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EX-10.3 - EXHIBIT 10.3 - Sucampo Pharmaceuticals, Inc.exh_103.htm
EX-32.2 - EXHIBIT 32.2 - Sucampo Pharmaceuticals, Inc.exh_322.htm
EX-32.1 - EXHIBIT 32.1 - Sucampo Pharmaceuticals, Inc.exh_321.htm
EX-31.2 - EXHIBIT 31.2 - Sucampo Pharmaceuticals, Inc.exh_312.htm
EX-31.1 - EXHIBIT 31.1 - Sucampo Pharmaceuticals, Inc.exh_311.htm
EX-10.6 - EXHIBIT 10.6 - Sucampo Pharmaceuticals, Inc.exh_106.htm
EX-10.5 - EXHIBIT 10.5 - Sucampo Pharmaceuticals, Inc.exh_105.htm
EX-10.4 - EXHIBIT 10.4 - Sucampo Pharmaceuticals, Inc.exh_104.htm
EX-10.2 - EXHIBIT 10.2 - Sucampo Pharmaceuticals, Inc.exh_102.htm
EX-10.1 - EXHIBIT 10.1 - Sucampo Pharmaceuticals, Inc.exh_101.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)  
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2016
   
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: 001-33609

 

SUCAMPO PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   30-0520478
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
805 King Farm Boulevard, Suite 550   20850
Rockville, MD   (Zip Code)
(Address of principal executive offices)    
     
(301) 961-3400
(Registrant’s telephone number,
including area code)

 

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. þ Yes o No

 

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). þ Yes o No

 

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.

 

Large accelerated filer o   Accelerated filer þ   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 Exchange Act). o Yes þ No

 

As of November 4, 2016, there were 45,837,056 shares of the registrant’s class A common stock outstanding.

 

 1 
 

Sucampo Pharmaceuticals, Inc.

 

Form 10-Q Index

 

  Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2016 and December 31, 2015 3
  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2016 and 2015 4
  Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2016 5
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2016 and 2015 6
  Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Item 4. Controls and Procedures 38
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 39
Item 6. Exhibits 40
SIGNATURES 42
INDEX TO EXHIBITS 43

 

 

 2 
 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

   September 30,
2016
  December 31,
2015
   (unaudited)   
ASSETS   
Current assets:          
Cash and cash equivalents  $128,465   $108,284 
Product royalties receivable   20,771    22,792 
Accounts receivable, net   20,684    22,759 
Restricted cash   25,213    55,218 
Inventories   24,202    33,121 
Prepaid expenses and other current assets   18,146    9,186 
Total current assets   237,481    251,360 
Property and equipment, net   6,563    6,393 
Intangible assets   134,886    130,315 
Goodwill   73,022    60,937 
In-process research and development   -    6,171 
Deferred charge, non-current   1,400    1,400 
Convertible note receivable   5,182    - 
Other assets   1,030    605 
Total assets  $459,564   $457,181 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $7,869   $11,213 
Accrued expenses   14,380    10,886 
Collaboration obligation   1,438    5,623 
Income tax payable   16,587    6,507 
Notes payable, current   21,730    39,083 
Other current liabilities   4,805    14,815 
Total current liabilities   66,809    88,127 
Notes payable, non-current   196,984    213,277 
Deferred revenue, non-current   913    1,088 
Deferred tax liability, net   41,757    52,497 
Other liabilities   8,291    15,743 
Total liabilities   314,754    370,732 
           
Commitments and contingencies (note 12)          
           
Stockholders' equity:          
Preferred stock, $0.01 par value; 5,000,000 shares authorized at September 30, 2016  and December 31, 2015; no shares issued and outstanding at September 30, 2016 and December 31, 2015   -    - 
Class A common stock, $0.01 par value; 270,000,000 shares authorized at September 30, 2016 and December 31, 2015; 45,828,775 and 45,509,150 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively   458    455 
Class B common stock, $0.01 par value; 75,000,000 shares authorized at September 30, 2016 and December 31, 2015; no shares issued and outstanding at September 30, 2016 and December 31, 2015   -    - 
Additional paid-in capital   113,440    99,212 
Accumulated other comprehensive income   54,339    13,412 
Treasury stock, at cost; 3,009,942 shares at September 30, 2016 and December 31, 2015   (46,269)   (46,269)
Retained earnings   22,842    19,639 
Total stockholders' equity   144,810    86,449 
Total liabilities and stockholders' equity  $459,564   $457,181 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 3 
 

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(In thousands, except per share data)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2016  2015  2016  2015
Revenues:         
Product royalty revenue  $20,771   $19,328   $56,222   $51,209 
Product sales revenue   31,554    11,022    86,538    36,678 
Research and development revenue   3,172    2,714    9,971    7,468 
Contract and collaboration revenue   2,376    384    4,301    2,457 
Total revenues   57,873    33,448    157,032    97,812 
                     
Costs and expenses:                    
Costs of goods sold   15,586    5,286    59,278    18,656 
Research and development   9,976    8,368    35,580    22,285 
Impairment of in-process research and development   7,286    -    7,286    - 
General and administrative   11,061    7,752    32,411    22,363 
Selling and marketing   696    385    2,094    1,617 
Total costs and expenses   44,605    21,791    136,649    64,921 
                     
Income from operations   13,268    11,657    20,383    32,891 
Non-operating income (expense):                    
Interest income   31    62    67    155 
Interest expense   (5,899)   (243)   (18,141)   (784)
Other income, net   8,102    87    5,216    1,947 
Total non-operating income (expense), net   2,234    (94)   (12,858)   1,318 
                     
Income before income taxes   15,502    11,563    7,525    34,209 
Income tax provision   (7,410)   (4,327)   (4,321)   (10,989)
Net income  $8,092   $7,236   $3,203   $23,220 
                     
Net income per share:                    
Basic  $0.19   $0.16   $0.08   $0.52 
Diluted  $0.19   $0.16   $0.07   $0.51 
Weighted average common shares outstanding:                    
Basic   42,813    44,731    42,704    44,576 
Diluted   43,443    46,309    43,334    45,939 
                     
Comprehensive income                    
Net income  $8,092   $7,236   $3,203   $23,220 
Other comprehensive income (expense):                    
Unrealized gain on pension benefit obligation   12    57    37    38 
Unrealized gain (loss) on investments, net of tax effect   -    (6)   -    6 
Foreign currency translation gain   4,635    264    40,890    102 
Comprehensive income  $12,739   $7,551   $44,130   $23,366 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 4 
 

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share data)

 

            Accumulated            
   Class A  Additional  Other           Total
   Common Stock  Paid-In  Comprehensive  Treasury Stock  Retained  Stockholders'
   Shares  Amount  Capital  Income  Shares  Amount  Earnings  Equity
Balance at December 31, 2015   45,509,150   $455   $99,212   $13,412    3,009,942   $(46,269)  $19,639   $86,449 
Stock-based compensation expense   -    -    5,445    -    -    -    -    5,445 
Stock issued under exercise of stock options   300,906    3    1,659    -    -    -    -    1,662 
Stock issued under employee stock purchase plan   18,719    -    174    -    -    -    -    174 
Windfall tax benefit from stock-based compensation   -    -    435    -    -    -    -    435 
Unrealized gain on pension benefit obligation   -    -    -    37    -    -    -    37 
Foreign currency translation   -    -    -    40,890    -    -    -    40,890 
Treasury stock transfer   -    -    6,515    -    -    -    -    6,515 
Net income   -    -    -    -    -    -    3,203    3,203 
Balance at September 30, 2016   45,828,775   $458   $113,440   $54,339    3,009,942   $(46,269)  $22,842   $144,810 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 5 
 

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   Nine Months Ended September 30,
   2016  2015
Cash flows from operating activities:          
Net income  $3,203   $23,220 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   37,873    433 
Loss on disposal of property and equipment   535    77 
Deferred tax provision   (16,571)   (2,828)
Deferred charge   -    221 
Stock-based compensation   5,445    5,607 
Amortization of premiums on investments   -    121 
Unrealized currency translations   9,811    2 
Shortfall from stock-based compensation   (25)   - 
Windfall benefit from stock-based compensation   (460)   - 
Transfer and assignment of licensing rights   -    (2,000)
Impairment of in-process research and development   7,286    - 
Forgiveness of AMED deferred grant   (9,258)   - 
Changes in operating assets and liabilities:          
Product royalties receivable   2,021    (752)
Accounts receivable   3,526    (1,347)
Inventory   (2,000)   (296)
Prepaid and income taxes receivable and payable, net   (1,067)   (600)
Accounts payable   (4,094)   785 
Accrued expenses   (2,414)   1,672 
Accrued interest payable   (55)   227 
Deferred revenue   (38)   (1,399)
Collaboration obligation   (4,185)   (448)
Other assets and liabilities, net   755    1,510 
Net cash provided by operating activities   30,288    24,205 
Cash flows from investing activities:          
Purchases of investments   (250)   (39,775)
Proceeds from sales of investments   -    2,398 
Maturities of investments   -    30,054 
Transfer and assignment of licensing rights   -    2,000 
Convertible note receivable   (5,000)   - 
Changes in restricted cash   12,302    548 
Payment of squeeze-out liability for non-tendering R-Tech shareholders   (7,668)   - 
Purchases of property and equipment   (1,219)   (2,023)
Net cash used in investing activities   (1,835)   (6,798)
Cash flows from financing activities:          
Payments of notes payable   (36,332)   (4,077)
Changes in restricted cash   17,676    - 
Proceeds from exercise of stock options   1,662    4,829 
Proceeds from employee stock purchase plan   174    74 
Windfall benefit from stock-based compensation   460    1,600 
Net cash (used in ) provided by financing activities   (16,360)   2,426 
Effect of exchange rates on cash and cash equivalents   8,088    50 
Net increase in cash and cash equivalents   20,181    19,883 
Cash and cash equivalents at beginning of period   108,284    71,622 
Cash and cash equivalents at end of period  $128,465   $91,505 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

 6 
 
1.Business Organization and Basis of Presentation

 

Description of the Business

 

Sucampo Pharmaceuticals, Inc., (Company) is a global biopharmaceutical company focused on developing, identifying, acquiring and bringing to market innovative medicines that meet unmet medical needs. Our primary focus areas are gastroenterology, ophthalmology, and oncology-related disorders.

 

The Company currently generates revenue mainly from product sales, product royalties, upfront and milestone payments, and reimbursements for development activities. The Company expects to continue to incur significant expenses for the next several years as the Company continues its research and development activities, seeks additional regulatory approvals and additional indications for approved products and other compounds and seeks strategic opportunities for in-licensing new products and product candidates.

 

AMITIZA® (lubiprostone) is being marketed for three gastrointestinal indications under the collaboration and license agreement (as amended in October 2014, the North America Takeda Agreement) with Takeda Pharmaceutical Company Limited (Takeda). These indications are chronic idiopathic constipation (CIC) in adults, irritable bowel syndrome with constipation (IBS-C) in adult women and opioid-induced constipation (OIC) in adults suffering from chronic non-cancer related pain. Under the North America Takeda Agreement, the Company is primarily responsible for clinical development activities, while Takeda is responsible for commercialization of AMITIZA in the United States (U.S.) and Canada. The Company and Takeda initiated commercial sales of AMITIZA in the U.S. for the treatment of CIC in April 2006, for the treatment of IBS-C in May 2008 and for the treatment of OIC in May 2013. Takeda is required to provide a minimum annual commercial investment during the current term of the North America Takeda Agreement and may reduce the minimum annual commercial investment when a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for CIC in adults. In October 2014, the Company and Takeda executed amendments to the North America Takeda Agreement, which, among other things, extended the term of the North America Takeda Agreement beyond December 2020. During the extended term beginning in January 2021, Takeda and the Company will share the annual net sales revenue of the branded AMITIZA products. The Company also partnered with Par Pharmaceuticals, Inc. (Par) and Dr. Reddy’s Laboratories, Ltd. and certain of its affiliates (Dr. Reddy’s) in connection with the settlement of patent litigation in the U.S. related to our AMITIZA (lubiprostone) 8 mcg and 24 mcg soft gelatin capsule products. Under the agreement with Par, the Company granted Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances. Beginning on January 1, 2021, the Company and Par will split the gross profits of the licensed products sold during the term of the agreement, which continues until each of the related patents has expired. Under the agreement with Dr. Reddy’s and certain of its affiliates, the Company granted Dr. Reddy’s a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA. This license does not begin until more than six years from today’s date, or earlier under certain circumstances. Dr. Reddy’s will pay to the Company a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and ends when all of the related patents have expired. In the event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, the Company has agreed to supply such product  under the terms of a manufacturing and supply agreement at a negotiated price.

 

In Japan, AMITIZA is marketed under a license, commercialization and supply agreement (the Japan Mylan Agreement) that was transferred to Mylan, Inc. (Mylan) from Abbott Laboratories, Inc. (Abbott), as of February 2015, as part of Mylan’s acquisition of a product portfolio from Abbott. The Company received approval of its new drug application (NDA) for AMITIZA for the treatment of chronic constipation (CC), excluding constipation caused by organic diseases, from Japan’s Ministry of Health, Labour and Welfare (MHLW) in June 2012 and pricing approval in November 2012. AMITIZA is Japan’s only prescription medicine for CC. The Company did not experience any significant changes in the commercialization of AMITIZA in Japan as a result of the transfer of the Japan Mylan Agreement from Abbott to Mylan.

 

In May 2015, the Company entered into an exclusive license, development, commercialization and supply agreement (the China Gloria Agreement) with Harbin Gloria Pharmaceuticals Co., Ltd. (Gloria), for AMITIZA in the People’s Republic of China. Under the China Gloria Agreement, Gloria is responsible for all development activities and costs, as well as commercialization and regulatory activities, for AMITIZA in the People’s Republic of China. The Company will be the exclusive supplier of AMITIZA to Gloria at an agreed upon supply price. Upon entering into the China Gloria Agreement, the Company received an upfront payment of $1.0 million. In June 2015, the China Food and Drug Administration accepted an Investigational New Drug (IND) application for a pivotal trial of AMITIZA in patients with CIC; as a result, the Company received an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received and recognized as revenue through June 2015, the Company is eligible to receive an additional payment for $1.5 million upon the occurrence of a specified regulatory or commercial milestone event.

 

 7 
 

In October 2014, the Company entered into an exclusive license, development, commercialization and supply agreement (the Global Takeda Agreement) for lubiprostone with Takeda, through which Takeda has the exclusive rights to further develop and commercialize AMITIZA in all global markets, except the U.S., Canada, Japan and the People’s Republic of China. Takeda became the marketing authorization holder in Switzerland in April 2015 and in the United Kingdom (U.K.), Austria, Belgium, Germany, Ireland, Netherlands, Luxembourg and Spain during 2016, and is expected to become the marketing authorization holder in Italy in the last quarter of 2016.

 

Before the execution of the Global Takeda Agreement, the Company retained full rights to develop and commercialize AMITIZA for the rest of the world’s markets outside of the U.S., Canada and Japan. In the U.K., the Company received approval in September 2012 from the Medicines and Healthcare Products Regulatory Agency (MHRA) for the use of AMITIZA to treat CIC. The Company made AMITIZA available in the U.K. in the fourth quarter of 2013. In July 2014, National Institute of Health and Care Excellence (NICE) published the technology appraisal guidance recommending the use of AMITIZA in the treatment of CIC and associated symptoms in adults who have failed laxatives. In January 2015, the Company successfully completed the European mutual recognition procedure (MRP) for AMITIZA for the treatment of CIC in select European countries, resulting in marketing authorizations in these countries.

 

In Switzerland, AMITIZA was approved to treat CIC in 2009. In 2012, the Company reached an agreement with the Bundesamt fur Gesundheit, (BAG), the Federal Office of Public Health in Switzerland, on a reimbursement price for AMITIZA in Switzerland, and began active marketing in the first quarter of 2013. In February 2014, the Company announced that the BAG revised several reimbursement limitations with which AMITIZA was first approved for reimbursement and inclusion in the Spezialitätenliste (SL) to allow all Swiss physicians to prescribe AMITIZA to patients who have failed previous treatments with at least two laxatives over a nine-month period. In July 2014, AMITIZA was approved for the treatment of OIC in chronic, non-cancer adult patients by the Swissmedic, the Swiss Agency for Therapeutic Products, and in October 2015, the BAG added this indication to the SL.

 

In October 2015, Takeda obtained approval of the clinical trial application (CTA) for AMITIZA for the treatment of CIC and IBS-C in Russia that was submitted in June 2015. In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and South Korea. Takeda initiated phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. An NDA for the treatment of CIC, IBS-C, and OIC was submitted in Israel in June 2015 and approved in July 2016. An NDA for the same indications was submitted in Kazakhstan in December 2015. Additional NDA submissions in 2016 are planned in various other markets.

 

As part of the acquisition of R-Tech in October 2015, the Company acquired all rights to RESCULA, an ophthalmology product used to lower intraocular pressure. In the U.S., the Company ceased marketing RESCULA in the fourth quarter of 2014 and no product was made available after the March 2015 expiration date. In May 2015, the Company returned all licenses for unoprostone isopropyl to R-Tech. In June 2016, the Company completed the withdrawal of the marketing authorization for RESCULA in the U.S. RESCULA is being commercialized by Santen Pharmaceutical Co., Ltd in Japan, Dong-A Pharmaceutical, Co., Ltd in South Korea and Sinphar Pharmaceutical, Co., Ltd and Zuellig Pharma Inc. in Taiwan.

 

The Company’s other current clinical development programs include the following:

 

Lubiprostone Alternate Formulation

The Company has been developing an alternate formulation of lubiprostone for both adult and pediatric patients who are unable to take or do not tolerate capsules and for naso-gastric tube fed patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work and the Company expects to initiate a phase 3 trial of the alternate formulation of lubiprostone in adults in the second half of 2016 and, if the trial is successful, to file an NDA in the U.S. for the alternate formulation for adults in the second half of 2017.

 

Lubiprostone for Pediatric Functional Constipation

The phase 3 program required to support an application for marketing authorization of lubiprostone for pediatric functional constipation comprises four clinical trials. The first two trials, one of which was recently completed, test the soft gelatin capsule formulation of lubiprostone in patients 6 to 17 years of age. The first of these trials is a pivotal 12-week, randomized, placebo-controlled trial which was initiated in December 2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term safety extension trial that was initiated in March 2014. In early November, the Company announced that the phase 3 trial of AMITIZA in pediatric functional constipation in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement (SBM) response. The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining, and stool consistency. In addition, in this study lubiprostone was well tolerated. The Company intends to review these results with the U.S. Food and Drug Administration (FDA) and other constituencies, and will announce next steps at the completion of this review. Additionally, after consultations with the FDA to better determine the doses and endpoints that should be studied, the phase 3 trial for the alternate formulation of lubiprostone described above will be followed in mid-2017 with a phase three program in children 6 months to 6 years of age using the alternate formulation. Takeda has agreed to fund 67% of the costs, up to a cap, of this pediatric functional constipation program.

 

 8 
 

VAP-1 Inhibitor RTU-1096

RTU-1096 is an oral compound recently under development for indications in auto-immune/inflammatory and immune-oncology diseases. In the first quarter of 2016, the Company completed a phase 1 trial in healthy individuals that evaluated the safety and pharmacokinetics of the compound. No significant safety issues were reported during the seven-day study. There was evidence of inhibition of systemic VAP-1 at all doses tested and the trial provided evidence of proof of mechanism. However, based on further assessment of the clinical data and on additional non-clinical data generated in the quarter, development of the compound has been discontinued.

 

VAP-1 Inhibitor RTU-009

RTU-009 is a pre-clinical stage, VAP-1 inhibitor that was planned to be studied in acute cerebral infarction. However, based on new non-clinical data and the decision to discontinue the development of RTU-1096, the development pathway has been revised to target chronic inflammatory conditions. The redirection of the RTU-009 program for chronic inflammatory conditions is in early preclinical development and as such has no perceived value. However, if the compound meets additional pre-specified non-clinical development goals the Company plans to complete IND-enabling studies and then determine how best to develop the molecule in the clinic.

 

CPP-1X/Sulindac Combination Product

In January 2016, the Company entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals, Inc. (CPP) has granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America. This product is currently in a phase 3 clinical trial being conducted by CPP for the treatment of familial adenomatous polyposis (FAP). Under the agreement with CPP, the Company has the exclusive option to license this product in North America. There are currently no approved treatments for FAP. The ongoing phase 3 study is a 150-patient, three-arm, double-blind, randomized trial of the combination agent and the single agent comparators. Enrollment in the study has completed, and results from a Phase 3 futility analysis are expected to be available in the first half of 2017. The trial is expected to conclude in 2018. More information regarding the Company’s arrangement with CPP is set forth in note 19 below.

 

Cobiprostone

In April 2016, the Company discontinued the development of cobiprostone for the treatment of proton pump inhibitor (PPI)-refractory non-erosive reflux disease (NERD) or symptomatic gastroesophageal reflux disease (sGERD), based on its analysis of top-line data from a Phase 2a study. While cobiprostone was observed to have significant benefit in some of the secondary parameters of this exploratory study, the trial did not meet its primary endpoints. In July 2016, the Company discontinued the development of an oral spray formulation of cobiprostone for the prevention of oral mucositis in patients that are undergoing radio chemotherapy for head and neck cancer, based on the results of a pre-specified futility analysis of the Phase 2a study. The futility analysis indicated that the clinical benefit of cobiprostone was insufficient to support continuation of the study.

 

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 11, 2016, as amended. The financial information as of September 30, 2016 and for the nine months ended September 30, 2016 and 2015 is unaudited. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments or accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or for a full fiscal year.

 

 9 
 

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries: Sucampo AG (SAG) based in Zug, Switzerland, through which the Company conducts certain of its worldwide and European operations; Sucampo Pharma, LLC (SPL) based in Osaka, Japan, through which the Company conducts its Asian operations; R-Tech Ueno, Ltd., based in Tokyo, Japan, through which the Company conducts manufacturing and certain development operations; Sucampo Pharma Americas LLC (SPA), based in Rockville, Maryland, through which the Company conducts its North American operations; and Sucampo Pharma Europe, Ltd. (SPE), based in Oxford, United Kingdom. All inter-company balances and transactions have been eliminated.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

 

2.Summary of Significant Accounting Policies

 

Restricted Cash

As of September 30, 2016, restricted cash consisted of $25.2 million primarily related to the Credit Facility (see note 14); these funds will be held in a restricted account until at least $35 million of the Term Loans under the Credit Facility have been repaid or prepaid.

 

As of December 31, 2015, restricted cash consisted of $25.0 million related to the Credit Facility and $17.7 million related to the payment of the Ueno and Kuno Trust Notes (see note 13), which were settled on February 1, 2016, and $8.2 million related to the squeeze out of non-tendering R-Tech shareholders (see note 4), which was settled in January 2016.

 

Certain Risks, Concentrations and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents, restricted cash and receivables. The Company places its cash, cash equivalents and restricted cash with highly rated financial institutions. As of September 30, 2016 and December 31, 2015, approximately $1.8 million or 1.1%, and $5.9 million or 3.6%, respectively, of the Company’s cash, cash equivalents, and restricted cash were issued or insured by the United States government or other government agencies. The Company has not experienced any losses on these accounts related to amounts in excess of insured limits.

 

Revenues from Takeda, an unrelated party, accounted for 65.7% and 66.3% of the Company’s total revenues for the three months ended September 30, 2016 and 2015, respectively, and 65.6% and 60.4% for the nine months ended September 30, 2016 and 2015, respectively. Accounts receivable, unbilled accounts receivable and product royalties receivable from Takeda accounted for 82.6% and 78.1% of the Company’s total accounts receivable, unbilled accounts receivable and product royalties receivable at September 30, 2016 and December 31, 2015, respectively.

 

Revenues from another unrelated party, Mylan, accounted for 30.1% and 30.8% of the Company’s total revenues for the three months ended September 30, 2016 and 2015, respectively, and 29.6% and 36.7% for the nine months ended September 30, 2016 and 2015, respectively. The Company depends significantly upon collaborations with Takeda and Mylan, and its activities may be impacted if these relationships are disrupted.

 

Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments approximate their fair values based on their short maturities, independent valuations or internal assessments. The Company’s financial instruments include cash and cash equivalents, restricted cash, current and non-current investments, receivables, accounts payable, convertible notes receivable, collaboration obligation and accrued expenses. The carrying amounts of the Credit Facility notes payable at September 30, 2016 and December 31, 2015 approximated fair value and are classified as a Level 2 instrument.

 

Variable Interest Entities

The Company performs initial and on-going evaluations of the entities with which it has variable interests, such as equity ownership, in order to identify entities (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support or (ii) in which the equity investors lack an essential characteristic of a controlling financial interest. Such entities are classified as variable interest entities (VIEs). If an entity is identified as a VIE, the Company performs an assessment to determine whether the Company has both (i) the power to direct activities that most significantly impact the VIE’s economic performance and (ii) have the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, the Company is identified as the primary beneficiary of the VIE. As of September 30, 2016, CPP, in which the Company held a variable interest, was determined to be a VIE. See note 19 for additional information.

 

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Recent Accounting Pronouncements

In May 2014, the FASB issued authoritative guidance that sets forth a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance was originally scheduled to be effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2016, but in July 2015 the FASB voted to defer the effective date to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption is permitted, but not before the original effective date of December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company is currently evaluating the impact of this guidance on its results of operations, financial position and cash flows.

 

In April 2015, the FASB issued ASU Number 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct reduction from the face amount of the note. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years. ASU 2015-03 had no effect on the Company’s results of operations or liquidity.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, (ASU 2015-17). This new guidance requires businesses to classify deferred tax liabilities and assets on their balance sheets as noncurrent. Under existing accounting, a business must separate deferred income tax liabilities and assets into current and noncurrent. ASU 2015-17 was issued as a way to simplify the way businesses classify deferred tax liabilities and assets on their balance sheets. Public companies must apply ASU 2015-17 to fiscal years beginning after December 15, 2016. Companies must follow the requirements for interim periods within those fiscal years, but early adoption at the beginning of an interim or annual period is allowed for all entities. The Company has elected to early adopt the guidance and has applied the guidance on a prospective basis. The adoption had no impact on the Company’s consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the three and nine months ended September 30, 2016 and 2015.

 

In January 2016, the FASB issued Accounting Standards Update 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income (other than those accounted for under equity method of accounting). This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently assessing the impact of the adoption of this guidance on its consolidated financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), in which it provided new guidance related to accounting for leases. The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organizations' leasing activities. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, with early adoption permitted. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases and amounts previously recognized in accordance with the business combinations guidance for leases. The Company is currently evaluating its expected adoption method and the impact of this new standard on its consolidated financial statements and disclosures.

 

 11 
 

In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee Share Based Payment Accounting, which requires all of the tax effects related to share-based payments to be recorded through the income statement. The new guidance also removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable; instead, it is required to be recognized at the time of settlement, subject to normal valuation allowance considerations. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently assessing the impact of the adoption of this guidance on its consolidated financial statements and disclosures.

 

 

3.Net Income per Share

 

Basic net income per share is computed by dividing net income by the sum of the weighted average class A common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average common shares and potential dilutive common shares outstanding.

 

The computation of net income per share for the three and nine months ended September 30, 2016 and 2015 is shown below:

 

   Three Months Ended September 30,  Nine Months Ended September 30,
(In thousands, except per share data)  2016  2015  2016  2015
             
Net income  $8,092   $7,236   $3,203   $23,220 
                     
Basic net income per share:                    
Weighted average class A common shares outstanding   42,813    44,731    42,704    44,576 
Basic net income per share  $0.19   $0.16   $0.08   $0.52 
                     
Diluted net income per share:                    
Weighted average class A common shares outstanding   42,813    44,731    42,704    44,576 
Assumed exercise of stock options under the treasury stock method   630    1,578    630    1,363 
    43,443    46,309    43,334    45,939 
Diluted net income per share  $0.19   $0.16   $0.07   $0.51 

 

The following securities were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive for the three and nine months ended September 30, 2016 and 2015:

 

   Three Months Ended September 30,  Nine Months Ended June 30,
(In thousands)  2016  2015  2016  2015
Employee stock options   2,410    273    2,410    884 

 

 

4.Acquisition of R-Tech

 

On October 20, 2015, the Company acquired approximately 98% of the outstanding shares of R-Tech Ueno, Ltd., a Japanese company (R-Tech). The Company acquired the remaining 2% of outstanding shares of R-Tech through a squeeze-out process under Japanese law on December 8, 2015. The total consideration for the acquisition was approximately $275 million. This transaction was accounted for under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of R-Tech were recorded as of the acquisition date at their respective fair values, and combined with those of the Company.

 

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The final allocation of the purchase price based upon estimated fair value of assets acquired and liabilities assumed is as follows:

 

(In thousands)   
Cash  $62,097 
Accounts receivable   8,299 
Inventory   37,563 
Other current assets   3,792 
Property, plant and equipment   2,796 
Other long term assets   449 
Accounts payable and accrued liabilities   (11,598)
Income tax payable   (5,025)
Other liabilities, current   (3,282)
Deferred tax liability, net   (63,365)
Other liabilities, long term   (9,347)
R-Tech shares of Sucampo stock (treasury stock)   43,956 
Total fair value of tangible assets acquired and liabilities assumed   66,335 
Acquired in-process research and development   6,200 
Acquired intangible assets   134,600 
Goodwill   61,618 
Total purchase price  $268,753 
      
Total purchase price   268,753 
Settlement of net receivable from pre-existing relationship   6,364 
Total consideration  $275,117 
Acquisition, net of acquired cash   161,187 
Acquired cash   62,097 
Purchase of treasury stock   43,956 
Squeeze out liability for non-tendering R-Tech shareholders   7,668 
Other   209 
Total consideration  $275,117 

 

The following unaudited pro forma information is presented as if the acquisition had occurred on January 1, 2015, and combines the historical results of operations of the Company and R-Tech for the three and nine months ended September 30, 2015.

 

   Three Months Ended September 30, 2015  Nine Months Ended September 30, 2015
(In thousands)      
Pro forma revenue  $43,529   $129,529 
Pro forma net income (loss)   1,301    (3,036)

 

 

5.Segment Information

 

The Company has one operating segment, which is the development and commercialization of pharmaceutical products.

 

Summarized product category and geographic information is shown in the tables below.

 

Product Category Information

Revenues for product categories are attributed based on the following categories.

 

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Product royalty revenue represents royalty revenue earned on the net sales of AMITIZA in North America. Product sales revenue represents drug product net sales of AMITIZA in North America, Japan and Europe and drug product net sales of RESCULA in Japan. Research and development revenue represents funded development work primarily related to AMITIZA. Contract and collaboration revenue represents the amortization of up-front payments under the North America Takeda Agreement and release of the collaboration obligation under the Global Takeda Agreement (see note 15).

 

Company revenues by product category for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

   Three Months Ended September 30,  Nine Months Ended September 30,
(In thousands)  2016  2015  2016  2015
Product royalty revenue  $20,771   $19,328   $56,222   $51,209 
Product sales revenue - AMITIZA   29,132    10,286    79,253    35,930 
Product sales revenue - RESCULA   2,422    736    7,285    748 
Research and development revenue   3,172    2,714    9,971    7,468 
Contract and collaboration revenue   2,376    384    4,301    2,457 
Total  $57,873   $33,448   $157,032   $97,812 

 

Geographical Information

Revenues are attributable to countries based on the location of the customer. The Company operates a manufacturing facility in Japan that supplies products to customers as well as the Company’s subsidiaries in other countries. The sales from the manufacturing operations to other countries are included in the net sales of the country in which the manufacturing location is based. The intersegment portions of such sales are excluded to derive consolidated revenues. The Company’s country of domicile is the United States.

 

Company revenues by geographic location for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

   Three Months Ended September 30,  Nine Months Ended September 30,
(In thousands)  2016  2015  2016  2015
United States  $34,911   $22,919   $98,073   $59,850 
Japan  $19,839   $10,295    54,004    35,952 
Rest of the world  $3,123   $234    4,955    2,010 
Total  $57,873   $33,448   $157,032   $97,812 

 

The Company’s long-lived assets by geographic location where located on September 30, 2016 and December 31, 2015 were as follows:

 

(In thousands)  September 30,
2016
  December 31,
2015
United States  $3,192   $3,105 
Japan   3,334    3,232 
Rest of the world   37    56 
Total  $6,563   $6,393 

 

 

6.Fair Value measurements

 

The Company performs fair value measurements in accordance with the Financial Accounting Standards Board’s (FASB) guidance for fair value measurements and disclosures, which defines fair value as the exchange price that would be received for selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is established which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company classifies its investments into the following categories based on the three levels of inputs used to measure fair value:

 

 14 
 

Level 1: quoted prices in active markets for identical assets or liabilities,

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company has elected the fair value option on its investment in CPP; as such, it is measured at fair value on a recurring basis. As of September 30, 2016, the fair value of the convertible note is $5.2 million using level 3 inputs (see note 19) provided by a valuation specialist using unobservable market level inputs and assumptions that include accrued interest and prepayment assumptions. The Company re-evaluates the fair value on a quarterly basis. Changes in the fair value can result from adjustments to the market level inputs and assumptions. The election was made upon the acquisition of the financial asset and cannot be revoked. The changes in fair value are recorded in current earnings within Other Income. As of September 30, 2016, there were no changes in the fair value of the note recorded in earnings related to the convertible note received from CPP. There were no other financial instruments measured at fair value on a recurring basis as of September 30, 2016.

 

 

7.Restructuring

 

In December 2015, the Company adopted a plan to restructure certain of its operations and to consolidate certain functions in the Company’s corporate headquarters located in Rockville, Maryland and in the Company’s Japanese subsidiaries. During the nine months ended September 30, 2016, the Company recorded pretax charges of approximately $1.9 million in connection with these restructuring activities. The restructuring plan primarily included headcount reductions in connection with the ongoing integration of R-Tech (see note 4). These costs are reflected within operating expenses and are detailed below:

 

   Incurred during the nine months ended September 30, 2016
(In thousands)   
Termination benefits  $1,809 
Asset impairments   86 
Contract and other costs   24 
Total  $1,919 

 

As of September 30, 2016, a restructuring accrual of $1.0 million for termination benefits was included in accrued liabilities. The following table summarizes the accrued restructuring costs at September 30, 2016.

 

(In thousands) 

Accrued

Restructuring Costs
September 30, 2016

Balance at December 31, 2014  $- 
Expenses incurred   953 
Amounts paid   (102)
Balance at December 31, 2015  $851 
Expenses incurred  $1,809 
Amounts paid   (1,669)
Foreign currency translation adjustment   14 
Balance at September 30, 2016  $1,005 

 

The Company expects to record additional restructuring charges in the final quarter of 2016 related to the ongoing integration of R-Tech. The Company has incurred total restructuring charges under this plan of $2.9 million through September 30, 2016.

 

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8.Inventory

 

Inventories are valued under a weighted average costing method and are stated at the lower of cost or net realizable value. Inventories consist of raw materials, work-in-process and finished goods. The Company’s inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs. In connection with the acquisition of R-Tech, all inventory held by R-Tech was stepped-up in fair value to $37.6 million as of the acquisition date. As of September 30, 2016 and December 31, 2015, the remaining balance of inventory step-up was zero and $14.3 million, respectively.

 

Inventory consisted of the following at September 30, 2016 and December 31, 2015:

 

(In thousands)  September 30,
2016
  December 31,
2015
Raw materials  $2,370   $5,554 
Work in process   20,380    26,926 
Finished goods   1,452    641 
Total  $24,202   $33,121 

 

 

9.Intangible Assets

 

Intangible assets by major class consisted of the following as of September 30, 2016 and December 31, 2015:

 

   September 30, 2016  December 31, 2015
(In thousands)  Weighted average life
(in months)
  Carrying amount  Weighted average life
(in months)
  Carrying amount
Amortized intangible assets                    
Patent and license rights   63   $10,513    72   $10,513 
Manufacturing know-how   68    134,600    76    134,600 
Accumulated amortization        (27,382)        (8,463)
Impairment losses        (5,651)        (5,651)
Foreign currency translation adjustments        22,806         (684)
Total amortized intangible assets       $134,886        $130,315 
                     
Unamortized intangible assets                    
In-process research and development       $-        $6,171 
Goodwill        73,022         60,937 
Total unamortized intangible assets       $73,022        $67,108 
                     
Total intangible assets       $207,908        $197,423 

 

The changes in intangible assets for the nine months ended September 30, 2016 are as follows:

 

(In thousands)  Intangibles  Goodwill  In-process research & development
Balance at December 31, 2015  $130,315   $60,937   $6,171 
Additions/(Impairments)   -    455    (7,286)
Amortization   (18,907)   -    - 
Foreign currency translation adjustment   23,478    11,630    1,115 
Balance at September 30, 2016  $134,886   $73,022   $- 

 

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During the quarter ended September 30, 2016, the Company discontinued its VAP-1 Inhibitor RTU-1096 development program and changed the indication for its VAP-1 Inhibitor RTU-009 program. The Company considered the discontinuance and change in indication as a potential indicator of impairment of the related in-process research and development (IPR&D) asset. Accordingly, the Company performed an interim assessment, and as a result, recorded an impairment charge of $7.3 million during the quarter ended September 30, 2016, which represented the entire carrying value of the IPR&D asset. This charge is classified in the Company’s statement of operations as impairment of in-process research and development.

 

 

10.Accrued Expenses and Other Current Liabilities

 

Accrued expenses consisted of the following at September 30, 2016 and December 31, 2015:

 

(In thousands)  September 30,
2016
  December 31,
2015
Research and development costs  $8,142   $3,843 
Employee compensation   3,447    4,860 
Restructuring   1,005    851 
Legal, consulting & other professional expenses   821    428 
Other accrued expenses   965    904 
Total  $14,380   $10,886 

 

Other current liabilities consisted of the following at September 30, 2016 and December 31, 2015:

 

(In thousands)  September 30,
2016
  December 31,
2015
Indirect taxes payable  $3,029   $5,963 
Squeeze out liability for non-tendering R-Tech shareholders   249    7,668 
Deferred revenue   813    676 
Other liabilities   714    508 
Total  $4,805   $14,815 

 

 

11.Other Liabilities

 

Other liabilities consisted of the following at September 30, 2016 and December 31, 2015:

 

(In thousands)  September 30,
2016
  December 31,
2015
Deferred grants  $750   $9,604 
Unrecognized tax benefits   3,694    3,061 
Deferred leasehold incentive   1,618    1,715 
Defined benefit obligation   972    949 
Other liabilities   1,257    414 
Total  $8,291   $15,743 

 

At December 31, 2015, deferred grants consisted of a $9.3 million grant from the Japan Agency for Medical Research & Development (AMED), for use in developing unoprostone-related medicine for Retinitis Pigmentosa (see below), and a $300,000 government grant from Montgomery County, Maryland related to the move of the Company’s headquarters. Both grants may have to be repaid if certain conditions are not met.

 

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Under its arrangement with AMED, R-Tech received ¥1.05 billion to support the development of unoprostone. This grant would be repayable in full if R-Tech terminated the development of unoprostone for commercial or other reasons, but only in part if such termination was due to scientific failure of the compound. R-Tech discontinued the development of unoprostone in early 2016. At the time of the Company’s acquisition of R-Tech, AMED’s position, on which we relied when accounting for this liability at the time of the R-Tech acquisition, was that the full amount of the grant would be repayable by R-Tech because such termination was for convenience, rather than due to a scientific failure of the compound. In September 2016, however, AMED agreed to waive the repayment of all but approximately ¥105 million (approximately $1.0 million) of the grant, representing 10% of the funds received by R-Tech from AMED through the end of March 2014. The Company recognized approximately $9.3 million in other income for the three and nine months ended September 30, 2016 because of this grant forgiveness.

 

 

12.Commitments and Contingencies

 

Operating Leases

The Company leases office space in the United States, Switzerland and Japan under operating leases through 2027. Total future minimum, non-cancelable lease payments under operating leases are as follows:

 

(In thousands)  September 30,
2016
2016  $576 
2017   1,186 
2018   1,323 
2019   1,048 
2020   974 
2021   3,188 
Total minimum lease payments  $8,295 

 

Rent expense for all operating leases was $650,000 and $482,000 for the three months ended September 30, 2016 and 2015, respectively, and $2.0 million and $1.1 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Numab Commitment

In July 2016, Numab repaid all outstanding amounts under its loan from Zurcher Kantonalbank, which was guaranteed by the Company under the Numab Agreement (see note 13). As a result, the Company’s liability associated with the Numab Agreement guarantee has been released.

 

 

13.Related Party Transactions

 

R-Tech Ueno, Ltd.

Before the R-Tech acquisition on October 20, 2015, R-Tech was a related party through common ownership. Prior to the R-Tech acquisition, the Company did not own manufacturing facilities. Instead, the Company contracted with R-Tech as the sole manufacturer of the Company’s products to produce AMITIZA and RESCULA. The Company had entered into multiple exclusive supply arrangements with R-Tech and had granted to R-Tech the exclusive right to manufacture and supply AMITIZA and other products and compounds to the Company to meet its commercial and clinical requirements.

 

The Company received upfront, development and milestone payments under these agreements totaling $9.0 million through October 20, 2015. The Company recorded the following expenses under all of its agreements with R-Tech for the three and nine months ended September 30, 2015:

 

(In thousands)  Three Months Ended September 30, 2015  Nine Months Ended September 30, 2015
Clinical supplies  $106   $143 
Other research and development services   258    347 
Commercial supplies   4,860    18,038 
   $5,224   $18,528 

 

The Company recognized $356,000 and $829,000 of revenue relating to its agreements with R-Tech for the three and nine months ended September 30, 2015, respectively, which was recorded as contract and collaboration revenue in the accompanying condensed consolidated statements of operations and comprehensive income.

 

 18 
 

Numab AG

In September 2011, the Company entered into a loan guarantee and development agreement (the Numab Agreement) with Numab AG (Numab). Under the terms of the Numab Agreement, the Company provided Numab with up to CHF 5.0 million as collateral and served as guarantor for a loan to Numab from a third party, Zurcher Kantonalbank. Following the payment of the first success fee during the first quarter of 2013, this amount was reduced to CHF 2.2 million, or approximately $2.2 million, as of December 31, 2015. As of December 31, 2015, collateral of CHF 2.2 million had been deposited by the Company and Numab had utilized CHF 1.5 million of its loan facility, or approximately $1.5 million. At December 31, 2015, the Company had recorded a guarantee liability of $202,000 in collateral callable to meet a potential loan default by Numab.

 

In July 2016, Numab repaid all outstanding amounts under its loan from Zurcher Kantonalbank, which was guaranteed by the Company under the Numab Agreement. As a result, the Company’s liability associated with the Numab Agreement guarantee has been released, and all deposited collateral returned.

 

Subordinated Unsecured Promissory Notes

In connection with the SAG acquisition in 2010, the Company issued subordinated unsecured promissory notes (Notes) to the Ueno Trust and Kuno Trust, former shareholders of SAG. The Ueno Trust and Kuno Trust are considered related parties. Each of the Notes was issued with an initial principal balance of approximately $25.9 million, or approximately $51.9 million in the aggregate. The interest rate for the Notes was the sum of the London Interbank Offered Rate, or LIBOR, plus 4.0%, and was reset on December 1, 2015 to 4.7%. On February 1, 2016, the Notes were paid in full.

 

 

14.Credit Facility and Notes Payable

 

On October 16, 2015, the Company entered into a Credit Agreement (Credit Facility) with Jefferies Financing LLC. Term Loans under the Credit Facility bear interest, at the Company’s option, at the Adjusted Eurodollar Rate plus 7.25% or the Adjustable Base Rate plus 6.25%. The average interest rate on the notes payable for the nine months ending September 30, 2016 was 8.43%. The Company was in compliance with all covenants under the Credit Facility as of September 30, 2016.

 

The Company’s debt is subject to the fair value disclosure requirements as discussed in note 2. The carrying amounts of the notes payable at September 30, 2016 and December 31, 2015 approximated fair value and are classified as a Level 2 instrument.

 

 

15.Collaboration Obligation

 

Due to the signing of the Global Takeda Agreement, the Company received an upfront payment from Takeda of $14.0 million in 2014, of which the Company is obligated to reimburse Takeda for the first $6.0 million in developmental expenses incurred by Takeda. As of September 30, 2016 and December 31, 2015, the collaboration obligation was $1.4 million and $5.6 million, respectively.

 

 

16.Collaboration and License Agreements

 

North America Takeda Agreement

The following table summarizes the cash streams and related revenue recognized or deferred under the North America Takeda Agreement for the nine months ended September 30, 2016:

 

 19 
 

(In thousands)  Amount Deferred at December 31,
2015
  Cash Received for the Nine Months Ended September 30,
2016
  Revenue Recognized for the Nine Months Ended September 30,
2016
  Change in Receivables for the Nine Months Ended September 30,
2016
  Foreign Currency Effects for the Nine Months Ended September 30,
2016
  Amount Deferred at September 30,
2016
                   
Product royalty revenue  $-   $58,027   $56,005   $(2,022)  $-   $- 
                               
Product sales revenue  $-   $34,382   $31,953   $(501)  $(1,928)  $- 
                               
Research and development revenue:                              
Reimbursement of research and development expenses  $-   $9,378   $9,964   $586   $-   $- 
                               
Collaboration revenue:                              
Up-front payment associated with the Company's obligation to participate in joint committees  $736   $-   $110   $-   $-   $626 

 

Japan Mylan Agreement

The following table summarizes the cash streams and related revenue recognized or deferred under the Japan Mylan Agreement for the nine months ended September 30, 2016:

 

(In thousands)  Amount Deferred at December 31,
2015
  Cash Received for the Nine Months Ended September 30,
2016
  Revenue Recognized for the Nine Months Ended September 30,
2016
  Change in Receivables for the Nine Months Ended September 30,
2016
  Foreign Currency Effects for the Nine Months Ended September 30,
2016
  Amount Deferred at September 30,
2016
                   
Product sales revenue  $-   $49,276   $46,509   $2,122   $(4,889)  $- 
                               
Collaboration revenue:                              
Up-front payment associated with the Company's obligation to participate in joint committees  $416   $-   $29   $-   $95   $482 

 

Japan Santen Agreement

The Company has recorded RESCULA product sales revenue for the three and nine months ended September 30, 2016 of approximately $2.3 million and $7.1 million, respectively, under its distribution agreement with Santen Pharmaceutical Co., Ltd. for the commercialization of RESCULA in Japan.

 

 

17.Stock Option Plans

 

A summary of employee stock option activity for the nine months ended September 30, 2016 under the Company’s Amended and Restated 2001 Stock Incentive Plan is presented below:

 

 20 
 

2001 Stock Incentive Plan  Shares  Weighted Average Exercise Price Per Share  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value
Options outstanding, December 31, 2015   37,400   $10.00           
Options exercised   (20,400)   10.00           
Options expired   (17,000)   10.00           
Options outstanding, September 30, 2016   -         -   $- 
Options exercisable, September 30, 2016   -         -   $- 
Options vested and expected to vest, September 30, 2016   -         -   $- 

 

A summary of employee stock option activity for the nine months ended September 30, 2016 under the Company’s Amended and Restated 2006 Stock Incentive Plan is presented below:

 

2006 Stock Incentive Plan  Shares  Weighted Average Exercise Price Per Share  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value
Options outstanding, December 31, 2015   4,440,608   $9.37           
Options granted   1,266,050    13.60           
Options exercised   (280,506)   5.20           
Options forfeited   (90,918)   13.16           
Options expired   (59,365)   14.53           
Options outstanding, September 30, 2016   5,275,869    10.49    8.07   $14,796,907 
Options exercisable, September 30, 2016   2,060,515    8.45    6.96   $9,134,458 
Options vested and expected to vest, September 30, 2016   2,061,303    8.45    6.96   $9,140,683 

 

The weighted average grant date fair value of options granted during the nine months ended September 30, 2016 and the year ended December 31, 2015 was $7.10 and $9.45, respectively.

 

A summary of employee stock option activity for the nine months ended September 30, 2016 under the Company’s 2016 Equity Incentive Plan, or the 2016 Plan, is presented below:

 

2016 Equity Incentive Plan  Shares  Weighted Average Exercise Price Per Share  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value
Options outstanding, December 31, 2015   -   $-           
Options granted   41,164    13.55           
Options outstanding, September 30, 2016   41,164    13.55    1.12   $9,926 
Options exercisable, September 30, 2016   -    -    -   $- 
Options vested and expected to vest, September 30, 2016   -    -    -   $- 

 

A summary of employee restricted stock units activity for the nine months ended September 30, 2016 under the Company’s 2016 Plan is presented below:

 

 21 
 

2016 Equity Incentive Plan  Shares  Weighted Average Grant-Date Fair Value
Nonvested Restricted Stock Units, December 31, 2015   -   $- 
Restricted Stock Units granted   63,700    12.29 
Restricted Stock Units vested   -      
Restricted Stock Units forfeited   -      
Nonvested Restricted Stock Units, September 30, 2016   63,700    12.29 

 

Employee Stock Purchase Plan

Under the Company’s 2006 Employee Stock Purchase Plan, the Company received $46,262 and $36,324 upon employees’ purchase of 4,932 and 2,502 shares of class A common stock during the three months ended September 30, 2016 and 2015, respectively, and $174,572 and $74,414 upon employees’ purchase of 18,719 and 5,442 shares of class A common stock during the nine months ended September 30, 2016 and 2015, respectively.

 

Accumulated Other Comprehensive Income

The following table details the accumulated other comprehensive income activity for the nine months ended September 30, 2016:

 

(In thousands)  Foreign currency translation adjustments  Unrealized income on investments, net of tax effect  Unrealized income (loss) on pension benefit obligation  Accumulated other comprehensive income
Balance January 1, 2016  $14,243   $42   $(873)  $13,412 
Other comprehensive income before reclassifications   40,890    -    37    40,927 
Amounts reclassified from accumulated other comprehensive loss   -    -    -    - 
Balance September 30, 2016  $55,133   $42   $(836)  $54,339 

 

 

18.Income Taxes

 

The provision for income taxes is based upon the estimated annual effective tax rates for the year applied to the current period income before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company’s operating subsidiaries are exposed to statutory effective tax rates ranging from zero to approximately 40%. Fluctuations in the distribution of pre-tax income among the Company’s operating subsidiaries can lead to fluctuations of the effective tax rate in the condensed consolidated financial statements. In the three-month periods ended September 30, 2016 and 2015, the actual effective tax rates were 47.8% and 37.4%, respectively, and for the nine-month periods ended September 30, 2016 and 2015, the actual effective tax rates were 57.4% and 32.1%, respectively.

 

The Company assesses uncertain tax positions in accordance with ASC 740-10 Accounting for Uncertainties in Tax. As of September 30, 2016, the Company’s net unrecognized tax benefits totaled approximately $3.7 million. Of this balance, $1.8 million would favorably impact the Company’s effective tax rate in the periods if they are recognized. Management has not identified any material uncertain tax positions that are reasonably likely to be released during the next 12 months due to lapse of statutes of limitations or settlements with tax authorities.

 

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S., Switzerland and Japan, as well as in various other state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. Currently tax years 2011 to 2015 remain open and subject to examination in the major tax jurisdictions in which tax returns are filed. The tax years 2009-2011 were examined by the U.S. tax authorities and resulted in no tax adjustments.

 

 22 
 
19.Investment in CPP

 

On January 9, 2016, the Company entered into a Securities Purchase Agreement and an Option and Collaboration Agreement with Cancer Prevention Pharmaceuticals (CPP) for the development and commercialization of CPP-1X/sulindac combination.

 

The Company made a $5.0 million loan to CPP in exchange for a convertible note. The convertible note bears interest at the rate of 5% per annum and matures on January 31, 2019 unless earlier converted or prepaid. The convertible note is automatically convertible into securities of CPP, subject to certain limitations, in the event CPP consummates a future financing with aggregate proceeds at least $10.0 million, exclusive of any investment by the Company, whether through a public offering or a private offering (a Qualified Financing). Depending on the timing of the Qualified Financing, the convertible note will automatically convert into the same securities issued in the Qualified Financing at a 10% to 20% discount to the lowest issuance price of the securities in the Qualified Financing. The Company has also agreed to purchase up to $5.0 million of CPP’s securities in any such Qualified Financing.

 

Under the terms of an Option and Collaboration Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/Sulindac combination product in North America. This product is currently in a Phase 3 clinical trial for the treatment of familial adenomatous polyposis (FAP). Target enrollment in the study was achieved in April 2016 and the trial is expected to conclude in 2018. The Company will pay CPP an option fee of $7.5 million, payable in two tranches. The first tranche of $3.0 million was paid in January 2016 and was recorded as research and development expense. The second tranche of $4.5 million is due upon achievement of certain results of the ongoing feasibility study, which are expected in early 2017. CPP will complete the ongoing Phase 3 trial under the oversight of a joint steering committee between CPP and the Company. Upon exercise of its exclusive option, the Company would negotiate an exclusive license to develop and commercialize the product in North America for all indications. In connection with the exercise of the option right, the subsequent execution of a license agreement and the development and commercialization of the product, the Company would be obligated to pay CPP up to an aggregate of $190.0 million of specified clinical development and sales milestones. Under the terms of the license, the Company and CPP would share equally in net profits from the sale of licensed products.

 

The Company has elected the fair value option on the convertible note received from CPP due to the nature of the financial characteristics of the investment. As of September 30, 2016, the fair value of the convertible note is $5.2 million using level 3 inputs.

 

CPP is considered to be a VIE with respect to the Company. It has been determined that the power to direct the activities that most significantly impact CPP’s economic performance is held by the board of directors of CPP. The Company does not have a representative on CPP’s board and does not have the right to appoint or elect such a representative. Therefore, the Company is not the primary beneficiary of CPP, and the entity is not consolidated with the financial statements of the Company. The company’s maximum exposure to loss as a result of its involvement with CPP is $5.2 million as of September 30, 2016, which is the investment in the convertible security of $5.2 million. As of June 30, 2016, CPP had total assets of $7.1 million and total liabilities of $20.5 million.

 

 23 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Quarterly Report on Form 10-Q contains forward-looking statements regarding Sucampo Pharmaceuticals, Inc. and our business, financial condition, results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our other filings with the Securities and Exchange Commission (SEC) including our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which we filed with the SEC on March 11, 2016, as subsequently amended. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Form 10-Q and with our consolidated financial statements and related notes for the year ended December 31, 2015 which are included in our Annual Report on Form 10-K.

 

Overview

 

Sucampo Pharmaceuticals, Inc., (Company) is a global biopharmaceutical company focused on developing, identifying, acquiring and bringing to market innovative medicines that meet unmet medical needs. Our primary focus areas are gastroenterology, ophthalmology, and oncology-related disorders.

 

We currently generate revenue mainly from product sales, product royalties, development milestone payments, and reimbursements for clinical development activities. We expect to continue to incur significant expenses for the next several years as we continue our research and development activities, seek additional regulatory approvals and additional indications for our approved products and other compounds and seek strategic opportunities for in-licensing new products and product candidates.

 

Our operations are conducted through subsidiaries based in the United States (U.S.), Japan and Switzerland. We operate as one segment, which focuses on the development and commercialization of pharmaceutical products.

 

AMITIZA (lubiprostone)

 

United States and Canada

AMITIZA is marketed in the U.S. for three gastrointestinal indications under a collaboration and license agreement (North America Takeda Agreement) with Takeda Pharmaceutical Company Limited (Takeda). These indications are chronic idiopathic constipation (CIC) in adults, irritable bowel syndrome with constipation (IBS-C) in adult women and opioid-induced constipation (OIC) in adults suffering from chronic non-cancer related pain. Under the North America Takeda Agreement, we are primarily responsible for clinical development activities, while Takeda is responsible for commercialization of AMITIZA in the U.S. and Canada. Takeda is required to provide a minimum annual commercial investment during the current term of the North America Takeda Agreement and may reduce the minimum annual commercial investment when a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for CIC in adults. In October 2014, we signed an amendment (Takeda Amendment) to the North America Takeda Agreement, which among other things, extended the term of the North America Takeda Agreement beyond December 2020. During the extended term beginning in January 2021, we will share with Takeda the annual net sales revenue on branded AMITIZA products. We have also partnered with Par Pharmaceuticals, Inc. (Par) and Dr. Reddy’s Laboratories, Ltd. (Dr. Reddy’s) in connection with the settlement of patent litigation in the U.S. related to our AMITIZA (lubiprostone) 8 mcg and 24 mcg soft gelatin capsule products. Under our agreement with Par, we granted Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances. Beginning on January 1, 2021, Par will split with us the gross profits of the licensed products sold during the term of the agreement, which continues until each of our related patents has expired. Under our agreement with Dr. Reddy’s, we granted Dr. Reddy’s a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA. This license does not begin until more than six years from today’s date, or earlier under certain circumstances. Dr. Reddy’s will pay to us a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and ends when all of our related patents have expired. In the event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, we have agreed to supply such product under the terms of a manufacturing and supply agreement at a negotiated price.

 

 24 
 

Japan

In Japan, AMITIZA is the only prescription medicine for chronic constipation, excluding constipation caused by organic diseases, and is marketed under a license, commercialization and supply agreement (Japan Mylan Agreement) originally entered into with Abbott Laboratories, Inc. (Abbott). In February 2015, Mylan purchased Abbott’s non-U.S. developed markets specialty and branded generics business, as a result of which Mylan acquired the rights to commercialize AMITIZA in Japan. We did not experience any significant changes in the commercialization of AMITIZA in Japan as a result of the transfer of the Japan Mylan Agreement from Abbott to Mylan.

 

People’s Republic of China

In May 2015, we entered into an exclusive license, development, commercialization and supply agreement (China Gloria Agreement) with Harbin Gloria Pharmaceuticals Co., Ltd. (Gloria) for AMITIZA in the People’s Republic of China. We will be the exclusive supplier of AMITIZA to Gloria at an agreed upon supply price. Under the China Gloria Agreement, Gloria is responsible for all development activities and costs, as well as commercialization and regulatory activities, for AMITIZA in the People’s Republic of China. Upon entering into the China Gloria Agreement, we received an upfront payment of $1.0 million. In June 2015, the China Food and Drug Administration accepted an Investigational New Drug (IND) application for a pivotal trial of AMITIZA in patients with CIC, as a result of which we received an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received and recognized as revenue through June 2015, we are eligible to receive an additional payment in the amount of $1.5 million upon the occurrence of a specified regulatory or commercial milestone event.

 

Other Global Markets

In October 2014, we entered into an exclusive license, development, commercialization and supply agreement (Global Takeda Agreement) for lubiprostone with Takeda. Under the Global Takeda Agreement, Takeda develops and markets AMITIZA globally except in the U.S., Canada, Japan and the People’s Republic of China. We supply Takeda with the clinical and commercial product at a negotiated price. Takeda currently markets AMITIZA for CIC and OIC in Switzerland and currently markets AMITIZA for CIC in the U.K. Takeda became the marketing authorization holder in Switzerland in April 2015, in the United Kingdom (U.K.), Austria, Belgium, Germany, Netherlands, Ireland, Luxembourg and Spain during 2016, and is expected to become the marketing authorization holder in Italy during the last quarter of 2016

 

Before the execution of the Global Takeda Agreement, we retained full rights to develop and commercialize AMITIZA for the rest of the world’s markets outside of the U.S., Canada and Japan. In the U.K., we received approval in September 2012 from the Medicines and Healthcare Products Regulatory Agency for the use of AMITIZA to treat CIC. We made AMITIZA available in the U.K. in the fourth quarter of 2013. In July 2014, National Institute of Health and Care Excellence published the technology appraisal guidance recommending the use of AMITIZA in the treatment of CIC and associated symptoms in adults who have failed laxatives. In January 2015, we successfully completed the European mutual recognition procedure for AMITIZA for the treatment of CIC in select European countries, resulting in marketing authorizations in these countries.

 

In Switzerland, AMITIZA was approved to treat CIC in 2009. In 2012, we reached an agreement with the Bundesamt fur Gesundheit, (BAG), the Federal Office of Public Health in Switzerland, on a reimbursement price for AMITIZA in Switzerland, and began active marketing in the first quarter of 2013. In February 2014, the BAG revised several reimbursement limitations with which AMITIZA was first approved for reimbursement and inclusion in the Spezialitätenliste (SL) to allow all Swiss physicians to prescribe AMITIZA to patients who have failed previous treatments with at least two laxatives over a nine-month period. In July 2014, AMITIZA was approved for the treatment of OIC in chronic, non-cancer adult patients by the Swissmedic, the Swiss Agency for Therapeutic Products, and in October 2015, the BAG added this indication to the SL.

 

In October 2015, Takeda obtained approval of the clinical trial application (CTA) for AMITIZA for the treatment of CIC and IBS-C in Russia that was submitted in June 2015. In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and South Korea. Takeda initiated phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. A new drug application (NDA) for the treatment of CIC, IBS-C, and OIC was submitted in Israel in June 2015 and approved in July 2016, and an NDA for the same indications was submitted in Kazakhstan in December 2015. Additional NDA submissions have been made in Singapore in May 2016, and South Africa and Indonesia in June 2016; further submissions are planned in 2016 for Brazil, the Philippines, Malaysia, Thailand, Vietnam and the United Arab Emirates.

 

 25 
 

RESCULA (unoprostone isopropyl)

 

As part of the acquisition of R-Tech in October 2015, we acquired global rights to RESCULA, an ophthalmology product used to lower intraocular pressure. In the U.S., we ceased marketing RESCULA in the fourth quarter of 2014 and no product was made available after the March 2015 expiration date. In May 2015, we returned all licenses for unoprostone isopropyl to R-Tech. In June 2016, we completed the withdrawal of the marketing authorization for RESCULA in the U.S. RESCULA is being commercialized by Santen Pharmaceutical Co., Ltd in Japan, Dong-A Pharmaceutical, Co., Ltd in South Korea and Sinphar Pharmaceutical, Co., Ltd and Zuellig Pharma Inc. in Taiwan.

 

Product Pipeline

The table below summarizes the development status of our marketed products and key product candidates. The commercialization rights to lubiprostone have been licensed to Takeda on a global basis other than Japan and the People’s Republic of China, to Mylan for Japan, and to Gloria for the People’s Republic of China. Commercialization of each product candidate may occur after successful completion of clinical trials and approval from competent regulatory agencies. For CPP-1X/sulindac, we have an option to acquire an exclusive license to commercialize in North America.

 

 

 

 

 

 

 

 26 
 

  Country   Program Type   Target Indication   Development Phase   Next Milestone
 Lubiprostone (AMITIZA ®)        
  U.S.   Commercial   Chronic idiopathic constipation (CIC) adults of all ages   Marketed    _____
  U.S.   Commercial   Irritable bowel syndrome with constipation (adult women) (IBS-C)   Marketed    Initiate phase 4 study on higher dosage and with additional male subjects
  U.S.   Commercial   Opioid-induced constipation (OIC) in patients with chronic non-cancer pain   Marketed    _____
  U.S.   Clinical   Alternate (Sprinkle) formulation    In development   Initiate phase 3 trial in adults
  U.S.   Clinical   Pediatric functional constipation
(6 months - 6 years)
  Alternate (Sprinkle) formulation in development   Initiate phase 3 program
  U.S.   Clinical   Pediatric IBS-C
(6 years - 17 years)
  Alternate (Sprinkle) formulation in development   Initiate phase 3 program
  U.S. &
European Union
  Clinical   Pediatric functional constipation
(6 years - 17 years)
  Open label phase 3 trials ongoing   Complete open label phase 3 trials and submit sNDA
  Japan   Commercial   Chronic constipation   Marketed    _____
  Japan   Clinical   CIC adults, 12mcg capsule   CTN submitted   Initiate Phase 3 trial 
  Switzerland   Commercial   CIC-adults of all ages   Marketed    _____
  Switzerland   Commercial   OIC in patients with chronic non-cancer pain   Marketed    _____
  U.K.   Commercial   CIC-adults of all ages   Marketed    _____
  Canada   Clinical   CIC-adults of all ages   Received approval from Health Canada   Market in Canada
  China   Clinical   CIC-adults of all ages   IND accepted   Initiate CIC study
  European Union   Clinical   CIC-adults of all ages   Received national marketing approvals in Ireland, Germany, Austria, Belgium, the Netherlands, Luxembourg, Italy and Spain (where product is not yet launched)    Launch feasibility and planning under evaluation
  Israel   Commercial   CIC-adults of all ages   Received national marketing approval   Develop pricing and reimbursement assessments and, based on outcome, determine launch feasibility and plans
  Mexico   Clinical   CIC-adults of all ages   CTA Approved   Complete phase 3 trial
  Mexico   Clinical   IBS-C - adult women   CTA Approved   Complete phase 3 trial
  Mexico   Clinical   OIC in patients with chronic non-cancer pain   CTA Approved   Complete phase 3 trial
  Russia   Clinical   CIC-adults of all ages   CTA Approved   Complete phase 3 trial
  Russia   Clinical   IBS-C - adult women   CTA Approved   Complete phase 3 trial
  South Korea   Clinical   CIC-adults of all ages   CTA Approved   Complete phase 3 trial
  South Korea   Clinical   IBS-C - adult women   CTA Approved   Complete phase 3 trial
  South Korea   Clinical   OIC in patients with chronic non-cancer pain   CTA Approved   Complete phase 3 trial
                   
Unoprostone isopropyl (RESCULA®)        
  Japan
South Korea
  Commercial   Glaucoma and ocular hypertension   Marketed   _____
  Taiwan                
                   
RTU-009        
  Japan   Preclinical   Inflammation/immune-related disorder   Initiate IND-enabling studies   Initiate phase 1a trial
                   
CPP-1X/sulindac combination product        
  U.S.   Option   Familial adenomatous polyposis (FAP)   Phase 3   Complete phase 3 trial

 

 27 
 

Our Clinical Development Programs

 

Lubiprostone

 

Alternate Formulation

We are developing an alternate formulation of lubiprostone for both adult and pediatric patients who are unable to take or do not tolerate capsules and for naso-gastric tube fed patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work and we expect to initiate a phase 3 trial of the alternate formulation of lubiprostone in adults in the second half of 2016 and, if the trial is successful, to file an NDA in the U.S. for the alternate formulation for adults in the second half of 2017.

 

Pediatric Functional Constipation

The phase 3 program required to support an application for marketing authorization of lubiprostone for pediatric functional constipation comprises four clinical trials. The first two trials, one of which was recently completed, test the soft gelatin capsule formulation of lubiprostone in patients 6 to 17 years of age. The first of these trials is a pivotal 12-week, randomized, placebo-controlled trial which was initiated in December 2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term safety extension trial that was initiated in March 2014. In early November, we announced that the phase 3 trial of AMITIZA in pediatric functional constipation in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement (SBM) response. The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining, and stool consistency. In addition, in this study lubiprostone was well tolerated. We intend to review these results with the U.S. Food and Drug Administration (FDA) and other constituencies, and will announce next steps at the completion of this review. Additionally, after consultations with the FDA to better determine the doses and endpoints that should be studied, the phase 3 trial for the alternate formulation of lubiprostone described above will be followed in mid-2017 with a phase 3 program in patients 6 months to 6 years of age using the alternate formulation. Takeda has agreed to fund 67% of the costs, up to a cap, of this pediatric functional constipation program.

 

VAP-1 Inhibitors

 

RTU-1096

RTU-1096 is an oral compound recently under development for indications in auto-immune/inflammatory and immune-oncology diseases. In the first quarter of 2016, we completed a phase 1 trial in healthy individuals that evaluated the safety and pharmacokinetics of the compound. No significant safety issues were reported during the seven-day study. There was evidence of inhibition of systemic VAP-1 at all doses tested and the trial provided evidence of proof of mechanism. However, based on further assessment of the clinical data and on additional non-clinical data generated in the quarter, development of the compound has been discontinued.

 

RTU-009

RTU-009 is a pre-clinical stage, VAP-1 inhibitor that was planned to be studied in acute cerebral infarction. However, based on new non-clinical data and the decision to discontinue the development of RTU-1096, the development pathway has been revised to target chronic inflammatory conditions. The redirection of the RTU-009 program for chronic inflammatory conditions is in early preclinical development and as such has no perceived value. However, if the compound meets additional pre-specified non-clinical development goals we plan to complete IND-enabling studies and then determine how best to develop the molecule in the clinic.

 

CPP- 1X/Sulindac Combination Product

 

In January 2016, we entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals, Inc. (CPP) has granted us the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America. This product is currently in a Phase 3 clinical trial being conducted by CPP for the treatment of familial adenomatous polyposis (FAP). Under our agreement with CPP, we have the exclusive option to license this product for North America. There are currently no approved treatments for FAP.  The ongoing Phase 3 study is a 150-patient, three-arm, double-blind, randomized trial of the combination agent and the single agent comparators. Enrollment in the study has completed and the results from a Phase 3 futility analysis are expected to be available in the first half of 2017. The trial is expected to conclude in 2018. More information regarding our arrangement with CPP is set forth in Note 19 in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

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Cobiprostone

 

In April 2016, we discontinued development of cobiprostone for the treatment of proton pump inhibitor (PPI)-refractory non-erosive reflux disease (NERD) or symptomatic gastroesophageal reflux disease (sGERD), based on our analysis of top-line data from a Phase 2a study. While cobiprostone was observed to have significant benefit in some of the secondary parameters of this exploratory study, the trial did not meet its primary endpoints. In July 2016, we discontinued the development of an oral spray formulation of cobiprostone for the prevention of oral mucositis in patients that are undergoing radio chemotherapy for head and neck cancer, based on the results of a pre-specified futility analysis of the Phase 2a study. The futility analysis indicated that the clinical benefit of cobiprostone was insufficient to support continuation of the study.

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2016 and 2015

 

Revenues

The following table summarizes our revenues for the three months ended September 30, 2016 and 2015:

 

   Three Months Ended
September 30,
(In thousands)  2016  2015
Product royalty revenue  $20,771   $19,328 
Product sales revenue - AMITIZA   29,132    10,286 
Product sales revenue - RESCULA   2,422    736 
Research and development revenue   3,172    2,714 
Contract and collaboration revenue   2,376    384 
Total  $57,873   $33,448 

 

Total revenues were $57.9 million for the three months ended September 30, 2016, compared to $33.4 million for the three months ended September 30, 2015, an increase of $24.4 million or 73.0%.

 

Product royalty revenue

Product royalty revenue primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $20.8 million for the three months ended September 30, 2016 compared to $19.3 million for the three months ended September 30, 2015, an increase of $1.4 million or 7.5%. The increase was primarily due to higher Takeda reported AMITIZA net sales, which were driven by a mix of price and volume increases.

 

Product sales revenue

Product sales revenue represents drug product sales of AMITIZA in North America, Japan and Europe, and drug product sales of RESCULA in Japan. AMITIZA product sales revenue was $29.1 million for the three months ended September 30, 2016 compared to $10.3 million for the three months ended September 30, 2015, an increase of $18.8 million or 183.2%. The increase was primarily due to a $10.9 million increase in AMITIZA sales in North America as a result of the acquisition of R-Tech in October 2015, coupled with an increase in Mylan related product sales in Japan. RESCULA product sales revenue was $2.4 million for the three months ended September 30, 2016 compared to $736,000 for the three months ended September 30, 2015, an increase of $1.7 million or 229.1%. The increase was due to the acquisition of R-Tech in October 2015 and resulting revenue from sales of RESCULA under the Japan Santen Agreement.

 

Research and development revenue

Research and development revenue was $3.2 million for the three months ended September 30, 2016 compared to $2.7 million for the three months ended September 30, 2015, an increase of $0.5 million or 16.9%. The increase was due to increased activity on the advancement of pediatric and alternative formulation studies in the third quarter of 2016 for which we receive reimbursement from Takeda.

 

Contract and collaboration revenue

Contract and collaboration revenue was $2.4 million for the three months ended September 30, 2016 compared to $384,000 for the three months ended September 30, 2015, an increase of $2.0 million. The increase was primarily attributable to a higher release of the collaboration obligation under the Global Takeda Agreement in the third quarter of 2016.

 

 29 
 

Costs of Goods Sold

Costs of goods sold were $15.6 million for the third quarter of 2016 compared to $5.3 million for the same period in 2015, an increase of $10.3 million or 194.9%. The increase was primarily due to acquired intangible asset amortization of $6.7 million and the costs associated with increased product sales.

 

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended September 30, 2016 and 2015:

 

   Three Months Ended
September 30,
(In thousands)  2016  2015
Direct costs:          
Lubiprostone  $6,787   $4,559 
Cobiprostone   697    2,742 
CPP-1X   14    - 
RTU-1096   383    - 
Other   1,023    (586)
    8,904    6,715 
Indirect costs   1,072    1,653 
Total  $9,976   $8,368 

 

Total research and development expenses for the three months ended September 30, 2016 were $10.0 million compared to $8.4 million for the three months ended September 30, 2015, an increase of $1.6 million or 19.2%. The increase was primarily due to an increase in expenses related to the ongoing AMITIZA pediatric trials, the acquisition of R-Tech in October 2015 and the inclusion of the respective share of R-Tech’s research and development costs during the post-acquisition period.

 

Impairment of In-Process Research and Development

During the quarter ended September 30, 2016, the Company discontinued its VAP-1 Inhibitor RTU-1096 development program and changed the indication for its VAP-1 Inhibitor RTU-009 program. The Company considered the discontinuance and change in indication as a potential indicator of impairment of the related in-process research and development (IPR&D) asset. Accordingly, the Company performed an interim assessment, and as a result, recorded an impairment charge of $7.3 million during the quarter ended September 30, 2016, which represented the entire carrying value of the IPR&D asset. This charge is classified in the Company’s statement of operations as impairment of in-process research and development.

 

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended September 30, 2016 and 2015:

 

   Three Months Ended
September 30,
(In thousands)  2016  2015
Salaries, benefits and related costs  $2,588   $2,314 
Legal, consulting and other professional expenses   4,065    2,833 
Stock-based compensation   1,172    994 
Rent   501    390 
Insurance   213    185 
Pharmacovigilance   440    465 
Restructuring costs   208    - 
R-Tech integration/opportunity costs   605    - 
Other expenses   1,269    571 
Total  $11,061   $7,752 

 

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General and administrative expenses were $11.1 million for the three months ended September 30, 2016, compared to $7.8 million for the three months ended September 30, 2015, an increase of $3.3 million or 42.7%. The increase was primarily due to legal costs associated with the settlement of the Dr. Reddy’s matter as described in Part II, Item 1 of this report, restructuring costs and R-Tech integration/opportunity costs in 2016.

 

Selling and Marketing Expenses

Selling and marketing expenses were $696,000 for the three months ended September 30, 2016, compared to $385,000 for the three months ended September 30, 2015, an increase of $311,000 or 80.8%. The increase was the result of the inclusion of R-Tech RESCULA-related commercial activities in 2016, which was partially offset by the elimination of RESCULA sales and marketing activities in the U.S. during the 2016 period.

 

Non-Operating Income and Expense

The following table summarizes our non-operating income and expense for the three months ended September 30, 2016 and 2015:

 

   Three Months Ended
September 30,
(In thousands)  2016  2015
Interest income  $31   $62 
Interest expense   (5,899)   (243)
Other income, net   8,102    87 
Total  $2,234   $(94)

 

Interest expense was $5.9 million for the three months ended September 30, 2016, compared to $243,000 for the three months ended September 30, 2015, an increase of $5.7 million, due to interest payable in connection with our Credit Facility that was entered into in October 2015.

 

Other income, net was $8.1 million for the three months ended September 30, 2016, compared to $87,000 for the three months ended September 30, 2015, an increase of $8.0 million. The increase was primarily attributable to the recognition of $9.3 million in other income from the forgiveness of the AMED grant, partially offset by increases in unrealized and non-cash foreign exchange losses in 2016.

 

Income Taxes

We recorded an income tax provision of $7.4 and $4.3 million for the three months ended September 30, 2016 and 2015, respectively. The income tax provision for the three months ended September 30, 2016 primarily pertains to the impact of Subpart F deemed dividend rules in the U.S. The tax provision for the three months ended September 30, 2015 primarily pertained to pre-tax profits generated by our U.S., Japanese and Swiss subsidiaries.

 

The effective tax rate (ETR) for the third quarter of 2016 was 47.8%, compared to 37.4% in the same period of 2015. The ETR for the quarter was based on a projection of the full year rate. The increase in the ETR was due to the shifting of profits from lower tax jurisdictions to higher tax jurisdictions and the impact of Subpart F deemed dividend rules in the U.S.

 

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Comparison of Nine Months Ended September 30, 2016 and 2015

 

Revenues

The following table summarizes our revenues for the nine months ended September 30, 2016 and 2015:

 

   Nine Months Ended
September 30,
(In thousands)  2016  2015
Product royalty revenue  $56,222   $51,209 
Product sales revenue - AMITIZA   79,253    35,930 
Product sales revenue - RESCULA   7,285    748 
Research and development revenue   9,971    7,468 
Contract and collaboration revenue   4,301    2,457 
Total  $157,032   $97,812 

 

Total revenues were $157.0 million for the nine months ended September 30, 2016, compared to $97.8 million for the nine months ended September 30, 2015, an increase of $59.2 million or 60.5%.

 

Product royalty revenue

Product royalty revenue primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $56.2 million for the nine months ended September 30, 2016 compared to $51.2 million for the nine months ended September 30, 2015, an increase of $5.0 million or 9.8%. The increase was primarily due to higher Takeda reported AMITIZA net sales, which were driven by a mix of price and volume increases.

 

Product sales revenue

AMITIZA product sales revenue was $79.3 million for the nine months ended September 30, 2016 compared to $35.9 million for the nine months ended September 30, 2015, an increase of $43.3 million or 120.6%. The increase was primarily due to a $32.0 million increase in AMITIZA sales in North America as a result of the acquisition of R-Tech in October 2015, coupled with an increase in Mylan related product sales in Japan. RESCULA product sales revenue was $7.3 million for the nine months ended September 30, 2016 compared to $748,000 for the nine months ended September 30, 2015, an increase of $6.5 million. The increase was due to the acquisition of R-Tech in October 2015 and resulting revenue from sales of RESCULA under the Japan Santen Agreement.

 

Research and development revenue

Research and development revenue was $10.0 million for the nine months ended September 30, 2016 compared to $7.5 million for the nine months ended September 30, 2015, an increase of $2.5 million or 33.5%. The increase was due to increased activity on the advancement of pediatric and alternative formulation studies for the nine months ended September 30, 2016, for which we receive reimbursement from Takeda.

 

Contract and collaboration revenue

Contract and collaboration revenue was $4.3 million for the nine months ended September 30, 2016 compared to $2.5 million for the nine months ended September 30, 2015, an increase of $1.8 million or 75.1%. The increase was primarily attributable to a higher release of the collaboration obligation under the Global Takeda Agreement in the nine months ended September 30, 2016, partially offset by upfront and milestone payments of $1.5 million recognized in the nine months ended September 30, 2015 under the China Gloria Agreement.

 

Costs of Goods Sold

Costs of goods sold were $59.3 million for the nine months ended September 30, 2016 compared to $18.7 million for the same period in 2015, an increase of $40.6 million or 217.7%. The increase was primarily due to the amortization of the R-Tech inventory step up of $15.2 million and acquired intangible asset amortization of $18.9 million.

 

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Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended September 30, 2016 and 2015:

 

   Nine Months Ended
September 30,
(In thousands)  2016  2015
Direct costs:          
Lubiprostone  $18,139   $11,673 
Cobiprostone   5,736    5,914 
CPP-1X   2,942    - 
RTU-1096   2,530    - 
Other   2,884    162 
    32,231    17,749 
Indirect costs   3,349    4,536 
Total  $35,580   $22,285 

 

Total research and development expenses for the nine months ended September 30, 2016 were $35.6 million compared to $22.3 million for the nine months ended September 30, 2015, an increase of $13.3 million or 59.7%. The increase was primarily due to an increase in expenses related to the ongoing AMITIZA pediatric trials, costs associated with the CPP option, and the inclusion of R-Tech’s research and development costs during the post-acquisition period.

 

Impairment of In-Process Research and Development

During the quarter ended September 30, 2016, the Company discontinued its VAP-1 Inhibitor RTU-1096 development program and changed the indication for its VAP-1 Inhibitor RTU-009 program. The Company considered the discontinuance and change in indication as a potential indicator of impairment of the related in-process research and development (IPR&D) asset. Accordingly, the Company performed an interim assessment, and as a result, recorded an impairment charge of $7.3 million during the nine months ended September 30, 2016, which represented the entire carrying value of the IPR&D asset. This charge is classified in the Company’s statement of operations as impairment of in-process research and development.

 

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2016 and 2015:

 

   Nine Months Ended
September 30,
(In thousands)  2016  2015
Salaries, benefits and related costs  $8,407   $7,521 
Legal, consulting and other professional expenses   8,939    6,391 
Stock-based compensation   3,843    3,831 
Rent and facilities   1,657    1,001 
Insurance   688    511 
Pharmacovigilance   1,311    1,029 
Restructuring costs   1,895    - 
R-Tech integration/opportunity costs   2,206    - 
Other expenses   3,465    2,079 
Total  $32,411   $22,363 

 

General and administrative expenses were $32.4 million for the nine months ended September 30, 2016, compared to $22.4 million for the nine months ended September 30, 2015, an increase of $10.0 million or 44.9%. The increase is primarily due to the legal costs associated with the settlement of the Dr. Reddy’s matter, the inclusion of R-Tech general and administrative expenses, restructuring costs and R-Tech opportunity/integration costs in 2016.

 

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Selling and Marketing Expenses

Selling and marketing expenses were $2.1 million for the nine months ended September 30, 2016, compared to $1.6 million for the nine months ended September 30, 2015, an increase of $477,000 or 29.7%. The increase was the result of the inclusion of R-Tech RESCULA-related commercial activities in 2016, which was partially offset by the elimination of RESCULA sales and marking activities in the U.S. during the 2016 period.

 

Non-Operating Income and Expense

The following table summarizes our non-operating income and expense for the nine months ended September 30, 2016 and 2015:

 

   Nine Months Ended 
September 30,
(In thousands)  2016  2015
Interest income  $67   $155 
Interest expense   (18,141)   (784)
Other income, net   5,216    1,947 
Total  $(12,858)  $1,318 

 

Interest income was $67,000 for the nine months ended September 30, 2016, compared to $155,000 for the nine months ended September 30, 2015, a decrease of $88,000 or 56.8%.

 

Interest expense was $18.1 million for the nine months ended September 30, 2016, compared to $784,000 for the nine months ended September 30, 2015, an increase of $17.4 million, due to interest payable in connection with our Credit Facility that was entered into in October 2015.

 

Other income, net was $5.2 million for the nine months ended September 30, 2016, compared to $1.9 million for the nine months ended September 30, 2015, an increase of $3.7 million, or 167.9%. The increase was primarily attributable to the recognition of $9.3 million in other income from the forgiveness of the AMED grant, offset by increases in unrealized and non-cash foreign exchange losses in 2016.

 

Income Taxes

We recorded an income tax provision of $4.3 million and $11.0 million for the nine months ended September 30, 2016 and 2015, respectively. The tax provision for the nine months ended September 30, 2016 primarily pertains to the impact of Subpart F deemed dividend rules in the U.S. The tax provision for the nine months ended September 30, 2015 primarily pertains to pre-tax profits generated by our U.S., Japanese and Swiss subsidiaries.

 

The effective tax rate (ETR) for the nine months ended September 30, 2016 was 57.4%, compared to 32.1% in the same period of 2015. The ETR for the nine months was based on a projection of the full year rate. The increase in the ETR was due to the shifting of profits from lower tax jurisdictions to higher tax jurisdictions and the impact of Subpart F deemed dividend rules in the U.S.

 

Reportable Operating Segments

We have one operating segment, which is the development and commercialization of pharmaceutical products.

 

 34 
 

Liquidity and Capital Resources

 

Sources of Liquidity

We finance our operations principally from cash generated from operations and our Credit Facility. From time to time, we have also received proceeds from the issuance and sale of our class A common stock and through the exercise of employee stock options. Cash generated from operations is principally derived from product sales, royalty payments, upfront and milestone payments, and research and development expense reimbursements received from Takeda, Mylan and other parties.

 

Our cash, cash equivalents and restricted cash consist of the following as of September 30, 2016 and December 31, 2015:

 

(In thousands)  September 30,
2016
  December 31,
2015
Cash and cash equivalents  $128,465   $108,284 
Restricted cash, current   25,213    55,218 
Total  $153,678   $163,502 

 

Our cash and cash equivalents are deposited in operating accounts and liquid investments with an original maturity at time of purchase of 90 days or less.

 

As of September 30, 2016, our restricted cash consisted primarily of $25.0 million held in a restricted cash account, which is required by the Credit Facility until at least $35 million of the Term Loans have been repaid or prepaid. As of December 31, 2015, our restricted cash consisted primarily of this $25.0 million related to the Credit Facility, and as part of the R-Tech acquisition, $17.7 million held in a restricted cash account for payment of the Ueno and Kuno Trust Notes, and $8.2 million held in restricted cash related to the squeeze out of non-tendering R-Tech shareholders. As of September 30, 2016, the Ueno and Kuno Trust Notes had been repaid and the R-Tech acquisition had been completed.

 

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2016 and 2015:

 

   Nine Months Ended June 30,
(In thousands)  2016  2015
Cash provided by (used in):          
Operating activities  $30,288   $24,205 
Investing activities   (1,835)   (6,798)
Financing activities   (16,360)   2,426 
Effect of exchange rates   8,088    50 
Net increase (decrease) in cash and cash equivalents  $20,181   $19,883 

 

Nine months ended September 30, 2016

Net cash provided by operating activities was $30.3 million for the nine months ended September 30, 2016. This was primarily due to net income of $3.2 million, adjustments to reconcile net income to net cash consisting of depreciation and amortization of $37.9 million, unrealized currency translation losses of $9.8 million, write down of in-process research and development of $7.3 million, and stock-based compensation expense of $5.4 million, offset by a deferred tax provision decrease of $16.6 million and AMED deferred grant forgiveness of $9.3. Additional cash provided by operating activities consisted of decreases in receivables of $5.5 million, and changes in other assets and liabilities, net of $0.8 million. Partially offsetting these items were an increase in inventory of $2.0 million, increases in prepaid and income taxes payable and receivable, net of $1.1 million, and decreases in payables of $10.7 million.

 

Net cash used in investing activities was $1.8 million for the nine months ended September 30, 2016. This was primarily due to the payment of the squeeze-out liability for non-tendering R-Tech shareholders of $7.7 million, investment in a convertible note receivable of $5.0 million, purchases of property and equipment of $1.2 million, partially offset by a decrease in restricted cash of $12.3 million.

 

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Net cash used in financing activities was $16.4 million for the nine months ended September 30, 2016. This was primarily due to repayments of notes payable (net of restricted cash) of $18.7 million, partially offset by the issuance of Class A common stock upon the exercise of options and the associated windfall benefit together totaling $2.3 million.

 

The effect of exchange rates on the cash balances of currencies held in foreign denominations for the nine months ended September 30, 2016 was an increase of $8.1 million.

 

Nine months Ended September 30, 2015

Net cash provided by operating activities of $24.2 million for the nine months ended September 30, 2015 was primarily due to our net income of $23.2 million plus non-cash stock-based compensation expense of $5.6 million, offset in part by a $2.0 million gain from the transfer and assignment of licensing rights to R-Tech and an increase in deferred tax provision of $2.8 million.

 

Net cash used in investing activities of $6.8 million for the nine months ended September 30, 2015 was primarily due to investment purchases of $39.8 million and purchases of property and equipment of $2.0 million, offset in part by sales and maturities of investments totaling $32.5 million, proceeds of $2.0 million from the transfer and assignment of licensing rights to R-Tech, and changes in restricted cash of $548,000.

 

Net cash provided by financing activities of $2.4 million for the nine months ended September 30, 2015 was primarily due to proceeds from exercised stock options totaling $4.8 million, plus a non-cash windfall benefit from stock-based compensation of $1.6 million, offset in part by repayment of notes payable totaling $4.1 million.

 

The effect of exchange rates on the cash balances of currencies held in foreign denominations for nine months ended September 30, 2015 was an increase of $50,000.

 

Off-Balance Sheet Arrangements

As of September 30, 2016, we did not have any off-balance sheet arrangements, as such term is defined in Item 303(a)(4) of Regulation S-K under the Securities Act of 1933, as amended.

 

Funding Requirements and Capital Resources

We may need substantial amounts of capital to continue growing our business. We may require this capital, among other things, to fund:

·our share of the on-going development program of AMITIZA;
·research, development, manufacturing, regulatory and marketing efforts for our other products and product candidates;
·the costs involved in obtaining and maintaining proprietary protection for our products, technology and know-how, including litigation costs and the results of such litigation;
·activities to resolve our ongoing legal matters ;
·any option and milestone payments under general option and licensing ventures, including our exclusive option and collaboration agreement with CPP;
·other business development activities, including partnerships, alliances and investments in or acquisitions of other businesses, products and technologies;
·the expansion of our commercialization activities including the purchase of inventory; and
·the payment of principal and interest under our loan obligations.

 

The timing of these funding requirements is difficult to predict due to many factors, including the outcomes of our preclinical and clinical research and development programs, when those outcomes are determined, the timing of obtaining regulatory approvals, and the presence and status of competing products. Our capital needs may exceed the capital available from our future operations, collaborative and licensing arrangements and existing liquid assets. Our future capital requirements and liquidity will depend on many factors, including, but not limited to:

 

·the cost and time involved to pursue our research and development programs;
·our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others; and
·any future change in our business strategy.

 

 36 
 

To the extent that our capital resources may be insufficient to meet our future capital requirements, we may need to finance our future cash needs through at-the-market sales, public or private equity offerings, further debt financings or corporate collaboration and licensing arrangements.

 

At September 30, 2016, based upon our current business plan, we believe our future cash flows from operating activities and our existing capital resources will be sufficient to meet our cash requirements for the next 12 months.

 

Effects of Foreign Currency

We currently receive a portion of our revenue, incur a portion of our operating expenses, and have assets and liabilities in currencies other than the U.S. Dollar, the reporting currency for our consolidated financial statements. As such, the results of our operations could be adversely affected by changes in exchange rates due to transaction losses, which are recognized in the statement of operations, or translation losses, which are recognized in comprehensive income. We currently do not hedge foreign exchange rate exposure via derivative instruments.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our market risks during the three months ended September 30, 2016 have not materially changed from those discussed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 11, 2016, as amended.

 

Foreign Currency Exchange Rate Risk

We are subject to foreign exchange risk for revenues and expenses denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the U.S. Dollar. We do not currently hedge our foreign currency transactions via derivative instruments.

 

Interest Rate Risk

Our exposure to market risks associated with changes in interest rates relates to both (i) the amount of interest income earned on our investment portfolio, and (ii) the amount of interest expense payable under our Credit Facility. These risks offset each other somewhat; for example, rising interest rates would increase both the amounts earned on our investments and amounts due under our Credit Facility.

 

With respect to our investments, our goal is to ensure the safety and preservation of invested funds by limiting default risk, market risk and reinvestment risk. We attempt to mitigate default risk by investing in investment grade securities. A hypothetical one percentage point decline in interest rates would not have materially affected the fair value of our interest-sensitive financial instruments as of September 30, 2016.

 

Our notes payable bear interest at a variable rate calculated by reference to the Federal Funds rate or LIBOR, at our option. A hypothetical one percentage point increase in interest rates would have increased our interest payments for the three and nine months ended September 30, 2016 by approximately $589,000 and $1.8 million, respectively.

 

We do not use derivative financial instruments for trading or speculative purposes. However, we regularly invest excess cash in overnight repurchase agreements that are subject to changes in short-term interest rates. We believe that the market risk arising from holding these financial instruments is minimal.

 

Credit Risk

Our exposure to credit risk generally consists of cash and cash equivalents, restricted cash, investments and receivables. We place our cash, cash equivalents and restricted cash with what we believe to be highly rated financial institutions and invest the excess cash in highly rated investments. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentrations by asset class and issuer.

 

Our exposure to credit risk also extends to strategic investments made as part of our ongoing business development activities, such as the investment of $5.0 million in CPP in exchange for a convertible note made in January 2016. A more detailed discussion of this arrangement is set forth in note 19 in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

 

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As of September 30, 2016 and December 31, 2015, approximately 1.1% and 3.6%, respectively, of our cash, cash equivalents, restricted cash and investments are issued or insured by the federal government or government agencies. We have not experienced any losses on these accounts related to amounts in excess of insured limits.

 

 

Item 4. Controls and Procedures.

 

a) Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2016. In designing and evaluating such controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based upon the evaluation we carried out, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2016, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the applicable rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

b) Changes in Internal Control Over Financial Reporting

We completed the R-Tech acquisition on October 20, 2015. Our management considers this transaction to be material to our consolidated financial statements and believes that the internal controls and procedures of R-Tech have a material effect on our internal control over financial reporting. We are currently in the process of incorporating the internal controls and procedures of R-Tech into our internal controls over financial reporting and extending our compliance program under the Sarbanes-Oxley Act of 2002, to include R-Tech.

 

 

Part II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

On October 3, 2014, we received a Paragraph IV certification notice letter regarding an abbreviated new drug application (ANDA) submitted to the U.S. Food and Drug Administration (the FDA) by Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. (collectively, Dr. Reddy’s), requesting approval to market, sell, and use a generic version of the 8 mcg and 24 mcg AMITIZA (lubiprostone) soft gelatin capsule products. In its notice letter, Dr. Reddy’s alleges that U.S. Patent Nos. 6,414,016; 6,583,174; 7,064,148; 7,417,067; 8,026,393; 8,071,613; 8,088,934; 8,097,649; 8,114,890; 8,338,639; 8,748,481; 8,779,187; 7,795,312; 8,097,653; and 8,389,542, which cover compositions, formulations and methods of using AMITIZA, are invalid, unenforceable and/or will not be infringed by Dr. Reddy’s manufacture, use or sale of the product described in its ANDA. The latest of such patents expires in 2027. On November 12, 2014, we, Takeda, and certain affiliates of Takeda filed a patent infringement lawsuit in the U.S. District Court for the District of New Jersey against Dr. Reddy’s related to the ANDA previously filed by Dr. Reddy’s and described above. The lawsuit claims infringement of 7 patents that are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book), with the latest expiring in 2027. Under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, as a result of the patent infringement lawsuit, final FDA approval of Dr. Reddy’s ANDA will be stayed up to 30 months from the date of receipt of the notice letter. On September 14, 2016, the parties to this lawsuit entered into a Settlement and License Agreement and agreed to dismiss the suit by mutual consent. Under this agreement, we granted Dr. Reddy’s a non-exclusive license to market its generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA. This license does not begin until more than six years from today’s date, or earlier under certain circumstances. Dr. Reddy’s will pay to us a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and ends when all of our related patents have expired. In the event Dr. Reddy’s elects to launch an authorized generic form of lubiprostone, we have agreed to supply such product under the terms of a manufacturing and supply agreement at a negotiated price. 

 

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On May 27, 2015, R-Tech received a Paragraph IV certification notice letter regarding an ANDA submitted to the FDA by Apotex, Inc. requesting approval to market, sell, and use a generic version of the RESCULA (unoprostone isopropyl ophthalmic solution) 0.15% product approved for the lowering of intraocular pressure in patients with open-angle glaucoma or ocular hypertension. In its notice letter, Par Pharmaceutical alleges that U.S. Patent Nos. 6,458,836 and 6,770,675, which cover compositions, formulations and methods of using RESCULA, are invalid and/or will not be infringed by Apotex’s manufacture, use or sale of the product described in its ANDA. The latest of such patents expires in 2020. On July 10, 2015, R-Tech filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Apotex related to the ANDA previously filed by Apotex and described above. The lawsuit claims infringement of two patents that are listed in the FDA’s Orange Book, with the latest expiring in 2020. Under the Hatch-Waxman Act, as a result of the patent infringement lawsuit, final FDA approval of Apotex’s ANDA will be stayed up to 30 months from the date of receipt of the notice letter. On September 10, 2015, Apotex filed an answer and counterclaim to our complaint. In May 2016, the parties negotiated a settlement of the litigation, which was subsequently dismissed by mutual consent. The settlement agreement grants Apotex a license to market its generic unoprostone product after a specified future date.

 

On December 28, 2015, in connection with our acquisition of R-Tech, three non-tendering stockholders of R-Tech submitted complaints to the Tokyo District Court alleging that the purchase price of R-Tech’s shares was unfair, and demanding an appraisal of the fair value of the shares. The number of shares subject to these proceedings is minimal. As of the date of this filing, these proceedings remain ongoing.

 

Item 1A. Risk Factors.

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed by us with the SEC on March 11, 2016, as amended. There have not been any material changes from the risk factors as previously disclosed in our Form 10-K for the fiscal year ended December 31, 2015.

 

 

 

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Item 6. Exhibits

 

Exhibit                    
Number   Description   Form   File No.   Exhibit   Filing Date
3.1   Certificate of Incorporation   8-K   001-33609   3.1   12/29/2008
                     
3.2   Certificate of Amendment   8-K   001-33609   3.2   12/29/2008
                     
3.3   Amended and Restated Bylaws   8-K   001-33609   3.3   8/2/2013
                     
4.1   Specimen Stock Certificate evidencing the shares of class A common stock   S-1/A   333-135133   4.1   2/1/2007
                     
10.1   Form of Indemnification Agreement between the Company and an indemnitee   Included herewith            
                     
10.2^   Employment Agreement, dated as of August 3, 2016, between the Company and Peter Greenleaf   Included herewith            
                     
10.3^   Employment Agreement, dated as of August 2, 2016, between the Company and Dr. Peter Kiener   Included herewith            
                     
10.4^   Employment Agreement, dated as of August 2, 2016, between the Company and Andrew Smith   Included herewith            
                     
10.5^   Employment Agreement, dated as of August 3, 2016, between the Company and Matthew Donley    Included herewith            
                     
10.6^   Employment Agreement, dated as of August 23, 2016, between Sucampo Ag and Dr. Peter Lichtlen   Included herewith            
                     
31.1   Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002   Included herewith            
                     
31.2   Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002   Included herewith            
                     
32.1 **   Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Included herewith            
                     
32.2 **   Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Included herewith            

 

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Exhibit                    
Number   Description   Form   File No.   Exhibit   Filing Date
                     
101.[SCH]   XBRL Taxonomy Extension Schema Document   Included herewith            
                     
101.[CAL]   XBRL Taxonomy Extension Calculation Linkbase Document   Included herewith            
                     
101.[LAB]   XBRL Taxonomy Extension Label Linkbase Document   Included herewith            
                     
101.[PRE]   XBRL Taxonomy Extension Presentation Linkbase Document   Included herewith            
                     

 

^ Compensatory plan, contract or arrangement.

 

**  These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

The exhibits filed as part of this Form 10-Q are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Sucampo Pharmaceuticals, Inc.
       
       
November 9, 2016 By: /s/  PETER GREENLEAF  
    Peter Greenleaf  
    Chief Executive Officer
    (Principal Executive Officer)
       
November 9, 2016 By: /s/  ANDREW P. SMITH  
    Andrew P. Smith  
    Chief Financial Officer  
    (Principal Financial Officer)

 

 

 

 

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Sucampo Pharmaceuticals, Inc.

Exhibit Index

 

Exhibit                    
Number   Description   Form   File No.   Exhibit   Filing Date
3.1   Certificate of Incorporation   8-K   001-33609   3.1   12/29/2008
                     
3.2   Certificate of Amendment   8-K   001-33609   3.2   12/29/2008
                     
3.3   Amended and Restated Bylaws   8-K   001-33609   3.3   8/2/2013
                     
4.1   Specimen Stock Certificate evidencing the shares of class A common stock   S-1/A   333-135133   4.1   2/1/2007
                     
10.1   Form of Indemnification Agreement between the Company and an indemnitee   Included herewith            
                     
10.2^   Employment Agreement, dated as of August 3, 2016, between the Company and Peter Greenleaf   Included herewith            
                     
10.3^   Employment Agreement, dated as of August 2, 2016, between the Company and Dr. Peter Kiener   Included herewith            
                     
10.4^   Employment Agreement, dated as of August 2, 2016, between the Company and Andrew Smith   Included herewith            
                     
10.5^   Employment Agreement, dated as of August 3, 2016, between the Company and Matthew Donley    Included herewith            
                     
10.6^   Employment Agreement, dated as of August 23, 2016, between Sucampo Ag and Dr. Peter Lichtlen   Included herewith            
                     
31.1   Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002   Included herewith            
                     
31.2   Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002   Included herewith            
                     
32.1 **   Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Included herewith            
                     
32.2 **   Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Included herewith            

 

 

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Exhibit                    
Number   Description   Form   File No.   Exhibit   Filing Date
                     
101.[SCH]   XBRL Taxonomy Extension Schema Document   Included herewith            
                     
101.[CAL]   XBRL Taxonomy Extension Calculation Linkbase Document   Included herewith            
                     
101.[LAB]   XBRL Taxonomy Extension Label Linkbase Document   Included herewith            
                     
101.[PRE]   XBRL Taxonomy Extension Presentation Linkbase Document   Included herewith            
                     

 

^ Compensatory plan, contract or arrangement.

 

**  These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.  

 

 

 

 

 

 

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