ACORDA THERAPEUTICS INC, 10-Q filed on 11/6/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 31, 2018
Document And Entity Information [Abstract]    
Entity Registrant Name ACORDA THERAPEUTICS INC  
Entity Central Index Key 0001008848  
Document Type 10-Q  
Document Period End Date Sep. 30, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Trading Symbol ACOR  
Entity Common Stock, Shares Outstanding   47,558,339
v3.10.0.1
Consolidated Balance Sheets - USD ($)
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 321,011,000 $ 307,068,000
Restricted cash 365,000 410,000
Short term investments 139,935,000 0
Trade accounts receivable, net of allowances of $2,336 and $845, as of September 30, 2018 and December 31, 2017, respectively 51,461,000 81,403,000
Prepaid expenses 16,221,000 13,333,000
Finished goods inventory held by the Company 10,800,000 37,501,000
Other current assets 6,802,000 1,983,000
Total current assets 546,595,000 441,698,000
Property and equipment, net of accumulated depreciation 52,061,000 36,669,000
Goodwill 283,435,000 286,611,000
Intangible assets, net of accumulated amortization 428,575,000 430,603,000
Non-current portion of deferred cost of license revenue   1,638,000
Other assets 419,000 750,000
Total assets 1,311,085,000 1,197,969,000
Current liabilities:    
Accounts payable 29,554,000 27,367,000
Accrued expenses and other current liabilities 97,816,000 100,128,000
Current portion of deferred license revenue   9,057,000
Current portion of loans payable 624,000 645,000
Current portion of liability related to sale of future royalties 7,714,000 6,763,000
Total current liabilities 135,708,000 143,960,000
Convertible senior notes (due 2021) 316,160,000 308,805,000
Non-current portion of acquired contingent consideration 131,229,000 112,722,000
Non-current portion of deferred license revenue   23,398,000
Non-current portion of loans payable 24,673,000 25,670,000
Deferred tax liability 70,656,000 22,459,000
Non-current portion of liability related to sale of future royalties 24,251,000 29,025,000
Other non-current liabilities 9,783,000 11,943,000
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.001 par value. Authorized 20,000,000 shares at September 30, 2018 and December 31, 2017; no shares issued as of September 30, 2018 and December 31, 2017, respectively
Common stock, $0.001 par value. Authorized 80,000,000 shares at September 30, 2018 and December 31, 2017; issued 47,310,300 and 46,441,428 shares, including those held in treasury, as of September 30, 2018 and December 31, 2017, respectively 47,000 46,000
Treasury stock at cost (79,275 shares at September 30, 2018 and 16,151 shares at December 31, 2017) (1,976,000) (389,000)
Additional paid-in capital 999,880,000 968,580,000
Accumulated deficit (403,439,000) (455,108,000)
Accumulated other comprehensive income 4,113,000 6,858,000
Total stockholders’ equity 598,625,000 519,987,000
Total liabilities and stockholders’ equity $ 1,311,085,000 $ 1,197,969,000
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Trade accounts receivable, allowances (in dollars) $ 2,336 $ 845
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, Authorized shares 20,000,000 20,000,000
Preferred stock, issued shares 0 0
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 47,310,300 46,441,428
Treasury stock, shares 79,275 16,151
v3.10.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Revenues:        
Total net revenues $ 142,814 $ 141,065 $ 402,281 $ 399,889
Costs and expenses:        
Cost of sales 25,391 29,992 77,834 84,840
Cost of license revenue   159   476
Research and development 22,855 33,286 79,325 130,963
Selling, general and administrative 43,571 40,741 135,435 142,100
Asset impairment   39,446   39,446
Changes in fair value of acquired contingent consideration 22,700 (400) 21,900 16,800
Total operating expenses 114,517 143,224 314,494 414,625
Operating income (loss) 28,297 (2,159) 87,787 (14,736)
Other (expense) income, net:        
Interest and amortization of debt discount expense (5,415) (4,180) (16,326) (13,783)
Interest income 1,176 30 2,412 103
Realized loss on foreign currency transactions (1) (18) (8) (458)
Other income     24  
Total other expense, net (4,240) (4,168) (13,898) (14,138)
Income (loss) before taxes 24,057 (6,327) 73,889 (28,874)
Provision for income taxes (37,968) (18,868) (49,802) (23,421)
Net (loss) income $ (13,911) $ (25,195) $ 24,087 $ (52,295)
Net (loss) income per share—basic $ (0.29) $ (0.55) $ 0.51 $ (1.14)
Net (loss) income per share—diluted $ (0.29) $ (0.55) $ 0.51 $ (1.14)
Weighted average common shares outstanding used in computing net (loss) income per share—basic 47,184 46,002 46,840 45,918
Weighted average common shares outstanding used in computing net (loss) income per share—diluted 47,184 46,002 47,251 45,918
Net Product Revenues        
Revenues:        
Total net revenues $ 139,973 $ 134,357 $ 393,388 $ 379,705
Royalty Revenues        
Revenues:        
Total net revenues $ 2,841 4,444 $ 8,893 13,391
License Revenue        
Revenues:        
Total net revenues   $ 2,264   $ 6,793
v3.10.0.1
Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement Of Income And Comprehensive Income [Abstract]        
Net (loss) income $ (13,911) $ (25,195) $ 24,087 $ (52,295)
Other comprehensive income (loss), net of tax:        
Foreign currency translation adjustment (721) 7,266 (2,703) 19,838
Unrealized income (loss) on available for sale debt securities 35   (42)  
Other comprehensive (loss) income, net of tax (686) 7,266 (2,745) 19,838
Comprehensive (loss) income $ (14,597) $ (17,929) $ 21,342 $ (32,457)
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net income (loss) $ 24,087 $ (52,295)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Share-based compensation expense 16,246 25,264
Amortization of net premiums and discounts on investments (807)  
Amortization of debt discount and debt issuance costs 11,917 8,918
Depreciation and amortization expense 9,118 17,484
Change in acquired contingent consideration obligation 21,900 16,800
Unrealized foreign currency transaction loss   247
Intangible asset impairment   39,446
Non-cash royalty revenue (7,826)  
Deferred tax provision 42,565 16,746
Changes in assets and liabilities:    
Decrease (increase) in accounts receivable 29,942 (1,505)
(Increase) decrease in prepaid expenses and other current assets (5,319) 1,614
Decrease in inventory 26,701 3,266
Decrease in non-current portion of deferred cost of license revenue   476
Decrease (increase) in other assets 25 (3,610)
Decrease in accounts payable, accrued expenses and other current liabilities (5,508) (29,557)
Decrease in non-current portion of deferred license revenue   (6,793)
Increase in other non-current liabilities 90 102
Net cash provided by operating activities 163,131 36,603
Cash flows from investing activities:    
Purchases of property and equipment (22,548) (10,370)
Purchases of intangible assets (375) (294)
Purchases of investments (191,652)  
Proceeds from maturities of investments 52,539  
Net cash used in investing activities (162,036) (10,664)
Cash flows from financing activities:    
Proceeds from issuance of common stock and option exercises 14,978 7,001
Refund of deposit for purchase of noncontrolling interest   2,722
Purchase of treasury stock (1,587) (60)
Repayment of loans payable (656) (2,409)
Net cash provided by financing activities 12,735 7,254
Effect of exchange rate changes on cash, cash equivalents and restricted cash (238) 1,060
Net increase in cash, cash equivalents and restricted cash 13,592 34,253
Cash, cash equivalents and restricted cash at beginning of period 308,039 158,871
Cash, cash equivalents and restricted cash at end of period 321,631 193,124
Supplemental disclosure:    
Cash paid for interest 3,045 3,047
Cash paid for taxes $ 16,665 $ 11,363
v3.10.0.1
Organization and Business Activities
9 Months Ended
Sep. 30, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Organization and Business Activities

(1) Organization and Business Activities

Acorda Therapeutics, Inc. (“Acorda” or the “Company”) is a biopharmaceutical company focused on developing therapies that restore function and improve the lives of people with neurological disorders.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information, Accounting Standards Codification (ASC) Topic 270-10 and with the instructions to Form 10-Q. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments considered necessary for a fair presentation have been included in the interim periods presented and all adjustments are of a normal recurring nature. The Company has evaluated subsequent events through the date of this filing. Operating results for the three and nine-month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. When used in these notes, the terms “Acorda” or “the Company” mean Acorda Therapeutics, Inc. The December 31, 2017 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. You should read these unaudited interim condensed consolidated financial statements in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2017.

Certain reclassifications were made to prior period amounts in the consolidated financial statements and accompanying notes to conform with the current year presentation due to the adoption of ASU 2016-18 “Statement of Cash Flows” and Topic 230: Restricted Cash. See Note 2.

v3.10.0.1
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

(2) Summary of Significant Accounting Policies

Our critical accounting policies are detailed in our Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2017. Effective January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, ASU 2016-15 “Statement of Cash Flows” (Topic 230): Classification of Certain Cash Receipts and Cash Payments, ASU 2016-18 “Statement of Cash Flows” (Topic 230): Restricted Cash, ASU 2017-01, “Business Combinations” (Topic 805): Clarifying the Definition of a Business, and ASU 2017-09, “Compensation – Stock Compensation” (Topic 718): Scope of Modification Accounting and ASU 2017-01. Other than the adoption of the new accounting guidance, our critical accounting policies have not changed materially from December 31, 2017.

Revenue Recognition

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”) and the related amendments to all contracts with customers that were not completed as of the date of adoption using the modified retrospective method. ASC 606 supersedes prior revenue guidance under ASC 605 “Revenue Recognition” (“ASC 605”) and requires entities to recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company completed its assessment of the new guidance and evaluated the new requirements as applied to its existing revenue contracts not completed as of the date of initial application. As a result of the assessment, with the exception of the changes to our recognition of license revenue as further described below, the Company determined that adoption of the new standard did not have a significant impact on its revenue recognition methodology. In accordance with ASC 606, the Company recognizes revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the good or service.

The Company determined that the revenue recognition methodology for the deferred license revenue changed as a result of the adoption of ASC 606. License revenue recorded by the Company prior to January 1, 2018 related exclusively to the recognition of the upfront payment received from Biogen upon the execution of the License and Collaboration agreement that granted Biogen an exclusive non sub-licensable license to sell Fampyra outside of the U.S. License revenue recorded prior to January 1, 2018 was recognized under ASC 605 on a pro rata basis as the Company’s obligations were satisfied throughout the duration of the license and collaboration agreement. As of January 1, 2018, the Company adopted ASC 606 which changed the Company’s determination of its distinct performance obligations resulting in an acceleration of the recognition of the revenue in the arrangement. The material performance obligations were completed prior to January 1, 2018, and as a result, the Company recognized its previously deferred revenue as a cumulative effect adjustment of $27.6 million within the accumulated deficit on the consolidated balance sheet as of January 1, 2018.

 

The cumulative effect of applying ASC 606 to the company’s consolidated balance sheet was as follows:

(In thousands)

Balance as of December 31, 2017

 

Net Adjustments

 

Balance as of

January 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

Other current assets

$

1,983

 

$

(634

)

$

1,349

 

Non-current portion of deferred cost of license revenue

 

1,638

 

 

(1,638

)

 

 

    Total Assets

$

1,197,969

 

$

(2,272

)

$

1,195,697

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current portion of deferred license revenue

$

9,057

 

$

(9,057

)

$

 

Non-current portion of deferred license revenue

 

23,398

 

 

(23,398

)

 

 

Deferred tax liability

 

22,459

 

 

2,600

 

 

25,059

 

Accumulated deficit

 

(455,108

)

 

27,583

 

 

(427,525

)

    Total liabilities and stockholders' equity

$

1,197,969

 

$

(2,272

)

$

1,195,697

 

          

The impact of the adoption of ASC 606 on the Company’s consolidated balance sheet as of September 30, 2018 was as follows:

(In thousands)

Balance as of

September 30, 2018

Prior to Adoption

of ASC 606

 

Net Adjustments

 

Balance as of

September 30, 2018

as Reported

Under ASC 606

 

Assets

 

 

 

 

 

 

 

 

 

Other current assets

$

7,436

 

$

(634

)

$

6,802

 

Non-current portion of deferred cost of license revenue

 

1,161

 

 

(1,161

)

 

 

    Total Assets

$

1,312,880

 

$

(1,795

)

$

1,311,085

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current portion of deferred license revenue

$

9,057

 

$

(9,057

)

$

 

Non-current portion of deferred license revenue

 

16,606

 

 

(16,606

)

 

 

Deferred tax liability

 

68,056

 

 

2,600

 

 

70,656

 

Accumulated deficit

 

(424,707

)

 

21,268

 

 

(403,439

)

    Total liabilities and stockholders' equity

$

1,312,880

 

$

(1,795

)

$

1,311,085

 

 

The impact of the adoption of ASC 606 on the Company’s consolidated statement of operations for the three-month period ended September 30, 2018 was as follows:

(In thousands)

Three-Month Period Ended September 30, 2018 Balance Prior to Adoption of ASC 606

 

Effect of Change

 

Three-Month Period Ended September 30, 2018 Balance as Reported Under ASC 606

 

License revenue

$

2,264

 

$

(2,264

)

$

 

Cost of license revenue

 

159

 

 

(159

)

 

 

Operating income (loss)

$

30,402

 

$

(2,105

)

$

28,297

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(11,806

)

$

(2,105

)

$

(13,911

)

Net (loss) income per share—basic

$

(0.25

)

$

(0.04

)

$

(0.29

)

Net (loss) income per share—diluted

$

(0.25

)

$

(0.04

)

$

(0.29

)

 

The impact of the adoption of ASC 606 on the Company’s consolidated statement of operations for the nine-month period ended September 30, 2018 was as follows:

(In thousands)

Nine-Month Period

Ended September 30, 2018

Balance Prior to

Adoption of ASC 606

 

Effect of Change

 

Nine-Month Period

Ended September 30, 2018

Balance as Reported

Under ASC 606

 

License revenue

$

6,792

 

$

(6,792

)

$

 

Cost of license revenue

 

477

 

 

(477

)

 

 

Operating income (loss)

$

94,102

 

$

(6,315

)

$

87,787

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

30,402

 

$

(6,315

)

$

24,087

 

Net income (loss) per share—basic

$

0.65

 

$

(0.14

)

$

0.51

 

Net income (loss) per share—diluted

$

0.64

 

$

(0.13

)

$

0.51

 

 

 

 

 

 

 

 

 

 

 

ASC 606 did not have an aggregate impact on the Company’s net cash provided by operating activities.

ASC 606 outlines a five-step process for recognizing revenue from contracts with customers: i) identify the contract with the customer, ii) identify the performance obligations in the contract, (iii) determine the transaction price, iv) allocate the transaction price to the separate performance obligations in the contract, and (v) recognize revenue associated with the performance obligations as they are satisfied.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606, the Company determines the performance obligations that are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to each respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company's performance obligations are transferred to customers at a point in time, typically upon receipt of the product by the customer.

ASC 606 requires entities to record a contract asset when a performance obligation has been satisfied or partially satisfied, but the amount of consideration has not yet been received because the receipt of the consideration is conditioned on something other than the passage of time. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer.

 

We currently do not have any contract assets. We recognize contract liabilities when a customer pays an upfront deposit upon contract execution for future obligations to be performed by us. As of September 30, 2018, we had a contract liability in the amount of $5.5 million which reflects an upfront deposit paid by a customer upon contract execution for future obligations to be performed by us. The amount is currently reported in accrued expenses and other current liabilities in the Balance Sheet. If the contract is canceled, these upfront deposits are refundable only if certain obligations have not been performed by us. We did not have any contract liability as of December 31, 2017.

Product Revenue, Net

 Net revenue from product sales is recognized at the transaction price when the customer obtains control of the Company’s products, which occurs at a point in time, typically upon receipt of the product by the customer. The Company’s products are sold primarily to a network of specialty providers which are contractually obligated to hold no more than an agreed upon number of days of inventory. The Company’s payment terms are between 30 to 35 days.

The Company’s net revenues represent total revenues adjusted for discounts and allowances, including estimated cash discounts, chargebacks, rebates, returns, copay assistance, data fees and wholesaler fees for services. These adjustments represent variable consideration under ASC 606 and are recorded for the Company’s estimate of cash consideration expected to be given by the Company to a customer that is presumed to be a reduction of the transaction price of the Company’s products and, therefore, are characterized as a reduction of revenue. These adjustments 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. Adjustments for variable consideration are determined 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.

Discounts and Allowances

Revenue from product sales are recorded at the transaction price, which includes estimates for discounts and allowances for which reserves are established and includes cash discounts, chargebacks, rebates, returns, copay assistance, data fees and wholesaler fees for services. Actual discounts and allowances are recorded following shipment of product and the appropriate reserves are credited. These reserves are classified as reductions of accounts receivable (if the amount is payable to the Customer and right of offset exists) or a current liability (if the amount is payable to a party other than a Customer). These allowances are established by management as its best estimate based on historical experience and data points available and are adjusted to reflect known changes in the factors that impact such reserves. Allowances for customer credits, chargebacks, rebates, data fees and wholesaler fees for services, returns, and discounts are established based on contractual terms with customers and analyses of historical usage of these items. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The nature of our allowances and accruals requiring critical estimates, and the specific considerations it uses in estimating their amounts are as follows:

Government Chargebacks and Rebates: We contract for Medicaid and other U.S. Federal government programs to allow for our products to remain eligible for reimbursement under these programs. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. Based upon our contracts and the most recent experience with respect to sales through each of these channels, we provide an allowance for chargebacks and rebates. We monitor the sales trends and adjust the chargeback and rebate percentages on a regular basis to reflect the most recent chargebacks and rebate experience. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Managed Care Contract Rebates: We contract with various managed care organizations including health insurance companies and pharmacy benefit managers. These contracts stipulate that rebates and, in some cases, administrative fees, are paid to these organizations provided our product is placed on a specific tier on the organization’s drug formulary. Based upon our contracts and the most recent experience with respect to sales through managed care channels, we provide an allowance for managed care contract rebates. We monitor the sales trends and adjust the allowance on a regular basis to reflect the most recent rebate experience. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Copay Mitigation Rebates: We offer copay mitigation to commercially insured patients who have coverage for our products (in accordance with applicable law) and are responsible for a cost share. Based upon our contracts and the most recent experience with respect to actual copay assistance provided, we provide an allowance for copay mitigation rebates. We monitor the sales trends and adjust the rebate percentages on a regular basis to reflect the most recent rebate experience.

Cash Discounts: We sell directly to companies in our distribution network, which primarily includes specialty pharmacies and ASD Specialty Healthcare, Inc. We generally provide invoice discounts for prompt payment for our products. We estimate our cash discounts based on the terms offered to our customers. Discounts are estimated based on rates that are explicitly stated in the Company’s contracts as it is expected they will take the discount and are recorded as a reduction of revenue at the time of product shipment when product revenue is recognized. We adjust estimates based on actual activity as necessary.

Product Returns: We either offer customers no return except for products damaged in shipping or consistent with industry practice, a limited right of return based on the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The company currently estimates product return liabilities using historical sales information and inventory remaining in the distribution channel. 

Data Fees and Fees for Services Payable to Specialty Pharmacies: We have contracted with certain specialty pharmacies to obtain transactional data related to our products in order to develop a better understanding of our selling channel as well as patient activity and utilization by the Medicaid program and other government agencies and managed care organizations. We pay a variable fee to the specialty pharmacies to provide us the data. We also pay the specialty pharmacies a fee in exchange for providing distribution and inventory management services, including the provision of inventory management data to the Company. We estimate our fee for service accruals and allowances based on sales to each specialty pharmacy and the applicable contracted rate.

Royalty Revenue

Royalty revenue recorded by the Company relates exclusively to the Company’s License and Collaboration agreement with Biogen which provides for ongoing royalties based on sales of Fampyra outside of the U.S. The Company recognizes revenue for royalties under ASC 606, which provides revenue recognition constraints by requiring the recognition of revenue at the later of the following: 1) sale or usage of the products or 2) satisfaction of the performance obligations. The Company has satisfied its performance obligations and therefore recognizes royalty revenue when the sales to which the royalties relate are completed.

Milestone Revenue

Milestone revenue relates to the License and Collaboration agreement with Biogen which provides for milestone payments for the achievement of certain regulatory and sales milestones during the term of the agreement. Regulatory milestones are contingent upon the approval of Fampyra for new indications outside of the U.S. Sales milestones are contingent upon the achievement of certain net sales targets for Fampyra sales outside of the U.S. The Company recognizes milestone revenue under ASC 606, which provides constraints for entities to recognize milestone revenue which is deemed to be variable by requiring the Company to estimate the amount of consideration to which it is entitled in exchange for transferring the promised goods or services to a customer. The Company recognizes an estimate of revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the milestone is achieved. For regulatory milestones, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. For sales-based milestones, the Company recognizes revenue upon the achievement of the specific sale milestones.

The following table disaggregates our revenue by major source (in thousands):

 

Three-month period ended September 30, 2018

 

 

Three-month period ended September 30, 2017

 

 

Nine-month period ended September 30, 2018

 

 

Nine-month period ended September 30, 2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product revenues

$

139,973

 

 

$

134,357

 

 

$

393,388

 

 

$

379,705

 

Royalty revenues

 

2,841

 

 

 

4,444

 

 

 

8,893

 

 

 

13,391

 

License revenue

 

 

 

 

2,264

 

 

 

 

 

 

6,793

 

Total net revenues

$

142,814

 

 

$

141,065

 

 

$

402,281

 

 

$

399,889

 

Foreign Currency Translation

The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiary, Biotie, are translated into United States dollars using the period-end exchange rate; income and expense items are translated using the average exchange rate during the period; and equity transactions are translated at historical rates. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction losses and gains are recognized in the period incurred and are reported as other (expense) income, net in the statement of operations.

Segment and Geographic Information

 

The Company is managed and operated as one business which is focused on developing therapies that restore function and 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 and Qutenza in the U.S.

 

 

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 the following subsequent events required disclosure in these financial statements.

On October 30, 2018, we sold our Qutenza assets and NP-1998 development program. Qutenza is a dermal patch containing 8% prescription strength capsaicin the effects of which can last up to three months and is approved by the FDA for the management of neuropathic pain associated with post-herpetic neuralgia, also known as post-shingles pain. NP-1998 is a Phase 3 ready, 20% prescription strength capsaicin topical solution that we were previously assessing for the treatment of neuropathic pain. Under the asset purchase agreement, the buyer made aggregate cash payments to us of approximately $7.9 million for the assets.

Accounting Pronouncements Adopted

As noted above, in May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606). This new standard replaced all previous U.S. GAAP guidance on this topic and eliminated all industry-specific guidance. The new standard requires the application of a five-step model to determine the amount and timing of revenue to be recognized. The underlying principle is that revenue is to be recognized for the transfer of goods or services to customers that reflects the amount of consideration that the Company expects to be entitled to in exchange for those goods or services. The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. See discussion of the adoption above in Revenue Recognition.

In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows” (Topic 230); Restricted Cash (ASU 2016-18), which defines new requirements for the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this ASU require retrospective application to each period presented. The Company adopted this guidance effective January 1, 2018 retrospectively. This ASU requires the entities to present statement of cash flows in a manner such that it reconciles beginning and ending totals of cash, cash equivalents, restricted cash or restricted cash equivalents. Also, when cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity should, for each period that a statement of financial position is presented, present on the face of the statement of cash flows or disclose in the notes to the financial statements, the line items and amounts of cash, cash equivalents, and restricted cash or restricted cash equivalents reported within the statement of financial position. The amounts, disaggregated by the line item in which they appear within the statement of financial position, shall sum to the total amount of cash, cash equivalents, and restricted cash or restricted cash equivalents at the end of the corresponding period shown in the statement of cash flows.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows:

 

Nine-month period ended September 30, 2018

 

 

Nine-month period ended September 30, 2017

 

(In thousands)

Beginning of period

 

 

End of period

 

 

Beginning of period

 

 

End of period

 

Cash and cash equivalents

$

307,068

 

 

$

321,011

 

 

$

158,537

 

 

$

192,496

 

Restricted cash

 

410

 

 

 

365

 

 

 

79

 

 

 

68

 

Restricted cash included in Other assets

 

561

 

 

 

255

 

 

 

255

 

 

 

560

 

Total Cash, cash equivalents and restricted cash per statement of cash flows

$

308,039

 

 

$

321,631

 

 

$

158,871

 

 

$

193,124

 

Amounts included in restricted cash represent those amounts required to be set aside to cover the Company’s self-funded employee health insurance. Restricted cash included in other assets on the statement of financial position relates to cash collateralized standby letters of credit in connection with obligations under facility leases, which is included with other assets in the consolidated balance sheet due to the long-term nature of the letters of credit.

In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Currently, share-based payment arrangements with employees are accounted for under ASC 718, while nonemployee share-based payments issued for goods and services are accounted for under ASC 505-50. ASC 505-50, before the amendments, differed significantly from ASC 718. However, FASB concluded that awards granted to employees are economically similar to awards granted to nonemployees and therefore two different accounting models were not justified. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods therein with early adoption permitted. The Company early adopted this guidance beginning April 1, 2018. The adoption of this guidance did not have an impact on its consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The main objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

This ASU is effective for the Company on January 1, 2019. We expect to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

 

The new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.

 

While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating leases and (2) providing significant new disclosures for our leasing activities. While we continue to assess our contracts, we do not expect a significant change in our leasing activities between now and adoption. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This new standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 allows for prospective application and is effective for fiscal years beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating whether it will adopt this guidance early. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, ‘Income Statement—Reporting Comprehensive Income’ (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). This new standard provides entities with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASC 740-10-35-4 requires that deferred tax assets and liabilities should be adjusted to account for any changes in tax laws or rates within the period that the enactment of these changes occurs and any adjustments to flow through income from continuing operations. Since the adjustments due to the Tax Cuts and Jobs Act are required to flow through income from continuing operations, the tax effects of items within accumulated other comprehensive income known now as “stranded tax effects,” do not reflect the appropriate tax rate. As such, FASB issued ASU 2018-02, in order to address these stranded income tax effects. The new standard requires entities to disclose the following:

 

A description of the accounting policy for releasing income tax effects from AOCI;

 

Whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act, and

 

Information about the other income tax effects that are reclassified.

 

The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118’. The ASU adds seven paragraphs to ASC 740, Income Taxes, that contain SEC guidance related to SAB 118 (codified as SEC SAB Topic 5.EE, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”), which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment which is the period that includes December 22, 2017. The measurement period should not extend beyond one year from the enactment date. The Company is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” The ASU’s amendments clarify, correct errors in, or make minor improvements to a variety of ASC topics. The changes in ASU 2018-09 are not expected to have a significant effect on current accounting practices. Some of the amendments in this update do not require transition guidance and will be effective upon issuance of this update. However, many of the amendments in this update do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820): “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendment in this ASU eliminate, add and modify certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public business entities will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The ASU clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, the ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).” The ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements.

In August 2018, the Securities Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company anticipates its first presentation of changes in stockholders’ equity as required under the new SEC guidance will be included in its Form 10-Q for the three-month period ended March 31, 2019.

v3.10.0.1
Share-based Compensation
9 Months Ended
Sep. 30, 2018
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Share-based Compensation

(3) Share-based Compensation

During the three‑month periods ended September 30, 2018 and 2017, the Company recognized share-based compensation expense of $5.1 million and $6.7 million, respectively. During the nine‑month periods ended September 30, 2018 and 2017, the Company recognized share-based compensation expense of $16.3 million and $26.2 million, respectively. Activity in options and restricted stock during the nine-month period ended September 30, 2018 and related balances outstanding as of that date are reflected below. The weighted average fair value per share of options granted to employees for the three-month periods ended September 30, 2018 and 2017 were approximately $12.39 and $9.46, respectively The weighted average fair value per share of options granted to employees for the nine-month periods ended September 30, 2018 and 2017 were approximately $12.81 and $10.68, respectively.

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

 

 

 

For the three-month period ended September 30,

 

 

For the nine-month period ended September 30,

 

(In millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development expense

 

$

1.1

 

 

$

2.0

 

 

$

4.4

 

 

$

8.4

 

Selling, general and administrative expense

 

 

4.0

 

 

 

4.7

 

 

 

11.9

 

 

 

17.8

 

Total

 

$

5.1

 

 

$

6.7

 

 

$

16.3

 

 

$

26.2

 

 

A summary of share-based compensation activity for the nine-month period ended September 30, 2018 is presented below:

Stock Option Activity

 

 

 

Number of

Shares

(In thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Intrinsic

Value

(In thousands)

 

Balance at January 1, 2018

 

 

8,930

 

 

$

29.46

 

 

 

 

 

 

 

 

 

Granted

 

 

748

 

 

 

25.04

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(595

)

 

 

28.07

 

 

 

 

 

 

 

 

 

Exercised

 

 

(721

)

 

 

20.78

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

 

8,362

 

 

$

29.91

 

 

 

5.6

 

 

$

2,163

 

Vested and expected to vest at

    September 30, 2018

 

 

8,328

 

 

$

29.93

 

 

 

5.6

 

 

$

2,159

 

Vested and exercisable at

    September 30, 2018

 

 

6,763

 

 

$

30.52

 

 

 

5.0

 

 

$

1,857

 

 

Restricted Stock and Performance Stock Unit Activity

 

(In thousands)

 

 

 

 

Restricted Stock and Performance Stock Units

 

Number of Shares

 

Nonvested at January 1, 2018

 

 

697

 

Granted

 

 

(148

)

Vested

 

 

 

Forfeited

 

 

(127

)

Nonvested at September 30, 2018

 

 

422

 

 

Unrecognized compensation cost for unvested stock options, restricted stock awards and performance stock units as of September 30, 2018 totaled $24.3 million and is expected to be recognized over a weighted average period of approximately 1.7 years.

The Company did not repurchase shares of common stock during the thee-month period ended September 30, 2018. During the nine‑month period ended September 30, 2018, the Company repurchased 63,124 shares of common stock at an average price of $25.15 per share or approximately $1.6 million. The share repurchase consists primarily of common stock withheld to cover the tax liability in connection with the settlement of vested restricted stock units and stock options that were exercised in the nine-month period ended September 30, 2018.

v3.10.0.1
(Loss) Earnings Per Share
9 Months Ended
Sep. 30, 2018
Earnings Per Share [Abstract]  
(Loss) Earnings Per Share

(4) (Loss) Earnings Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and nine-month periods ended September 30, 2018 and 2017:

 

(In thousands, except per share data)

 

Three-month period ended September 30, 2018

 

 

Three-month period ended September 30, 2017

 

 

Nine-month period ended September 30, 2018

 

 

Nine-month period ended September 30, 2017

 

Basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(13,911

)

 

$

(25,195

)

 

$

24,087

 

 

$

(52,295

)

Weighted average common shares outstanding used in

   computing net (loss) income per share—basic

 

 

47,184

 

 

 

46,002

 

 

 

46,840

 

 

 

45,918

 

Plus: net effect of dilutive stock options and restricted

   common shares

 

 

 

 

 

 

 

 

411

 

 

 

 

Weighted average common shares outstanding used in

   computing net (loss) income per share—diluted

 

 

47,184

 

 

 

46,002

 

 

 

47,251

 

 

 

45,918

 

Net (loss) income per share—basic

 

$

(0.29

)

 

$

(0.55

)

 

$

0.51

 

 

$

(1.14

)

Net (loss) income per share—diluted

 

$

(0.29

)

 

$

(0.55

)

 

$

0.51

 

 

$

(1.14

)

 

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 (loss) income per diluted share because their effects were anti-dilutive:

 

(In thousands)

 

Three-month period ended September 30, 2018

 

 

Three-month period ended September 30, 2017

 

 

Nine-month period ended September 30, 2018

 

 

Nine-month period ended September 30, 2017

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted common shares

 

 

8,825

 

 

 

9,147

 

 

 

7,262

 

 

 

9,232

 

 

Additionally, the impact of the convertible debt was determined to be anti-dilutive and excluded from the calculation of net (loss) income per diluted share for the three and nine-month periods ended September 30, 2018 and 2017.

v3.10.0.1
Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

(5) Income Taxes

The Company’s effective income tax rate differs from the U.S. statutory rate principally due to state taxes, Federal research and development tax credits, jurisdictions with pretax losses for which no tax benefit can be recognized, changes in the valuation allowance and the effects of share based compensation which are recorded discretely in the quarters in which they occur.

For the three-month periods ended September 30, 2018 and 2017, the Company recorded a provision of $38.0 million and $18.9 million for income taxes, respectively. The effective income tax rates for the Company for the three-month periods ended September 30, 2018 and 2017 were 157.8% and (298.2%), respectively. The variance in the effective tax rates for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017 was due primarily to differences in pre-tax book income between the periods, the decrease in the Federal statutory tax rate as a result of tax reform, the valuation allowance recorded on deferred tax assets for which no tax benefit can be recognized, state taxes, and the reduction in the research & development tax credit.

For the nine-month periods ended September 30, 2018 and 2017, the Company recorded a provision of $49.8 million and $23.4 million for income taxes, respectively. The effective income tax rates for the Company for the nine-month periods ended September 30, 2018 and 2017 were 67.4% and (81.1%), respectively. The variance in the effective tax rates for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017 was due primarily to differences in pre-tax book income between the periods, the decrease in the Federal statutory tax rate as a result of tax reform, the valuation allowance recorded on deferred tax assets for which no tax benefit can be recognized, state taxes, and the reduction in the research & development tax credit.

 

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

 

The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. Federal corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and includes a variety of other changes.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. For the three and nine-month periods ended September 30, 2018, the Company has not completed its accounting for the tax effects of the enactment of the Act; however, in certain cases, we have made a reasonable estimate of the effects on our existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to the enactment. The Company has not obtained additional information affecting the provisional amounts initially recorded. The Company did not record a provision related to the one-time transition tax on mandatory repatriation of undistributed foreign earnings and profits per the Act, since a preliminary analysis has determined that there is no accumulated earnings and profits.

 

Additional work is still necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the three-month period ending December 31, 2018 when the analysis is complete. The Company did not make any adjustments in the nine-month period ended September 30, 2018.

 

The Internal Revenue Service completed its examination of the Company’s U.S. income tax return for 2015 in the second quarter of 2018 with no material impact.

 

The Internal Revenue Service commenced its examination of the Company’s wholly-owned subsidiary, Biotie Therapies, Inc.’s, U.S. income tax return for the short period ended December 31, 2016 in the third quarter of 2018. There have been no proposed adjustments at this stage of the examination.

 

The New York State Department of Tax commenced an examination of the Company’s income tax returns for the years 2014-2016. There have been no proposed adjustments at this stage of the examination.

v3.10.0.1
Fair Value Measurements
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

(6) Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates, exchange rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. The Company’s Level 1 assets consist of time deposits and investments in a Treasury money market fund. The Company’s level 2 assets consist of investments in corporate bonds and commercial paper which are categorized as short-term investments for investments with original maturities between three months and one year. The Company’s Level 3 liabilities represent acquired contingent consideration related to the acquisition of Civitas and are valued using a probability weighted discounted cash flow valuation approach. No changes in valuation techniques occurred during the three or nine-month periods ended September 30, 2018. The estimated fair values of all of our financial instruments approximate their carrying values at September 30, 2018, except for the fair value of the Company’s convertible senior notes, which was approximately $298.4 million as of September 30, 2018. The Company estimates the fair value of its notes utilizing market quotations for the debt (Level 2).

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

20,729

 

 

$

 

 

$

 

Short-term investments

 

 

 

 

 

139,935

 

 

 

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

 

 

 

 

 

134,900

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

9,163

 

 

$

 

 

$

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

 

 

 

 

 

113,000

 

 

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

Acquired contingent consideration

 

(In thousands)

 

Three-month period ended September 30, 2018

 

 

Three-month period ended September 30, 2017

 

 

Nine-month period ended September 30, 2018

 

 

Nine-month period ended September 30, 2017

 

Acquired contingent consideration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

112,200

 

 

$

89,300

 

 

$

113,000

 

 

$

72,100

 

Fair value change to contingent consideration

   included in the statement of operations

 

 

22,700

 

 

 

(400

)

 

 

21,900

 

 

 

16,800

 

Balance, end of period

 

$

134,900

 

 

$

88,900

 

 

$

134,900

 

 

$

88,900

 

 

 

The Company estimates the fair value of its acquired contingent consideration using a probability weighted discounted cash flow valuation approach based on estimated future sales expected from Inbrija (levodopa inhalation powder), our most advanced development program for the treatment of OFF periods in people with Parkinson’s taking a carbidopa/levodopa regimen and CVT-427, a Phase I candidate. CVT-427 is an inhaled triptan intended for acute treatment of migraine using the ARCUS drug delivery technology. Using this approach, expected probability adjusted future cash flows are calculated over the expected life of the agreement and discounted to estimate the current value of the liability at the period end date. Some of the more significant assumptions made in the valuation include (i) the estimated Inbrija and CVT-427 revenue forecasts, (ii) probabilities of success, and (iii) discount periods and rate. The probability of achievement of revenue milestones ranged from 26.3% to 85.0% with milestone payment outcomes ranging from $0 to $60.0 million in the aggregate for Inbrija and CVT-427. The valuation is performed quarterly. Gains and losses are included in the statement of operations. For the three and nine-month periods ended September 30, 2018 and 2017, changes in the fair value of the acquired contingent consideration were due to the re-calculation of cash flows for the passage of time and updates to certain other estimated assumptions.

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

v3.10.0.1
Investments
9 Months Ended
Sep. 30, 2018
Investments Debt And Equity Securities [Abstract]  
Investments

(7) Investments

The Company has determined that all of its investments are classified as available-for-sale. Available-for-sale debt securities are carried at fair value with interest on these investments included in interest income and are recorded based on quoted market prices. Available-for-sale investments consisted of the following at September 30, 2018:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Short Term Investments

 

$

139,977

 

 

$

4

 

 

$

(46

)

 

$

139,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments with maturities of three months or less from date of purchase have been classified as cash equivalents, and amounted to approximately $20.7 million as of September 30, 2018. Short-term investments have original maturities of greater than 3 months but less than 1 year and amounted to approximately $139.9 million as of September 30, 2018. The aggregate fair value of short-term investments in an unrealized loss position amounted to approximately $104.9 million as of September 30, 2018. The Company held no short-term investments at December 31, 2017. Short-term investments at September 30, 2018 primarily consisted of high-grade commercial paper and corporate bonds. Long-term investments have original maturities of greater than 1 year. There were no investments classified as long-term at September 30, 2018 or December 31, 2017. The Company has determined that there were no other-than-temporary declines in the fair values of its investments as of September 30, 2018 as the Company does not intend to sell its investments and it is not more likely than not that the Company will be required to sell its investments prior to the recovery of its amortized cost basis.

Unrealized holding gains and losses, which relate to debt instruments, are reported within accumulated other comprehensive income (AOCI) in the statements of comprehensive income. The changes in AOCI associated with the unrealized holding losses on available-for-sale investments during the nine-month period ended September 30, 2018, were as follows (in thousands):

 

(In thousands)

 

Net Unrealized Gains (Losses) on Marketable Securities

 

Balance at December 31, 2017

 

$

 

Other comprehensive loss before reclassifications

 

 

(42

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current period other comprehensive loss

 

 

(42

)

Balance at September 30, 2018

 

$

(42

)

 

v3.10.0.1
Liability Related to Sale of Future Royalties
9 Months Ended
Sep. 30, 2018
Deferred Revenue Disclosure [Abstract]  
Liability Related to Sale of Future Royalties

(8) Liability Related to Sale of Future Royalties

As of October 1, 2017, the Company completed a royalty purchase agreement with HealthCare Royalty Partners, or HCRP (“Royalty Agreement”). In exchange for the payment of $40 million to the Company, HCRP obtained the right to receive Fampyra royalties payable by Biogen under the License and Collaboration Agreement between the Company and Biogen, up to an agreed upon threshold of royalties. When this threshold is met, if ever, the Fampyra royalties will revert back to the Company and the Company will continue to receive the Fampyra royalties from Biogen until the revenue stream ends. The transaction does not include potential future milestones to be paid.

The Company maintained the rights under the license and collaboration agreement with Biogen, therefore, the Royalty Agreement has been accounted for as a liability that will be amortized using the effective interest method over the life of the arrangement, in accordance with the relevant accounting guidance. The Company recorded the receipt of the $40 million payment from HCRP and established a corresponding liability in the amount of $40 million, net of transaction costs of approximately $2.2 million. The net liability is classified between the current and non-current portion of liability related to sale of future royalties in the consolidated balance sheets based on the recognition of the interest and principal payments to be received by HCRP in the next 12 months from the financial statement reporting date. The total net royalties to be paid, less the net proceeds received will be recorded to interest expense using the effective interest method over the life of the Royalty Agreement. The Company will estimate the payments to be made to HCRP over the term of the Agreement based on forecasted royalties and will calculate the interest rate required to discount such payments back to the liability balance. Over the course of the Royalty Agreement, the actual interest rate will be affected by the amount and timing of net royalty revenue recognized and changes in forecasted revenue. On a quarterly basis, the Company will reassess the effective interest rate and adjust the rate prospectively as necessary.

The Company recognized non-cash royalty revenue of approximately $2.5 million, non-cash interest expense of approximately $1.1 million and debt discount amortization costs of approximately $0.2 million for the three-month period ended September 30, 2018. The Company recognized non-cash royalty revenue of approximately $7.8 million, non-cash interest expense of approximately $3.4 million and debt discount amortization costs of approximately $0.6 million for the nine-month period ended September 30, 2018. The interest and debt discount amortization expense is reflected as interest and amortization of debt discount expense in the Statement of Operations.

(In thousands)

 

Three-month period ended September 30, 2018

 

 

Nine-month period ended September 30, 2018

 

Liability related to sale of future royalties - beginning balance

 

$

33,183

 

 

$

35,788

 

Deferred transaction costs recognized

 

 

195

 

 

 

596

 

Non-cash royalty revenue payable to HCRP

 

 

(2,500

)

 

 

(7,826

)

Non-cash interest expense recognized

 

 

1,087

 

 

 

3,407

 

Liability related to sale of future royalties - ending balance

 

$

31,965

 

 

$

31,965

 

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
Convertible Senior Notes
9 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
Convertible Senior Notes

(9) Convertible Senior Notes

On June 17, 2014, the Company issued $345 million aggregate principal amount of 1.75% Convertible Senior Notes due 2021 (the Notes) in an underwritten public offering. The net proceeds from the offering were $337.5 million after deducting the Underwriter’s discount and offering expenses paid by the Company.

The Notes are 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, under certain circumstances as outlined in the indenture, based on an initial conversion rate, subject to adjustment, of 23.4968 shares per $1,000 principal amount of Notes (representing an initial conversion price of approximately $42.56 per share).

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, under certain circumstances as outlined in the indenture.

The Company pays 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. 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 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 equity component is not re-measured as long as it continues to meet the conditions for equity classification.

The outstanding note balance as of September 30, 2018 and December 31, 2017 consisted of the following:

 

(In thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Liability component:

 

 

 

 

 

 

 

 

Principal

 

$

345,000

 

 

$

345,000

 

Less: debt discount and debt issuance costs, net

 

 

(28,840

)

 

 

(36,195

)

Net carrying amount

 

$

316,160

 

 

$

308,805

 

Equity component

 

$

61,195

 

 

$