ACORDA THERAPEUTICS INC, 10-K filed on 2/27/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 17, 2015
Jun. 30, 2014
Document and Entity Information
 
 
 
Entity Registrant Name
ACORDA THERAPEUTICS INC 
 
 
Entity Central Index Key
0001008848 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 830,937,207 
Entity Common Stock, Shares Outstanding
 
42,575,393 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 182,170 
$ 48,037 
Restricted cash
1,205 
277 
Short-term investments
125,448 
225,891 
Trade accounts receivable, net of allowances of $771 and $698, as of December 31, 2014 and 2013, respectively
32,211 
30,784 
Prepaid expenses
15,523 
8,398 
Finished goods inventory held by the Company
26,256 
25,535 
Finished goods inventory held by others
581 
637 
Deferred tax asset
18,420 
19,314 
Other current assets
7,324 
8,460 
Total current assets
409,138 
367,333 
Long-term investments
 
93,299 
Property and equipment, net of accumulated depreciation
46,090 
16,525 
Goodwill
182,952 
 
Deferred tax asset
(23,885)
107,985 
Intangible assets, net of accumulated amortization
432,822 
17,459 
Non-current portion of deferred cost of license revenue
3,540 
4,174 
Other non-current assets
6,137 
352 
Total assets
1,080,679 
607,127 
Current liabilities:
 
 
Accounts payable
17,751 
15,922 
Accrued expenses and other current liabilities
56,118 
37,569 
Deferred product revenue-Zanaflex
29,420 
32,090 
Current portion of deferred license revenue
9,057 
9,057 
Current portion of revenue interest liability
893 
861 
Current portion of convertible notes payable
1,144 
1,144 
Total current liabilities
114,383 
96,643 
Convertible senior notes (due 2021)
287,699 
 
Acquired contingent consideration
52,600 
 
Non-current portion of deferred license revenue
50,570 
59,628 
Non-current portion of convertible notes payable
2,184 
3,228 
Deferred tax liability
23,885 
 
Other non-current liabilities
9,103 
7,275 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, $0.001 par value. Authorized 80,000,000 shares at December 31, 2014 and 2013; issued and outstanding 41,883,843 and 40,896,355 shares, including those held in treasury, as of December 31, 2014 and 2013, respectively
42 
41 
Treasury stock at cost 12,420 shares at December 31, 2014 and December 31, 2013)
(329)
(329)
Additional paid-in capital
761,026 
678,686 
Accumulated deficit
(220,410)
(238,082)
Accumulated other comprehensive income
(74)
37 
Total stockholders' equity
540,255 
440,353 
Total liabilities and stockholders' equity
$ 1,080,679 
$ 607,127 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Consolidated Balance Sheets
 
 
Trade accounts receivable, allowances (in dollars)
$ 771 
$ 698 
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
41,883,843 
40,896,355 
Common stock, outstanding shares
41,883,843 
40,896,355 
Treasury stock, shares
12,420 
12,420 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues:
 
 
 
Net product revenues
$ 373,292 
$ 310,317 
$ 282,381 
Milestone revenue
19,131 
17,056 
14,376 
License revenue
9,057 
9,057 
9,057 
Total net revenues
401,480 
336,430 
305,814 
Costs and expenses:
 
 
 
Cost of sales
79,981 
66,009 
57,007 
Cost of milestone and license revenue
634 
634 
634 
Research and development
73,470 
53,877 
53,881 
Selling, general and administrative
201,813 
185,545 
168,690 
Asset impairment
6,991 
 
664 
Changes in fair value of acquired contingent consideration
2,200 
 
 
Total operating expenses
365,089 
306,065 
280,212 
Operating income
36,391 
30,365 
25,602 
Other expense (net):
 
 
 
Interest and amortization of debt discount expense
(9,288)
(2,170)
(1,880)
Interest income
674 
668 
552 
Other income (expense)
232 
 
(6)
Total other expense (net)
(8,382)
(1,502)
(1,334)
Income before taxes
28,009 
28,863 
24,268 
(Provision for) / benefit from income taxes
(10,337)
(12,422)
130,690 
Net income
$ 17,672 
$ 16,441 
$ 154,958 
Net income per share-basic (in dollars per share)
$ 0.43 
$ 0.41 
$ 3.93 
Net income per share-diluted (in dollars per share)
$ 0.42 
$ 0.39 
$ 3.84 
Weighted average common shares outstanding used in computing net income per share-basic (in shares)
41,150 
40,208 
39,459 
Weighted average common shares outstanding used in computing net income per share-diluted (in shares)
42,544 
41,682 
40,332 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Comprehensive Income
 
 
 
Net income
$ 17,672 
$ 16,441 
$ 154,958 
Other comprehensive (loss)
 
 
 
Unrealized (losses) on available for sale securities, net of tax
(111)
(25)
(4)
Net current period other comprehensive loss
(111)
(25)
(4)
Comprehensive income
$ 17,561 
$ 16,416 
$ 154,954 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common stock
Treasury stock
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Total
Balance at Dec. 31, 2011
$ 39 
$ (329)
$ 614,914 
$ (409,481)
$ 66 
$ 205,209 
Balance (in shares) at Dec. 31, 2011
39,328,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Compensation expense for issuance of stock options to employees
 
 
15,206 
 
 
15,206 
Compensation expense for issuance of restricted stock to employees
 
 
6,212 
 
 
6,212 
Compensation expense for issuance of restricted stock to employees (in shares)
224,000 
 
 
 
 
 
Exercise of stock options
 
4,339 
 
 
4,340 
Exercise of stock options (in shares)
252,000 
 
 
 
 
 
Other comprehensive loss, net of tax
 
 
 
 
(4)
(4)
Net income
 
 
 
154,958 
 
154,958 
Balance at Dec. 31, 2012
40 
(329)
640,671 
(254,523)
62 
385,921 
Balance (in shares) at Dec. 31, 2012
39,804,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Compensation expense for issuance of stock options to employees
 
 
18,036 
 
 
18,036 
Compensation expense for issuance of restricted stock to employees
 
 
7,103 
 
 
7,103 
Compensation expense for issuance of restricted stock to employees (in shares)
264,000 
 
 
 
 
 
Exercise of stock options
 
12,785 
 
 
12,786 
Exercise of stock options (in shares)
828,000 
 
 
 
 
 
Excess tax benefit from share-based compensation arrangements
 
 
91 
 
 
91 
Other comprehensive loss, net of tax
 
 
 
 
(25)
(25)
Net income
 
 
 
16,441 
 
16,441 
Balance at Dec. 31, 2013
41 
(329)
678,686 
(238,082)
37 
440,353 
Balance (in shares) at Dec. 31, 2013
40,896,000 
 
 
 
 
40,896,355 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Compensation expense for issuance of stock options to employees
 
 
21,910 
 
 
21,910 
Compensation expense for issuance of restricted stock to employees
 
 
7,527 
 
 
7,527 
Compensation expense for issuance of restricted stock to employees (in shares)
242,000 
 
 
 
 
 
Exercise of stock options
 
16,014 
 
 
16,015 
Exercise of stock options (in shares)
746,000 
 
 
 
 
 
Equity component of the convertible notes, issuance, net
 
 
38,166 
 
 
38,166 
Debt issuance costs
 
 
(1,277)
 
 
(1,277)
Other comprehensive loss, net of tax
 
 
 
 
(111)
(111)
Net income
 
 
 
17,672 
 
17,672 
Balance at Dec. 31, 2014
$ 42 
$ (329)
$ 761,026 
$ (220,410)
$ (74)
$ 540,255 
Balance (in shares) at Dec. 31, 2014
41,884,000 
 
 
 
 
41,883,843 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
 
 
 
Net income
$ 17,672 
$ 16,441 
$ 154,958 
Adjustments to reconcile net income (loss) to net cash provided by/(used in) operating activities:
 
 
 
Share-based compensation expense
29,437 
25,139 
21,418 
Amortization of net premiums and discounts on investments
3,571 
2,526 
4,382 
Amortization of debt discount and debt issuance costs
4,291 
 
 
Amortization of revenue interest issuance cost
27 
50 
67 
Depreciation and amortization expense
8,473 
6,999 
4,663 
Intangible asset impairment
6,991 
 
664 
Change in contingent consideration obligation
2,200 
 
 
(Gain) on put/call liability
(147)
(182)
(701)
Deferred tax provision (benefit)
6,681 
9,520 
(133,042)
Excess tax benefit from share-based compensation arrangements
 
(91)
 
Changes in assets and liabilities:
 
 
 
Increase in accounts receivable
(1,427)
(4,457)
(3,499)
Increase in prepaid expenses and other current assets
(4,083)
(377)
(2,961)
(Increase) decrease in inventory held by the Company
(721)
(5,269)
7,082 
Decrease in inventory held by others
56 
145 
345 
Decrease in non-current portion of deferred cost of license revenue
634 
634 
634 
Decrease (increase) in other assets
34 
34 
(3,753)
Increase (decrease) in accounts payable, accrued expenses, other current liabilities
13,180 
(5,785)
11,743 
Increase in revenue interest liability interest payable
108 
18 
600 
Decrease in non-current portion of deferred license revenue
(9,057)
(9,057)
(9,057)
(Decrease) increase in other non-current liabilities
(301)
78 
(22)
(Decrease) increase in deferred product revenue-Zanaflex
(2,670)
2,816 
(1,325)
Decrease (increase) in restricted cash
71 
103 
(77)
Net cash provided by operating activities
75,020 
39,285 
52,119 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(5,084)
(4,043)
(10,384)
Purchases of intangible assets
(2,699)
(3,121)
(3,194)
Acquisitions, net of cash received
(476,151)
(7,499)
 
Purchases of investments
(580,381)
(221,429)
(322,455)
Proceeds from maturities of investments
770,490 
191,000 
264,750 
Net cash used in investing activities
(293,825)
(45,092)
(71,283)
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
16,015 
12,786 
4,339 
Excess tax benefit from share-based compensation arrangements
 
91 
 
Repayments of revenue interest liability
(562)
(909)
(1,253)
Net cash provided by financing activities
352,937 
11,968 
3,086 
Net increase (decrease) in cash and cash equivalents
134,133 
6,161 
(16,078)
Cash and cash equivalents at beginning of period
48,037 
41,876 
57,954 
Cash and cash equivalents at end of period
182,170 
48,037 
41,876 
Supplemental disclosure:
 
 
 
Cash paid for interest
4,522 
2,022 
1,122 
Cash paid for taxes
$ 4,392 
$ 2,630 
$ 2,706 
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 to improve the lives of people with neurological disorders.

 

The management of the Company is responsible for the accompanying audited consolidated financial statements and the related information included in the notes to the consolidated financial statements. In the opinion of management, the audited 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.

 

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 preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include share-based compensation accounting, which are largely dependent on the fair value of the Company’s equity securities. In addition, the Company recognizes Zanaflex revenue based on estimated prescriptions filled. The Company adjusts its Zanaflex inventory value based on an estimate of inventory that may be returned. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments with original maturities of three months or less from date of purchase to be cash equivalents. All cash and cash equivalents are held in highly rated securities including a Treasury money market fund and US Treasury bonds, which are unrestricted as to withdrawal or use. To date, the Company has not experienced any losses on its cash and cash equivalents. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term and liquid nature.

 

Restricted Cash

 

Restricted cash represents a bank account with funds to cover the Company’s self-funded employee health insurance and cash deposits held in connection with obligations under facility leases.

 

Investments

 

Both short-term and long-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 and long-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 income.

 

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 Income

 

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

 

Inventory

 

Inventory is stated at the lower of cost or market value and includes amounts for Ampyra, Zanaflex tablet, Zanaflex Capsule and Qutenza inventories and is recorded at its net realizable value. The Company capitalizes inventory costs associated with the Company's products prior to regulatory approval when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. Cost is determined using the first-in, first-out method (FIFO) for all inventories. The Company adjusts its inventory value based on an estimate of inventory that may be returned or not sold based on sales projections and establishes reserves as necessary for obsolescence and excess inventory.

 

Ampyra

 

The cost of Ampyra inventory manufactured by Alkermes plc (Alkermes) is based on specified prices calculated as a percentage of net product sales of the product shipped by Alkermes to Acorda. In the event Alkermes does not manufacture the products, Alkermes is entitled to a compensating payment for the quantities of product provided by Patheon, the Company’s alternative manufacturer. This compensating payment is included in the Company’s inventory balances.

 

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which ranges from one to seven years. Leasehold improvements are recorded at cost, less accumulated amortization, which is computed on a straight-line basis over the shorter of the useful lives of the assets or the remaining lease term. Expenditures for maintenance and repairs are charged to expense as incurred.

 

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.  See Note 13 for discussion on goodwill.

 

Intangible Assets

 

The Company has finite lived intangible assets related to milestones for Ampyra, and for certain website development costs. These intangible assets are amortized on a straight line basis over the period in which the Company expects to receive economic benefit and are reviewed for impairment when facts and circumstances indicate that the carrying value of the asset may not be recoverable. The determination of the expected life will be dependent upon the use and underlying characteristics of the intangible asset. In the Company’s evaluation of the intangible assets, it considers the term of the underlying asset life and the expected life of the related product line. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value. Fair value is generally estimated based on either appraised value or other valuation techniques.  The Company also has indefinite lived intangible assets for the value of acquired in-process research and development related to CVT-301.  The Company reviews the carrying value of indefinite lived intangible assets annually and whenever indicators of impairment are present.  See also “In-Process Research and Development” and Note 13 for discussion on intangible assets.

 

Contingent Consideration

 

The Company records contingent consideration as part of the cost of 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. See Note 10 for discussion on the Alkermes ARCUS agreement.

 

Impairment of Long-Lived Assets

 

The Company continually evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful lives of its long-lived assets may warrant revision or that the carrying value of the assets may be impaired. The Company evaluates the realizability of its long-lived assets based on profitability and cash flow expectations for the related assets. Any write-downs are treated as permanent reductions in the carrying amount of the assets.

 

Patent Costs

 

Patent application and maintenance costs are expensed as incurred.

 

Research and Development

 

Research and development expenses include the costs associated with the Company’s internal research and development activities, including salaries and benefits, occupancy costs, and research and development conducted for it by third parties, such as contract research organizations (CROs), sponsored university-based research, clinical trials, contract manufacturing for its research and development programs, and regulatory expenses.  In addition, research and development expenses include the cost of clinical trial drug supply shipped to the Company’s clinical study vendors. For those studies that the Company administers itself, the Company accounts for its clinical study costs by estimating the patient cost per visit in each clinical trial and recognizes this cost as visits occur, beginning when the patient enrolls in the trial. This estimated cost includes payments to the trial site and patient-related costs, including laboratory costs related to the conduct of the trial. Cost per patient varies based on the type of clinical trial, the site of the clinical trial, and the length of the treatment period for each patient. For those studies for which the Company uses a CRO, the Company accounts for its clinical study costs according to the terms of the CRO contract. These costs include upfront, milestone and monthly expenses as well as reimbursement for pass through costs. As actual costs become known to the Company, it adjusts the accrual; such changes in estimate may be a material change in its clinical study accrual, which could also materially affect its results of operations. All research and development costs are expensed as incurred except when accounting for nonrefundable advance payments for goods or services to be used in future research and development activities.

 

These payments are capitalized at the time of payment and expensed ratably over the period the research and development activity is performed.

 

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 will be further developed or 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.

 

Accounting for Income Taxes

 

The Company provides for income taxes in accordance with ASC Topic 740 (ASC 740). Income taxes are accounted for under the asset and liability method with deferred tax assets and liabilities recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance for the amounts of any tax benefits which, more likely than not, will not be realized.

 

In determining whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits, a two-step process is utilized whereby the threshold for recognition is a more likely-than-not test that the tax position will be sustained upon examination and the tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

 

 

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 the amount of returns can be reasonably estimated and collectability is reasonably assured. The Company recognizes product sales of Ampyra following shipment of product to 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 between 10 to 30 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 rebates, discounts 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, 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. The amount of future tablet returns is uncertain due to generic competition and customer conversion to Zanaflex Capsules. The Company has accumulated some sales history with Zanaflex Capsules; however, due to existing and potential generic competition and customer conversion from Zanaflex tablets to Zanaflex Capsules, it does not believe it can reasonably determine a return rate at this time. As a result, the Company accounts for these product shipments using a deferred revenue recognition model. Under the deferred revenue model, the Company does not recognize revenue upon product shipment. For these product shipments, the Company invoices the wholesaler, records deferred revenue at gross invoice sales price, and classifies the cost basis of the product held by the wholesaler as a component of inventory. The Company recognizes revenue when prescribed to the end-user, on a first-in first-out (FIFO) basis. The Company’s revenue to be recognized is based on (1) the estimated prescription demand, based on pharmacy sales for its products; and (2) the Company’s analysis of third party information, including third party market research data. The Company’s estimates are subject to the inherent limitations of estimates that rely on third party data, as certain third party information is itself in the form of estimates, and reflect other limitations. The Company’s sales and revenue recognition reflects the Company’s estimates of actual product prescribed to the end-user. The Company expects to be able to apply a more traditional revenue recognition policy such that revenue is recognized following shipment to the customer when it believes it has sufficient data to develop reasonable estimates of expected returns based upon historical returns and greater certainty regarding generic competition.

 

 

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, should be characterized as a reduction of revenue when recognized in the vendor’s statement of operations. Adjustments are recorded for estimated discounts, rebates, and chargebacks. These allowances are established by management as its best estimate based on available information and are 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, analysis of historical levels of discounts, chargebacks and rebates, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for each product and anticipated introduction of competitive products. In addition, the Company records a charge to cost of goods sold for the cost basis of the estimated product returns the Company believes may ultimately be realized at the time of product shipment to wholesalers. The Company has recognized this charge at the date of shipment since it is probable that it will receive a level of returned products; upon the return of such product it will be unable to resell the product considering its expiration dating; and it can reasonably estimate a range of returns. This charge represents the cost basis for the low end of the range of the Company’s estimated returns. 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 shipment of product to 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 reasonably 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.

 

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 Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash, cash equivalents, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, restricted cash, short-term and long-term investments with approved financial institutions. The Company is exposed to credit risks and liquidity in the event of default by the financial institutions or issuers of investments in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution.

 

The Company does not own or operate, and currently does not plan to own or operate, facilities for production and packaging of Ampyra or its other commercial products, Zanaflex Capsules, Zanaflex tablets or Qutenza. It relies and expects to continue to rely on third parties for the production and packaging of its commercial products and clinical trial materials for all of its products except CVT-301. As part of the Civitas acquisition in 2014, the Company now subleases a manufacturing facility in Chelsea, Massachusetts which produces CVT-301 for clinical trials and will produce commercial supply, if approved.

 

The Company relies primarily on Alkermes for its supply of  Ampyra.  Under its supply agreement with Alkermes, the Company is obligated to purchase at least 75% of its yearly supply of Ampyra from Alkermes, and it is required to make compensatory payments if it does not purchase 100% of its requirements from Alkermes, subject to certain specified exceptions. The Company and Alkermes have agreed that the Company may purchase up to 25% of its annual requirements from Patheon, a mutually agreed-upon second manufacturing source, with compensatory payment.  The Company and Alkermes also rely on a single third-party manufacturer, Regis, to supply dalfampridine, the active pharmaceutical ingredient, or API, in Ampyra.  If Regis experiences any disruption in their operations, a delay or interruption in the supply of Ampyra product could result until Regis cures the problem or it locates an alternate source of supply.

 

The Company’s principal direct customers as of December 31, 2014 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 revenue in 2014 through 2012. Four customers individually accounted for more than 10% of the Company’s accounts receivable as of December 31, 2014 and three customers individually accounted for more than 10% of the Company’s accounts receivable as of December 31, 2013. The Company’s net product revenues are generated in the United States.

 

Allowance for Cash Discounts

 

An allowance for cash discounts is accrued based on historical usage rates at the time of product shipment.  The Company adjusts accruals based on actual activity as necessary.  Cash discounts are typically settled with customers within 30 days after the end of each calendar month.  The Company had cash discount allowances of $4.1 million and $3.4 million for the years ended December 31, 2014 and 2013, respectively.  The Company’s accruals for cash discount allowances were $392,000 and $319,000 as of December 31, 2014 and 2013, respectively.

 

Allowance for Doubtful Accounts

 

A portion of the Company’s accounts receivable may not be collected due principally to customer disputes and sales returns. The Company provides reserves for these situations based on the evaluation of the aging of its trade receivable portfolio and an analysis of high-risk customers. The Company has not historically experienced material losses related to credit risk.  The Company has recognized an allowance related to one customer of approximately $379,000 as of December 31, 2014 and December 31, 2013.  For the year ended December 31, 2014, the Company recorded no provision and did not record any write-offs.  For the year ended December 31, 2013, the Company recorded a provision of $119,000 and did not record any write-offs.

 

Contingencies

 

The Company accrues for amounts related to legal matters if it is probable that a liability has been incurred and the amount is reasonably estimable. Litigation expenses are expensed as incurred.

 

Fair Value of Financial Instruments

 

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can arise between the fair value and carrying amounts of financial instruments that are recognized at historical cost amounts. The Company considers that fair value should be based on the assumptions market participants would use when pricing the asset or liability.

 

The following methods are used to estimate the fair value of the Company’s financial instruments:

 

   

(a)

Cash equivalents, grants receivables, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments;

 

   

(b)

Available-for-sale securities are recorded based primarily on quoted market prices;

 

   

(c)

Put/call liability’s fair value is based on revenue projections and business, general economic and market conditions that could be reasonably evaluated as of the valuation date;

 

   

(d)

Contingent purchase price related to the NeurogesX acquisition was measured at fair value using a Monte Carlo simulation;

 

   

(e)

Acquired contingent consideration related to the Civitas acquisition was measured at fair value using a probability weighted, discounted cash flow approach; and

 

   

(f)

Convertible Senior Notes were measured at fair value based on market quoted prices of debt securities with similar terms and maturities using other observable inputs.

 

Earnings per Share

 

Basic net income per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common shares outstanding during the period plus the effect of additional weighted average common equivalent shares outstanding during the period when the effect of adding such shares is dilutive. Common equivalent shares result from the assumed exercise of outstanding stock options (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury stock method), the vesting of restricted stock and the potential dilutive effects of the conversion option on the Company’s convertible debt. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of stock options.  See Note 8 for discussion on earnings per share.

 

Share-based Compensation

 

The Company has various share-based employee and non-employee compensation plans, which are described more fully in Note 7.

 

The Company accounts for stock options and restricted stock granted to employees and non-employees by recognizing the costs resulting from all share-based payment transactions in the consolidated financial statements at their fair values. The Company estimates the fair value of each option on the date of grant using the Black-Scholes closed-form option-pricing model based on assumptions of expected volatility of its common stock, prevailing interest rates, an estimated forfeiture rate, and the expected term of the stock options, and the Company recognizes that cost as an expense ratably over the associated employee service period.

 

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 the sales of Ampyra, Zanaflex and Qutenza in the United States.

 

Comprehensive Income

 

Unrealized gains (losses) from the Company’s investment securities are included in accumulated other comprehensive income within the consolidated balance sheet.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued Accounting Standards Update "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. ASU 2013-11 is effective prospectively for fiscal years and interim periods within those years, beginning after December 15, 2013 for public entities. The adoption of ASU 2013-11 did not have a significant impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.  The Company is currently evaluating the impact of the new standard.

 

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. The pronouncement 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.

 

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.

 

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 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 securityholders’ 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’ securityholders.    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 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 preliminary 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 will be 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 intended to provide relief from acute migraine episodes.  Refer to  Note 10 for further discussion about the Alkermes ARCUS agreement.

 

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 preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:

 

(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

 

 

(102,633

)

Other non-current liabilities

 

 

(1,065

)

Fair value of acquired assets and liabilities

 

 

346,574

 

Goodwill

 

 

182,952

 

Aggregate purchase price

 

 

529,526

 

Amount paid to extinguish long-term debt

 

 

(5,325

)

Cash Paid

 

$

524,201

 

 

 

 

 

The Company may update its preliminary acquisition accounting for provisional amounts for which the accounting is incomplete during the reporting period in which the acquisition occurred, and may continue to update the provisional amounts until the amounts are no longer provisional, but for no longer than one year from the date of the acquisition.  Any updates to the fair value of consideration given or fair value assigned to assets acquired and liabilities assumed during the measurement period would be adjusted through goodwill.

 

NeurogesX Acquisition

 

On July 8, 2013, Acorda acquired certain assets from NeurogesX, Inc. (NeurogesX), including two neuropathic pain management assets: Qutenza and NP-1998. Qutenza is approved by the FDA for the management of neuropathic pain associated with post-herpetic neuralgia. NP-1998 is a Phase 3 ready prescription strength capsaicin topical solution being assessed for the treatment of neuropathic pain. NP-1998 was previously referred to as NGX-1998. Prior to the acquisition, NeurogesX was a specialty pharmaceutical company focused on developing and commercializing a portfolio of novel non-opioid pain management therapies headquartered in San Mateo, CA. Acquisition-related costs during the year ended December 31, 2013 of approximately $1.0 million for advisory, legal, regulatory and valuation costs incurred in connection with the NeurogesX acquisition have been expensed in selling, general and administrative expenses.

 

Astellas Pharma Europe Ltd. (Astellas) has exclusive commercialization rights for Qutenza in the European Economic Area including the 28 countries of the European Union, Iceland, Norway, and Liechtenstein as well as Switzerland, certain countries in Eastern Europe, the Middle East and Africa. Astellas also has an option to develop NP-1998 in those same territories. 

 

In consideration for the acquisition of assets pursuant to the Asset Purchase Agreement, Acorda paid NeurogesX $7.5 million in cash and may pay up to an additional $5.0 million of post-closing milestone payments (Milestone Payments), as follows:

 

$2.0 million upon the approval for sale of an NP-1998 liquid formulation product in the United States for the cutaneous treatment of PDN in humans, if FDA approval is obtained prior to December 31, 2016; and

 

$3.0 million if net sales of an NP-1998 approved product in Acorda’s territory reaches $100,000,000 during the first 12 months that such product is sold in Acorda’s territory, commencing with the first date that such product is commercially available for purchase anywhere in Acorda’s territory. Acorda’s territory consists of all territories worldwide other than those jurisdictions covered by the Astellas Agreement, which generally comprise countries in Europe, Africa and the Middle East.

 

There is no assurance that any of the conditions for the Milestone Payments will be met. Refer to Note 15 – Fair Value Measurements for more information on the contingent consideration liability.

 

Total purchase price is summarized as follows:

 

(In thousands)

Cash paid to NeurogesX shareholders and its creditors

 

$

7,499 

 

Fair value of contingent liabilities

 

 

205 

 

Total preliminary estimated purchase price

 

$

7,704 

 

 

The allocation of the purchase price to the fair value of assets acquired reflects the estimated fair values of NeurogesX’s assets as of the acquisition date. In accordance with the acquisition method of accounting, the Company allocated the acquisition cost for the NeurogesX transaction to the underlying assets acquired by the Company, based upon the estimated fair values of those assets at the date of acquisition and will classify the fair value of acquired IPR&D 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 following table presents the allocation of purchase price to assets acquired:

 

(In thousands)

Inventory

 

$

90 

 

Equipment

 

 

173 

 

Identifiable intangible assets:

 

 

 

 

   Developed technology – Qutenza

 

 

450 

 

   In-process research and development – NP-1998

 

 

6,991 

 

Fair value of acquired assets

 

 

7,704 

 

Aggregate purchase price

 

 

7,704 

 

Goodwill

 

$

 

 

Refer to Note 13 for 2014 impairment discussion.

 

Pro-Forma Financial Information Associated with Acquisitions (Unaudited)

 

The following table summarizes certain supplemental pro forma financial information for the years ended December 31, 2014 and 2013 as if the acquisitions of Civitas and NeurogesX had occurred as of January 1, 2013 and January 1, 2012, respectively.  The unaudited pro forma financial information for the year ended December 31, 2014 reflects (i) the impact to operations resulting from the elimination of transaction costs related to the Civitas acquisition; (ii) the impact to depreciation expense based on fair value adjustments to the property, plant and equipment acquired from Civitas; (iii) the elimination of interest costs associated with Civitas’ debt retired during the acquisition that were included in the results of operations for the year ended December 31, 2014; and the related tax effects of those adjustments.  The unaudited pro forma financial information for December 31, 2013 reflects (i) the impact to depreciation expense based on fair value adjustments to the property, plant and equipment acquired from Civitas, (ii) the impact to operations resulting from the elimination of transaction costs related to the NeurogesX transaction; and the related tax effects of those adjustments.  The unaudited pro forma financial information was prepared for comparative purposes only and is not necessarily indicative of what would have occurred had the acquisitions been made at those times or of results which may occur in the future.

 

   

Year ended

 

Year ended

 

   

December 31, 2014

 

December 31, 2013

 

(In thousands)

Reported

 

Pro Forma

 

Reported

 

Pro Forma

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

401,480

 

 

$

401,480

 

 

$

336,430

 

 

$

337,130

 

Net income/(loss)

 

 

17,672

 

 

 

(14,084

)

 

 

16,441

 

 

 

(5,976

)

 

Investments
Investments

 

(4) 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

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury bonds

 

$

125,443

 

 

$

14

 

 

$

(9

)

 

$

125,448

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury bonds

 

 

319,123

 

 

 

69

 

 

 

(2

)

 

 

319,190

 

 

The Company’s short-term and long-term investments consist of US Treasury bonds. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment would be charged to earnings for the difference between the investment’s cost and fair value at such date and a new cost basis for the security established. Factors evaluated to determine if an investment is other-than-temporarily impaired include significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the issuer; adverse changes in the general market condition in which the issuer operates; the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment; and, issues that raise concerns about the issuer’s ability to continue as a going concern. The Company has determined that there were no other-than-temporary declines in the fair values of its short term investments as of December 31, 2014.

 

Short-term investments with maturity of three months or less from date of purchase have been classified as cash and cash equivalents, and amounted to $149.8 million and $28.3 million as of December 31, 2014 and 2013, respectively. Short-term investments have original maturities of greater than 3 months but less than 1 year and long-term investments are greater than 1 year.  There were no investments classified as long-term at December 31, 2014. The Company’s long-term investments as of December 31, 2013 consisted of US Treasury bonds with original maturities greater than one year. The balance of these investments was $93.3 million as of December 31, 2013.

 

The Company holds available-for-sale investment securities which are reported at fair value on the Company’s balance sheet. 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 gain on available-for-sale investments during the years ended December 31, 2014 and 2013 were as follows (in thousands):

 

(In thousands)

 

 

Net Unrealized Gains (Losses) on Marketable Securities

 

Balance at December 31, 2012

 

$

62

 

   Other comprehensive loss before reclassifications:

 

 

(25

)

   Amounts reclassified from accumulated other

       comprehensive income

 

 

 

   Net current period other comprehensive loss

 

 

(25

)

Balance at December 31, 2013

 

 

37

 

   Other comprehensive loss before reclassifications:

 

 

(111

)

   Amounts reclassified from accumulated other

       comprehensive income

 

 

 

   Net current period other comprehensive loss

 

 

(111

)

Balance at December 31, 2014

 

$

(74

)

 

Property and Equipment
Property and Equipment

(5) Property and Equipment

 

Property and equipment consisted of the following:

 

(In thousands)

 

 

December 31,

2014

 

 

December 31,

2013

 

Estimated

useful lives used

Machinery and equipment 

 

$

21,026

 

 

$

173

 

2-7 years

Leasehold improvements

 

 

15,763

 

 

 

10,260

 

Lesser of useful life or remaining lease term

Computer equipment

 

 

12,118

 

 

 

9,586

 

1-3 years

Laboratory equipment

 

 

5,247

 

 

 

3,555

 

2-5 years

Furniture and fixtures

 

 

1,163

 

 

 

1,067

 

4-7 years

 

 

 

 

 

 

 

 

 

 

Capital in progress

 

 

4,501

 

 

 

439

 

2-3 years

   

 

 

59,818

 

 

 

25,080

 

   

Less accumulated depreciation

 

 

 

(13,728

)

 

 

(8,555

)

   

   

 

$

46,090

 

 

$

16,525

 

   

 

Depreciation and amortization expense on property and equipment was $5.1 million and $4.6 million for the years ended December 31, 2014 and 2013, respectively.

 

Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

 

(6) Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following:

 

(In thousands)

 

 

December 31,

2014

 

 

December 31,

2013

 

Accrued inventory

 

$

12,453 

 

 

$

8,632 

 

Bonus payable

 

 

10,696 

 

 

 

7,899 

 

Product discount and allowances accruals

 

 

10,165 

 

 

 

6,007 

 

Research and development expense accruals

 

 

6,918 

 

 

 

1,841 

 

Sales force commissions and incentive payments payable

 

 

3,039 

 

 

 

1,583 

 

Royalties payable

 

 

2,540 

 

 

 

2,063 

 

Vacation accrual

 

 

2,038 

 

 

 

1,629 

 

Commercial and marketing expense accruals

 

 

2,091 

 

 

 

3,435 

 

Other accrued expenses

 

 

 

6,178 

 

 

 

4,480 

 

    Total

 

 

$

56,118 

 

 

$

37,569 

 

 

Common Stock Options and Restricted Stock
Common Stock Options and Restricted Stock

(7) Common Stock Options and Restricted Stock

 

On June 18, 1999, the Company’s board of directors approved the adoption of the Acorda Therapeutics, Inc. 1999 Employee Stock Option Plan (the 1999 Plan). All employees of the Company were eligible to participate in the 1999 Plan, including executive officers, as well as directors, independent contractors, and agents of the Company. The number of shares authorized for issuance under the 1999 Plan was 2,481,334. As of December 31, 2014, the Company had granted an aggregate of 2,385,883 shares as restricted stock or subject to issuance upon exercise of stock options under the 1999 Plan, of which 4,659 shares remained subject to outstanding options.

 

On January 12, 2006, the Company’s board of directors approved the adoption of the Acorda Therapeutics, Inc. 2006 Employee Incentive Plan (the 2006 Plan). This 2006 Plan serves as the successor to the Company’s 1999 Plan, as amended, and no further option grants or stock issuances shall be made under the 1999 Plan after the effective date, as determined under Section 14 of the 2006 Plan. All employees of the Company are eligible to participate in the 2006 Plan, including executive officers, as well as directors, independent contractors, and agents of the Company. The 2006 Plan also covers the issuance of restricted stock. The 2006 Plan is administered by the Compensation Committee of the Board of Directors, which selects the individuals to be granted options and restricted stock, determines the time or times at which options and restricted stock shall be granted under the 2006 Plan, determines the number of shares to be granted subject to any option or restricted stock under the 2006 Plan and the duration of each option and restricted stock, and makes any other determinations necessary, advisable, and/or appropriate to administer the 2006 Plan. Under the 2006 Plan, each option granted expires no later than the tenth anniversary of the date of its grant. Since inception, the number of shares of common stock authorized for issuance under the 2006 Plan as of December 31, 2014 is 13,216,463 shares. The total number of shares of common stock available for issuance under the 2006 Plan, including shares of common stock subject to the then outstanding awards, shall automatically increase on January 1 of each year during the term of this plan, beginning 2007, by a number of shares of common stock equal to 4% of the outstanding shares of common stock on that date, unless otherwise determined by the Board of Directors. The Board approved the automatic increases of 4% for 2014, 2013, and 2012. Upon the exercise of options in the future, the Company intends to issue new shares. As of December 31, 2014, the Company had granted an aggregate of 12,075,770 shares as restricted stock or subject to issuance upon exercise of stock options under the 2006 Plan, of which 7,781,630 shares remained subject to outstanding options.

 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

   

Year ended December 31,

   

2014

   

2013

   

2012

Employees and directors:

   

   

   

   

   

Estimated volatility

51.26% 

   

55.91% 

   

60.67% 

Expected life in years

5.84 

   

5.82 

   

5.64 

Risk free interest rate

1.79% 

   

1.16% 

   

1.16% 

Dividend yield

   

   

 

 

The Company estimated volatility for purposes of computing compensation expense on its employee and non-employee options using the historic volatility of the Company’s stock price. The expected life used to estimate the fair value of employee options is 5.84 years which is based on the historical life of the Company’s options based on exercise data.

 

The weighted average fair value per share of options granted to employees and directors for the years ended December 31, 2014, 2013 and 2012 amounted to approximately $17.61, $15.95, and $13.67, respectively. No options were granted to non-employees for the years ended December 31, 2014, 2013 and 2012.

 

During the year ended December 31, 2014, the Company granted 2,739,118 stock options and restricted stock awards to employees and directors under the 2006 Plan. The stock options were issued with a weighted average exercise price of $36.54 per share. As a result of these grants the total compensation charge to be recognized over the service period is $51.1 million, of which $9.7 million was recognized during the year ended December 31, 2014.

 

Compensation costs for options and restricted stock granted to employees and directors amounted to $29.4 million, $25.1 million, and $21.4 million, for the years ended December 31, 2014, 2013 and 2012, respectively. There were no compensation costs capitalized in inventory balances. Compensation expense for options and restricted stock granted to employees and directors are classified between research and development, sales and marketing and general and administrative expense based on employee job function.  The following table summarizes share-based compensation expense included within the Company’s consolidated statements of operations:

 

   

 

Year ended December 31,

 

(In thousands)

 

2014

 

 

2013

 

 

2012

 

   

 

 

 

 

 

 

 

 

 

Research and development

 

$

5,939 

 

 

$

5,805 

 

 

$

5,122 

 

    Selling, general and administrative

 

 

23,498 

 

 

 

19,334 

 

 

 

16,296 

 

  Total

 

$

29,437 

 

 

$

25,139 

 

 

$

21,418 

 

 

 

A summary of share-based compensation activity for the year ended December 31, 2014 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 December 31, 2011

 

 

4,793

 

 

$

21.31

 

   

   

Granted

 

 

1,292

 

 

 

25.69

 

   

   

Forfeited and expired

 

 

(166

)

 

 

27.98

 

   

   

Exercised

 

 

(252

)

 

 

17.24

 

   

   

Balance at December 31, 2012

 

 

5,667

 

 

 

22.30

 

   

   

Granted

 

 

 

1,835

 

 

 

31.50

 

   

   

Forfeited and expired

 

 

 

(188

)

 

 

27.90

 

   

   

Exercised

 

 

 

(828

)

 

 

15.45

 

   

   

Balance at December 31, 2013

 

 

6,486

 

 

 

25.61

 

   

   

Granted

 

 

 

2,352

 

 

 

36.56

 

   

   

Forfeited and expired

 

 

 

(306

)

 

 

32.40

 

   

   

Exercised

 

 

 

(746

)

 

 

21.46

 

   

   

Balance at December 31, 2014

 

 

 

7,786

 

 

$

29.05

 

6.9
$
92,053

Vested and expected to vest at December 31, 2014

 

 

 

7,695

 

 

$

28.98

 

6.9
$
91,513

Vested and exercisable at December 31, 2014

 

 

 

4,464

 

 

$

25.67

 

5.5
$
67,834

 

   

 

Options Outstanding

 

 

Options Exercisable

 

Range of exercise price

 

 

Outstanding

as of

December 31,

2014 (In thousands)

 

 

Weighted-

average

remaining

contractual life

 

 

Weighted-

average

exercise price

 

 

Exercisable

as of

December 31,

2014 (In thousands)

 

 

Weighted-

average

exercise price

 

$2.45 - $16.88

 

 

381 

 

 

 

1.5 

 

 

$

9.60 

 

 

 

381 

 

 

$

9.60 

 

$17.52 - $21.97

 

 

755 

 

 

 

4.0 

 

 

 

20.20 

 

 

 

730 

 

 

 

20.17 

 

$22.00 - $24.93

 

 

1,035 

 

 

 

5.2 

 

 

 

22.35 

 

 

 

942 

 

 

 

22.31 

 

$25.05 - $29.92

 

 

1,245 

 

 

 

7.0 

 

 

 

26.88 

 

 

 

804 

 

 

 

26.73 

 

$30.12 - $41.07

 

 

 

4,370 

 

 

 

8.3 

 

 

 

34.48 

 

 

 

1,607 

 

 

 

33.43 

 

   

 

 

7,786 

 

 

 

6.9 

 

 

$

29.05 

 

 

 

4,464 

 

 

$

25.67 

 

 

Restricted Stock Activity

 

Restricted Stock

   

Number of Shares (In thousands)

Nonvested at December 31, 2011

 

377 

Granted

320 

Vested

(224)

Forfeited

 

(15)

Nonvested at December 31, 2012

 

458 

Granted

258 

Vested

(264)

Forfeited

 

(31)

Nonvested at December 31, 2013

 

421 

Granted

 

387 

Vested

 

(241)

Forfeited

 

(48)

Nonvested at December 31, 2014

 

519 

 

Unrecognized compensation cost for unvested stock options and restricted stock awards as of December 31, 2014 totaled $93.4 million and is expected to be recognized over a weighted average period of approximately 2.7 years.

 

Earnings Per Share
Earnings Per Share

 

(8) Earnings Per Share

 

 

The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2014, 2013 and 2012:

 

(In thousands, except per share data)

 

 

Year ended

December 31,

2014

 

 

Year ended

December 31,

2013

 

 

Year ended

December 31,

2012

 

Basic and diluted

 

 

 

 

 

 

 

 

 

Net income

 

$

17,672 

 

 

$

16,441 

 

 

$

154,958 

 

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

 

 

41,150 

 

 

 

40,208 

 

 

 

39,459 

 

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

 

 

1,394 

 

 

 

1,474 

 

 

 

873 

 

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

 

 

 

42,544 

 

 

 

41,682 

 

 

 

40,332 

 

Net income per share—basic

 

 

$

0.43 

 

 

$

0.41 

 

 

$

3.93 

 

Net income per share—diluted

 

 

$

0.42 

 

 

$

0.39 

 

 

$

3.84 

 

 

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)

 

Year ended

December 31,

2014

   

Year ended

December 31,

2013

   

Year ended

December 31,

2012

Denominator

   

   

   

   

   

Stock options and restricted common shares

4,078 

   

2,419 

   

3,573 

Convertible note

29 

   

39 

   

48 

 

 

Additionally, the impact of the convertible debt was determined to be anti-dilutive and excluded from the calculation of net income per diluted share.

 

Income Taxes
Income Taxes

(9) Income Taxes

 

The (provision for)/benefit from income taxes is based on income before income taxes as follows:


 

(In thousands)

 

 

Year ended

December 31,

2014

 

 

Year ended

December 31,

2013

 

 

Year ended

December 31,

2012

 

   

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

28,009 

 

 

$

28,863 

 

 

$

24,268 

 

 

The (provision for)/benefit from income taxes in 2014, 2013 and 2012 consists of current and deferred federal, state and foreign taxes as follows:

 

 

(In thousands)

 

 

Year ended

December 31,

2014

 

 

Year ended

December 31,

2013

 

 

Year ended

December 31,

2012

 

   

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

   Federal

 

$

(1,105

)

 

$

(665

)

 

$

(640

)

   State

 

 

(1,819

)

 

 

(2,050

)

 

 

(1,138

)

   Foreign

 

 

(732

)

 

 

(154

)

 

 

(574

)

   

 

 

(3,656

)

 

 

(2,869

)

 

 

(2,352

)

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

   Federal

 

 

(6,085

)

 

 

(6,815

)

 

 

119,247

 

   State

 

 

(596

)

 

 

(2,738

)

 

 

13,795

 

   Foreign

 

 

 

 

 

 

 

 

 

   

 

 

(6,681

)

 

 

(9,553

)

 

 

133,042

 

Total (provision for)/benefit from income taxes

 

 

$

(10,337

)

 

$

(12,422

)

 

$

130,690

 

 

 

In the fourth quarter of 2012, the Company reversed the valuation allowance recorded against its net deferred tax assets. The decision to reverse the valuation allowance in full was made after management determined, based on an assessment of historical profitability and forecasts of future taxable income, that it was more likely than not that these deferred tax assets would be realized. It will continue to evaluate the necessity for a valuation allowance on these and future  deferred tax assets based on available evidence at each reporting period in conformity with ASC 740.

 

Due to the amount of net operating loss (NOL) and tax credit carryforwards, the Company does not currently pay substantial U.S. federal income taxes. The Company expects to pay cash taxes in various US states and Puerto Rico where it has operations and NOL carryforwards are not available or limited. The Company was subject to the alternative minimum tax during 2014 and 2013 and expects it will continue to be subject to such tax in the near term. The payment of alternative minimum tax generates a credit that may be carried forward indefinitely and can be used to offset its future regular income tax liability.

 

The Company had available federal NOL carryforwards of approximately $215.2 million and $173.8 million and state NOL carryforwards of approximately $14.7 million  and $22.8 million as of December 31, 2014 and 2013, respectively, which are available to offset future taxable income. The net operating loss carryforwards include approximately $31.9 million of deductions related to the exercise of stock options. This amount represents an excess tax benefit of $11.2 million and has not been included in the gross deferred tax asset reflected. The tax benefit  associated with the exercise of these stock options will be recorded in additional paid-in capital when the associated net operating loss is recognized. The federal losses are expected to begin to expire in 2025, while the state losses are expected to expire during similar periods, although not all states conform to the federal carryforward period and occasionally limit the use of net operating losses for a period of time. The Company is no longer subject to federal income tax audits for tax years prior to 2012 however, such net operating losses utilized by the Company in years subsequent to 2004 is subject to review. In 2013 the Company completed an IRS exam for tax years 2009 through 2011 with no material findings.  The Company also has research and development credit carry-forwards of $11.9 million and $6.4 million as of December 31, 2014 and 2013, respectively that are subject to expiration starting in 2017. The Company also has Alternative Minimum Tax credit carry-forwards of $3.3 million and $2.2 million as of December 31, 2014 and 2013, respectively.  Such credits can be carried forward indefinitely and have no expiration date.

 

The Tax Reform Act of 1986 contains certain provisions that can limit a taxpayer's ability to utilize net operating loss and tax credit carryforwards in any given year resulting from cumulative changes in ownership interests in excess of 50 percent over a three-year period. The Company hae determined that these limiting provisions were triggered during a prior year for both Acorda Therapeutics and Neuronex, its wholly owned subsidiary and a current limitation was triggered in the current period for Civitas, another wholly owned subsidiary of Acorda Therapeutics.  However, it believes that such limitation is not expected to result in the expiration or loss of any of its federal NOL’s and income tax credit carryforwards. Future ownership changes may limit the use of these carryforwards.

 

The provision (benefit) for income taxes differs from the U.S. federal statutory tax rate. The reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income tax rate is as follows:

 

 

   

Year ended

December 31,

2014

   

Year ended

December 31,

2013

   

Year ended

December 31,

2012

   

   

   

   

   

   

U.S. federal statutory tax rate

35.0% 

   

35.0% 

   

35.0% 

State and local income taxes

3.7% 

   

10.7% 

   

2.4% 

Foreign income tax

1.8% 

   

0.1% 

   

1.5% 

Stock option compensation

 

0.5% 

   

2.0% 

   

1.9% 

Stock option shortfall

 

   

0.3% 

   

5.6% 

Neuronex acquisition

   

   

9.4% 

Research and development credit

(13.2%)

   

(7.6%)

   

Other nondeductible and permanent differences

6.9% 

   

2.5% 

   

3.3% 

Provision (benefit) attributable to valuation allowance

2.2% 

   

   

(597.6%)

Effective income tax rate

 

36.9% 

   

43.0% 

   

(538.5%)

 

The effective tax rate related to state taxes reflects amended tax return filings and the deferred impact of customary state tax law and apportionment changes that occurred during the year; the state effective tax rate is not necessarily indicative of the company’s expected state tax rate for the foreseeable future.

 

Provisions have been made for deferred taxes based on the differences between the basis of the assets and liabilities for financial statement purposes and the basis of the assets and liabilities for tax purposes using currently enacted tax rates and regulations that will be in effect when the differences are expected to be recovered or settled. The components of the deferred tax assets and liabilities are as follows:

 

 

(In thousands)

 

 

December 31,

2014

 

 

December 31,

2013

 

Deferred tax assets:

 

 

 

 

 

 

   Net operating loss and other carryforwards

 

$

69,149

 

 

$

52,017

 

   Tax credits

 

 

13,199

 

 

 

6,871

 

   Deferred revenue

 

 

29,144

 

 

 

33,557

 

   Stock based compensation

 

 

22,776

 

 

 

19,030

 

   Amortization

 

 

 

 

 

7,912

 

   Other

 

 

11,359

 

 

 

7,912

 

Total deferred tax assets

 

 

145,627

 

 

 

127,299

 

Valuation allowance

 

 

(5,497

)

 

 

 

Total deferred tax assets net of valuation allowance

 

 

140,130

 

 

 

127,299

 

   

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

   Intangible assets

 

 

(123,593

)

 

 

 

   Convertible debt

 

 

(22,002

)

 

 

 

Total deferred tax liabilities

 

 

(145,595

)

 

 

 

Net deferred tax asset (liability)

 

 

$

(5,465

)

 

$

127,299

 

 

(In thousands)

 

 

December 31,

2014

 

 

December 31,

2013

 

Current deferred tax assets, net:

 

 

 

 

 

 

   Current deferred tax assets, net of deferred tax liabilities

 

$

19,143

 

 

$

19,314

 

   Valuation allowance

 

 

(723

)

 

 

 

Current deferred tax assets, net

 

 

18,420

 

 

 

19,314

 

Non-current deferred tax assets, net:

 

 

 

 

 

 

 

 

   Non-current deferred tax assets, net of deferred tax liabilities

 

 

(19,111

)

 

 

107,985

 

   Valuation allowance

 

 

(4,774

)

 

 

 

Non-current deferred tax assets (liabilities), net

 

 

(23,885

)

 

 

107,985

 

Net deferred tax asset (liability)

 

 

$

(5,465

)

 

$

127,299

 

 

 

The Company follows authoritative guidance regarding accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

The beginning and ending amounts of unrecognized tax benefits reconciles as follows:

 

 

(In thousands)

 

 

Year ended

December 31,

2014

 

 

Year ended

December 31,

2013

 

 

Year ended

December 31,

2012

 

   

 

 

 

 

 

 

 

 

 

Beginning of period balance

 

$

2,244

 

 

$

1,936

 

 

$

 

   Increases for tax positions taken during a prior period

 

 

451

 

 

 

589

 

 

 

1,936

 

Decreases for tax positions taken during a prior period

 

 

(200

)

 

 

(511

)

 

 

 

Increases for tax positions taken during the current period

 

 

800

 

 

 

230

 

 

 

 

Reduction as a result of a lapse of statute of limitations

 

 

 

 

 

 

 

 

 

 

   

 

$

3,295

 

 

$

2,244

 

 

$

1,936

 

 

Due to the amount of the Company’s NOLs and tax credit carryforwards, it has not accrued interest relating to these unrecognized tax benefits. Accrued interest and penalties, however, would be disclosed within the related liabilities lines in the consolidated balance sheet and recorded as a component of income tax expense. Unless related to excess tax benefits from stock options, all of its unrecognized tax benefits, if recognized, would impact the effective tax rate.

 

The Company files federal and state income tax returns in the U.S. and Puerto Rico. The U.S. and Puerto Rico have statute of limitations ranging from 3 to 5 years. However, the statute of limitations could be extended due to the Company’s NOL carryforward position in a number of its jurisdictions. The tax authorities, generally, have the ability to review income tax returns for periods where the statute of limitation has previously expired and can subsequently adjust the NOL carryforward or tax credit amounts. Accordingly, the Company does not expect to reverse any portion of the unrecognized tax benefits within the next year.

 

On September 13, 2013, the Internal Revenue Service issued final Tangible Property Regulations (TPR) under Internal Revenue Code (IRC) Section 162 and IRC Section 263(a), which prescribe the capitalization treatment of certain repair costs, asset betterments and other costs which could affect temporary deferred taxes. Although the regulations are not effective until tax years beginning on or after January 1, 2014, certain portions may require an accounting method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to fixed and real asset deferred taxes. Pursuant to U.S. GAAP, as of the date of the issuance, the release of the regulations is treated as a change in tax law. Therefore, the Company is required to determine whether there will be an impact on its financial statements. The Company is currently analyzing the expected impact of the new regulations and does not believe the impact will be material to its financial position or results of operations. The Company will continue to monitor any future changes in the TPR prospectively.

 

License, Research and Collaboration Agreements
License, Research and Collaboration Agreements

(10) License, Research and Collaboration Agreements

 

Alkermes plc, formerly Elan plc

 

The Company has entered into agreements with Elan Corporation plc, including those described immediately below and elsewhere in these financial statements.  In September 2011, Alkermes plc acquired Elan’s Drug Technologies business and Elan transferred the agreements to Alkermes as part of that transaction.  Throughout this report, references to “Alkermes” include Alkermes plc and also, as the context may require, Elan Corporation plc as the predecessor to Alkermes plc under the agreements.

 

The Company is a party to a 2003 amended and restated license agreement and a 2003 supply agreement with Alkermes for Ampyra, which replaced two prior license and supply agreements for Ampyra. Under the license agreement, the Company has exclusive worldwide rights to Ampyra, as well as Alkermes’s formulation for any other mono or di-aminopyridines, for all indications, including multiple sclerosis and spinal cord injury. The Company is obligated to pay Alkermes milestone payments and royalties based on a percentage of net product sales and the quantity of product shipped by Alkermes to Acorda.

 

Subject to early termination provisions, the Alkermes license terminates on a country by country basis on the latter to occur of fifteen years from the date of the agreement, the expiration of the last to expire Alkermes patent or the existence of competition in that country.

 

Under the supply agreement, Alkermes has the right to manufacture for the Company, subject to certain exceptions, Ampyra and other products covered by these agreements at specified prices calculated as a percentage of net product sales of the product shipped by Alkermes to Acorda. In the event Alkermes does not manufacture the products, it is entitled to a compensating payment for the quantities of product provided by the alternative manufacturer.

 

Convertible Note

 

Under the Agreement, Alkermes also loaned to the Company an aggregate of $7.5 million pursuant to two convertible promissory notes. On December 23, 2005, Alkermes transferred these promissory notes to funds affiliated with Saints Capital. One promissory note in the amount of $5.0 million bears interest at a rate of 3% beginning on the first anniversary of the issuance of the note. The original unpaid principal was convertible into 67,476 shares of common stock. As of December 31, 2014 the unpaid principal was convertible into 28,918 shares of common stock. Principal and interest are repayable, if not converted, ratably over a seven-year period beginning one year after the Company receives certain regulatory approval for the products to be developed, subject to limitations related to gross margin on product sales. The $5.0 million promissory note restricts the Company’s ability to incur indebtedness that is senior to the notes, subject to certain exceptions, including for the Company’s revenue interests assignment arrangement (See Note 14).

 

The second promissory note was in the amount of $2.5 million and was non-interest bearing. In December 2006, Saints Capital exercised the conversion of this note into 210,863 shares of common stock.

 

On January 22, 2010, the Company received regulatory approval for the product under development that was subject to this convertible note payable. Saints Capital held the option to convert the outstanding principal into common stock until the first anniversary of regulatory approval or January 22, 2011. Saints Capital did not convert by the first anniversary date, therefore the Company is obligated to pay the outstanding principal sum on the promissory note, together with all accrued and unpaid interest, subject to limitations related to gross margin on product sales, in seven equal installments, the first of which was paid on the maturity date, and the balance shall be paid on the six successive anniversaries of the maturity date. The Company, at its option, may at any time prepay in whole or in part, without penalty, the principal balance together with accrued interest to the date of payment, by giving Saints Capital written notice at least thirty days prior to the date of prepayment.

 

Interest on this convertible promissory note has been recorded using 3% on the $5 million note.

 

Supply Agreement

 

The Company is a party to a 2003 supply agreement with Alkermes relating to the manufacture and supply of Ampyra by Alkermes. The Company is obligated to purchase at least 75% of its annual requirements of Ampyra from Alkermes, unless Alkermes is unable or unwilling to meet its requirements, for a percentage of net product sales and the quantity of product shipped by Alkermes to Acorda. In those circumstances, where the Company elects to purchase less than 100% of its requirements from Alkermes, the Company is obligated to make certain compensatory payments to Alkermes. Alkermes is required to assist the Company in qualifying a second manufacturer to manufacture and supply the Company with Ampyra subject to its obligations to Alkermes.

 

As permitted by the agreement with Alkermes, the Company has designated Patheon, Inc. (Patheon) as a qualified second manufacturing source of Ampyra. In connection with that designation, the Company entered into a manufacturing agreement with Patheon, and Alkermes assisted the Company in transferring manufacturing technology to Patheon. The Company and Alkermes have agreed that a purchase of up to 25% of annual requirements from Patheon is allowed if compensatory payments are made to Alkermes. In addition, Patheon may supply the Company with Ampyra if Alkermes is unable or unwilling to meet the Company’s requirements.

 

Rush-Presbyterian St. Luke’s Medical Center

 

In 1990, Alkermes licensed from Rush know-how relating to dalfampridine (4-aminopyridine, 4-AP, the formulation used in Ampyra), for the treatment of MS. The Company subsequently licensed this know-how from Alkermes. In September 2003, the Company entered into an agreement with Rush and Alkermes terminating the Rush license to Alkermes and providing for mutual releases. The Company also entered into a license agreement with Rush in 2003 in which Rush granted the Company an exclusive worldwide license to its know-how relating to dalfampridine for the treatment of MS. Rush has also assigned to the Company its Orphan Drug Designation for dalfampridine for the relief of symptoms of MS.

 

As of December 31, 2014, the Company made or accrued royalty payments totaling $27.8 million.

 

Biogen Idec

 

On June 30, 2009, the Company entered into an exclusive collaboration and license agreement with Biogen Idec International GmbH (Biogen Idec) 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 Idec 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 Idec 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 Idec (the Supply Agreement), pursuant to which the Company will supply Biogen Idec 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 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 million based on the successful achievement of future regulatory milestones and up to $365 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 Idec will be required to make double-digit tiered royalty payments to the Company on ex-U.S. sales. In addition, the consideration that Biogen Idec 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 Idec 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 Idec, 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 a license receivable and deferred revenue of $110.0 million for the upfront payment due to the Company from Biogen Idec under the Collaboration Agreement. Also, as a result of such payment to Acorda, a payment of $7.7 million became payable by Acorda to Alkermes and was recorded as a cost of license payable and deferred expense. The payment of $110.0 million was received from Biogen Idec on July 1, 2009 and the payment of $7.7 million was made to Alkermes on July 7, 2009.

 

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 Idec. 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 Idec 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 knowhow 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 Idec 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 $9.1 million in amortized license revenue, a portion of the $110.0 million received from Biogen Idec, and $634,000 in cost of license revenue, a portion of the $7.7 million paid to Alkermes, during each of the twelve-month periods ended December 31, 2014, 2013 and 2012.

 

On January 21, 2011 Biogen Idec announced that the European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use (CHMP) decided against approval of Fampyra to improve walking ability in adult patients with multiple sclerosis.  Biogen Idec, working closely with the Company, filed a formal appeal of the decision.  In May 2011, the CHMP recommended conditional marketing authorization, and in July 2011 Biogen Idec received conditional approval from the European Commission for, Fampyra (prolonged-release fampridine tablets) for the improvement of walking in adult patients with MS with walking disability (Expanded Disability Status Scale of 4-7). The Company changed the amortization period on a prospective basis during the three-month period ended March 31, 2011 by five months and 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 Idec owes Acorda royalties based on ex-U.S. net sales, and milestones based on ex-U.S. regulatory approval, new indications, and ex-U.S. net sales.  These milestones included a $25 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 Idec 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.

 

Cost of milestone and license revenue includes $634,000 in cost of license revenue for the twelve-month periods ended December 31, 2014, 2013 and 2012, which represents the amortized portion of the $7.7 million paid to Alkermes in 2009.  

 

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 twelve-month periods ended December 31, 2014 and 2013, the Company recognized royalty revenue of $9.1 million and $7.8 million, respectively, related to the gross margin of the Zanaflex Capsule authorized generic.  During the twelve-month periods ended December 31, 2014 and 2013, the Company also recognized revenue and a corresponding cost of sales of $4.6 million and $3.2 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.

 

Alkermes (ARCUS products)

 

In December 2010, Civitas, the Company’s wholly-owned subsidiary, entered into the Alkermes Agreement, in which Civitas licensed or acquired from Alkermes certain pulmonary development programs and INDs, underlying intellectual property and laboratory equipment associated with the pulmonary business of Alkermes. The assets acquired includes (i) patents, patent applications and related know-how and documentation; (ii) a formulation of inhaled L-dopa; (iii) several other pulmonary development programs and INDs, which are part of the platform device and formulation IP; (iv) instruments, laboratory equipment and apparatus; and (v) inhalers, inhaler molds, tools, and the associated assembled equipment. In addition, Civitas signed the sublease for the facility where the Alkermes operations were housed in Chelsea, Massachusetts.

 

Under the terms of the Alkermes Agreement, Civitas will also pay to Alkermes royalties for each licensed product as follows: (i) for all licensed products sold by Civitas, Civitas will pay Alkermes a mid-single digit percentage of net sales of such licensed products and (ii) for all licensed products sold by a collaboration partner, Civitas will pay Alkermes the lower of a mid-single digit percentage of net sales of such licensed products in a given calendar year or a percentage in the low-to-mid-double digits of all collaboration partner revenue received in such calendar year. Notwithstanding the foregoing, in no event shall the royalty paid be less than a low-single digit percentage of net sales of a licensed product in any calendar year.

 

As consideration for the agreement with Alkermes, Civitas issued stock and also agreed to pay Alkermes royalties on future net product sales from products developed from licensed technology under the Alkermes Agreement. The fair value of the future royalties is classified as contingent consideration. The Company estimates the fair value of this contingent consideration based on future revenue projections and estimated probabilities of receiving regulatory approval and commercializing such products.  Refer to Note 15 – Fair Value Measurements for more information on the contingent consideration liability.

 

Neuronex

 

In December 2012, the Company acquired Neuronex, Inc., a privately-held development stage pharmaceutical company (Neuronex) developing Plumiaz (its trade name for Diazepam Nasal Spray).  Plumiaz is a proprietary nasal spray formulation of diazepam that it is 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. 

 

Under the terms of the 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 shareholders less a $300,000 holdback provision.  After adjustment for Neuronex’s working capital upon closing of the acquisition, approximately $120,000 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.

 

The former equity holders of Neuronex are entitled to receive from Acorda up to an additional $18 million in contingent earnout payments upon the achievement of specified regulatory and manufacturing-related milestones with respect to Diazepam Nasal Spray products, and up to $105 million upon the achievement of specified sales milestones with respect to Diazepam Nasal Spray products.  The former equity holders of Neuronex will also be entitled to receive tiered royalty-like earnout payments, ranging from the upper single digits to lower double digits, on worldwide net sales of Diazepam Nasal Spray products.  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 paid during the three-month period ending September 30, 2013 upon the FDA’s acceptance for review of the first NDA for Plumiaz), 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 transaction based upon the guidance of ASC 805, Business Combinations, and concluded that it will only acquire 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.

 

Employee Benefit Plan
Employee Benefit Plan

(11) Employee Benefit Plan

 

Effective September 1, 1999, the Company adopted a defined contribution 401(k) savings plan (the 401(k) plan) covering all employees of the Company. Participants may elect to defer a percentage of their annual pretax compensation to the 401(k) plan, subject to defined limitations. The plan includes an employer match contribution to employee deferrals. For each dollar an employee invests up to 6% of his or her earnings, the Company will contribute an additional 50 cents into the funds. The Company’s expense related to the plan was $1.9 million, $1.5 million and $1.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.

 

Commitments and Contingencies
Commitments and Contingencies

(12) Commitments and Contingencies

 

Operating Leases

 

Ardsley, New York

 

In June 2011, the Company entered into a 15 year lease for an aggregate of approximately 138,000 square feet of office and laboratory space in Ardsley, New York.  In July 2012, the Company relocated its corporate headquarters, and all employees based at the prior Hawthorne, NY location, to the Ardsley facility.  The Company has grown substantially over the last several years, and the new facility provides state-of-the art office and laboratory space that accommodates the Company’s current needs and allows for future growth.  The Company has options to extend the term of the lease for three additional five-year periods, and the Company has an option to terminate the lease after 10 years subject to payment of an early termination fee.  Also, the Company has rights to lease up to approximately 120,000 additional square feet of space in additional buildings at the same location.  The Company’s extension, early termination, and expansion rights are subject to specified terms and conditions, including specified time periods when they must be exercised, and are also subject to limitations including that the Company not be in default under the lease.  In 2014, the Company exercised its option to expand into an additional 25,405 square feet of office space, which the Company occupied in January 2015.

 

The Ardsley lease provides for monthly payments of rent during the term. These payments consist of base rent, which takes into account the costs of the facility improvements being funded by the facility owner prior to the Company’s occupancy, and additional rent covering customary items such as charges for utilities, taxes, operating expenses, and other facility fees and charges.  The base rent is currently $4.1 million per year, which reflects an annual 2.5% escalation factor as well as the recent expansion, described above.

 

 Chelsea, Massachusetts

 

The Company’s 2014 acquisition of Civitas Therapeutics, Inc. included a  subleased, manufacturing facility in Chelsea, Massachusetts with commercial-scale capabilities.  The approximately 90,000 square foot facility also includes office and laboratory space.  Civitas subleases the Chelsea, Massachusetts facility from Alkermes, Inc. The sublease is an operating lease that expires December 31, 2015, which Civitas may extend for two five-year terms.  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. Alkermes leases the building from H&N Associates, LLC pursuant to an overlease dated December 6, 2000, as amended. Civitas assumed all of Alkermes’s rights and obligations under the overlease.  The base rent is currently $722,000 per year.

 

Future minimum commitments under all non-cancelable operating leases subsequent to December 31, 2014 are as follows:

 

(In thousands)

 

 

 

2015

 

$

4,787 

 

2016

 

 

4,353 

 

2017

 

 

4,462 

 

2018

 

 

4,573 

 

2019

 

 

4,688 

 

Later years

 

 

 

16,780 

 

   

 

$

39,643 

 

 

Rent expense under these operating leases during the years ended December 31, 2014, 2013 and 2012 was approximately $6.2 million, $3.4 million, and $2.3 million, respectively.

 

License Agreements

 

Under the Company’s Ampyra license agreement with Alkermes, the Company is obligated to make milestone payments to Alkermes of up to $15.0 million over the life of the contract and royalty payments as a percentage of net product sales and the quantity of product shipped by Alkermes to Acorda. In addition, under the Company’s various other research, license and collaboration agreements with other parties, it is obligated to make milestone payments of up to an aggregate of approximately $204 million over the life of the contracts. The FDA approval of Ampyra triggered a milestone of $2.5 million to Alkermes that was paid during the quarter ended June 30, 2010. An additional milestone payment to Alkermes was paid during the quarter ended March 31, 2012 with an additional $2.5 million recorded as an intangible asset.  Further milestone amounts are payable in connection with additional indications.

 

Under the Company’s Ampyra supply agreement with Alkermes, payments for product manufactured by Alkermes are calculated as a percentage of net product sales and the quantity of product shipped by Alkermes to Acorda. Under this agreement, Acorda also has the option to purchase an agreed to quantity of product from a second source provided Acorda makes a compensating payment to Alkermes for the quantities of product provided by the second source.

 

Under the Company’s license agreement with Rush-Presbyterian-St. Luke’s Medical Center, it is obligated to make royalty payments as a percentage of net sales in the United States and in countries other than the United States.

 

Under the Company’s supply agreement with Alkermes, it provides Alkermes with monthly written 18-month forecasts, and with annual written five-year forecasts for its supply requirements of Ampyra and two-year forecasts for its supply requirements of Zanaflex Capsules. In each of the five months for Zanaflex and three months for Ampyra following the submission of its written 18-month forecast the Company is obligated to purchase the quantity specified in the forecast, even if its actual requirements are greater or less.

 

Employment Agreements

 

The Company has an employment agreement with its Chief Executive Officer under which the Chief Executive Officer is entitled to severance and other payments if his employment is terminated under certain circumstances. The employment agreement was amended in 2011.  Under the employment agreement as amended, if the Company terminates the Chief Executive Officer for reasons other than cause or if the Chief Executive Officer terminates his employment for good reason, the Company must pay (i) an amount equal to the base salary the chief executive officer would have received during the 24 month period immediately following the date of termination, plus (ii) bonus equal to the Chief Executive Officer’s last annual bonus, prorated based on the number of days in the calendar year elapsed as of the termination date.  If the termination occurs after a change in control, then the bonus is an amount equal to two (2) times the larger of the Chief Executive Officer’s (x) prior year annual bonus and (y) target annual bonus for the year of termination.  The Chief Executive Officer is also entitled to COBRA premium payments for the 24 month severance period.

 

The Company also has employment agreements with some of its other executive officers, including the Company’s Chief Scientific Officer, President, International and General Counsel, Chief Financial Officer, and Chief of Business Operations that govern the terms and conditions of their employment.  These agreements were amended during 2011 with the exception of the agreement with the Chief Financial Officer which was executed in 2014.  Under these agreements as amended, if the Company terminates the employment of any of the executive officers for reasons other than cause, or if any of the executive officers terminates his or her employment for good reason, the Company must (i) make severance payments equal to the base salary the executive would have received during the twelve month period immediately following the date of termination, plus (ii) a bonus equal to the executive officer’s target cash bonus for the year of termination, prorated based on the number of days in the calendar year elapsed as of the termination date.  If the termination occurs within 18 months after a change in control, then the severance payment is 24 months of base salary and is paid in a lump sum, and the bonus is an amount equal to two (2) times the executive officer’s target cash bonus for the year of termination.  The executive officers are also entitled to COBRA premium payments for the relevant severance period.

 

The Company also has a change in control agreement with its Chief Medical Officer.  Under this agreement, if the Company terminates the employment of the Chief Medical Officer for reasons other than cause within twelve months following a change in control, or if the Chief Medical Officer terminates his employment for good reason within six months following a change in control, the Company must pay the Chief Medical Officer (i) a lump sum equal to the base salary the Chief Medical Officer would have received during the 24 month period immediately following the date of termination, plus (ii) a bonus equal to two times the Chief Medical Officer’s target cash bonus for the year of termination.  The Chief Medical Officer is also entitled to COBRA premium payments for the severance period.

 

Other

 

The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company accrues for amounts related to legal matters if it is probable that a liability has been incurred and the amount is reasonably estimable. While losses, if any, are possible the Company is not able to estimate any ranges of losses as of December 31, 2014. Litigation expenses are expensed as incurred.

 

The Company is currently party to the other legal proceedings described in Part I, Item 3 of this annual report on Form 10-K, 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 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 the matters described in Part I, Item 3, Legal Proceedings, of this annual report on Form 10-K, 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.

 

Intangible Assets and Goodwill
Intangible Assets

(13) Intangible Assets and Goodwill

 

Intangible Assets

 

CVT-301 and ARCUS Technology IPR&D

 

In October 2014, the Company acquired through the acquisition of Civitas (Note 3), 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 the Company believes has potential applications in multiple disease areas.  CVT-301 is an inhaled formulation of levodopa, or L-dopa, for the treatment of OFF episodes in Parkinson’s disease.

 

In accordance with the acquisition method of accounting, the Company allocated the acquisition cost for the transaction to the underlying assets acquired and liabilities assumed by the Company, based upon the estimated fair values of those assets and liabilities at the date of acquisition and classified the fair value of the acquired IPR&D as an indefinite-lived intangible asset until the successful completion or abandonment of the associated research and development efforts.  The value allocated to the indefinite lived intangible asset was $423 million.

 

Ampyra

 

On January 22, 2010, the Company received marketing approval from the FDA for Ampyra triggering two milestone payments of $2.5 million to Alkermes and $750,000 to Rush-Presbyterian St. Luke’s Medical Center (Rush) and an additional $2.5 million payable to Alkermes two years from date of approval.  The Company made milestone payments totaling $3.25 million which were recorded as intangible assets in the consolidated financial statements during the three-month period ended March 31, 2010. An additional milestone payment to Alkermes was paid during the three-month period ended March 31, 2012 with an additional $2.5 million recorded as an intangible asset.

 

In April 2011 the Company announced the United States Patent and Trademark Office (USPTO) allowed U.S. Patent Application No. 11/010,828 entitled “Sustained Release Aminopyridine Composition.”  The claims of the patent application relate to methods to improve walking in patients with multiple sclerosis (MS) by administering 10 mg of sustained release 4-aminopyridine (dalfampridine) twice daily. The patent that issued from this application was accorded an initial patent term adjustment by the USPTO of 298 days, initially extending its term to early October 2025.  In August 2011 the USPTO issued the Company’s Patent Application No. 11/010,828 as U.S. Patent No.8,007,826 entitled “Sustained Release Aminopyridine Composition.”  The patent, which is listed in the FDA Orange Book, expires in May 2027. The estimated remaining useful life of this asset is presented in the table below.

 

In August 2003, the Company entered into an Amended and Restated License Agreement with the Canadian Spinal Research Organization (CSRO). Under this agreement, the Company was granted an exclusive and worldwide license under certain patent assets and know-how of CSRO relating to the use of dalfampridine in the reduction of chronic pain and spasticity in a spinal cord injured subject.  The agreement required the Company to pay to CSRO royalties based on a percentage of net sales of any product incorporating the licensed rights, including royalties on the sale of Ampyra and on the sale of dalfampridine for any other indication. During the three-month period ended March 31, 2010, the Company purchased CSRO’s rights to all royalty payments under the agreement with CSRO for $3.0 million.  This payment was recorded as an intangible asset in the consolidated financial statements. The estimated remaining useful life of this asset is presented in the table below.

 

NP-1998 IPR&D and Qutenza Developed Technology

 

In July 2013, the Company acquired rights in the U.S., Canada, Latin America and certain other countries to two neuropathic pain management assets from NeurogesX, Inc., including: Qutenza®, which is approved by the FDA for the management of neuropathic pain associated with post-herpetic neuralgia, also known as post-shingles pain; and NP-1998, a Phase 3 ready, prescription strength capsaicin topical solution, that was being assessed for the treatment of neuropathic pain.  In accordance with the acquisition method of accounting, the Company allocated the acquisition cost for the NeurogesX transaction to the underlying assets acquired by the Company, based upon the estimated fair values of those assets at the date of acquisition and classified the fair value of the acquired IPR&D as an indefinite-lived asset classified under intangible assets until the successful completion or abandonment of the associated research and development efforts.  The value allocated to this indefinite lived asset was approximately $7.0 million.  The value allocated to the Qutenza developed technology was determined to be approximately $450,000 and was recorded as an intangible asset.

 

The Company evaluated and reprioritized its research and development pipeline based on the 2014 acquisition of Civitas, and as a result has no current plans to invest in further development of NP-1998 for neuropathic pain. Therefore, the Company believes that the intangible assets associated with NP-1998 and Qutenza were fully impaired based on the currently estimated fair value of the assets, and the Company recorded asset impairment charges of approximately $7.0 million and $0.3 million to fully write off the carrying value of the NP-1998 and Qutenza assets, respectively, during the three-month period ended December 31, 2014.

 

Websites

 

Intangible assets also include certain website development costs which have been capitalized. The Company has developed several websites, each with its own purpose, including the general corporate website, product information websites and various other websites.

 

The Company continually evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful life of its intangible assets may warrant revision or that the carrying value of these assets may be impaired. As of December 31, 2014, the Company does not believe that there are any facts or circumstances that would indicate a need for changing the estimated remaining useful life of the Company’s other intangible assets.

 

Intangible assets consisted of the following:

 

(In thousands)

 

 

December 31,

2014

 

 

December 31,

2013

 

 

Estimated

remaining

useful lives as of

December 31,

2014

 

In-process research & development – CVT-301/ARCUS

 

 

$

423,000 

 

 

$

 

 

Indefinite-lived

 

In-process research & development – NP-1998

 

 

 

 

 

 

6,991 

 

 

 

n/a

 

Ampyra milestones

 

 

 

5,750 

 

 

 

5,750 

 

 

12 years

 

Ampyra CSRO royalty buyout

 

 

 

3,000 

 

 

 

3,000 

 

 

5 years

 

Qutenza developed technology

 

 

 

 

 

 

450 

 

 

 

n/a

 

Website development costs

 

 

 

11,319 

 

 

 

8,435 

 

 

1-3 years

 

Website development costs – in process

 

 

 

306 

 

 

 

492 

 

 

3 years

 

   

 

 

443,375 

 

 

 

25,118 

 

 

 

 

 

Less accumulated amortization

 

 

 

10,553 

 

 

 

7,659 

 

 

 

 

 

   

 

$

432,822 

 

 

$

17,459 

 

 

 

 

 

 

The Company recorded $3.3 million and $2.4 million in amortization expense related to these intangible assets in the years ended December 31, 2014 and 2013, respectively.  The Company recorded impairment charges of approximately $7.0 million and $0.3 million to write-off the carrying value of NP-1998 and Qutenza, respectively during the three-month period ended December 31, 2014.

 

Estimated future amortization expense for intangible assets subsequent to December 31, 2014 is as follows:

 

(In thousands)

 

 

 

2015

 

$

3,014 

 

2016

 

 

2,099 

 

2017

 

 

1,331 

 

2018

 

 

588 

 

2019

 

 

588 

 

Thereafter

 

 

 

2,202 

 

   

 

$

9,822 

 

 

Goodwill

 

At December 31, 2014, the Company recorded goodwill associated with the acquisition of Civitas Therapeutics.  The carrying value of goodwill at December 31, 2014 was approximately $183.0 million.

 

The change in the carrying value of goodwill is as follows:

 

   Balance at December 31, 2013

 

$

 

   Acquisition of Civitas Therapeutics

 

 

182,952 

 

   Balance at December 31, 2014

 

$

182,952 

 

 

Debt
Debt

(14) Debt

 

Convertible Senior Notes

 

 

On June 17, 2014, the Company entered into an underwriting agreement (the Underwriting Agreement) with J.P. Morgan Securities LLC (the Underwriter) relating to the issuance by the Company of $345 million aggregate principal amount of 1.75% Convertible Senior Notes due 2021 (the Notes) in an underwritten public offering pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-196803) (the Registration Statement) and a related preliminary and final prospectus supplement, filed with the Securities and Exchange Commission (the Offering). The principal amount of Notes includes $45 million aggregate principal amount of Notes that was purchased by the Underwriter pursuant to an option granted to the Underwriter in the Underwriting Agreement, which option was exercised in full. The net proceeds from the offering, after deducting the Underwriter’s discount and the offering expenses paid by the Company, were approximately $337.5 million.

 

The Notes are governed by the terms of an indenture, dated as of June 23, 2014 (the Base Indenture) and the first supplemental indenture, dated as of June 23, 2014 (the Supplemental Indenture, and together with the Base Indenture, the Indenture), each between the Company and Wilmington Trust, National Association, as trustee (the Trustee). The Notes will be convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment, of 23.4968 shares per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $42.56 per share), only in the following circumstances and to the following extent: (1) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (2) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (3) if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; (4) upon the occurrence of specified events described in the Indenture; and (5) at any time on or after December 15, 2020 through the second scheduled trading day immediately preceding the maturity date.

 

The Company may not redeem the Notes prior to June 20, 2017. The Company may redeem for cash all or part of the Notes, at the Company’s option, on or after June 20, 2017 if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within five trading days prior to the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

 

The Company will pay 1.75% interest per annum on the principal amount of the Notes, payable semiannually in arrears in cash on June 15 and December 15 of each year, beginning on December 15, 2014. The first payment was made on  December 9, 2014 in the amount of $2.9 million. The Notes will mature on June 15, 2021.

 

If the Company undergoes a “fundamental change” (as defined in the Indenture), subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If a make-whole fundamental change, as described in the Indenture, occurs and a holder elects to convert its Notes in connection with such make-whole fundamental change, such holder may be entitled to an increase in the conversion rate as described in the Indenture.

 

The Indenture contains customary terms and covenants and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Notes by notice to the Company and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal and accrued and unpaid interest, if any, on all of the Notes will become due and payable automatically. Notwithstanding the foregoing, the Indenture provides that, to the extent the Company elects and for up to 270 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right to receive additional interest on the Notes.

 

The Notes will be senior unsecured obligations and will rank equally with all of the Company’s existing and future senior debt and senior to any of the Company’s subordinated debt. The Notes will be structurally subordinated to all existing or future indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries and will be effectively subordinated to the Company’s existing or future secured indebtedness to the extent of the value of the collateral. The Indenture does not limit the amount of debt that the Company or its subsidiaries may incur.

 

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the seven-year term of the Notes using the effective interest method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

 

The outstanding note balances as of December 31, 2014 consisted of the following:

 

 (In thousands)

   

December 31, 2014

   

Liability component:

   

 

   

  Principal

   

$

345,000

   

  Less: debt discount, net

   

(57,301

)

Net carrying amount

   

$

287,699

   

Equity component

   

$

61,195

   

 

In connection with the issuance of the Notes, the Company incurred approximately $7.5 million of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $7.5 million of debt issuance costs, $1.3 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and $6.2 million were allocated to the liability component and recorded as deferred financing costs included in other assets on the balance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the Notes using the effective interest method.

 

The Company determined the expected life of the debt was equal to the seven year term on the Notes. The carrying amount of the Company’s borrowings of $287.7 million approximated fair value at December 31, 2014.  

 

As of December 31, 2014, the remaining contractual life of the Notes is approximately 6.5 years. The effective interest rate on the liability component was approximately 4.8% for the period from the date of issuance through December 31, 2014. The following table sets forth total interest expense recognized related to the Notes for the year ended December 31, 2014:

 

(In thousands)

 

 

Year ended

December 31, 2014

 

Contractual interest expense

 

$

3,153 

 

Amortization of debt issuance costs

 

 

397 

 

Amortization of debt discount

 

 

3,894 

 

      Total interest expense

 

$

7,444 

 

 

 

Convertible Note

 

The Company is a party to an amended and restated license agreement and a supply agreement with Alkermes, which replaced two prior license and supply agreements for Ampyra.  Under the license agreement, Alkermes also loaned to the Company an aggregate of $7.5 million pursuant to two convertible promissory notes. On December 23, 2005, Alkermes transferred these promissory notes to funds affiliated with Saints Capital. One promissory note remains outstanding in the amount of $5.0 million and bears interest at a rate of 3% beginning on the first anniversary of the issuance of the note (See Note 10).

 

Revenue Interests Assignment

 

On December 23, 2005, the Company entered into an agreement with an affiliate of Paul Royalty Fund (PRF), under which the Company received $15 million in cash. In exchange the Company has assigned PRF revenue interest in Zanaflex Capsules, Zanaflex tablets and any future Zanaflex products. The agreement covers all Zanaflex net revenues (as defined in the agreement) generated from October 1, 2005 through and including December 31, 2015, unless the agreement terminates earlier. In November 2006, the Company entered into an amendment to the revenue interests assignment agreement with PRF. Under the terms of the amendment, PRF paid the Company $5.0 million in November 2006. An additional $5.0 million was due to the Company if net revenues during the fiscal year 2006 equaled or exceeded $25.0 million. This milestone was met and the receivable was reflected in the Company’s December 31, 2006 financial statements. Under the terms of the amendment, the Company repaid PRF $5.0 million on December 1, 2009 and an additional $5.0 million on December 1, 2010 since the net revenues milestone was met. In November 2014 PRF sold its Zanaflex revenue interest to Valeant Pharmaceuticals International, Inc.

 

Under the revenue interests assignment agreement and the amendment to the agreement, PRF was entitled to, and now as PRF’s successor Valeant is entitled to, the following portion of Zanaflex net revenues: