Item 7. Management’s Discussion and Analysis
Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations .
Revenues
Revenues consist primarily of net product sales of our commercial products in the U.S., supplemented by royalty revenues from our collaborative licensing arrangements. The following table provides information regarding our revenues during the years ended December 31, 2022 and 2021 (dollars in thousands):
Years Ended December 31, Change
2022 2021 Amount Percent
Net product sales
Trokendi XR $ 261,221 $ 304,817 $ (43,596) (14) %
Oxtellar XR 115,345 110,708 4,637 4 %
GOCOVRI 104,421 9,778 94,643 **
APOKYN 75,305 99,233 (23,928) (24) %
Qelbree 61,322 9,879 51,443 **
Other (1)
31,818 33,089 (1,271) (4) %
Total net product sales 649,432 567,504 81,928 14 %
Royalty revenues 17,806 12,271 5,535 45 %
Total revenues $ 667,238 $ 579,775 $ 87,463 15 %
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(1) Includes net product sales of MYOBLOC, XADAGO and Osmolex ER.
** Indicates calculation result is equal to or greater than 100%. Net product sales of GOCOVRI represents sales subsequent to the completion of the Adamas Acquisition in November 2021. In addition, Qelbree was launched in May 2021.
Net Product Sales
Net product sales increased by $81.9 million from $567.5 million in 2021 to $649.4 million in 2022. The increase in net product sales was primarily due to the $94.6 million increase in net product sales of GOCOVRI, subsequent to the completion of the Adamas Acquisition in November 2021, as well as a $51.4 million increase in net product sales of Qelbree, which was launched in May 2021. Partially offsetting this increase was a $43.6 million decrease in net product sales of Trokendi XR and a $23.9 million decrease in net product sales of APOKYN primarily attributable to the decline in unit demand due to competitive headwinds.
Sales deductions and related accruals
We record accrued product returns and accrued product rebates as current liabilities in Accrued product returns and rebates, on our consolidated balance sheets. We record sales discounts as a reduction against Accounts receivable, net on the consolidated balance sheets. Both amounts are generally affected by changes in gross product sales, changes in the provision for net product sales deductions, and the timing of payments/credits.
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The following table provides a summary of activities with respect to accrued product returns and rebates for the years ended December 31, 2022 and 2021 (dollars in thousands):
Accrued Product Returns and Rebates
Product
Returns Product
Rebates Allowance for
Sales Discounts Total
Balance at December 31, 2021 $ 35,127 $ 97,597 $ 13,537 $ 146,261
Provision
Provision for sales in current year 22,129 437,323 76,079 535,531
Adjustments relating to prior year sales (3,866) (155) (3) (4,024)
Total provision 18,263 437,168 76,076 531,507
Less: Actual payments/credits (8,382) (428,108) (76,618) (513,108)
Balance at December 31, 2022 $ 45,008 $ 106,657 $ 12,995 $ 164,660
Balance at December 31, 2020 $ 29,603 $ 96,589 $ 11,404 $ 137,596
Adamas Acquisition liabilities assumed 223 2,194 271 2,688
Provision
Provision for sales in current year 15,762 370,273 69,383 455,418
Adjustments relating to prior year sales (3,069) 1,335 19 (1,715)
Total provision 12,693 371,608 69,402 453,703
Less: Actual payments/credits (7,392) (372,794) (67,540) (447,726)
Balance at December 31, 2021 $ 35,127 $ 97,597 $ 13,537 $ 146,261
Accrued product returns and rebates
The accrued product returns balance increased from $35.1 million as of December 31, 2021 to $45.0 million as of December 31, 2022 due to timing of related return activity and an increase in provision for product returns primarily for Qelbree.
The accrued product rebates balance increased from $97.6 million as of December 31, 2021 to $106.7 million as of December 31, 2022 due to timing of payments and the increase in the provision.
Provision for returns and rebates
The provision for product returns increased from $12.7 million in 2021 to $18.3 million in 2022. This increase was primarily attributable to an increase in volume of products sold with the launch of Qelbree for pediatric patients in the second quarter of 2021 and for adults in second quarter of 2022, partially offset by lower sales of Trokendi XR.
The provision for product rebates increased from $371.6 million in 2021 to $437.2 million in 2022. The increase was primarily attributable to higher sales volume, as well as higher per patient payments under both government and commercial managed care programs.
The provision for sales discounts increased from $69.4 million in 2021 to $76.1 million in 2022. The increase is due to higher gross sales primarily due to launch of Qelbree and the acquired commercial products from the Adamas Acquisition in November 2021.
Adjustments related to prior year sales
Adjustments related to prior year sales in 2022 of $4.0 million was less than 1% of both net product sales and total provision for the year ended December 31, 2022. Adjustments related to prior year sales in 2021 of $1.7 million was less than 1% of both net product sales an total provision for the year ended December 31, 2021.
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Royalty Revenues
The following table provides information regarding our royalty revenues for the years indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Royalty revenues $ 17,806 $ 12,271 $ 5,535 45%
Royalty revenues increased by approximately $5.5 million, or 45%, in 2022 compared to 2021, primarily due to the full year of Namzaric royalties associated with the Adamas Acquisition. The Company recognized noncash royalty revenues of $9.8 million, $9.4 million for the years ended December 31, 2022 and 2021, respectively.
Cost of Goods Sold
The following table provides information regarding our cost of goods sold for the years indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Cost of goods sold $ 87,221 $ 75,061 $ 12,160 16%
Cost of goods sold includes the cost of royalties; cost of materials, including active pharmaceutical ingredients (API); and cost to manufacture, including tableting, packaging, personnel, overhead, stability testing, and distribution.
Cost of goods sold increased from $75.1 million in 2021 to $87.2 million in 2022. The increase was primarily due to higher Qelbree sales, offset by lower royalty expense compared to the same period in the prior year.
Research and Development Expenses
The following table provides information regarding our research and development (R&D) expenses for the years indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Research and development expense $ 74,552 $ 90,467 $ (15,915) (18)%
R&D expenses decreased from $90.5 million in 2021 to $74.6 million in 2022. The decrease was primarily due to the $15.0 million write-down of the investment in Navitor LLC in 2021 which was attributable to a single in-process research and development (IPR&D) asset and recorded in R&D expense in the first quarter of 2021. Refer to Note 5, Investments in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of the write-down of the investment in Navitor LLC in 2021.
Selling, General, and Administrative Expense
The table below provides information regarding our selling, general, and administrative (SG&A) expenses for the years indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Selling and marketing expense $ 267,788 $ 199,709 $ 68,079 34%
General and administrative expense 109,433 105,050 4,383 4%
Total $ 377,221 $ 304,759 $ 72,462 24%
Selling and Marketing Expense
Selling and marketing expenses increased from $199.7 million in 2021 to $267.8 million in 2022. The increase was primarily due to increased marketing expenditures of $46.7 million primarily for activities to support the launch of Qelbree to the adult population and the Qelbree direct-to-consumer campaign, which substantially occurred in the third quarter of 2022, as well as higher sales and corporate accounts management expenditures to the commercial products including those acquired from the Adamas Acquisition.
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General and Administrative Expense
General and administrative expenses increased from $105.1 million in 2021 to $109.4 million in 2022. The increase was primarily due to higher professional and consulting costs and increased employee-related costs mainly to support IT and finance operations related to the ransomware incident, financial reporting and Adamas integration in 2022.
Amortization of Intangible Assets
The following table provides information regarding the amortization expense for intangible assets during the periods indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Amortization of intangible assets $ 82,630 $ 29,989 $ 52,641 **
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** Indicates calculation result is equal to or greater than 100%.
Amortization of intangible assets increased for the year ended December 31, 2022, primarily due to the amortization of definite-lived intangible assets acquired in the Adamas Acquisition.
Contingent Consideration (Gain) Expense
The following table provides information regarding the contingent consideration expense during the periods indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Contingent consideration (gain) expense $ (510) $ (6,530) $ 6,020 (92)%
Contingent consideration gain recorded for the years ended December 31, 2022 and December 31, 2021 of $0.5 million and $6.5 million, respectively. The decrease in contingent consideration gain was primarily due to $6.5 million gain recorded in 2021 due to the write-down of the sales-based contingent consideration liabilities associated with the USWM Acquisition.
Other Income (Expense)
The following table provides the components of other income (expense) during the years indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Interest and other income, net $ 21,689 $ 10,569 $ 11,120 **
Interest expense (4,654) (19,696) (15,042) 76%
Interest expense on nonrecourse liability related to sale of future royalties (2,416) (3,727) (1,311) 35%
Total $ 14,619 $ (12,854) $ 27,473 **
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** Indicates calculation result is equal to or greater than 100%.
Interest and other income, net includes primarily interest earned from cash, cash equivalents, and marketable securities holdings. Interest and other income, net in creased from $10.6 million 2021 to $21.7 million in 2022. The increase in interest and other income, net was primarily due to $12.9 million recorded in 2022 in connection with the gain associated with the Navitor investment. The decrease in interest expense of $15.0 million was primarily related to the Company's adoption of ASU 2020-06.
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Income Tax Expense
The following table provides information regarding our income tax expense during the periods indicated (dollars in thousands):
2022 vs 2021 Change
2022 2021 Dollar Percent
Income tax expense $ 32 $ 19,751 $ (19,719) **
Effective tax rate 0.1 % 27.0 %
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** Indicates calculation result is equal to or greater than 100%.
Income tax expense was $32 thousand and $19.8 million for the years ended December 31, 2022 and December 31, 2021, respectively. The change in income tax expense and effective income tax rate was primarily due to tax benefits associated with the Adamas legal entities reorganization in the first quarter of 2022.
Net Earnings
The following table provides information regarding our net earnings during the periods indicated (dollars in thousands):
Change
2022 2021 Amount Percent
Net earnings $ 60,711 $ 53,424 $ 7,287 14%
The increase in net earnings was primarily due to the decrease in income tax expense and interest expense, and an increase in interest income for the year ended December 31, 2022 compared to the same period in 2021.
Summary of Cash Flows
The following table summarizes the major sources and uses of cash for the periods set forth below (dollars in thousands):
December 31, Change
2022 2021 Amount
Net cash provided by (used in):
Operating activities $ 116,826 $ 127,127 $ (10,301)
Investing activities (216,663) (81,913) (134,750)
Financing activities (10,477) (130,420) 119,943
Net change in cash and cash equivalents $ (110,314) $ (85,206) $ (25,108)
Operating Activities
Net cash provided by operating activities is comprised of two components: cash provided by operating earnings; and cash provided by (used in) changes in working capital. The net cash provided by operating activities was $116.8 million in 2022 compared to $127.1 million in 2021. The year over year change was primarily driven by decrease in working capital which reflects the timing impacts of cash collections on receivables and settlement of payables, offset by an increase in operating earnings and non-cash items.
Investing Activities
Net cash used in investing activities was $216.7 million in 2022 compared to $81.9 million in 2021. The year over year change of $134.8 million was primarily attributed to the following:
• Cash outflows related to marketable securities activity were higher by $435.2 million in 2022 compared to 2021 due to higher purchases of marketable securities offset by lower proceeds from sales and maturities of marketable securities;
• Cash outflows in 2021 of $311.7 million related to the Adamas acquisition;
• Cash inflow from cash distribution received in 2021 of $12.9 million related to investment in Navitor.
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Financing Activities
Net cash used in financing activities was $10.5 million in 2022 compared to $130.4 million provided in the same period in 2021. This year over year change is primarily attributable to the repayment of the acquired debt from the Adamas Acquisition in prior year partially offset by the payment of a contingent consideration milestone associated with the USWM Acquisition in the first quarter of 2022 and the increase in proceeds from the issuance of common stock.
Liquidity and Capital Resources
Cash and cash equivalents, marketable securities, and long term marketable securities presented below are as follows (dollars in thousands):
December 31, 2022
Cash and cash equivalents $ 93,120
Marketable securities 368,214
Long term marketable securities 93,896
Total $ 555,230
We have financed our operations primarily with cash generated from product sales, supplemented by revenues from royalty and licensing arrangements, as well as proceeds from the sale of equity and debt securities. Continued cash generation is highly dependent on the success of our commercial products, as well as the success of our product candidates if approved by the FDA. While we expect continued profitability in future years, we anticipate there may be significant variability from year to year in the level of our profits particularly due to the commercial launch of Qelbree in May 2021; continued market and payor pressures for our commercial products; and the likely unfavorable impact of the loss of patent exclusivity for Trokendi XR in January 2023.
The Company believes its balances of cash, cash equivalents and unrestricted marketable securities, which totaled $555.2 million as of December 31, 2022, along with cash generated from ongoing operations and continued access to debt markets, will be sufficient to satisfy its cash requirements over the next 12 months and beyond.
We may, from time to time, consider raising additional capital through: new collaborative arrangements; strategic alliances; additional equity and/or debt financings; or financing from other sources, especially in conjunction with opportunistic business development initiatives. We will continue to actively manage our capital structure and to consider all financing opportunities that could strengthen our long-term financial profile. Any such capital raises may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.
Our material cash requirements include the following contractual and other obligations.
Convertible Notes due 2023
As of December 31, 2022, the outstanding principal on the 0.625% Convertible Senior Notes due 2023 (2023 Notes) was $402.5 million. No 2023 Notes were converted as of December 31, 2022. Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions), issuing 402,500 convertible note hedge options. The Convertible Note Hedge Transactions are expected to reduce the potential dilution of the Company's common stock upon conversion of the 2023 Notes. Concurrently with entering into the Convertible Note Hedge Transactions, we also entered into separate warrant transactions, issuing a total of 6,783,939 warrants (the Warrant Transactions). Refer to Note 9, Convertible Senior Notes Due 2023 in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Secured Uncommitted Credit Line
During the first quarter of 2023, we entered into an uncommitted demand secured credit line with a financial institution for up to $150.0 million (the "Credit Line"). Although as of the March 1, 2023 the Company has not drawn from the Credit Line. The Credit Line is secured primarily by our portfolio of marketable securities, which is primarily comprised of corporate and U.S. government agency and municipal debt securities, and it contains collateral maintenance requirements. Pursuant to the terms of the Credit Line, the lender may terminate the Credit Line and/or demand full or partial payment of amounts borrowed thereunder at any time.
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Leases
Our operating lease commitments include leases of fleet vehicles, leases of certain facilities, including the lease of the current headquarters office and laboratory space. As of December 31, 2022, we have fixed lease payment obligations of $50.8 million, with $8.3 million payable within 12 months. Refer to Note 13, Leases in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Manufacturing Purchase Obligations
In October 2021, we entered into an amendment to the Merz Agreement which increased the price of the annual purchase commitment of MYOBLOC from €3.0 million to approximately €3.9 million. For further discussion on the embedded operating lease related to the Merz Agreement, refer to Note 13, Leases in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Milestone Payment Obligations
The Company has contingent consideration milestones payable related to the Adamas Acquisition. The possible outcomes for the contingent consideration range, on an undiscounted basis, from $0 to $50.9 million. One Milestone Payment is payable (subject to certain terms and conditions) upon the first occurrence of the achievement of aggregate worldwide net sales of GOCOVRI in excess of $150 million during any consecutive 12-month period ending on or before December 31, 2024 (Milestone 2024). Another Milestone Payment is payable (subject to certain terms and conditions) upon the first occurrence of the achievement of aggregate worldwide net sales of GOCOVRI in excess of $225 million during any consecutive 12-month period ending on or before December 31, 2025 (Milestone 2025 and, together with Milestone 2024, the Milestones). Each Milestone may only be achieved once.
We also have contingent consideration milestones payable related to the USWM Acquisition. On February 18, 2022, the FDA accepted the SPN-830 NDA for review, and we paid the resulting $25 million milestone in the first quarter of 2022. In addition, there are two other regulatory and developmental contingent consideration milestone payments: the first is a $25 million milestone due upon the FDA's regulatory approval and $30 million upon commercial launch of SPN-830. If SPN-830 is approved by the FDA and commercially launched, we expect these milestones to become due and be paid in between 2023 and 2024.
Navitor Development Agreement
We have obligations from the Development Agreement with Navitor we entered into in April 2020. The Company can terminate the Development Agreement upon 30 days' notice. Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) for treatment-resistant depression. The Company will bear all of Phase I and Phase II development costs incurred by either party, up to a maximum of $50 million. In addition, the Company will incur certain other research and development support costs.
Royalty Payments
We obtained exclusive licenses from third parties for proprietary rights to support our commercial products and product candidates. We are obligated to pay royalties to third parties, computed as a percentage of net product sales, for each respective product under a license agreement, beginning upon commercialization. The amount of future royalty obligations are dependent on future net product sales of each of the respective products under a license agreement.
Other Obligations
We have other obligations in which the timing, likelihood and, in some situations, the amount of such payments are not known, which include the following:
• any milestone payments which may become payable to third parties under license agreements or contractual agreements regarding our clinical trials, or those which may become payable upon achieving sales and developmental milestones per contractual agreements.
• any future royalty payments to third parties.
• liabilities related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing and the amounts associated with the resolution of these positions is uncertain. As such, we are unable to make a reasonably reliable estimate regarding the timing of payments beyond 12 months.
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Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2 in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report.