire business is managed by a single management team that reports to the Chief Executive Officer. The Company does not operate separate lines of business with respect to any of its products or product candidates and the Company does not prepare discrete financial information with respect to separate products or product candidates or by location.  Accordingly, the Company views its business as one reportable operating segment. Net product revenues reported to date are derived from sales of Ampyra, Zanaflex and Qutenza in the United States.

 

Subsequent Events

 

Subsequent events are defined as those events or transactions that occur after the balance sheet date, but before the financial statements are filed with the Securities and Exchange Commission. The Company completed an evaluation of the impact of any subsequent events through the date these financial statements were issued, and determined there were no subsequent events requiring disclosure in or requiring adjustment to these financial statements.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).  This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance.  In July 2015, the FASB decided to defer the effective date of the new revenue standard for interim and annual periods beginning after December 15, 2017 (previously December 15, 2016).  The change will allow public entities to adopt the new standard as early as the original public entity effective date (i.e. annual reporting periods beginning after December 15, 2016 and interim periods therein).  Early adoption prior to that date will not be permitted.  ASU 2014-09 allows for either full retrospective or modified retrospective adoption.  The Company is evaluating the transition method that will be elected and the potential effects of adopting the provisions of ASU No. 2014-09.

 

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern.  ASU 2014-05 is effective for annual reporting periods ending after December 15, 2016 with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.  ASU-2014-15 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015, with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements or results of operations.

 

On June 12, 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. With regard to fair value measurement disclosures, ASU 2015-10 clarified that, for nonrecurring measurements estimated at a date during the reporting period other than the end of the reporting period, an entity should clearly indicate that the fair value information presented is not as of the period’s end as well as the date or period that the measurement was taken. This change was effective immediately upon issuance of ASU 2015-10.  The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements or disclosures.

 

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which requires the measurement of inventory at the lower of cost and net realizable value.  ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods therein with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements or results of operations.

 

In September 2015, the FASB issued Accounting Standards update 2015-16, Business Combinations (Topic 805):   Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the period in which the adjustment amount is determined.  The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  In addition the acquirer is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  This guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and requires prospective application. Early adoption is permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements or results of operations.

Acquisitions (Tables)

 

(In thousands)

 

 

 

Cash paid

 

$

524,201 

 

Extinguishment of long-term debt

 

5,325 

 

 

 

 

 

Fair value of consideration transferred

 

$

529,526 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

Current assets

 

$

54,911

 

Property and equipment

 

27,913

 

Identifiable intangible assets:

 

 

 

In-process research and development

 

423,000

 

Other non-current assets

 

1,002

 

Current liabilities

 

(6,154

)

Contingent consideration

 

(50,400

)

Deferred taxes

 

(103,317

)

Other non-current liabilities

 

(1,065

)

 

 

 

 

 

 

 

 

Fair value of acquired assets and liabilities

 

345,890

 

Goodwill

 

183,636

 

 

 

 

 

 

 

 

 

Aggregate purchase price

 

529,526

 

Amount paid to extinguish long-term debt

 

(5,325

)

 

 

 

 

 

 

 

 

Cash Paid

 

$

524,201

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

Goodwill – balance at October 22, 2014

 

$

182,952 

 

Increase to goodwill for final adjustment to deferred taxes

 

684 

 

 

 

 

 

 

 

 

 

Goodwill – balance at September 30, 2015

 

$

183,636 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three-Month Period ended

 

For the Three-Month Period ended

 

 

 

September 30, 2015

 

September 30, 2014

 

(In thousands)

 

Reported

 

Pro Forma

 

Reported

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

148,199

 

$

148,199

 

$

105,961

 

$

105,961

 

Net income (loss)

 

3,941

 

3,941

 

11,953

 

(10,288

)

 

 

 

For the Nine-Month Period ended

 

For the Nine-Month Period ended

 

 

 

September 30, 2015

 

September 30, 2014

 

(In thousands)

 

Reported

 

Pro Forma

 

Reported

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

361,758

 

$

361,758

 

$

283,608

 

$

283,608

 

Net income (loss)

 

1,853

 

1,853

 

17,342

 

(13,733

)

 

Share-based Compensation (Tables)

 

 

 

For the three-month

 

For the nine-month

 

 

 

period ended September 30,

 

period ended September 30,

 

(In millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

2.2 

 

$

1.5 

 

$

6.2 

 

$

4.1 

 

Selling, general and administrative

 

6.7 

 

5.8 

 

18.5 

 

16.5 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8.9 

 

$

7.3 

 

$

24.7 

 

$

20.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares
(In thousands)

 

Weighted Average
Exercise Price

 

Weighted Average
Remaining
Contractual
Term

 

Intrinsic Value
(In thousands)

 

Balance at January 1, 2015

 

7,787

 

$

29.05

 

 

 

 

 

Granted

 

1,561

 

35.42

 

 

 

 

 

Cancelled

 

(261

)

34.75

 

 

 

 

 

Exercised

 

(327

)

24.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2015

 

8,760

 

$

30.19

 

6.7

 

$

14,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2015

 

8,655

 

$

30.12

 

6.7

 

$

14,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable at September 30, 2015

 

5,202

 

$

27.05

 

5.4

 

$

14,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)
Restricted Stock

 

Number of Shares

 

Nonvested at January 1, 2015

 

502

 

Granted

 

219

 

Vested

 

(17

)

Forfeited

 

(30

)

 

 

 

 

Nonvested at September 30, 2015

 

674

 

 

 

 

 

 

Earnings Per Share (Tables)

 

(In thousands, except per share data)

 

Three-month
period ended
September 30,
2015

 

Three-month
period ended
September 30,
2014

 

Nine-month
period ended
September 30,
2015

 

Nine-month
period ended
September 30,
2014

 

Basic and diluted

 

 

 

 

 

 

 

 

 

Net income

 

$

3,941 

 

$

11,953 

 

$

1,853 

 

$

17,342 

 

Weighted average common shares outstanding used in computing net income per share—basic

 

42,174 

 

41,094 

 

42,097 

 

41,022 

 

Plus: net effect of dilutive stock options and restricted common shares

 

1,258 

 

1,271 

 

1,337 

 

1,324 

 

Weighted average common shares outstanding used in computing net income per share—diluted

 

43,432 

 

42,365 

 

43,434 

 

42,346 

 

Net income per share—basic

 

$

0.09 

 

$

0.29 

 

$

0.04 

 

$

0.42 

 

Net income per share—diluted

 

$

0.09 

 

$

0.28 

 

$

0.04 

 

$

0.41 

 

 

 

(In thousands)

 

Three-month
period ended
September 30,
2015

 

Three-month
period ended
September 30,
2014

 

Nine-month
period ended
September 30,
2015

 

Nine-month
period ended
September 30,
2014

 

Denominator

 

 

 

 

 

 

 

 

 

Stock options and restricted common shares

 

4,630 

 

4,380 

 

4,517 

 

3,959 

 

Convertible note — Saints Capital

 

19 

 

29 

 

19 

 

29 

 

 

Fair Value Measurements (Tables)

 

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2015

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

Cash equivalents

 

$

50,142 

 

$

 

$

 

Short-term investments

 

 

233,593 

 

 

 

 

 

 

 

 

 

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

60,000 

 

Put/call liability

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

Cash equivalents

 

$

149,754 

 

$

 

$

 

Short-term investments

 

 

125,448 

 

 

 

 

 

 

 

 

 

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

52,600 

 

Put/call liability

 

 

 

 

 

 

(In thousands)

 

Three-month
period ended
September 30,
2015

 

Three-month
period ended
September 30,
2014

 

Nine-month
period ended
September 30,
2015

 

Nine-month
period ended
September 30,
2014

 

Acquired contingent consideration:

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

56,800 

 

$

 

$

52,600 

 

$

 

Fair value change to contingent consideration (unrealized) included in the statement of operations

 

3,200 

 

 

7,400 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

60,000 

 

$

 

$

60,000 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments (Tables)

 

(In thousands)

 

Amortized
Cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair
value

 

September 30, 2015

 

 

 

 

 

 

 

 

 

US Treasury bonds

 

$

233,539

 

$

57

 

$

(3

)

$

233,593

 

December 31, 2014

 

 

 

 

 

 

 

 

 

US Treasury bonds

 

125,443

 

14

 

(9

)

125,448

 

 

 

The changes in AOCI associated with the unrealized holding gains on available-for-sale investments during the nine-month period ended September 30, 2015, were as follows (in thousands):

 

(In thousands)

 

Net Unrealized
Gains (Losses) on
Marketable
Securities

 

Balance at December 31, 2014

 

$

(74

)

Other comprehensive income before reclassifications:

 

31

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

 

Net current period other comprehensive income

 

31

 

 

 

 

 

Balance at September 30, 2015

 

$

(43

)

 

 

 

 

 

 

Summary of Significant Accounting Policies (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2015
Minimum
Ampyra
Sep. 30, 2015
Maximum
Ampyra
Revenue Recognition
 
 
 
Contractually obligated inventory holdings period
 
10 days 
30 days 
Net adjustment from previously deferred product sales
$ 22.2 
 
 
Summary of Significant Accounting Policies (Details 2)
9 Months Ended 12 Months Ended
Sep. 30, 2015
segment
Distributor
Sep. 30, 2015
Product revenue
customer
Sep. 30, 2014
Product revenue
customer
Sep. 30, 2015
Accounts receivable
customer
Dec. 31, 2014
Accounts receivable
customer
Concentration of Risk
 
 
 
 
 
Number of specialty distributors for Qutenza
 
 
 
 
Number of customers
 
Segment and Geographic Information
 
 
 
 
 
Number of reportable operating segments
 
 
 
 
Acquisitions (Details) (USD $)
3 Months Ended 9 Months Ended 0 Months Ended 3 Months Ended 9 Months Ended 11 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Dec. 31, 2014
Oct. 22, 2014
Oct. 22, 2014
Civitas Therapeutics
sqft
item
Sep. 30, 2015
Civitas Therapeutics
Sep. 30, 2014
Civitas Therapeutics
Sep. 30, 2015
Civitas Therapeutics
Sep. 30, 2014
Civitas Therapeutics
Sep. 30, 2015
Civitas Therapeutics
Oct. 22, 2014
Civitas Therapeutics
item
Oct. 22, 2014
Civitas Therapeutics
In-process research and development
Business Acquisitions [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Size of office and laboratory space
 
 
 
 
 
 
90,000 
 
 
 
 
 
 
 
Number of Civitas Employees
 
 
 
 
 
 
 
 
 
 
 
 
45 
 
Purchase price, gross of liabilities assumed
 
 
 
 
 
 
$ 525,000,000 
 
 
 
 
 
 
 
Acquisition-related cost
 
 
 
 
 
7,200,000 
 
 
 
 
 
 
4,500,000 
 
Escrow Deposit
 
 
 
 
 
 
 
 
 
 
 
 
39,375,000 
 
Purchase price :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid
 
 
 
 
 
 
524,201,000 
 
 
 
 
 
 
 
Extinguishment of long-term debt
 
 
 
 
 
 
5,325,000 
 
 
 
 
 
 
 
Fair value of consideration transferred
 
 
 
 
 
 
529,526,000 
 
 
 
 
 
 
 
Current assets
429,568,000 
 
429,568,000 
 
409,138,000 
 
 
 
 
 
 
 
54,911,000 
 
Property and equipment
 
 
 
 
 
 
 
 
 
 
 
 
27,913,000 
 
Identifiable intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
423,000,000 
Other non-current assets
5,507,000 
 
5,507,000 
 
6,137,000 
 
 
 
 
 
 
 
1,002,000 
 
Current liabilities
(93,239,000)
 
(93,239,000)
 
(114,383,000)
 
 
 
 
 
 
 
(6,154,000)
 
Contingent consideration
 
 
 
 
 
 
 
 
 
 
 
 
(50,400,000)
 
Deferred taxes
 
 
 
 
 
 
 
 
 
 
 
 
(103,317,000)
 
Other non-current liabilities
(9,223,000)
 
(9,223,000)
 
(9,103,000)
 
 
 
 
 
 
 
(1,065,000)
 
Fair value of acquired assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
 
345,890,000 
 
Goodwill, Beginning Balance
 
 
182,952,000 
 
 
 
182,952,000 
 
 
 
 
182,952,000 
 
 
Increase to goodwill for final adjustment to deferred taxes
 
 
 
 
 
 
 
 
 
 
 
684,000 
 
 
Goodwill, Ending Balance
183,636,000 
 
183,636,000 
 
 
 
 
183,636,000 
 
183,636,000 
 
183,636,000 
 
 
Unaudited pro forma financial information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported net revenues
148,199,000 
105,961,000 
361,758,000 
283,608,000 
 
 
 
148,199,000 
105,961,000 
361,758,000 
283,608,000 
 
 
 
Net income (loss)
3,941,000 
11,953,000 
1,853,000 
17,342,000 
 
 
 
3,941,000 
11,953,000 
1,853,000 
17,342,000 
 
 
 
Pro Forma net revenues
 
 
 
 
 
 
 
148,199,000 
105,961,000 
361,758,000 
283,608,000 
 
 
 
Pro Forma net income (loss)
 
 
 
 
 
 
 
$ 3,941,000 
$ (10,288,000)
$ 1,853,000 
$ (13,733,000)
 
 
 
Share Based Compensation (Details) (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Share-based compensation expense
 
 
 
 
Share-based compensation expense recognized
$ 8.9 
$ 7.3 
$ 24.7 
$ 20.6 
Stock Options and Restricted Stock Awards
 
 
 
 
Share-based compensation expense
 
 
 
 
Weighted average fair value of options granted (in dollars per share)
$ 14.74 
$ 14.88 
$ 15.89 
$ 18.04 
Research and development.
 
 
 
 
Share-based compensation expense
 
 
 
 
Share-based compensation expense recognized
2.2 
1.5 
6.2 
4.1 
Selling, general, and administrative
 
 
 
 
Share-based compensation expense
 
 
 
 
Share-based compensation expense recognized
$ 6.7 
$ 5.8 
$ 18.5 
$ 16.5 
Share Based Compensation (Details 2) (USD $)
9 Months Ended
Sep. 30, 2015
Share based compensation, other disclosures
 
Total unrecognized compensation costs related to unvested stock options and restricted stock awards that the company expects to recognize
$ 66,000,000 
Weighted average period
2 years 6 months 
Stock Options
 
Stock Option Activity
 
Beginning balance (in shares)
7,787,000 
Granted (in shares)
1,561,000 
Cancelled (in shares)
(261,000)
Exercised (in shares)
(327,000)
Ending balance (in shares)
8,760,000 
Vested and expected to vest at end of period (in shares)
8,655,000 
Vested and exercisable at end of period (in shares)
5,202,000 
Weighted Average Exercise Price
 
Balance at the beginning of the period (in dollars per share)
$ 29.05 
Granted (in dollars per share)
$ 35.42 
Forfeited and expired (in dollars per share)
$ 34.75 
Exercised (in dollars per share)
$ 24.49 
Balance at the end of the period (in dollars per share)
$ 30.19 
Vested and expected to vest at the end of the period (in dollars per share)
$ 30.12 
Vested and exercisable at the end of the period (in dollars per share)
$ 27.05 
Weighted Average Remaining Contractual Term
 
Balance at the end of the period
6 years 8 months 12 days 
Vested and expected to vest at the end of the period
6 years 8 months 12 days 
Vested and exercisable at the end of the period
5 years 4 months 24 days 
Intrinsic Value
 
Balance at the end of the period
14,685,000 
Vested and expected to vest at the end of the period
14,685,000 
Vested and exercisable at the end of the period
$ 14,543,000 
Restricted Stock
 
Restricted Stock Activity
 
Nonvested at the beginning of the period (in shares)
502 
Granted (in shares)
219 
Vested (in shares)
(17)
Forfeited (in shares)
(30)
Nonvested at the end of the period (in shares)
674 
Earnings Per Share (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Basic and diluted
 
 
 
 
Net income (in dollars)
$ 3,941 
$ 11,953 
$ 1,853 
$ 17,342 
Weighted average common shares outstanding used in computing net income per share-basic (in shares)
42,174 
41,094 
42,097 
41,022 
Plus: net effect of dilutive stock options and restricted common shares
1,258 
1,271 
1,337 
1,324 
Weighted average common shares outstanding used in computing net income per share-diluted
43,432 
42,365 
43,434 
42,346 
Net income per share-basic (in dollars per share)
$ 0.09 
$ 0.29 
$ 0.04 
$ 0.42 
Net income per share-diluted (in dollars per share)
$ 0.09 
$ 0.28 
$ 0.04 
$ 0.41 
Earnings Per Share (Details 2)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Stock options and restricted common shares
 
 
 
 
Antidilutive Securities
 
 
 
 
Anti-dilutive securities excluded from computation of earnings per share (in shares)
4,630 
4,380 
4,517 
3,959 
Convertible note - Saints Capital
 
 
 
 
Antidilutive Securities
 
 
 
 
Anti-dilutive securities excluded from computation of earnings per share (in shares)
19 
29 
19 
29 
Income Taxes (Details) (USD $)
1 Months Ended 3 Months Ended 9 Months Ended
Jul. 31, 2015
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Reconciliation of statutory federal income tax rate to effective income tax rate
 
 
 
 
 
Income tax provision
 
$ 17,770,000 
$ 4,536,000 
$ 16,861,000 
$ 13,361,000 
Effective income tax rate (as a percent)
 
82.00% 
28.00% 
90.00% 
44.00% 
Payment to the former equity holders
$ 8,750,000 
 
 
 
 
Fair Value Measurements (Details) (USD $)
Sep. 30, 2015
Dec. 31, 2014
Assets Carried at Fair Value:
 
 
Short-term investments
$ 233,593,000 
$ 125,448,000 
Level 2
 
 
Liabilities Carried at Fair Value:
 
 
Convertible senior notes
314,400,000 
 
Recurring basis |
Level 1
 
 
Assets Carried at Fair Value:
 
 
Cash equivalents
50,142,000 
149,754,000 
Recurring basis |
Level 2
 
 
Assets Carried at Fair Value:
 
 
Short-term investments
233,593,000 
125,448,000 
Recurring basis |
Level 3
 
 
Liabilities Carried at Fair Value:
 
 
Acquired contingent consideration
$ 60,000,000 
$ 52,600,000 
Fair Value Measurements (Details 2) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2015
Assets and liabilities measured at fair value on a recurring basis utilizing Level 3 inputs
 
 
Balance, beginning of period
$ 56,800,000 
$ 52,600,000 
Fair value change to contingent consideration (unrealized) included in the statement of operations
3,200,000 
7,400,000 
Balance, end of period
60,000,000 
60,000,000 
Contingent liability
 
 
Assets and liabilities measured at fair value on a recurring basis utilizing Level 3 inputs
 
 
Milestone payment, minimum (as a percent)
28.50% 
28.50% 
Milestone payment, maximum (as a percent)
70.00% 
70.00% 
Milestone payment, minimum
Milestone payment, maximum
$ 60,000,000 
$ 60,000,000 
Investments (Details ) (USD $)
9 Months Ended 12 Months Ended
Sep. 30, 2015
Dec. 31, 2014
Investments
 
 
Other-than-temporary declines in the fair values of investments
$ 0 
 
Short-term investments classified as cash and cash equivalents
50,100,000 
149,800,000 
Minimum
 
 
Investments
 
 
Short-term investments maturity term