Attached files
| file | filename |
|---|---|
| 8-K/A - 8-K -VIBATIV FINANCIAL STATEMENTS - CUMBERLAND PHARMACEUTICALS INC | a8kaforvibativfs.htm |
| EX-99.3 - EXHIBIT 99.3 PROFORM - CUMBERLAND PHARMACEUTICALS INC | exhibit993.htm |
| EX-99.1 - EXHIBIT 99.1 2017 VIBATIV SPF - CUMBERLAND PHARMACEUTICALS INC | exhibit991.htm |
| EX-23.1 - EXHIBIT 23.1 CONSENT OF INDEPENDANT AUDITORS - CUMBERLAND PHARMACEUTICALS INC | exhibit231.htm |
Exhibit 99.2
VIBATIV® PRODUCT LINE OF THERAVANCE BIOPHARMA, INC.
Special Purpose Statement of Assets Purchased and Liabilities Assumed
(Unaudited)
September 30, 2018 | |||
Assets acquired | |||
Current assets: | |||
Inventories | $ | 17,574,000 | |
Total assets acquired | 17,574,000 | ||
Liabilities assumed | |||
Current liabilities: | |||
Deferred revenue | 5,000 | ||
Total current liabilities assumed | 5,000 | ||
Deferred revenue | 80,000 | ||
Total liabilities assumed | 85,000 | ||
Net assets acquired | $ | 17,489,000 | |
See accompanying notes to special purpose financial statements.
VIBATIV PRODUCT LINE OF THERAVANCE BIOPHARMA, INC.
Special Purpose Statement of Revenue and Direct Expenses
(Unaudited)
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | ||||||
Revenue | |||||||
Product sales | $ | 12,889,000 | $ | 10,664,000 | |||
Revenue from collaborative arrangements | 15,000 | 104,000 | |||||
Total revenue | 12,904,000 | 10,768,000 | |||||
Direct expenses | |||||||
Cost of goods sold | 83,000 | 2,914,000 | |||||
Research and development | 16,037,000 | 22,575,000 | |||||
Selling, general, and administrative | 23,447,000 | 28,764,000 | |||||
Total direct expenses | 39,567,000 | 54,253,000 | |||||
Excess of direct expenses over revenue | $ | (26,663,000 | ) | $ | (43,485,000 | ) | |
See accompanying notes to special purpose financial statements.
UNAUDITED VIBATIV® PRODUCT LINE OF THERAVANCE BIOPHARMA, INC.
Notes to Special Purpose Financial Statements
1. | Organization and Summary of Significant Accounting Policies |
Theravance Biopharma, Inc. (“Theravance Biopharma”, the “Company”, or “we” and other similar pronouns) is a diversified biopharmaceutical company with the core purpose of creating medicines that help improve the lives of patients suffering from serious illness. VIBATIV® (the “VIBATIV Product”) is a once-daily dual-mechanism antibiotic approved in the US and certain other countries for difficult-to-treat infections.
On November 12, 2018, the Company completed the previously disclosed sale of its assets related to the manufacture, marketing and sale of the VIBATIV Product to Cumberland Pharmaceutical Inc. (“Buyer”) pursuant to the Asset Purchase Agreement dated November 1, 2018 (the “APA”) by and among Theravance Biopharma Ireland Limited and Theravance Biopharma US, Inc. (collectively, “Sellers,” and each a direct or indirect wholly-owned subsidiary of the Company) and Buyer (the “Transaction”). At the closing of the Transaction, Sellers received $20.0 million in cash. Pursuant to the terms of the APA, an additional $5.0 million in cash will be paid by Buyer to Sellers on or before April 1, 2019.
Sellers retained financial responsibility for any liabilities relating to products sold prior to transaction closing, and the Buyer assumed financial responsibility for any liabilities relating to products sold on or after transaction closing.
Basis of Presentation
The accompanying special purpose financial statements (the “Financial Statements”) were prepared to present the net assets sold pursuant to the APA and the revenue and direct expenses related to the net assets sold. The Financial Statements will be included in an 8-K filing of the Buyer as required by Rule 3-05, Significant Acquisition Carveout Financial Statement Reporting Requirements, of the US Securities and Exchange Commission’s (“SEC”) Regulation S-X. The basis of preparation describes how these Financial Statements have been prepared.
The accompanying special purpose statements of assets acquired and liabilities assumed as of September 30, 2018 and of revenue and direct expenses for the nine months ended September 30, 2018 and 2017 of the Company’s VIBATIV Product represent an incomplete presentation of the Company’s assets, liabilities, revenues and expenses and are therefore not intended to represent the financial condition or results of operations of the Company. These Financial Statements are based upon the APA and relief from SEC Rule 3-05 obtained by the Buyer from the SEC. The statement of assets acquired and liabilities assumed only presents the assets acquired and liabilities assumed in accordance with the APA, and the statement of revenue and direct expenses presents only those revenues and estimated expenses related directly to the VIBATIV Product to be acquired. The statement of revenue and direct expenses excludes costs not directly involved with the revenue producing activity, such as interest and taxes. The funding and management of the Company’s operations (including the VIBATIV Product) are performed on a consolidated basis; accordingly, costs of funding the operations, including debt and related interest expense were not allocated to the VIBATIV Product. The Company also maintains its tax functions on a consolidated basis; accordingly, tax expense was not allocated to the VIBATIV Product. The Financial Statements were derived from the historical accounting records of the Company and were prepared in accordance with the basis of accounting described in these notes, which is in accordance with accounting principles generally accepted in the United States of America (US GAAP).
As the VIBATIV Product has historically been managed as a part of the Company and has not been accounted for on a stand-alone basis, it is not practicable to prepare complete financial statements, including these accompanying notes, related to the VIBATIV Product. As a result, these Financial Statements may not be indicative of the complete financial condition or results of operations of the VIBATIV Product on a stand-alone basis. In addition, certain costs and expenses presented in these Financial Statements have been allocated by the Company and the Sellers based on a specific identification basis or, when specific identification was not practicable, a proportional cost allocation method (primarily headcount), depending on the nature of the services rendered. The allocations and estimates used to derive the amounts in the statement of revenue and direct expenses are based in part on judgments and assumptions that the Company believes are reasonable, but may not necessarily be indicative of the costs that would have been incurred if the VIBATIV Product had been operated on a stand-alone basis for the periods presented.
Effective January 1, 2018, we adopted Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as
of January 1, 2018 and recognized the cumulative effect of ASC 606 at the date of initial application. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. To reflect the impact of the adoption of Topic 606 on the VIBATIV Product, we recorded a cumulative adjustment related to one of the VIBATIV Product’s collaborative arrangements resulting in a decrease to the Company’s accumulated deficit by approximately $0.5 million, as of January 1, 2018. This cumulative adjustment was the result of the recognition of previously deferred revenue related to a deliverable under the collaborative arrangement. Our revenue related to the VIBATIV Product under ASC 606 for the nine months ended September 30, 2018 would not have been materially different under the legacy Accounting Standards Codification, Topic 605, Revenue Recognition.
Use of Management’s Estimates
The preparation of these Financial Statements requires management to make certain estimates and assumptions that affect the reported amounts of assets, revenue and expenses. Such estimates and assumptions are made in conformity with US GAAP. Actual outcomes and results could differ from these estimates and assumptions. These Financial Statements include allocations and estimates that are not necessarily indicative either of the costs and assets that would have resulted if the VIBATIV Product had been operated as a separate business, or of the future results of the VIBATIV Product. The Financial Statements presented are not indicative of the financial condition or results of operations of the VIBATIV Product going forward because of the omission of various operating expenses. We based our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances.
Inventories
Inventories consist of raw materials, work‑in‑process and finished goods related to the production of the VIBATIV Product. Raw materials include the VIBATIV Product’s active pharmaceutical ingredient (“API”) and other raw materials. Work‑in‑process and finished goods include third‑party manufacturing costs and labor and indirect costs we incur in the production process. Included in inventories are raw materials and work‑in‑process that may be used as clinical products, which are charged to research and development (“R&D”) expense when consumed. In addition, under certain commercialization agreements, we may sell the VIBATIV Product packaged in unlabeled vials that are recorded in work‑in‑process. Inventories are stated at the lower of cost or net realizable value. We determine the cost of inventory using the average‑cost method for each manufacturing batch.
We assess our inventory levels each reporting period and write‑down inventory that is expected to be at risk for expiration, that has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. In evaluating the sufficiency of our inventory reserves or liabilities for firm purchase commitments, we also take into consideration our firm purchase commitments for future inventory production. If we were to decide to cancel our manufacturing commitment, such cancellation would trigger the payment of a cancellation fee. If we project to have excess inventories and that it would be more cost-efficient to pay the cancellation fee, we may accrue the cancellation fee as a liability. Our assessment of excess inventories, including future firm purchase commitments, requires management to utilize judgement in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions.
When we recognize a loss on such inventory or firm purchase commitments, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis. If inventory with a lower cost basis is subsequently sold, it will result in higher gross margin for those sales. During the nine months ended September 30, 2018, we reversed a $2.3 million excess inventory charge, originally recognized in the fourth quarter of 2017, due to a waiver of our minimum purchase commitment by our third-party manufacturer.
Revenue Recognition
Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
At contract inception, once the contract is determined to be within the scope of ASC 606, we identify the performance obligations in the contract by assessing whether the goods or services promised within each contract are distinct. We then recognize revenue for the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Sales
We sell VIBATIV in the US market by making the drug product available through a limited number of distributors, who sell VIBATIV to healthcare providers. Title and risk of loss transfer upon receipt by these distributors. We recognize VIBATIV product sales and related cost of product sales when the distributors obtain control of the drug product, which is at the time title transfers to the distributors.
Product sales are recorded on a net sales basis which includes estimates of variable consideration. The variable consideration results from sales discounts, government‑mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. We reflect such reductions in revenue as either an allowance to the related account receivable from the distributor, or as an accrued liability, depending on the nature of the sales deduction. Sales deductions are based on management’s estimates that consider payor mix in target markets, industry benchmarks and experience to date. In general, these estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in ASC 606. We monitor inventory levels in the distribution channel, as well as sales of VIBATIV by distributors to healthcare providers, using product‑specific data provided by the distributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns of VIBATIV, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. We update our estimates and assumptions each quarter, and if actual future results vary from our estimates, we may adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment.
Sales Discounts: We offer cash discounts to certain customers as an incentive for prompt payment. We expect our customers to comply with the prompt payment terms to earn the cash discount. In addition, we offer contract discounts to certain direct customers. We estimate sales discounts based on contractual terms, historical utilization rates, as available, and our expectations regarding future utilization rates. We account for sales discounts by reducing accounts receivable by the expected discount and recognizing the discount as a reduction of revenue in the same period the related revenue is recognized.
Chargebacks and Government Rebates: For VIBATIV sales in the US, we estimate reductions to product sales for qualifying federal and state government programs including discounted pricing offered to Public Health Service (“PHS”), as well as government‑managed Medicaid programs. Our reduction for PHS is based on actual chargebacks that distributors have claimed for reduced pricing offered to such healthcare providers and our expectation about future utilization rates. Our accrual for Medicaid is based upon statutorily‑defined discounts, estimated payor mix, expected sales to qualified healthcare providers, and our expectation about future utilization. The Medicaid accrual and government rebates that are invoiced directly to us are recorded in other accrued liabilities on the condensed consolidated balance sheets. For qualified programs that can purchase our products through distributors at a lower contractual government price, the distributors charge back to us the difference between their acquisition cost and the lower contractual government price, which we record as an allowance against accounts receivable.
Distribution Fees: We have contracts with our distributors in the US that include terms for distribution‑related fees. We determine distribution‑related fees based on a percentage of the product sales price, and we record the distribution fees as an allowance against accounts receivable.
Product Returns: We offer our distributors a right to return product purchased directly from us, which is principally based upon the product’s expiration date. Our policy is to accept product returns during the six months prior to and twelve months after the product expiration date on product that has been sold to our distributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns of VIBATIV, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. We record our product return reserves as other accrued liabilities.
Collaborative Arrangements and Multiple‑Element Arrangements
The VIBATIV Product operations include licensing arrangements for specified territories. We enter into collaborative arrangements with partners that fall under the scope of Accounting Standards Codification, Topic 808, Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, we may analogize to ASC 606 for some aspects of the arrangements. We analogize to ASC 606 for certain activities within the collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of our ongoing major or central operations.
The terms of our collaborative arrangements typically include one or more of the following: (i) up-front fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) reimbursements or cost-sharing of R&D expenses; and (v) profit/loss sharing arising from co-promotion arrangements. Each of these payments results in collaboration revenues or an offset against R&D expenses. Where a portion of non‑refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied.
Research and Development Expenses
Research and development expenses are recorded in the period that services are rendered or goods are received. Research and development expenses consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain research and development activities on behalf of us.
As part of the process of preparing financial statements, we are required to estimate and accrue research and development expenses. This process involves the following:
identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost;
estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and
periodically confirming the accuracy of our estimates with selected service providers and making adjustments, if necessary.
Examples of estimated research and development expenses that we accrue include:
fees paid to clinical research organizations (“CROs”) in connection with preclinical and toxicology studies and clinical studies;
fees paid to investigative sites in connection with clinical studies;
fees paid to contract manufacturing organizations (“CMOs”) in connection with the production of product and clinical study materials; and
professional service fees for consulting and related services.
We base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors, such as the successful enrollment of patients and the completion of clinical study milestones. Our service providers invoice us monthly in arrears for services performed. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.
Fair Value of Share‑Based Compensation Awards
We use the Black‑Scholes‑Merton option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire shares granted under our employee share purchase plan (“ESPP”). The Black‑Scholes‑Merton option valuation model requires the use of assumptions, including the expected term of the award and
the expected share price volatility. We use the “simplified” method as described in Staff Accounting Bulletin No. 107, Share‑Based Payment, to estimate the expected option term.
Share‑based compensation expense is calculated based on awards ultimately expected to vest and is reduced for actual forfeitures as they occur, as allowed under Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718) (“ASU 2016‑09”). Prior to the adoption of ASU 2016-09 on January 1, 2017, forfeitures were estimated at the time of grant and revised, if necessary, in subsequent periods if the actual forfeitures differed from those estimates.
Compensation expense for purchases under the ESPP is recognized based on the fair value of the award on the date of offering.
2. | Inventories |
Inventory consists of the following:
September 30, 2018 | ||||
Raw materials | $ | 10,644,000 | ||
Work‑in‑process | 3,628,000 | |||
Finished goods | 3,302,000 | |||
Total inventories | $ | 17,574,000 | ||
3. | Share‑Based Compensation |
The Company has share-based compensation plans, and the allocation of the VIBATIV Product-related share‑based compensation expense included in the Financial Statements was as follows:
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | ||||||
Research and development | $ | 1,472,000 | $ | 1,396,000 | |||
Selling, general and administrative | 303,000 | 3,447,000 | |||||
Total share‑based compensation expense | $ | 4,775,000 | $ | 4,843,000 | |||