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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For The Quarterly Period Ended September 30, 2014

 

OR

 

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

 

For the transition period from              to             

 

Commission File Number 001-33389

 

VIVUS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-3136179

(State or other jurisdiction of

 

(IRS employer

incorporation or organization)

 

identification number)

 

 

 

351 East Evelyn Avenue

 

 

Mountain View, California

 

94041

(Address of principal executive office)

 

(Zip Code)

 

(650) 934-5200

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

At October 29, 2014, 103,678,036 shares of common stock, par value $.001 per share, were outstanding.

 

 

 



Table of Contents

 

VIVUS, INC.

 

Quarterly Report on Form 10-Q

 

INDEX

 

 

PART I — FINANCIAL INFORMATION

 

3

 

 

 

 

Item 1:

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

 

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013

 

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2:

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

 

17

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

 

25

Item 4:

Controls and Procedures

 

25

 

 

 

 

 

PART II — OTHER INFORMATION

 

26

 

 

 

 

Item 1:

Legal Proceedings

 

26

Item 1A:

Risk Factors

 

27

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

Item 3:

Defaults Upon Senior Securities

 

56

Item 4:

Mine Safety Disclosures

 

56

Item 5:

Other Information

 

56

Item 6:

Exhibits

 

57

 

Signatures

 

58

 

2



Table of Contents

 

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

VIVUS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

Note 1

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

83,163

 

$

103,262

 

Available-for-sale securities

 

223,710

 

240,024

 

Accounts receivable, net

 

27,099

 

12,214

 

Inventories

 

38,105

 

48,503

 

Prepaid expenses and other assets

 

10,383

 

19,938

 

Total current assets

 

382,460

 

423,941

 

Property and equipment, net

 

1,506

 

1,954

 

Non-current assets

 

7,857

 

5,901

 

Total assets

 

$

391,823

 

$

431,796

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8,235

 

$

10,759

 

Accrued and other liabilities

 

29,264

 

23,993

 

Deferred revenue

 

20,243

 

17,255

 

Total current liabilities

 

57,742

 

52,007

 

Long-term debt, net of current portion

 

217,110

 

213,106

 

Deferred revenue, net of current portion

 

9,466

 

10,360

 

Non-current accrued and other liabilities

 

1,553

 

2,954

 

Total liabilities

 

285,871

 

278,427

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock; $1.00 par value; 5,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock; $.001 par value; 200,000 shares authorized; 103,678 and 103,161 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

104

 

103

 

Additional paid-in capital

 

823,552

 

813,802

 

Accumulated other comprehensive income

 

98

 

66

 

Accumulated deficit

 

(717,802

)

(660,602

)

Total stockholders’ equity

 

105,952

 

153,369

 

Total liabilities and stockholders’ equity

 

$

391,823

 

$

431,796

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Net product revenue

 

$

12,454

 

$

6,379

 

$

32,575

 

$

16,025

 

License and milestone revenue

 

15,070

 

21,000

 

38,614

 

21,000

 

Supply revenue

 

5,300

 

 

18,336

 

 

Royalty revenue

 

1,053

 

 

2,924

 

 

Total revenue

 

33,877

 

27,379

 

92,449

 

37,025

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

7,268

 

741

 

23,816

 

1,703

 

Research and development

 

2,574

 

8,405

 

11,083

 

24,683

 

Selling, general and administrative

 

27,828

 

38,167

 

84,703

 

121,666

 

Inventory impairment and other non-recurring charges

 

4,119

 

20,743

 

6,173

 

34,892

 

Total operating expenses

 

41,789

 

68,056

 

125,775

 

182,944

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(7,912

)

(40,677

)

(33,326

)

(145,919

)

 

 

 

 

 

 

 

 

 

 

Total interest expense and other expense, net

 

8,135

 

7,669

 

24,534

 

11,817

 

Loss from continuing operations before income taxes

 

(16,047

)

(48,346

)

(57,860

)

(157,736

)

Provision for (benefit from) income taxes

 

(222

)

33

 

(660

)

46

 

Loss from continuing operations

 

(15,825

)

(48,379

)

(57,200

)

(157,782

)

Income from discontinued operations, net of tax

 

 

175

 

 

490

 

Net loss

 

$

(15,825

)

$

(48,204

)

$

(57,200

)

$

(157,292

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.15

)

$

(0.48

)

$

(0.55

)

$

(1.56

)

Discontinued operations

 

 

 

 

 

Net loss per share

 

$

(0.15

)

$

(0.48

)

$

(0.55

)

$

(1.56

)

Shares used in per share computation:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

103,477

 

100,904

 

103,373

 

100,769

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(15,825

)

$

(48,204

)

$

(57,200

)

$

(157,292

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Unrealized gain on securities, net of taxes

 

 

118

 

32

 

59

 

Comprehensive loss

 

$

(15,825

)

$

(48,086

)

$

(57,168

)

$

(157,233

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss from continuing operations

 

$

(57,200

)

$

(157,782

)

Adjustments to reconcile net loss to net cash used for operating activities from operations:

 

 

 

 

 

Depreciation

 

648

 

673

 

Amortization of debt issuance costs and discounts

 

11,833

 

5,377

 

Amortization of discount or premium on available-for-sale securities

 

2,955

 

1,816

 

Share-based compensation expense

 

7,768

 

27,755

 

Inventory impairment

 

2,170

 

7,525

 

Other non-cash adjustments, net

 

 

105

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(14,885

)

(3,811

)

Inventories

 

8,228

 

(19,623

)

Prepaid expenses and other assets

 

9,981

 

(1,521

)

Accounts payable

 

(2,524

)

(7,850

)

Accrued and other liabilities

 

(3,030

)

7,335

 

Deferred revenue

 

2,094

 

18,997

 

Net cash used for operating activities from continuing operations

 

(31,962

)

(121,004

)

Net cash used for operating activities from discontinued operations

 

 

(208

)

Net cash used for operating activities

 

(31,962

)

(121,212

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Property and equipment purchases

 

(200

)

(1,795

)

Purchases of available-for-sale securities

 

(188,359

)

(230,854

)

Proceeds from maturities of available-for-sale securities

 

201,750

 

181,750

 

Non-current assets

 

(3,310

)

(1,419

)

Net cash provided by (used for) investing activities

 

9,881

 

(52,318

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from debt issuances

 

 

290,247

 

Payments for capped call transactions

 

 

(34,709

)

Proceeds from exercise of stock options and sale of common stock through employee stock purchase plan

 

1,982

 

2,508

 

Net cash provided by financing activities

 

1,982

 

258,046

 

Net change in cash and cash equivalents

 

(20,099

)

84,516

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

103,262

 

58,605

 

End of period

 

$

83,163

 

$

143,121

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6



Table of Contents

 

VIVUS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2014

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Management has evaluated all events and transactions that occurred after September 30, 2014, through the date these unaudited condensed consolidated financial statements were filed. There were no events or transactions during this period that require recognition or disclosure in these unaudited condensed consolidated financial statements. The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements, but does not include all of the disclosures required by U.S. GAAP.

 

The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed on February 28, 2014 and as amended by the Form 10-K/A filed on April 30, 2014, with the Securities and Exchange Commission, or SEC. The unaudited condensed consolidated financial statements include the accounts of VIVUS, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

When we refer to “we,” “our,” “us,” the “Company” or “VIVUS” in this document, we mean the Delaware corporation, or VIVUS, Inc., and its California predecessor, as well as all of our consolidated subsidiaries.

 

Reclassifications

 

Certain prior year amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.

 

Significant Accounting Policies

 

There have been no changes to the Company’s significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Use of Estimates

 

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates, including critical accounting policies or estimates related to available-for-sale securities, debt instruments, research and development expenses, income taxes, inventories, revenues, contingencies and litigation and share-based compensation. The Company bases its estimates on historical experience, information received from third-parties and on various market specific and other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions or conditions.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

7



Table of Contents

 

2. SHARE-BASED COMPENSATION

 

The Company accounts for share-based compensation arrangements in accordance with the FASB’s Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation, or ASC 718, and ASC 505-50, Equity — Equity Based Payments to Non-Employees.

 

Total share-based compensation expense for all of the Company’s share-based awards is as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

28

 

$

 

$

91

 

$

 

Research and development

 

337

 

363

 

924

 

2,217

 

Selling, general and administrative

 

1,711

 

2,740

 

6,410

 

12,822

 

Non-recurring charges

 

 

12,716

 

343

 

12,716

 

Total share-based compensation expense

 

$

2,076

 

$

15,819

 

$

7,768

 

$

27,755

 

 

The Company did not capitalize any share-based compensation cost as part of the cost of inventory during the three and nine months ended September 30, 2014, because there was no manufacturing activity during these periods.  The Company capitalized share-based compensation costs of $75,000 and $467,000 during the three and nine months ended September 30, 2013, respectively, as part of the cost of inventory.

 

3. CASH, CASH EQUIVALENTS, AND AVAILABLE-FOR-SALE SECURITIES

 

The fair value and the amortized cost of cash, cash equivalents, and available-for-sale securities by major security type at September 30, 2014 and December 31, 2013, are presented in the tables that follow.

 

 

 

As of September 30, 2014 (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

Cash and cash equivalents and available-for-sale

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

securities

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Cash and money market funds

 

$

83,163

 

$

 

$

 

$

83,163

 

U.S. Treasury securities

 

223,612

 

102

 

(4

)

223,710

 

Total

 

306,775

 

102

 

(4

)

306,873

 

Less amounts classified as cash and cash equivalents

 

(83,163

)

 

 

(83,163

)

Classified as available-for-sale securities

 

$

223,612

 

$

102

 

$

(4

)

$

223,710

 

 

 

 

As of December 31, 2013 (in thousands):

 

Cash and cash equivalents and available-for-sale
securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Cash and money market funds

 

$

103,262

 

$

 

$

 

$

103,262

 

U.S. Treasury securities

 

239,959

 

69

 

(4

)

240,024

 

Total

 

343,221

 

69

 

(4

)

343,286

 

Less amounts classified as cash and cash equivalents

 

(103,262

)

 

 

(103,262

)

Classified as available-for-sale securities

 

$

239,959

 

$

69

 

$

(4

)

$

240,024

 

 

As of September 30, 2014, all of the Company’s available-for-sale securities have original contractual maturities up to 24 months. However, the Company may or may not hold securities with stated maturities greater than 12 months until maturity. In response to changes in the availability of and the yield on alternative investments as well as liquidity requirements, the Company may sell these securities prior to their stated maturities. As these securities are viewed by the Company as available to support current operations, securities with maturities beyond 12 months are classified as current assets. Due to their short-term maturities, the Company believes that the fair value of its bank deposits approximate their carrying value.

 

8



Table of Contents

 

Fair Value Measurements

 

As of September 30, 2014 and December 31, 2013, all of the Company’s cash and cash equivalents and available-for-sale securities were measured at fair value on a recurring basis, and classified as Level 1 in the fair value hierarchy. There were no assets or liabilities measured on a recurring basis where Level 2 or Level 3 valuation techniques were used.

 

4. ACCOUNTS RECEIVABLE

 

Accounts receivable consist of (in thousands):

 

 

 

Balance as of

 

 

 

September 30, 2014

 

December 31, 2013

 

Qsymia

 

$

8,533

 

$

6,777

 

STENDRA/SPEDRA

 

18,727

 

5,571

 

 

 

27,260

 

12,348

 

Qsymia allowance for cash discounts

 

(161

)

(134

)

Net

 

$

27,099

 

$

12,214

 

 

5. INVENTORIES

 

Inventories consist of (in thousands):

 

 

 

Balance as of

 

 

 

September 30, 2014

 

December 31, 2013

 

Raw materials

 

$

30,405

 

$

28,557

 

Finished goods

 

4,294

 

14,793

 

Deferred costs

 

3,406

 

5,153

 

Total

 

$

38,105

 

$

48,503

 

 

As of September 30, 2014 and December 31, 2013, raw materials inventories consist primarily of the active pharmaceutical ingredients, or API, for the commercialization of Qsymia (phentermine and topiramate extended release) capsules CIV and finished goods. Deferred costs inventories consist of both Qsymia and STENDRA (avanafil). The Qsymia deferred costs represents Qsymia product shipped to the Company’s wholesalers, certified retail pharmacies and certified home delivery pharmacy services networks, but not yet dispensed to patients through prescriptions, net of prompt payment discounts, and for which recognition of revenue has been deferred. The STENDRA deferred costs represent certain initial orders of STENDRA or SPEDRA product with the right of return or credit, which have not met the required specifications of one of the Company’s partners, and for which recognition of revenue has been deferred.

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories, which are valued using a weighted average cost method calculated for each production batch. The Company periodically evaluates the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or market approach as that used to value the inventory. As a result of this evaluation, in both the three and nine months ended September 30, 2014, the Company recorded a charge of $2.2 million for finished goods and certain non-API raw materials on hand in excess of demand. During the three months ended September 30, 2013, there was no inventory impairment charge.  During the nine months ended September 30, 2013, the Company recorded a charge of $10.2 million for inventories on hand in excess of demand. These charges are included in inventory impairment and other non-recurring charges on the condensed consolidated statement of operations.

 

6. PREPAID EXPENSES AND OTHER ASSETS

 

Prepaid expenses and other assets consist of (in thousands):

 

 

 

Balance as of

 

 

 

September 30, 2014

 

December 31, 2013

 

Prepaid sales and marketing expenses

 

$

4,054

 

$

5,187

 

Debt issuance costs

 

1,252

 

1,247

 

Prepaid insurance

 

68

 

3,617

 

Withholding tax receivable

 

 

5,560

 

Prepaid expenses and other assets

 

5,009

 

4,327

 

Total

 

$

10,383

 

$

19,938

 

 

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The amounts included in prepaid expenses and other assets consist primarily of interest income receivable and prepayments for future services. These and other prepayment amounts represent probable future economic benefits obtained or controlled by the Company as a result of past transactions or events, which meet the definition of an asset under FASB Concept Statement 6. As such, these costs have been deferred as prepaid expenses and other assets on the condensed consolidated balance sheets and will be either (i) charged to expense accordingly when the related prepaid services are rendered to the Company, or (ii) converted to cash when the receivables are collected by the Company.

 

7. NON-CURRENT ASSETS

 

Non-current assets consist of (in thousands):

 

 

 

Balance as of

 

 

 

September 30, 2014

 

December 31, 2013

 

Debt issuance costs

 

$

3,682

 

$

4,620

 

Other non-current assets

 

4,175

 

1,281

 

Total

 

$

7,857

 

$

5,901

 

 

The amounts included in non-current assets primarily consist of patent acquisition and assignment costs (see Note 10),  and debt issuance costs related to the Convertible Notes and the Senior Secured Notes offerings (see Note 13).

 

8. ACCRUED AND OTHER LIABILITIES

 

Accrued and other liabilities consist of (in thousands):

 

 

 

Balance as of

 

 

 

September 30, 2014

 

December 31, 2013

 

Accrued interest expense

 

$

6,116

 

$

5,541

 

Non-recurring charges (see Note 10)

 

3,856

 

4,577

 

Current portion of long-term debt

 

6,899

 

 

Accrued employee compensation and benefits

 

3,604

 

3,408

 

Accrued manufacturing costs

 

153

 

4,071

 

Other accrued liabilities

 

8,636

 

6,396

 

Total

 

$

29,264

 

$

23,993

 

 

The amounts included in other accrued liabilities consist of obligations primarily related to sales, marketing, research, clinical development, corporate activities and royalties.

 

9. NON-CURRENT ACCRUED AND OTHER LIABILITIES

 

Non-current accrued and other liabilities at September 30, 2014 and December 31, 2013, were $1.6 million and $3.0 million, respectively, primarily comprised of costs associated with the exit of certain operating leases and employee termination costs related to a cost reduction plan implemented in the fourth quarter of 2013 (see Note 10).

 

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10. INVENTORY IMPAIRMENT AND OTHER NON-RECURRING CHARGES

 

Inventory impairment and other non-recurring charges for the three and nine months ended September 30, 2014 and 2013 consist of (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Inventory impairment (see Note 5)

 

$

2,170

 

$

 

$

2,170

 

$

10,225

 

Patent settlement

 

1,949

 

 

1,949

 

 

Share-based compensation (see Note 2)

 

 

12,716

 

343

 

12,716

 

Proxy contest expenses

 

 

5,155

 

 

8,863

 

Employee severance and related costs

 

 

2,872

 

1,711

 

2,872

 

Operating lease termination costs

 

 

 

 

216

 

Total inventory impairment and other non-recurring expense

 

$

4,119

 

$

20,743

 

$

6,173

 

$

34,892

 

 

As discussed in Note 5, in both the three and nine months ended September 30, 2014, the Company recorded a charge of $2.2 million for finished goods and certain non-API raw materials on hand in excess of demand. During the three months ended September 30, 2013, there was no inventory impairment charge.  During the nine months ended September 30, 2013, the Company recorded a charge of $10.2 million, for inventories on hand in excess of demand.

 

In September 2014, the Company paid $5.0 million in connection with the transfer and assignment of certain patents from Janssen Pharmaceuticals, Inc. Of the $5.0 million, approximately $1.9 million was recognized as a non-recurring expense in the condensed consolidated statements of operations as it related to a legal settlement during the quarter ended September 30, 2014. The remaining balance of approximately $3.1 million is recorded as an intangible asset and being amortized as cost of goods sold over the period in which the Company expects to benefit from the patents through their expiration dates. Of the $3.1 million, $0.1 million was recorded in cost of goods sold during the three months ended September 30, 2014, and the remaining $3.0 million is included in non-current assets on the condensed consolidated balance sheet and will be amortized over an estimated period of approximately 5.5 years.

 

The following table presents activities related to a cost reduction plan during the three and nine months ended September 30, 2014 (in thousands):

 

 

 

Severance
obligations

 

Facilities-related
obligations
(1)

 

Total

 

Balance of accrued costs at December 31, 2013

 

$

6,509

 

$

1,022

 

$

7,531

 

Charges

 

1,711

(2)

 

1,711

 

Payments

 

(1,659

)

(180

)

(1,839

)

Balance of accrued costs at March 31, 2014

 

6,561

 

842

 

7,403

 

Payments

 

(1,086

)

(219

)

(1,305

)

Balance of accrued costs at June 30, 2014

 

5,475

 

623

 

6,098

 

Payments

 

(944

)

(25

)

(969

)

Balance of accrued costs at September 30, 2014

 

$

4,531

 

$

598

 

$

5,129

 

 


(1)         The accrued facilities-related costs at September 30, 2014 represent estimated losses, net of expected subleases, on space vacated as part of the Company’s cost reduction plan. The noncancelable operating leases and scheduled payments against the amounts accrued extend through May 2020, unless the Company is able to negotiate earlier terminations.

(2)         In addition to the above non-recurring charges, as previously presented in Note 2, the Company incurred non-cash share-based compensation expense of $0.3 million in the nine months ended September 30, 2014.

 

Commencing on May 1, 2014, the Company subleased a portion of its Evelyn Lease consisting of approximately 14,105 square feet of space for a term of 36 months at a starting annual rental rate of $42 per square feet (subject to agreed increases). The sublessee is entitled to abatement of monthly installments of rents for months one through four. Minimum rents expected to be received under this sublease as of September 30, 2014 are $146,000, $601,000, $626,000 and $212,000 in fiscal years 2014 (remaining three months), 2015, 2016 and 2017, respectively. Upon the completion of the sublease for this space, the Company expects to either find usage or to locate a suitable sublessee for the duration of the Company’s Evelyn Lease.

 

Commencing on September 1, 2014, the Company subleased the expansion space relating to the Castro Lease.  The sublease consists of approximately 4,914 square feet of space for a term of 31 months at a starting annual rental rate of $53 per square feet (subject to agreed increases). The sublessee is entitled to abatement of the first monthly installment. Minimum rents expected to be received under this sublease as of September 30, 2014 are $65,000, $261,000, $266,000 and $68,000 in fiscal years 2014 (remaining three months), 2015, 2016 and 2017, respectively.

 

Of the total accrued employee severance and facilities-related costs as of September 30, 2014, $3.8 million is included under current liabilities in “Accrued and other liabilities” and $1.3 million is included in “Non-current accrued and other liabilities.”

 

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The balance of the accrued employee severance and facilities-related costs at September 30, 2014 is anticipated to be paid out as follows (in thousands):

 

2014 (remaining three months)

 

$

1,270

 

2015

 

3,231

 

2016

 

260

 

2017

 

341

 

2018

 

11

 

Thereafter

 

16

 

 

 

$

5,129

 

 

11. DEFERRED REVENUE

 

Qsymia Deferred Revenue

 

At September 30, 2014, the Company had $16.3 million in current deferred revenue, which represents Qsymia product shipped to the Company’s wholesalers, certified retail pharmacies and certified home delivery pharmacy services networks, but not yet dispensed to patients through prescriptions, net of prompt payment discounts.

 

STENDRA or SPEDRA Deferred Revenue

 

At September 30, 2014, the Company had $3.9 million and $9.5 million in current and non-current deferred revenue, respectively, relating to prepayment for future royalties on sales of SPEDRA. Additionally, the Company supplied certain initial orders of STENDRA or SPEDRA product with a right of return or credit, which have not met the required specifications of one of the Company’s partners and for which the Company had $2.8 million in current deferred revenue at September 30, 2014.

 

12. LICENSE, COMMERCIALIZATION AND SUPPLY AGREEMENTS

 

During 2013, the Company entered into license and commercialization agreements and commercial supply agreements with the Menarini Group, through its subsidiary Berlin-Chemie AG, or Menarini, Auxilium Pharmaceuticals, Inc., or Auxilium, and Sanofi and its affiliate, or Sanofi, to commercialize and promote STENDRA or SPEDRA in their respective territories. Menarini’s territory is comprised of over 40 European countries, including the EU, plus Australia and New Zealand. Auxilium’s territory is comprised of the United States and Canada and their respective territories. Sanofi’s territory is comprised of Africa, the Middle East, Turkey and Eurasia.

 

For the three months ended September 30, 2014, the Company recognized $15.1 million in license and milestone revenue primarily attributable to milestone revenue related to the approval of the Time of Onset Claim in the U.S. For the nine months ended September 30, 2014, the Company recognized $38.6 million in license and milestone revenue primarily attributable to product launches in certain EU countries and milestone revenue related to the approval of the Time of Onset Claim in the U.S.  For the three and nine months ended September 30, 2014, the Company recognized $5.3 million and $18.3 million, respectively, in supply revenue relating to STENDRA or SPEDRA delivered under the various commercial supply agreements with Menarini, Auxilium and Sanofi. Additionally, for the three and nine months ended September 30, 2014, the Company recognized $1.1 million and $2.9 million, respectively, in royalty revenue based on net sales reported by Menarini and Auxilium.

 

13. LONG-TERM DEBT

 

Convertible Senior Notes Due 2020

 

On May 21, 2013, the Company closed an offering of $220.0 million in 4.5% Convertible Senior Notes due May 1, 2020, or the Convertible Notes. The Convertible Notes are governed by an indenture, dated as of May 21, 2013, between the Company and Deutsche Bank National Trust Company, as trustee. On May 29, 2013, the Company closed on an additional $30.0 million of Convertible Notes upon exercise of an option by the initial purchasers of the Convertible Notes. Total net proceeds from the Convertible Notes were approximately $241.8 million. For the three and nine months ended September 30, 2014, total interest expense related to the Convertible Notes was $6.3 million and $18.6 million, respectively, including amortization of $3.7 million and $10.9 million of the debt discount and $202,000 and $584,000 of deferred financing costs, respectively. For the three and nine months ended September 30, 2013, total interest expense related to the Convertible Notes was $5.7 million and $8.1 million, respectively, including amortization of $3.4 million and $5.9 million of the debt discount and $182,000 and $260,000 of deferred financing costs, respectively.

 

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Senior Secured Notes Due 2018

 

On March 25, 2013, the Company entered into the Purchase and Sale Agreement between the Company and BioPharma Secured Investments III Holdings Cayman LP, a Cayman Islands exempted limited partnership, providing for the purchase of a debt-like instrument, or the Senior Secured Notes. Under the agreement, the Company received $50 million, less $500,000 in funding and facility payments, at the initial closing on April 9, 2013. The Company had the option, but elected not to exercise it, to receive an additional $60 million, less $600,000 in a funding payment, at a secondary closing no later than January 15, 2014. For the three and nine months ended September 30, 2014, the interest expense related to the Senior Secured Notes was $1.9 million and $5.7 million, respectively, including amortization of deferred financing costs amounting to $116,000 and $354,000, respectively. For the three and nine months ended September 30, 2013, the interest expense related to the Senior Secured Notes was $1.7 million and $3.2 million, respectively, including amortization of deferred financing costs amounting to $106,000 and $212,000, respectively.

 

The following table summarizes information on the debt (in thousands):

 

 

 

September 30, 2014

 

Convertible Senior Notes due 2020:

 

 

 

Fair value of the liability component at issuance date

 

$

154,737

 

Accumulated accretion of discount

 

19,271

 

Net carrying value

 

$

174,008

 

 

 

 

 

Senior Secured Notes due 2018:

 

 

 

Carrying value

 

$

50,000

(1)

 

 

 

 

Total Notes:

 

 

 

Fair value of the liability component at issuance date

 

$

204,737

 

Accumulated accretion of discount

 

19,271

 

Net carrying amount

 

$

224,008

 

 


(1)         Approximately $6.9 million was classified as current and included in accrued and other current liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2014.

 

14. NET INCOME (LOSS) PER SHARE

 

The Company computes basic net income (loss) per share applicable to common stockholders based on the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the weighted average number of common and common equivalent shares, which represent shares that may be issued in the future upon the exercise of outstanding stock options or upon a net share settlement of the Company’s Convertible Notes. Common share equivalents are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the price exceeds the average market price over the period have an anti-dilutive effect on net income per share and, accordingly, are excluded from the calculation. The triggering conversion conditions that allow holders of the Convertible Notes to convert have not been met. If such conditions are met and the note holders opt to convert, the Company may choose to pay in cash, common stock, or a combination thereof; however, if this occurs, the Company has the intent and ability to net share settle this debt security; thus the Company uses the treasury stock method for earnings per share purposes. Due to the effect of the capped call instrument purchased in relation to the Convertible Notes, there would be no net shares issued until the market value of the Company’s stock exceeds $20 per share, and thus no impact on diluted net income per share. Further, when there is a net loss, potentially dilutive common equivalent shares are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.

 

As the Company recognized a net loss for the three and nine months ended September 30, 2014 and 2013, all potential common equivalent shares were excluded for these periods as they were anti-dilutive. For the three and nine months ended September 30, 2014, awards and options outstanding of 8,069,865 and 8,494,903, respectively, were excluded in the computation of diluted net loss per share for the Company because the effect would be anti-dilutive. For the three and nine months ended September 30, 2013, awards and options outstanding of 5,626,000 and 6,026,000, respectively, were excluded in the computation of diluted net loss per share because the effect would be anti-dilutive.

 

15. INCOME TAXES

 

For the three and nine months ended September 30, 2014, the Company recorded a tax benefit of $222,000 and $660,000, respectively. For the three and nine months ended September 30, 2013, the Company recorded provisions for income taxes of $33,000 and $46,000, respectively.  The tax benefit for the three months ended September 30, 2014 primarily relates to tax liabilities in certain states, offset by a reduction to the Company’s unrecognized tax benefits as a result of the California Franchise Tax Board audit that was favorably settled.

 

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The tax benefit for the nine months ended September 30, 2014 primarily relates to tax liabilities in certain states, offset by a tax refund received from the State of New Jersey as a result of a settlement of an audit and acceptance of a refund claim for the tax year ended December 31, 2007 and a reduction of the Company’s unrecognized tax benefits as a result of the California Franchise Tax Board audit that was favorably settled. The tax provision for the three and nine months ended September 30, 2013 relates to state tax liabilities.

 

The Company assesses the likelihood that it will be able to recover its deferred tax assets on a quarterly basis. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is not more likely than not that the Company will recover its deferred tax assets, the Company will increase its provision for taxes by recording a valuation allowance against the deferred tax assets that the Company estimates will not ultimately be recoverable. As a result of the Company’s analysis of all available evidence, both positive and negative, as of December 31, 2013, it was considered more likely than not that the Company’s deferred tax assets would not be realized. However, should there be a change in the Company’s ability to recover its deferred tax assets, the Company would recognize a benefit to its tax provision in the period in which the Company determines that it is more likely than not that it will recover its deferred tax assets.

 

There were changes to the Company’s unrecognized tax benefits in the three months ended September 30, 2014 as a result of the favorable settlement with the California Franchise Tax Board. We do not expect to have any further significant changes to unrecognized tax benefits through the end of the fiscal year, because of our history of tax losses, and certain tax years that remain open to tax audit.

 

16. LEGAL MATTERS

 

Securities Related Class Action and Shareholder Derivative Lawsuits

 

The Company, a current officer and a former officer were defendants in a putative class action captioned Kovtun v. VIVUS, Inc., et al., Case No. 4:10-CV-04957-PJH, in the U.S. District Court, Northern District of California. The action, filed in November 2010, alleged violations of Section 10(b) and 20(a) of the federal Securities Exchange Act of 1934 based on allegedly false or misleading statements made by the defendants in connection with the Company’s clinical trials and New Drug Application, or NDA, for Qsymia as a treatment for obesity. The Court granted defendants’ motions to dismiss both plaintiff’s Amended Class Action Complaint and Second Amended Class Action Complaint; by order dated September 27, 2012, the latter dismissal was with prejudice and final judgment was entered for defendants the same day. On October 26, 2012, plaintiff filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit. Briefing of the appeal is complete, and the Court of Appeals has set oral argument for January 16, 2015.

 

Additionally, certain of the Company’s former officers and directors and a current director are defendants in a shareholder derivative lawsuit captioned Turberg v. Logan, et al., Case No. CV-10-05271-PJH, pending in the same federal court. In the plaintiff’s Verified Amended Shareholder Derivative Complaint filed June 3, 2011, the plaintiff largely restated the allegations of the Kovtun action and alleged that the directors breached fiduciary duties to the Company by purportedly permitting the Company to violate the federal securities laws as alleged in the Kovtun action. The same individuals are also named defendants in consolidated shareholder derivative suits pending in the California Superior Court, Santa Clara County, under the caption In re VIVUS, Inc. Derivative Litigation, Master File No. 11 0 CV188439. The allegations in the state court derivative suits are substantially similar to the other lawsuits. The Company is named as a nominal defendant in these actions, neither of which seeks any recovery from the Company. The parties have agreed to stay the derivative lawsuits pending the outcome of the appeal of the securities class action.

 

On July 12, 2013, various current and former officers and directors of the Company were named as defendants in a separate shareholder derivative lawsuit filed in the California Superior Court, Santa Clara County, and captioned Ira J. Gaines IRA, et al. v. Leland F. Wilson, et al., Case No.1-13-CV-249436. The lawsuit generally alleged breaches of the fiduciary duty of care in connection with the launch of Qsymia, breaches of the duty of loyalty and insider trading by some defendants for selling Company stock while purportedly being aware that the Qsymia launch would be less successful than predicted and corporate waste. On March 14, 2014, the Court sustained a demurrer and dismissed the complaint with leave to amend. An order memorializing the Court’s ruling was entered March 21, 2014. On April 21, 2014, derivative plaintiffs filed an Amended Shareholder Derivative Complaint alleging substantially similar breaches of duty. On May 21, 2014, the Company filed a demurrer to the Amended Complaint. With that demurrer pending, derivative plaintiffs asked the Court in July 2014 to dismiss the action with prejudice as to the named plaintiffs and otherwise without prejudice. The Court did so by order entered July 17, 2014, and the matter is now concluded.

 

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On March 27, 2014, Mary Jane and Thomas Jasin, who purport to be purchasers of VIVUS common stock, filed an Amended Complaint in Santa Clara County Superior Court alleging securities fraud against the Company and three of its former officers and directors.  In that complaint, captioned Jasin v. VIVUS, Inc., Case No. 114-cv-261427, plaintiffs asserted claims under California’s securities and consumer protection securities statutes.    Plaintiffs alleged generally that defendants misrepresented the prospects for the Company’s success, including with respect to the launch of Qsymia, while purportedly selling VIVUS stock for personal profit. Plaintiffs alleged losses of “at least” $2.8 million, and sought damages and other relief.  On June 5, 2014, the Company and the other defendants filed a demurrer to the Amended Complaint seeking its dismissal.  With the demurrer pending, on July 18, 2014, the same plaintiffs filed a complaint in the United States District Court for the Northern District of California, captioned Jasin v. VIVUS, Inc., Case No. 5:14-cv-03263.  The Jasins’ federal complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, based on facts substantially similar to those alleged in their state court action.  On September 15, 2014, pursuant to an agreement between the parties, plaintiffs moved to voluntarily dismiss, with prejudice, the state court action.  In the federal action, the parties have filed a briefing stipulation providing for briefing on the Company’s and the other defendants’ anticipated motion to dismiss in November 2014-January 2015, with a court hearing on the motion thereafter.   The Company maintains directors’ and officers’ liability insurance that it believes affords coverage for much of the anticipated cost of the remaining Jasin action, subject to payment of our self-insured retention and the policies’ terms and conditions.

 

The Company and its directors cannot predict the outcome of the various shareholder lawsuits, but they believe the various shareholder lawsuits are without merit and intend to continue vigorously defending them.

 

Qsymia ANDA Litigation

 

On May 7, 2014, the Company received a Paragraph IV certification notice from Actavis Laboratories FL indicating that it filed an abbreviated new drug application, or ANDA, with the U.S. Food and Drug Administration, or FDA, requesting approval to market a generic version of Qsymia and contending that all six patents listed for Qsymia in the FDA Orange Book (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, and 8,580,299 (collectively “patents-in-suit”)) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offer for sale of a generic form of Qsymia as described in their ANDA. On June 12, 2014, the Company filed a lawsuit in the U.S District Court for the District of New Jersey against Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC, collectively referred to as Actavis. The lawsuit (Case No. 14-3786 (FSH)(MAH)) was filed on the basis that Actavis’ submission of their ANDA to obtain approval to manufacture, use, sell or offer for sale generic versions of Qsymia prior to the expiration of the patents-in-suit constitutes infringement of one or more claims of those patents.

 

In accordance with the Hatch-Waxman Act, as a result of having filed a timely lawsuit against Actavis, FDA approval of Actavis’ ANDA will be stayed until the earlier of (i) November 7, 2016 which is 30 months from the Company’s May 7, 2014 receipt of Actavis’ Paragraph IV certification notice or (ii) a District Court decision finding that the identified patents are invalid, unenforceable or not infringed. The Company intends to vigorously enforce its intellectual property rights relating to Qsymia, but the Company cannot predict the outcome of this matter.

 

Janssen Litigation

 

On August 22, 2014, the Company was named as a defendant in a complaint filed by Janssen Pharmaceuticals, Inc., or Janssen, in the United States District Court of Delaware. In the complaint, the plaintiff alleged that the Company was infringing U.S. Patent No. 6,071,537, or the’537 patent, by selling Qsymia.   The plaintiff sought a permanent injunction enjoining the Company from further infringement and unspecified monetary damages. On August 24, 2014, the Company entered into a Patent Assignment Agreement with Janssen that included assignment of the ‘537 patent to the Company. As a result, Janssen voluntarily dismissed the lawsuit on August 24, 2014.

 

17. SEGMENT INFORMATION

 

The Company operates in one reportable segment—the development and commercialization of novel therapeutic products. The Company has identified its Chief Executive Officer as the Chief Operating Decision Maker, or CODM, who manages the Company’s operations on a consolidated basis for purposes of allocating resources. When evaluating financial performance, the CODM reviews product information, while other financial information is reviewed on a consolidated basis. Therefore, results of operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Disclosures about revenues by product and by geographic area are presented below.

 

Geographic Information

 

Outside the United States, or ROW, the Company sells products through a commercialization licensee principally in the EU. The geographic classification of product sales was based on the location of the customer. The geographic classification of supply, license and milestone revenue was based on the domicile of the entity from which the revenue was earned.

 

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Table of Contents

 

Net product revenue by geographic region was as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2014

 

 

 

 

 

2013

 

 

 

 

 

U.S.

 

ROW

 

Total

 

U.S.

 

ROW

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qsymia—Net product revenue

 

$

12,454

 

$

 

$

12,454

 

$

6,379

 

$

 

$

6,379

 

STENDRA/SPEDRA—License and milestone revenue

 

15,000

 

70

 

15,070

 

 

21,000

 

21,000

 

STENDRA/SPEDRA—Supply revenue

 

1,222

 

4,078

 

5,300

 

 

 

 

STENDRA/SPEDRA —Royalty revenue

 

651

 

402

 

1,053

 

 

 

 

Total revenue

 

$

29,327

 

$

4,550

(1)

$

33,877

 

$

6,379

 

$

21,000

(1)

$

27,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

 

 

 

2013

 

 

 

 

 

U.S.

 

ROW

 

Total

 

U.S.

 

ROW

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qsymia—Net product revenue

 

$

32,575

 

$

 

$

32,575

 

$

16,025

 

$

 

$

16,025

 

STENDRA/SPEDRA—License and milestone revenue

 

15,406

 

23,208

 

38,614

 

 

21,000

 

21,000

 

STENDRA/SPEDRA—Supply revenue

 

6,628

 

11,708

 

18,336

 

 

 

 

STENDRA/SPEDRA —Royalty revenue

 

1,901

 

1,023

 

2,924

 

 

 

 

Total revenue

 

$

56,510

 

$

35,939

(2)

$

92,449

 

$

16,025

 

$

21,000

(1)

$

37,025

 

 


(1) Consists of revenue attributable to Germany.

(2) Includes $30.8 million of revenue attributable to Germany.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain “forward looking” statements that involve risks and uncertainties. These statements typically may be identified by the use of forward-looking words or phrases such as “may,” “believe,” “expect,” “forecast,” “intend,” “anticipate,” “predict,” “should,” “planned,” “likely,” “opportunity,” “estimated,” and “potential,” the negative use of these words or other similar words. All forward-looking statements included in this document are based on our current expectations, and we assume no obligation to update any such forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our business include but are not limited to: (1) our limited commercial experience with Qsymia® in the United States, or U.S.; (2) the timing of initiation and completion of the clinical studies required as part of the approval of Qsymia by the U.S. Food and Drug Administration, or FDA; (3) the response from the FDA to the data that we will submit relating to post-approval clinical studies; (4) the impact of the indicated uses and contraindications contained in the Qsymia label and the Risk Evaluation and Mitigation Strategy requirements; (5) our ability to continue to certify and add to the Qsymia retail pharmacy network and sell Qsymia through this network; (6) whether the Qsymia retail pharmacy network will simplify and reduce the prescribing burden for physicians, improve access and reduce waiting times for patients seeking to initiate therapy with Qsymia; (7) that we may be required to provide further analysis of previously submitted clinical trial data; (8) our assessment of the European Medicines Agency’s Scientific Advice relating to our cardiovascular outcomes trial, or CVOT, and the resubmission of an application for the grant of a marketing authorization to the European Medicines Agency, or EMA, the timing of such resubmission, if any, the results of the CVOT, assessment by the EMA of the application for marketing authorization, and their agreement with the data from the CVOT; (9) our ability to successfully seek approval for Qsymia in other territories outside the U.S. and European Union, or EU; (10) whether healthcare providers, payors and public policy makers will recognize the significance of the American Medical Association officially recognizing obesity as a disease, or the new American Association of Clinical Endocrinologists guidelines; (11) our ability to successfully commercialize Qsymia including risks and uncertainties related to expansion to retail distribution, the broadening of payor reimbursement, the expansion of Qsymia’s primary care presence, and the outcomes of our discussions with pharmaceutical companies and our strategic and franchise-specific pathways for Qsymia; (12) our ability to focus our promotional efforts on health-care providers and on patient education that, along with increased access to Qsymia and ongoing improvements in reimbursement, will result in the accelerated adoption of Qsymia; (13) our ability to eliminate expenses that are not essential to expanding the use of Qsymia and fully realize the anticipated benefits from a cost reduction plan, including the timing thereof; (14) the impact of lower annual net cost savings than currently expected; (15) the impact of a cost reduction plan on our business and unanticipated charges not currently contemplated that may occur as a result of a cost reduction plan; (16) our ability to ensure that the entire supply chain for Qsymia efficiently and consistently delivers Qsymia to our customers; (17) risks and uncertainties related to the timing, strategy, tactics and success of the launches and commercialization of STENDRA® (avanafil) or SPEDRA™ (avanafil) by our sublicensees in the United States, Canada, the EU, Australia, New Zealand, Africa, the Middle East, Turkey, and the Commonwealth of Independent States, including Russia; (18) our ability to successfully complete on acceptable terms, and on a timely basis, avanafil partnering discussions for other territories under our license with Mitsubishi Tanabe Pharma Corporation, or MTPC, in which we do not have a commercial collaboration; (19) the timing of the qualification and subsequent approval by regulatory authorities of Sanofi Chimie and Sanofi Winthrop Industrie as a qualified supplier of STENDRA/SPEDRA, Sanofi Chimie’s ability to undertake worldwide manufacturing of the avanafil active pharmaceutical ingredient and Sanofi Winthrop Industrie’s ability to undertake worldwide manufacturing of the tablets for avanafil; (20)  whether the European Commission, following an opinion by the EMA, will approve the new prescribing information we intend to submit, to include the recently announced clinical study results showing avanafil is effective for sexual activity within 15 minutes in men with erectile dysfunction, or ED; (21) the ability of our partners to maintain regulatory approvals to manufacture and adequately supply our products to meet demand; (22) our ability to accurately forecast Qsymia demand; (23) our ability to increase Qsymia sales in 2014 through growth in certified retail pharmacies, expansion of reimbursement coverage and the use of a more focused selling message; (24) the number of Qsymia prescriptions dispensed through the mail order system and through certified retail pharmacies; (25) the impact of promotional programs for Qsymia on our net product revenue and net income (loss) in future periods; (26) our history of losses and variable quarterly results; (27) substantial competition; (28) risks related to the failure to protect our intellectual property and litigation in which we are involved or may become involved; (29) uncertainties of government or third-party payor reimbursement; (30) our reliance on sole-source suppliers; (31) our reliance on third parties and our collaborative partners; (32) our failure to continue to develop innovative investigational drug candidates and drugs; (33) risks related to the failure to obtain FDA or foreign authority clearances or approvals and noncompliance with FDA or foreign authority regulations; (34) our ability to demonstrate through clinical testing the quality, safety, and efficacy of our investigational drug candidates; (35) the timing of initiation and completion of clinical trials and submissions to foreign authorities; (36) the results of post-marketing studies are not favorable; (37) compliance with post-marketing regulatory standards, post-marketing obligations or pharmacovigilance rules is not maintained; (38) the volatility and liquidity of the financial markets; (39) our liquidity and capital resources; (40) our expected future revenues, operations and expenditures; (41) potential change in our business strategy to enhance long-term stockholder value; (42) the impact, if any, of changes to our Board of Directors, the recent appointment of a new Chief Executive Officer and an interim Chief Financial Officer, the resignation of our President, the decision of our Chief Financial Officer to exercise his right to terminate his employment for Good Reason (as defined in his Amended and Restated Change of Control and Severance Agreement with the Company, effective as of July 1, 2013) and the assumption of the Chief Commercial Officer’s duties and responsibilities by our Chief Executive Officer; and (43) other factors that are described from time to time in our periodic filings with the Securities and Exchange Commission, or the SEC, or the Commission, including those set forth in this filing as “Item 1A. Risk Factors.”

 

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When we refer to “we,” “our,” “us,” the “Company” or “VIVUS” in this document, we mean the current Delaware corporation, or VIVUS, Inc., and its California predecessor, as well as all of our consolidated subsidiaries.

 

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the quarter ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year or any future period.

 

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2013 as filed on February 28, 2014 and as amended by the Form 10-K/A filed on April 30, 2014, and other disclosures (including the disclosures under “Part II. Item 1A. Risk Factors”) included in this Quarterly Report on Form 10-Q. Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

 

OVERVIEW

 

VIVUS is a biopharmaceutical company with two therapies approved by the FDA: Qsymia for chronic weight management and STENDRA for erectile dysfunction. STENDRA is also approved by the European Commission, or EC, under a trade name, SPEDRA, for the treatment of erectile dysfunction in the EU.

 

Our drug Qsymia (phentermine and topiramate extended-release) was approved by the FDA in July 2012, as an adjunct to a reduced-calorie diet and increased physical activity for chronic weight management in adult patients with an initial body mass index (BMI) of 30 or greater (obese), or 27 or greater (overweight) in the presence of at least one weight-related comorbidity, such as hypertension, type 2 diabetes mellitus or high cholesterol (dyslipidemia). Qsymia incorporates a proprietary formulation combining low doses of active ingredients from two previously approved drugs, phentermine and topiramate. Although the exact mechanism of action is unknown, Qsymia is believed to suppress appetite and increase satiety, or the feeling of being full, the two main mechanisms that impact eating behavior. In September 2012, Qsymia became available in the U.S. market through a limited number of certified home delivery networks. In July 2013, Qsymia became available in retail pharmacies through approximately 8,000 Walgreens, Costco and Duane Reade pharmacies nationwide. As of the date of this report, Qsymia is available in over 41,000 certified retail pharmacies nationwide, including all of the major pharmacy chains in the country. We intend to continue to certify and add new pharmacies to the Qsymia retail pharmacy network, including national and regional chains as well as independent pharmacies.

 

We commercialize Qsymia in the U.S. primarily through a dedicated contract sales force, supported by an internal commercial team consisting of sales management, marketing and managed care professionals. Our efforts to expand the appropriate use of Qsymia include scientific publications, participation and presentations at medical conferences and development and implementation of patient-directed support programs.

 

After re-examination of our appeal application, on February 21, 2013, the Committee for Medicinal Products for Human Use, or CHMP, adopted a final opinion that reaffirmed the Committee’s earlier negative opinion to refuse the marketing authorization in the EU for the medicinal product QsivaTM (the approved trade name for Qsymia in the EU). On May 15, 2013, the European Commission issued a decision refusing the grant of marketing authorization for Qsiva in the EU. On September 20, 2013, we submitted a request to the EMA for Scientific Advice, a procedure similar to the U.S. Special Protocol Assessment process, regarding use of a pre-specified interim analysis from the study to assess the long-term treatment effect of Qsymia on the incidence of major adverse cardiovascular events in overweight and obese subjects with confirmed cardiovascular disease, or AQCLAIM, to support the resubmission of an application for a marketing authorization for Qsiva for treatment of obesity in accordance with the EU centralized procedure. We received feedback earlier this year from European Union regulatory officials regarding the AQCLAIM CVOT protocol, and we have recently received feedback from the FDA regarding the amended protocol. As a part of addressing the FDA comments, we are working to ensure that the planned interim analysis will not jeopardize the overall integrity of the study and will support other objectives in both the EU and U.S. We also intend to seek approval for Qsymia in other territories outside the United States and EU. We intend to commercialize Qsymia in territories where we obtain approval through commercial collaboration agreements with third parties.

 

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Our drug STENDRA, or avanafil, is an oral phosphodiesterase type 5, or PDE5, inhibitor that we have licensed from MTPC. STENDRA was approved by the FDA in April 2012 for the treatment of ED in the United States. In June 2013, the EC adopted the implementing decision granting marketing authorization for SPEDRA (the approved trade name for avanafil in the EU) for the treatment of ED in the EU. In July 2013, we entered into an agreement with the Menarini Group, through its subsidiary Berlin-Chemie AG, or Menarini, under which Menarini received an exclusive license to commercialize and promote SPEDRA for the treatment of ED in over 40 European countries, including the EU, plus Australia and New Zealand. Menarini commenced its commercialization launch of the product in the EU in early 2014, and as of the date of this filing, SPEDRA is commercially available in 23 countries within the Menarini territory.

 

In October 2013, we entered into an agreement with Auxilium Pharmaceuticals, Inc., or Auxilium, under which Auxilium received an exclusive license to commercialize and promote STENDRA in the United States and Canada. On the same date, we also entered into a supply agreement with Auxilium, whereby VIVUS will supply Auxilium with STENDRA drug product for commercialization. Auxilium began commercializing STENDRA in the U.S. market in December 2013.

 

In December 2013, we entered into an agreement with Sanofi under which Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use in humans in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, or CIS, including Russia. Sanofi will be responsible for obtaining regulatory approval in its territories. Sanofi intends to market avanafil under the trade name SPEDRA or STENDRA. Effective as of December 11, 2013, we also entered into a supply agreement, or the Sanofi Supply Agreement, with Sanofi Winthrop Industrie, a wholly owned subsidiary of Sanofi.

 

Under the license agreements with Menarini, Auxilium and Sanofi, avanafil is expected to be commercialized in over 100 countries worldwide. In addition, we are currently in discussions with potential collaboration partners to market and sell STENDRA for our other territories in which we do not currently have a commercial collaboration.

 

On September 18, 2014, the FDA approved a supplemental new drug application (sNDA) for STENDRA®. STENDRA is now the only FDA-approved ED medication indicated to be taken as early as approximately 15 minutes before sexual activity. We are also working with European regulatory authorities with respect to these data for the SPEDRA label.

 

Foreign regulatory approvals, including EC marketing authorization to market Qsiva in the EU, may not be obtained on a timely basis, or at all, and the failure to receive regulatory approvals in a foreign country would prevent us from marketing our products in that market, which could have a material adverse effect on our business, financial condition and results of operations.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to available-for-sale securities, research and development expenses, income taxes, inventories, revenues, including revenues from multiple element arrangements, contingencies and litigation and share-based compensation. We base our estimates on historical experience, information received from third-parties and on various market specific and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates under different assumptions or conditions.

 

For the three and nine months ended September 30, 2014, there were no significant changes from the discussion in our Annual Report on Form 10-K to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013, provides a more complete discussion of our critical accounting policies and estimates.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

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RESULTS OF OPERATIONS

 

For the three and nine months ended September 30, 2014, net loss was $15.8 million and $57.2 million, or $0.15 and $0.55 net loss per share, respectively, as compared to a net loss of $48.2 million and $157.3 million, or $0.48 and $1.56 net loss per share, respectively, for the same periods in 2013. The decrease in net loss in the three and nine months ended September 30, 2014, as compared to same periods in 2013, was primarily attributable to higher total net revenue and lower selling and marketing expenses related to Qsymia, plus lower spending across other functional areas as a result of a cost reduction plan implemented in the fourth quarter of 2013 and reduced share-based compensation expense.

 

We may have continued losses in future periods, depending on our success in commercializing Qsymia, our partners’ commercial success with STENDRA or SPEDRA, and the timing of our research and development expenditures, primarily related to the post-marketing study requirements for our approved drugs.

 

Continuing operations

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except for percentages)

 

2014

 

2013

 

2014 vs.
2013
Increase/
(Decrease)

 

2014

 

2013

 

2014 vs.
2013
Increase/
(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product revenue

 

$

12,454

 

$

6,379

 

95

%

$

32,575

 

$

16,025

 

103

%

License and milestone revenue

 

15,070

 

21,000

 

(28

)%

38,614

 

21,000

 

84

%

Supply revenue

 

5,300

 

 

 

18,336

 

 

 

Royalty revenue

 

1,053

 

 

 

2,924

 

 

 

Total revenue

 

$

33,877

 

$

27,379

 

24

%

$

92,449

 

$

37,025

 

150

%

 

Net product revenue

 

We recognize net product revenue from sales of Qsymia based on prescription sell-through to patients by the certified retail pharmacies and home delivery pharmacy services networks as we do not have sufficient historical information to reliably estimate returns.

 

Net product revenue from sales of Qsymia increased by $6.1 million and $16.5 million in the three and nine months ended September 30, 2014, respectively, compared to the corresponding periods of 2013.  The increases were primarily attributable to continued growth in Qsymia prescriptions, which we began distributing to certified home delivery pharmacies in our network in September 2012, and the product became available in certified retail pharmacies in July 2013. In the three and nine months ended September 30, 2014, approximately 140,000 and 398,000 Qsymia prescriptions were dispensed, respectively, compared to 109,000 and 249,000 in the same periods in 2013, respectively.

 

In the three and nine months ended September 30, 2014, approximately 63% and 59%, respectively, of our total prescriptions included either a free good or discount offer, with approximately 29,000 and 84,000, respectively, of those prescriptions dispensed as free goods. In comparison, in the three and nine months ended September 30, 2013, approximately 56% and 49%, respectively, of our total prescriptions included either a free good or discount offer, with approximately 28,000 and 73,000 respectively, of those prescriptions dispensed as free goods.

 

As of September 30, 2014, we recorded deferred revenue related to sales of Qsymia of $16.3 million, which represents Qsymia product shipped to wholesalers, certified retail pharmacies and certified home delivery pharmacy services networks, but not yet dispensed to patients through prescriptions, net of prompt-payment discounts.

 

License and milestone revenue

 

In the second half of 2013, we entered into separate license and commercialization agreements and commercial supply agreements with the Menarini Group, through its subsidiary Berlin-Chemie AG, or Menarini, Auxilium Pharmaceuticals, Inc., or Auxilium, and Sanofi and its affiliate, or Sanofi, to commercialize and promote STENDRA or SPEDRA in their respective territories. Menarini’s territory is comprised of over 40 European countries, including the EU, plus Australia and New Zealand. Auxilium’s territory is comprised of the United States and Canada and their respective territories. Sanofi’s territory is comprised of Africa, the Middle East, Turkey and Eurasia.

 

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While license and milestone revenue decreased by $6.0 million in the three months ended September 30, 2014, compared with the same period in 2013, we experienced an increase of $17.6 million in the nine months ended September 30, 2014, compared with the same period in 2013.  The fluctuations in both periods were largely attributable to the timing of achievement of certain revenue recognition milestones.  In the three months ended September 30, 2014, we recognized $15.1 million in license and milestone revenue primarily attributable to milestone revenue related to the approval of the Time of Onset Claim in the U.S. compared with the same period in 2013, in which the license and milestone revenue consisted primarily of the license fee from the arrangement with Menarini. The increase in license and milestone revenue in the nine months ended September 30, 2014, compared with the same period in 2013, was primarily driven by product launches in certain EU countries and approval of the Time of Onset Claim in the U.S.

 

Supply revenue

 

Supply revenue was $5.3 million and $18.3 million for the three and nine months ended September 30, 2014, respectively, primarily attributable to STENDRA or SPEDRA delivered under the various commercial supply agreements we entered into during the second half of 2013.  We did not record supply revenue in the three and nine months ended September 30, 2013, as there were no shipments of STENDRA or SPEDRA in those periods.

 

Royalty revenue

 

Royalty revenue was $1.1 million and $2.9 million for the three and nine months ended September 30, 2014, respectively, primarily attributable to agreements with Menarini and Auxilium that we entered into during the second half of 2013, for which we earn royalties based upon a certain percentage of net sales reported by commercialization partners. We did not record royalty revenue in the first nine months of 2013, as Auxilium launched STENDRA in its territory in the fourth quarter of 2013, and Menarini launched SPEDRA in its territory in the first quarter of 2014.

 

Cost of goods sold

 

Total cost of goods sold increased by $6.5 million and $22.1 million in the three and nine months ended September 30, 2014, respectively, compared with the corresponding periods in 2013.

 

Cost of goods sold for Qsymia dispensed to patients includes the inventory costs of active pharmaceutical ingredients, or APIs, third-party contract manufacturing and packaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storage costs, and overhead costs of the employees involved with production. Cost of goods sold related to Qsymia shipments during the three and nine months ended September 30, 2014 were $2.1 million and $5.3 million, respectively compared with $0.7 million and $1.7 million, respectively, in the same periods in 2013.  This increase was primarily due to increased shipments of Qsymia.

 

Cost of goods sold for STENDRA or SPEDRA shipped to Menarini and Auxilium includes the inventory costs of purchased tablets, freight, shipping, handling and overhead costs. Cost of goods sold for STENDRA during the three and nine months ended September 30, 2014 were $5.2 million and $18.5 million, respectively. We did not have shipments of STENDRA or SPEDRA in the three or nine months ended September 30, 2013.

 

The cost of goods sold related to deferred revenue on Qsymia and STENDRA product shipments is recorded as deferred costs, which are included in inventories in the condensed consolidated balance sheets, until such time as the deferred revenue is recognized.

 

Research and development expense

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Drug Indication/Description

 

2014

 

2013

 

2014 vs.
2013
Increase/
(Decrease)

 

2014

 

2013

 

2014 vs.
2013
Increase/
(Decrease)

 

 

 

(in thousands, except for percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qsymia for obesity

 

$

630

 

$

4,225

 

(85

)%

$

3,743

 

$

7,435

 

(50

)%

STENDRA for ED

 

299

 

1,932

 

(85

)%

1,922

 

8,159

 

(76

)%

Other projects

 

 

18

 

(100

)%

30

 

313

 

(90

)%

Share-based compensation

 

337

 

363

 

(7

)%

924

 

2,217

 

(58

)%

Overhead costs*

 

1,308

 

1,867

 

(30

)%

4,464

 

6,559

 

(32

)%

Total research and development expense

 

$

2,574

 

$

8,405

 

(69

)%

$

11,083

 

$

24,683

 

(55

)%

 


*            Overhead costs include compensation and related expenses, consulting, legal and other professional services fees relating to research and development activities, which we do not allocate to specific projects.

 

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Total research and development expense decreased by $5.8 million, or 69%, and by $13.6 million, or 55%, in the three and nine months ended September 30, 2014, respectively, compared with the corresponding periods in 2013, primarily due to the completion of various product studies, including the STENDRA 15-minute and spermatogenesis studies. Other factors that favorably impacted research and development expenses include (i) a decrease due to the timing of Qsymia study activities, known as the AQCLAIM study, and (ii) decreases in employee costs (including share-based compensation expense), external staffing and consulting fees, other project costs and overhead costs, all of which were attributable to a cost reduction plan.

 

We estimate the AQCLAIM study will cost between $180.0 and $220.0 million and the study could take as long as five to six years to complete. We submitted a request for Scientific Advice to the EMA regarding use of a pre-specified interim analysis from AQCLAIM to support the resubmission of an application for a marketing authorization for Qsiva for obesity in accordance with the EU centralized marketing authorization procedure. We received feedback earlier this year from European Union regulatory officials regarding the AQCLAIM CVOT protocol, and we have recently received feedback from the FDA regarding the amended protocol.  As a part of addressing the FDA comments, we are working to ensure that the planned interim analysis will not jeopardize the overall integrity of the study and will support other objectives in both the EU and U.S.

 

There will be additional research and development expenses for post-approval studies related to STENDRA and Qsymia. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical and pre-clinical studies.

 

Selling, general and administrative expense

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014 vs.
2013
Increase/
(Decrease)

 

2014

 

2013

 

2014 vs.
2013
Increase/
(Decrease)

 

 

 

(in thousands, except for percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

$

18,447

 

$

22,593

 

(18

)%

$

54,555

 

$

72,438

 

(25

)%

General and administrative

 

9,381

 

15,574

 

(40

)%

30,148

 

49,228

 

(39

)%

Total selling, general and administrative expense

 

$

27,828

 

$

38,167

 

(27

)%

$

84,703

 

$

121,666

 

(30

)%

 

Selling and marketing expenses decreased by $4.1 million, or 18%, and by $17.9 million, or 25 %, in the three and nine months ended September 30, 2014, respectively, compared with the corresponding periods in 2013. This decrease was primarily due to lower selling and marketing activities for Qsymia, as a result of our more targeted and focused spending on marketing and promotional activities in 2014.

 

General and administrative expenses decreased by $6.2 million, or 40%, and by $19.1 million, or 39%, in the three and nine months ended September 30, 2014, respectively, compared with the corresponding periods in 2013, primarily due to factors attributable to our cost-cutting initiatives, including reduction in headcount and other employee costs (including share-based compensation expense), lower spending on professional fees, grant costs for continuing medical education programs and other corporate activities.

 

Inventory impairment and other non-recurring charges

 

Inventory impairment and other non-recurring charges were $4.1 million and $6.2 million in the three and nine months ended September 30, 2014, respectively, compared with $20.7 million and $34.9 million for the three and nine months ended September 30, 2013.

 

In the third quarter of 2014, we incurred non-recurring charges of approximately $1.9 million related to a patent settlement with Janssen Pharmaceuticals, Inc., or Janssen, pursuant to which we paid $5.0 million in connection with the transfer and assignment of certain patents related to Qsymia from Janssen. Of the $5.0 million, approximately $1.9 million was recognized as a non-recurring expense in the condensed consolidated statements of operations as it related to a legal settlement during the quarter ended September 30, 2014. The remaining balance of approximately $3.1 million is recorded as an intangible asset and being amortized as cost of goods sold over the period in which we expect to benefit from the patents through their expiration dates. Of the $3.1 million, $0.1 million was recorded in cost of goods sold during the three months ended September 30, 2014, and the remaining $3.0 million is included in non-current assets on the condensed consolidated balance sheet and will be amortized over an estimated period of approximately 5.5 years.

 

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Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories, which are valued using a weighted average cost method calculated for each production batch. We periodically evaluate the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or market approach as that used to value the inventory. As a result of this evaluation, in both the three and nine months ended September 30, 2014, we recorded a charge of $2.2 million for finished goods and certain non-API raw materials on hand in excess of demand. During the three months ended September 30, 2013, there was no inventory impairment charge.  During nine months ended September 30, 2013, the Company recorded a charge of $10.2 million, for inventories on hand in excess of demand. We will continue to periodically evaluate our inventories and we may incur additional inventory write-downs in future periods if actual events differ materially from our current assumptions.

 

In the fourth quarter of 2013, we announced a cost reduction plan, which resulted in a 17% reduction in our workforce and incurred certain expenses associated with the exit of certain operating leases. Most of the costs associated with these events were recognized in the fourth quarter of 2013.  In the three months ended September 30, 2014, there were no severance charges, however, during the nine months ended September 30, 2014, we incurred charges of $2.1 million related to employee severance. At September 30, 2014, we had remaining liabilities of $5.1 million related to this cost reduction plan, which we expect to pay through 2020.

 

Total interest expense and other expense, net

 

                Total interest expense and other expense, net was $8.1 million and $24.5 million in the three and nine months ended September 30, 2014, respectively, compared with $7.7 million and $11.8 million in the corresponding periods in 2013.  The increase in interest expense and other expense, net, particularly in the nine months ended September 30, 2014, compared with the same period in 2013, was primarily due to the timing of the issuance of the Convertible Senior Notes of $250.0 million which closed in May 2013 and the Senior Secured Notes of $50.0 million which closed in March 2013.  Other expense and income were not significant.

 

Provision for (benefit from) income taxes

 

For the three and nine months ended September 30, 2014, we recorded a tax benefit of $222,000 and $660,000, respectively. For the three and nine months ended September 30, 2013, we recorded provisions for income taxes of $33,000 and $46,000, respectively.  The tax benefit for the three months ended September 30, 2014 primarily relates to tax liabilities in certain states, offset by a reduction to our unrecognized tax benefits as a result of the California Franchise Tax Board audit that was favorably settled.

 

The tax benefit for the nine months ended September 30, 2014 primarily relates to tax liabilities in certain states, offset by a tax refund received from the State of New Jersey as a result of a settlement of an audit and acceptance of a refund claim for the tax year ended December 31, 2007 and a reduction of our unrecognized tax benefits as a result of the California Franchise Tax Board audit that was favorably settled. The tax provision for the three and nine months ended September 30, 2013 related to state tax liabilities.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, cash equivalents and marketable securities

 

At September 30, 2014, we had $83.2 million in cash and cash equivalents and $223.7 million in available-for-sale securities. We invest our excess cash balances in money market and U.S. government securities, in accordance with our investment policy. At September 30, 2014, all of our cash equivalents and available-for-sale securities were invested in either U.S. government securities or money market funds. Our investment policy has the primary investment objectives of preservation of principal; however, there may be times when certain of the securities in our portfolio will fall below the credit ratings required in the policy. If those securities are downgraded or impaired, we would experience realized or unrealized losses in the value of our portfolio, which would have an adverse effect on our results of operations, liquidity and financial condition.

 

Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in these risk factors in the near term could have an adverse material impact on our results of operations or stockholders’ equity.

 

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Working capital

 

Accounts Receivable.  We extend credit to our customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Past due accounts receivable, determined to be uncollectible, are written-off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment.

 

As of September 30, 2014, accounts receivable, net of allowance for cash discount, was $27.1 million, as compared to $12.2 million at December 31, 2013. The increase in accounts receivable is primarily due to milestone revenue of $15.0 million related to STENDRA as a result of the FDA approval of a Time of Onset Claim in the U.S. for the product in the Auxilium territory. The payment was received in full in October 2014.

 

Liabilities.  Total liabilities were $285.9 million at September 30, 2014, which is $7.4 million higher than at December 31, 2013 due primarily to timing differences of certain operational activities.

 

Cash Flows

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

Cash provided by (used for):

 

 

 

 

 

Operating activities from continuing operations

 

$

(31,962

)

$

(121,212

)

Investing activities

 

9,881

 

(52,318

)

Financing activities

 

1,982

 

258,046

 

 

Operating Activities.  Cash used in operating activities decreased by $89.2 million during the nine months ended September 30, 2014, compared with the same period in 2013. The decrease was primarily due to higher net product revenue from sales of Qsymia and license and milestone revenue from the license and commercialization agreements for STENDRA or SPEDRA, and lower operating expenses, primarily attributable to a cost reduction plan initiated in the fourth quarter of 2013, conclusion of various clinical studies, and a more targeted and focused spending on marketing and promotional activities.  These factors were partially offset by changes in assets and liabilities in the nine months ended September 30, 2014, compared with the same period in 2013.

 

Investing Activities .  Cash provided by investing activities increased by $62.2 million, compared with the same period in 2013, primarily due to a decrease of $42.5 million in cash used in the purchases of available-for-sales securities, combined with an increase of $20.0 million in proceeds from maturity of available-for-sales securities, which are attributable to the timing of investment purchases and the maturity of investment securities.

 

Financing Activities. Cash provided by financing activities decreased by $256.1 million in the nine months ended September 30, 2014, compared with the same period in 2013. Cash provided by financing activities in the first three quarters of 2013 included $255.5 million in net proceeds from the issuance of the Convertible Senior Notes and Senior Secured Notes.

 

The funding necessary to execute our business strategies is subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Commercialization of Qsymia may be more costly than we planned. In addition, completion of clinical trials and approval by the FDA of investigational drug candidates may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of an investigational drug candidate. It is also important to note that if an investigational drug candidate is identified, the further development of that candidate can be halted or abandoned at any time due to a number of factors. These factors include, but are not limited to, funding constraints, lack of efficacy or safety or change in market demand.

 

We anticipate that our existing capital resources combined with anticipated future cash flows will be sufficient to support our operating needs at least for the next twelve months. However, we anticipate that we may require additional funding to expand the use of Qsymia through targeted patient and physician education, find the right partner for expanded Qsymia commercial promotion to a broader primary care physician audience, create a pathway for centralized approval of the marketing authorization application for Qsiva in the EU, continue the expansion of our distribution of Qsymia through certified retail pharmacy locations, conduct post-approval clinical studies for both Qsymia and STENDRA, conduct non-clinical and clinical research and development work to support regulatory submissions and applications for our future investigational drug candidates, finance the costs involved in filing and prosecuting patent applications and enforcing or defending our patent claims, if any, to fund operating expenses, establish additional or new manufacturing and marketing capabilities, and manufacture quantities of our drugs and investigational drug candidates and to make payments under our existing license and supply agreements for STENDRA.

 

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If we require additional capital, we may seek any required additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our commercialization or development programs or obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

Commitments and Contingencies

 

We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We may be subject to contingencies that may arise from matters such as product liability claims, legal proceedings, shareholder suits and tax matters, as such, we are unable to estimate the potential exposure related to these indemnification matters. We did not record any liabilities related to these matters as of September 30, 2014.

 

Contractual Obligations

 

During the nine months ended September 30, 2014, there were no material changes to our contractual obligations, other than the fulfillment of existing obligations in the ordinary course of business, described under Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market and Interest Rate Risk

 

Our cash, cash equivalents and available-for-sale securities as of September 30, 2014 consisted primarily of money market funds and U.S. Treasury securities. Our cash is invested in accordance with an investment policy approved by our Board of Directors that specifies the categories (money market funds, U.S. Treasury securities and debt securities of U.S. government agencies, corporate bonds, asset-backed securities, and other securities), allocations, and ratings of securities we may consider for investment. Currently, we have focused on investing in U.S. Treasuries until market conditions improve.

 

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable debt securities. The primary objective of our investment activities is to preserve principal. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment may decline. A hypothetical 100 basis point increase in interest rates would reduce the fair value of our available-for-sale securities at September 30, 2014 by approximately $1.1 million. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the rules and forms of the Securities and Exchange Commission, or SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our interim Chief Financial Officer, of the effectiveness of the design and operation of VIVUS’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in internal controls

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Securities Related Class Action and Shareholder Derivative Lawsuits

 

The Company, a current officer and a former officer were defendants in a putative class action captioned Kovtun v. VIVUS, Inc., et al., Case No. 4:10-CV-04957-PJH, in the U.S. District Court, Northern District of California. The action, filed in November 2010, alleged violations of Section 10(b) and 20(a) of the federal Securities Exchange Act of 1934 based on allegedly false or misleading statements made by the defendants in connection with the Company’s clinical trials and New Drug Application, or NDA, for Qsymia as a treatment for obesity. The Court granted defendants’ motions to dismiss both plaintiff’s Amended Class Action Complaint and Second Amended Class Action Complaint; by order dated September 27, 2012, the latter dismissal was with prejudice and final judgment was entered for defendants the same day. On October 26, 2012, plaintiff filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit. Briefing of the appeal is complete, and the Court of Appeals has set oral argument for January 16, 2015.

 

Additionally, certain of the Company’s former officers and directors and a current director are defendants in a shareholder derivative lawsuit captioned Turberg v. Logan, et al., Case No. CV-10-05271-PJH, pending in the same federal court. In the plaintiff’s Verified Amended Shareholder Derivative Complaint filed June 3, 2011, the plaintiff largely restated the allegations of the Kovtun action and alleged that the directors breached fiduciary duties to the Company by purportedly permitting the Company to violate the federal securities laws as alleged in the Kovtun action. The same individuals are also named defendants in consolidated shareholder derivative suits pending in the California Superior Court, Santa Clara County, under the caption In re VIVUS, Inc. Derivative Litigation, Master File No. 11 0 CV188439. The allegations in the state court derivative suits are substantially similar to the other lawsuits. The Company is named as a nominal defendant in these actions, neither of which seeks any recovery from the Company. The parties have agreed to stay the derivative lawsuits pending the outcome of the appeal of the securities class action.

 

On July 12, 2013, various current and former officers and directors of the Company were named as defendants in a separate shareholder derivative lawsuit filed in the California Superior Court, Santa Clara County, and captioned Ira J. Gaines IRA, et al. v. Leland F. Wilson, et al., Case No.1-13-CV-249436. The lawsuit generally alleged breaches of the fiduciary duty of care in connection with the launch of Qsymia, breaches of the duty of loyalty and insider trading by some defendants for selling Company stock while purportedly being aware that the Qsymia launch would be less successful than predicted and corporate waste. On March 14, 2014, the Court sustained a demurrer and dismissed the complaint with leave to amend. An order memorializing the Court’s ruling was entered March 21, 2014. On April 21, 2014, derivative plaintiffs filed an Amended Shareholder Derivative Complaint alleging substantially similar breaches of duty.  On May 21, 2014, the Company filed a demurrer to the Amended Complaint.  With that demurrer pending, derivative plaintiffs asked the Court in July 2014 to dismiss the action with prejudice as to the named plaintiffs and otherwise without prejudice.  The Court did so by order entered July 17, 2014, and the matter is now concluded.

 

On March 27, 2014, Mary Jane and Thomas Jasin, who purport to be purchasers of VIVUS common stock, filed an Amended Complaint in Santa Clara County Superior Court alleging securities fraud against the Company and three of its former officers and directors.  In that complaint, captioned Jasin v. VIVUS, Inc., Case No. 114-cv-261427, plaintiffs asserted claims under California’s securities and consumer protection securities statutes.    Plaintiffs alleged generally that defendants misrepresented the prospects for the Company’s success, including with respect to the launch of Qsymia, while purportedly selling VIVUS stock for personal profit. Plaintiffs alleged losses of “at least” $2.8 million, and sought damages and other relief.  On June 5, 2014, the Company and the other defendants filed a demurrer to the Amended Complaint seeking its dismissal.  With the demurrer pending, on July 18, 2014, the same plaintiffs filed a complaint in the United States District Court for the Northern District of California, captioned Jasin v. VIVUS, Inc., Case No. 5:14-cv-03263.  The Jasins’ federal complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, based on facts substantially similar to those alleged in their state court action.  On September 15, 2014, pursuant to an

 

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agreement between the parties, plaintiffs moved to voluntarily dismiss, with prejudice, the state court action.  In the federal action, the parties have filed a briefing stipulation providing for briefing on the Company’s and the other defendants’ anticipated motion to dismiss in November 2014-January 2015, with a court hearing on the motion thereafter.   The Company maintains directors’ and officers’ liability insurance that it believes affords coverage for much of the anticipated cost of the remaining Jasin action, subject to payment of our self-insured retention and the policies’ terms and conditions.

 

The Company and its directors cannot predict the outcome of the various shareholder lawsuits, but they believe the various shareholder lawsuits are without merit and intend to continue vigorously defending them.

 

Qsymia ANDA Litigation

 

On May 7, 2014, the Company received a Paragraph IV certification notice from Actavis Laboratories FL indicating that it filed an abbreviated new drug application, or ANDA, with the U.S. Food and Drug Administration, or FDA, requesting approval to market a generic version of Qsymia and contending that all six patents listed for Qsymia in the FDA Orange Book (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, and 8,580,299 (collectively “patents-in-suit”)) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offer for sale of a generic form of Qsymia as described in their ANDA. On June 12, 2014, the Company filed a lawsuit in the U.S District Court for the District of New Jersey against Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC, collectively referred to as Actavis. The lawsuit (Case No. 14-3786 (FSH)(MAH)) was filed on the basis that Actavis’ submission of their ANDA to obtain approval to manufacture, use, sell, or offer for sale generic versions of Qsymia prior to the expiration of the patents-in-suit constitutes infringement of one or more claims of those patents.

 

In accordance with the Hatch-Waxman Act, as a result of having filed a timely lawsuit against Actavis, FDA approval of Actavis’ ANDA will be stayed until the earlier of (i) November 7, 2016, which is 30 months from the Company’s May 7, 2014 receipt of Actavis’ Paragraph IV certification notice or (ii) a District Court decision finding that the identified patents are invalid, unenforceable or not infringed.  The Company intends to vigorously enforce its intellectual property rights relating to Qsymia, but the Company cannot predict the outcome of this matter.

 

Janssen Litigation

 

On August 22, 2014, the Company was named as a defendant in a complaint filed by Janssen Pharmaceuticals, Inc., or Janssen, in the United States District Court of Delaware. In the complaint, the plaintiff alleged that the Company was infringing U.S. Patent No. 6,071,537, or the’537 patent, by selling Qsymia.   The plaintiff sought a permanent injunction enjoining the Company from further infringement and unspecified monetary damages. On August 24, 2014, the Company entered into a Patent Assignment Agreement with Janssen that included assignment of the ‘537 patent to the Company. As a result, Janssen voluntarily dismissed the lawsuit on August 24, 2014.

 

ITEM 1A. RISK FACTORS

 

Set forth below and elsewhere in this Form 10-Q and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. These are not the only risks and uncertainties facing VIVUS. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

 

Risks Relating to our Business

 

Changes to our management and strategic business plan may cause uncertainty regarding the future of our business, and may adversely impact employee hiring and retention, our stock price, and our revenue, operating results, and financial condition.

 

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In July 2013, we announced changes to our Board and management. In September and November 2013, and January 2014, we announced further changes to our management team. In November 2013, we announced a reduction in force of approximately 17%, the decision of our Chief Financial Officer to exercise his right to terminate his employment for Good Reason (as defined in his Amended and Restated Change of Control and Severance Agreement with the Company, effective as of July 1, 2013), and the appointment of our Corporate Controller as the Company’s interim Chief Financial Officer. In January 2014, we announced that our Chief Executive Officer was assuming the duties and responsibilities of the Company’s Chief Commercial Officer. The implementation of these changes, including the recent appointment of a new Chief Executive Officer and interim Chief Financial Officer, the changes to our Board, the resignation of our President, the decision of our Chief Financial Officer to exercise his right to terminate his employment for Good Reason, the assumption of the Chief Commercial Officer’s duties and responsibilities by our Chief Executive Officer, and the potential for additional changes to our management, organizational structure and strategic business plan, may cause speculation and uncertainty regarding our future business strategy and direction. These changes may cause or result in:

 

·  disruption of our business or distraction of our employees and management;

 

·  difficulty in recruiting, hiring, motivating and retaining talented and skilled personnel;

 

·  stock price volatility; and

 

·  difficulty in negotiating, maintaining or consummating business or strategic relationships or transactions.

 

If we are unable to mitigate these or other potential risks, our revenue, operating results and financial condition may be adversely impacted.

 

Our success will depend on our ability to effectively and profitably commercialize Qsymia®.

 

Our success will depend on our ability to effectively and profitably commercialize Qsymia, which will include our ability to:

 

·  expand the use of Qsymia through targeted patient and physician education;

 

·  find the right partner for expanded Qsymia commercial promotion to a broader primary care physician audience;

 

·  obtain marketing authorization by the European Commission, or EC for Qsiva™ in the EU through the centralized procedure;

 

·  manage our alliances with Auxilium, Menarini, MTPC and Sanofi, to help ensure the commercial success of avanafil;

 

·  manage costs;

 

·  continue to certify and add to the Qsymia retail pharmacy network nationwide and sell Qsymia through this network;

 

·  improve third-party payor coverage, lower out-of-pocket costs to patients with discount programs, and obtain coverage for obesity under Medicare Part D;

 

·  create market demand for Qsymia through patient and physician education, marketing and sales activities;

 

·  achieve market acceptance and generate product sales;

 

·  comply with the post-marketing requirements established by the FDA, including Qsymia’s Risk Evaluation and Mitigation Strategy, or REMS, any future changes to the REMS, and any other requirements established by the FDA in the future;

 

·  conduct the post-marketing studies required by the FDA;

 

·  comply with other healthcare regulatory requirements;

 

·  maintain and defend our patents, if challenged;

 

·  ensure that the active pharmaceutical ingredients, or APIs, for Qsymia and avanafil and the finished products are manufactured in sufficient quantities and in compliance with requirements of the FDA and similar foreign regulatory agencies and with an acceptable quality and pricing level in order to meet commercial demand; and

 

·  ensure that the entire supply chain for Qsymia and avanafil, from APIs to finished products, efficiently and consistently delivers Qsymia and avanafil to customers.

 

Prior to the commercialization of Qsymia, we have not had any commercial products since the divestiture of MUSE® in November 2010. While our management and key personnel have significant experience developing, launching and commercializing drugs at VIVUS and at other companies, we are in the initial stage of commercialization of Qsymia and we cannot be certain that we will be successful. If we are unable to successfully commercialize Qsymia, our ability to generate product sales will be severely

 

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limited, which will have a material adverse impact on our business, financial condition, and results of operations. In addition, we rely on a third-party contract sales organization, PDI, to assist with the hiring of sales representatives and the promotion of Qsymia to physicians. We depend on the success of PDI in performing its services, and we cannot be certain PDI will cooperate with us to perform its obligations under the agreement. Although they are contractually obligated, we cannot control the amount of resources that will be devoted by PDI to the promotion of Qsymia. Any failure of PDI to perform its obligations, or delay in allocating resources to the promotion of Qsymia, could adversely affect the commercialization of Qsymia and materially harm our business, financial condition and results of operations.

 

We may not fully realize the anticipated benefits from a cost reduction plan we announced in November 2013.

 

In November 2013, we announced a cost reduction plan to eliminate expenses that are not essential to expanding the use of Qsymia. The plan reduced our workforce by approximately 20 employees, not including our sales force. We substantially completed this cost reduction plan by December 31, 2013, and incurred pre-tax non-recurring charges of $8.0 million in the fourth quarter of 2013, including approximately $5.7 million in employee termination costs, $1.3 million in non-cash share-based compensation expense related to the automatic acceleration of vesting of unvested stock options held by the terminated employees, and $1.0 million in facilities and other lease exit costs. In the first three quarters of 2014, we incurred an additional $2.1 million in non-recurring charges relating to our cost reduction plan. We may not fully realize the anticipated benefits from this cost reduction plan.

 

We depend on our collaboration partner Auxilium to market and sell STENDRA™ (avanafil) in the United States and Canada, our collaboration partner Sanofi to gain approval, market, and sell avanafil in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, and our collaboration partner Menarini to market and sell SPEDRA™ (avanafil) in over 40 European countries, including the EU, plus Australia and New Zealand.

 

In December 2013, we entered into a License and Commercialization Agreement with Sanofi under which Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use in humans in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, or CIS, including Russia. Sanofi will be responsible for obtaining regulatory approval in its territories. Sanofi intends to market avanafil under the trade name SPEDRA or STENDRA. In October 2013, we entered into a License and Commercialization Agreement with Auxilium under which Auxilium received an exclusive license to commercialize and promote STENDRA for the treatment of erectile dysfunction, or ED, in the United States and Canada. In July 2013, we entered into a License and Commercialization Agreement with Menarini under which Menarini received an exclusive license to commercialize and promote SPEDRA for the treatment of ED in over 40 European countries, including the EU, plus Australia and New Zealand.

 

We are relying on our collaboration partners, Auxilium, Menarini, and Sanofi, to successfully commercialize STENDRA or SPEDRA in their respective territories, inclusive of obtaining any necessary approvals. There can be no assurances that these collaboration partners will be successful in doing so. In general, we cannot control the amount and timing of resources that our collaboration partners devote to the commercialization of our drugs. If any of our collaboration partners fails to successfully commercialize our drug products, our business may be negatively affected. For example, if Sanofi, Auxilium or Menarini do not successfully commercialize STENDRA or SPEDRA, we may receive limited or no revenues under our agreements with them. Additionally, because we lack the resources and experience to commercialize STENDRA or SPEDRA ourselves in these territories, we would need to seek replacement licensees to undertake these commercialization efforts. We may be unable to find other licensees in a timely manner, which could delay or impair our ability to commercialize STENDRA or SPEDRA in these territories.

 

Under our license agreement with MTPC, we are obligated to ensure that Sanofi, Auxilium and Menarini, as sublicensees, comply with its terms and conditions. MTPC has the right to terminate our license rights to avanafil in the event of any uncured material breach of the license agreement. Consequently, failure by Sanofi, Auxilium or Menarini to comply with these terms and conditions could result in termination of our license rights to avanafil on a worldwide basis, which could delay, impair, or preclude our ability to commercialize avanafil.

 

If we are unable to enter into agreements with collaborators for the territories that are not covered by our existing commercialization agreements, our ability to commercialize STENDRA in these territories may be impaired.

 

We intend to enter into collaborative arrangements or a strategic alliance with one or more pharmaceutical partners or others to commercialize STENDRA in our other territories that are not covered by our current commercial collaboration agreements. We may be unable to enter into agreements with third parties for STENDRA for these territories on favorable terms or at all, which could delay, impair, or preclude our ability to commercialize STENDRA in these territories.

 

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We depend on collaborative arrangements or strategic alliances for the commercialization of STENDRA or SPEDRA.

 

Our dependence on collaborative arrangements or strategic alliances for the commercialization of STENDRA or SPEDRA, including our license agreements with Sanofi, Auxilium and Menarini, will subject us to a number of risks, including the following:

 

·  we may not be able to control the commercialization of our drug products in the relevant territories, including amount, timing and quality of resources that our collaborators may devote to our drug products;

 

·  our collaborators may experience financial, regulatory or operational difficulties, which may impair their ability to commercialize our drug products;

 

·  our collaborators may be required under the laws of the relevant territory to disclose our confidential information or may fail to protect our confidential information;

 

·  as a requirement of the collaborative arrangement, we may be required to relinquish important rights with respect to our drug products, such as marketing and distribution rights;

 

·  business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to satisfactorily complete its commercialization or other obligations under any collaborative arrangement;

 

·  legal disputes or disagreements may occur with one or more of our collaborators;

 

·  a collaborator could independently move forward with a competing investigational drug candidate developed either independently or in collaboration with others, including with one of our competitors; and

 

·  a collaborator could terminate the collaborative arrangement, which could negatively impact the continued commercialization of our drug products.

 

Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.

 

In order to market products in many foreign jurisdictions, we must obtain separate regulatory approvals. Approval by the FDA in the U.S. does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. For example, while our drug STENDRA was approved in both the U.S. and the European Union, or EU, our drug Qsymia was approved in the U.S. but Qsiva (the approved trade name for Qsymia in the EU) was not approved in the EU due to concerns over the potential cardiovascular and central nervous system effects associated with long-term use, teratogenic potential and use by patients for whom Qsiva would not have been indicated. We intend to seek approval, either directly or through our collaboration partners, for Qsymia and STENDRA in other territories outside the United States and EU. However, we have had limited interactions with foreign regulatory authorities, and the approval procedures vary among countries and can involve additional testing. Foreign regulatory approvals may not be obtained, by us or our collaboration partners responsible for obtaining approval, on a timely basis, or at all, for any of our products. The failure to receive regulatory approvals in a foreign country would prevent us from marketing and commercializing our products in that country, which could have a material adverse effect on our business, financial condition and results of operations.

 

We, together with Sanofi, Auxilium and Menarini in certain territories, intend to market STENDRA or SPEDRA outside the U.S., which will subject us to risks related to conducting business internationally.

 

We, through Sanofi, Auxilium and Menarini in certain territories, intend to manufacture, market, and distribute STENDRA or SPEDRA outside the U.S. We expect that we will be subject to additional risks related to conducting business internationally, including:

 

·  different regulatory requirements for drug approvals in foreign countries;

 

·  differing U.S. and foreign drug import and export rules;

 

·  reduced protection for intellectual property rights in some foreign countries;

 

·  unexpected changes in tariffs, trade barriers and regulatory requirements;

 

·  different reimbursement systems;

 

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·  economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

·  compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

·  foreign taxes, including withholding of payroll taxes;

 

·  foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incidental to doing business in another country;

 

·  workforce uncertainty in countries where labor unrest is more common than in the U.S.;

 

·  production shortages resulting from events affecting raw material supply or manufacturing capabilities abroad;

 

·  potential liability resulting from development work conducted by these distributors; and

 

·  business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.

 

We rely in part on a third-party contract sales organization for certain sales and marketing support services for Qsymia.

 

We rely on PDI, Inc., or PDI, a third-party contract sales organization, to assist with the hiring of sales representatives and the promotion of Qsymia to physicians. Our internal sales and marketing personnel manage and supervise the activities of this sales force. Nevertheless, we face risks in our partial reliance on the third-party contract sales organization, including the following:

 

·  PDI may not apply the expected financial resources or required expertise to successfully promote Qsymia;

 

·  PDI may not invest in the continued development of a sales force and the related infrastructure at levels that ensure that sales of Qsymia reach their full potential;

 

·  PDI, or its sales representatives, may not comply with applicable legal or regulatory requirements, including the requirement to promote drugs only for uses for which they have been approved;

 

·  disputes may arise between us and PDI, including between the contract sales representatives, who are PDI employees, and sales management, who are VIVUS employees, that may adversely affect Qsymia sales or profitability; and

 

·  PDI may enter into agreements with other parties that have products that could compete with Qsymia.

 

We depend on the success of PDI in performing its services, and we cannot be certain PDI will cooperate with us to perform its obligations under the agreement. Although they are contractually obligated, we cannot control the amount of resources that will be devoted by PDI to the promotion of Qsymia. Any failure of PDI to perform its obligations or to continue to allocate resources to the promotion of Qsymia could adversely affect the commercialization of Qsymia and materially harm our business, financial condition and results of operations.

 

We have significant inventories on hand and, in the nine months ended September 30, 2014 and year ended December 31, 2013, we recorded inventory impairment and commitment fees totaling $2.2 million and $10.2 million, respectively,  primarily to write off excess inventory related to Qsymia.

 

We maintain significant inventories and evaluate these inventories on a periodic basis for potential excess and obsolescence. During the nine months ended September 30, 2014 and year ended December 31, 2013, we recognized total charges of $2.2 million and $10.2 million, respectively, for Qsymia inventories on hand in excess of demand, plus a purchase commitment fee. The inventory impairment charges were based on our analysis of current Qsymia inventory on hand and remaining shelf life, in relation to our projected demand for the product. The current FDA-approved commercial product shelf life for Qsymia is 36 months. STENDRA is approved in the U.S. and SPEDRA in the EU for 48 and 30 months commercial product shelf life, respectively.

 

Our write-down for excess and obsolete inventory is subjective and requires accurate forecasting of the future market demand for our products. Forecasting demand for Qsymia, a drug in the obesity market in which there had been no new FDA-approved medications in over a decade prior to 2012, and for which reimbursement from third-party payors had previously been non-existent, has been difficult. Forecasting demand for STENDRA or SPEDRA, a drug that is new to a crowded and competitive market and has no sales history, is difficult. We will continue to evaluate our inventories on a periodic basis. The value of our inventories could be impacted if actual sales differ significantly from our estimates of future demand or if any significant unanticipated changes in future product demand or market conditions occur. Any of these events, or a combination thereof, could result in additional inventory write-downs in future periods, which could be material.

 

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Our failure to manage and maintain our distribution network for Qsymia or compliance with certain requirements of the Qsymia REMS program could compromise the commercialization of this product.

 

We rely on Cardinal Health 105, Inc., or Cardinal Health, a third-party distribution and supply-chain management company, to warehouse Qsymia and distribute it to the certified home delivery pharmacies and wholesalers that then distribute Qsymia directly to patients and certified retail pharmacies. Cardinal Health provides billing, collection and returns services. Cardinal Health is our exclusive supplier of distribution logistics services, and accordingly we depend on Cardinal Health to satisfactorily perform its obligations under our agreement with them.

 

Pursuant to the REMS program applicable to Qsymia, our distribution network is through a small number of certified home delivery pharmacies and wholesalers and through a broader network of certified retail pharmacies. We have contracted through a third-party vendor to certify the retail pharmacies and collect required data to support the Qsymia REMS program. In addition to providing services to support the distribution and use of Qsymia, each of the certified pharmacies has agreed to comply with the REMS program requirements and, through our third-party data collection vendor, will provide us with the necessary patient and prescribing healthcare provider, or HCP, data. In addition, we have contracted with third-party data warehouses to store this patient and HCP data and report it to us. We rely on this third-party data in order to recognize revenue and comply with the REMS requirements for Qsymia, such as data analysis. This distribution and data collection network requires significant coordination with our sales and marketing, finance, regulatory and medical affairs teams, in light of the REMS requirements applicable to Qsymia.

 

We rely on the certified pharmacies to implement a number of safety procedures and report certain information to our third-party REMS data collection vendor. Failure to maintain our contracts with Cardinal Health, our third-party REMS data collection vendor, or with the third-party data warehouses, or the inability or failure of any of them to adequately perform under our contracts with them, could negatively impact the distribution of Qsymia, or adversely affect our ability to comply with the REMS applicable to Qsymia. Failure to comply with a requirement of an approved REMS can result in, among other things, civil penalties, operating restrictions and criminal prosecution. Failure to coordinate financial systems could also negatively impact our ability to accurately report and forecast product revenue. If we are unable to effectively manage the distribution and data collection process, sales of Qsymia could be severely compromised and our business, financial condition and results of operations would be harmed.

 

If we are unable to enter into agreements with suppliers or our suppliers fail to supply us with the APIs for our products or finished products or if we rely on sole-source suppliers, we may experience delays in commercializing our products.

 

We currently do not have supply agreements for extended-release topiramate or phentermine, which are APIs used in Qsymia. We cannot guarantee that we will be successful in entering into supply agreements on reasonable terms or at all or that we will be able to obtain or maintain the necessary regulatory approvals for these suppliers in a timely manner or at all.

 

We anticipate that we will continue to rely on single source suppliers for phentermine and extended-release topiramate for the foreseeable future. Any production shortfall on the part of our suppliers that impairs the supply of phentermine or extended-release topiramate could have a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain a sufficient quantity of these compounds, there could be a substantial delay in successfully developing a second source supplier. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for Qsymia, which could adversely affect our product sales and operating results materially, which could significantly harm our business.

 

The API and the tablets for STENDRA are currently manufactured by MTPC. MTPC has arrangements for the three main starting materials necessary for the manufacturing of avanafil API. If MTPC is unable to receive approval from foreign regulators and maintain ongoing FDA or foreign regulatory compliance, or manufacture STENDRA’s API or tablets in sufficient quantities to meet projected demand, the U.S. commercial launch, and future sales of STENDRA in the U.S. and abroad will be adversely affected, which in turn could have a detrimental impact on our financial results and could impact our ability to enter into a collaboration agreement for the commercialization of STENDRA in our other territories not covered by our agreements with Sanofi, Auxilium and Menarini.

 

In August 2012, we entered into an amendment to our license agreement with MTPC that permits us to manufacture the API and tablets for STENDRA ourselves or through third-party suppliers at any time, and we are required under the amendment to transition away from MTPC as a supplier on or before June 30, 2015. We currently do not have any manufacturing facilities and intend to continue to rely on third parties for the supply of such API and tablets, as well as for the supply of starting materials.

 

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However, we cannot be certain that we will be able to obtain the necessary regulatory approvals for these suppliers in a timely manner or at all.

 

In July 2013, we entered into a Commercial Supply Agreement with Sanofi Chimie to manufacture and supply the API for avanafil on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. In November 2013, we entered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie to manufacture and supply the avanafil tablets on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. We intend to submit an amendment to the New Drug Application, or NDA, for avanafil to the FDA, and the Marketing Authorization, or MA, for avanafil to the European Medicines Agency, or EMA, to include Sanofi Chimie as a qualified supplier of the avanafil API and Sanofi Winthrop Industrie as a qualified supplier of the avanafil tablets. We cannot be certain we will receive approval by regulatory authorities, or that we will be able to obtain such approval in a timely manner. The failure to receive such approval in a timely manner or at all could prevent, delay or preclude our ability to establish a reliable supply chain, which could compromise our ability to commercialize avanafil through our relationships with Sanofi, Auxilium and Menarini, or otherwise. In addition, we have entered into supply agreements with Menarini and Auxilium under which we are obligated to supply them with avanafil tablets. If we are unable to establish a reliable supply of avanafil API or tablets from Sanofi Chimie and/or Sanofi Winthrop Industrie, we may be unable to satisfy our obligations under these supply agreements in a timely manner or at all, and we may, as a result, be in breach of one or both of these agreements.

 

We have in-licensed all or a portion of the rights to Qsymia and STENDRA from third parties. If we default on any of our material obligations under those licenses, we could lose rights to these drugs.

 

We have in-licensed and otherwise contracted for rights to Qsymia and STENDRA, and we may enter into similar licenses in the future. Under the relevant agreements, we are subject to commercialization, development, supply, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. Loss of any of these licenses or the exclusive rights provided therein could harm our financial condition and operating results.

 

In particular, we license the rights to avanafil from MTPC, and we have certain obligations to MTPC in connection with that license. We license the rights to Qsymia from Dr. Najarian. We believe we are in compliance with the material terms of our license agreements with MTPC and Dr. Najarian. However, there can be no assurance that this compliance will continue or that the licensors will not have a differing interpretation of the material terms of the agreements. If the license agreements were terminated early or if the terms of the licenses were contested for any reason, it would have a material adverse impact on our ability to commercialize products subject to these agreements, our ability to raise funds to finance our operations, our stock price and our overall financial condition. The monetary and disruption costs of any disputes involving our agreements could be significant despite rulings in our favor.

 

Our ability to gain market acceptance and generate revenues will be subject to a variety of risks, many of which are out of our control.

 

Qsymia and STENDRA may not gain market acceptance among physicians, patients, healthcare payors or the medical community. We believe that the degree of market acceptance and our ability to generate revenues from such drugs will depend on a number of factors, including:

 

·  our ability to expand the use of Qsymia through targeted patient and physician education;

 

·  our ability to find the right partner for expanded Qsymia commercial promotion to a broader primary care physician audience;

 

·  our ability to obtain marketing authorization by the EC for Qsiva in the EU through the centralized procedure;

 

·  our ability to successfully expand the certified retail pharmacy distribution channel in the United States;

 

·  contraindications for Qsymia and STENDRA;

 

·  competition and timing of market introduction of competitive drugs;

 

·  quality, safety and efficacy in the approved setting;

 

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·  prevalence and severity of any side effects, including those of the generic components of our drugs;

 

·  emergence of previously unknown side effects, including those of the generic components of our drugs;

 

·  results of any post-approval studies;

 

·  potential or perceived advantages or disadvantages over alternative treatments, including generics;

 

·  the relative convenience and ease of administration and dosing schedule;

 

·  the convenience and ease of purchasing the drug, as perceived by potential patients;

 

·  strength of sales, marketing and distribution support;

 

·  price, both in absolute terms and relative to alternative treatments;

 

·  the effectiveness of our or any future collaborators’ sales and marketing strategies;

 

·  the effect of current and future healthcare laws;

 

·  availability of coverage and reimbursement from government and other third-party payors;

 

·  the level of mandatory discounts required under federal and state healthcare programs and the volume of sales subject to those discounts;

 

·  recommendations for prescribing physicians to complete certain educational programs for prescribing drugs;

 

·  the willingness of patients to pay out-of-pocket in the absence of government or third-party coverage; and

 

·  product labeling, product insert, or new REMS requirements of the FDA or other regulatory authorities.

 

Our drugs may fail to achieve market acceptance or generate significant revenue to achieve or sustain profitability. In addition, our efforts to educate the medical community and third-party payors on the safety and benefits of our drugs may require significant resources and may not be successful.

 

We are required to complete post-approval studies mandated by the FDA for both Qsymia and STENDRA, and such studies are expected to be costly and time consuming. If the results of these studies reveal unacceptable safety risks, Qsymia or STENDRA may be required to be withdrawn from the market.

 

As part of the approval for STENDRA, the FDA is requiring us to perform two post-approval clinical studies. The first is a randomized, double-blind, placebo-controlled, parallel group multicenter clinical trial on the effect of STENDRA on spermatogenesis in healthy adult males and males with mild ED. The other study is a double-blind, randomized, placebo-controlled, single-dose clinical trial to assess the effects of STENDRA on multiple parameters of vision, including, but not limited to, visual acuity, intraocular pressure, pupillometry, and color vision discrimination in healthy male subjects. If we are unable to complete these studies or the results of these studies reveal unacceptable safety risks, we could be required to perform additional tests and regulatory approval could even be withdrawn.

 

As part of the approval of Qsymia, we are required to conduct several post-marketing studies, including a study to assess the long-term treatment effect of Qsymia on the incidence of major adverse cardiovascular events in overweight and obese subjects with confirmed cardiovascular disease, or AQCLAIM, studies to assess the safety and efficacy of Qsymia for weight management in obese pediatric and adolescent subjects, studies to assess drug utilization and pregnancy exposure and a study to assess renal function. We estimate the AQCLAIM study will cost between $180 million and $220 million and the study could take as long as five to six years to complete. On September 20, 2013, we submitted to the EMA a request for Scientific Advice regarding use of a pre-specified interim analysis from the AQCLAIM cardiovascular outcomes trial to support the resubmission of the Marketing Authorization Application, or MAA, for approval of Qsiva for the treatment of obesity in accordance with the centralized marketing authorization procedure. Based on feedback from the EMA health authority, as well as various country health authorities associated with review of the AQCLAIM trial application, the protocol has been revised and resubmitted to the FDA. There can be no assurance that the FDA or EMA will not request or require us to provide additional information or undertake additional preclinical studies and clinical studies or retrospective observational studies.

 

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In addition to these studies, the FDA may also require us to commit to perform other lengthy post-approval studies, for which we would have to expend significant additional resources, which could have an adverse effect on our operating results, financial condition and stock price. Failure to comply with the applicable regulatory requirements can result in, among other things, civil penalties, suspensions of regulatory approvals, operating restrictions and criminal prosecution. The restriction, suspension or revocation of regulatory approvals or any other failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition, results of operations and stock price.

 

We depend upon consultants and outside contractors extensively in important roles within our company.

 

We outsource many key functions of our business and therefore rely on a substantial number of consultants, and we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials or other development activities may be extended, delayed or terminated, and we may not be able to complete our post-approval clinical trials for Qsymia and STENDRA, obtain regulatory approval for our future investigational drug candidates, successfully commercialize our approved drugs or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on commercially reasonable terms, or at all.

 

Qsymia is a combination of two active ingredient drug products approved individually by the FDA that are commercially available and marketed by other companies, although the specific dose strengths would differ. As a result, Qsymia may be subject to substitution by prescribing physicians, or by pharmacists, with individual drugs contained in the Qsymia formulation, which would adversely affect our business.

 

Although Qsymia is a once-a-day, proprietary extended-release formulation, both of the approved APIs (phentermine and topiramate extended-release) that are combined to produce Qsymia are commercially available as drug products at prices that together are lower than the price at which we sell Qsymia. In addition, the distribution and sale of these drug products is not limited under a REMS program, as is the case with Qsymia. Further, the individual drugs contained in the Qsymia formulation are available in retail pharmacies and neither has a Pregnancy Category X, which is used to indicate that the risks involved in the use of the drug in pregnant women clearly outweigh potential benefits, as is the case with Qsymia. We cannot be sure that physicians will view Qsymia as sufficiently superior to a treatment regimen of Qsymia’s individual APIs to justify the significantly higher cost for Qsymia, and they may prescribe the individual generic drugs already approved and marketed by other companies instead of our combination drug. Although our U.S. and European patents contain composition, product formulation and method-of-use claims that we believe protect Qsymia, these patents may be ineffective or impractical to prevent physicians from prescribing, or pharmacists from dispensing, the individual generic constituents marketed by other companies instead of our combination drug. Phentermine and topiramate are currently available in generic form, although the doses used in Qsymia are currently not available. In the third quarter of 2013, Supernus Pharmaceuticals, Inc. launched Trokendi XR™ and in the second quarter of 2014, Upsher-Smith Laboratories, Inc. launched Qudexy™. Both products provide an extended-release formulation of the generic drug topiramate that is indicated for certain types of seizures. Topiramate is not approved for obesity treatment, and phentermine is only approved for short-term treatment of obesity. However, because the price of Qsymia is significantly higher than the prices of the individual components as marketed by other companies, physicians may have a greater incentive to write prescriptions for the individual components outside of their approved indication, instead of for our combination drug, and this may limit how we price or market Qsymia. Similar concerns could also limit the reimbursement amounts private health insurers or government agencies in the U.S. are prepared to pay for Qsymia, which could also limit market and patient acceptance of our drug and could negatively impact our revenues.

 

In many regions and countries where we may plan to market Qsymia, the pricing of reimbursed prescription drugs is controlled by the government or regulatory agencies. The government or regulatory agencies in these countries could determine that the pricing for Qsymia should be based on prices for its APIs when sold separately, rather than allowing us to market Qsymia at a premium as a new drug, which could limit our pricing of Qsymia and negatively impact our revenues.

 

If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage.

 

Qsymia and STENDRA, like all pharmaceutical products, are subject to heightened risk for product liability claims due to inherent potential side effects. For example, because topiramate, a component of Qsymia, may increase the risk of congenital malformation in infants exposed to topiramate during the first trimester of pregnancy and also may increase the risk of suicidal thoughts and behavior, such risks may be associated with Qsymia as well. Other potential risks involving Qsymia may include, but are not limited to, an increase in resting heart rate, acute angle closure glaucoma, cognitive and psychiatric adverse events, metabolic acidosis, an increase in serum creatinine, hypoglycemia in patients with type 2 diabetes, kidney stone formation, decreased sweating and hypokalemia, or lower-than-normal amount of potassium in the blood.

 

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Although we have obtained product liability insurance coverage for Qsymia, we may be unable to maintain this product liability coverage for Qsymia or any other of our approved drugs in amounts or scope sufficient to provide us with adequate coverage against all potential risks. A product liability claim in excess of, or excluded from, our insurance coverage would have to be paid out of cash reserves and could have a material adverse effect upon our business, financial condition and results of operations. Product liability insurance is expensive even with large self-insured retentions or deductibles, difficult to maintain, and current or increased coverage may not be available on acceptable terms, if at all.

 

In addition, we develop, test, and manufacture through third parties, approved drugs and future investigational drug candidates that are used by humans. We face an inherent risk of product liability exposure related to the testing of our approved drugs and investigational drug candidates in clinical trials. An individual may bring a liability claim against us if one of our approved drugs or future investigational drug candidates causes, or merely appears to have caused, an injury.

 

If we cannot successfully defend ourselves against a product liability claim, whether involving Qsymia, STENDRA or a future investigational drug candidate, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

·  injury to our reputation;

 

·  withdrawal of clinical trial patients;

 

·  costs of defending the claim and/or related litigation;

 

·  cost of any potential adverse verdict;

 

·  substantial monetary awards to patients or other claimants; and

 

·  the inability to commercialize our drugs.

 

Damages awarded in a product liability action could be substantial and could have a negative impact on our financial condition. Whether or not we were ultimately successful in product liability litigation, such litigation would consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which would impair our business. In addition, product liability claims could result in an FDA investigation of the safety or efficacy of our product, our third-party manufacturing processes and facilities, or our marketing programs. An FDA investigation could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension or withdrawal of approval.

 

The markets in which we operate are highly competitive and we may be unable to compete successfully against new entrants or established companies.

 

Competition in the pharmaceutical and medical products industries is intense and is characterized by costly and extensive research efforts and rapid technological progress. We are aware of several pharmaceutical companies also actively engaged in the development of therapies for the treatment of obesity and erectile dysfunction. Many of these companies have substantially greater research and development capabilities as well as substantially greater marketing, financial and human resources than we do. Some of the drugs that may compete with Qsymia may not have a REMS requirement and the accompanying complexities such a requirement presents. Our competitors may develop technologies and products that are more effective than those we are currently marketing or researching and developing. Such developments could render Qsymia and STENDRA less competitive or possibly obsolete. We are also competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited experience.

 

Qsymia for the treatment of chronic weight management competes with several approved anti-obesity drugs including, Belviq® (lorcaserin), Arena Pharmaceutical’s approved anti-obesity compound marketed by Eisai Inc., Eisai Co., Ltd.’s U.S. subsidiary; Xenical® (orlistat), marketed by Roche; alli®, the over-the-counter version of orlistat, marketed by GlaxoSmithKline; Suprenza™, an orally disintegrating tablet (phentermine hydrochloride), marketed by Akrimax Pharmaceuticals, LCL; and Contrave®, Orexigen Therapeutics, Inc.’s recently approved anti-obesity compound marketed by Takeda Pharmaceutical Company Limited.

 

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There are also several drugs in development for obesity including an investigational drug candidate, liraglutide, in Phase 3 clinical trials being developed by Novo Nordisk A/S. Victoza® (liraglutide) is approved by the FDA for the treatment of type 2 diabetes and also is being developed for the treatment of obesity. Newer agents recently approved for type 2 diabetes include Invokana® (canaglifozin) from Johnson & Johnson’s Janssen Pharmaceuticals, an SGLT2 inhibitor that has demonstrated modest, single-digit weight loss in clinical studies. In addition, there are several other investigational drug candidates in Phase 2 clinical trials for the treatment of obesity. There are also a number of generic pharmaceutical drugs that are prescribed for obesity, predominantly phentermine. Phentermine is sold at much lower prices than we charge for Qsymia and is available in retail pharmacies. The availability of branded prescription drugs, generic drugs and over-the-counter drugs could limit the demand for, and the price we are able to charge for, Qsymia.

 

We also may face competition from the off-label use of the generic components in our drugs. In particular, it is possible that patients will seek to acquire phentermine and topiramate, the generic components of Qsymia. Neither of these generic components has a REMS program and both are available at retail pharmacies. Although the dose strength of these generic components has not been approved by the FDA for use in the treatment of obesity, the off-label use of the generic components in the U.S. or the importation of the generic components from foreign markets could adversely affect the commercial potential for our drugs and adversely affect our overall business, financial condition and results of operations.

 

There are also surgical approaches to treat severe obesity that are becoming increasingly accepted. Two of the most well established surgical procedures are gastric bypass surgery and adjustable gastric banding, or lap bands. In February 2011, the FDA approved the use of a lap band in patients with a BMI of 30 (reduced from 35) with comorbidities. The lowering of the BMI requirement will make more obese patients eligible for lap band surgery. In addition, other potential approaches that utilize various implantable devices or surgical tools are in development. Some of these approaches are in late-stage development and may be approved for marketing.

 

We anticipate that STENDRA (avanafil) for the treatment of erectile dysfunction will compete with PDE5 inhibitors in the form of oral medications including Viagra® (sildenafil citrate), marketed by Pfizer, Inc.; Cialis® (tadalafil), marketed by Eli Lilly and Company; Levitra® (vardenafil), co-marketed by GlaxoSmithKline plc and Schering-Plough Corporation in the U.S.; and STAXYN® (vardenafil in an oral disintegrating tablet, or ODT), co-marketed by GlaxoSmithKline plc and Merck & Co., Inc.

 

As patents for the three major PDE5 inhibitors, sildenafil citrate, tadalafil and vardenafil, expire beginning in 2017, we anticipate that generic PDE5 inhibitors will enter the market. Generic PDE5 inhibitors would likely be sold at lower prices and may reduce the demand for STENDRA especially at the prices we would be required to charge for STENDRA to cover our manufacturing and other costs. In addition, PDE5 inhibitors are in various stages of development by other companies. Warner-Chilcott plc, which was acquired by Actavis, Inc. and is now known as Actavis plc, has licensed the U.S. rights to udenafil, a PDE5 inhibitor, from Dong-A Pharmaceutical. Other treatments for ED exist, such as needle injection therapies, vacuum constriction devices and penile implants, and the manufacturers of these products will most likely continue to develop or improve these therapies.

 

Qsymia and STENDRA may also face challenges and competition from newly developed generic products. Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, newly approved drugs and indications may benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act stimulates competition by providing incentives to generic pharmaceutical manufacturers to introduce non-infringing forms of patented pharmaceutical products and to challenge patents on branded pharmaceutical products. If we are unsuccessful at challenging an Abbreviated New Drug Application, or ANDA, filed pursuant to the Hatch-Waxman Act, a generic version of Qsymia or STENDRA may be launched, which would harm our business.

 

New developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical and medical technology industries at a rapid pace. These developments may render our drugs and future investigational drug candidates obsolete or noncompetitive. Compared to us, many of our potential competitors have substantially greater:

 

·  research and development resources, including personnel and technology;

 

·  regulatory experience;

 

·  investigational drug candidate development and clinical trial experience;

 

·  experience and expertise in exploitation of intellectual property rights; and

 

·  access to strategic partners and capital resources.

 

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As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our future investigational drug candidates. Our competitors may also develop drugs or surgical approaches that are more effective, more useful and less costly than ours and may also be more successful in manufacturing and marketing their products. In addition, our competitors may be more effective in commercializing their products. We currently outsource our manufacturing and therefore rely on third parties for that competitive expertise. There can be no assurance that we will be able to develop or contract for these capabilities on acceptable economic terms, or at all.

 

We may participate in new partnerships and other strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

 

From time to time, we consider strategic transactions, such as out-licensing or in-licensing of compounds or technologies, acquisitions of companies and asset purchases. Additional potential transactions we may consider include a variety of different business arrangements, including strategic partnerships, joint ventures, spin-offs, restructurings, divestitures, business combinations and investments. In addition, another entity may pursue us as an acquisition target. Any such transactions may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges, require additional expertise or disrupt our management or business, any of which could harm our operations and financial results.

 

As part of an effort to enter into significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the expected benefits of the transaction. If we fail to realize the expected benefits from any transaction we may consummate, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected.

 

Our failure to successfully acquire, develop and market additional investigational drug candidates or approved drugs would impair our ability to grow.

 

As part of our growth strategy, we may acquire, in-license, develop and/or market additional products and investigational drug candidates. We have not in-licensed any new product candidates in several years. Because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select and acquire promising pharmaceutical investigational drug candidates and products.

 

The process of proposing, negotiating and implementing a license or acquisition of an investigational drug candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of investigational drug candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional investigational drug candidates on terms that we find acceptable, or at all.

 

In addition, future acquisitions may entail numerous operational and financial risks, including:

 

·  exposure to unknown liabilities;

 

·  disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;

 

·  incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;

 

·  higher than expected acquisition, integration and maintenance costs;

 

·  increased amortization expenses;

 

·  difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

·  impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

 

·  inability to retain key employees of any acquired businesses.

 

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Further, any investigational drug candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and obtaining approval by the FDA and applicable foreign regulatory authorities. All investigational drug candidates are prone to certain failures that are relatively common in the field of drug development, including the possibility that an investigational drug candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot be certain that any drugs that we develop or approved products that we may acquire will be commercialized profitably or achieve market acceptance.

 

If we fail to retain our key personnel and hire, train and retain qualified employees, we may not be able to compete effectively, which could result in reduced revenues or delays in the development of our investigational drug candidates or commercialization of our approved drugs.

 

Our success is highly dependent upon the skills of a limited number of key management personnel. To reach our business objectives, we will need to retain and hire qualified personnel in the areas of manufacturing, commercial operations, research and development, regulatory and legal affairs, business development, clinical trial design, execution and analysis, and pre-clinical testing. There can be no assurance that we will be able to hire or retain such personnel, as we must compete with other companies, academic institutions, government entities and other agencies. The loss of any of our key personnel or the failure to attract or retain necessary new employees could have an adverse effect on our research programs, investigational drug candidate development, approved drug commercialization efforts and business operations.

 

We rely on third parties and collaborative partners to manufacture sufficient quantities of compounds within product specifications as required by regulatory agencies for use in our pre-clinical and clinical trials and commercial operations and an interruption to this service may harm our business.

 

We do not have the ability to manufacture the materials we use in our pre-clinical and clinical trials and commercial operations. Rather, we rely on various third parties to manufacture these materials and there may be long lead times to obtain materials. There can be no assurance that we will be able to identify, contract with, qualify and obtain prior regulatory approval for additional sources of clinical materials. If interruptions in this supply occur for any reason, including a decision by the third parties to discontinue manufacturing, technical difficulties, labor disputes, natural or other disasters, or a failure of the third parties to follow regulations, we may not be able to obtain regulatory approvals for our investigational drug candidates and may not be able to successfully commercialize these investigational drug candidates or our approved drugs.

 

Our third-party manufacturers and collaborative partners may encounter delays and problems in manufacturing our approved drugs or investigational drug candidates for a variety of reasons, including accidents during operation, failure of equipment, delays in receiving materials, natural or other disasters, political or governmental changes, or other factors inherent in operating complex manufacturing facilities. Supply-chain management is difficult. Commercially available starting materials, reagents, excipients, and other materials may become scarce, more expensive to procure, or not meet quality standards, and we may not be able to obtain favorable terms in agreements with subcontractors. Our third-party manufacturers may not be able to operate manufacturing facilities in a cost-effective manner or in a time frame that is consistent with our expected future manufacturing needs. If our third-party manufacturers, cease or interrupt production or if our third-party manufacturers and other service providers fail to supply materials, products or services to us for any reason, such interruption could delay progress on our programs, or interrupt the commercial supply, with the potential for additional costs and lost revenues. If this were to occur, we may also need to seek alternative means to fulfill our manufacturing needs.

 

For example, Catalent Pharma Solutions, LLC, or Catalent, supplied the product for the Phase 3 program for Qsymia and is our sole source of clinical and commercial supplies for Qsymia. Catalent has been successful in validating the commercial manufacturing process for Qsymia at an initial scale, which has been able to support the launch of Qsymia in the U.S. market. While Catalent has significant experience in commercial scale manufacturing, there is no assurance that Catalent will be successful in increasing the scale of the initial Qsymia manufacturing process, should the market demand for Qsymia expand beyond the level supportable by the current validated manufacturing process. Such a failure by Catalent to further scale up the commercial manufacturing process for Qsymia could have a material adverse impact on our ability to realize commercial success with Qsymia in the U.S. market, and have a material adverse impact on our plan, market price of our common stock and financial condition.

 

In the case of avanafil, we currently rely on MTPC to supply the API (avanafil) and the avanafil tablets for STENDRA and SPEDRA. MTPC is responsible for all aspects of manufacture, including obtaining the starting materials for the production of API. If MTPC is unable to manufacture the avanafil API or tablets in sufficient quantities to meet projected demand, future sales could be adversely affected, which in turn could have a detrimental impact on our financial results, our license, commercialization, and supply agreements with our collaboration partners, and our ability to enter into a collaboration agreement for the commercialization in other territories.

 

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In August 2012, we entered into an amendment to our agreement with MTPC that permits us to manufacture the API and tablets for STENDRA ourselves or through third parties. According to the amendment, the transition of manufacturing from MTPC must occur on or before June 30, 2015. We currently do not have any manufacturing facilities and intend to continue to rely on third parties for the supply of the starting materials, API and tablets. The transfer of technology to and qualification of a new supplier is expensive, time consuming and logistically complicated. The technology transfer needed for this transition is highly dependent on the cooperation of MTPC and its current suppliers. If MTPC, or its current suppliers, are unable to effectively transfer the technology or supply on commercially reasonable terms, partnerability and commercial success of STENDRA could be adversely impacted. Additionally, we cannot be certain that we will be successful in entering into appropriate agreements with other suppliers or that we will be able to obtain the necessary regulatory approvals for these suppliers in a timely manner or at all.

 

In July 2013, we entered into a Commercial Supply Agreement with Sanofi Chimie to manufacture and supply the API for avanafil on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. On November 18, 2013, we entered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie to manufacture and supply the avanafil tablets on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. We intend to submit an amendment to the NDA for avanafil to the FDA, and the MA for avanafil to the EMA, to include Sanofi Chimie as a qualified supplier of the avanafil API and Sanofi Winthrop Industrie as a qualified supplier of the avanafil tablets. We cannot be certain we will receive approval by regulatory authorities, and the failure to receive such approval could prevent, delay, or preclude our ability to establish a reliable supply chain, which could compromise our ability to commercialize avanafil through our relationships with Sanofi, Auxilium, Menarini, or otherwise.

 

Any future manufacturing sites, including those of Sanofi Chimie and Sanofi Winthrop Industrie, would need to be inspected by the U.S. and EU authorities, and any failure of such manufacturing sites to receive approval from FDA or foreign authorities, obtain and maintain ongoing FDA or foreign regulatory compliance, or manufacture avanafil API or tablets in expected quantities could have a detrimental impact on our ability to commercialize STENDRA under our agreements with Sanofi, Auxilium and Menarini and our ability to enter into a collaboration agreement for the commercialization of STENDRA in our other territories not covered by our agreements with Sanofi, Auxilium and Menarini.

 

We rely on third parties to maintain appropriate levels of confidentiality of the data compiled during clinical, pre-clinical and retrospective observational studies and trials.

 

We seek to maintain the confidential nature of our confidential information through contractual provisions in our agreements with third parties, including our agreements with clinical research organizations, or CROs, that manage our clinical studies for our investigational drug candidates. These CROs may fail to comply with their obligations of confidentiality or may be required as a matter of law to disclose our confidential information. As the success of our clinical studies depends in large part on our confidential information remaining confidential prior to, during and after a clinical study, any disclosure could have a material adverse effect on the outcome of a clinical study, our business, financial condition and results of operations.

 

The collection and use of personal health data in the EU is governed by the provisions of the Data Protection Directive. This Directive imposes a number of requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, notification of data processing obligations to the competent national data protection authorities and the security and confidentiality of the personal data. The Data Protection Directive also imposes strict rules on the transfer of personal data out of the EU to the United States. Failure to comply with the requirements of the Data Protection Directive and the related national data protection laws of the EU Member States may result in fines and other administrative penalties. The draft EU Data Protection Regulation currently going through the adoption process is expected to introduce new data protection requirements in the EU and substantial fines for breaches of the data protection rules. If the draft Data Protection Regulation is adopted in its current form, it may increase our responsibility and liability in relation to personal data that we process and we may be required to put in place additional mechanisms ensuring compliance with the new EU data protection rules. This may be onerous and increase our cost of doing business.

 

If we fail to comply with applicable healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

 

Our arrangements with third-party payors and customers expose us to broadly applicable federal and state healthcare laws and regulations pertaining to fraud and abuse. The restrictions under applicable federal and state healthcare laws and regulations that may affect our ability to operate include, but are not limited to:

 

·  the federal Anti-Kickback Law, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcare items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted

 

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to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Further, the Affordable Care Act, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback statute or specific intent to violate it. In addition, the Affordable Care Act amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Law constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Law protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny. We seek to comply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability;

 

·  the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using, or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing, or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. In addition, in recent years the government has pursued civil False Claims Act cases against a number of pharmaceutical companies for causing false claims to be submitted as a result of the marketing of their products for unapproved, and thus non-reimbursable, uses. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;

 

·  numerous federal and state laws, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most healthcare providers who prescribe our product and from whom we obtain patient health information are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. We are not a HIPAA-covered entity and we do not operate as a business associate to any covered entities. Therefore, these privacy and security requirements do not apply to us. However, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting the violation of HIPAA. We are unable to predict whether our actions could be subject to prosecution in the event of an impermissible disclosure of health information to us. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing business;

 

·  analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payor. Some state laws also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states prohibit providing meals to prescribers or other marketing-related activities. In addition, California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes of conduct. Additional states are considering or recently have considered similar proposals. Foreign governments often have similar regulations, which we also will be subject to in those countries where we market and sell products;

 

·  the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain pharmaceutical manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a payments database, and public reporting of the payment data. Pharmaceutical manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to track and report such payments. Centers for Medicare and Medicaid Services, or CMS, recently issued a final rule implementing the Physician Payment Sunshine Act provisions and clarified the scope of the reporting obligations, as well as that applicable manufacturers must begin tracking on August 1, 2013, and must report payment data to CMS by March 31, 2014, and annually thereafter; and

 

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·  the federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. A determination that our operations or activities are not, or were not, in compliance with United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence.

 

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

 

In the EU, the advertising and promotion of our products will also be subject to EU Member States’ laws concerning promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, as well as other EU Member State legislation governing statutory health insurance, bribery and anti-corruption. Failure to comply with these rules can result in enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.

 

Marketing activities for our approved drugs are subject to continued governmental regulation.

 

The FDA, and third country authorities, including the competent authorities of the EU Member States, have the authority to impose significant restrictions, including REMS requirements, on approved products through regulations on advertising, promotional and distribution activities. After approval, if products are marketed in contradiction with FDA laws and regulations, the FDA may issue warning letters that require specific remedial measures to be taken, as well as an immediate cessation of the impermissible conduct, resulting in adverse publicity. The FDA may also require that all future promotional materials receive prior agency review and approval before use. Certain states have also adopted regulations and reporting requirements surrounding the promotion of pharmaceuticals. Qsymia and STENDRA are subject to these regulations. Failure to comply with state requirements may affect our ability to promote or sell pharmaceutical drugs in certain states. This, in turn, could have a material adverse impact on our financial results and financial condition and could subject us to significant liability, including civil and administrative remedies as well as criminal sanctions.

 

We are subject to ongoing regulatory obligations and restrictions, which may result in significant expense and limit our ability to commercialize our drugs.

 

We are required to comply with extensive regulations for drug manufacturing, labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion and record keeping in connection with the marketing of Qsymia and STENDRA. Regulatory approvals may also be subject to significant limitations on the indicated uses or marketing of the investigational drug candidates or to whom and how we may distribute our products. Even after FDA approval is obtained, the FDA may still impose significant restrictions on a drug’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. For example, the labeling approved for Qsymia includes restrictions on use, including recommendations for pregnancy testing, level of obesity and duration of treatment. We are subject to ongoing regulatory obligations and restrictions that may result in significant expense and limit our ability to commercialize Qsymia. The FDA has also required the distribution of a Medication Guide to Qsymia patients outlining the increased risk of teratogenicity with fetal exposure and the possibility of suicidal thinking or behavior. In addition, the FDA has required a REMS that may act to limit access to the drug, reduce our revenues and/or increase our costs. The FDA may modify the Qsymia REMS in the future to be more or less restrictive.

 

Even if we maintain FDA approval, or receive a marketing authorization from the EC, and other regulatory approvals, if we or others identify adverse side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval or EU marketing authorization may be varied, suspended or withdrawn and reformulation of our products, additional clinical trials, changes in labeling and additional marketing applications may be required, any of which could harm our business and cause our stock price to decline.

 

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We and our contract manufacturers are subject to significant regulation with respect to manufacturing of our products.

 

All of those involved in the preparation of a therapeutic drug for clinical trials or commercial sale, including our existing supply contract manufacturers, and clinical trial investigators, are subject to extensive regulation. Components of a finished drug product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with current Good Manufacturing Practices, or cGMP. These regulations govern quality control of the manufacturing processes and documentation policies and procedures, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Our facilities and quality systems and the facilities and quality systems of our third-party contractors must be inspected routinely for compliance. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulation occurs independent of such an inspection or audit, we or the FDA may require remedial measures that may be costly and/or time consuming for us or a third party to implement and that may include the issuance of a warning letter, temporary or permanent suspension of a clinical trial or commercial sales, recalls, market withdrawals, seizures, or the temporary or permanent closure of a facility. Any such remedial measures would be imposed upon us or third parties with whom we contract until satisfactory cGMP compliance is achieved. The FDA could also impose civil penalties. We must also comply with similar regulatory requirements of foreign regulatory agencies.

 

We obtain the necessary raw materials and components for the manufacture of Qsymia and STENDRA as well as certain services, such as analytical testing packaging and labeling, from third parties. In particular, we rely on Catalent to supply Qsymia capsules and Packaging Coordinators, Inc., or PCI, for Qsymia packaging services. We and these suppliers and service providers are required to follow cGMP requirements and are subject to routine and unannounced inspections by the FDA and by state and foreign regulatory agencies for compliance with cGMP requirements and other applicable regulations. Upon inspection of these facilities, the FDA or foreign regulatory agencies may find the manufacturing process or facilities are not in compliance with cGMP requirements and other regulations. Because manufacturing processes are highly complex and are subject to a lengthy regulatory approval process, alternative qualified supply may not be available on a timely basis or at all.

 

Difficulties, problems or delays in our suppliers and service providers’ manufacturing and supply of raw materials, components and services could delay our clinical trials, increase our costs, damage our reputation and cause us to lose revenue or market share if we are unable to timely meet market demands.

 

If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

We participate in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates are based on pricing data reported by us on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug.

 

The Affordable Care Act made significant changes to the Medicaid Drug Rebate program. Effective in March 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the Affordable Care Act increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. In addition, the Affordable Care Act and subsequent legislation changed the definition of average manufacturer price. Finally, the Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2014 (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.

 

In 2012, CMS issued proposed regulations to implement the changes to the Medicaid Drug Rebate program under the Affordable Care Act but has not yet issued final regulations. CMS is currently expected to release the final regulations in 2014. Moreover, in the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program has and will continue to increase our costs and the complexity of compliance, has been and will be time consuming, and could have a material adverse effect on our results of operations.

 

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Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service’s 340B drug pricing discount program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B pricing program requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under the Affordable Care Act and CMS’s issuance of final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations.

 

The Affordable Care Act expanded the 340B program to include additional entity types: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Affordable Care Act. The Affordable Care Act also obligates the Secretary of the U.S. Department of Health and Human Services, or HHS, to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. The Health Resources and Services Administration, or HRSA, is expected to issue a comprehensive proposed regulation in 2014 that will address many aspects of the 340B program. When that regulation is finalized, it could affect our obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

 

Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our current average manufacturer prices and best prices for the quarter. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate program. Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the ceiling price at which we are required to offer our products to certain covered entities, such as safety-net providers, under the 340B drug discount program.

 

We are liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted false average manufacturer price or best price information to the government, we may be liable for civil monetary penalties in the amount of $100,000 per item of false information. Our failure to submit monthly/quarterly average manufacturer price and best price data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in the Medicaid program. In the event that CMS terminates our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.

 

In September 2010, CMS and the Office of the Inspector General indicated that they intend to pursue more aggressively companies that fail to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our submissions will not be found by CMS to be incomplete or incorrect.

 

Federal law requires that, for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased by certain federal agencies and certain federal grantees, it also must participate in the Department of Veterans Affairs, or VA, Federal Supply Schedule, or FSS, pricing program. To participate, we are required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs” available to the “Big Four” federal agencies—the VA, the Department of Defense, or DoD, the Public Health Service, and the Coast Guard—at pricing that is capped pursuant to a statutory federal ceiling price, or FCP, formula set forth in Section 603 of the Veterans Health Care Act of 1992, or VHCA. The FCP is based on a weighted average wholesaler price known as the “non-federal average manufacturer price,” or Non-FAMP, which manufacturers are required to report on a quarterly and annual basis to the VA. If a company misstates Non-FAMPs or FCPs it must restate these figures. Pursuant to the VHCA, knowingly providing false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of false information.

 

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FSS contracts are federal procurement contracts that include standard government terms and conditions, separate pricing for each product, and extensive disclosure and certification requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an agreed “tracking customer.” Further, in addition to the “Big Four” agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. FSS contractors are permitted to charge FSS purchasers other than the “Big Four” agencies “negotiated pricing” for covered drugs that is not capped by the FCP; instead, such pricing is negotiated based on a mandatory disclosure of the contractor’s commercial “most favored customer” pricing. We offer one single FCP-based FSS contract price to all FSS purchasers for all products.

 

In addition, pursuant to regulations issued by the DoD TRICARE Management Activity, or TMA, now Defense Health Agency, or DHA, to implement Section 703 of the National Defense Authorization Act for Fiscal Year 2008, each of our covered drugs is listed on a Section 703 Agreement with TMA under which we have agreed to pay rebates on covered drug prescriptions dispensed to TRICARE beneficiaries. Companies are required to list their innovator products on Section 703 Agreements in order for those products to be eligible for DoD formulary inclusion. The formula for determining the rebate is established in the regulations and our Section 703 Agreement and is based on the difference between the Annual Non-FAMP and the FCP (as described above, these price points are required to be calculated by us under the VHCA).

 

If we overcharge the government in connection with our FSS contract or Section 703 Agreement, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Changes in reimbursement procedures by government and other third-party payors, including changes in healthcare law and implementing regulations, may limit our ability to market and sell our approved drugs, or any future drugs, if approved, may limit our product revenues and delay profitability, and may impact our business in ways that we cannot currently predict. These changes could have a material adverse effect on our business and financial condition.

 

In the U.S. and abroad, sales of pharmaceutical drugs are dependent, in part, on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. Some third-party payor benefit packages restrict reimbursement, charge co-pays to patients, or do not provide coverage for specific drugs or drug classes.

 

In addition, certain healthcare providers are moving towards a managed care system in which such providers contract to provide comprehensive healthcare services, including prescription drugs, for a fixed cost per person. We are unable to predict the reimbursement policies employed by third-party healthcare payors.

 

Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price, average manufacturer price and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. CMS, the federal agency that administers the Medicare and Medicaid Drug Rebate program, has made draft National Average Drug Acquisition Cost, or NADAC, and draft National Average Retail Price, or NARP, data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products.

 

The healthcare industry in the U.S. and abroad is undergoing fundamental changes that are the result of political, economic and regulatory influences. The levels of revenue and profitability of pharmaceutical companies may be affected by the continuing efforts of governmental and third-party payors to contain or reduce healthcare costs through various means. Reforms that have been and may be considered include mandated basic healthcare benefits, controls on healthcare spending through limitations on the increase in private health insurance premiums and the types of drugs eligible for reimbursement and Medicare and Medicaid spending, the creation of large insurance purchasing groups, and fundamental changes to the healthcare delivery system. These proposals include measures that would limit or prohibit payments for some medical treatments or subject the pricing of drugs to government control and regulations changing the rebates we are required to provide. These changes could impact our ability to maximize revenues in the federal marketplace.

 

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In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together the Affordable Care Act. The Affordable Care Act substantially changed the way healthcare is financed by both governmental and private insurers, and could have a material adverse effect on our future business, cash flows, financial condition and results of operations, including by operation of the following provisions:

 

·  Effective in March 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. This expanded eligibility affects rebate liability for that utilization.

 

·  With regard to the amount of the rebates owed, the Affordable Care Act increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price.

 

·  Effective in January 2011, pharmaceutical companies must provide a 50% discount on branded prescription drugs dispensed to beneficiaries within the Medicare Part D coverage gap or “donut hole,” which is a coverage gap that currently exists in the Medicare Part D prescription drug program. We currently do not anticipate coverage under Medicare Part D, but this could change in the future.

 

·  Effective in January 2011, the Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2014, (and set to increase in ensuing years) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.

 

·  Some states have elected to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level. For each state that does not choose to expand its Medicaid program, there may be fewer insured patients overall, which could impact our sales, business and financial condition. We expect any Medicaid expansion to impact the number of adults in Medicaid more than children because many states have already set their eligibility criteria for children at or above the level designated in the Affordable Care Act. An increase in the proportion of patients who receive our drugs and who are covered by Medicaid could adversely affect our net sales.

 

Many of the Affordable Care Act’s most significant reforms do not take effect until 2014. In 2012, CMS issued proposed regulations to implement the changes to the Medicaid Drug Rebate program under the Affordable Care Act but has not yet issued final regulations. CMS is currently expected to release the final regulations in 2014. At this time, we cannot predict the full impact of the Affordable Care Act, or the timing and impact of any future rules or regulations promulgated to implement the Affordable Care Act.

 

The Affordable Care Act also expanded the Public Health Service’s 340B drug pricing discount program. The 340B pricing program requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The Affordable Care Act expanded the 340B program to include additional types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Affordable Care Act. The Affordable Care Act also obligates the Secretary of the Department of Health and Human Services to create regulations and processes to improve the integrity of the 340B program and to ensure the agreement that manufacturers must sign to participate in the 340B program obligates a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. The HRSA is expected to issue a comprehensive proposed regulation in 2014 that will address many aspects of the 340B program. When that regulation is finalized, it could affect our obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

 

There can be no assurance that future healthcare legislation or other changes in the administration or interpretation of government healthcare or third-party reimbursement programs will not have a material adverse effect on us. Healthcare reform is also under consideration in other countries where we intend to market Qsymia.

 

We expect to experience pricing and reimbursement pressures in connection with the sale of Qsymia, STENDRA and our investigational drug candidates, if approved, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. In addition, we may confront limitations in insurance coverage for Qsymia, STENDRA and our investigational drug candidates. For example, the Medicare program generally does not provide coverage for drugs used to treat erectile dysfunction or drugs used to treat obesity. Similarly, other insurers may determine that such products are not covered under their programs. If we fail to successfully secure and maintain reimbursement coverage for our approved drugs and investigational drug candidates or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our approved drugs and investigational drug candidates and our business will be harmed. Congress has enacted healthcare reform and may enact further reform, which could adversely affect the pharmaceutical industry as a whole, and therefore could have a material adverse effect on our business.

 

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Both of the active pharmaceutical ingredients in Qsymia, phentermine and topiramate, are available as generics and do not have a REMS requirement. The exact doses of the active ingredients in Qsymia are different than those currently available for the generic components. State pharmacy laws prohibit pharmacists from substituting drugs with differing doses and formulations. The safety and efficacy of Qsymia is dependent on the titration, dosing and formulation, which we believe could not be easily duplicated, if at all, with the use of generic substitutes. However, there can be no assurance that we will be able to provide for optimal reimbursement of Qsymia as a treatment for obesity or, if approved, for any other indication, from third-party payors or the U.S. government. Furthermore, there can be no assurance that healthcare providers would not actively seek to provide patients with generic versions of the active ingredients in Qsymia in order to treat obesity at a potential lower cost and outside of the REMS requirements.

 

An increasing number of EU Member States and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory. Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere. In addition, the ongoing budgetary difficulties faced by a number of EU Member States, including Greece and Spain, have led and may continue to lead to substantial delays in payment and payment partially with government bonds rather than cash for medicinal products, which could negatively impact our revenues and profitability. Moreover, in order to obtain reimbursement of our medicinal products in some countries, including some EU Member States, we may be required to conduct clinical trials that compare the cost effectiveness of our products to other available therapies. There can be no assurance that our medicinal products will obtain favorable reimbursement status in any country.

 

Setbacks and consolidation in the pharmaceutical and biotechnology industries, and our, or our collaborators’, inability to obtain third-party coverage and adequate reimbursement, could make partnering more difficult and diminish our revenues.

 

Setbacks in the pharmaceutical and biotechnology industries, such as those caused by safety concerns relating to high-profile drugs like Avandia®, Vioxx® and Celebrex®, or investigational drug candidates, as well as competition from generic drugs, litigation, and industry consolidation, may have an adverse effect on us. For example, pharmaceutical companies may be less willing to enter into new collaborations or continue existing collaborations if they are integrating a new operation as a result of a merger or acquisition or if their therapeutic areas of focus change following a merger. Moreover, our and our collaborators’ ability to commercialize any of our approved drugs or future investigational drug candidates will depend in part on government regulation and the availability of coverage and adequate reimbursement from third-party payors, including private health insurers and government payors, such as the Medicaid and Medicare programs, increases in government-run, single-payor health insurance plans and compulsory licenses of drugs. Government and third-party payors are increasingly attempting to contain healthcare costs by limiting coverage and reimbursement levels for new drugs. Given the continuing discussion regarding the cost of healthcare, managed care, universal healthcare coverage and other healthcare issues, we cannot predict with certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on our business. These efforts may limit our commercial opportunities by reducing the amount a potential collaborator is willing to pay to license our programs or investigational drug candidates in the future due to a reduction in the potential revenues from drug sales. Adoption of legislation and regulations could limit pricing approvals for, and reimbursement of, drugs. A government or third-party payor decision not to approve pricing for, or provide adequate coverage and reimbursements of, our drugs could limit market acceptance of these drugs.

 

Our business and operations would suffer in the event of system failures.

 

Despite the implementation of security measures, our internal computer systems and those of our contract sales organization, or CSO, CROs, safety monitoring company and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, accidents, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our investigational drug candidate development programs and drug manufacturing operations. For example, the loss of clinical trial data from completed or ongoing clinical trials for our investigational drug candidates could result in delays in our regulatory approval efforts with the FDA, the EC, or the competent authorities of the EU Member States, and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our investigational drug candidates, or commercialization of our approved drugs, could be delayed. If we are unable to restore our information systems in the event of a systems failure, our communications, daily operations and the