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TABLE OF CONTENTS
PART IV
Index to Consolidated Financial Statements
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
OR
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 001-36292
NEOS THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2834
(Primary Standard Industrial
Classification Code Number)
27-0395455
(I.R.S. Employer
Identification Number)
2940 N. Highway 360
Grand Prairie, TX 75050
(972) 408-1300
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Gerald McLaughlin, President and Chief Executive Officer
Neos Therapeutics, Inc.
2940 N. Highway 360
Grand Prairie, TX 75050
(972) 408-1300
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Title of each class
Common stock, par value $0.001 per share
Name of each exchange on which registered
The NASDAQ Global Market
Securities registered pursuant to section 12(b) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:2) Yes (cid:1) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:2) Yes (cid:1) No
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. (cid:1) Yes (cid:2) No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). (cid:1) Yes (cid:2) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:2)
Accelerated filer (cid:1)
Non-accelerated filer (cid:2)
Smaller reporting company (cid:1)
Emerging growth company (cid:1)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:2) Yes (cid:1) No
The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any
person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold on the
NASDAQ Global Market on June 30, 2018 was $177.9 million.
As of March 11, 2019, there were 49,710,677 shares of the registrant's common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Registrant's 2019 Annual Meeting of Stockholders. Such Definitive Proxy Statement will be filed with the
Commission not later than 120 days after the conclusion of the registrant's fiscal year ended December 31, 2019.
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Special note regarding forward-looking statements
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements
other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In
some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should,"
"expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations,
strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not
limited to, statements about:
our anticipated cash needs and our estimates regarding our anticipated expenses, capital requirements and our needs
for additional financings;
our ability to commercialize Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or develop and
commercialize any other future product or product candidate;
our ability to maintain our license for NT0502, to obtain regulatory approval of NT0502 and to otherwise realize
the intended benefits of this license;
the effect of the amendment to our facility agreement with Deerfield Private Design Fund III, L.P. and Deerfield
Special Situations Fund, L.P. and our ability to satisfy the repayment obligations thereunder;
the cost or other aspects of the future sales of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or the
timing, cost or other aspects of the commercial launch and future sales of any other future product or product
candidate;
our ability to increase our manufacturing and distribution capabilities for Adzenys XR-ODT, Cotempla XR-ODT
and Adzenys ER or any other future product or product candidate;
the attention deficit hyperactivity disorder patient market size and market adoption of Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER by physicians and patients;
the therapeutic benefits, effectiveness and safety of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or any
other future product or product candidate;
our expectations regarding the commercial supply of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, or
any other future products, or our generic Tussionex;
our ability to receive, and the timing of any receipt of the U.S. Food and Drug Administration, ("FDA"), approvals,
or other regulatory action in the United States and elsewhere, for any future product candidate;
our expectations regarding federal, state and foreign regulatory requirements;
our entry into the settlement and licensing agreement with Actavis Laboratories FL, Inc. ("Actavis") the effect of
our agreement with Actavis on its Abbreviated New Drug Application ("ANDA") and with the FDA for a generic
version of Adzenys XR-ODT, and the expected timing of the manufacture and marketing of Actavis's generic
version of Adzenys XR-ODT under the ANDA;
our entry into the settlement and licensing agreement with Teva Pharmaceuticals USA, Inc. ("Teva") the effect of
our agreement with Teva on its ANDA and with the FDA for a generic version of Cotempla XR-ODT, and the
expected timing of the manufacture and marketing of Teva's generic version of Cotempla XR-ODT under the
ANDA;
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our product research and development activities, including the timing and progress of our clinical trials, and
projected expenditures;
issuance of patents to us by the U.S. Patent and Trademark Office and other governmental patent agencies;
our ability to achieve profitability;
our staffing needs; and
the additional risks, uncertainties and other factors described under the caption "Risk Factors" in this Annual Report
on Form 10-K.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report
on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the
forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and
projections about future events and trends that we believe may affect our business, financial condition, results of operations
and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and
other factors described in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very
competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible
for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this
Annual Report on Form 10-K. The results, events and circumstances reflected in the forward-looking statements may not be
achieved or occur, and actual results, events or circumstances could differ materially from those described in the
forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which
the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report
on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new
information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans,
intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our
forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments we may make.
Furthermore, this Annual Report on Form 10-K includes statistical and other industry and market data that we obtained
from industry publications and research, surveys and studies conducted by third parties. Industry publications and third party
research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable,
although they do not guarantee the accuracy or completeness of such information.
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NEOS THERAPEUTICS, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2018
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
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ITEM 1. Business
Overview
PART I
We are a fully-integrated pharmaceutical company focused on developing, manufacturing and commercializing products
utilizing our proprietary modified-release drug delivery technology platform, which we have already used to develop
Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER oral suspension ("Adzenys ER"), for the treatment of attention
deficit hyperactivity disorder ("ADHD"). Our products are extended-release ("XR"), medications in patient-friendly, orally
disintegrating tablets ("ODT") or liquid suspension dosage forms. Our proprietary modified-release drug delivery platform
has enabled us to create novel, extended-release ODT and liquid suspension dosage forms. We received approval from the
U.S. Food and Drug Administration ("FDA"), for Adzenys XR-ODT, our amphetamine XR-ODT, on January 27, 2016 and
launched the commercialization of this product on May 16, 2016. We received approval from the FDA for Cotempla
XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19, 2017. We
initiated an early experience program with limited product availability on September 5, 2017 before launching this product
nationwide on October 2, 2017. Also, we received approval from the FDA for Adzenys ER, our amphetamine
extended-release liquid suspension, on September 15, 2017, and launched the commercialization of this product on
February 26, 2018. We believe Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER can address an unmet need by
providing more patient- and caregiver-friendly dosing options not previously available to patients in the $8.9 billion market
for ADHD-indicated medications. In addition to our marketed products, we are developing NT-0400, our preclinical
XR-ODT product candidate, for nausea and vomiting, and NT0502, our preclinical product candidate for the treatment of
sialorrhea.
Our branded products incorporate two of the most commonly prescribed medications for the treatment of ADHD,
methylphenidate and amphetamine. Our proprietary modified-release drug delivery platform has enabled us to create novel,
extended-release ODT and liquid suspension dosage forms of these medications. We believe Adzenys XR-ODT and
Cotempla XR-ODT are the first amphetamine XR-ODT and the first methylphenidate XR-ODT, respectively, for the
treatment of ADHD on the market. We expect our patent estate, which we developed internally and which includes
composition-of-matter, method-of-manufacture and method-of-use patents and patent applications, some of which are not
scheduled to expire until 2032, will provide additional protection for our branded products. As a result of Abbreviated New
Drug Applications ("ANDAs") filed with the FDA for a generic version of Adzenys XR-ODT by Actavis Laboratories
FL, Inc. ("Actavis") and for a generic version of Cotempla XR-ODT by Teva Pharmaceuticals USA, Inc. ("Teva") we have
entered into a Settlement Agreement and Licensing Agreement with Actavis whereby Actavis is granted the right to
manufacture and market its generic version of Adzenys XR-ODT under its ANDA beginning on September 1, 2025, or earlier
under certain circumstances, and a Settlement Agreement and Licensing Agreement with Teva whereby Teva is granted the
right to manufacture and market its generic version of Cotempla XR-ODT under its ANDA beginning on July 1, 2026, or
earlier under certain circumstances. These agreements have been submitted to the applicable governmental agencies.
In 2018, 74.8 million prescriptions for medications with ADHD labeling, and principally in extended-release
formulations, were written in the United States. The vast majority of currently available dosage forms for ADHD are tablets
and capsules. Despite once-daily dosing of these extended-release formulations, we believe there is a significant opportunity
to improve compliance rates. Up to 54% of the pediatric population and 40% of the adult population have reported difficulties
with swallowing tablets and capsules. We believe that the inability, difficulty or reluctance of many patients to swallow intact
tablets and capsules contributes to diminished compliance rates. Such limitations highlight the need for more convenient
dosing options such as ODT or liquids. To our
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knowledge, we are the only company that has succeeded to date in commercializing an XR-ODT formulation of any ADHD
medication, even though ODT are among the most preferred dosage forms of pharmaceutical products. We believe, therefore,
there is a significant market opportunity to provide two of the most prescribed medications for ADHD, methylphenidate and
amphetamine, in two more convenient and patient-friendly dosage forms, ODT and liquid suspension, which we developed
using our proprietary technology platform.
We are focusing on commercialization in the United States using our own commercial infrastructure. We currently have
a specialty sales force of approximately 75 representatives targeting the highest-volume prescribers of ADHD medication.
We manufacture Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in our current Good Manufacturing Practice
("cGMP") and U.S. Drug Enforcement Administration ("DEA") -registered manufacturing facilities, thereby obtaining our
products at cost without manufacturer's margins and better controlling supply, quality and timing. We also currently use these
facilities to manufacture our generic equivalent to the branded product, Tussionex, an XR liquid suspension of hydrocodone
and chlorpheniramine indicated for the relief of cough and upper respiratory symptoms of cold.
We believe we can apply our XR-ODT and XR liquid suspension technologies that underlie our branded products and
our generic Tussionex to other active pharmaceutical ingredients ("APIs") as well. Our longer-term strategy is to utilize these
technologies for the development and approval of additional XR-ODT or XR liquid suspension drug candidates, while
leveraging our manufacturing and commercialization experience to reduce costs and effectively reach patients. Patients with
central nervous system ("CNS") conditions, such as stroke, Parkinson's disease and Alzheimer's disease often have difficulty
swallowing their medication and may benefit from ODT and liquid suspension dosage forms. In 2019, we plan to further
evaluate NT-0400, a preclinical product candidate for the treatment of nausea and vomiting to determine its development
feasibility. On October 23, 2018, we entered into an Exclusive License Agreement (the "License Agreement") with NeuRx
Pharmaceuticals LLC ("NeuRx"), pursuant to which NeuRx granted an exclusive, worldwide royalty-bearing license to us to
develop, manufacture, and commercialize certain pharmaceutical products containing NeuRx's proprietary compound
designated as NRX 101, referred to by us as NT0502. NT0502 is a new chemical entity and a selective muscarinic receptor
antagonist that will utilize our microparticle technology, which is used in the Company's four on-market products. NT0502
will be developed to address the significant unmet medical needs for the treatment of chronic sialorrhea (excessive salivation
or drooling) in adult and pediatric patients with neurological conditions including cerebral palsy, Parkinson's disease, mental
retardation, and amyotrophic lateral sclerosis (ALS). We intend to utilize the regulatory pathway provided by
Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (the "505(b)(2) regulatory approval pathway"), for our
product candidates using only APIs from approved drug products and incorporating our proprietary drug delivery platform to
create branded product candidates.
Our total revenues increased to $50.0 million for the year ended December 31, 2018, from $27.1 million for the year
ended December 31, 2017 and $10.0 million for the year-ended December 31, 2016, all of which were generated in the
United States.
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OUR STRATEGY
Our goal is to be a leading pharmaceutical company focused on the development, manufacture and commercialization of
pharmaceutical products that utilize our proprietary modified-release drug delivery technology platform. Key elements of our
business strategy to achieve this goal are to:
Leverage our targeted sales force and commercial infrastructure in the United States to efficiently market
Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER as well as any of our other product candidates that
we may develop that are FDA approved or any FDA approved products that we in-license.
We believe that we can effectively commercialize Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in the
United States with a specialty sales force of approximately 75 representatives. We intend to target the highest volume
prescribers for the approved uses to address the unmet need for more patient- and caregiver-friendly dosage forms of the two
most prescribed medications in the $8.9 billion market for ADHD-indicated medications. We plan to commercialize our
products outside of the United States after receiving the required approvals in those countries through partnerships and
collaborations.
Manufacture our proprietary products in our cGMP, FDA-inspected and DEA-registered manufacturing
facilities.
We believe our manufacturing facilities and years of manufacturing experience are a competitive advantage. We intend
to leverage the economic efficiencies afforded by manufacturing our ADHD products in our cGMP and DEA-registered
manufacturing facilities. We believe that we will have sufficient capacity to supply commercial quantities for all of our
ADHD products.
Utilize our proprietary technology platform to develop additional branded product candidates in CNS and
other therapeutic areas with unmet need.
We intend to expand our branded product portfolio by identifying existing pharmaceutical products that could be
improved upon by utilizing our proprietary modified-release drug delivery technology platform. We plan to focus our
development efforts on approved drug products for which we believe we can secure composition-of-matter patent protection
and utilize the 505(b)(2) regulatory approval pathway. We plan to explore product opportunities in several therapeutic areas,
including CNS and gastrointestinal indications.
Continue to expand our robust intellectual property portfolio covering our novel modified-release drug
delivery technology platform and innovative products.
We have built a three-tier patent estate consisting of composition-of-matter, method-of-manufacture and method-of-use
patents and patent applications. We intend to extend our patent portfolio as we continue to expand upon our drug delivery
technologies and identify and develop additional branded product candidates. If issued and listed in the FDA's publication of
approved drug products with therapeutic equivalence evaluations (the "Orange Book"), we believe that these patents will
provide additional market protection for our FDA-approved products.
ADHD
Market and current treatment options
ADHD is a neurobehavioral disorder characterized by a persistent pattern of inattention and/or hyperactivity/impulsivity
that interferes with functioning and/or development. ADHD can have a profound impact on an individual's life, causing
disruption at school, work, and home and in relationships. It is one of the most common developmental disorders in children
and often persists into adulthood. In 2011, an estimated 11% of children in the United States ages 4 to 17 had previously
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received an ADHD diagnosis. A 2006 study estimated 4.4% of adults in the United States experience ADHD symptoms.
Current ADHD treatment guidelines recommend a multi-faceted approach that uses medications in conjunction with
behavioral interventions.
In 2018, 74.8 million prescriptions for medications with ADHD labeling were written in the United States and generated
$8.9 billion in sales. Approximately 91% of these prescriptions were for stimulant medications, such as methylphenidate and
amphetamine, which have been the standard of care for several decades. Methylphenidate and amphetamine prescriptions
generated $2.8 billion and $5.8 billion in sales, respectively, in 2018 in the United States. A few non-stimulant medications
are also available, but evidence of their efficacy for treating ADHD symptoms is less compelling. The market for ADHD
medications outside of the United States is less developed, but we believe it will continue to grow as recognition and
awareness of the disorder increase.
Limitations of existing treatment options
Extended-release, or long acting, dosage forms of stimulant medications are the standard of care for treating ADHD,
making up approximately 54% of ADHD prescriptions. Most of these extended-release dosage forms allow for once-daily
dosing in the morning, which eliminates the need to re-dose during the day. However, even with once-daily dosing, there is
great potential for improvement. The vast majority of currently available dosage forms for ADHD are tablets and capsules.
We believe that the inability, difficulty or reluctance of many patients to swallow intact tablets and capsules contributes to
diminished compliance rates.
Up to 54% of the pediatric population has difficulty swallowing tablets and capsules, and this can be especially
problematic in children with ADHD. For many of these patients, swallowing difficulties can persist into adolescence and
adulthood, with 40% of adults reporting pill-swallowing difficulties that result in skipping doses or discontinuing their
medication altogether. In addition, ADHD medications are typically administered in the morning, which is often the busiest
and most chaotic period for families.
Some extended-release products do offer alternative dosing options, such as opening the capsule to sprinkle contents
over food, but labeling for these products generally includes a caveat that such manipulation may impair the efficacy and/or
safety of the product. These alternatives may also be difficult or inconvenient for the caregiver and disruptive to an already
difficult and chaotic morning routine. Thus, a significant need remains for more patient- and caregiver-friendly dosage forms
of ADHD medications in once-daily dosing forms.
Market receptivity to novel dosage forms for the treatment of ADHD
The most prescribed extended-release medications for ADHD, Concerta® and Adderall XR® (and each of their generic
equivalents), are long-acting versions of previously short-acting methylphenidate and amphetamine medications, respectively.
While these products address the need for once-daily dosing, Concerta and Adderall XR are only available as tablets and
capsules, respectively, and may be difficult for some patients to swallow.
This limitation led to the development of a transdermal methylphenidate patch, Daytrana®. While the methylphenidate
transdermal patch offered a non-oral delivery method, it created additional issues related to dose variability, patch placement
and premature patch removal. Adverse events such as skin irritation and accidental exposure from discarded patches also
deterred Daytrana's utilization. Despite these shortcomings, Daytrana achieved approximately a 3% share of the overall
methylphenidate extended-release market in 2014.
In January 2013, an extended-release liquid formulation of methylphenidate, Quillivant XRTM, was launched by Pfizer,
providing a new dosing option. In April 2016, Pfizer launched Quillichew ERTM, an
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extended-release chewable formulation of methylphenidate and Tris Pharmaceuticals launched an extended-release liquid
formulation of amphetamine, Dyanavel XRTM. In 2017, Quillivant XR had approximately 627,000 prescriptions and gross
sales of approximately $193.3 million. Quillivant XR had captured a 0.9% share of the ADHD market in the fourth quarter of
2017 prior to a drug shortage issue at the end of year, which further impacted the Quillivant XR market share in 2018.
We launched commercialization of our amphetamine extended-release ODT, Adzenys XR-ODT, on May 16, 2016,
initiated an early experience program with Cotempla XR-ODT with limited product availability on September 5, 2017 and
launched this product nationwide on October 2, 2017, and launched Adzenys ER oral suspension on February 26, 2018. In
2018, we shipped 275,476, 211,440 and 1,836 units of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, respectively,
generating $26.6 million and $19.0 million in product revenue for of Adzenys XR-ODTand Cotempla XR-ODT, respectively.
Our ADHD portfolio captured a 0.62% aggregate share in the fourth quarter of 2018, including Adzenys XR-ODT and
Cotempla XR-ODT which captured a 0.36% share and 0.25% share, respectively, of the ADHD market in the fourth quarter
of 2018.
The market acceptance of these novel formulations, despite their limitations, further demonstrates the significant unmet
need and opportunity for novel, patient- and caregiver-friendly dosage forms in the treatment of ADHD. We believe that
XR-ODT and XR liquid suspension would be preferred and clinically beneficial dosage forms for the treatment of ADHD
patients with swallowing aversion. In a survey commissioned by us, when asked to project their next 100
dextroamphetamine/amphetamine prescriptions, a sample of 51 pediatricians and psychiatrists said they would prescribe a
once-daily controlled-release ODT dextroamphetamine/amphetamine four times as often as they would prescribe a once-daily
controlled-release liquid dextroamphetamine/amphetamine (13.3 vs. 3.4 out of their next 100 ADHD patients receiving
dextroamphetamine/amphetamine). In a study of adult patients with a CNS disorder, 61% of patients chose an ODT, in
comparison with 27% who chose a conventional tablet and 12% who were indifferent. However, to our knowledge, we are
the first company to date to commercialize an XR-ODT formulation of any ADHD medication. We believe there is a
significant market opportunity to provide the two most prescribed medications for ADHD, methylphenidate and
amphetamine, in two patient-friendly dosage forms, ODT and liquid suspension.
Our product and product candidates address an unmet need for ADHD patients
Our proprietary modified-release drug delivery technology platform has enabled us to create XR-ODT and XR liquid
suspension formulations of methylphenidate and amphetamine. We have achieved this by combining two key drug delivery
attributes in each of our products:
An extended-release profile, which allows for once daily dosing; and
An ODT or liquid suspension dosage form, which allows for easier administration and ingestion.
We have developed two XR-ODT products and an XR liquid suspension product, each of which addresses an unmet
need. Adzenys XR-ODT and Cotempla XR-ODT are the first XR-ODT products for the treatment of ADHD. We believe that
our XR-ODT products have unique attributes to improve compliance and could offer significant advantages over other solid
oral dosage forms that can help simplify the morning routine in households with ADHD-diagnosed children. These
advantages include:
Ease of administration and ingestion because they disintegrate rapidly in the mouth and may be taken without
water;
Taste-masking of bitter ADHD medications, with flavoring options;
Prevention of "cheeking", the practice of hiding medication in the mouth and later spitting it out rather than
swallowing it; and
Convenient single-unit blister-packaging, which is both portable and discrete.
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Adzenys ER is a ready-to-use, XR liquid suspension that does not require reconstitution or refrigeration, and offers an
attractive dosing option for younger children who prefer to ingest liquid medicine.
We believe that an XR-ODT, such as Adzenys XR-ODT and Cotempla XR-ODT, and an XR liquid suspension, such as
Adzenys ER, may solve the swallowing issue that undermines compliance with tablet and capsule medication regimens.
OUR CURRENTLY MARKETED PRODUCTS
Utilizing our proprietary modified-release drug delivery technology platform, we currently manufacture and market
Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and our generic Tussionex. We are in the early stages of discovering
and developing future product candidates for which we intend to seek FDA approval in accordance with Section 505(b)(2).
The table below summarizes our pipeline of currently marketed products.
Product
Adzenys XR-ODT
Cotempla XR-ODT
Adzenys ER
Generic Tussionex
Active Drug and Indication
Formulation
Status
Amphetamine for ADHD
Methylphenidate for ADHD
Amphetamine for ADHD
Hydrocodone and chlorpheniramine for cough
and upper respiratory symptoms of a cold
XR-ODT
XR-ODT
XR Liquid Suspension
XR Liquid Suspension
Approved and marketed
Approved and marketed
Approved and marketed
Approved and marketed
In general, our clinical development program for our branded products comprised single-dose clinical pharmacology
studies, each designed to evaluate the bioequivalence and bioavailability of these dosage forms under different test
conditions. Each product was studied in adult volunteers and children with ADHD. In addition, a clinical efficacy and safety
trial in children with ADHD was conducted for Cotempla XR-ODT, our methylphenidate XR-ODT. During each phase of the
clinical trials, safety and tolerability were systematically assessed. A summary of each program is presented below. For the
purposes of our clinical trials, unless otherwise indicated, we refer to children as individuals ages 6 to 12, adolescents as
individuals ages 13 to 17, and adults as individuals 18 and older.
Adzenys XR-ODT: Amphetamine XR-ODT for the treatment of ADHD
We received approval from the FDA for Adzenys XR-ODT, our amphetamine XR-ODT, on January 27, 2016. We
believe Adzenys XR-ODT is the first amphetamine XR-ODT for the treatment of ADHD. Our NDA for Adzenys XR-ODT
relies on the efficacy and safety data that formed the basis of FDA approval for the listed drug, Adderall XR, 30 mg, together
with bioequivalence, bioavailability and aggregate safety data from our Adzenys XR-ODT clinical program.
Adzenys XR-ODT contains amphetamine loaded onto a mixture of immediate-release and polymer-coated
delayed-release resin particles, which are formulated and compressed into an ODT along with other typical tableting
excipients using our patented RDIM technology. The result is amphetamine with an in vivo extended-release profile delivered
through a tablet that quickly disintegrates in the mouth without the need for water. We offer Adzenys XR-ODT in 30-day
supply, child-resistant blister packs. We have composition-of-matter patents for Adzenys XR-ODT that are scheduled to
expire in 2026 and 2032. These patents are listed in the Orange Book, which we believe will provide additional protection for
Adzenys XR-ODT. In addition, we entered into a Settlement Agreement and a Licensing Agreement (collectively, the
"Actavis Agreement") with Actavis Laboratories FL, Inc. ("Actavis") which resolved all ongoing litigation involving our
Adzenys XR-ODT patents and Actavis's Abbreviated New Drug Application ("ANDA") with the FDA for a generic version
of Adzenys XR-ODT. Under the Actavis Agreement, we granted Actavis the right to manufacture and market its generic
version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or earlier under certain circumstances.
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Adzenys XR-ODT commercialization
We launched the commercialization of Adzenys XR-ODT on May 16, 2016 and are commercializing this product in the
United States with our own infrastructure. We are using a dedicated specialty sales force in approximately 75 territories
targeting approximately 6,100 physicians who prescribe approximately 20% of all ADHD prescriptions. During 2018, we had
254,299 total prescriptions. The number of prescribers of Adzenys XR-ODT continues to grow, and during the year ended
December 31, 2018, 12,684 health care providers had written prescriptions for the product.
Adzenys XR-ODT clinical program
The clinical program for Adzenys XR-ODT consisted of five Phase 1 single-dose human pharmacokinetic studies under
fasted and/or fed conditions. Four of the five single-dose clinical studies were submitted to the FDA with the original NDA in
December 2012. The fifth study was conducted using commercial-scale material, and was included in our resubmission to the
FDA. The four original studies were a Phase 1 bioequivalence study versus Adderall XR, 30 mg, in healthy adult volunteers
under fasted conditions; a Phase 1 bioavailability study in healthy adult volunteers under both fed and fasted conditions; a
Phase 1 study to determine the impact of alcohol on the bioavailability of Adzenys XR-ODT; and a bioavailability study in
children with ADHD under fasted conditions.
The data from the pilot-scale bioequivalence study versus Adderall XR, 30 mg, is shown in Figure 1 and shows that
Adzenys XR-ODT is bioequivalent to the listed drug, Adderall XR, 30 mg, under fasted conditions.
Figure 1: Bioequivalence Study of Adzenys XR-ODT versus Adderall XR, 30 mg,
in Healthy Adult Volunteers under Fasted Conditions
Other key observations from our original clinical program for Adzenys XR-ODT included:
No alcohol dose-dumping: The extended-release properties of Adzenys XR-ODT were maintained in the presence
of varying concentrations of alcohol, indicating that Adzenys XR-ODT is a "rugged" formulation that does not
cause premature and intentional release of the drug product, or dose-dump, in the presence of alcohol.
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Similar exposure rate: Consistent with the listed drug, there was a higher mean amphetamine exposure in children,
which decreased with increasing age.
Safety and Tolerability: There were no unexpected adverse events, serious adverse events, deaths or other safety
signals. The aggregate data suggested that Adzenys XR-ODT has a similar safety profile to that of the listed drug
and is well-tolerated.
Following the receipt of a Complete Response Letter, we received feedback from the FDA on the design of an additional
bioequivalence and bioavailability study of Adzenys XR-ODT produced at commercial scale to support the NDA
resubmission. This study was designed to compare the pharmacokinetic profile of the commercial-scale product to the listed
drug in adult volunteers under fasted conditions; compare the pilot-scale manufacturing batches to the commercial-scale
batches; and evaluate the oral bioavailability of Adzenys XR-ODT under fed and fasted conditions in adult volunteers.
The bioequivalence data for the commercial-scale product demonstrated that Adzenys XR-ODT has a similar
pharmacokinetic profile to the listed drug under fasted conditions, meeting bioequivalence criteria for key exposure
parameters (AUC5[ib]-t, Cmax, AUClast, and AUCinf). The lower 90% confidence interval for early exposure (AUC0[ib]-5) of
Adzenys XR-ODT produced at commercial scale fell just below the 80% lower criterion when compared to the listed drug.
However, the concentration-time profiles for Adzenys XR-ODT produced at commercial scale and pilot scale are virtually
identical, as shown in Figure 2, indicating that scale-up of the Adzenys XR-ODT process did not significantly affect the rate
and extent of absorption of amphetamine.
Figure 2: Comparison of Adzenys XR-ODT Pilot Scale versus Adzenys XR-ODT Commercial Scale
Our settlement agreement with Shire Pharmaceuticals ("Shire"), the producer of Adderall XR, precluded the possibility
of a 30-month stay of approval under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly
known as the Hatch-Waxman Amendments.
We have committed to the FDA to conduct the following three trials as a post-marketing requirement after approval of
the Adzenys XR-ODT NDA: 1) a single-dose, open-label, randomized pharmacokinetic study of Adzenys XR-ODT
(amphetamine extended-release orally disintegrating tablets), in male and female children (4 to less than 6 years of age) with
ADHD; 2) a randomized,
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double-blind, placebo-controlled, flexible-dose titration study of Adzenys XR-ODT (amphetamine extended-release orally
disintegrating tablets), in children ages 4 to 5 years diagnosed with ADHD; and 3) a one year Pediatric Open-Label Safety
Study of patients age 4 to 5 years (at the time of entry into the second study, or at the time of enrollment if directly enrolled
into this study) diagnosed with ADHD treated with Adzenys XR-ODT (amphetamine extended-release orally disintegrating
tablets). We met with FDA officials in January 2017 to further clarify the design of the protocols required to conduct these
studies. We commenced the program beginning with the pharmacokinetics trial in 2017, and we expect to complete this
pharmacokinetics trial in 2019.
Cotempla XR-ODT: Methylphenidate XR-ODT for the treatment of ADHD
We received approval from the FDA for Cotempla XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD
in patients 6 to 17 years old, on June 19, 2017. We believe Cotempla XR-ODT is the first methylphenidate XR-ODT for the
treatment of ADHD, providing onset-of-effect within one hour and a 12-hour duration. Our Cotempla XR-ODT NDA relies
on the efficacy and safety data that formed the basis of FDA approval for the listed drug, Metadate CD®, together with
bioavailability/bioequivalence data and efficacy/safety data from our Cotempla XR-ODT clinical program.
Cotempla XR-ODT contains methylphenidate loaded onto a mixture of immediate-release and polymer-coated
delayed-release resin particles, which are formulated and compressed into an ODT along with other typical tableting
excipients using our patented rapidly disintegrating ionic masking, or RDIM, technology. The result is methylphenidate with
an in vivo extended-release profile delivered through a tablet that quickly disintegrates in the mouth. We offer Cotempla
XR-ODT in 30-day supply, child-resistant blister packs. We have composition-of-matter patents in the U.S. which we expect
will provide Cotempla XR-ODT intellectual property protection until 2032. These patents are listed in the Orange Book,
which we believe will provide additional market protection for Cotempla XR-ODT. Cotempla XR-ODT also has an FDA
marketing exclusivity period of three years which bars approval of an ANDA. In addition, we entered into a Settlement
Agreement and a Licensing Agreement (collectively, the "Teva Agreement") with Teva Pharmaceuticals USA, Inc. ("Teva")
which resolved all ongoing litigation involving our Cotempla XR-ODT patents and Teva's ANDA with the FDA for a generic
version of Cotempla XR-ODT. Under the Teva Agreement, we granted Teva the right to manufacture and market its generic
version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain circumstances.
Cotempla XR-ODT commercialization
We initiated an early experience program with limited product availability for Cotempla XR-ODT on September 5, 2017
before launching this product nationwide on October 2, 2017 and are commercializing this product in the United States with
our own infrastructure. We are using the same dedicated contract specialty sales force that we are using for our
commercialization of Adzenys XR-ODT, and have sales professionals in approximately 75 territories targeting approximately
6,100 physicians who prescribe approximately 20% of all ADHD prescriptions. During 2018, we had 156,996 total
prescriptions. The number of prescribers of Cotempla XR-ODT continues to grow, and during the year ended December 31,
2018, 8,562 health care providers had written prescriptions for the product.
Cotempla XR-ODT Clinical Program
The clinical program for Cotempla XR-ODT consists of four Phase 1 clinical pharmacology studies and a Phase 3
clinical efficacy and safety trial. Three of the clinical pharmacology studies were previously completed. They were
single-dose pharmacokinetic studies conducted under fasted and/or fed conditions: a Phase 1 bioequivalence study versus
Metadate CD in healthy adult volunteers under fasted conditions; a Phase 1 bioavailability study in healthy adult volunteers
under both fed and fasted
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conditions; and a Phase 1 bioavailability study in children and adolescents with ADHD under fasted conditions. A fourth
clinical pharmacology study, which was designed to be a Phase 1 bioequivalence study, demonstrated equivalence between
our clinical trial formulation and our to-be-marketed formulation in healthy adult volunteers under fed and fasted conditions
and was completed in July 2016. On July 28, 2016, we announced that we had completed the bridging study demonstrating
that the Cotempla XR-ODT to-be-marketed drug product met all of the primary and secondary endpoints for establishing
bioequivalence under fasted conditions. The NDA includes results from our Phase 3 clinical efficacy and safety study that
showed a statistically significant improvement in ADHD symptom control compared to placebo across the classroom day.
Onset of effect was observed within one hour post-dose and persisted through 12 hours. No serious adverse events were
reported during the study and the adverse event profile was consistent with the drug's mechanism of action. In addition, data
from a pharmacokinetic study in children with ADHD was submitted.
The data from our bioequivalence study versus Metadate CD is presented in Figure 3, and shows that Cotempla
XR-ODT has a similar plasma concentration-time profile to the listed product, Metadate CD, with a peak exposure that is
about 25% higher. The potential efficacy benefits of this increased maximum exposure, as well as any impact on safety
parameters, were evaluated in a clinical efficacy and safety trial.
Figure 3: Bioequivalence Study of Cotempla XR-ODT versus Metadate CD, 60 mg, in Healthy Adult
Volunteers under Fasted Conditions
Other key observations from the Cotempla XR-ODT clinical pharmacology program included:
No formulation-related food effect: The pharmacokinetic profile of Cotempla XR-ODT was similar under fed and
fasted conditions.
Similar exposure rate: There was higher mean methylphenidate exposure in children, which decreased with
increasing age.
Safety and tolerability: There were no unexpected adverse events, serious adverse events, deaths or other safety
signals. The aggregate data suggested that Cotempla XR-ODT has a similar safety profile to that of the listed drug
and is well-tolerated.
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Cotempla XR-ODT Phase 3 classroom efficacy and safety trial
The efficacy, safety and tolerability of Cotempla XR-ODT were evaluated in a multicenter, double-blind,
placebo-controlled laboratory classroom trial in 87 children with ADHD. The laboratory classroom was a controlled study
environment designed to model the community school classroom setting while allowing detailed assessments of behavior
over time by trained observers. The primary efficacy variable was the Swanson, Kotkin, Agler, M-Flynn and Pelham, or
SKAMP, Combined Score, a validated rating of attention and behavior, averaged over the test day, with higher scores
indicating a higher degree of functional impairment. Time to onset and duration of effect were also evaluated as key
secondary endpoints. Additional secondary efficacy endpoints included the Permanent Product Measure of Performance, or
PERMP, a ten-minute, level-adjusted math test that measures the child's ability to focus on written schoolwork by
determining the number of problems attempted and the number answered correctly.
Cotempla XR-ODT met the primary and key secondary efficacy endpoints, showing statistically significant
improvement versus placebo on the SKAMP (p<0.0001). Statistical significance expresses the probability that the results of a
particular study could have occurred purely by chance. Results are said to be statistically significant when the p-value
obtained is less than the pre-established significance level, which in this case was p<0.05 for the primary efficacy endpoint.
The SKAMP-Combined score averaged over the classroom testing day was 25.3 for the placebo group and 14.3 in the
Cotempla XR-ODT group indicating greater symptom severity in the placebo group. The least squares mean difference
was –11.04. Figure 4 shows SKAMP-Combined Scores for Cotempla XR-ODT versus placebo over the classroom day from
our Phase 3 efficacy trial. Time to onset was observed within one hour, with a 12-hour duration of effect.
Figure 4: Change from Baseline in Mean SKAMP Score During the Test Day
Statistically significant improvement versus placebo was also observed on both attempted and correct PERMP scales
(p<0.0001). Figure 5 shows PERMP scores for Cotempla XR-ODT versus placebo from our Phase 3 classroom efficacy trial.
Taken together, the data demonstrate clinically meaningful differences on both the rater-evaluated assessment of attentiveness
and behavior and the objective measure of sustained attention.
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Figure 5: Mean Profiles for PERMP Measurements During the Test Day
All of the other secondary endpoints were also statistically significant, indicating a robust effect of the drug, as well as
internal consistency in the study results. There was no impact on safety parameters as Cotempla XR-ODT was well-tolerated
with no unexpected adverse events, serious adverse events, deaths or other safety signals.
Bridging Study: Bioequivalence Between Clinical Trial Formulation and Commercial Formulation
The objective of this study was to compare the rate of absorption and oral bioavailability of the previously studied
clinical trial formulation of Cotempla XR-ODT 60 mg (2 × 30 mg) under fasted conditions to the commercial scale
formulation of Cotempla XR-ODT 60 mg (2 × 30 mg) under fasted conditions. Additionally, the rate of absorption and oral
bioavailability of the commercial scale formulation of Cotempla XR-ODT 60 mg (2 × 30 mg) under fed and fasted conditions
was compared.
The results from the bioequivalence study bridging the clinical trial lot used in the Cotempla XR-ODT clinical trial
program and the commercial lot are presented in Figure 6 below. Key findings from this study are:
The clinical trial formulation of Cotempla XR-ODT is bioequivalent to the commercial formulation of Cotempla
XR-ODT under fasted conditions.
Peak exposure is decreased slightly (approximately 23%) in the presence of a high-fat meal; however, overall
systemic.
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Fig. 6 Bioequivalence Study of Cotempla XR-ODT Clinical vs. Commercial Scale Lot in
Healthy Adult Volunteers
Analyte=DMETH+LMETH
Treatment A = Cotempla XR-ODT Commercial Scale Lot (Fed); Treatment B = Cotempla XR-ODT Commercial Scale Lot
(Fasted); Treatment C = Cotempla XR-ODT Clinical Scale Lot (Fasted)
Our 505(b)(2) application for Cotempla XR-ODT referenced the FDA's previous findings of safety and effectiveness for
Metadate CD. The NDA submission included a Paragraph IV certification notification to UCB, Inc., or UCB, the NDA holder
of Metadate CD, in accordance with the Hatch-Waxman Amendments. UCB has acknowledged that they will not initiate a
suit against us, and the 45-day period following Paragraph IV notification has since passed which precluded the possibility of
a 30-month stay of approval under the Hatch-Waxman Amendments.
We have committed to the FDA to conduct the following three trials as a post-marketing requirement after approval of
the Cotempla XR-ODT NDA: 1) a single-dose, open-label, randomized pharmacokinetic study of Cotempla XR-ODT
(methylphenidate extended-release orally disintegrating tablets), in male and female children (4 to less than 6 years of age)
with ADHD; 2) a randomized, double-blind, placebo-controlled, flexible-dose titration study of Cotempla XR-ODT
(methylphenidate extended-release orally disintegrating tablets), in children ages 4 to 5 years diagnosed with ADHD; and 3) a
6-month Pediatric Open-Label Safety Study of patients age 4 to 5 years (at the time of entry into the second study, or at the
time of enrollment if directly enrolled into this study) diagnosed with ADHD treated with Cotempla XR-ODT
(methylphenidate extended-release orally disintegrating tablets). We commenced with the pharmacokinetics trial in 2018, and
we expect to complete this pharmacokinetics trial in 2019.
Adzenys ER: Amphetamine XR liquid suspension for the treatment of ADHD
We received approval from the FDA for Adzenys ER, our amphetamine extended-release liquid suspension, on
September 15, 2017. There are currently no post-marketing requirements for this product.
In addition to the clinical trial program outlined below, we conducted two additional bioequivalence studies for Adzenys
ER, in support of the NDA: a bridging study of our clinical trial material and our to-be-marketed drug material, which
examined the effect of a high-fat meal on the commercial formulation, and a bioequivalence study of the commercial
formulation versus Adderall XR 30 mg.
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Adzenys ER contains amphetamine loaded onto a mixture of immediate-release and polymer coated delayed-release
resin particles, and using our patented dynamic time release suspension, or DTRS, technology, we are able to create an
amphetamine XR liquid suspension. Adzenys ER is designed to be shelf stable for 24 months, without requiring refrigeration
or reconstitution. We have composition-of-matter patents for Adzenys ER that are scheduled to expire in 2032. These patents
are listed in the Orange Book, which we believe will provide additional market protection for Adzenys ER.
Adzenys ER commercialization
We launched the commercialization of Adzenys ER on February 26, 2018 and are commercializing this product in the
United States with our own infrastructure. We are using the same dedicated contract specialty sales force that we are using for
our commercialization of Adzenys XR-ODT and Cotempla XR-ODT, and have sales professionals in approximately 75
territories targeting approximately 6,100 physicians who prescribe approximately 20% of all ADHD prescriptions. During
2018, we had 1,658 total prescriptions, and as of December 31, 2018, 414 health care providers had written prescriptions for
the product.
Adzenys ER clinical program
The bioavailability/bioequivalence of Adzenys ER has been characterized in five Phase 1 clinical studies: a Phase 1
study investigating the bioavailability and bioequivalence of three test formulations of Adzenys ER in healthy adults; a
Phase 1 study comparing the pharmacokinetic, or PK, profile of the commercial scale formulation of Adzenys ER to Adderall
XR 30 mg capsules; a Phase 1 food effect study of Adzenys ER in healthy adults; a Phase 1 study comparing the commercial
scale and clinical trial formulations of Adzenys ER under fasted conditions, as well as the effect of food on the PK profile of
the commercial scale formulation of Adzenys ER; and a Phase 1 PK study of Adzenys ER in children with ADHD.
The data from our most recent bioequivalence study versus Adderall XR is shown in Figure 7 and shows that the
commercial scale formulation of Adzenys ER is bioequivalent to the listed drug, Adderall XR, 30 mg, under fasted
conditions.
Figure 7: Mean d-amphetamine Concentration-Time Profiles after Administration of AMP XR OS (Treatment A) and
Adderall XR 30 mg (Treatment B)
Analyte=DAMPH
Treatment A = Adzenys ER (30 mg/15 mL); Treatment B = Adderall XR 30 mg capsule
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Other key observations from our clinical program for Adzenys ER included:
No significant food effects: When administered under fasted and fed conditions, no significant food effects were
observed for Adzenys ER, and the observed food effects of Adzenys ER were less than those for the listed drug.
Similar exposure rate: Consistent with the listed drug, there was a higher mean amphetamine exposure in children,
which decreased with increasing age.
Safety and Tolerability: There were no unexpected adverse events, serious adverse events, deaths or other safety
signals. The aggregate data suggested that Adzenys ER has a similar safety profile to that of the listed drug and is
well-tolerated.
We included a Paragraph IV certification in the NDA submission, which required a Paragraph IV certification
notification to the producer of Adderall XR, Shire Pharmaceuticals, in accordance with the Hatch-Waxman Amendments. On
March 6, 2017, we entered into a license agreement with Shire, pursuant to which Shire granted us a non-exclusive license to
certain patents owned by Shire for certain activities with respect to Adzenys ER. Under the terms of the agreement, we paid a
lump sum, non-refundable license fee of an amount less than $1.0 million due no later than thirty days after receiving
regulatory approval by the FDA of our NDA for Adzenys ER. We will also pay a single digit royalty on net sales of the
Adzenys ER during the life of the relevant Shire patents. Additionally, the license agreement contains a covenant from Shire
not to file a patent infringement suit against us alleging that Adzenys ER infringes the Shire patents.
Generic Tussionex
We manufacture and market a generic equivalent to the branded product Tussionex. Our generic Tussionex is a
hydrocodone polistirex and chlorpheniramine polistirex XR liquid suspension that is a Schedule II narcotic, antitussive and
antihistamine combination. This product is indicated for the relief of cough and upper respiratory symptoms associated with
allergies or colds in adults and children six years of age and older.
Since its launch in September 2013, we have manufactured and utilized our DTRS technology in the production of our
generic Tussionex at our facilities in Grand Prairie, Texas. In August 2014, we acquired all commercialization and profit
rights to this formulation of the generic Tussionex product from Cornerstone BioPharma, Inc. and Coating Place, Inc. We
have an exclusive supply agreement (the "Supply Agreement"), with Coating Place, Inc., or CPI, which expires in August
2021, pursuant to which CPI (i) is the exclusive supplier of the active ingredient complexes in our generic Tussionex and
(ii) has agreed to not supply anyone else engaged in the production of generic Tussionex with such active ingredient
complexes. Under the terms of the Supply Agreement, we must deliver a 24-month rolling forecast, or Forecast, of our
expected product requirements to CPI on a quarterly basis; however, only the first calendar quarter commencing on or after
the 90th day after the delivery of a Forecast constitutes a binding purchase commitment with respect to the products listed in
such Forecast. In October 2014, we re-launched the product under our own label. We sell our product to drug wholesalers in
the United States. We have also established indirect contracts with drug, food and mass retailers that order and receive our
product through wholesalers. We have obtained required state licenses, set up distribution channels and established trade
relations in order to commercialize our generic Tussionex.
Commercialization
We are commercializing Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, in the United States using our
existing commercial infrastructure. We sell our Adzenys XR-ODT, Cotempla XR-ODT
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and Adzenys ER products to drug wholesalers in the United States, and we have obtained required state licenses and set up
distribution channels.
In the United States, approximately 6,100 physicians prescribe approximately 20% of all ADHD prescriptions. We are
using a specialty sales force of approximately 75 sales representatives primarily targeting the highest-volume prescribers of
ADHD medication for the approved uses. The sales force is divided into eight regions, each managed by a regional sales
manager. Furthermore, since our target physicians tend to prescribe both methylphenidate and amphetamine, we leverage our
sales force by promoting all three of our ADHD products to the same audience.
Our commercialization efforts are focused on delivering the right message for each of our three ADHD products. Data
indicates that ADHD-indicated extended-release methylphenidate and extended-release amphetamine products are widely
prescribed. Our messaging focuses on anticipated benefits of our XR-ODT and ER liquid suspension dosage forms with
balancing important product safety information. We use multi-channel tactics to reach physicians, payers, patients and patient
caregivers with the right frequency to drive behavior. In addition to personal promotion, we intend to reach physicians
through medical education, direct marketing, journal advertising and electronic health record communication.
Advocacy groups, patients and caregivers are extremely active and vocal in the ADHD space. The period from initial
diagnosis to symptom control is difficult, and caregivers actively seek and pass on useful information. Our direct-to-patient
and direct-to-consumer plan is designed to provide useful educational materials and tools to help caregivers and patients
successfully manage ADHD treatment.
We launched Adzenys XR-ODT, our amphetamine XR-ODT, on May 16, 2016. We initiated an early experience
program with limited product availability for Cotempla XR-ODT, our methylphenidate XR-ODT, on September 5, 2017
before launching this product nationwide on October 2, 2017. We launched Adzenys ER, our amphetamine extended-release
liquid suspension, on February 26, 2018.
Our proprietary technology platform
We believe that we can apply the XR-ODT and XR liquid suspension technologies that underlie Adzenys XR-ODT,
Cotempla XR-ODT, Adzenys ER and generic Tussionex to other active pharmaceutical ingredients, or APIs. This would
allow us to offer more patient- and caregiver-friendly dosage forms, potentially improving compliance rates due to difficulty
swallowing and providing other clinical advantages. We have the ability to produce drug-loaded micro-particles with
complex release profiles, which allows us to develop ODT or liquid suspension formulations that mimic or improve existing
therapies not otherwise available in XR-ODT or XR liquid suspension form.
Our proprietary modified-release drug delivery technology platform, as illustrated below in Figure 8, allows us to
produce drug-loaded micro-particles through an ion exchange process that creates new salt forms of existing drug compounds
that have been proven safe and effective. By applying a uniform modified-release coating to these drug-loaded
micro-particles and avoiding agglomeration, or clumping, we are able to create particle structures that can withstand
compression and osmotic forces without rupturing, sloughing or leaking. This allows us to compress the modified-release
micro-particles into ODT or suspend them in a liquid formulation without destroying their integrity or causing dose-dumping.
By applying different types of coatings, we can modify the drug release characteristics of a micro-particle. Additionally, by
mixing combinations of these micro-particles, each of which has its own release profile, we are able to produce complex drug
release profiles. These micro-particles are further blended with excipients to form a final drug product, which we incorporate
into a patient-friendly dosage form such as an ODT or liquid suspension. We are also able to utilize this technology to
achieve tamper-resistant formulations and taste-masking.
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Figure 8: Our Proprietary Modified-Release Drug Delivery Technology Platform
We believe our technology platform is able to deliver a proprietary portfolio of commercially available drugs in highly
desirable dosage forms.
Our XR-ODT Technology: Rapidly Disintegrating Ionic Masking
Our Rapidly Disintegrating Ionic Masking ("RDIM") technology utilizes an orally disintegrating, modified-release,
taste-masked pharmaceutical composition that can withstand compression forces associated with standard tableting
technology, allowing for a drug to be incorporated into the ODT dosage form using ion resin technology. This technology not
only provides extended-release and controlled-release properties, it masks the unpleasant taste of the active drug. Flavor and
coloring can also be added to the compression blend to further enhance the pharmaceutical elegance of the finished XR-ODT.
The finished product is then packaged in blister packs making them extremely portable, child resistant and stable for
24 months. Our RDIM technology is protected by a U.S. patent that is scheduled to expire in 2026.
ODT are one of the most preferred solid oral dosage forms in the market. We believe Adzenys XR-ODT and Cotempla
XR-ODT, using our patented XR-ODT technology, are the first amphetamine XR-ODT and the first methylphenidate
XR-ODT, respectively, for the treatment of ADHD on the market.
Our XR Liquid Suspension Technology: Dynamic Time Release Suspension
Our Dynamic Time Release Suspension ("DTRS") technology encompasses a set of process technologies and know-how
to manufacture and test modified-release liquid suspension products that are shelf-stable. By matching the specific gravity,
osmotic and ionic characteristics of the drug resin particle to that of the suspension, we are able to obtain shelf-stable liquids
with a 24-month shelf life that do not require reconstitution or refrigeration.
XR liquid suspension provides a patient-friendly dosage form for patients who find swallowing an intact tablet or
capsule to be difficult, or for whom more precise dose-titration may be preferred or required. Our DTRS technology not only
provides for an extended-release, ready-to-use Liquid Suspension but also provides excellent taste-masking of the drug itself.
Our DTRS technology is protected by a series of patents and patent applications.
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Our Tamper Resistant Technology: Kinetically Controlled Tamper Protection
Ion resin drug products inherently deter some forms of abuse, such as inhalation, smoking and injection; however, the
most common form of abuse for many drugs is to induce dose-dumping by crushing, chewing or extraction. Our Kinetically
Controlled Tamper Protection ("KCTP") technology is designed to prevent abuse by altering the kinetics of the drug product
and can be used in conjunction with both our XR-ODT and XR liquid suspension dosage forms. KCTP is designed to
discourage common methods of tampering associated with certain classes of medications which can be abused and misused.
KCTP utilizes an additional ion resin particle with an aversive agent bound to it. The aversive resin complex is then coated so
that it passes through the body without material release. If an attempt is made to tamper with the XR-ODT or XR liquid
suspension to cause dose-dumping, the aversive agent will also be released and block or disrupt the properties of the active
drug product.
We believe that our KCTP technology may be especially useful for opioid-based pain products or other DEA scheduled
drug products for which abuse and dose dumping are known problems. Our KCTP technology is the subject of a patent
application and, if granted, this patent will provide protection until 2032.
Our product pipeline potential
Beyond our initial focus on ADHD, our strategy is to apply our proprietary drug delivery technology platform for the
development of additional drug candidates where patients may benefit from either XR ODT or XR liquid suspension dosage
forms of existing extended release medications. Difficulty and inability to swallow tablets and capsules are not limited to
ADHD medications. Patients with CNS conditions, such as stroke, Parkinson's disease and Alzheimer's, and gastrointestinal
conditions, such as nausea and vomiting, often have difficulty swallowing their medication and would benefit from ODT and
liquid suspension dosage forms.
In addition, our technology may be able to be applied to new chemical entities and existing small molecule therapeutics
that are currently not optimized for their kinetic delivery. We believe that our technology is capable of overcoming some of
the common issues in oral drug delivery, such as high peak to trough ratios, blood level spikes that induce unwanted side
effects, wide variations in fed fasted effect, suboptimal onset of action, suboptimal duration of effect, dose dumping and
single point failures of the delivery system, while providing an oral dosage form that is preferred by patients, caregivers and
physicians.
We are focused on further advancing the development of our pipeline to diversify our revenue base and sustain our
future. Our lead product candidate that will utilize our proprietary drug delivery technology platform is NT0502 or
N-desethyloxybutynin. This candidate is a new chemical entity and a selective muscarinic receptor antagonist that will utilize
our microparticle technology, which is used in our four on-market products. NT0502 will be developed to potentially address
the significant unmet medical needs for the treatment of chronic sialorrhea in adult and pediatric patients with neurological
conditions including cerebral palsy, Parkinson's disease, mental retardation, and amyotrophic lateral sclerosis (ALS).
N-desethyloxybutynin is the active metabolite of oxybutynin, an approved drug to treat a urological condition and, therefore
we believe we can leverage existing preclinical data for the parent molecule in our NT0502 development program.
In the US, more than 1.4 million patients with neurological disease—including those with cerebral palsy, Parkinson's
disease, mental retardation, ALS, and other central nervous system disorders—experience sialorrhea due to
neuromuscular/sensory dysfunction.1 Anatomic abnormalities and side effects from certain medications including
anticonvulsants and antipsychotics can also cause excessive drooling. Sialorrhea can lead to significant physical and
psychosocial complications, including perioral chapping, dehydration, infection, foul odor, stigmatization, and increased
dependency and level of care, all of which can create an additional burden for these medically complicated patients. Current
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anticholinergic agents are associated with treatment-limiting adverse events and require titration and dosing up to three times
per day, presenting complexity and inconvenience to patients and caregivers. Based on the pharmacological profile of
NT0502, we expects a potentially improved tolerability profile for this product candidate.
We have completed feasibility studies on several additional potential product candidates thus far, including NT-0400 for
nausea and vomiting. We believe several of these potential product candidates will be synergistic to our existing commercial
infrastructure and the others would allow us to expand into adjacent therapeutic categories.
Our screening criteria for future potential product candidates to initially assess technical feasibility include whether the
target drug compound can be ionized and bound to a resin micro particle. We are assessing drug loading efficiency and
coating polymers and conducting initial coating work to determine whether the desired release profile can be achieved for a
particular drug resin micro particle.
We are also assessing regulatory criteria to minimize regulatory approval risk. The 505(b)(2) regulatory approval
pathway allows for a potentially streamlined and targeted clinical development program. During the development process, we
communicated with the FDA on several occasions and received feedback on our clinical development plans for our currently
marketed products. We intend to continue to use the 505(b)(2) regulatory approval pathway in an effort to mitigate approval
risk, and also simplify the clinical development program. We intend to address clinical study design, study endpoints and
labeling advantages early in the development process so that we can tailor a given clinical program that produces a product
candidate with attributes that allow for the optimal strategic positioning, if approved.
Finally, we are evaluating criteria when systematically choosing a potential product candidate for our pipeline. We have
looked for product candidates that we believe have a market potential in excess of $50.0 million, a concentrated specialty
physician prescribing base, in the case of complementary candidates, and a patent landscape that can be navigated and
protected through the lifespan of our potential product candidate.
We have designed our development process to be targeted and relatively efficient. If we are able to effectively execute
our development process, we may be able to initiate clinical trials in approximately 18 months, and submit our NDA in as
few as 36 months, after identifying a potential product candidate. We believe we have identified several potential product
candidates that fit our screening criteria and that are attractive candidates for our branded product portfolio.
OUR MANUFACTURING CAPABILITIES
Overview
We lease one manufacturing site in Grand Prairie, Texas that handles the development, production, quality control
testing and packaging of our products. This facility has 77,112 square feet of manufacturing and laboratory space, and
contains dedicated cGMP manufacturing suites for both XR-ODT and XR liquid suspension. We hold DEA manufacturing
and analytical licenses, and maintain storage and use of Schedule II through IV controlled substances. The manufacture of our
products is subject to extensive cGMP regulations, which impose various procedural and documentation requirements and
govern all areas of record keeping, production processes and controls, personnel and quality control. We have operated and
maintained these facilities dating back to when we operated as a contract manufacturer by our predecessor corporation,
PharmaFab, Inc., or PharmaFab.
In April 2007, the FDA announced entry of a Consent Decree of Permanent Injunction, or the Consent Decree, against
PharmaFab, one of its subsidiaries and two of its officials, including Mark Tengler, our former Chief Technology Officer,
who was, at the time, PharmaFab's president and Russ McMahen, our Senior Vice President of Scientific Affairs, who held a
similar position at the time with
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PharmaFab, or jointly, the Defendants. The Consent Decree arose out of several perceived cGMP deficiencies related to the
manufacture of unapproved drugs or Drug Efficacy Study Implementation, or DESI, drugs that we no longer manufacture.
Pursuant to the Consent Decree, the Defendants were permanently restrained and enjoined from directly or indirectly
manufacturing, processing, packing, labeling, holding or distributing any prescription drugs that are not the subject of an
NDA or an abbreviated NDA. Among other things, the Consent Decree also granted the FDA the ability to, without prior
notice, inspect PharmaFab's place of business and take any other measures necessary to monitor and ensure continuing
compliance with the terms of the Consent Decree. The FDA has inspected the Grand Prairie facility several times since the
Consent Decree was entered, and we have been able to manufacture and ship our generic Tussionex, Adzenys XR-ODT,
Cotempla XR-ODT, Adzenys ER for commercial distribution and drug products for our clinical trials. We have also
concluded the required annual audit program as prescribed by the Consent Decree. For our most recent annual audit by a
cGMP expert in November 2014, the cGMP expert concluded our corrective actions satisfactorily addressed the observations
noted by the cGMP expert in its audit report. However, on May 22, 2015, the FDA's Dallas District Office identified three
ongoing cGMP deviations based on our response to the audit report related to batch failure investigations, quality control unit
procedures, and in-process specifications. We implemented corrective actions and submitted additional information in our
response to the FDA pursuant to the Consent Decree and the FDA closed the matter. To date, the consent decree has had no
material impact on our current business operations or our ability to pursue approval of our product candidates.
We are currently producing Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and our generic Tussionex for
commercial distribution. We believe that our current facilities have the manufacturing capacity for commercial production of
Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and generic Tussionex in quantities sufficient to meet what we believe
will be our commercial needs, and to accommodate the manufacturing of materials for future clinical trials of other potential
product candidates that we may identify for our product pipeline. We believe that maintaining our internal manufacturing
capabilities enables us to obtain our products at-cost without manufacturer's margins and to better control supply quality and
timing.
Drug substances
We currently purchase the APIs used in Adzenys XR-ODT and Adzenys ER (amphetamine), and Cotempla XR-ODT
(methylphenidate), anionic resins, excipients and other materials from third-party providers, on a purchase order basis from
manufacturers based outside and within the United States. We have entered into commercial supply agreements, with several
of these manufacturers, and anticipate entering into commercial supply agreements with additional manufacturers at a later
date.
Both amphetamine and methylphenidate are classified as controlled substances under U.S. federal law. Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER are classified by the DEA as Schedule II controlled substances, meaning that
these drug products have a high potential for abuse and dependence among drugs that are recognized as having an accepted
medical use. Consequently, the procurement, manufacturing, shipping, dispensing and storing of our products and product
candidates will be subject to a high degree of regulation, as described in more detail under the caption "Governmental
Regulation—DEA Regulation" included elsewhere in this Annual Report on Form 10-K.
INTELLECTUAL PROPERTY
Proprietary protection
Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our drug
candidates, manufacturing and process discoveries and other know-how, to
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operate without infringing the proprietary rights of others, and to prevent others from infringing on our proprietary rights. We
have been building and continue to build our intellectual property portfolio relating to our ADHD products, our generic
Tussionex and our technology platform. Our policy is to seek to protect our proprietary position by, among other methods,
filing U.S. and certain foreign patent applications related to our proprietary technology, inventions and improvements that are
important to the development and implementation of our business. We also intend to rely on trade secrets, know-how,
continuing technological innovation, and potential in-licensing opportunities to develop and maintain our proprietary
position. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect
to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may
be granted to us in the future will be commercially useful in protecting our technology.
Patent rights
Our intellectual property portfolio consists of 13 patents and 8 patent applications in the United States, including 2
provisional applications, and 3 patents and 2 patent applications in foreign countries and regions, and 1 international (PCT)
patent application. Our intellectual property strategy emphasizes specific drug products, product groups, and technology
platforms. Our patents and patent applications covering specific drug products include claims to the drug products and to
methods of using those products. Our patents and patent applications covering technology platforms include claims to
methods of making products as well as claims to the products made by those methods. Certain of these patents and patent
applications cover more than one product.
Our XR-ODT product Adzenys XR-ODT patent portfolio includes five granted U.S. patents and three pending U.S.
non-provisional applications. The issued patents contain pharmaceutical composition-of-matter claims covering
controlled-release direct compression ODT with drug-resin particles and, among other things, composition of matter for
Adzenys XR-ODT. The composition-of-matter patents are scheduled to expire in 2026 and 2032.
Our XR-ODT product Cotempla XR-ODT patent portfolio includes three granted U.S. patents, including pharmaceutical
composition-of-matter claims covering controlled-release direct compression ODT with drug-resin particles and, among other
things, composition of matter for Cotempla XR-ODT. These patents are scheduled to expire in 2026 and 2032, respectively.
This portfolio also includes four other pending U.S. non-provisional applications and one international (PCT) patent
application.
Our XR liquid suspension product Adzenys ER patent portfolio contains nine granted U.S. patents and three other
pending U.S. non-provisional applications. These patents contain claims directed to, among other things, compositions of
matter, as well as methods of preparing liquid controlled-release formulations and for predicting bioequivalence for liquid
suspension. The longest-term composition-of-matter patent is scheduled to expire in 2032, and the method patents are
scheduled to expire in 2025, 2029 and 2031, respectively.
Our generic Tussionex is covered by six of our granted U.S. patents which include claims directed to, among other
things, a composition-of-matter, as well as methods-of-making, and for predicting bioequivalence for liquid suspension. Our
generic Tussionex is also covered by one other pending non-provisional applications. The composition-of-matter patent is
scheduled to expire in 2031. We expect protection under certain other granted patents and/or a patent granted on the pending
application to also extend until 2031.
Both applicable platform patents and relevant specific drug patents for Adzenys XR-ODT, Cotempla XR-ODT and
Adzenys ER are listed in the Orange Book. We own all of the above patents and pending applications.
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On July 25, 2016, we received a Paragraph IV certification from Actavis advising us that Actavis has filed an ANDA
with the FDA for a generic version of Adzenys XR-ODT. The certification notice alleges that the four U.S. patents listed in
the FDA's Orange Book for Adzenys XR-ODT, one with an expiration date in April 2026 and three with expiration dates in
June 2032, will not be infringed by Actavis's proposed product, are invalid and/or are unenforceable. On September 1, 2016,
we filed a patent infringement lawsuit in federal district court in the District of Delaware against Actavis that automatically
stayed, or barred, the FDA from approving Actavis's ANDA for 30 months or until a district court decision that is adverse to
the asserted patents is rendered, whichever is earlier. On October 17, 2017, we entered into the Actavis Agreement with
Actavis, which resolved all ongoing litigation involving our Adzenys XR-ODT patents and Actavis's ANDA. Under the
Actavis Agreement, we have granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT
under the ANDA beginning on September 1, 2025, or earlier under certain circumstances. A stipulation and order of
dismissal was entered by the U.S. District Court for the District of Delaware. The Actavis Agreement has been submitted to
the applicable governmental agencies.
On October 31, 2017, we received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. ("Teva") advising
us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT, in connection with seeking to
market its product prior to the expiration of patents covering Cotempla XR-ODT. On December 13, 2017, we filed a patent
infringement lawsuit in federal district court in the District of Delaware against Teva. This case alleged that Teva infringed
our Cotempla XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Cotempla
XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Teva's
ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier.
On December 21, 2018, we entered into the Teva Agreement with Teva, which resolved all ongoing litigation involving our
Cotempla XR-ODT patents and Teva's ANDA. Under the Teva Agreement, we have granted Teva the right to manufacture
and market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain
circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The
Teva Agreement has been submitted to the applicable governmental agencies.
On October 23, 2018, we signed a licensing agreement with NeuRx Pharmaceuticals LLC ("NeuRx") for NRX 101 (now
known as NT0502 and formerly known as NT0501), a selective muscarinic receptor antagonist drug candidate for the
treatment of sialorrhea. Under the terms of this licensing agreement, we have assumed responsibility for the NeuRx
intellectual property portfolio protecting NT0502, currently consisting of two pending U.S. non provisional patent
applications. These applications include claims directed to, among other things, methods of treatment and pharmaceutical
dosage forms with NT0502. Patents, if granted, from these applications would be expected to expire in 2032.
Adzenys XR-ODT and Cotempla XR-ODT are not currently protected by patents outside of the United States and our
generic Tussionex and Adzenys ER are currently protected by method patents only in the United States, Canada and Mexico.
As such, competitors may be free to sell products that incorporate the same or similar technologies that are used in our
products in countries in which the relevant product does not have patent protection.
Patent life determination depends on the date of filing of the application and other factors as promulgated under the
patent laws. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed
filing date of a non-provisional patent application in the applicable country.
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Trade secret and other protection
In addition to patented intellectual property, we also rely on trade secrets and proprietary know-how to protect our
technology and maintain our competitive position, especially when we do not believe that patent protection is appropriate or
can be obtained. Our policy is to require each of our employees, consultants and advisors to execute a confidentiality and
inventions assignment agreement before beginning their employment, consulting or advisory relationship with us. The
agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential
information developed or learned by the individual during the course of the individual's relationship with us except in limited
circumstances. These agreements generally also provide that we shall own all inventions conceived by the individual in the
course of rendering services to us.
Other intellectual property rights
We seek trademark protection in the United States when appropriate. We have filed for trademark protection for the
Neos Therapeutics mark, which we use with our pharmaceutical research and development as well as products, as well as
trade names that could be used with our potential products. We currently have registered trademarks for Neos Therapeutics,
Adzenys, Adzenys XR-ODT, Adzenys ER and Cotempla XR-ODT in the United States, as well as for our DTRS technology.
From time to time, we may find it necessary or prudent to obtain licenses from third party intellectual property holders.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 2018, December 31, 2017 and December 31, 2016, our research and development
expenses were $8.5 million, $9.0 million and $12.2 million, respectively.
COMPETITION
Our industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. We face competition and potential competition from a number of sources, including pharmaceutical and
biotechnology companies, generic drug companies, drug delivery companies and academic and research institutions. We
believe the key competitive factors that will affect the development and commercial success of our product candidates
include ease of administration and convenience of dosing, therapeutic efficacy, safety and tolerability profiles and cost. Many
of our potential competitors have substantially greater financial, technical and human resources than we do, as well as more
experience in the development of product candidates, obtaining FDA and other regulatory approvals of products, and the
commercialization of those products. Consequently, our competitors may develop modified-release products for the treatment
of ADHD or for other indications we may pursue in the future, and such competitors' products may be more effective, better
tolerated and less costly than our product candidates. Our competitors may also be more successful in manufacturing and
marketing their products than we are. We will also face competition in recruiting and retaining qualified personnel and
establishing clinical trial sites and patient enrollment in clinical trials.
Adzenys XR ODT, Cotempla XR-ODT and Adzenys ER also face competition from commercially available generic and
branded medications currently produced by companies that are promoting products in the ADHD market, including Shire
(Vyvanse, Adderall XR, Mydayis), Janssen (Concerta), Pfizer (Quillivant XR and QuilliChew ER), Novartis (Focalin XR and
Ritalin LA), Tris Pharmaceuticals (Dyanavel XR), Rhodes Pharmaceuticals (Aptensio XR), Osomotica Pharmaceuticals
(Methylphenidate HCl ER 72 mg Tablet) and related generics. On August 9, 2018, Ironshore Pharmaceuticals announced the
FDA approval for its ADHD product Jornay PM, a delayed-release and extended-release formulation of methylphenidate,
which it expects to commercially launch in the
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first half of 2019. Also, on March 1, 2019, Adlon Therapeutics L.P., as subsidiary of Purdue Pharma L.P., announced that the
FDA approved Adhansia XR, its methylphenidate extended release capsule for the treatment of ADHD. We are also aware of
efforts by several pharmaceutical companies with ADHD medications in clinical development, including Sunovion, Kem
Pharm and Neurovance. Tris Pharmaceuticals is also working in this space to reformulate existing methylphenidate and
amphetamine medications.
The FDA recently issued revised guidance for bioequivalence testing of extended-release methylphenidate, which makes
it more difficult to seek approval on the basis of bioequivalence for new generic products. We believe this will result in
limited competition for the generic Concerta market and a new branded, extended-release methylphenidate drug with 12-hour
duration of effect, such as Cotempla XR-ODT would benefit from the lack of competition. In light of these developments, we
believe that along with Concerta and Aptensio XR, Cotempla XR-ODT is positioned to be one of only three branded solid
oral dosage formulations of extended-release methylphenidate with 12-hour coverage, and its ODT formulation would offer a
unique and patient- and caregiver-friendly dosage form. While several generic versions of Concerta have recently been
approved by the FDA, two additional generic manufacturers launched generic versions of Concerta, Mallinckrodt in 2011 and
KUDCO in 2013, both have lost their AB-rating, are now BX-rated, and may no longer be substituted for Concerta. This
results in a market with a higher barrier to entry.
GOVERNMENT REGULATION
Government authorities in the United States at the federal, state and local levels and in other countries regulate, among
other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage,
record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and
import of drug products. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety
and efficacy must be obtained, organized into a format specific for each regulatory authority, submitted for review and
ultimately approved by the applicable regulatory authority.
U.S. drug development
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its'
implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations. The process of
obtaining regulatory approval and maintaining subsequent compliance with applicable federal, state and local statutes and
regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S.
requirements at any time during product development, the approval process or after approval may subject an applicant to
administrative or judicial sanctions. These sanctions could include, among other actions, the FDA's refusal to approve
pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, voluntary product recalls or
market withdrawals, product seizures, total or partial suspension of production or distribution injunctions, fines, consent
decrees, refusals of government contracts, restitution, disgorgement or civil and criminal penalties. Any agency or judicial
enforcement action could have a material adverse effect on us. For a description of a consent decree our predecessor
corporation entered into with the FDA and to which we remain subject, see "Our manufacturing capabilities—Overview" and
"Risk factors—Risks related to commercialization."
If we fail to manufacture Adzenys XR-ODT, Cotempla XR-ODT or Adzenys ER in sufficient quantities and at
acceptable quality and pricing levels, or fail to obtain adequate DEA quotas for controlled substances, or to fully comply with
cGMP regulations, we may face delays in the commercialization of this product candidate or be unable to meet market
demand, and may be unable to generate potential revenues.
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Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in
the United States. We intend to submit our NDAs under the 505(b)(2) regulatory approval pathway. Development and
approval of drugs generally involves the following:
Submission to the FDA of an IND, which must become effective before clinical trials involving humans may begin;
Approval by an independent institutional review board, or IRB, or ethics committee at each clinical trial site before
a trial may be initiated at that site;
Performance of adequate and well-controlled human clinical trials in accordance with applicable IND regulations
and other good clinical practices, or GCPs;
Submission of an NDA to the FDA;
The FDA's decision within 60 days of its receipt of an NDA to accept it for filing and review;
Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the
drug is produced to assess compliance with cGMPs and assure that the facilities, methods and controls are adequate
to preserve the drug's identity, strength, quality and purity;
Possible FDA audit of the clinical trial sites that generated the data in support of the NDA; and
FDA review and approval of the NDA.
The nonclinical testing, clinical trials and review process requires substantial time, effort and financial resources, and we
cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all. The data required to
support an NDA are generated in two distinct developmental stages: nonclinical and clinical. The nonclinical development
stage generally involves synthesizing the active component, developing the formulation and control procedures and
determining the manufacturing process, as well as carrying out non-human toxicology, pharmacology and drug metabolism
studies in the laboratory, which may support subsequent clinical testing in humans. In the case of documentation to support a
505(b)(2) NDA, this nonclinical data may be referenced in literature or the FDA's previous findings of safety and efficacy for
a listed drug. The sponsor must submit the results of the nonclinical studies, together with manufacturing information,
analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An
IND is a request for authorization from the FDA to administer an investigational drug product to humans, and must become
effective before clinical trials may begin. An IND automatically becomes effective 30 days after receipt by the FDA, unless
before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the IND on
clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can
begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
The clinical stage of development involves the administration of the product candidate to healthy volunteers and patients
under the supervision of qualified investigators, generally physicians not employed by or under the sponsor's control, in
accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their
participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of
the trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety
and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of
the IND. Further, each clinical trial must be reviewed and approved by an independent IRB for each institution where the trial
will be conducted to ensure that the risks to individuals participating in the clinical trials are minimized and are reasonable in
relation
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to anticipated benefits. The IRB also approves the informed consent form that must be provided to each subject or his or her
legal representative and must monitor the clinical trial until completed.
Clinical trials
Clinical trials are generally conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may
overlap.
Phase 1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single
dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the
metabolism, pharmacology, side effect tolerability and safety of the drug.
Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to
produce the desired benefits. At the same time, safety and further pharmacokinetic and pharmacodynamics
information is collected, possible adverse effects and safety risks are identified and a preliminary evaluation of
efficacy is conducted.
Phase 3 clinical trials generally involve large numbers of patients at multiple sites and are designed to provide the
data necessary to demonstrate the product candidate's safety and effectiveness for its intended use, establish its
overall benefit/risk relationship, and provide an adequate basis for approval.
By following the 505(b)(2) regulatory approval pathway, the applicant may reduce some of the burdens of developing a
full clinical program by relying on investigations not conducted by the applicant and for which the applicant has not obtained
a right of reference, such as prior investigations involving the listed drug. In such cases, some clinical trials may not be
required or may be otherwise limited.
Post-approval trials, sometimes referred to as Phase 4, may be conducted after initial marketing approval. These trials
are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain
instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.
Before approval, progress reports detailing the results of the clinical trials, among other information, must be submitted
at least annually to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and
unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the same
or similar drugs, findings from animal or in vitro testing suggesting a significant risk to humans, and any clinically important
rate increase of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure. Phase 1,
Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the
sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects
are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its
institution if the trial is not being conducted in accordance with the IRB's requirements or the use of the drug raises any safety
concerns. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the
sponsor, known as a data safety monitoring board or committee. Depending on its charter, this group may determine whether
a trial may move forward at designated check points based on access to certain data from the trial.
There are also requirements governing the reporting of ongoing clinical trials and completed trial results to public
registries. Sponsors of certain clinical trials of FDA-regulated products are required to register and disclose specified clinical
trial information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population,
phase of investigation, study sites and investigators and other aspects of the clinical trial is then made public as part of the
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registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results
of these trials can be delayed until the new product or new indication being studied has been approved. However, there are
evolving rules and increasing requirements for publication of all trial-related information, and it is possible that data and other
information from trials involving drugs that never garner approval could require disclosure in the future.
Concurrent with clinical trials, companies usually develop additional information about the chemistry and physical
characteristics of the drug as well as finalize a process for manufacturing it in commercial quantities in accordance with
cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product
candidate, and, among other things, a drug manufacturer must develop methods for testing the identity, strength, quality and
purity of the final drug product. Appropriate packaging must be selected and tested, and stability studies must be conducted to
demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
NDA and FDA review process
The results of nonclinical studies and clinical trials, together with other detailed information, including extensive
information on manufacturing and drug composition and proposed labeling, are submitted to the FDA in the form of an NDA
requesting approval to market the drug for one or more specified indications. The FDA reviews an NDA to determine, among
other things, whether a drug is safe and effective for its intended use and whether the product is being manufactured in
accordance with cGMPs to assure and preserve the product's identity, strength, quality and purity. FDA approval of an NDA
must be obtained before a drug may be legally marketed in the United States.
Under the Prescription Drug User Fee Act, as amended (the "PDUFA"), each NDA must be accompanied by a user fee.
The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA's fee schedule, effective through
September 30, 2018, the user fee for an application requiring clinical data, such as an NDA, was $2,421,495, which increased
to $2,588,478 for the period beginning October 1, 2018. Clinical data, as interpreted by the FDA to assess fees under
PDUFA, include (1) study reports or literature reports of what are explicitly or implicitly represented by the applicant to be
adequate and well-controlled trials for safety or effectiveness or (2) reports of comparative activity (other than bioequivalence
and bioavailability studies), immunogenicity, or efficacy, where those reports are necessary to support a claim of comparable
clinical effect. The term does not include bioequivalence and bioavailability studies submitted in support of an NDA. NDAs
for which clinical data are not required to demonstrate safety and effectiveness are reduced to half of the amount of the
prescribed user fee, or $1,210,748 through September 30, 2018 and $1,294,239 through September 30, 2019. PDUFA also
imposes an annual program fee for human drugs ($304,162 through September 30, 2018, and $309,915 through
September 30, 2019, per product up to a maximum of five fees for a fiscal year for prescription drug products identified in a
single approved application). Fee waivers or reductions are available in certain circumstances, including waiver of the
application fee for the first application filed by a small business.
The FDA reviews submitted NDAs before it accepts them for filing, and may request additional information rather than
accepting the applications. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once
the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to
by the FDA under PDUFA, the FDA has ten months from the filing date in which to complete its initial review of a standard
NDA and respond to the applicant, and six months from the filing date for an NDA designated for priority review. The FDA
does not always meet its PDUFA goal dates for standard and priority NDAs, and the review process is often significantly
extended by FDA requests for additional information or clarification.
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Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new
product to determine whether they comply with cGMPs. The FDA will not approve the product unless it determines that the
manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent
production of the product to specifications. The FDA may also audit data from clinical trials to ensure compliance with GCP
requirements. Additionally, the FDA may refer applications for novel drug products or drug products which present difficult
questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for
review, evaluation and a recommendation regarding whether the application should be approved and, if so, under what
conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers them carefully when
making decisions. NDAs submitted under Section 505(b)(2) are typically not referred to an Advisory Panel for consideration
unless new safety information is revealed in the review cycle. The FDA likely will re-analyze the clinical trial data, which
could result in extensive discussions between the FDA and the applicant during the review process. The review and
evaluation of an NDA by the FDA is extensive and time consuming and may take longer than originally planned to complete,
and we may not receive a timely approval, if at all.
After the FDA evaluates an NDA, it will issue an approval letter or a Complete Response Letter. An approval letter
authorizes commercial marketing of the drug with prescribing information for specific indications. A Complete Response
Letter indicates that the review cycle of the application is complete and the application will not be approved in its present
form. A Complete Response Letter usually describes the specific deficiencies in the NDA identified by the FDA, and may
require additional clinical data, such as an additional pivotal Phase 3 clinical trial, and other significant and time-consuming
requirements related to clinical trials, nonclinical studies or manufacturing. If a Complete Response Letter is issued, the
applicant may resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even
if such data and information are submitted, the FDA may decide that the NDA does not satisfy the criteria for approval. Data
obtained from clinical trials are not always conclusive, and the FDA may interpret data differently than the sponsor interprets
the same data.
There is no assurance that the FDA will approve a product candidate for marketing, and the sponsor may encounter
significant difficulties or costs during the review process. If a product receives marketing approval, the approval may be
significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict
the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be
included in the product labeling, or it may condition approval on changes to the proposed labeling. The FDA also may
condition approval on the development of adequate controls and specifications for manufacturing and a commitment to
conduct post-marketing testing and surveillance to monitor the potential effects of approved products. For example, the FDA
may require Phase 4 trials designed to further assess a drug's safety and efficacy.
The FDA may also place other conditions on approval including the requirement for a risk evaluation and mitigation
strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must
submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could
include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution
methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict
the commercial promotion, distribution, prescription or dispensing of products. Marketing approval may be withdrawn for
non-compliance with regulatory requirements or if problems occur following initial marketing.
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Section 505(b)(2) regulatory approval pathway
Section 505(b)(2) of the FDCA provides an alternate regulatory pathway for approval of a new drug by allowing the
FDA to rely on data not developed by the applicant. Specifically, Section 505(b)(2) permits the submission of an NDA where
one or more of the investigations relied upon by the applicant for approval was not conducted by or for the applicant and for
which the applicant has not obtained a right of reference. The applicant may rely upon published literature and/or the FDA's
findings of safety and effectiveness for an approved drug already on the market. Approval or submission of a 505(b)(2)
application, like those for abbreviated new drugs, or ANDAs, may be delayed because of patent and/or exclusivity rights that
apply to the previously approved drug.
A 505(b)(2) application may be submitted for a new chemical entity, or NCE, when some part of the data necessary for
approval is derived from studies not conducted by or for the applicant and when the applicant has not obtained a right of
reference. Such data are typically derived from published studies, rather than FDA's previous findings of safety and
effectiveness of a previously approved drug. For changes to a previously approved drug however, an applicant may rely on
the FDA's finding of safety and effectiveness of the approved drug, coupled with information needed to support the change
from the approved drug, such as new studies conducted by the applicant or published data. When based on an approved drug,
the 505(b)(2) drug may be approved for all of the indications permitted for the approved drug, as well as any other indication
supported by additional data.
Section 505(b)(2) applications also may be entitled to marketing exclusivity if supported by appropriate data and
information. As discussed in more detail below, three-year new data exclusivity may be granted to the 505(b)(2) application if
one or more clinical investigations conducted in support of the application, other than bioavailability/bioequivalence studies,
were essential to the approval and conducted or sponsored by the applicant. Five years of marketing exclusivity may be
granted if the application is for an NCE, and pediatric exclusivity is likewise available.
Orange Book listing and Paragraph IV certification
For NDA submissions, including those under Section 505(b)(2), applicants are required to list with the FDA certain
patents with claims that cover the applicant's product. Upon approval, each of the patents listed in the application is published
in Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book. Any
applicant who subsequently files an ANDA or 505(b)(2) NDA that references a drug listed in the Orange Book must certify to
the FDA that (1) no patent information on the drug product that is the subject of the application has been submitted to the
FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be
infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. This last
certification is known as a Paragraph IV certification.
If an applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the
Paragraph IV certification to the holder of the NDA for the approved drug and the patent owner once the application has been
accepted for filing by the FDA. The NDA holder or patent owner may then initiate a patent infringement lawsuit in response
to notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a
Paragraph IV certification prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of
30 months from the date of the lawsuit, the applicant's successful defense of the suit, or expiration of the patent.
Pursuant to our settlement agreements with Shire, we stipulated that Shire's two Orange Book-listed patents covering
Adderall XR were valid, enforceable and infringed by our 505(b)(2) NDAs covering Adzenys XR-ODT and Adzenys ER.
The agreements with Shire applies solely with respect to Adzenys XR-ODT and Adzenys ER.
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Pediatric information
Under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the
safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and
administration for each pediatric subpopulation in which the product is safe and effective. The FDA may grant deferrals for
submission of pediatric data or full or partial waivers.
The Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law on July 9, 2012,
amended the FDCA to require that a sponsor who is planning to submit an NDA for a new active ingredient, new indication,
new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within
60 days of an end-of-Phase 2 meeting or, if there is no such meeting, as early as practicable before the initiation of the
Phase 3 or Phase 2/3 trial. The initial PSP must include an outline of the pediatric trial(s) that the sponsor plans to conduct,
including objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including
such information and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to
provide data from pediatric trials. The FDA and the sponsor must reach an agreement on the PSP, but the sponsor can submit
amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data
collected from nonclinical studies, early phase clinical trials and other clinical development programs.
Post-marketing requirements
Following approval, the company and the new product are subject to continuing regulation by the FDA, which include
monitoring and recordkeeping activities, reporting of adverse experiences and complying with promotion and advertising
requirements, which include prohibitions on the promotion of the drugs for unapproved, or "off-label" uses. Although
physicians may prescribe legally available drugs for off-label treatments, manufacturers may not promote such non-FDA
approved uses. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use on an
on-going basis. Further, if there are any modifications to the drug, including changes to indications, labeling, or
manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a supplemental
NDA or new NDA, which may require the applicant to develop additional data or conduct additional nonclinical studies or
clinical trials.
The FDA regulations require that products be manufactured in specific approved facilities and in accordance with
cGMPs. These regulations require, among other things, quality control and quality assurance, the maintenance of records and
documentation and the obligation to investigate and correct any deviations from cGMPs. Drug manufacturers and other
entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the
FDA and certain state agencies, and are subject to periodic, unannounced inspections by the FDA and certain state agencies
for compliance with cGMPs and other laws. Accordingly, manufacturers must continue to expend time, money and effort in
the area of production and quality control to maintain compliance with cGMPs. The discovery of violative conditions,
including failure to conform to cGMPs, could result in enforcement actions, and the discovery of problems with a product
after approval may result in restrictions on a product, manufacturer or holder of an approved NDA, including voluntary
recalls and product seizures.
Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements
can have negative consequences, including adverse publicity, judicial or administrative enforcement, untitled or warning
letters from the FDA, mandated corrections to advertising or communications to doctors and civil or criminal penalties,
among others. Newly discovered or developed safety or effectiveness data may require changes to a product's approved
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labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk
management measures. New government requirements, including those resulting from new legislation, may be established, or
the FDA's policies may change, which could delay or prevent regulatory approval of our products under development.
As a condition of approval for Adzenys XR-ODT and Cotempla XR-ODT, we committed to three post-marketing
requirements to evaluate the pharmacokinetic, efficacy and safety of the product in children ages 4 to 5 years of age. We met
with FDA officials in January 2017 to further clarify the design of the protocols required to conduct these studies for Adzenys
XR-ODT. We commenced with the pharmacokinetic trial for Adzenys XR-ODT in 2017. We commenced with the
pharmacokinetic trial for Cotempla XR-ODT in 2018, and we expect to complete these pharmacokinetic trials in 2019.
U.S. marketing exclusivity
The FDCA provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, for a drug
product that contains a previously approved NCE if new clinical investigations, other than bioavailability/bioequivalence
studies, were essential to the application's approval (e.g., for new indications, dosages or strengths of an existing drug). This
three-year exclusivity for new data covers only the modification for which the drug received approval on the basis of the new
clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the
original indication. Furthermore, this exclusivity will not delay the submission or approval of a full NDA. However, an
applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the nonclinical studies
and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.
Pediatric exclusivity is another type of regulatory market exclusivity in the United States, which, if granted, adds six
months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other
exclusivity protections or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance
with a FDA-issued "Written Request." The FDA issues a written request for pediatric clinical trials before approval of an
NDA only where it determines that information relating to the use of a drug in a pediatric population, or part of the pediatric
population, may produce health benefits in that population.
DEA regulation
Because our products and product candidates are subject to the Controlled Substances Act, or CSA, we must comply
with various requirements set forth by that legislation, as amended, its implementing regulations and as enforced by the DEA.
The CSA imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas,
labeling and packaging requirements, security controls, prescription and order form requirements and restrictions on
prescription refills for certain kinds of pharmaceutical products. A principal factor for determining the particular requirements
of the CSA applicable to a product, if any, is its actual or potential abuse profile. A product may be listed as a Schedule I, II,
III, IV or V controlled substance, with Schedule I presenting the highest perceived risk of abuse and Schedule V presenting
the least. For example, Schedule I controlled substances have no currently accepted medical use in treatment in the United
States and a lack of accepted safety for use under medical supervision. The active ingredients in our products, hydrocodone,
amphetamine and methylphenidate, are Schedule II controlled substances and under various restrictions, including, but not
limited to, mandatory written prescriptions and the prohibition of refills.
Annual registration is required for any facility that manufactures, distributes, dispenses, imports or exports any
controlled substance. The registration is specific to the particular location, activity and controlled substance schedule. For
example, separate registrations are needed for import and
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manufacturing, and each registration will specify which schedules of controlled substances are authorized. Similarly, separate
registrations are also required for separate facilities.
The DEA typically inspects a facility to review its security measures prior to issuing a registration and on a periodic
basis. Security requirements vary by controlled substance schedule, with the most stringent requirements applying to
Schedule I and Schedule II controlled substances. Required security measures include background checks on employees and
physical control of inventory through measures such as vaults and inventory reconciliations. Records must be maintained for
the handling of all controlled substances, and periodic reports made to the DEA, for example distribution reports for
Schedule I and II controlled substances. Reports must also be made for thefts or losses of any controlled substance, and to
obtain authorization to destroy any controlled substance.
In addition, a DEA quota system controls and limits the availability and production of controlled substances in
Schedule I or II. Distributions of any Schedule I or II controlled substance must also be accompanied by special order forms,
with copies provided to the DEA. Because our products are, and our product candidates are expected to be, regulated as
Schedule II controlled substances, they will be subject to the DEA's production and procurement quota scheme. The DEA
establishes annually an aggregate quota for how much of a controlled substance may be produced in total in the United States
based on the DEA's estimate of the quantity needed to meet legitimate scientific and medicinal needs. The limited aggregate
amount that the DEA allows to be produced in the United States each year is allocated among individual companies, which
must submit applications annually to the DEA for individual production and procurement quotas. We must receive an annual
quota from the DEA in order to produce or procure any Schedule I or Schedule II controlled substance for use in
manufacturing of our product and product candidates. The DEA may adjust aggregate production quotas and individual
production and procurement quotas from time to time during the year, although the DEA has substantial discretion in whether
or not to make such adjustments.
To enforce these requirements, the DEA conducts periodic inspections of registered establishments that handle
controlled substances. Failure to maintain compliance with applicable requirements, particularly as manifested in loss or
diversion, can result in administrative, civil or criminal enforcement action. The DEA may seek civil penalties, refuse to
renew necessary registrations or initiate administrative proceedings to revoke those registrations. In some circumstances,
violations could result in criminal proceedings.
In addition to federal scheduling, some drugs may be subject to state-controlled substance regulation and thus more
extensive requirements than those determined by the DEA and FDA.
Pharmaceutical coverage, pricing and reimbursement
Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors,
such as government health programs, commercial insurance and managed healthcare organizations. In the United States no
uniform policy of coverage and reimbursement for drug products exists. Accordingly, decisions regarding the extent of
coverage and amount of reimbursement to be provided for any of our products will be made on a payor by payor basis. As a
result, the coverage determination process is often a time-consuming and costly process that will require us to provide
scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage
and adequate reimbursement will be obtained.
Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of
medical products and services, in addition to their safety and efficacy. In order to obtain coverage and reimbursement for any
product that might be approved, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the
medical necessity and cost-effectiveness of any products, in addition to the costs required to obtain regulatory approvals. Our
product candidates may not be considered medically necessary or cost-effective. If third-party payors do
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not consider a product to be cost-effective compared to other available therapies, they may not cover the product after
approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its
products at a profit.
The U.S. government and state legislatures have shown significant interest in implementing cost containment programs
to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and
requirements for substitution of generic products for brand-named prescription drugs. For example, the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA,
contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs
reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for
certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies' share of sales to federal health
care programs. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with
existing controls and measures, could limit payments for pharmaceuticals.
As noted above, even if we are able to secure regulatory approval, sales of any of our products may suffer if the
government and third-party payors fail to provide adequate coverage and reimbursement. An increasing emphasis on cost
containment measures in the United States has increased, and we expect this sentiment will continue to increase the pressure
on drug pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage
and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable
coverage policies and reimbursement rates may be implemented in the future.
Other healthcare laws and compliance requirements
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by
numerous regulatory authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other
divisions of the Department of Health and Human Services, the U.S. Department of Justice, the DEA, the Consumer Product
Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental
Protection Agency and state and local governments.
We also are subject to various federal and state laws targeting fraud and abuse in the healthcare industry. These laws
may impact, among other things, our proposed sales, marketing and educational programs. In addition, we may be subject to
patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may
affect our ability to operate include:
The federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully
soliciting, receiving, offering or paying remuneration, directly or indirectly, overtly or covertly, in cash or in kind,
to induce or reward, or in return for, either (1) the referral of an individual to a person for furnishing any item or
service for which payment is available under a federal health care program, or (2) the purchase, lease, order or
recommendation thereof of any good, facility, service or item for which payment is available under a federal health
care program;
The False Claims Act and civil monetary penalty laws, which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, false or fraudulent claims for payment from the federal
government, or making or using, or causing to be made or used, a false record or statement material to a false or
fraudulent claim;
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The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal
criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program, obtaining money or
property of the health care benefit program through false representations or knowingly and willingly falsifying,
concealing or covering up a material fact, making false statements or using or making any false or fraudulent
document in connection with the delivery of, or payment for, health care benefits or services;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH,
and its implementing regulations, which imposes certain requirements relating to the privacy, security and
transmission of individually identifiable health information;
The provision under the ACA commonly referred to as the Sunshine Act, which requires applicable manufacturers
of covered drugs, devices, biologics and medical supplies to track and annually report to CMS payments and other
transfers of value provided to physicians and teaching hospitals and certain ownership and investment interests held
by physicians or their immediate family members in applicable manufacturers and group purchasing organizations;
and
State law equivalents of each of the above federal laws, such as the Anti-Kickback Statute and False Claims Act,
and state laws concerning security and privacy of health care information, which may differ in substance and
application from state-to-state thereby complicating compliance efforts.
The ACA broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of
the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C.
Section 1320a-7b. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this
statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the
government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute. Many
states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for
healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
As noted above, the federal False Claims Act prohibits anyone from, among other things, knowingly presenting, or
causing to be presented, false or fraudulent claims for payment from federal programs, including Medicare and Medicaid.
Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they are
deemed to "cause" the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding
information to customers. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for
our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal,
state, and third-party reimbursement for our products, and the sale and marketing of our products are subject to scrutiny under
this law. For example, pharmaceutical companies have been prosecuted under the federal False Claims Act in connection
with their off-label promotion of drugs. Penalties for such violations could include three times the actual damages sustained
by the government, mandatory civil penalties between $5,500 and $11,000 for each separate false claim, exclusion from
participation in federal healthcare programs, and the potential implication of various federal criminal statutes. Private
individuals also have the ability to bring actions under the federal False Claims Act, or qui tam actions, and certain states
have enacted laws based on the federal False Claims Act.
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Additionaly, on January 31, 2019, the Department of Health and Human Services (HHS) and HHS Office of Inspector
General (OIG) proposed an amendment to one of the existing Anti-Kickback safe harbors (42 C.F.R. 1001.952(h)) which
would prohibit certain pharmaceutical manufacturers from offering rebates to pharmacy benefit managers ("PBMs") in the
Medicare Part D and Medicaid managed care programs. The proposed amendment would remove protection for "discounts"
from Anti-Kickback enforcement action, and would include criminal and civil penalties for knowingly and willfully offering,
paying, soliciting, or receiving remuneration to induce or reward the referral of business reimbursable under federal health
care programs. At the same time, HHS also proposed to create a new safe harbor to protect point-of-sale discounts that drug
manufacturers provide directly to patients, and adds another safe harbor to protect certain administrative fees paid by
manufacturers to PBMs. If this proposal is adopted, in whole or in part, it could affect the pricing and reimbursement for any
products for which we receive approval in the future.
EMPLOYEES
As of December 31, 2018, we employed 215 full-time employees.
AVAILABLE INFORMATION
Our website address is www.neostx.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available free of charge through the investor relations page of our internet website as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission. Alternatively, these reports may be accessed at the SEC's website at www.sec.gov.
CORPORATE INFORMATION
Our predecessor company was incorporated in Texas on November 30, 1994 as PharmaFab, Inc. and subsequently
changed its name to Neostx, Inc. On June 15, 2009, we completed a reorganization pursuant to which substantially all of the
capital stock of Neostx, Inc. was acquired by a newly formed Delaware corporation, named Neos Therapeutics, Inc. The
remaining capital stock of Neostx, Inc. was acquired by us on June 29, 2015, and Neostx, Inc. was merged with and into Neos
Therapeutics, Inc. Our principal executive offices are located at 2940 N. Highway 360, Grand Prairie, Texas, 75050, and our
telephone number is (972) 408-1300. We completed our initial public offering of common stock July 2015 and our common
stock is listed on the NASDAQ Global Market under the symbol "NEOS."
Item 1A. Risk factors
We operate in an industry that involves numerous risks and uncertainties. You should carefully consider the risks and
uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including our
consolidated financial statements and the related notes appearing at the end of this Annual Report on Form 10-K, before
making a decision to invest in our common stock. If any of the risks actually occur, our business, financial condition, results
of operations and prospects could be harmed. In that event, the trading price of our common stock could decline, and you
may lose part or all of your investment.
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RISKS RELATED TO COMMERCIALIZATION
We are heavily dependent on the success of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. We have not
generated substantial revenues from the sales of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, any sales
revenues from any of our product candidates, if approved, and we may never achieve or maintain profitability.
Our ability to become profitable depends upon our ability to generate revenues from sales of Adzenys XR-ODT,
Cotempla XR-ODT, Adzenys ER and, if approved, any other product candidates that we may develop. We have limited
experience in generating revenues from our marketed products, having only generated revenues from the sale of our generic
Tussionex since we acquired it in 2014, Adzenys XR-ODT, which we commenced commercializing in May 2016, and
Cotempla XR-ODT, which we commenced commercializing in September 2017. None of our marketed products have thus
far generated substantial product sales revenues. We launched Adzenys ER in February 2018, and as a result have generated
minimal sales revenue for this product to date. We have not generated any revenues from product sales of any other product
candidates that we may develop and, to date, have incurred significant operating losses.
Our ability to generate product revenues is dependent on our ability to successfully commercialize Adzenys XR-ODT,
our amphetamine extended-release orally disintegrating tablet ("XR-ODT"), Cotempla XR-ODT, our methylphenidate
XR-ODT, and Adzenys ER, our amphetamine XR liquid suspension, for the treatment of attention deficit hyperactivity
disorder, or ADHD, and any other product candidates that we may identify, develop and obtain approval of. Our ability to
successfully commercialize our products and product candidates depends on, among other things, our ability to:
manufacture commercial quantities of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and, if approved, any
other product candidates that we may develop at acceptable cost levels; and
successfully establish and maintain sales and marketing capabilities to commercialize Adzenys XR-ODT, Cotempla
XR-ODT, Adzenys ER and, if approved, any other product candidates that we may develop.
We have incurred and anticipate continuing to incur significant costs associated with commercialization of Adzenys
XR-ODT, Cotempla XR-ODT, Adzenys ER and, if approved, any other product candidates that we may develop. It is
possible that we will never have sufficient product sales revenues to achieve profitability.
If our sales and marketing efforts for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are not successful, and if we
are unable to establish and maintain sales and marketing capabilities or enter into agreements with third parties to market
and sell our other product candidates, if approved, we may be unable to generate significant revenue.
We have only recently completed building an organization for the sale, marketing and distribution of Adzenys XR-ODT,
Cotempla XR-ODT and Adzenys ER, and there is no guarantee that we will be successful in the commercialization of our
products. We currently have a limited sales history for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER.
Additionally, we may need to expand or build additional sales, marketing and distribution capabilities for our products.
Although we have established a focused, specialty sales and marketing organization of approximately 75 representatives to
promote our approved products in the United States, these commercialization capabilities have only been recently established,
and we may need to expand our sales force if we decide to undertake additional commercialization activities on our own,
which will be costly and time-consuming. We cannot be certain that we will reap the benefits of our commercialization
efforts of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER compared to the cost of such efforts. Our prior experience
in the marketing, sale and distribution of pharmaceutical products is limited to our generic Tussionex, and,
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before launching the commercialization of Adzenys XR-ODT, we had no prior experience in marketing, sale and distribution
of branded pharmaceutical products. There are significant risks involved in building and managing a sales organization,
including our ability to hire, retain and incentivize qualified individuals and in the appropriate numbers, generate sufficient
sales leads, provide adequate training to sales and marketing personnel, effectively manage a geographically dispersed sales
and marketing team and successfully negotiate with managed care and third-party payors. Any failure or delay in the
development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of
these products.
In addition, while we realigned our commercial operations in November 2018 to deploy our resources to what we
believe are the most appropriate regions and physician targets, there can be no assurances that we will realize the intended
benefits of this realignment or that our strategy will improve our operating results. The realignment of our commercialization
organization resulted in approximately $1.0 million of severance and employee related costs. In addition, our reduced
salesforce may result in fewer prescriptions written for our marketed products, and we may experience difficulty in hiring and
retaining qualified sales personnel for our commercial organization in the future.
We also intend to enter into strategic partnerships with third parties to commercialize Adzenys XR-ODT, Cotempla
XR-ODT, Adzenys ER and our product candidates, if approved, outside of the United States and intend to also enter into
strategic partnerships with third parties for certain aspects of our commercialization efforts within the United States. We may
have difficulty establishing relationships with third parties on terms that are acceptable to us, or in all of the regions where we
wish to commercialize our products, or at all. If we are unable to establish adequate sales, marketing and distribution
capabilities, whether independently or with third parties, we may not be able to generate sufficient product revenue and may
not become profitable. We will be competing with many companies that currently have extensive and well-funded marketing
and sales operations. Even though we have established an internal sales team, we may be unable to compete successfully
against these more established companies.
Our business is subject to extensive regulatory requirements, and our approved products and any product candidates that
obtain approval will be subject to ongoing and continued regulatory review, which may result in significant expense and
limit our ability to commercialize such products.
Even after a product is approved, we will remain subject to ongoing FDA, and other regulatory requirements governing,
among other things, the production, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion,
import, export, record-keeping and reporting of safety and other post-market information. The holder of an approved new
drug application ("NDA") is obligated to monitor and report adverse events, or AEs, and any failure of a product to meet the
specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain
FDA approval for certain changes to the approved product, product labeling or manufacturing process. In addition, the FDA
may impose significant restrictions on the approved indicated uses for which the product may be marketed or on the
conditions of approval.
For example, a product's approval may contain requirements for potentially costly post-approval trials and surveillance
to monitor the safety and efficacy of the product or the imposition of a Risk Evaluation and Mitigation Strategy, or REMS,
program.
Prescription drug advertising, marketing and promotion are subject to federal, state and foreign regulations, which
include requirements for direct-to-consumer advertising and promotional activities involving the Internet and social media. In
the United States, prescription drug promotional materials must be submitted to the FDA in conjunction with their first use.
The FDA closely regulates the post-approval marketing and promotion of drugs to ensure they are marketed only for their
approved indications and in accordance with the provisions of the approved label. Any promotion for uses or in
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patient populations not described in the approved labeling, known as "off-label" promotion, is impermissible and could
subject us to enforcement actions and significant penalties for off-label marketing. The FDA has also provided guidance on
industry-sponsored scientific and educational activities to ensure such activities are not promotional.
In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including
ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices ("cGMPs").
These cGMP regulations cover all aspects of manufacturing relating to our generic Tussionex, Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER. As such, we are subject to continual review and periodic inspections to assess compliance with
cGMP and must continue to expend time, money and resources in all areas of regulatory compliance, including
manufacturing, production and quality control. As a result of the Consent Decree entered into by our predecessor, which is
discussed below, we were required to have a cGMP expert conduct an annual audit and submit those audit reports and our
responses to the FDA for a period of five years. Although for our most recent and last annual audit by the cGMP expert in
November 2014, the expert concluded that our corrective actions satisfactorily addressed the observations noted in its report,
on May 22, 2015, the FDA's Dallas District Office identified three ongoing cGMP deviations in our response to the audit
related to batch failure investigations, quality control unit procedures, and in-process specifications. We implemented
corrective actions and submitted additional information in our response to the FDA pursuant to the Consent Decree and the
FDA closed the matter.
The facilities used by us to manufacture our products and any product candidates that we may develop are subject to
inspections, including pre-approval inspections following our submission of any NDAs to the FDA for any product
candidates that we may develop. For example, the FDA conducted a cGMP and pre-approval inspection related to our NDA
for Cotempla XR-ODT from May 27 to June 4, 2015. At the end of the inspection, the agency issued a Form FDA 483 with
one observation finding that appropriate controls are not exercised over one of our computer systems in order to assure that
changes in records are instituted only by authorized personnel. We implemented corrective action related to this observation
and responded to the FDA, and the FDA closed the inspection. In addition, in connection with a general cGMP and
pre-approval inspection for Adzenys ER from July 11 to July 25, 2017, we received a Form FDA 483 with one observation
related to complaint records failing to document the reason and the individual making the decision not to conduct a complaint
investigation. We implemented corrective action related to this observation and responded to the FDA. The FDA conducted a
Post-Marketing Adverse Drug Experience Reporting Inspection from June 25 through June 27, 2018. The FDA did not have
any findings and did not issue a Form FDA 483. The FDA conducted a complete Six Systems cGMP inspection of our Grand
Prairie, Texas facility from September 4, 2018 through September 7, 2018 and did not issue any Form FDA 483s.
If we cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements
of the FDA, we will not be able to secure and/or maintain regulatory approval for our product candidates. If the FDA finds
deficiencies at our manufacturing facility and does not approve our NDA for any of our future product candidates or if it
withdraws any such approval in the future for our products, our ability to develop or market any of our products or any
product candidates that we may develop will be impacted.
Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA
and other regulatory authorities for compliance with cGMPs and adherence to commitments made in the NDA. If we or a
regulatory agency discovers previously unknown problems with a product, such as AEs of unanticipated severity or
frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions
relative to that product or the manufacturing facility, including notice to physicians, withdrawal of the product from the
market or suspension of manufacturing. Manufacturers are also subject to annual prescription drug product
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program fee. If we are unable to generate sales of our product candidates, the user fee requirements could be difficult to pay.
If we fail to comply with applicable regulatory requirements, the FDA may, for example:
issue untitled or warning letters asserting that we are in violation of the Federal Food, Drug and Cosmetic Act (the
"FDCA");
impose restrictions on the marketing or manufacturing of any product or product candidate that we may develop;
seek an injunction or impose civil, criminal and/or administrative penalties, damages, assess monetary fines, or
require disgorgement;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve a pending NDA or supplements to an NDA submitted by us with respect to any product candidate
that we may develop; or
seize the product.
Moreover, any violation of these and other laws and regulations could result in exclusion from participation in federal
healthcare programs, such as Medicare and Medicaid, require curtailment or restructuring of our operations and prohibit us
from entering into government contracts.
Similar requirements may apply in foreign jurisdictions in which we may seek approval of our products. Any
government investigation of alleged violations of law could require us to expend significant time and resources in response
and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to
commercialize our products and generate revenues.
In addition, the FDA's regulations or policies may change and new or additional statutes or government regulations in
the United States and other jurisdictions may be enacted that could prevent or delay regulatory approval of our product
candidates or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from pending or future legislation or administrative action, either in the United States or
abroad. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market our products
and/or product candidates, which would adversely affect our ability to generate revenue and achieve or maintain profitability.
The commercial success of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER depends upon attaining market
acceptance by physicians, patients, third-party payors and the medical community.
To date, we have expended significant time, resources, and effort on the development of Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER, and a substantial majority of our resources are now focused on the commercialization of these
products in the United States. Accordingly, our ability to generate significant product revenue will depend almost entirely on
our ability to successfully commercialize Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER.
Our ability to successfully commercialize Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER will depend on,
among other things, our ability to:
establish relationships with third-party suppliers for the active pharmaceutical ingredient ("API"), in Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER;
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manufacture and produce, through a validated process, sufficiently large quantities and inventory of Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER to permit successful commercialization;
build and maintain a wide variety of internal sales, distribution and marketing capabilities sufficient to build
commercial sales of our products;
establish collaborations with third parties for the commercialization of our products in countries outside the United
States, and such collaborators' ability to obtain regulatory and reimbursement approvals in such countries;
secure widespread acceptance of our products by physicians, health care payors, patients and the medical
community;
properly price and obtain adequate coverage and reimbursement of the product by governmental authorities, private
health insurers, managed care organizations and other third-party payors;
maintain compliance with ongoing FDA labeling, packaging, storage, advertising, promotion, recordkeeping, safety
and other post-market requirements; and
manage our growth and spending as costs and expenses increase due to commercialization.
There are no guarantees that we will be successful in completing these tasks. Successful commercialization will also
depend on whether we can adequately protect against and effectively respond to any claims by holders of patents and other
intellectual property rights that our products infringe their rights, whether any unanticipated adverse effects or unfavorable
publicity develops in respect of our products, as well as the emergence of new or existing products as competition, which may
be proven to be more clinically effective and cost-effective. If we are unable to successfully complete these tasks, we may be
unable to generate sufficient revenues to sustain and grow our business.
In addition, we will need to continue investing substantial financial and management resources to build out our
commercial infrastructure and to recruit and train sufficient additional qualified marketing, sales and other personnel to
support the ongoing commercialization of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. In addition, we have
certain revenue expectations with respect to the sale of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. If we
cannot successfully commercialize and achieve those revenue expectations with respect to Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER, our anticipated revenues and liquidity will be materially adversely impacted.
Moreover, the continued commercial success of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER may be
largely dependent on the capability of third-party collaborators. Such third-party collaborators may not deploy the resources
we would like them to, and our revenue would then suffer. In addition, we could become embroiled in disputes with these
parties regarding the terms of any agreements, their performance or intellectual property rights. Any dispute could disrupt the
sales of our products and adversely affect our reputation and revenue. In addition, if any of our manufacturing or
collaboration partners fail to effectively perform under our arrangements for any reason, we may not be able to find a suitable
replacement partner on a timely basis or on acceptable terms.
We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will
suffer if we fail to compete effectively.
The biopharmaceutical industries are intensely competitive and subject to rapid and significant technological change.
We expect to have competitors both in the United States and internationally, including major multinational pharmaceutical
companies, biotechnology companies and universities and other research institutions. For example, amphetamine XR is
currently marketed in the United States
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by Takeda, following its acquisition of Shire, under the brand names Adderall XR, Vyvanse and Mydayis and by Tris
Pharmaceuticals, or Tris, under the brand name Quillivant XR, a reconstituted liquid suspension, QuilliChew ER, a chewable
formulation and Dyanavel XR, a liquid suspension, and methylphenidate is marketed in the United States by Janssen under
the brand name Concerta, by Rhodes Pharmaceuticals under the brand name Aptensio XR, a capsule, by Osomotica
Pharmaceuticals under the name Methylphenidate HCl ER 72 mg Tablet and by Novartis under the brand names Focalin XR
and Ritalin LA. On August 9, 2018, Ironshore Pharmaceuticals announced the FDA approval for its ADHD product Jornay
PM, a delayed-release and extended-release formulation of methylphenidate, which it expects to commercially launch in the
first half of 2019. Also, on March 1, 2019, Adlon Therapeutics L.P., as subsidiary of Purdue Pharma L.P., announced that the
FDA approved Adhansia XR, its methylphenidate extended release capsule for the treatment of ADHD. Further, makers of
branded drugs could also enhance their own formulations in a manner that competes with our enhancements of these drugs.
We are also aware of efforts by several pharmaceutical companies with ADHD medications in clinical development,
including Sunovian, KemPharm and Neurovance.
Many of our competitors have substantially greater financial, technical and other resources, such as larger research and
development staff and more experienced marketing and manufacturing organizations. Mergers and acquisitions in the
biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. As a
result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling
and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large, established companies. Competition may increase further as a
result of advances in the commercial applicability of technologies and greater availability of capital for investment in these
industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products or drug
delivery technologies that are more effective or less costly than our XR-ODT or XR liquid suspension, or any product
candidate that we are currently developing or that we may develop. In addition, our competitors may file citizens' petitions
with the FDA in an attempt to persuade the FDA that our products, or the nonclinical studies or clinical trials that support
their approval, contain deficiencies or that new regulatory requirements be placed on the product candidate or drug class of
the product candidate. Such actions by our competitors could delay or even prevent the FDA from approving any NDA that
we submit under Section 505(b)(2).
We believe that our ability to successfully compete will depend on, among other things:
the ability to commercialize and market any of our products and product candidates that receive regulatory
approval;
the price of our products and product candidates that receive regulatory approval, including in comparison to
branded or generic competitors;
the efficacy and safety of our products and product candidates, including as relative to marketed products and
product candidates in development by third parties;
the ability to manufacture on a cost-effective basis and sell commercial quantities of our products and product
candidates that receive regulatory approval;
acceptance of any of our products and product candidates that receive regulatory approval by physicians and other
healthcare providers;
the time it takes for our product candidates to complete clinical development and receive marketing approval;
the ability to maintain a good relationship with regulatory authorities;
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whether coverage and adequate levels of reimbursement are available under private and governmental health
insurance plans, including Medicaid and Medicare; and
the ability to protect intellectual property rights related to our product and product candidates.
If our competitors market products that are more effective, safer or less expensive than our products or that reach the
market sooner than our products we may enter the market too late in the cycle and may not achieve commercial success, or
we may have to reduce our price, which would impact our ability to generate revenue and obtain profitability. In addition, the
biopharmaceutical industry is characterized by rapid technological change. Because we have limited research and
development capabilities, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at
the forefront of technological change, we may be unable to compete effectively. Technological advances or products
developed by our competitors may render our technologies or product candidates obsolete, less competitive or not
economical.
If we are unable to differentiate our products or product candidates from branded drugs or existing generic therapies for
similar treatments, or if the FDA or other applicable regulatory authorities approve generic products that compete with
any of our products or product candidates, our ability to successfully commercialize such products or product candidates
would be adversely affected.
We expect to compete against branded drugs and to compete with their generic counterparts that will be sold for a lower
price. Although we believe that our products and product candidates will be differentiated from branded drugs and their
generic counterparts, if any, including through clinical efficacy or through improved patient compliance and ease of
administration, it is possible that such differentiation will not impact our market position. If we are unable to achieve
significant differentiation for our products and product candidates against other drugs, the opportunity for our products and, if
approved, product candidates to achieve premium pricing and be commercialized successfully would be adversely affected.
After an NDA, including a 505(b)(2) application, is approved, the covered product becomes a "listed drug" that, in turn,
can be cited by potential competitors in support of approval of an abbreviated new drug application, or ANDA. The FDCA,
implementing regulations and other applicable laws provide incentives to manufacturers to create modified, non-infringing
versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes. These manufacturers
might only be required to conduct a relatively inexpensive study to show that their product has the same active ingredient(s),
dosage form, strength, route of administration, and conditions of use, or labeling as our product candidate and that the generic
product is bioequivalent to ours, meaning it is absorbed in the body at the same rate and to the same extent as our product
candidate. These generic equivalents, which must meet the same quality standards as the listed drugs, would be significantly
less costly than ours to bring to market and companies that produce generic equivalents are generally able to offer their
products at lower prices.
Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product, such as
Adzenys XR-ODT, Cotempla XR-ODT or Adzenys ER, can be lost to the generic version. Accordingly, competition from
generic equivalents to our product candidates would materially adversely impact our revenues, profitability and cash flows
and substantially limit our ability to obtain a return on the investments we have made in our product candidates.
For example, on July 25, 2016, we received a paragraph IV certification from Actavis Laboratories FL, Inc. ("Actavis")
advising us that Actavis had filed an ANDA with the FDA for a generic version of Adzenys XR-ODT. On September 1,
2016, we filed a patent infringement lawsuit in federal district court in the District of Delaware against Actavis, Inc. This case
alleged that Actavis infringed our Adzenys XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic
version of Adzenys XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred,
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the FDA from approving Actavis's ANDA for 30 months or until a district court decision that is adverse to the asserted
patents is rendered, whichever is earlier.
On October 17, 2017, we entered into a Settlement Agreement and a Licensing Agreement (collectively, the "Actavis
Agreement") with Actavis. This Actavis Agreement resolved all ongoing litigation involving our Adzenys XR-ODT patents
and Actavis's ANDA. Under the Actavis Agreement, we have granted Actavis the right to manufacture and market its generic
version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or earlier under certain circumstances. A
stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Actavis Agreement
has been submitted to the applicable governmental agencies.
On October 31, 2017, we received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. ("Teva") advising
us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT, in connection with seeking to
market its product prior to the expiration of patents covering Cotempla XR-ODT. On December 13, 2017, we filed a patent
infringement lawsuit in federal district court in the District of Delaware against Teva. This case alleged that Teva infringed
our Cotempla XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Cotempla
XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Teva's
ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier.
On December 21, 2018, we entered into a Settlement Agreement and a Licensing Agreement (collectively, the "Teva
Agreement") with Teva. This Teva Agreement resolved all ongoing litigation involving our Cotempla XR-ODT patents and
Teva's ANDA. Under the Teva Agreement, we have granted Teva the right to manufacture and market its generic version of
Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain circumstances. A stipulation and
order of dismissal was entered by the U.S. District Court for the District of Delaware. The Teva Agreement has been
submitted to the applicable governmental agencies.
The design, development, manufacture, supply and distribution of our products and product candidates are highly
regulated processes and technically complex.
We are subject to extensive regulation in connection with the preparation and manufacture of our products, product
candidates and potential product candidates for clinical trials and commercial sale. Components of a finished therapeutic
product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMPs
and equivalent foreign standards. These regulations govern manufacturing processes and procedures, including record
keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products
and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or
other contaminants, or to inadvertent changes in the properties or stability of our products and product candidates that may
not be detectable in final product testing. The development, manufacture, supply and distribution of our approved products as
well as any of our future potential product candidates, are highly regulated processes and technically complex. We, along
with our third-party suppliers, must comply with all applicable regulatory requirements of the FDA and foreign authorities.
For instance, because each of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER is a regulated drug product and
subject to the U.S. Drug Enforcement Administration ("DEA") regulation, we have had to, and will continue to, need to
secure state licenses from each state in which we intend to sell such product allowing us to distribute a regulated drug product
in such state.
We must supply all necessary documentation in support of our regulatory filings for our product candidates on a timely
basis and must adhere to applicable parts of the FDA's Good Laboratory Practices, or GLP, and cGMP requirements enforced
by the FDA through its facilities inspection program, and the equivalent standards of the regulatory authorities in other
countries. Any failure to
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comply with cGMP requirements or failure to scale-up manufacturing processes, including any failure to deliver sufficient
quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any
of our product candidates. Our facilities and quality systems must also pass a pre-approval inspection for compliance with the
applicable regulations as a condition of regulatory approval of our product candidates or any of our other potential products.
For example, the FDA conducted a cGMP and pre-approval inspection related to our NDA for Cotempla XR-ODT from
May 27 to June 4, 2015. At the end of the inspection, the agency issued a Form FDA 483 with one observation finding that
appropriate controls are not exercised over one of our computer systems in order to assure that changes in records are
instituted only by authorized personnel. We implemented corrective action related to this observation and responded to the
FDA, and the FDA closed the inspection. Additionally, in connection with a general cGMP and pre-approval inspection for
Adzenys ER from July 11, 2017 to July 25, 2017, we received a Form FDA 483 with one observation related to complaint
records failing to document the reason and the individual making the decision not to conduct a complaint investigation. We
implemented corrective action related to this observation and responded to the FDA. The FDA conducted a Post-Marketing
Adverse Drug Experience Reporting Inspection from June 25, 2018 through June 27, 2018. The FDA did not have any
findings and did not issue a Form FDA 483. The FDA conducted a complete Six Systems cGMP inspection of our Grand
Prairie, Texas facility from September 4, 2018 through September 7, 2018 and did not issue any Form FDA 483s. In addition,
the regulatory authorities in any country may, at any time, audit or inspect a manufacturing facility involved with the
preparation of our product candidates or our other potential products or the associated quality systems for compliance with
the regulations applicable to the activities being conducted. If these facilities and quality systems do not pass a pre-approval
plant inspection, FDA approval of our product candidates, or the equivalent approvals in other jurisdictions, will not be
granted.
Regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities.
If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product
specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory
authority may require remedial measures that may be costly and/or time-consuming for us to implement and that may include
the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of our
facility. Any such remedial measures imposed upon us could materially harm our business. If we fail to maintain regulatory
compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending
application for a new drug product or revocation of a pre-existing approval. As a result, our business, financial condition and
results of operations may be materially harmed.
For our approved products, we must comply with the requirements of the Drug Supply Chain Security Act, which outlines
critical steps to build an electronic, interoperable system to identify and trace certain prescription drugs as they are
distributed in the United States.
For our approved drugs, we must comply with the requirements of the Drug Supply Chain Security Act, including those
related to product tracing, verification, and authorized trading partners. Signed into law on November 27, 2013, the Drug
Supply Chain Security Act amended the FSCA and is being implemented over a ten-year period. The law's requirements
include the ability to quarantine and promptly investigate suspect product, such as potentially counterfeit, diverted or stolen
product, to determine if it is illegitimate, and notify our trading partners and the FDA of any illegitimate product. By
November 27, 2017, we were required to place a unique product identifier on prescription drug packages, and such
requirement will be enforced beginning November 2018. This identifier consists of the National Drug Code, serial number,
lot number and expiration date, in the form of a 2-dimensional data matrix barcode that can be easily read electronically. If
our drug products fail to bear this unique
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product identifier, they would be misbranded under the FDCA and our drug products may not be accepted into the supply
chain.
We rely on limited sources of supply for Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and our generic Tussionex,
and any disruption in the chain of supply may impact production and sales of Adzenys XR-ODT, Cotempla XR-ODT,
Adzenys ER and our generic Tussionex, and cause delays in developing and commercializing our product candidates and
currently manufactured and commercialized products.
Our approved NDAs for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, include our proposed manufacturing
process for each product candidate. Any change to our manufacturing process, facilities or suppliers could require that we
supplement our approved NDA. Also, because of our proprietary processes for manufacturing our product candidates, we
cannot immediately transfer manufacturing activities for Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or our generic
Tussionex to an alternate supplier, and a change of facilities would be a time-consuming and costly endeavor.
Any changes to our manufacturing process would involve substantial cost and could result in a delay in our desired
clinical and commercial timelines. We are also reliant on a limited number of suppliers for resin, drug compounds, coating
and other component substances of our final product candidates and products. If any of these single-source suppliers were to
breach or terminate its supply agreement, if any, with us or otherwise not supply us, we would need to identify an alternative
source for the supply of component substances for our product candidates and products. Identifying an appropriately qualified
source of alternative supply for any one or more of the component substances for our product candidates or products could be
time consuming, and we may not be able to do so without incurring material delays in the development and
commercialization of our approved products or product candidates or a decrease in sales of our approved products, which
could harm our financial position and commercial potential for our product candidates and products. Any alternative vendor
would also need to be qualified through an NDA supplement which could result in further delay, including delays related to
additional clinical trials. The FDA, DEA, or other regulatory agencies outside of the United States may also require additional
studies if we enter into agreements with new suppliers for the manufacture of Adzenys XR-ODT, Cotempla XR-ODT,
Adzenys ER and our generic Tussionex that differ from the suppliers used for clinical development of such product
candidates.
These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of
our products and product candidates, cause us to incur higher costs and prevent us from commercializing them successfully.
Furthermore, if our suppliers fail to deliver the required commercial quantities of components and APIs on a timely basis and
at commercially reasonable prices, including if our suppliers did not receive adequate DEA quotas for the supply of certain
scheduled components, and we are unable to secure one or more replacement suppliers capable of production at a
substantially equivalent cost, commercialization of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER, our generic
Tussionex and clinical trials of future potential product candidates, may be delayed or we could lose potential revenue and
our business, financial condition, results of operation and reputation could be adversely affected.
If we fail to produce our products or product candidates in the volumes that we require on a timely basis, or fail to comply
with stringent regulations applicable to pharmaceutical drug manufacturers, we may face penalties from wholesalers and
contracted retailers of our products and delays in the development and commercialization of our product candidates.
We currently depend on third-party suppliers for the supply of the APIs for our products and product candidates,
including drug substance for nonclinical research, clinical trials and commercialization. For Adzenys XR-ODT, Cotempla
XR-ODT, Adzenys ER and our generic Tussionex, we currently rely on single suppliers for raw materials including APIs,
which we use to manufacture,
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produce and package final dosage forms. In particular, we have an exclusive supply agreement with Coating Place, Inc.
("CPI"), pursuant to which CPI (i) is the exclusive supplier of the active ingredient complexes in our generic Tussionex and
(ii) has agreed to not supply anyone else engaged in the production of generic Tussionex with such active ingredient
complexes. Any future curtailment in the availability of raw materials could result in production or other delays with
consequent adverse effects on us. In addition, because regulatory authorities must generally approve raw material sources for
pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw material costs. We
are subject to penalties from wholesalers and contracted retailers if we do not deliver our generic Tussionex, Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER in quantities that meet their demand. Any such delays could trigger these
penalty provisions, which would have a negative impact on our business.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the
development of advanced manufacturing techniques and process controls. Pharmaceutical companies often encounter
difficulties in manufacturing, particularly in scaling up production of their products. These problems include manufacturing
difficulties relating to production costs and yields, quality control, including stability of the product and quality assurance
testing, shortages of qualified personnel, as well as compliance with federal, state and foreign regulations. If we are unable to
demonstrate stability in accordance with commercial requirements, or if our raw material manufacturers were to encounter
difficulties or otherwise fail to comply with their obligations to us, our ability to obtain FDA approval and market our
products and product candidates would be jeopardized. In addition, any delay or interruption in the supply of clinical trial
supplies could delay or prohibit the completion of our bioequivalence and/or clinical trials, increase the costs associated with
conducting our bioequivalence and/or clinical trials and, depending upon the period of delay, require us to commence new
trials at significant additional expense or to terminate a trial.
Manufacturers of pharmaceutical products need to comply with cGMP requirements enforced by the FDA through their
facilities inspection programs. These requirements include, among other things, quality control, quality assurance and the
maintenance of records and documentation. We may be unable to comply with these cGMP requirements and with other FDA
and foreign regulatory requirements. A failure to comply with these requirements may result in fines and civil penalties,
suspension of production, suspension or delay in product approval, product seizure or voluntary recall, or withdrawal of
product approval. If the safety of any of our products or product candidates is compromised due to failure to adhere to
applicable laws or for other reasons, we may not be able to obtain, or to maintain once obtained, regulatory approval for such
products or product candidate or successfully commercialize such products or product candidates, and we may be held liable
for any injuries sustained as a result. Any of these factors could cause a delay in clinical development, regulatory
submissions, approvals or commercialization of our products or product candidates, entail higher costs or result in our being
unable to effectively commercialize our products or product candidates. The FDA conducted a cGMP and pre-approval
inspection related to our NDA for Cotempla XR-ODT from May 27 to June 4, 2015. At the end of the inspection, the agency
issued a Form FDA 483 with one observation finding that appropriate controls are not exercised over one of our computer
systems in order to assure that changes in records are instituted only by authorized personnel. We implemented corrective
action related to this observation and responded to the FDA, and the FDA closed the inspection. In addition, in connection
with a general cGMP and pre-approval inspection for Adzenys ER from July 11 to July 25, 2017, we received a Form FDA
483 with one observation related to complaint records failing to document the reason and the individual making the decision
not to conduct a complaint investigation. We implemented corrective action related to this observation and responded to the
FDA. The FDA conducted a Post-Marketing Adverse Drug Experience Reporting Inspection from June 25, 2018 through
June 27, 2018. The FDA did not have any findings and did not issue a Form FDA 483. The FDA conducted a complete Six
Systems cGMP
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inspection of our Grand Prairie, Texas facility from September 4, 2018 through September 7, 2018 and did not issue any
Form FDA 483s.
If we fail to manufacture Adzenys XR-ODT, Cotempla XR-ODT or Adzenys ER in sufficient quantities and at acceptable
quality and pricing levels, or fail to obtain adequate DEA quotas for controlled substances, or to fully comply with cGMP
regulations, we may face delays in the commercialization of these products or our product candidates, if approved, or be
unable to meet market demand, and may be unable to generate potential revenues.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the
development of advanced manufacturing techniques and process controls, and the use of specialized processing equipment. In
order to meet anticipated demand for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER we have installed specialized
processing equipment in our Grand Prairie, Texas facilities, which we believe will produce sufficient quantities of our
products for commercialization. We purchase raw materials and components from various suppliers in order to manufacture
Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. If we are unable to source the required raw materials from our
suppliers, or if we do not obtain DEA quotas or receive inadequate DEA quotas, we may experience delays in manufacturing
Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, and may not be able to meet our customers' demands for our
products.
In addition, we must comply with federal, state and foreign regulations, including cGMP requirements enforced by the
FDA through its facilities inspection program. Any failure to comply with applicable regulations may result in fines and civil
penalties, suspension of production, suspension or delay in product approval, product seizure or voluntary recall, or
withdrawal of product approval, and would limit the availability of our products. Any manufacturing defect or error
discovered after products have been produced and distributed could result in even more significant consequences, including
costly recall procedures, re-stocking costs, damage to our reputation and potential for product liability claims.
Our Grand Prairie facility was formerly operated by our predecessor, PharmaFab, Inc., or PharmaFab. In April 2007, the
FDA announced entry of a Consent Decree of Permanent Injunction, or the Consent Decree, against PharmaFab, one of its
subsidiaries and two of its officials, including Mark Tengler, a former officer of ours who was, at the time, PharmaFab's
president, and Russ McMahen, our Senior Vice President of Scientific Affairs, who held a similar position at the time with
PharmaFab, or jointly, the Defendants. The Consent Decree arose out of several perceived cGMP deficiencies related to the
manufacture of unapproved drugs or Drug Efficacy Study Implementation ("DESI"), drugs that we no longer manufacture.
Pursuant to the Consent Decree, the Defendants were permanently restrained and enjoined from directly or indirectly
manufacturing, processing, packing, labeling, holding or distributing any prescription drugs that are not the subject of an
NDA or an abbreviated NDA. Among other things, the Consent Decree also granted the FDA the ability to, without prior
notice, inspect PharmaFab's place of business and take any other measures necessary to monitor and ensure continuing
compliance with the terms of the Consent Decree. The FDA has inspected the Grand Prairie facility several times since the
Consent Decree was entered, and we have been able to manufacture and ship our generic Tussionex, Adzenys XR-ODT,
Cotempla XR-ODT and Adzenys ER for commercial distribution and drug products for our clinical trials. Although we have
concluded the annual audit program prescribed by the Consent Decree entered into by our predecessor, our facilities may be
inspected by the FDA at any time as a result of the Consent Decree. Although for our most recent annual audit by the cGMP
expert in November 2014, the expert concluded that our corrective actions satisfactorily addressed the observations noted in
its report, on May 22, 2015, the FDA's Dallas District Office identified three ongoing cGMP deviations in our response to the
audit related to batch failure investigations, quality control unit procedures, and in-process specifications. We implemented
corrective actions and submitted additional information in our response to the FDA pursuant to the
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Consent Decree and the FDA closed the matter. On June 20, 2018, we wrote to the Department of Justice and the FDA and
explained we wished to move the court for relief from the Consent Decree, and asked the FDA to recognize the
appropriateness of this request and not oppose the motion. Although we may apply for relief from the Consent Decree, there
is no guarantee that such relief will be granted or that we will be in compliance with the requirements of the Consent Decree.
If we are unable to produce the required commercial quantities of our approved products to meet market demand for
such products on a timely basis or at all, or if we fail to comply with applicable laws for the manufacturing of Adzenys
XR-ODT, Cotempla XR-ODT or Adzenys ER, we will suffer damage to our reputation and commercial prospects and we will
be unable to generate potential revenues.
If we are unable to support demand for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER and any future product
candidates, including ensuring that we have adequate capacity to meet increased demand, or we are unable to successfully
manage the evolution of our drug delivery technology platform, our business could suffer.
As our volume grows, we will need to continue to increase our workflow capacity for customer service, improve our
billing and general process, expand our internal quality assurance program and extend our platform to support product
production at a larger scale within expected turnaround times. We may need additional certified laboratory scientists and
other scientific and technical personnel to process higher volumes of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys
ER. Portions of our process are not automated and will require additional personnel to scale. We may also need to purchase
additional equipment, some of which can take several months or more to procure, set up and validate, and increase our
software and computing capacity to meet increased demand. There is no assurance that any of these increases in scale,
expansion of personnel, equipment, software and computing capacities, or process enhancements will be successfully
implemented, or that we will have adequate space in our facilities to accommodate such required expansion.
As additional product candidates, if approved, are commercialized, we will need to incorporate new equipment,
implement new technology systems and laboratory processes and hire new personnel with different qualifications. Failure to
manage this growth or transition could result in turnaround time delays, higher product costs, declining product quality,
deteriorating customer service and slower responses to competitive challenges. A failure in any one of these areas could make
it difficult for us to meet market expectations for our products and could damage our reputation and the prospects for our
business.
If our sole manufacturing facility becomes damaged or inoperable or we are required to vacate our facility, our ability to
manufacture Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER, our generic Tussionex or future potential product
candidates for clinical development, may be jeopardized. Our inability to continue manufacturing adequate supplies of our
products could adversely affect our ability to generate revenues.
All of our manufacturing capabilities are housed in our sole manufacturing facility located in Grand Prairie, Texas. Our
facility and equipment could be harmed or rendered inoperable by natural or man-made disasters, including war, fire, tornado,
power loss, communications failure or terrorism, any of which may render it difficult or impossible for us to operate our drug
delivery technology platform and manufacture our product candidates or products for some period of time. The inability to
manufacture our products and product candidates if our facility or our equipment is inoperable, for even a short period of
time, may result in the loss of customers or harm to our reputation, and we may be unable to regain those customers or repair
our reputation in the future. Furthermore, our facility and the equipment we use to manufacture our products and product
candidates could become damaged and time-consuming to repair or replace. It would be difficult, time-consuming and
expensive to rebuild our facility or repair or replace our equipment or license or transfer our proprietary technology to a
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third-party, particularly in light of the requirements for a DEA-registered manufacturing and storage facility like ours. If we
are required to change or add a new manufacturer or supplier, the process would likely require prior FDA, DEA and/or
equivalent foreign regulatory authority approval, and would be very time consuming. Even in the unlikely event we are able
to find a third party with such qualifications to enable us to manufacture our products or product candidates, we may be
unable to negotiate commercially reasonable terms.
We carry insurance for damage to our property and the disruption of our business, but this insurance may not cover all of
the risks associated with damage or disruption to our business, may not provide coverage in amounts sufficient to cover our
potential losses and may not continue to be available to us on acceptable terms, if at all. An inability to continue
manufacturing adequate supplies of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or our generic Tussionex at our
Grand Prairie, Texas facility could result in a disruption in the supply of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys
ER, or our generic Tussionex to physicians and pharmacies, which would adversely affect our ability to generate revenues.
If other forms of our products and product candidates are approved and successfully commercialized by other third
parties, especially if approved before we can successfully commercialize our products and product candidates, our
business would be materially harmed.
Other third parties may seek approval to manufacture and market their own versions of product candidates in our product
pipeline in the United States. If any of these parties obtain FDA approval of such a competitive product before we do, they
may be entitled to three years of marketing exclusivity. Such exclusivity would, for example, delay the commercialization of
our product candidates and, as a result, we may never achieve significant market share for these products. Consequently,
revenues from product sales of these products would be similarly delayed and our business, including our development
programs, and growth prospects would suffer. Even if any of our product candidates are approved before a competitor's
product candidate, we may not be entitled to any marketing exclusivity and, other than under circumstances in which third
parties may infringe or are infringing our patents, we may not be able to prevent the submission or approval of another full
NDA for any competitor's product candidate.
Amphetamine, methylphenidate and hydrocodone are Schedule II controlled substances under the Controlled Substances
Act, and any failure to comply with this Act or its state equivalents would have a negative impact on our business.
Amphetamine, methylphenidate and hydrocodone are listed by the DEA as a Schedule II controlled substance under the
Controlled Substances Act ("CSA"). The DEA classifies substances as Schedule I, II, III, IV or V controlled substances, with
Schedule I controlled substances considered to present the highest risk of substance abuse and Schedule V controlled
substances the lowest risk. Scheduled controlled substances are subject to DEA regulations relating to supply, procurement,
manufacturing, storage, distribution and physician prescription procedures. For example, Schedule II controlled substances
are subject to various restrictions, including, but not limited to, mandatory written prescriptions and the prohibition of refills.
In addition to federal scheduling, some drugs may be subject to state-controlled substance laws and regulations and more
extensive requirements than those determined by the DEA and FDA. Though state controlled substances laws often mirror
federal law, because the states are separate jurisdictions, they may schedule products separately. While some states
automatically schedule a drug when the DEA does so, other states require additional state rulemaking or legislative action,
which could delay commercialization. Some state and local governments also require manufacturers to operate a drug
stewardship program that collects, secures, transports and safely disposes of unwanted drugs.
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Entities must register annually with the DEA to manufacture, distribute, dispense, import, export and conduct research
using controlled substances. In addition, the DEA requires entities handling controlled substances to maintain records and file
reports, including those for thefts or losses of any controlled substances, and to obtain authorization to destroy any controlled
substances.
Registered entities also must follow specific labeling and packaging requirements, and provide appropriate security
measures to control against diversion of controlled substances. Security requirements vary by controlled substance schedule
with the most stringent requirements applying to Schedule I and Schedule II controlled substances. Required security
measures include background checks on employees and physical control of inventory through measures such as vaults and
inventory reconciliations. Failure to follow these requirements can lead to significant civil and/or criminal penalties and
possibly even lead to a revocation of a DEA registration. The DEA also has a production and procurement quota system that
controls and limits the availability and production of Schedule I or II controlled substances. If we or any of our suppliers of
raw materials that are DEA-classified as Schedule I or II controlled substances are unable to receive any quota or a sufficient
quota to meet demand for our products, if any, our business would be negatively impacted.
Products containing controlled substances may generate public controversy. As a result, these products may have their
marketing approvals withdrawn. Political pressures and adverse publicity could lead to delays in, and increased expenses for,
and limit or restrict, the introduction and marketing of our product or product candidates or result in other legal action. For
example, we are the target of a lawsuit filed in December 2017 by the County of Harris, Texas, against us and other alleged
manufacturers, promoters, sellers and distributers of opioid pharmaceutical products.
Legislative or regulatory reform of the health care system in the United States may adversely impact our business,
operations or financial results.
Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results.
In particular, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010 (collectively the "Affordable Care Act" or "ACA"), was signed into law. This legislation changes
the current system of healthcare insurance and benefits intended to broaden coverage and control costs. The law also contains
provisions that will affect companies in the pharmaceutical industry and other healthcare related industries by imposing
additional costs and changes to business practices. Provisions affecting pharmaceutical companies include the following:
mandatory rebates for drugs sold into the Medicaid program have been increased, and the rebate requirement has
been extended to drugs used in risk-based Medicaid managed care plans.
the 340B Drug Pricing Program under the Public Health Service Act has been extended to require mandatory
discounts for drug products sold to certain critical access hospitals, cancer hospitals and other covered entities.
pharmaceutical companies are required to offer discounts on branded drugs to patients who fall within the Medicare
Part D coverage gap, commonly referred to as the "Donut Hole."
pharmaceutical companies are required to pay an annual non-tax deductible fee to the federal government based on
each company's market share of prior year total sales of branded drugs to certain federal healthcare programs, such
as Medicare, Medicaid, Department of Veterans Affairs and Department of Defense. The aggregated industry-wide
fee is expected to total $28.0 billion through 2019. Since we expect our branded pharmaceutical sales to constitute a
small portion of the total federal health program pharmaceutical market, we do not expect this annual assessment to
have a material impact on our financial condition.
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Despite initiatives to invalidate the Affordable Care Act, the U.S. Supreme Court has upheld certain key aspects of the
legislation, including a tax-based shared responsibility payment imposed on certain individuals who fail to maintain
qualifying health coverage for all or part of a year, which is commonly referred to as the "individual mandate." However, as a
result of tax reform legislation passed in December 2017, the individual mandate has been eliminated effective January 1,
2019. On December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate
portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as
part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. The Trump administration and
CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018, the same judge issued an
order staying the judgment pending appeal. It is unclear how this decision and any subsequent appeals and other efforts to
repeal and replace the ACA will impact the ACA and our business. Litigation and legislation over the ACA are likely to
continue, with unpredictable and uncertain results. We will continue to evaluate the effect that the ACA and its possible
repeal and replacement has on our business.
In addition, since January 2017, President Trump has signed two Executive Orders designed to delay the implementation
of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the
ACA. Further, the Trump administration has concluded that cost-sharing reduction, or CSR, payments to insurance
companies required under the ACA have not received necessary appropriations from Congress and announced that it will
discontinue these payments immediately until such appropriations are made. The loss of the CSR payments is expected to
increase premiums on certain policies issued by qualified health plans under the ACA. Several state Attorneys General filed
suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal
judge in California on October 25, 2017 and again on July 18, 2018. Furthermore, on June 14, 2018, the U.S. Court of
Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk
corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement on
third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.
In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for
insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits
required under the ACA for plans sold through such marketplaces. In 2019, Congress may consider other legislation to repeal
and replace elements of the Affordable Care Act, and litigation and legislation over the Affordable Care Act are likely to
continue, with unpredictable and uncertain results. Changes to the Affordable Care Act or other existing health care
regulations could significantly impact our business and the pharmaceutical industry. Although it is too early to determine the
effect of legal challenges, pending legislation, and executive action on the Affordable Care Act, the law appears likely to
continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our
regulatory burdens and operating costs.
Additionally, other federal health reform measures have been proposed and adopted in the United States since the ACA
was enacted:
The Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A
Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2
trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation's
automatic reduction to several government programs. These changes included aggregate reductions to Medicare
payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect
through 2027 unless additional Congressional action is taken.
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The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers,
and increased the statute of limitations period for the government to recover overpayments to providers from three
to five years.
The Right to Try Act of 2018 provides a federal framework for certain patients to access certain investigational new
drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under
certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA
permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug
products available to eligible patients as a result of the Right to Try Act, but the manufacturer must develop an internal policy
and respond to patient requests according to that policy.
Further, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their
marketed products, which have resulted in several recent Congressional inquiries and proposed bills designed to, among other
things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient
programs, and reform government program reimbursement methodologies for products. In addition, the United States
government, state legislatures, and foreign governments have shown significant interest in implementing cost containment
programs, including price-controls, restrictions on reimbursement and requirements for substitution of generic products for
branded prescription drugs to limit the growth of government paid health care costs. Individual states in the United States
have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical
and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from
other countries and bulk purchasing. We anticipate pricing scrutiny will continue and escalate, including on a global basis. As
a result, our business and reputation may be harmed, our stock price may be adversely impacted and experience periods of
volatility, and our results of operations may be adversely impacted.
CMS may also develop new payment and delivery models, such as bundled payment models. CMS has recently
proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small
group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold
through such marketplaces. On November 30, 2018, CMS announced a proposed rule that would amend the Medicare
Advantage and Medicare Part D prescription drug benefit regulations to reduce out of pocket costs for plan enrollees and
allow Medicare plans to negotiate lower rates for certain drugs. Among other things, the proposed rule changes would allow
Medicare Advantage plans to use pre authorization (PA) and step therapy (ST) for six protected classes of drugs and, with
certain exceptions, permit plans to implement PA and ST in Medicare Part B drugs; and change the definition of "negotiated
prices" as well as add a definition of "price concession" in the regulations. It is unclear whether these proposed changes will
be accepted, and if so, what effect such changes will have on our business.
In addition, in September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted giving the
FDA enhanced post-marketing authority including the authority to require post-marketing studies and clinical trials, labeling
changes based on new safety information and compliance with REMS approved by the FDA. The FDA's exercise of this
authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased
costs to ensure compliance with post-approval regulatory requirements and potential restrictions on the sale and/or
distribution of approved products.
Moreover, we cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state
legislative and regulatory developments are likely, and we expect ongoing initiatives in the United States to increase pressure
on drug pricing. Such reforms could have an
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adverse effect on anticipated revenues from product candidates that we may successfully develop and for which we may
obtain regulatory approval and may affect our overall financial condition and ability to develop product candidates.
Inadequate funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key
leadership and other personnel, prevent new products and services from being developed or commercialized in a timely
manner or otherwise prevent those agencies from performing normal business functions on which the operation of our
business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including
government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and
statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In
addition, government funding of the SEC and other government agencies on which our operations may rely, including those
that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or
approved by necessary government agencies, which would adversely affect our business. For example, over the last several
years, including beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory
agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop
critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely
review and process our regulatory submissions, which could have a material adverse effect on our business. Further, upon
completion of this offering and in our operations as a public company, future government shutdowns could impact our ability
to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or
penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations. Our operations involve the use of
hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous
waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate
the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of
hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also
could incur significant costs associated with civil or criminal fines and penalties.
Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries
to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide
adequate coverage against potential liabilities. In addition, we may incur substantial costs in order to comply with current or
future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our
research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial
fines, penalties or other sanctions.
If we are unable to achieve and maintain adequate levels of coverage and reimbursement for our products or, if approved,
product candidates their commercial success may be severely hindered.
Successful sales of our products and any product candidates that receive regulatory approval depend on the availability
of adequate coverage and reimbursement from third-party payors. Patients who are prescribed medications for the treatment
of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription
drugs. Adequate coverage
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and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is
critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new
drug products when more established or lower cost therapeutic alternatives are already available or subsequently become
available. Assuming we obtain coverage for a given product, the resulting reimbursement payment rates might not be
adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless
coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.
In addition, the market for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER will depend significantly on access
to third-party payors' drug formularies, or lists of medications for which third-party payors provide coverage and
reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on
pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or
otherwise restrict patient access through formulary controls or otherwise to a branded drug when a less costly generic
equivalent or other alternative is available.
Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy requirement for
coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for
drug products can differ significantly from payor to payor. As a result, the coverage determination process is often a
time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to
each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained
in the first instance.
Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the
United States and in international markets. Third party coverage and reimbursement for our product candidates for which we
may receive regulatory approval may not be available or adequate in either the United States or international markets, which
could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our relationships with customers, healthcare providers and third-party payors are subject to applicable anti-kickback,
fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties,
contractual damages, reputational harm and diminished profits and future earnings.
For our product and any product candidates that obtain regulatory approval and are marketed in the United States, our
arrangements with third-party payors, healthcare providers, and customers may expose us to broadly applicable fraud and
abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships
through which we market, sell and distribute any products for which we obtain marketing approval. In addition, we may be
subject to health information privacy and security regulation by U.S. federal and state governments and foreign jurisdictions
in which we conduct our business. In the United States, these laws include, without limitation, state and federal anti-kickback,
false claims, physician transparency, and patient data privacy and security laws and regulations, including but not limited to
those described below:
The federal Anti-Kickback Statute, makes it illegal for any person, including a prescription drug or biologic
manufacturer (or a party on its behalf) to knowingly and willfully solicit, receive, offer or pay remuneration,
directly or indirectly, overtly or covertly, in cash or in kind, that is intended to induce or reward referrals, either the
referral of an individual, or the purchase, recommendation, order or prescription of a particular item, drug or service
for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs.
Violations of this law are punishable by up to five years in prison, criminal fines, administrative
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civil money penalties and exclusion from participation in federal healthcare programs. In addition, a person or
entity does not need to have actual knowledge of the statute or specific intent to violate it.
The federal False Claims Act imposes civil penalties, including through civil whistleblower or qui tam actions,
against individuals or entities (including manufacturers) for, among other things, knowingly presenting, or causing
to be presented false or fraudulent claims for payment by a federal healthcare program or making a false statement
or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to
the federal government. Penalties for a False Claims Act violation include three times the actual damages sustained
by the government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from
participation in federal healthcare programs and the potential implication of various federal criminal statutes. The
government may deem manufacturers to have "caused" the submission of false or fraudulent claims by, for
example, providing inaccurate billing or coding information to customers or promoting a product off-label. Claims
which include items or services resulting from a violation of the federal Anti-Kickback Statute are false or
fraudulent claims for purposes of the False Claims Act. Our future marketing and activities relating to the reporting
of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate
information and other information affecting federal, state and third-party reimbursement for our products, and the
sale and marketing of our product and any future product candidates, are subject to scrutiny under this law.
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which imposes criminal and civil liability
for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit
program, including private payors, or falsifying, concealing or covering up a material fact, or making any materially
false statements in connection with the delivery of or payment for healthcare benefits, items, or services.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009
("HITECH"), and their respective implementing regulations, which impose, among other things, specified
requirements on covered entities and their business associates, relating to the privacy, and security of individually
identifiable health information, including mandatory contractual terms and required implementation of technical
safeguards of such information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to
make civil and criminal penalties applicable to business associates, and gave state attorneys general new authority
to file civil actions for damage or injunctions in federal courts to enforce the federal HIPAA laws and seek
attorneys' fees and costs associated with pursuing federal civil actions.
The Physician Payments Sunshine Act, enacted as part of the Affordable Care Act which imposed new annual
reporting requirements for certain manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children's Health Insurance Program for certain payments
and other "transfers of value" provided to physicians and teaching hospitals, and ownership and investment interests
held by physicians and their immediate family members.
Analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims
laws, which may be broader in scope and apply regardless of payor. Such laws are enforced by various state
agencies and through private actions. Some state laws require pharmaceutical companies to comply with the
pharmaceutical industry's voluntary compliance guidelines and the relevant federal government compliance
guidance, require drug manufacturers to report information related to payments and other transfers of value to
physicians and other healthcare providers, and restrict marketing practices or require disclosure of marketing
expenditures. Some states, such as California, Massachusetts and Vermont, mandate
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implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation,
and other remuneration to physicians. State and foreign laws also govern the privacy and security of health
information in certain circumstances. Such data privacy and security laws may differ from one another in
significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
On January 31, 2019, the Department of Health and Human Services (HHS) and HHS Office of Inspector General (OIG)
proposed an amendment to one of the existing Anti-Kickback safe harbors (42 C.F.R. 1001.952(h)) which would prohibit
certain pharmaceutical manufacturers from offering rebates to pharmacy benefit managers ("PBMs") in the Medicare Part D
and Medicaid managed care programs. The proposed amendment would remove protection for "discounts" from
Anti-Kickback enforcement action, and would include criminal and civil penalties for knowingly and willfully offering,
paying, soliciting, or receiving remuneration to induce or reward the referral of business reimbursable under federal health
care programs. At the same time, HHS also proposed to create a new safe harbor to protect point-of-sale discounts that drug
manufacturers provide directly to patients, and adds another safe harbor to protect certain administrative fees paid by
manufacturers to PBMs. If this proposal is adopted, in whole or in part, it could affect the pricing and reimbursement for any
products for which we receive approval in the future.
In addition, regulators globally are also imposing greater monetary fines for privacy violations. For example, in 2016,
the E.U. adopted a new regulation governing data practices and privacy called the General Data Protection Regulation, or
GDPR, which became effective on May 25, 2018. The GDPR applies to any company established in the E.U. as well as to
those outside the E.U. if they collect and use personal data in connection with the offering goods or services to individuals in
the E.U. or the monitoring of their behavior. The GDPR enhances data protection obligations for processors and controllers of
personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on
retention of information, mandatory data breach notification requirements and onerous new obligations on services providers.
Non-compliance with the GDPR may result in monetary penalties of up to A20 million or 4% of worldwide revenue,
whichever is higher. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain
types of personal data, such as healthcare data or other sensitive information, could greatly increase our cost of providing our
products and services or even prevent us from offering certain services in jurisdictions that we operate in.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of
healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement
bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which
has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. It is possible that
governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations
or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in
violation of any of these laws or any other related governmental regulations that may apply to us, we may be subject to
significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment,
disgorgement, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid,
reputational harm, additional oversight and reporting obligations if we become subject to a corporate integrity agreement or
similar settlement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our
operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to
be not in compliance with applicable laws, they may be subject to similar actions, penalties and sanctions. Efforts to ensure
that our business arrangements comply with applicable healthcare laws and regulations, as well as responding to possible
investigations by government authorities, can be time- and resource-consuming and can divert a company's attention from the
business.
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Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of
our products.
The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. We
face a risk of product liability exposure related to the testing of our product candidates in clinical trials and face even greater
risks related to the commercialization of our products and upon any commercialization by us of our future products and, if
approved, our product candidates, such as claims related to opioid abuse. For example, on March 7, 2018, we received a
citation advising us that the County of Harris Texas filed a lawsuit on December 13, 2017 against us and various other alleged
manufacturers, promoters, sellers and distributors of opioid pharmaceutical products. These lawsuits may divert our
management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of
these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one or
more of our products.
Our product liability insurance coverage may not be adequate to cover any and all liabilities that we may incur.
We currently have $10.0 million in product liability insurance coverage in the aggregate, which may not be adequate to
cover any and all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain
insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Large judgments have
been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim
or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and
adversely affect our business. In addition, we may not be able to obtain or maintain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability claims, which could prevent or inhibit the
commercial production and sale of our products. For example, we have experienced increasing difficulty in procuring
insurance coverage for our products, in particular, our opioid-based product, due to their status as controlled substances.
RISKS RELATED TO THE CLINICAL DEVELOPMENT, REGULATORY REVIEW AND APPROVAL OF OUR
PRODUCT CANDIDATES
Our failure to successfully identify, develop and market additional product candidates could impair our ability to grow.
As part of our growth strategy, we intend to identify, develop and market additional product candidates. We are
exploring various therapeutic opportunities for our pipeline and proprietary technologies. We may spend several years
completing our development of any particular current or future internal product candidates, and failure can occur at any stage.
The product candidates to which we allocate our resources may not end up being successful. In addition, because our internal
research capabilities are limited, we may be dependent upon pharmaceutical companies, academic scientists and other
researchers to sell or license product candidates, approved products or the underlying technology to us. The success of this
strategy depends partly upon our ability to identify, select, discover and acquire promising product candidates and products.
The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved
product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales
resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited
resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and
integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing
opportunities that are never completed, or we may fail to realize the anticipated benefits of
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such efforts. For example, we may fail to realize the anticipated benefits of the license of NT0502, our in-licensed product
candidate, and there is no assurance that we will be able to maintain the license for NT0502 on commercially reasonable
terms or at all. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or
at all.
In addition, future acquisitions may entail numerous operational and financial risks, including:
exposure to unknown liabilities;
disruption of our business and diversion of our management's time and attention to develop acquired products or
technologies;
incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;
higher than expected acquisition and integration costs;
difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel;
increased amortization expenses;
impairment of relationships with key suppliers or customers of any acquired businesses due to changes in
management and ownership; and
inability to motivate key employees of any acquired businesses.
Further, any product candidate that we acquire may require additional development efforts prior to commercial sale,
including extensive clinical testing and approval by the FDA and other regulatory authorities.
Premarket review of our product candidates by the FDA or other regulatory authorities is a lengthy and uncertain process
and approval may be delayed, limited or denied, any of which would adversely affect our ability to generate operating
revenues.
The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of
a product candidate for many reasons. For example, the FDA:
could determine that we cannot rely on the 505(b)(2) regulatory approval pathway for any future product candidate
that we may identify and develop;
could determine that the information provided by us was inadequate, contained clinical deficiencies or otherwise
failed to demonstrate safety and effectiveness of any of our product candidates for any indication;
may not find the data from bioequivalence studies and/or clinical trials sufficient to support the submission of an
NDA or to obtain marketing approval in the United States, including any findings that the safety risks outweigh
clinical and other benefits of our product candidates;
may require us to conduct additional bioequivalence studies to demonstrate that the proposed commercial product is
bioequivalent to the batch used in clinical trials;
may disagree with our trial design or our interpretation of data from nonclinical studies, bioequivalence studies
and/or clinical trials, or may change the requirements for approval even after it has reviewed and commented on the
design for our trials;
may determine that we inappropriately relied on a certain listed drug or drugs for our 505(b)(2) NDA or that
approval of our applications for any future product candidate is blocked by patent or non-patent exclusivity of the
listed drug or drugs;
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may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we
enter into agreements for the supply of the API used in our product candidates;
may identify deficiencies in our own manufacturing processes or our proposed scale-up of the manufacturing
processes or facilities for the production of our product candidates;
may approve our product candidates for fewer or more limited indications than we request, or may grant approval
contingent on the performance of costly post-approval clinical trials;
may change its approval policies or adopt new regulations; or
may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization
of our product candidates.
Notwithstanding the approval of many products by the FDA pursuant to 505(b)(2), over the last few years, some
pharmaceutical companies and others have objected to the FDA's interpretation of 505(b)(2). If the FDA changes its
interpretation of 505(b)(2), or if the FDA's interpretation is successfully challenged in court, this could delay or even prevent
the FDA from approving any 505(b)(2) application that we submit. Any failure to obtain regulatory approval of our product
candidates would significantly limit our ability to generate revenues, and any failure to obtain such approval for all of the
indications and labeling claims we deem desirable could reduce our potential revenues.
If the FDA does not conclude that our product candidates satisfy the requirements for the 505(b)(2) regulatory approval
pathway, or if the requirements for approval of any of our product candidates under Section 505(b)(2) are not as we
expect, the approval pathway for our product candidates will likely take significantly longer, cost significantly more and
encounter significantly greater complications and risks than anticipated, and in any case may not be successful.
We intend to seek FDA approval through the 505(b)(2) regulatory approval pathway for each of our future product
candidates in our product pipeline. The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known
as the Hatch-Waxman Amendments, added 505(b)(2) to the FDCA. Section 505(b)(2) permits the submission of an NDA
where at least some of the information required for approval comes from trials that were not conducted by or for the applicant
and for which the applicant does not have a right of reference.
If we cannot pursue the 505(b)(2) regulatory approval pathway for our product candidates as we intend, we may need to
conduct additional nonclinical studies or clinical trials, provide additional data and information and meet additional
requirements for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval
for our product candidates likely would increase substantially. Moreover, the inability to pursue the 505(b)(2) regulatory
approval pathway could result in new competitive products reaching the market before our product candidates, which could
materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the 505(b)(2) regulatory
approval pathway for a product candidate, we cannot assure you that we will receive the requisite or timely approvals for
commercialization of such product candidate.
In addition, our competitors may file citizen petitions with the FDA in an attempt to persuade the FDA that our product
candidates, or the clinical trials that support their approval, contain deficiencies or that new regulatory requirements be placed
on the product candidate or drug class of the product candidate. Such actions by our competitors could delay or even prevent
the FDA from approving any NDA that we submit under 505(b)(2).
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An NDA submitted under 505(b)(2) may subject us to a patent infringement lawsuit that would delay or prevent the review
or approval of our product candidate.
Our product candidates will be submitted to the FDA for approval under 505(b)(2) of the FDCA. Section 505(b)(2)
permits the submission of an NDA where at least some of the information required for approval comes from trials that were
not conducted by, or for, the applicant and for which the applicant has not obtained a right of reference. An NDA under
505(b)(2) would enable us to reference published literature and/or the FDA's previous findings of safety and effectiveness for
the previously approved drug.
For NDAs submitted under 505(b)(2), the patent certification and related provisions of the Hatch-Waxman Amendments
apply. Accordingly, we may be required to include certifications, known as Paragraph IV certifications, that certify that any
patents listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the "Orange
Book"), with respect to any product referenced in the 505(b)(2) application, are invalid, unenforceable or will not be infringed
by the manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA.
Under the Hatch-Waxman Amendments, the holder of patents that the 505(b)(2) application references may file a patent
infringement lawsuit after receiving notice of the Paragraph IV certification. Filing of a patent infringement lawsuit against
the filer of the 505(b)(2) applicant within 45 days of the patent owner's receipt of notice triggers a one-time, automatic,
30-month stay of the FDA's ability to approve the 505(b)(2) NDA, unless patent litigation is resolved in favor of the
Paragraph IV filer or the patent expires before that time. Accordingly, we may invest a significant amount of time and
expense in the development of one or more product candidates only to be subject to significant delay and patent litigation
before such product candidates may be commercialized, if at all.
In addition, a 505(b)(2) application will not be approved until any non-patent exclusivity, such as exclusivity for
obtaining approval of a new chemical entity, or NCE, listed in the Orange Book for the listed drug has expired. The FDA also
may require us to perform one or more additional clinical trials or measurements to support the change from the listed drug,
which could be time consuming and could substantially delay our achievement of regulatory approval. The FDA also may
reject any future 505(b)(2) submissions and require us to submit traditional NDAs under 505(b)(1), which would require
extensive data to establish safety and effectiveness of the drug for the proposed use and could cause delay and additional
costs. These factors, among others, may limit our ability to commercialize our product candidates successfully.
Our approved products and product candidates may cause adverse effects or have other properties that could delay or
prevent their regulatory approval or limit the scope of any approved label or market acceptance, or result in significant
negative consequences following marketing approval, if any.
As with many pharmaceutical products, treatment with our products or product candidates may produce undesirable side
effects or adverse reactions or events. Although our products and product candidates contain active ingredients that have
already been approved, meaning that the side effects arising from the use of the active ingredient or class of drug in our
product candidates is generally known, our products or product candidates still may cause undesirable side effects. These
could be attributed to the active ingredient or class of drug or to our unique formulation of such products or product
candidates, or other potentially harmful characteristics. Such characteristics could cause us, institutional review boards, or
IRBs, clinical trial sites, the FDA or other regulatory authorities to interrupt, delay or halt clinical trials and could result in a
more restrictive label, if the product candidate is approved, or the delay, denial or withdrawal of regulatory approval, which
may harm our business, financial condition and prospects significantly.
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Further, if any of our products cause serious or unexpected side effects after receiving market approval, a number of
potentially significant negative consequences could result, including:
regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution;
the FDA may require implementation of a REMS;
regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
we may be required to change the way the product is administered or conduct additional clinical trials;
we may need to voluntarily recall our products
we could be sued and held liable for harm caused to patients; or
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or
product candidate and could substantially increase the costs of commercializing our products and product candidates.
We will need to obtain FDA approval of any proposed names for our product candidates that gain marketing approval,
and any failure or delay associated with such naming approval may adversely impact our business.
Any name we intend to use for our product candidates will require approval from the FDA regardless of whether we
have secured a formal trademark registration from the U.S. Patent and Trademark Office ("USPTO"). The FDA typically
conducts a review of proposed product names, including an evaluation of whether proposed names may be confused with
other product names. The FDA may object to any product name we submit if it believes the name inappropriately implies
medical claims.
If the FDA objects to any of our proposed product names, we may be required to adopt an alternative name for our
product candidates, which could result in further evaluation of proposed names with the potential for additional delays and
costs.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will
be successful in obtaining regulatory approval of our product candidates in other jurisdictions.
Even if we obtain and maintain regulatory approval of our product candidates in one jurisdiction, such approval does not
guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in
obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For
example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign
jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries.
Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from
those in the United States, including additional nonclinical studies or clinical trials as investigations conducted in one
jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United
States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In
some cases, the price that we intend to charge for our products is also subject to approval.
Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant
delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail
to comply with the regulatory requirements in international
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markets and/or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full
market potential of our product candidates will be harmed.
We are heavily dependent on the success of our product candidates. We cannot give any assurance that we will receive
regulatory approval for our product candidates, which is necessary before they can be commercialized.
Our business and future success are substantially dependent on our ability to timely obtain regulatory approval for and
commercialize any product candidates that we may identify and pursue. We are not permitted to market any of our product
candidates in the United States until we receive approval of an NDA from the FDA, or in any foreign jurisdiction until we
receive the requisite approvals from such jurisdiction. Satisfaction of regulatory requirements can be protracted, is dependent
upon the type, complexity and novelty of the product candidate and requires the expenditure of substantial resources. We
cannot predict whether we will obtain regulatory approval to commercialize our product candidates, and we cannot, therefore,
predict the timing of any future revenues from these product candidates, if any. Any delay or setback in the regulatory
approval or commercialization of any of these product candidates could adversely affect our business.
The commencement and completion of clinical trials can be delayed or prevented for a number of reasons.
We intend to identify, develop and market additional product candidates; however, we may not be able to commence or
complete the clinical trials that would support the submission of an NDA to the FDA. Drug development is a long, expensive
and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. Clinical trials can be delayed or
prevented for a number of reasons, including:
difficulties obtaining regulatory approval to commence a clinical trial or complying with conditions imposed by a
regulatory authority regarding the scope or term of a clinical trial;
delays in reaching or failing to reach agreement on acceptable terms with prospective contract research
organizations, or CROs, contract manufacturing organizations, or CMOs, and trial sites, the terms of which can be
subject to extensive negotiation and may vary significantly among different CROs and trial sites;
failure of our third-party contractors, such as CROs and CMOs, or our investigators to comply with regulatory
requirements or otherwise meet their contractual obligations in a timely manner;
insufficient or inadequate supply or quality of a product candidate or other materials necessary to conduct our
clinical trials;
difficulties obtaining IRB approval to conduct a clinical trial at a prospective site;
the FDA requiring alterations to any of our study designs, our nonclinical strategy or our manufacturing plans;
challenges recruiting and enrolling subjects to participate in clinical trials for a variety of reasons, including size
and nature of subject population, proximity of subjects to clinical sites, eligibility criteria for the trial, nature of trial
protocol, the availability of approved effective treatments for the relevant disease and competition from other
clinical trial programs for similar indications;
difficulties maintaining contact with subjects after treatment, which results in incomplete data;
receipt by a competitor of marketing approval for a product targeting an indication that our product targets;
governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; and
varying interpretations of data by the FDA and similar foreign regulatory agencies.
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Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a
clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a trial, or a
data safety monitoring board overseeing the clinical trial at issue, or other regulatory authorities due to a number of factors,
including:
failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;
unforeseen safety issues, including serious adverse events associated with a product candidate, or lack of
effectiveness; and
lack of adequate funding to continue the clinical trial.
Positive results in previous nonclinical studies and clinical trials of any of our product candidates may not be replicated in
future clinical trials of the same product candidates, which could result in development delays or a failure to obtain
marketing approval.
Positive results in nonclinical studies and clinical trials of any of our product candidates may not be predictive of similar
results in future clinical trials. Also, interim results during a clinical trial do not necessarily predict final results. A number of
companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials
even after achieving promising results in early-stage development. Accordingly, the results from any completed nonclinical
studies and clinical trials for any of our product candidates may not be predictive of the results we may obtain in later stage
trials. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to
conduct additional clinical trials. Moreover, clinical data is often susceptible to varying interpretations and analyses, and
many companies that have believed their product candidates performed satisfactorily in nonclinical studies and clinical trials
have nonetheless failed to obtain FDA approval for their products.
RISKS RELATED TO OUR BUSINESS AND FINANCIAL POSITION
We have incurred significant operating losses since our inception and anticipate that we will continue to incur losses for
the foreseeable future.
Our company has limited operating history commercializing branded products. Adzenys XR-ODT, Cotempla XR-ODT
and Adzenys ER require substantial resources as we implement commercialization strategies to seek to begin generating
substantial revenue from product sales. In addition, our product candidates will require substantial additional resources before
we will be able to receive regulatory approvals, implement commercialization strategies and begin generating revenue from
product sales, if approved. There can be no assurance that any of our product candidates will ever achieve regulatory approval
or generate any substantial revenue or revenue at all. We do not anticipate generating substantial revenue from sales of
Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or any of our other product candidates, if approved in the near term, if
ever. We have incurred significant net losses of $51.7 million, $65.8 million and $82.8 million for the years ended
December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of
$317.0 million. We have devoted most of our financial resources to implementation of our commercialization strategies,
manufacturing operations and product development. To date, we have financed our operations primarily through the sale of
equity and debt securities and payments received under collaborative arrangements. The size of our future net losses will
depend, in part, on the rate of future expenditures and our ability to generate revenue. Because of the numerous risks and
uncertainties associated with pharmaceutical product development, we are unable to fully predict the timing or amount of our
increased expenses,
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but we expect to continue to incur substantial expenses, which we expect will increase as we expand our development
activities and operate a specialty sales force and commercialization infrastructure. Our expenses could increase beyond
expectations if we are required by the FDA to perform studies in addition to the clinical trials we have already completed. As
a result of the foregoing, we expect to continue to incur significant and increasing losses and negative cash flows for the
foreseeable future, which may increase compared to past periods. Even if we are able to generate revenue from the sale of any
approved products, we may not become profitable and may need to obtain additional funding to continue operations.
We may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce
or eliminate our product development programs or commercialization efforts.
Developing future potential product candidates, conducting clinical trials, establishing raw material supplier
relationships and manufacturing and marketing drugs are expensive and uncertain processes. Although we believe our cash,
cash equivalents and marketable securities and anticipated future product revenues will be sufficient to allow us to fund the
commercialization of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, we may need to obtain additional capital
through equity offerings, debt financing, payments under new or existing licensing and research and development
collaboration agreements, or any combination thereof, in order to become cash flow positive and to develop and
commercialize additional product candidates. If sufficient funds on acceptable terms are not available when needed, we could
be required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate one or more of our
development programs, which may have a material adverse effect on our business, results of operations and financial
condition.
In addition, unforeseen circumstances may arise, or our strategic imperatives could change, causing us to consume
capital significantly faster than we currently anticipate, requiring us to seek to raise additional funds sooner than expected.
We have no committed external sources of funds.
The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:
the costs of establishing and operating sales, marketing, distribution and commercial manufacturing capabilities for
Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and any other potential product candidates;
our ability to successfully commercialize Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, and to continue
to increase the level of sales in the marketplace;
the rate of progress and cost of our trials and other product development programs for our other potential product
candidates;
the costs and timing of in-licensing additional product candidates or acquiring other complementary technologies,
assets or companies;
the actions of our competitors and their success in selling competitive product offerings; and
the status, terms and timing of any collaborative, licensing, co-promotion or other arrangements.
Additional financing may not be available when we need it or may not be available on terms that are favorable to us. In
addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we
have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis, or at
all, we may be required to delay, reduce the scope of or eliminate commercialization efforts for one or more of our products
or development programs for future potential product candidates.
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We may sell additional equity or incur debt to fund our operations, which may result in dilution to our stockholders and
impose restrictions on our business.
In order to raise additional funds to support our operations, we may sell additional equity or incur debt, which could
adversely impact our stockholders, as well as our business. The sale of additional equity or convertible debt securities would
result in the issuance of additional shares of our capital stock and dilution to all of our stockholders. The incurrence of
indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such
as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property
rights and other operating restrictions that could adversely impact our ability to conduct our business. We may not have
enough available cash or be able to raise additional funds on satisfactory terms, if at all, through equity or debt financings to
repay our indebtedness at the time any such repayment is required (causing a default under such indebtedness), which could
have a material adverse effect on our business, financial condition and results of operations.
We may not have cash available to us in an amount sufficient to enable us to make interest or principal payments on our
indebtedness when due.
On May 11, 2016, we entered into a $60.0 million senior secured credit facility with Deerfield as lender. On
November 5, 2018, we amended the facility and prepaid $7.5 million otherwise due in May 2019, and currently have a
balance of $52.5 million of senior secured credit. $7.5 million in principal on the debt is due in May 2019, $15.0 million is
due in each of May 2020 and May 2021, and a final payment of principal, interest and all other obligations under the facility
due on May 11, 2022. Interest is due quarterly at a rate of 12.95% per year. All obligations under our credit facility are
secured by substantially all of our existing property and assets subject to certain exceptions. This debt financing may create
additional financial risk for us, particularly if our business or prevailing financial market conditions are not conducive to
paying off or refinancing our outstanding debt obligations at maturity. Since our inception, we have had significant operating
losses. As of December 31, 2018, we had an accumulated deficit of $317.0 million. Although we have strategies and plans to
achieve profitability through revenue growth, we expect to continue to incur net losses and have negative cash flow from
operating activities for the foreseeable future as we continue to market our approved products and continue to develop and
seek marketing approval for our product candidates.
As a result, we may not have sufficient funds, or may be unable to arrange for additional financing, to pay the amounts
due on our outstanding indebtedness under our credit facility with Deerfield. Further, funds from external sources may not be
available on economically acceptable terms, if at all. For example, if we raise additional funds through collaboration,
licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates
or technologies, or to grant licenses on terms that are not favorable to us. If adequate funds are not available when and if
needed, our ability to make interest or principal payments on our debt obligations, finance our operations, our research and
development efforts and other general corporate activities would be significantly limited and we may be required to delay,
significantly curtail or eliminate one or more of our programs.
Failure to satisfy our current and future debt obligations under our credit facility with Deerfield could result in an event
of default and, as a result, our lenders could accelerate all of the amounts due. In the event of an acceleration of amounts due
under our credit facility as a result of an event of default, we may not have sufficient funds or may be unable to arrange for
additional financing to repay our indebtedness. In addition, our lenders could seek to enforce their security interests in any
collateral securing such indebtedness.
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Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly and annual fluctuations. We expect that any revenues we
generate will fluctuate from quarter to quarter and year to year as a result of the timing of our commercialization efforts and
seasonal trends with respect to ADHD diagnosis and use of medicinal products in the management of this disorder. Our net
loss and other operating results will be affected by numerous factors, including:
our ability to establish and maintain an effective sales and marketing infrastructure;
variations in the level of expenses related to our commercialization efforts and the development of additional
clinical programs;
competition from existing products or new products that may emerge;
the level of market acceptance for any approved product candidates and underlying demand for that product,
seasonality in the use of that product by end-users and wholesalers' buying patterns;
regulatory developments affecting our products and product candidates;
our dependency on third-party manufacturers to supply components of our product candidates;
potential side effects of our future products that could delay or prevent commercialization or cause an approved
drug to be taken off the market;
any delays in regulatory review and approval of our product candidates;
any intellectual property infringement lawsuit in which we may become involved; and
our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or
receive under these arrangements.
Due to the various factors mentioned above, and others, the results of any prior quarterly period should not be relied
upon as an indication of our future operating performance. If our quarterly operating results fall below the expectations of
investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), if a corporation undergoes an
"ownership change," generally defined as a greater than 50% change (by value) in its equity ownership over a three year
period, the corporation's ability to use its pre-change net operating loss carry-forwards and other pre-change tax attributes,
such as research tax credits, to offset its post-change income may be limited. We have in the past and may experience
ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable
income, our ability to use our pre-change net operating loss carry-forwards to offset U.S. federal taxable income may be
subject to limitations, which could potentially result in increased future tax liability to us. In addition, pursuant to the Tax
Cuts and Jobs Act of 2017, we may not carry back net operating losses to prior years and we may not use net operating losses
generated in 2018 and later to reduce our taxable income in any year by more than 80%. Net operating losses generated prior
to 2018 are available to fully offset future taxable income. These new rules apply regardless of the occurrence of an
"ownership change."
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Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the principal members of our executive team, the loss of whose services may adversely
impact the achievement of our objectives. Any of our executive officers could leave our employment at any time, as all of our
employees are "at will" employees. Recruiting and retaining other qualified employees for our business, including scientific
and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry,
which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may
not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical
companies for individuals with similar skill sets. In addition, failure to succeed in clinical trials or to receive regulatory
approval for our product candidates may make it more challenging to recruit and retain qualified personnel. The inability to
recruit key executives or the loss of the services of any executive or key employee might impede the progress of our
development and commercialization objectives.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately
report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other
public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together
with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting
obligations. We have established an annual SOX Risk Assessment and Control Effectiveness Test Cycle that is designed to
timely identify deficiencies to management for remediation to comply with Section 404 of the Sarbanes-Oxley Act of 2002
(or the "SOX Act"). We may discover additional deficiencies in our internal controls over financial reporting, including those
identified through testing conducted by us in connection with Section 404 of the SOX Act. Such deficiencies may be deemed
to be significant deficiencies or material weaknesses that may require prospective or retroactive changes to our consolidated
financial statements or identify other areas for further remedial action. Failures of internal controls could also cause investors
to lose confidence in our reported financial information, which could have a negative effect on the trading price of our
common stock.
Our business and operations would suffer in the event of system failures.
We utilize information technology, or IT, systems and networks to process, transmit and store electronic information in
connection with our business activities. As use of digital technologies has increased, cyber incidents, including deliberate
attacks and attempts to gain unauthorized access to computer systems and networks, have increased in frequency and
sophistication. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and
integrity of our data. There can be no assurance that we will be successful in preventing cyber-attacks or successfully
mitigating their effects.
Despite the implementation of security measures, our internal computer systems and those of our contractors and
consultants are vulnerable to damage from such cyber attacks, including computer viruses, unauthorized access, natural
disasters, terrorism, war and telecommunication and electrical failures. Such an event could cause interruption of our
operations. For example, the loss of data from completed clinical trials for our product candidates could result in delays in our
regulatory approval efforts and significantly increase our costs. To the extent that any disruption or security breach were to
result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary
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information, we could suffer reputational harm or face litigation or adverse regulatory action and the development of our
product candidates could be delayed.
We may rely on third parties to perform many essential services for any products that we commercialize, including
distribution, customer service, accounts receivable management, cash collection and adverse event reporting. If these third
parties fail to perform as expected or to comply with legal and regulatory requirements, our ability to commercialize
Adzenys XR-ODT, Cotempla XR-ODT or Adzenys ER will be significantly impacted and we may be subject to regulatory
sanctions.
We may retain third-party service providers to perform a variety of functions related to the sale and distribution of
Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, key aspects of which will be out of our direct control. These
service providers may provide key services related to distribution, customer service, accounts receivable management and
cash collection. We would substantially rely on these third-party providers to perform services for us. If these third-party
service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not
carry out their contractual duties to us, our ability to deliver product to meet commercial demand may be significantly
impaired. In addition, we may engage third parties to perform various other services for us relating to adverse event reporting,
safety database management, fulfillment of requests for medical information regarding our product candidates and related
services. If the quality or accuracy of the data maintained by these service providers is insufficient or if they fail to comply
with various requirements, we could be subject to regulatory sanctions.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
If our intellectual property related to our products or product candidates is not adequate, we may not be able to compete
effectively in our market.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual
property related to our products, product candidates and technology. Any disclosure to or misappropriation by third parties of
our confidential or proprietary information could enable competitors to duplicate or surpass our technological achievements,
thus eroding our competitive position in our market.
Due to legal standards relating to patentability, validity, enforceability and scope of claim, patents covering
pharmaceutical and biotechnology inventions involve complex legal, scientific and factual questions. Formulation of drug
products such as ours with complex release profiles is an area of intense research, publishing and patenting, which limits the
scope of any new patent applications. As a result, our ability to obtain, maintain and enforce patents is uncertain and any
rights under any existing patents, or any patents we might obtain or license, may not provide us with sufficient protection for
our products and product candidates to afford a commercial advantage against competitive products or processes. The patent
applications that we own or license may fail to result in issued patents in the United States or in foreign countries. Even if
patents do successfully issue, third parties may challenge their patentability, validity (e.g., by discovering previously
unidentified prior art, or a patent-barring event such as a prior public disclosure, use, sale or offer for sale of the invention),
enforceability or scope, which may result in such patents being narrowed, invalidated or held unenforceable. For example, we
are aware that certain patent rights that are in-licensed for NT0502 may be limited by prior art, which may reduce or
eliminate the scope of coverage for this product candidate. In addition, U.S. patents may be challenged by third parties via
inter partes review, post grant review, derivation or interference proceedings at the USPTO, and European patents may be
challenged via an opposition proceeding at the European Patent Office. Furthermore, if we were to assert our patent rights
against a competitor, the competitor could challenge the validity and/or enforceability of the asserted patent rights. Although
a granted U.S. patent is entitled to a statutory presumption of validity, its issuance is
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not conclusive as to its validity or its enforceability, and it may not provide us with adequate proprietary protection or
competitive advantages against competitors with similar products.
If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with respect to
our products and product candidates is successfully challenged, we may face unexpected competition that could have a
material adverse impact on our business. Even if they are unchallenged, our patents and patent applications may not
adequately protect our intellectual property or prevent others from designing around our claims. For example, a third party
may develop a competitive product that provides therapeutic benefits similar to our products or product candidates, but is
sufficiently different to fall outside the scope of our patent protection.
Furthermore, if we encounter delays in our clinical trials or entry onto the market in a particular jurisdiction, the period
of time during which we could market a particular product under patent protection would be reduced.
Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine
the scope of our proprietary rights, and the outcome of such litigation would be uncertain. If we or one of our future
collaborators were to initiate legal proceedings against a third party to enforce a patent covering a product or our technology,
the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States,
defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could
be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, lack of written
description, non-enablement or a patent-barring event, such as a public disclosure, use or sale of the invention more than a
year before the filing date of the application. Grounds for an unenforceability assertion could, for example, be an allegation
that someone connected with prosecution of the patent withheld material information from the USPTO, or made a misleading
statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable.
With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent
examiner were unaware during prosecution, or that a third party challenging one of our patents would not assert that a
patent-barring event had occurred. If a plaintiff or a defendant were to prevail on a legal assertion of invalidity and/or
unenforceability against one or more of our patents, we would lose at least part, and perhaps all, of the patent protection for
one or more of our products or product candidates. Such a loss of patent protection could have a material adverse impact on
our business.
For example, on July 25, 2016, we received a paragraph IV certification from Actavis advising us that Actavis has filed
an ANDA with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, we filed a patent infringement
lawsuit in federal district court in the District of Delaware against Actavis, Inc. This case alleged that Actavis infringed our
Adzenys XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT
prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Actavis's ANDA
for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier.
On October 17, 2017, we entered into the Actavis Agreement with Actavis. This Actavis Agreement resolved all
ongoing litigation involving our Adzenys XR-ODT patents and Actavis's ANDA. Under the Actavis Agreement, we have
granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on
September 1, 2025, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S.
District Court for the District of Delaware. The Actavis Agreement has been submitted to the applicable governmental
agencies. There can be no assurance that the Actavis Agreement will be approved by such agencies. In addition, there can be
no assurance that we would not face future litigation regarding Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or any
future product candidates.
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For example, on October 31, 2017, we received a paragraph IV certification from Teva advising us that Teva has filed an
ANDA with the FDA for a generic version of Cotempla XR-ODT, in connection with seeking to market its product prior to
the expiration of patents covering Cotempla XR-ODT. A paragraph IV certification is a certification by a generic applicant
that in the opinion of that applicant, the patent(s) listed in the Orange Book for a branded product are invalid, unenforceable,
and/or will not be infringed by the manufacture, use or sale of the generic product. On December 13, 2017, we filed a patent
infringement lawsuit in federal district court in the District of Delaware against Teva. This case alleged that Teva infringed
our Cotempla XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Cotempla
XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Teva's
ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier.
On December 21, 2018, we entered into the Teva Agreement with Teva. This Teva Agreement resolved all ongoing
litigation involving our Cotempla XR-ODT patents and Teva's ANDA. Under the Teva Agreement, we have granted Teva the
right to manufacture and market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or
earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District
of Delaware. The Teva Agreement has been submitted to the applicable governmental agencies. There can be no assurance
that the Teva Agreement will be approved by such agencies. In addition, there can be no assurance that we would not face
future litigation regarding Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or any future product candidates.
Such litigation is often time-consuming and costly and its outcome would be unpredictable; however, we intend to
vigorously enforce our intellectual property rights relating to our products. We would expect to face generic competition for
our products if such patents are not upheld or if a filer of a Paragraph IV certification is found not to infringe such patents.
The resulting loss of exclusivity would impact pricing and our sales of our products, which could have a material adverse
impact on our business.
Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in
reexamination, inter partes review, or interference proceedings challenging our patent rights. Patents based on applications
that we file in the future may also be subject to derivation and/or post-grant review proceedings. An adverse determination in
any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights and allow third parties
to commercialize our technology or products and compete directly with us. In addition, if the breadth or strength of protection
provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to
license, develop or commercialize current or future product candidates.
We may not seek to protect our intellectual property rights in all jurisdictions throughout the world, and we may not be
able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world
would be prohibitively expensive, and our intellectual property rights in some countries outside the United States are less
extensive than in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights
to the same extent as federal and state laws in the United States. Consequently, even where we do elect to pursue patent rights
outside the United States, we may not be able to obtain relevant claims and/or we may not be able to prevent third parties
from practicing our inventions in all countries outside the United States, or from selling or importing products made using our
inventions in and into the United States or other jurisdictions.
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Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop
their own products and further, may possibly export otherwise infringing products to territories where we have patent
protection, but enforcement is not as strong as that in the United States. These products may compete with our products and
our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we
pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be
effective or sufficient to prevent third parties from competing with us.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United
States. Many companies have encountered significant problems in protecting and defending intellectual property rights in
certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the
enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement
of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign
countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many
countries limit the enforceability of patents against third parties, including government agencies or government contractors.
In these countries, patents may provide limited or no benefit.
Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Accordingly, we have, and may in the future, choose not to seek patent protection in certain
countries. Furthermore, while we intend to protect our intellectual property rights in certain markets for our products, we
cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market
our products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission,
fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced
or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural,
documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can
result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the
relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been
the case.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an
unfavorable outcome in that litigation would have a material adverse effect on our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market
and sell our and their approved products and use our proprietary technologies without infringing the proprietary rights of third
parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in
the fields in which we are developing product candidates. As the pharmaceutical industry expands and more patents are
issued, the risk increases that our products and product candidates may give rise to claims of infringement of the patent rights
of others. There may, for example, be issued patents of third parties of which we are currently unaware, that may be infringed
by our products or product candidates, which could prevent us from being able to commercialize our products or product
candidates, respectively. Because patent applications can take many years to issue, there may be currently pending
applications which may later result in issued patents that our products or product candidates may infringe.
The pharmaceutical industry is rife with patent litigation between patent holders and producers of follow-on drug
products. The possibility of blocking FDA approval of a competitor's product for up to
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30 months provides added incentive to litigate over Orange Book patents, but suits involving non-Orange Book patents are
also common in the ADHD space. There have been multiple patent litigations involving nearly all of the medications for
treatment of ADHD. This trend may continue and, as a result, we may become party to legal matters and claims arising in the
ordinary course of business.
We may be exposed to, or threatened with, future litigation by third parties alleging that our products or product
candidates infringe their intellectual property rights. If one of our products or product candidates is found to infringe the
intellectual property rights of a third party, we or our collaborators could be enjoined by a court and required to pay damages
and could be unable to commercialize the applicable approved products and product candidates unless we obtain a license to
the patent. A license may not be available to us on acceptable terms, if at all. In addition, during litigation, the patent holder
could obtain a preliminary injunction or other equitable relief which could prohibit us from making, using or selling our
approved products, pending a trial on the merits, which may not occur for several years.
There is a substantial amount of litigation involving patent and other intellectual property rights in the pharmaceutical
industry generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a
number of issues, including, but not limited to:
infringement and other intellectual property claims which, regardless of merit, may be expensive and
time-consuming to litigate and may divert our management's attention from our core business;
third parties bringing claims against us may have more resources than us to litigate claims against us;
substantial damages for infringement, which we may have to pay if a court decides that the product at issue
infringes on or violates the third party's rights, and, if the court finds that the infringement was willful, we could be
ordered to pay treble damages and the patent owner's attorneys' fees;
a court prohibiting us from selling our product or any product candidate approved in the future, if any, unless the
third party licenses its rights to us, which it is not required to do;
if a license is available from a third party, we may have to pay substantial royalties, fees or grant cross-licenses to
our intellectual property rights; and
redesigning any of our products and product candidates so they do not infringe, which may not be possible or may
require substantial monetary expenditures and time.
Our drug development strategy relies heavily upon the 505(b)(2) regulatory approval pathway, which requires us to certify
that we do not infringe upon third-party patents covering approved drugs. Such certifications typically result in third-party
claims of intellectual property infringement, the defense of which would be costly and time consuming, and an
unfavorable outcome in any litigation may prevent or delay our development and commercialization efforts which would
harm our business.
Our commercial success depends in large part on our avoiding infringement of the patents and proprietary rights of third
parties for existing approved drug products. Because we utilize the 505(b)(2) regulatory approval pathway for the approval of
our products and product candidates, we rely in whole or in part on studies conducted by third parties related to those
approved drug products. As a result, upon filing with the FDA for approval of our product candidates, we will be required to
certify to the FDA that either: (1) there is no patent information listed in the FDA's Orange Book with respect to our NDA;
(2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular
date and approval is sought after patent expiration; or (4) the
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listed patents are invalid or will not be infringed by the manufacture, use or sale of our proposed drug product. If we certify to
the FDA that a patent is invalid or not infringed, or a Paragraph IV certification, a notice of the Paragraph IV certification
must also be sent to the patent owner once our 505(b)(2) NDA is accepted for filing by the FDA. The third party may then
initiate a lawsuit against us asserting infringement of the patents identified in the notice. The filing of a patent infringement
lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving our NDA until the earliest of
30 months or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement
lawsuit in our favor. If the third party does not file a patent infringement lawsuit within the required 45-day period, our NDA
will not be subject to the 30-month stay. However, even if the third party does not sue within the 45-day time limit, thereby
invoking the 30-month stay, it may still challenge our right to market our product upon FDA approval; therefore, some risk of
an infringement suit remains even after the expiry of the 45-day limit. By way of example, when we initially submitted our
Adzenys XR-ODT NDA in December 2012 and in response to our Paragraph IV certification, Shire initiated a lawsuit against
us claiming patent infringement against certain of Shire's patents. We settled with Shire in July 2014. As part of our
settlement, among other things, we stipulated that the commercial manufacture, use, selling, offering for sale or importing of
Adzenys XR-ODT would infringe on certain Shire patents and that such patent claims are valid and enforceable with respect
to our Adzenys XR-ODT NDA, but that such stipulations do not preclude us from filing new regulatory applications
containing a Paragraph IV certification citing such patents. We also entered into a non-exclusive License Agreement (the
"2014 License Agreement") with Shire for certain of Shire's patents with respect to our Adzenys XR-ODT NDA. Under the
terms of the 2014 License Agreement, upon obtaining FDA approval of our Adzenys XR-ODT NDA, we were required to
pay a lump-sum, non-refundable license fee no later than thirty days after receiving such approval and are required to pay a
single-digit royalty on net sales of Adzenys XR-ODT during the life of Shire's patents. In addition, on January 26, 2017, we
sent a letter to Shire, notifying Shire that we have made a Paragraph IV certification to the FDA that in our opinion and to the
best of our knowledge, the patents owned by Shire that purportedly cover our Adzenys ER are invalid, unenforceable and/or
will not be infringed by the commercial manufacture, use or sale of Adzenys ER. On March 6, 2017, we entered into a
License Agreement (the "2017 License Agreement") with Shire, pursuant to which Shire granted us a non-exclusive license to
certain patents owned by Shire for certain activities with respect to Adzenys ER. Under the terms of the 2017 License
Agreement, we were required to pay a lump sum, non-refundable license fee no later than thirty days after receiving
regulatory approval and are required to pay a single digit royalty on net sales of the Adzenys ER during the life of the
relevant Shire patents. Additionally, each of the 2014 License Agreement and 2017 License Agreement contains a covenant
from Shire not to file a patent infringement suit against us alleging that Adzenys XR-ODT or Adzenys ER, respectively,
infringes the Shire patents.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not
believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on
confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other
advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent
disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly
and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to
obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products
that compete with our products or cause additional, material adverse effects upon our competitive business position.
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We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual
property, or claiming ownership of what we regard as our own intellectual property.
Some of our employees were previously employed at other companies, including actual or potential competitors. We
may also engage advisors and consultants who are concurrently employed at other organizations or who perform services for
other entities. Although we try to ensure that our employees, advisors and consultants do not use the proprietary information
or know-how of others in their work for us, we may be subject to claims that we or our employees, advisors, or consultants
have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such party's
former employer or in violation of an agreement with or legal obligation in favor of another party. Litigation may be
necessary to defend against these claims.
In addition, while we generally require our employees, consultants, advisors and contractors who may be involved in the
development of intellectual property to execute agreements assigning such intellectual property to us, we may be
unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our
own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring
claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our
intellectual property. Similarly, we may be subject to claims that an employee, advisor or consultant performed work for us
that conflicts with that person's obligations to a third party, such as an employer or former employer, and thus, that the third
party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary
to defend against these claims.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation
could result in substantial costs and be a distraction to management.
RISKS RELATED TO OUR COMMON STOCK
The market price of our common stock may be highly volatile and investors in our common stock could incur substantial
losses.
The trading price of our common stock is likely to be volatile. Since shares of our common stock were sold in our initial
public offering ("IPO"), in July 2015 at a price of $15.00 per share, our stock price has ranged from $1.40 to $28.99, through
March 11, 2019. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the
following:
failure to successfully execute our commercialization strategy with respect to Adzenys XR-ODT, Cotempla
XR-ODT, Adzenys ER, or any other approved potential product candidate in the future;
any delay in filing an NDA for any of our product candidates and any adverse development or perceived adverse
development with respect to the FDA's review of that NDA;
adverse results or delays in clinical trials, if any;
significant lawsuits, including patent or stockholder litigation;
inability to obtain additional funding;
failure to successfully develop and commercialize our product candidates;
changes in laws or regulations applicable to our products and product candidates;
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inability to manufacture adequate amounts of product supply or obtain adequate amounts of components of our
product supply for our products, or the inability to do so at acceptable prices;
unanticipated serious safety concerns related to the use of our generic Tussionex, Adzenys XR-ODT, Cotempla
XR-ODT, Adzenys ER or any future potential product candidates;
adverse regulatory decisions;
introduction of new products or technologies by our competitors;
failure to meet or exceed product development or financial projections we provide to the public;
failure to meet or exceed the estimates and projections of the investment community;
the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or
our competitors, or perceptions regarding unsolicited public acquisition proposals of our company;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to
obtain patent protection for our technologies;
additions or departures of key scientific or management personnel;
changes in the market valuations of similar companies;
sales of our common stock by us or our stockholders in the future; and
trading volume of our common stock.
In addition, the stock market in general, and the NASDAQ Global Market ("NASDAQ") in particular, has experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of
these listed companies. Broad market and industry factors may negatively affect the market price of our common stock,
regardless of our actual operating performance.
Our principal stockholders and management own a significant percentage of our shares and will be able to exert
significant control over matters subject to stockholder approval.
As of December 31, 2018, our executive officers, directors, 5% or greater stockholders and their affiliates beneficially
owned approximately 35% of our outstanding voting stock. These stockholders may be able to determine all matters requiring
stockholder approval. For example, these stockholders, acting together, may be able to control elections of directors,
amendments of our organizational documents or approval of any merger, sale of assets or other major corporate transaction.
This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in
your best interest as one of our stockholders.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could
cause our stock price to fall.
Sales of a substantial number of shares of our common stock by our existing stockholders in the public market or the
perception that these sales might occur, could depress the market price of our common stock and could impair our ability to
raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on
the prevailing market price of our common stock. Shares held by our affiliates will be subject to volume limitations and other
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conditions pursuant to Rule 144 of the Securities Act. Sales of stock by these stockholders could have a material adverse
effect on the trading price of our common stock. On November 5, 2018, we amended a $60.0 million senior secured credit
facility with Deerfield as lender, pursuant to which we were afforded the right, subject to the terms and conditions of the
facility and certain other limitations, to make interest and principal payments owed to Deerfield through the issuance of our
common stock, and provided Deerfield with a right, subject to the terms and conditions of the facility and the amended and
restated convertible notes issued under the facility and certain other limitations, to convert principal under the amended and
restated convertible notes into our common stock, subject to a floor of 95% of $10.00 per share.
Potential uncertainty resulting from unsolicited acquisition proposals and related matters may adversely affect our
business.
In the past we have received, and in the future we may receive, unsolicited proposals to acquire our company or our
assets. For example, in June 2017 and in October 2017, the Board of Directors received an unsolicited non-binding proposal
for the acquisition of all of our stock. The review and consideration of acquisition proposals and related matters could require
the expenditure of significant management time and personnel resources. Such proposals may also create uncertainty for our
employees, customers and vendors. Any such uncertainty could make it more difficult for us to retain key employees and hire
new talent, and could cause our customers and vendors to not enter into new arrangements with us or to terminate existing
arrangements. Additionally, we and members of our Board of Directors could be subject to future lawsuits related to
unsolicited proposals to acquire us. Any such future lawsuits could become time consuming and expensive.
We will continue to incur significant increased costs as a result of operating as a public company, and our management
will be required to devote substantial time to new compliance initiatives.
As a public company, we will continue to incur significant legal, accounting and other expenses. In addition, the SOX
Act, as well as rules subsequently implemented by the Securities and Exchange Commission (the "SEC") and NASDAQ,
have imposed various requirements on public companies. In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"), was enacted. There are significant corporate governance and executive compensation
related provisions in the Dodd-Frank Act that required the SEC to adopt additional rules and regulations in these areas such as
"say on pay" and proxy access. Stockholder activism, the current political environment and the current high level of
government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which
may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we operate
our business. Our management and other personnel will need to devote a substantial amount of time to these compliance
initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and
more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to
maintain our current levels of such coverage.
We are an "emerging growth company," and we cannot be certain if the reduced reporting requirements applicable to
emerging growth companies will make our common stock less attractive to investors.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"). For as
long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting
requirements that are applicable to other public companies that are not "emerging growth companies," including exemption
from compliance with the auditor attestation requirements of Section 404 of the SOX Act and reduced disclosure obligations
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regarding executive compensation in the Annual Report on Form 10-K and our periodic reports and proxy statements, and
exemptions from the requirements of holding a non-binding advisory vote on executive compensation. We will remain an
emerging growth company until the earlier of (1) the last day of the fiscal year (a) in 2020, (b) in which we have total annual
gross revenue of at least $1.07 billion (as inflation-adjusted by the SEC from time to time), or (c) in which we are deemed to
be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds
$700 million as of the prior June 30st, and (2) the date on which we have issued more than $1 billion in non-convertible debt
during the prior three-year period.
Even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company,"
which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption
from compliance with the auditor attestation requirements of Section 404 of the SOX Act and reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our
common stock less attractive because we may rely on these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more
volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until
such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption
from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as
other public companies that are not emerging growth companies.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so in the
foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion
of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success
of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no
guarantee that shares of our common stock will appreciate in value or even maintain the price at which you purchased them.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law,
could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would
benefit our stockholders or remove our current management.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an
acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our
stockholders to replace or remove our current management. These provisions include:
authorizing the issuance of "blank check" preferred stock, the terms of which may be established and shares of
which may be issued without stockholder approval;
limiting the removal of directors by the stockholders;
creating a classified board of directors;
prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting
of our stockholders;
eliminating the ability of stockholders to call a special meeting of stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing
matters that can be acted upon at stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of directors, which is responsible
for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General
Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with an interested stockholder for a period of three years following the date on which the stockholder became
an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the
effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further,
other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the
exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders' ability
to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation, as currently in effect, provides that the Court of Chancery of the
State of Delaware is the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action
asserting a claim for breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our
stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law,
our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting a claim
governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder's ability to bring a claim in a
judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage
such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of
forum provision contained in our amended and restated certificate of incorporation and amended and restated bylaws to be
inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other
jurisdictions, which could adversely affect our business and financial condition.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our corporate headquarters are located in Grand Prairie, Texas, where we lease approximately 97,282 square feet of
office, laboratory and manufacturing space. Our lease expires on December 31, 2024, with an option to extend. We believe
our current office, laboratory and manufacturing space is sufficient to meet our needs until the expiration of the lease. In
addition, we executed a 60-month lease for 6,078 square feet of office space in Blue Bell, Pennsylvania for our commercial
operations which commenced on May 1, 2016 and which has an option to extend for 60 months. We may seek to negotiate
new leases or evaluate additional or alternate space to accommodate operations relating to commercialization. We believe
that appropriate alternative space is readily available on commercially reasonable terms.
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ITEM 3. Legal Proceedings
From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our
business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are
party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be
reasonably expected to have a material adverse effect on our business. We may file infringement claims against third parties
for the infringement of our patents, such as the lawsuits discussed below. Regardless of the outcome, litigation can have an
adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
On July 25, 2016, we received a paragraph IV certification from Actavis advising us that Actavis has filed an ANDA
with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, we filed a patent infringement lawsuit in
federal district court in the District of Delaware against Actavis, Inc. alleging that Actavis infringed our Adzenys XR-ODT
patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the expiration
of our patents.
On October 17, 2017, we entered into the Actavis Agreement with Actavis, which resolved all ongoing litigation
involving our Adzenys XR-ODT patents and Actavis's ANDA. Under the Actavis Agreement, we granted Actavis the right to
manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or
earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District
of Delaware. The Actavis Agreement has been submitted to the applicable governmental agencies.
On October 31, 2017, we received a paragraph IV certification from Teva advising us that Teva has filed an ANDA with
the FDA for a generic version of Cotempla XR-ODT. We have new product exclusivity for a three-year period from the date
of approval for Cotempla XR-ODT. On December 13, 2017, we filed a patent infringement lawsuit in federal district court in
the District of Delaware against Teva alleging that Teva infringed our Cotempla XR-ODT patents by submitting to the FDA
an ANDA seeking to market a generic version of Cotempla XR-ODT prior to the expiration of our patents. This lawsuit
automatically stayed, or barred, the FDA from approving Teva's ANDA for 30 months or until a district court decision that is
adverse to the asserted patents is rendered, whichever is earlier.
On December 21, 2018, we entered into the Teva Agreement with Teva, which resolved all ongoing litigation involving
our Cotempla XR-ODT patents and Teva's ANDA. Under the Teva Agreement, we granted Teva the right to manufacture and
market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain
circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The
Agreement has been submitted to the applicable governmental agencies.
On March 7, 2018, we received a citation advising us that the County of Harris Texas (the "County") filed a lawsuit on
December 13, 2017 against us and various other alleged manufacturers, promoters, sellers and distributors of opioid
pharmaceutical products. Through this lawsuit, the County seeks to recoup as damages some of the expenses it allegedly has
incurred to combat opioid use and addiction. The County also seeks punitive damages, disgorgement of profits and attorneys'
fees. While we believe that the lawsuit is without merit and intend to vigorously defend against it, we are not able to predict
at this time whether this proceeding will have a material impact on our results of operations.
ITEM 4. Mine Safety Disclosures
Not applicable.
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ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information for our Common Stock
Our common stock has been listed on the NASDAQ Global Market under the symbol "NEOS" since July 23, 2015. Our
initial public offering was priced at $15.00 per share on July 22, 2015. On December 31, 2018, the last trading day of 2018,
the last reported sale price of our common stock on the NASDAQ Global Market was $1.65 per share. As of March 11, 2019,
there were 49,710,677 shares of common stock outstanding, held by approximately 62 holders of record of our common
stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are
beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record
also does not include shareholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and
any future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of
directors. Our ability to pay dividends on our common stock is limited by restrictions under the terms of our credit facility
with Deerfield Private Design Fund III, L.P. and Deerfield Special Situations Fund, L.P. In addition, any future indebtedness
that we may incur could preclude us from paying dividends. Investors should not purchase our common stock with the
expectation of receiving cash dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans is included in Item 12 of Part III of this Annual Report on Form 10-K.
Performance Graph
The following stock performance graph illustrates a comparison of the total cumulative stockholder return on our
common stock to two indices; the NASDAQ Composite Index and the NASDAQ Biotechnology Index since July 23, 2015,
which is the date our common stock first began trading on the NASDAQ Global Market. The graph assumes an initial
investment of $100 at the initial public offering price to the public for Neos stock of $15 on July 23, 2015 or at June 30, 2015
if invested in the indices, and all dividends, if any, were reinvested. No cash dividends have been declared or paid on our
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common stock. Stockholder return over the indicated period should not be considered indicative of future stockholder returns.
Recent Sales of Unregistered Securities
On November 5, 2018, we amended a $60.0 million senior secured credit facility with Deerfield as lender, pursuant to
which we were afforded the right, subject to the terms and conditions of the facility and certain other limitations, to make
interest and principal payments owed to Deerfield through the issuance of our common stock, and provided Deerfield with a
right, subject to the terms and conditions of the facility and the amended and restated convertible notes issued under the
facility and certain other limitations, to convert principal under the amended and restated convertible notes into our common
stock, subject to a floor of 95% of $10.00 per share.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There was no share purchase in the year ended December 31, 2018.
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ITEM 6. Selected Consolidated Financial Data
The following selected consolidated statements of operations data for the years ended December 31, 2018, 2017, and
2016, and the balance sheet data as of December 31, 2018 and 2017 are derived from our audited financial statements
appearing elsewhere in this Annual Report on Form 10-K. The selected historical financial data for the year ended
December 31, 2015 and 2014 and as of December 31, 2016, 2015 and 2014 have been derived from our audited consolidated
financial statements not included in this Annual Report on Form 10-K. You should read this data together with our financial
statements and related notes included elsewhere in this Annual Report on Form 10-K and the information under the caption
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Our historical results for
any prior period are not necessarily indicative of results to be expected in any future period.
Consolidated Statements of Operations Data:
Year ended December 31,
Total Revenue(1)
Cost of Goods Sold
Research and Development Expenses
Selling and Marketing Expenses(1)
General and Administrative Expenses
Interest, Loss on Debt Extinguishment and Other
Expense
Net Loss(1)
Preferred Stock Accretion to Redemption Value
Preferred Stock Dividends
Net Loss Attributable to Common Stock
Net Loss per Share—Basic and Diluted(2)
$
$
$
$
Shares Used to Compute Net Loss per Share—Basic
2018
2017
49,988 $
26,928
8,508
44,133
13,915
8,179
(51,675) $
—
—
(51,675) $
(1.60) $
27,132 $
14,030
8,957
46,881
13,805
9,231
(65,772) $
—
—
(65,772) $
(2.66) $
2016
2015
(in thousands, except per share data)
10,033 $
11,734
12,207
49,291
12,625
3,792 $
5,929
11,691
5,672
7,078
6,927
(82,751) $
—
—
(82,751) $
(5.16) $
4,203
(30,781) $
(1,169)
(1,221)
(33,171) $
(4.38) $
2014
758
3,391
10,574
229
5,036
2,377
(20,849)
(1,118)
(2,185)
(24,152)
(27.56)
and Diluted(2)
32,288,555
24,751,091
16,052,390
7,581,881
876,318
(1) The Company began selling Adzenys XR-ODT on May 16, 2016, initiated an early experience program for Cotempla
XR-ODT with limited product availability on September 5, 2017 before launching this product nationwide on
October 2, 2017 and began selling Adzenys ER on February 26, 2018. Net product sales represent total gross product
sales less gross to net sales adjustments. Gross to net sales adjustments for branded Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER include savings offers, prompt payment discounts, wholesaler fees, estimated rebates to be
incurred on the selling price of the respective product sales and estimated allowances for product returns. The
Company began selling generic Tussionex in August 2014. Gross to net sales adjustments for generic Tussionex
include prompt payment discounts, estimated allowances for product returns, wholesaler fees, estimated government
rebates and estimated chargebacks to
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be incurred on the selling price of generic Tussionex related to the respective product sales. The Company recognizes
total gross product sales less gross to net sales adjustments as revenue based on shipments from 3PLs to the
Company's wholesaler customers. Also, the Selling and Marketing Expenses and Net Loss amounts in 2018, 2017 and
2016 reflect the sales and marketing expenses associated with the commercialization of Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER.
(2) See Note 3 to the notes to our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for an explanation of the calculations of our basic and diluted net loss per common share.
Consolidated Balance Sheet Data:
Cash and Cash Equivalents
Short-Term Investments
Working Capital
Total Assets
Current Portion of Long Term
Debt(1)
Long Term Debt, net of Current
Portion(1)
Redeemable Convertible
Preferred Stock(2)
Stockholders' Equity (Deficit)
2018
2017
December 31,
2016
(in thousands)
2015
2014
$
46,478 $
—
31,573
111,357
31,969 $
18,448
46,095
104,108
24,352 $
15,430
34,206
79,571
90,763 $
—
82,306
122,510
13,343
3,000
13,380
45,230
8,557
896
4,921
7,973
1,653
43,217
58,938
58,599
26,271
23,121
—
7,845
—
8,947
—
(966)
—
78,374
90,149
(78,782)
(1) On May 11, 2016, we entered into a $60 million senior secured credit facility ("Facility") with Deerfield Private
Design Fund III, L.P. (662/3% of Facility) and Deerfield Special Situations Fund, L.P. (331/3% of Facility)
(collectively, "Deerfield"), as lenders. See Note 11 to the notes to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for further details.
(2) On the closing of the IPO, all outstanding shares of redeemable preferred stock converted into 9,217,983 shares of
common stock and all remaining outstanding Series C warrants issued in conjunction with purchases of Series C
preferred stock were net exercised at the IPO price for 78,926 shares of common stock. Upon the closing of our IPO,
all of the shares of our redeemable convertible preferred stock were retired and cancelled and shall not be reissued as
shares of such series, and all rights and preferences of those shares of redeemable convertible preferred stock were
cancelled, including the right to receive undeclared accumulated dividends.
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with
the "Item 6. Selected Consolidated Financial Data" and the consolidated financial statements and related notes that are
included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those set forth under "Item 1A. Risk Factors" or in
other parts of this Annual Report on Form 10-K.
OVERVIEW
We are a pharmaceutical company focused on developing, manufacturing and commercializing products utilizing our
proprietary microparticle modified-release drug delivery technology platform, which we have already used to develop
Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER oral suspension ("Adzenys ER"), for the treatment of attention
deficit hyperactivity disorder ("ADHD"). Our products and product candidates are extended-release ("XR"), medications in
patient-friendly, orally disintegrating tablets ("ODT") or liquid suspension dosage forms. Our microparticle technology
platform has enabled us to create novel, extended-release ODT and liquid suspension dosage forms. We received approval
from the U.S. Food and Drug Administration ("FDA"), for Adzenys XR-ODT, our amphetamine XR-ODT, on January 27,
2016 and launched the commercialization of this product on May 16, 2016. We received approval from the FDA for
Cotempla XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19,
2017. We initiated an early experience program with limited product availability on September 5, 2017 before launching this
product nationwide on October 2, 2017. Also, we received approval from the FDA for Adzenys ER, our amphetamine
extended-release liquid suspension, on September 15, 2017, and launched the commercialization of this product on
February 26, 2018. We believe Adzenys XR-ODT and Cotempla XR-ODT are the first amphetamine XR-ODT and the first
methylphenidate XR-ODT, respectively, for the treatment of ADHD on the market. In addition to our marketed products, we
are developing NT-0400, our XR-ODT product candidate, for nausea and vomiting and NT0502, our product candidate, for
the treatment of sialorrhea.
We are commercializing Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in the United States using our own
commercial infrastructure. We manufacture Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in our current Good
Manufacturing Practice ("cGMP") and U.S. Drug Enforcement Administration ("DEA")-registered manufacturing facilities,
thereby better controlling supply quality and timing. We also currently use these facilities to manufacture our generic
equivalent to the branded product, Tussionex, an XR liquid suspension of hydrocodone and chlorpheniramine indicated for
the relief of cough and upper respiratory symptoms of a cold ("generic Tussionex").
On October 23, 2018, we entered into an Exclusive License Agreement (the "License Agreement") with NeuRx
Pharmaceuticals LLC ("NeuRx"), pursuant to which NeuRx granted an exclusive, royalty-bearing license to us to develop,
manufacture, and commercialize certain pharmaceutical products containing NeuRx's proprietary compound designated as
NRX 101, referred to by us as NT0502, on a world-wide basis. NT0502 is a new chemical entity and a selective muscarinic
receptor antagonist that will utilize our microparticle technology, which is used in our four on-market products. NT0502 will
be developed to address the significant unmet medical needs for the treatment of chronic sialorrhea (excessive salivation or
drooling) in adult and pediatric patients with neurological conditions including cerebral palsy, Parkinson's disease, mental
retardation, and amyotrophic lateral sclerosis (ALS).
On July 25, 2016, we received a paragraph IV certification from Actavis Laboratories FL, Inc. ("Actavis") advising us
that Actavis has filed an Abbreviated New Drug Application ("ANDA") with the FDA for a generic version of Adzenys
XR-ODT. On September 1, 2016, we filed a patent infringement
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lawsuit in federal district court in the District of Delaware against Actavis, Inc. alleging that Actavis infringed our Adzenys
XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the
expiration of our patents. On October 17, 2017, we entered into a Settlement Agreement and a Licensing Agreement
(collectively, the "Actavis Agreement") with Actavis. The Actavis Agreement resolved all ongoing litigation involving our
Adzenys XR-ODT patents and Actavis's ANDA. Under the Actavis Agreement, we have granted Actavis the right to
manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or
earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District
of Delaware. The Actavis Agreement has been submitted to the applicable governmental agencies.
On October 31, 2017, we received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. ("Teva") advising
us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT. We have new product exclusivity
for a three-year period from the date of approval for Cotempla XR-ODT. On December 13, 2017, we filed a patent
infringement lawsuit in federal district court in the District of Delaware against Teva alleging that Teva infringed our
Cotempla XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Cotempla XR-ODT
prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Teva's ANDA for
30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier. On
December 21, 2018, we entered into the Agreement with Teva (the "Teva Agreement"), which resolved all ongoing litigation
involving our Cotempla XR-ODT patents and Teva's ANDA. Under the Teva Agreement, we granted Teva the right to
manufacture and market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier
under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of
Delaware. The Teva Agreement has been submitted to the applicable governmental agencies.
Our predecessor company was incorporated in Texas on November 30, 1994 as PharmaFab, Inc. and subsequently
changed its name to Neostx, Inc. On June 15, 2009, we completed a reorganization pursuant to which substantially all of the
capital stock of Neostx, Inc. was acquired by a newly formed Delaware corporation, named Neos Therapeutics, Inc. The
remaining capital stock of Neostx, Inc. was acquired by us on June 29, 2015, and Neostx, Inc. was merged with and into Neos
Therapeutics, Inc. Historically, we were primarily engaged in the development and contract manufacturing of unapproved or
Drug Efficacy Study Implementation ("DESI"), pharmaceuticals and, to a lesser extent, nutraceuticals for third parties. The
unapproved or DESI pharmaceuticals contract business was discontinued in 2007, and the manufacture of nutraceuticals for
third parties was discontinued in March 2013.
Since our reorganization in 2009, we have devoted substantially all of our resources to funding our manufacturing
operations and to our commercial products and product candidates which consist of implementation of our commercialization
strategies, research and development activities, clinical trials for our product candidates, the general and administrative
support of these operations and intellectual property protection and maintenance. Prior to our initial public offering of our
common stock in July 2015, we funded our operations principally through private placements of our common stock,
redeemable convertible preferred stock, bank and other lender financings and through payments received under collaborative
arrangements.
On August 28, 2014, we completed an acquisition of all of the rights to the Tussionex Abbreviated New Drug
Application ("Tussionex ANDA"), which include the rights to produce, develop, market and sell, as well as all the profits
from such selling activities, our generic Tussionex, which we previously owned the rights to manufacture, but which was
marketed and sold by the generic drug division of Cornerstone Biopharma, Inc. ("Cornerstone"). These rights were acquired
from the collaboration of the Company, Cornerstone and Coating Place, Inc. Prior to the acquisition, we shared profits
generated by the sale and manufacture of the product under a development and manufacturing agreement with those
companies.
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We have incurred significant losses in each year since our reorganization in 2009. Our net losses were $51.7 million for
the year ended December 31, 2018. As of December 31, 2018, we had an accumulated deficit of approximately
$317.0 million. We expect to continue to incur significant expenses and operating losses in the near term as we:
operate commercial infrastructure to support sales and marketing for Adzenys XR-ODT, Cotempla XR-ODT, and
Adzenys ER;
continue research and development activities for new product candidates;
conduct post-marketing approval research activities for our approved products;
manufacture supplies for our preclinical studies and clinical trials;
continue to enforce our intellectual property rights; and
operate as a public company.
On July 28, 2015, we closed our initial public offering ("IPO"), whereby we sold 5,520,000 shares of common stock, at a
public offering price of $15.00 per share, which includes 720,000 shares of our common stock resulting from the
underwriters' exercise of their over-allotment option at the IPO price on July 23, 2015. The net proceeds from our IPO, after
deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately
$75.0 million. The securities described above were offered by us pursuant to a registration statement on Form S-1 declared
effective by the SEC on July 22, 2015.
On May 11, 2016, we entered into a $60 million senior secured credit facility ("Facility") with Deerfield Private Design
Fund III, L.P. (662/3% of Facility) and Deerfield Special Situations Fund, L.P. (331/3% of Facility) (collectively, "Deerfield"),
as lenders. Approximately $33 million of the proceeds was used to prepay the existing senior and subordinated debt (the
"Note") that was otherwise payable in 2016 and 2017. Principal on the new debt was initially due in three equal annual
installments beginning in May 2019 and continuing through May 2021, with a final payment of principal, interest and all
other obligations under the facility due May 11, 2022. Interest is due quarterly beginning in June 2016, at a rate of 12.95%
per year. We had an option, which we exercised, to defer payment of each of the first four interest payments, adding such
amounts to the outstanding loan principal. The aggregate $6.6 million in deferred interest payments ("Accrued Interest") was
to be paid in cash on June 1, 2017.
On June 1, 2017 (the "Amendment Date"), we entered into a First Amendment (the "Amendment") with Deerfield to the
Facility which extended the date to repay the Accrued Interest under the Facility to June 1, 2018 (the "PIK Maturity Date"),
which may have been extended to June 1, 2019 at our election if certain conditions had been met as specified in the
Amendment. The right to payment of the Accrued Interest was memorialized in the form of Senior Secured Convertible
Notes (the "Convertible Notes") issued to Deerfield on the Amendment Date. Interest is due quarterly at a rate of 12.95% per
year. The $6.6 million of Convertible Notes were convertible into shares of our common stock at the noteholder's option at
any time up to the close of business on the date that is five days prior to the PIK Maturity Date.
On October 26, 2017, Deerfield provided a conversion notice electing to convert the entire $6.6 million of Convertible
Notes into shares of our common stock at a conversion price of $7.08 per share. The conversion price was based on 95% of
the average of the volume weighted average prices per share of the Company's common stock on the NASDAQ Global
Market for the three trading day period immediately preceding such conversion. This resulted in issuing 929,967 shares of our
common stock to Deerfield on this date and the Convertible Notes were cancelled.
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On August 1, 2016, we filed a shelf registration statement on Form S-3 with the SEC, which covers the offering,
issuance and sale by us of up to an aggregate of $125.0 million of its common stock, preferred stock, debt securities, warrants
and/or units (the "Shelf"). We simultaneously entered into a Sales Agreement with Cowen and Company, LLC, as sales
agent, to provide for the offering, issuance and sale by us of up to $40.0 million of its common stock from time to time in
"at-the-market" offerings under the Shelf (the "Sales Agreement"). The Shelf was declared effective by the SEC on
August 12, 2016.
In February 2017, we closed an underwritten public offering under the Shelf of 5,750,000 shares of our common stock at
a public offering price of $5.00 per share, which included 750,000 shares of our common stock resulting from the
underwriters' exercise of their over-allotment option on February 17, 2017. Deerfield, our senior lender, participated in the
purchase of our common shares as part of this public offering, and as a result, was classified as a related party. The net
proceeds to us from this offering, after deducting underwriting discounts and commissions and other offering expenses
payable by us, were approximately $26.7 million.
On June 30, 2017, we closed an underwritten public offering of 4,800,000 shares of our common stock at a public
offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. We also
granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of our common stock which was
exercised in full on July 26, 2017. The net proceeds to us through July 26, 2017 from this offering, after deducting offering
expenses payable by us, were approximately $34.3 million.
On November 8, 2018, we closed an underwritten public offering under the Shelf of 19,999,999 shares of our common
stock at a public offering price of $2.30 per share, which includes 2,608,695 shares of our common stock resulting from the
underwriters' exercise of their over-allotment option at the public offering price. The net proceeds to us from this offering,
after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately
$43.4 million. Also, on November 5, 2018, we entered into a Second Amendment to the Facility with Deerfield under which
we used $7.5 million of proceeds of the offering to prepay $7.5 million of principal on the Facility otherwise due on May 11,
2018. Pursuant to the Second Amendment, the schedule of principal repayments under the facility was further modified to
allow for the $15.0 million payment otherwise due on May 11, 2020 to be deferred until either May 2021 or May 2022 if
certain revenue milestones for the years ended December 31, 2019 and December 31, 2020 are achieved. Finally, the Second
Amendment provides us with a right, subject to the terms and conditions of the Facility and certain other limitations, to make
interest and principal payments through the issuance of our common stock, and provides Deerfield with a right, subject to the
terms and conditions of the Facility and the amended and restated convertible notes (the "A&R Notes") issued under the
Facility and certain other limitations, to convert principal under the A&R Notes into our common stock, subject to a floor of
95% of $10.00 per share.
During the year ended December 31, 2018, we sold an aggregate 651,525 shares of common stock under the Sales
Agreement, at an average sale price of approximately $6.25 per share for gross proceeds of $4.1 million and net proceeds of
$3.9 million, and paid total compensation to the sales agent and other costs of approximately $0.2 million. On November 5,
2018, we reduced the size of the Sales Agreement to up to $7,825,113 of our common stock (inclusive of amounts previously
sold thereunder prior to the date hereof), effective on November 5, 2018. As of the date hereof, aggregate gross proceeds of
sales of our common stock under the Sales Agreement total $7,825,113, and sales of our common stock under the Sales
Agreement have been suspended.
We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no
assurance that such funds will be available on terms favorable to us, if at all, or that we will be able to successfully
commercialize our product candidates. In addition, we may
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not be profitable even if we succeed in commercializing Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER, and, if
approved, any of our product candidates that we may develop.
FINANCIAL OPERATIONS OVERVIEW
Revenue
Prior to 2017, our revenue was generated primarily from product sales of our generic Tussionex recorded on a net sales
basis. Sales of our generic Tussionex are seasonal and correlate with the cough and cold season. We launched
commercialization of Adzenys XR-ODT on May 16, 2016, initiated an early experience program with Cotempla XR-ODT
with limited product availability on September 5, 2017 before launching this product nationwide on October 2, 2017 and
launched commercialization of Adzenys ER on February 26, 2018. We sell our products to drug wholesalers in the United
States. We have also established indirect contracts with drug, food and mass retailers that order and receive our generic
Tussionex product through wholesalers. As a result of our acquisition of all of the rights to commercialize and derive future
profits from the Tussionex ANDA, and the continuing commercialization of Adzenys XR-ODT, Cotempla XR-ODT and
Adzenys ER, we expect our future revenue to increase from historical levels.
We expect the number of prescriptions filled for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to continue to
increase. In addition, we expect product shipments to our wholesalers to correspondingly increase. For the year ended
December 31, 2018, wholesalers purchased 275,476 units of Adzenys XR-ODT, as compared to 216,679 units for the year
ended December 31, 2017. Unit shipments of Cotempla XR-ODT, which launched in the third quarter of 2017, for the year
ended December 31, 2018 were 211,440, as compared to 21,443 units for the year ended December 31, 2017. Unit shipments
of Adzenys ER, which launched commercially on February 26, 2018, were 1,836 units for the year ended December 31,
2018.
In the future, we will seek to generate additional revenue from product sales of Adzenys XR-ODT, Cotempla XR-ODT,
Adzenys ER and generic Tussionex. If we fail to successfully market Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER
and generic Tussionex, our inability to generate future revenue from product sales may adversely affect our results of
operations and financial position.
Research and development
We expense research and development costs as they are incurred. Research and development expenses consist of costs
incurred in the discovery and development of our product candidates, and primarily include:
expenses, including salaries and benefits, which includes share-based compensation expense, of employees engaged
in research and development activities;
expenses incurred under third party agreements with contract research organizations ("CROs"), and investigative
sites that conduct our clinical trials and a portion of our pre-clinical activities;
cost of raw materials, as well as manufacturing cost of our materials used in clinical trials and other development
testing;
cost of facilities, depreciation and other allocated expenses;
fees paid to regulatory authorities for review and approval of our product candidates; and
expenses associated with obtaining and maintaining patents.
Direct development expenses associated with our research and development activities are allocated to our products and
product candidates. Indirect costs related to our research and development
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activities that are not allocated to a product or product candidate are included in "Other Research and Development
Activities" in the table below.
Prior to 2016, the largest component of our total operating expenses has been our investment in research and
development activities including the clinical development of our product candidates. The following table summarizes our
research and development expenses for the periods indicated:
NT-0102 Cotempla XR-ODT
NT-0201 Adzenys ER
NT-0202 Adzenys XR- ODT
NT-0400
NT-0502
Other Research and Development Activities(1)
2018
December 31,
2017
(in thousands)
2016
$
$
1,724 $
23
1,248
144
83
5,286
8,508 $
2,034 $
155
760
—
—
6,008
8,957 $
1,613
2,403
650
—
—
7,541
12,207
(1)
Includes unallocated product development cost, salaries and wages, occupancy and depreciation and amortization.
During the third quarter of 2016, we reclassified our approved product and facility regulatory fees out of research and
development expense and into cost of sales commensurate with the commercial launch of Adzenys XR-ODT. We have
reclassified all such applicable regulatory fees for prior quarters and prior years out of research and development expense and
into cost of goods sold in accordance with this approach.
We expect that our research and development expenses will fluctuate over time as we explore new product candidates,
but will decrease as a percentage of revenue if Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are commercially
successful. We expect to fund our research and development expenses from our current cash and cash equivalents, a portion
of the net proceeds from our public offerings of common stock and debt financing and revenues, if any, from Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER and, if approved, our product candidates that we may develop.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may
never succeed in achieving marketing approval for our product candidates. The probability of success of our product
candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and
commercial viability. As a result, we are unable to determine the duration and completion costs of our research and
development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our
product candidates.
Selling and marketing
Selling and marketing expenses consist primarily of salaries and related costs for personnel, including share-based
compensation expense, commercialization activities for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER,
pre-commercialization activities for Adzenys ER, commercial sales organization costs incurred in the preparation for and in
the commercialization of Adzenys XR-ODT and Cotempla XR-ODT, and in the preparation for the launch and
commercialization of Adzenys ER and trade sales expenses for our generic Tussionex. Other selling and marketing expenses
include market research, brand development, advertising agency and other public relations costs, managed care relations,
medical marketing, sales support tools, sales planning and market data and analysis.
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We believe that our selling and marketing expenses may continue at these levels with the continuing commercialization
of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in the United States.
General and administrative
General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based
compensation expense, for our employees in executive, finance, information technology and human resources functions.
Other general and administrative expenses include facility-related costs not otherwise included in research and development
expenses or cost of goods sold, and professional fees for business development, accounting, tax and legal services, expenses
associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and
officer insurance premiums and investor relations costs, as well as accounting and compliance costs to support the
commercialization of our products, and, if approved, our product candidates. In addition, general and administrative expenses
include our Paragraph IV litigation costs. Beginning in July 2016, we began recording stock compensation expense in the
same income statement line as the cash compensation of the employee with the associated stock option in accordance with
Staff Accounting Bulletin ("SAB") Topic 14 due to the increased number and amount of stock options and option
compensation. We have reclassified all prior quarters' and prior years' amounts that relate to personnel not classified as
general and administrative employees out of general and administrative expense to the appropriate income statement line in
accordance with this approach.
We anticipate that our general and administrative expenses will continue at these levels and may increase as we incur
costs professional fees associated with future business development activities, if any. In addition, although we have settled
our recent Paragraph IV litigation cases, we may be subject to future Paragraph IV litigation costs, and could incur material
legal fees in the enforcement of our intellectual property rights.
Interest expense, net
On May 11, 2016, we entered into a $60.0 million senior secured credit facility (the "Facility") with Deerfield Private
Design Fund III, L.P. (662/3% of Facility) and Deerfield Special Situations Fund, L.P. (331/3% of Facility) (collectively,
"Deerfield") as lenders. Deerfield participated in the purchase of our common shares as part of our February 2017 public
offering, and as a result, was classified as a related party at the time of the corresponding transactions. Approximately
$33.0 million of the Facility proceeds were used to prepay the existing senior Loan and Security Agreement (the "LSA") with
Hercules Technology III, L.P. ("Hercules") and the 10% subordinated debt (the "Note") issued by Essex Capital Corporation
("Essex") that was otherwise payable in 2016 and 2017. We entered into an amendment (the "Amendment") to the Facility on
June 1, 2017 (the "Agreement Date") to provide a one-year deferral, with an option for a second year of deferral, of payment
of the first year accrued interest of $6.6 million (the "Accrued Interest"), provided that we met certain sales revenue targets
and obtained FDA approval of certain of our product candidates on or before the Prescription Drug User Fee Act (the
"PDUFA") goal date. Before the Amendment, this accrued interest had been deferred until June 1, 2017 per the terms of the
Facility. The right to payment of the $6.6 million of accrued interest was memorialized in the form of senior secured
convertible notes (the "Convertible Notes") issued to Deerfield on the Amendment Date. Interest was due quarterly at a rate
of 12.95% per year. Deerfield had an option to convert these notes into our common stock. On October 26, 2017, Deerfield
provided a conversion notice electing to convert the entire $6.6 million of Convertible Notes into shares of our common stock
at a conversion price of $7.08 per share. This resulted in issuing 929,967 shares of our common stock to Deerfield on this
date and the Convertible Notes were cancelled.
On November 5, 2018, we entered into a Second Amendment to the Facility with Deerfield under which we used
$7.5 million of proceeds of an underwritten public offering of shares of our common
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stock which closed on November 8, 2018, to prepay $7.5 million of principal on the Facility otherwise due on May 11, 2018.
Pursuant to the Second Amendment, the schedule of principal repayments under the facility was further modified to allow for
the $15.0 million payment otherwise due on May 11, 2020 to be deferred until either May 2021 or May 2022 if certain
revenue milestones for the years ended December 31, 2019 and December 31, 2020 are achieved. Finally, the Second
Amendment provides us with a right, subject to the terms and conditions of the Facility, and certain other limitations, to make
interest and principal payments through the issuance of our common stock, and provides Deerfield with a right, subject to the
terms and conditions of the Facility and the amended and restated convertible notes (the "A&R Notes") issued under the
Facility and certain other limitations, to convert principal under the A&R Notes into our common stock, subject to a floor of
95% of $10.00 per share.
Interest expense to date has consisted primarily of interest expense on senior debt, including the amortization of debt
discounts, the Note and the capitalized leases from Essex resulting from the sale-leaseback transactions of our existing and
newly-acquired property and equipment. We amortize debt issuance costs over the life of the notes which are reported as
interest expense in our consolidated statements of operations.
Other income (expense), net
Other income and expense to date has primarily consisted of amortization of the net gain recorded on the sale-leaseback
of our property and equipment. The first sale-leaseback financings occurred in five separate transactions in 2013 and 2014,
each with a 42-month lease term. The gains on the transactions were recognized on a straight-line basis over the respective
42-month lease term. In February 2017, we entered into an additional agreement for the sale-leaseback of newly acquired
assets of up to $5.0 million to finance our capital expenditures. Under this agreement, we entered into leases and sold assets
with a total capitalized cost of $481,000 and $2,742,000 at effective interest rates of 14.3% and 14.9% on February 13, 2017
and June 30, 2017, respectively. The February sale resulted in a net gain of $14,000 which has been deferred and is being
amortized over the 36-month term of the lease. There was no gain or loss on the June 2017 sale. (See Notes 11 and 17 to the
notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details).
Other income and expense also includes interest earned, accretion and gains on our cash and cash equivalents and short-term
investments and changes resulting from the remeasurement of the fair value of our earnout and derivative liabilities. The
primary objective of our investment policy is liquidity and capital preservation.
RESULTS OF OPERATIONS
Year ended December 31, 2018 compared to the year ended December 31, 2017
Revenues
The following table summarizes our revenues for the year ended December 31, 2018 and 2017:
Product
$
49,988 $
27,132 $
22,856
84.2 %
Year Ended December 31,
2018
2017
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Total product revenues were $50.0 million for the year ended December 31, 2018, an increase of $22.9 million or
84.2%, from the $27.1 million for the year ended December 31, 2017. The increase was primarily due to a $17.4 million
increase in net sales of Cotempla XR-ODT, which commenced commercialization on September 5, 2017 with an early
experience program. Sales from Adzenys XR-ODT increased approximately $6.3 million to $26.6 million for the year ended
December 31, 2018
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from $20.4 million for the year ended December 31, 2017. Net sales of Adzenys ER, which launched on February 26, 2018,
were negligible for the year ended December 31, 2018. These increases were partially offset by an $0.8 million decrease in
net sales of our generic Tussionex to $4.4 million for the year ended December 31, 2018 from $5.2 million for the year ended
December 31, 2017, primarily due to alternative treatment options for this product.
Cost of goods sold
The following table summarizes our cost of goods sold for the year ended December 31, 2018 and 2017:
Cost of goods sold
$
26,928 $
14,030 $
12,898
91.9%
Year Ended December 31,
2018
2017
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
The total cost of goods sold was $26.9 million for the year ended December 31, 2018, an increase of $12.9 million or
91.9%, from the $14.0 million for the year ended December 31, 2017. This increase was due to a $9.3 million increase in
product costs and an associated increase of $1.7 million of finished drug, royalty fees and logistic costs relating to the 30.7%
increase in sales of Adzenys XR-ODT for the year ended December 31, 2018 as compared to the year ended December 31,
2017 and sales of Cotempla XR-ODT and Adzenys ER, which commenced on September 5, 2017 and February 26, 2018,
respectively. In addition, increased investment in labor and indirect production activities associated with increased
manufacturing demand for our products of $1.6 million also contributed to the higher cost of goods sold for the year ended
December 31, 2018.
Research and development expenses
The following table summarizes our research and development expenses for the year ended December 31, 2018 and
2017:
Year Ended
December 31,
2018
2017
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Research and development expenses
$
8,508 $
8,957 $
(449)
(5.0)%
Research and development expenses were $8.5 million for the year ended December 31, 2018, a decrease of
approximately $0.4 million or 5.0%, from $9.0 million for the year ended December 31, 2017. The decrease was primarily
related to lower product development expenses for the year ended December 31, 2018 as a result of the FDA approvals of
Cotempla XR-ODT in June 2017 and Adzenys ER in September 2017.
Selling and marketing expenses
The following table summarizes our selling and marketing expenses for the year ended December 31, 2018 and 2017:
Sales and marketing expenses
$
44,133 $
46,881 $
(2,748)
(5.8)%
Year Ended
December 31,
2018
2017
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
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The total selling and marketing expenses were $44.1 million for the year ended December 31, 2018, a decrease of
$2.7 million or 5.8%, from $46.9 million for the year ended December 31, 2017. The main decreases in selling and marketing
expenses for the year ended December 31, 2018 as compared to the year ended December 31, 2017 were contract sales
organization expenses of $17.4 million due to the internalization of our sales force in April 2018, marketing expenses of
$1.1 million and professional service expenses of $0.8 million. Partially offsetting the decreases were increased salary and
benefit expenses of $11.4 million, travel and entertainment expenses of $3.6 million and administrative expenses of
$1.1 million due to the establishment of our internal sales team in April 2018 and to support the sales of Cotempla XR-ODT
and Adzenys ER, which commenced on September 5, 2017 and February 26, 2018, respectively.
General and administrative expenses
The following table summarizes our general and administrative expenses for the year ended December 31, 2018 and
2017:
Year Ended
December 31,
2018
2017
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
General and administrative expenses
$
13,915 $
13,805 $
110
0.8%
The total general and administrative expenses were $13.9 million for the year ended December 31, 2018, an increase of
$0.1 million or 0.8%, from the $13.8 million for the year ended December 31, 2017. The increase was primarily from higher
administrative expenses and professional service expenses for the year ended December 31, 2018.
Interest expense
The following table summarizes interest expense for the year ended December 31, 2018 and 2017:
Year Ended
December 31,
2018
2017
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Interest expense
$
(8,974) $
(10,085) $
1,111
11.0%
The total interest expense was $9.0 million for the year ended December 31, 2018, a decrease of $1.1 million or 11.0%,
from the $10.1 million for the year ended December 31, 2017. Interest expenses for both periods were primarily from interest
on the Facility (see Note 11 to the notes to our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for additional details).
Other income, net
The following table summarizes our other income for the year ended December 31, 2018 and 2017:
Other income, net
Year Ended
December 31,
2018
2017
$
795 $
(in thousands)
854 $
Increase
(Decrease)
% Increase
(Decrease)
(59)
(6.9)%
Other income, net was $0.8 million for the year ended December 31, 2018, a slight decrease of 6.9% from the
$0.9 million for the year ended December 31, 2017. Other income, net mainly consisted
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of change in fair value of the Deerfield debt derivative and interest income for both of the years ended December 31, 2018
and 2017.
Year ended December 31, 2017 compared to the year ended December 31, 2016
Revenues
The following table summarizes our revenues for the year ended December 31, 2017 and 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Product
$
27,132 $
10,033 $
17,099
170.4 %
Total product revenues were $27.1 million for the year ended December 31, 2017, an increase of $17.1 million or
170.4% from the $10.0 million for the year ended December 31, 2016. The increase was primarily due to a $16.6 million
increase in net sales of Adzenys XR-ODT which launched on May 16, 2016 from $20.4 million of net sales for the year
ended December 31, 2017 versus $3.8 million for the year ended December 31, 2016. Net sales of Cotempla XR-ODT which
commenced on September 5, 2017 were $1.6 million. The increase was partially offset by an approximately $1.1 million
decline in net sales of our generic Tussionex to $5.1 million for the year ended December 31, 2017 from $6.2 million for the
year ended December 31, 2016 primarily due to competitive pricing pressures for this product.
Cost of goods sold
The following table summarizes our cost of goods sold for the year ended December 31, 2017 and 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Cost of goods sold
$
14,030 $
11,734 $
2,296
19.6%
Total cost of goods sold was $14.0 million for the year ended December 31, 2017, an increase of $2.3 million or 19.6%,
from the $11.7 million for the year ended December 31, 2016. This increase was primarily from a $4.9 million increase in
product costs and an associated increase of $1.7 million of royalty fees, freight and logistics costs relating to the increased
sales of Adzenys XR-ODT in 2017 which launched on May 16, 2016 and sales from of Cotempla XR-ODT which
commenced on September 5, 2017. Partially offsetting these increased costs were lower production cost of $4.5 million
relating to efficiencies from increased production to meet sales demand, manufacturing costs for the production of Cotempla
XR-ODT being capitalized into inventory after June 30, 2017, following the FDA approval date of June 19, 2017 and
manufacturing costs for the production of Adzenys ER being capitalized into inventory after June 30, 2017, September 30,
2017, following the FDA approval date of September 15, 2017.
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Research and development expenses
The following table summarizes our research and development expenses for year ended December 31, 2017 and 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Research and development expenses
$
8,957 $
12,207 $
(3,250)
(26.6)%
Research and development expenses were $9.0 million for the year ended December 31, 2017, a decrease of
approximately $3.3 million or 26.6%, from the $12.2 million for the year ended December 31, 2016. This decrease was
primarily due to a $1.4 million decrease in clinical expenses and a $1.0 million decrease in FDA filing fees associated with
Adzenys ER and Cotempla XR-ODT, which completed in 2016. Additionally, development cost for materials, professional
fees, employee and related administrative expenses declined $0.9 million.
Selling and marketing expenses
The following table summarizes our selling and marketing expenses for the year ended December 31, 2017 and 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Sales and marketing expenses
$
46,881 $
49,291 $
(2,410)
(4.9)%
The total selling and marketing expenses were $46.9 million for the year ended December 31, 2017, a decrease of
$2.4 million or 4.9%, from the $49.3 million for the year ended December 31, 2016. The decrease was primarily due to a
decrease of $7.0 million in advertising expenses, $0.4 million in media management and creative design and $2.0 million in
commercial team training activities associated with the launch of our initial branded product, Adzenys XR-ODT, in 2016.
These decreases were partially offset by $6.4 million increase in the commercial sales organization salesforce costs and
$0.6 million increase in salaries and benefits, as this salesforce and support organization was in place for the full year of
2017, whereas in 2016, we were in the process of building out this operation in anticipation of the May 2016 launch of our
initial branded product.
General and administrative expenses
The following table summarizes our general and administrative expenses for the year ended December 31, 2017 and
2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
General and administrative expenses
$
13,805 $
12,625 $
1,180
9.3%
The total general and administrative expenses were $13.8 million for the year ended December 31, 2017, an increase of
$1.2 million or 9.3%, from the $12.6 million for the year ended December 31, 2016. Salaries and benefits expense primarily
increased $0.6 million due to additional corporate personnel supporting increased compliance requirements. Legal cost for
patent defense increased $1.0 million, partially offset by a $0.5 million decrease in business development and office supplies.
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Interest expense
The following table summarizes interest expense and loss on debt extinguishment for the year ended December 31, 2017
and 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Interest expense and loss on debt extinguishment $
(10,085) $
(8,124) $
1,961
24.1%
The total interest expense was $10.1 million for the year ended December 31, 2017, an increase of $2.0 million or
24.1%, from the $8.1 million for the year ended December 31, 2016. Interest on debt was $3.1 million higher due to the
higher debt balance in 2017 and interest expense related to the additional debt discounts recorded in June 2017 as a result of
the modification of the Facility (see Note 11 to the notes to our consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for additional details).
Partially offsetting increased senior debt interest expense was the early prepayment of the LSA in 2016 which resulted in
a $1.2 million loss on debt extinguishment due to recording the $0.2 million LSA prepayment charge, writing off the
$0.5 million of unamortized LSA end of term charge and the $0.5 million of unamortized LSA loan discount.
Other income, net
The following table summarizes our other income for the year ended December 31, 2017 and 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Increase
(Decrease)
% Increase
(Decrease)
Other income, net
$
854 $
1,197 $
(343)
(28.7)%
Other income, net was $0.9 million for the year ended December 31, 2017, a decrease of $0.3 million or 28.7%, from
$1.2 million for the year ended December 31, 2016. Other income, net in 2017 consisted of changes in fair value of the
Deerfield debt derivative and the Tussionex earn-out liability amounting to $0.5 million, interest income of $0.3 million and
amortized gain on the sale-leasebacks of $0.1 million. Other income, net in 2016 consisted of $0.5 million of amortization of
the gain on the sale-leasebacks, $0.4 million gain on the auction sale of certain fully depreciated property and equipment, and
interest income of $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
From our reorganization in 2009 until our initial public offering ("IPO"), we financed our operations primarily through
private placements of common stock and redeemable convertible preferred stock and bank and other lender financing. On
July 28, 2015, we closed our IPO whereby we sold 5,520,000 shares of our common stock, at a public offering price of
$15.00 per share, which includes 720,000 shares of our common stock resulting from the underwriters' exercise of their
over-allotment option at the IPO price on July 23, 2015. We received aggregate net proceeds of $75.0 million from the
offering, after deducting underwriting discounts and commissions of $5.8 million and offering expenses of approximately
$2.0 million. The securities described above were offered by us pursuant to a registration statement on Form S-1 declared
effective by the SEC on July 22, 2015.
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On May 11, 2016, we entered into the Facility with Deerfield. Approximately $33 million of the $60 million Facility
proceeds was used to prepay the existing $24.3 million principal and $0.1 million of accrued interest related to the LSA, the
$1.1 million LSA end of term fee, an LSA prepayment charge of $243,000 and the $5.9 million of principal and $1.3 million
of interest on the Note that was issued by us to Essex, which payments were otherwise payable in 2016 and 2017. Principal
on the Facility was initially due in three equal annual installments beginning in May 2019 and continuing through May 2021,
with a final payment of principal, interest and all other obligations under the Facility due May 11, 2022. Interest is due
quarterly beginning in June 2016, at a rate of 12.95% per year. We had an option, which we exercised, to defer payment of
each of the first four interest payments under the Facility, adding such amounts to the outstanding loan principal. The
aggregate $6.6 million Accrued Interest was to be paid in cash on June 1, 2017.
On the Amendment Date, we entered into the Amendment to the Facility with Deerfield which extended the date to
repay the Accrued Interest under the Facility to June 1, 2018 (the "PIK Maturity Date"), which may have been extended to
June 1, 2019 at our election if certain conditions had been met as specified in the Amendment. The right to payment of the
Accrued Interest was memorialized in the Convertible Notes issued to Deerfield on the Amendment Date. Interest was due
quarterly at a rate of 12.95% per year.
The $6.6 million of Convertible Notes were convertible into shares of our common stock at the noteholder's option at
any time up to the close of business on the date that was five days prior to the PIK Maturity Date. The per share conversion
price was to be the greater of (A) 95% of the average of the volume weighted average prices per share of our common stock
on the NASDAQ Global Market for the three trading day period immediately preceding such conversion, and (B) $7.00. On
June 30, 2017, we filed a registration statement on form S-3 with the SEC registering 940,924 shares of our common stock
that may be offered from time to time by Deerfield, the maximum number of shares of our common stock which would be
issued upon conversion of the Convertible Notes assuming the lowest possible conversion price of $7.00 per share, and such
registration statement was declared effective by the SEC on July 11, 2017. On October 26, 2017, Deerfield provided a
conversion notice electing to convert the entire $6.6 million of Convertible Notes into shares of the Company's common stock
at a conversion price of $7.08 per share. The conversion price was based on 95% of the average of the volume weighted
average prices per share of the Company's common stock on the NASDAQ Global Market for the three trading day period
immediately preceding such conversion. This resulted in issuing 929,967 shares of the Company's common stock to Deerfield
on this date and the Convertible Notes were cancelled.
In February 2017, we entered into an agreement with Essex for the sale-leaseback of newly acquired assets of up to
$5.0 million to finance our capital expenditures. Each lease under this master agreement is for an initial term of 36 months
and will have a bargain purchase option at the end of the respective lease. Under this agreement, we entered into leases and
sold assets with a total capitalized cost of $481,000 and $2,742,000 at effective interest rates of 14.3% and 14.9% on
February 13, 2017 and June 30, 2017, respectively.
In February 2017, we closed an underwritten public offering of 5,750,000 shares of our common stock at a public
offering price of $5.00 per share, which includes 750,000 shares of our common stock resulting from the underwriters'
exercise of their over-allotment option at the public offering price on February 17, 2017. Deerfield, our senior lender,
participated in the purchase of our common shares as part of this public offering, and as a result, was classified as a related
party at the time of the corresponding transactions. The net proceeds to us from this offering, after deducting underwriting
discounts and commissions and other offering expenses payable by us were approximately $26.7 million.
On June 30, 2017, we closed an underwritten public offering of 4,800,000 shares of our common stock at a price of
$6.25 per share for total proceeds of $30.0 million before estimated offering costs of
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$0.2 million. We also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of our common
stock which the underwriters exercised in full on July 26, 2017. The net proceeds to us from this offering, after deducting
offering expenses payable by us, were approximately $34.3 million.
The shares of common stock for both the June 2017 and February 2017 offerings were offered pursuant to a shelf
registration statement on Form S-3, including a base prospectus, filed by us on August 1, 2016, and declared effective by the
SEC on August 12, 2016. This shelf registration statement covers the offering, issuance and sale by us of up to an aggregate
of $125.0 million of our common stock, preferred stock, debt securities, warrants and/or units (the "Shelf").
We simultaneously entered into a sales agreement with Cowen and Company, LLC, as sales agent, to provide for the
offering, issuance and sale by us of up to $40.0 million of our common stock from time to time in "at-the-market" offerings
under the Shelf (the "Sales Agreement"). During the year ended December 31, 2017, we sold an aggregate 749,639 shares of
common stock under the Sales Agreement, at an average sale price of approximately $5.01 per share for gross proceeds of
$3.7 million and net proceeds of $3.6 million after paying compensation to the sales agent of $0.1 million. During the year
ended December 31, 2018, we sold an aggregate 651,525 shares of common stock under the Sales Agreement, at an average
sale price of approximately $6.25 per share for gross proceeds of $4.1 million and net proceeds of $3.9 million and paying
total compensation to the sales agent and other costs of approximately $0.2 million. On November 5, 2018, we supplemented
the Shelf to reduce the size of the Sales Agreement to up to $7,825,113 of our common stock (inclusive of amounts
previously sold thereunder prior to the date hereof), effective on November 5, 2018. As of the date hereof, aggregate gross
proceeds of sales of our common stock under the Sales Agreement total $7,825,113, and sales of our common stock under the
Sales Agreement have been suspended.
On November 8, 2018, we closed an underwritten public offering 19,999,999 shares of our common stock at a public
offering price of $2.30 per share, which includes 2,608,695 shares of our common stock resulting from the underwriters'
exercise of their over-allotment option at the public offering price. The net proceeds to us from this offering, after deducting
underwriting discounts and commissions and other offering expenses payable by us, were approximately $43.4 million. Also,
on November 5, 2018, we entered into a Second Amendment to the Facility with Deerfield under which we used $7.5 million
of proceeds of the offering to prepay $7.5 million of principal on the Facility otherwise due on May 11, 2018. Pursuant to the
Second Amendment, the schedule of principal repayments under the facility was further modified to allow for the
$15.0 million payment otherwise due on May 11, 2020 to be deferred until either May 2021 or May 2022 if certain revenue
milestones for the years ended December 31, 2019 and December 31, 2020 are achieved. Finally, the Second Amendment
provides us with a right, subject to the terms and conditions of the Facility and certain other limitations, to make interest and
principal payments through the issuance of our common stock, and provides Deerfield with a right, subject to the terms and
conditions of the Facility and the amended and restated convertible notes (the "A&R Notes") issued under the Facility and
certain other limitations, to convert principal under the A&R Notes into our common stock, subject to a floor of 95% of
$10.00 per share.
Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the
principal balance and provide liquidity. Accordingly, our cash equivalents and short-term investments are invested in bank
deposits, money market funds, financials and corporate debt securities, all of which are currently providing only minimal
returns.
As of December 31, 2018, we had $46.5 million in cash and cash equivalents. We believe that our existing cash and cash
equivalents will be sufficient to fund our operations for at least the next 12 months after filing this Annual Report on
Form 10-K.
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We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no
assurance that such funds will be available on terms favorable to us, if at all, or that we will be able to successfully
commercialize our product candidates. In addition, we may not be profitable even if we succeed in commercializing Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER.
Cash flows
The following table sets forth the primary sources and uses of cash for the periods indicated:
Net Cash (used in) provided by:
Net Cash used in operating activities
Net Cash provided by (used in) investing activities
Net Cash provided by financing activities
Net increase (decrease) in cash and cash
$
Year Ended
December 31,
2018
2017
Increase
(Decrease)
(in thousands)
Year Ended
December 31,
2017
2016
Increase
(Decrease)
(41,441) $
17,219
38,731
(53,261) $
(2,533) $
63,411 $
11,820 $
19,752
(24,680)
(53,261) $
(2,533)
63,411
(70,646) $
(19,322) $
23,557 $
17,385
16,789
39,854
equivalents
$
14,509 $
7,617 $
6,892 $
7,617 $
(66,411) $
74,028
Cash used in operating activities
Net cash used in operating activities during these periods primarily reflected our net losses, partially offset by changes in
working capital and non-cash charges including deferred interest on debt, changes in fair value of earnout, derivative and
warrant liabilities, share-based compensation expense, depreciation expense, amortization of patents and other intangible
assets and amortization of senior debt fees.
Net cash used in operating activities was $41.4 million and $53.3 million for the years ended December 31, 2018 and
2017, respectively. The $11.8 million decrease in net cash used from operating activities was due to the $14.1 million
decrease in our net losses, as discussed in "Results of Operations" above, a $2.5 million decrease in noncash items and a
$0.2 million increase in cash provided by working capital. The decrease of $2.5 million in noncash items was primarily due to
a $2.1 million decrease in deferred interest on debt to Deerfield, a $0.7 million decrease in share-based compensation expense
and a $0.4 million decrease on amortization of senior debt discounts, partially offset by a $0.1 million increase from the fair
value change of earnout and derivative liabilities and a $0.4 million increase in depreciation and amortization of property and
equipment. The $0.2 million increase in cash provided by working capital included a $7.6 million increase from decreased
inventories due to increased sales for our branded products, Adzenys VR-ODT and Cotempla XR-ODT, in 2018, partially
offset by a $6.6 million decrease in accounts receivable due to timing of collections, and a $0.7 million decrease from the
discontinued deferred commercial sales organization costs due to the transitioning of our sales organization from contracted
to internal in April 2018.
Net cash used in operating activities was $53.3 million and $70.6 million for the years ended December 31, 2017 and
2016, respectively. The $17.4 million decrease in net cash used from operating activities was due to the $17.0 million
decrease in our net losses, a $2.0 million decrease in noncash items and a $2.4 million increase in the provision of cash from
working capital. The increase in cash provided by working capital changes resulted primarily from the following:
$9.2 million decreased cash usage for accounts payable and accrued expenses due to the timing of vendor invoicing and
payments, $0.8 million increase from the deferred commercial sales organization costs as the ongoing operations
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contract commenced in March 2016 and $0.9 million increase from other assets related mainly to prepaid expenses. These
increases were partially offset by $5.3 million for accounts receivable mainly due to increased sales in Adzenys XR-ODT and
Cotempla XR-ODT in 2017 and $3.2 million from increased inventories due to increased production volume for Adzenys
XR-ODT and Cotempla XR-ODT. The decrease in noncash items was principally due to a $2.6 million decrease in deferred
interest on debt, a $0.9 million decrease resulting from the 2016 loss on debt extinguishment due to the early repayment of
the Facility and the Note, a $0.5 million decrease in the fair value change of earnout and derivative liabilities and a
$0.2 million decrease in depreciation and amortization expense, partially offset by a $0.6 million increase in share-based
compensation expense, a $0.9 million increase in amortization of senior debt fees and a $0.9 million decrease in deferred gain
on sale of equipment primarily due to the expiration of the 2013 and 2014 sale-leasebacks.
Cash provided by (used in) investing activities
Net cash used in investing activities is generally due to investments of cash in excess of our operating needs as well as
purchase of equipment to support our research and development and manufacturing activities.
Net cash provided by investing activities was $17.2 million for the year ended December 31, 2018 primarily due to
$36.5 million of sales and maturities of short-term investments, partially offset by the $17.9 million purchase of short-term
investments and $1.4 million of capital expenditures principally for production equipment.
Net cash used in investing activities was $2.5 million for the year ended December 31, 2017 primarily due to the
$48.0 million purchase of short-term investments and $2.5 million of capital expenditures principally for production
equipment, partially offset by the $45.1 million of sales and maturities of short-term investments and $3.2 million of proceeds
from the sale-leaseback of equipment.
Net cash used by investing activities was $19.3 million for the year ended December 31, 2016 primarily due to the
$66.1 million purchase of short-term investments partially offset by the $50.8 million sales of short-term investments,
$3.6 million of capital expenditures principally for equipment and systems to be used in the production and testing of
Adzenys XR-ODT and our other product candidates and a new Enterprise Resource Planning System.
Cash provided by financing activities
Net cash provided by financing activities of $38.7 million in the year ended December 31, 2018 principally included
$47.3 million of proceeds from the issuance of common stock net of related underwriting discounts, commissions and
issuance costs and partially offset by $8.4 million due to the $7.5 million principal payments of the senior facility under the
Second Amendment with Deerfield and the principal payments under the sales-leasebacks.
Net cash provided by financing activities of $63.4 million in the year ended December 31, 2017 principally included
$64.6 million of proceeds from the issuance of common stock net of related underwriting discounts, commissions and
issuance costs and partially offset by $1.0 million of principal payments under the sales-leasebacks.
Net cash provided by financing activities of $23.6 million in the year ended December 31, 2016 primarily resulted from
proceeds of $60.0 million from the issuance of notes to Deerfield, partially offset by a $1.4 million yield enhancement fee
paid to Deerfield and $0.2 million of legal fees, the full repayment of the $25.0 million of principal and a $1.1 million end of
term charge payment under the LSA, a $7.3 million of principal and interest payment under the 10% Note, and $1.9 million
of
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principal payments under the sales leasebacks partially offset by $0.4 million of proceeds from the sale of related equipment.
Credit facilities
On May 11, 2016, we entered into a $60.0 million Facility with Deerfield. Approximately $33 million of the proceeds
was used to repay the existing $24.3 million principal and $0.1 million of accrued interest related to the LSA, the $1.1 million
LSA end of term fee, an LSA prepayment charge of $243,000 and the $5.9 million of principal and $1.3 million of interest on
the Note that was issued by us to Essex which was to mature in March 2017, which were otherwise payable in 2016 and
2017. Principal on the Facility was initially due in three equal annual installments beginning in May 2019 and continuing
through May 2021, with a final payment of principal, interest and all other obligations under the Facility due May 11, 2022.
Interest is due quarterly beginning in June 2016, at a rate of 12.95% per year. In connection with the Facility, we paid a
$1,350,000 yield enhancement fee to Deerfield and approximately $0.2 million of legal fees. Borrowings under the Facility
are collateralized by substantially all of our assets, except the assets under capital lease, and we will maintain cash on deposit
of not less than $5.0 million.
We had an option, which we exercised, to defer payment of each of the first four interest payments, adding such amounts
to the outstanding loan principal. The aggregate $6.6 million Accrued Interest was to be paid in cash on June 1, 2017.
On June 1, 2017, we entered into the Amendment to the Facility which extended the PIK Maturity Date to June 1, 2018,
which may have been extended to June 1, 2019 at our election if certain conditions had been met as specified in the
Amendment. The right to payment of the Accrued Interest was memorialized in the Convertible Notes issued to Deerfield on
the Amendment Date. Interest is due quarterly at a rate of 12.95% per year.
The $6.6 million of Convertible Notes were convertible into shares of our common stock at Deerfield's option at any
time up to the close of business on the date that is five days prior to the PIK Maturity Date. The per share conversion price
was to be the greater of (A) 95% of the average of the volume weighted average prices per share of our common stock on the
NASDAQ Global Market for the three trading day period immediately preceding such conversion, and (B) $7.00. On June 30,
2017, we filed a registration statement on form S-3 with the SEC registering 940,924 shares of our common stock that may be
offered from time to time by Deerfield, the maximum number of shares of our common stock which would be issued upon
conversion of the Convertible Notes assuming the lowest possible conversion price of $7.00 per share, and such registration
was declared effective by the SEC on July 11, 2017. Deerfield cannot own more than 9.985% of our outstanding shares at any
one time, and the aggregate conversion could not exceed 19.9% of our outstanding common stock as of June 1, 2017.
The principal amount of the Convertible Notes issued under the Amendment and all accrued and unpaid interest thereon
was to become due and payable upon written notice from the Deerfield, and if either (a) we did not meet certain quarterly
sales milestones specified in the Amendment or (b) we did not receive and publicly announce FDA approval of the new drug
applications on or before the applicable PDUFA goal date as set forth on the schedules to Amendment. Per the Amendment,
we will prepay all of the outstanding obligations under the Facility and the Convertible Notes upon the occurrence of a
change in control or a sale of substantially all of our assets and liabilities. The Amendment increased the staggered
prepayment fees for prepayments due upon a change of control or any other prepayment made or required to be made by us
by 300 basis points from June 1, 2017 through the period ending prior to May 11, 2020 for the change in control prepayment
fees and through the period ending prior to May 11, 2022 for any other prepayments, respectively (the "Prepayment
Premiums"). Such Prepayment Premiums, as amended, range from 12.75% to 2%.
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On October 26, 2017, Deerfield elected to convert the entire $6.6 million of Convertible Notes into shares of the
Company's common stock at a conversion price of $7.08 per share. This resulted in issuing 929,967 shares of the Company's
common stock to Deerfield on this date and the Convertible Notes were cancelled.
On November 5, 2018, we entered into a Second Amendment to the Facility with Deerfield under which we used
$7.5 million of proceeds of an underwritten public offering of shares of our common stock to prepay $7.5 million of principal
on the Facility otherwise due on May 11, 2018. Pursuant to the Second Amendment, the schedule of principal repayments
under the facility was further modified to allow for the $15.0 million payment otherwise due on May 11, 2020 to be deferred
until either May 2021 or May 2022 if certain revenue milestones for the years ended December 31, 2019 and December 31,
2020 are achieved. Finally, the Second Amendment provides us with a right, subject to the terms and conditions of the
Facility and certain other limitations, to make interest and principal payments through the issuance of our common stock, and
provides Deerfield with a right, subject to the terms and conditions of the Facility and the A&R Notes and certain other
limitations, to convert principal under the A&R Notes into our common stock, subject to a floor of 95% of $10.00 per share.
Borrowings under the Facility are collateralized by substantially all of our assets, except the assets under capital lease,
and we will maintain cash on deposit of not less than $5.0 million. The Facility also contains certain customary nonfinancial
covenants, including limitations on our ability to transfer assets, engage in a change of control, merge or acquire with or into
another entity, incur additional indebtedness and distribute assets to shareholders. Upon an event of default, the lender may
declare all outstanding obligations accrued under the Facility to be immediately due and payable, and exercise its security
interests and other rights. As of December 31, 2018, we were in compliance with the covenants under the Facility.
We had a Note in the aggregate principal amount of $5.9 million that was issued by us to Essex which was to mature in
March 2017. Interest was to be accrued and added to the principal balance until such time as we achieved positive EBITDA
for three consecutive months. The $5.9 million Note and the related $1.3 million of accrued interest were repaid on May 11,
2016 with proceeds from the Facility as mentioned above.
During the years ended December 31, 2017, 2014 and 2013, we entered into agreements with Essex for the
sale-leaseback of existing and newly acquired assets with a total capitalized cost of $3.2 million, $795,000 and $5.5 million,
respectively, with bargain purchase options at the end of each respective lease, all of which are classified as capital leases.
The two February 2013 leases for a total of $3.5 million of assets expired in July 2016, the July 2013 lease for a total of
$1.0 million of assets expired in December 2016, the November 2013 lease for a total of $1.0 million of assets expired in
April 2017, the March 2014 lease for a total of $795,000 of assets expired in September 2017, and all lease buy-out liabilities
were satisfied. The approximate imputed interest rate on these leases is 14.9%, 14.5% and 14.5%, respectively. See
"Contractual Commitments and Obligations" below for future payments under these leases.
Capital resources and funding requirements
On August 1, 2016, we filed a shelf registration statement on Form S-3 with the SEC, which covers the offering,
issuance and sale by us of up to an aggregate of $125.0 million of our common stock, preferred stock, debt securities,
warrants and/or units. We simultaneously entered into a Sales Agreement with Cowen and Company, LLC, as sales agent, to
provide for the offering, issuance and sale by us of up to $40.0 million of our common stock from time to time in
"at-the-market" offerings under the Shelf. The Shelf was declared effective by the SEC on August 12, 2016.
In February 2017, pursuant to the Shelf, we closed an underwritten public offering of 5,750,000 shares of our common
stock at a public offering price of $5.00 per share, which includes 750,000 shares
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of our common stock resulting from the underwriters' exercise of their over-allotment option at the public offering price on
February 17, 2017. The net proceeds to us from this offering, after deducting underwriting discounts and commissions and
other offering expenses payable by us were approximately $26.7 million.
On June 30, 2017, pursuant to the Shelf, we closed an underwritten public offering of 4,800,000 shares of our common
stock at a price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. We also
granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of our common stock which the
underwriters exercised in full on July 26, 2017. The net proceeds to us from this offering, after deducting offering expenses
payable by us, were approximately $34.3 million.
During the year ended December 31, 2017, we sold an aggregate 749,639 shares of common stock under the Sales
Agreement at an average sale price of approximately $5.01 per share.
On November 5, 2018, we filed Supplement No. 1 to the prospectus dated August 12, 2016, which reduced the size of
our continuous offering of our common stock pursuant to the Sales Agreement. Following the reduction, we are authorized to
issue up to $7,825,113 of our common stock pursuant to the Sales Agreement (inclusive of amounts previously sold
thereunder prior to the date hereof). As of the date hereof, aggregate gross proceeds of sales of our common stock under the
Sales Agreement total $7,825,113, and sales of our common stock under the Sales Agreement have been suspended.
On November 8, 2018, the Company closed an underwritten public offering of 19,999,999 shares of its common stock at
a public offering price of $2.30 per share, which includes 2,608,695 shares of its common stock resulting from the
underwriters' exercise of their over-allotment option at the public offering price. The net proceeds to the Company from this
offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, were
approximately $43.4 million.
During the year ended December 31, 2018, we sold an aggregate 651,525 shares of common stock under the Sales
Agreement, at an average sale price of approximately $6.25 per share for gross proceeds of $4.1 million and net proceeds of
$3.9 million and paying total compensation to the sales agent and other costs of approximately $0.2 million. As of
December 31, 2018, $5.2 million of our common stock, preferred stock, debt securities, warrants and/or units remained
available to be sold pursuant to the Shelf.
We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no
assurance that such funds will be available on terms favorable to us, if at all, or that we will be able to successfully
commercialize Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or, if approved, our new product candidates. In addition,
we may not be profitable even if we succeed in commercializing Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER or, if
approved, any of our new product candidates. We expect to continue to incur operating losses over the next several years as
we seek regulatory approval for our product candidates and build and operate commercial infrastructure to support sales and
marketing of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and, if approved, our product candidates that we may
develop. We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our
anticipated operating requirements for at least the next twelve months. We have based this estimate on assumptions that may
prove to be wrong, resulting in the use of our available capital resources sooner than we currently expect. Because of the
numerous risks and uncertainties associated with the development and commercialization of our products and product
candidates, we are unable to estimate the amount of increased capital required to become profitable. Our future funding
requirements will depend on many factors, including:
the costs of operating our sales, marketing and distribution capabilities;
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the market acceptance of our products and, if approved, product candidates and related success in commercializing
and generating sales from our products and, if approved, product candidates, that we may develop;
the costs of our manufacturing capabilities to support our commercialization activities, including any costs
associated with adding new capabilities;
the costs and timing involved in obtaining regulatory approvals for our new product candidates;
the timing and number of product candidates for which we obtain regulatory approval;
the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation
costs and liabilities;
the number and characteristics of new product candidates that we pursue; and
our ability to hire qualified employees at salary levels consistent with our estimates to support our growth and
development, including additional general and administrative personnel as a result of increased product sales and
commercial operations, as well as sales and marketing personnel to commercialize our approved products.
We may not generate a sufficient amount of product revenues from sales of Adzenys XR-ODT, Cotempla XR-ODT and
Adzenys ER to finance our cash requirements. Until we obtain regulatory approval to market our new product candidates, if
ever, we cannot generate revenues from sales of those products. Even if we are able to sell our products, including Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER, we may not generate a sufficient amount of product revenues to finance our
cash requirements. Accordingly, we may need to obtain additional financing in the future which may include public or private
debt and equity financings and/or entrance into product and technology collaboration agreements or licenses and asset sales.
There can be no assurance that additional capital will be available when needed on acceptable terms, or at all. The issuance of
equity securities may result in dilution to stockholders. If we raise additional funds through the issuance of debt securities,
these securities may have rights, preferences and privileges senior to those of our common stock and the terms of the debt
securities could impose significant restrictions on our operations. If we raise additional funds through collaborations and
licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses
on terms that are not favorable to us. If adequate funds are not available, we may have to scale back our commercial
operations or limit our research and development activities, which would have a material adverse impact on our business
prospects and results of operations.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our management's discussion and analysis of financial condition and results of operations is based on our financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States
("GAAP"). The preparation of our financial statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the financial
statements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our
estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may
differ materially from these estimates under different assumptions or conditions.
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While our significant accounting policies are described in more detail in Note 2 to the notes to our audited financial
statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be
critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the
consideration which we expect to receive in exchange for those goods or services at a point in time. We make estimates of the
net sales price, including estimates of variable consideration (e.g., savings offers, prompt payment discounts, product returns,
wholesaler fees, wholesaler chargebacks and estimated rebates) to be incurred on the selling price of the respective product
sales, and recognize the estimated amount as revenue when it transfers control of the product to its customers (e.g., upon
delivery). Variable consideration is determined using either an expected value or a most likely amount method. The estimate
of variable consideration is also subject to a constraint such that some or all of the estimated amount of variable consideration
will only be included in the transaction price to the extent that it is probable that a significant reversal of revenue (in the
context of the contract) will not occur when the uncertainty associated with the variable consideration is subsequently
resolved. Estimating variable consideration and the related constraint will require the use of significant management
judgment and other market data. We provide for prompt payment discounts, wholesaler fees and wholesaler chargebacks
based on customer contractual stipulations. We analyze recent product return history and other market data obtained from our
third party logistics providers ("3PLs") to determine a reliable return rate. Additionally, we analyze historical savings offers
and rebate payments based on patient prescriptions dispensed for Adzenys XR ODT, Cotempla XR ODT and Adzenys ER
and information obtained from third party providers to determine these respective variable considerations.
We sell our generic Tussionex, Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to a limited number of
pharmaceutical wholesalers, all subject to rights of return. Pharmaceutical wholesalers buy drug products directly from
manufacturers. Title to the product passes upon delivery to the wholesalers, when the risks and rewards of ownership are
assumed by the wholesaler. These wholesalers then resell the product to retail customers such as food, drug and mass
merchandisers.
Revenues for Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and generic Tussionex for the years ended
December 31, 2018, 2017 and 2016, respectively, are as follows:
Adzenys XR-ODT
Cotempla XR-ODT
Adzenys ER
Generic Tussionex
Net product sales
2018
Year Ended December 31,
2017
(in thousands)
2016
$
$
26,631 $
19,014
(27)
4,370
49,988 $
20,377 $
1,590
—
5,165
27,132 $
3,803
—
—
6,230
10,033
Net product sales represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments
for branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER include savings offers, prompt payment discounts,
wholesaler fees, estimated rebates to be incurred on the selling price of the respective product sales and estimated allowances
for product returns.
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Gross to net sales adjustments for generic Tussionex include prompt payment discounts, estimated allowances for
product returns, wholesaler fees, estimated government rebates and estimated chargebacks to be incurred on the selling price
of generic Tussionex related to the respective product sales.
We recognize total gross product sales less gross to net sales adjustment as revenue based on shipments from 3PLs to the
Company's wholesaler customers.
Savings offers for branded products
We offer savings programs for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to patients covered under
commercial payor plans in which the cost of a prescription to such patients is discounted. The Company records the amount
of redeemed savings offers based on information from third-party providers against the estimated discount recorded as
accrued expenses. The estimated discount is recorded as a gross to net sales adjustments at the time revenue is recognized.
Prompt payment discounts
Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance
against accounts receivable and as a gross to net sales adjustments at the time revenue is recognized.
Wholesale distribution fees
Wholesale distribution fees are based on definitive contractual agreements for the management of the Company's
products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is
recognized.
Rebates
Our branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are subject to commercial managed care and
government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed
care organizations and federal and/or state governments. Calculations related to rebate accruals of branded products are
estimated based on information from third-party providers.
Our generic Tussionex product is subject to state government-managed Medicaid programs whereby discounts and
rebates are provided to participating state governments. Generic Tussionex government rebates are estimated based upon
rebate payment data available from sales of the Company's generic Tussionex product over the past three years.
Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is
recognized. Historical trends of estimated rebates will be continually monitored and may result in future adjustments to such
estimates.
Product returns
Wholesalers' contractual return rights are limited to defective product, product that was shipped in error, product ordered
by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or
other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product
starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses
and as a gross to net sales adjustments at the time revenue is recognized.
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We analyzed recent branded product return history and other market data obtained from the Company's 3PLs as well as
data available from sales of our branded products to determine a reliable return rate for branded Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER. Generic Tussionex product returns were estimated based upon return data available from sales of
our generic Tussionex product over the past three years.
Wholesaler chargebacks for generic product
Our generic Tussionex products are subject to certain programs with wholesalers whereby pricing on products is
discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the
discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to the
Company. Estimated chargebacks are recorded as a discount allowance against accounts receivable and as a gross to net sales
adjustments at the time revenue is recognized based on information provided by third parties.
Due to estimates and assumptions inherent in determining the amount of generic Tussionex returns, rebates and
chargebacks, the actual amount of returns, claims for rebates and chargebacks may be different from the estimates, at which
time reserves would be adjusted accordingly. Wholesale distribution fees and the allowance for prompt pay discounts are
recorded at the time of shipment and such fees and allowances are recorded in the same period that the related revenue is
recognized.
The following table presents our gross to net sales deductions for our Adzenys XR-ODT which we launched
commercially on May 16, 2016, our Cotempla XR-ODT which we initiated an early experience program with limited product
availability on September 5, 2017 and launched nationwide on October 2, 2017 and Adzenys ER which we launched
commercially on February 26, 2018 for the years ended December 31, 2018, 2017 and 2016:
Balance at December 31, 2015
Provision, net
Payments / credits
Balance at December 31, 2016
Provision, net
Payments / credits
Balance at December 31, 2017
Provision, net
Payments / credits
Balance at December 31, 2018
Cash
Discounts
Sales
Offers
Wholesaler
Fees
Returns
Government
Rebates
Total Gross
to Net Sales
Deductions
$
— $
384
(324)
$
60 $
1,468
(1,288)
$
240 $
3,210
(2,997)
$
453 $
— $
5,816
(3,746)
2,070 $
30,978
(25,880)
7,168 $
71,303
(67,183)
11,288 $
(in thousands)
— $
1,082
(622)
460 $
6,791
(5,047)
2,204 $
16,150
(14,362)
3,992 $
— $
274
—
274 $
1,625
(80)
1,819 $
3,506
(1,145)
4,180 $
— $
567
(62)
505 $
7,793
(4,354)
3,944 $
18,709
(14,973)
7,680 $
—
8,123
(4,754)
3,369
48,655
(36,649)
15,375
112,878
(100,660)
27,593
Total items deducted from gross product sales were $112,878, $48,655 and $8,123, or 71.2%, 68.9% and 68.1% as a
percentage of gross product sales, for the years ended December 31, 2018, 2017 and 2016, respectively, due principally to the
savings offers being made to penetrate the ADHD market.
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The following table presents our gross to net sales deductions for our generic Tussionex for the years ended
December 31, 2018, 2017 and 2016:
Balance at December 31, 2015
Provision, net
Payments / credits
Balance at December 31, 2016
Provision, net
Payments / credits
Balance at December 31, 2017
Provision, net
Payments / credits
Balance at December 31, 2018
Chargebacks
Cash
Discounts
Wholesaler
Fees
Returns
Government
Rebates
Total Gross to
Net Sales
Deductions
940
10,504
(10,665)
$
779 $
10,146
(10,109)
816 $
8,565
(8,067)
1,314 $
$
$
99
388
(376)
111 $
346
(359)
(in thousands)
361
1,756
(2,068)
49 $
1,452
(1,360)
98 $
141 $
308
(308)
1,263
(1,147)
98 $
257 $
429
491
(36)
884 $
167
(158)
893 $
297
(213)
977 $
110
(48)
(24)
38 $
43
(18)
63 $
37
(17)
83 $
1,939
13,091
(13,169)
1,861
12,154
(12,004)
2,011
10,470
(9,752)
2,729
Total items deducted from gross product sales were $10,470, $12,154 and $13,091, or 70.6%, 70.2% and 67.8% as a
percentage of gross product sales, for the years ended December 31, 2018, 2017 and 2016, respectively. The increase in the
gross to net sales deduction percentage resulted from a higher proportion of the sales being made to a major pharmacy chain
that receives volume pricing concessions.
Inventories
Inventories are stated at the lower of cost (first in, first out) or market in 2016 and, effective January 1, 2017, inventory
is now required to be measured at the lower of cost (first in, first out) or net realizable value. The change to stating
inventories at the lower of cost or net realizable value in 2017 was adopted prospectively and did not have a significant effect
on the Company's ongoing financial reporting as valuing inventory at the lower of cost or net realizable value approximated
the prior policy of valuing inventory at the lower of cost or market. Inventories have been reduced by an allowance for excess
and obsolete inventories. Cost elements include material, labor and manufacturing overhead. Inventories consist of raw
materials, work in process and finished goods.
Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is
probable, pre-launch inventories are expensed into research and development. Manufacturing costs for the production of
Adzenys XR-ODT incurred after the January 27, 2016 FDA approval date are being capitalized into inventory, for the
production of Cotempla XR-ODT incurred after June 30, 2017, following the FDA approval date of June 19, 2017, and for
the production of Adzenys ER incurred after September 30, 2017, following the FDA approval date of September 15, 2017,
are being capitalized into inventory.
Research and development expenses
Research and development expenses include costs incurred in performing research and development activities, personnel
related expenses, laboratory and clinical supplies, facilities expenses, overhead expenses, fees for contractual services,
including preclinical studies, clinical trials and raw materials. We estimate clinical trial expenses based on the services
received pursuant to contracts with research institutions and CROs which conduct and manage clinical trials on our behalf.
We accrue service fees based on work performed, which relies on estimates of total costs incurred based on
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milestones achieved, patient enrollment and other events. The majority of our service providers invoice us in arrears, and to
the extent that amounts invoiced differ from our estimates of expenses incurred, we accrue for additional costs. The financial
terms of these agreements vary from contract to contract and may result in uneven expenses and cash flows. To date, we have
not experienced any events requiring us to make material adjustments to our accruals for service fees. If we do not identify
costs that we incurred or if we underestimate or overestimate the level of services performed, our actual expenses could differ
from our estimates which could materially affect our results of operations. Adjustments to our accruals are recorded as
changes in estimates become evident. In addition to accruing for expenses incurred, we may also record payments made to
service providers as prepaid expenses that we will recognize as expense in future periods as services are rendered.
Share-based compensation expense
Share-based compensation awards, including grants of employee stock options and restricted stock and modifications to
existing stock options, are recognized in the statement of operations based on their fair values. Compensation expense related
to awards to employees is recognized on a straight-line basis, based on the grant date fair value, over the requisite service
period of the award, which is generally the vesting term. The fair value of our share-based awards to employees and directors
is estimated using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including
(1) the expected stock price volatility, (2) the expected term of the award, (3) the risk-free interest rate and (4) expected
dividends.
Under recent guidance for accounting for share-based payments, we have elected to continue estimating forfeitures at the
time of grant and, if necessary, revise the estimate in subsequent periods if actual forfeitures differ from those estimates.
Ultimately, the actual expense recognized over the vesting period will only be for those options that vest. The adoption of this
standard in 2017 did not have a material impact on our business, financial position, results of operations or liquidity.
We calculated the fair value of share-based compensation awards using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the
expected life of stock options. The application of this valuation model involves assumptions that are highly subjective,
judgmental and sensitive in the determination of compensation cost. As a formerly private company, we do not have
sufficient history to estimate the volatility of our common stock price or the expected life of our options. We have not paid
and do not anticipate paying cash dividends. Therefore, the expected dividend rate is assumed to be 0%. The expected stock
price volatility for stock option awards was based on a blended volatility rate of prior studies of historical volatility from a
representative peer group of comparable companies' selected using publicly-available industry and market capitalization data
and 30 months of our stock price volatility. The risk-free rate was based on the U.S. Treasury yield curve in effect
commensurate with the expected life assumption. The average expected life of stock options was determined according to the
"simplified method" as described in SAB Topic 110, which is the midpoint between the vesting date and the end of the
contractual term. The risk-free interest rate was determined by reference to implied yields available from U.S. Treasury
securities with a remaining term equal to the expected life assumed at the date of grant. We estimate forfeitures based on our
historical analysis of actual stock option forfeitures. We estimate the fair value of all stock option awards on the grant date by
applying the Black-Scholes option pricing valuation model. Given the absence of an active market for our common stock
prior to our IPO, our board of directors was required to estimate the fair value of our common stock at the time of each option
grant primarily based upon valuations performed by a third party valuation firm. After the closing of our IPO, our board of
directors has determined the fair value of each share of underlying common stock based on the closing price of our common
stock as reported by the NASDAQ Global Market on the date of grant.
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There is a high degree of subjectivity involved when using option-pricing models to estimate share-based compensation.
There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the
estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.
Although the fair value of employee stock-based awards is determined using an option-pricing model, such a model value
may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing
seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we
record in the future may differ significantly from what we have historically reported.
Derivative liabilities
We evaluate our debt and equity issuances to determine if those contracts or embedded components of those contracts
qualify as derivatives requiring separate recognition in our financial statements. The result of this accounting treatment is that
the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability and the
change in fair value is recorded in other income (expense) in the consolidated results of operations. In circumstances where
the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded
derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments
are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity
instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair
value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within twelve
months of the balance sheet date.
When we have determined that the embedded conversion options should not be bifurcated from their host instruments,
we record, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt
instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the
note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are
amortized over the term of the related debt to their stated date of redemption and recorded in interest expense in the
consolidated financial statements.
Intangible assets
Intangible assets subject to amortization, which principally include our proprietary modified-release drug delivery
technology, the costs to acquire the rights to Tussionex ANDA and patents, are recorded at cost and are amortized over the
estimated lives of the assets, which primarily range from 10 to 20 years.
110
Table of Contents
CONTRACTUAL COMMITMENTS AND OBLIGATIONS
The following table reflects a summary of our estimates of future material contractual obligations as of December 31,
2018. Future events could cause actual payments to differ from these estimates.
Deerfield senior secured facility
Capital leases for equipment
Earnout liability
Texas facility operating lease
Pennsylvania office space lease
Equipment operating leases
Total
< 1 Yr
1 - 3 Yrs.
(In thousands)
3 - 5 Yrs
Thereafter
$
$
68,124 $
2,096
37
6,181
360
112
76,910 $
13,843 $
1,257
—
955
152
73
16,280 $
37,662 $
819
—
2,010
208
39
40,738 $
16,619
20
—
2,110
—
—
18,749 $
—
—
37
1,106
—
—
1,143
We had borrowed $60.0 million under the Deerfield Facility. On November 5, 2018, we amended the facility and
prepaid $7.5 million otherwise due in May 2019, and currently have a balance of $52.5 million of senior secured credit as of
December 31, 2018. The payments above are inclusive of related interest amounts as of December 31, 2018.
In addition to the commitments shown above, in response to a lawsuit brought against us by Shire LLC ("Shire") for
infringement of certain of Shire's patents, we entered into a Settlement Agreement and an associated License Agreement (the
"2014 License Agreement") with Shire for a non-exclusive license to certain patents for certain activities with respect to our
New Drug Application (the "NDA") No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet
in July 2014. Under the terms of the license agreement, after receiving regulatory approval by the FDA of our NDA for
Adzenys XR-ODT, in the first quarter of 2016, we paid a lump sum, non-refundable license fee of an amount less than
$1.0 million. This license fee was capitalized and is being amortized over the life of the longest associated patent. We are
paying a single digit royalty on net sales of Adzenys XR-ODT during the life of the patents.
On March 6, 2017, after our NDA submission for Adzenys ER requiring a Paragraph IV certification notification to the
producer of Adderall XR, Shire Pharmaceuticals, in accordance with the Hatch-Waxman Amendments, we entered into a
License Agreement (the "2017 License Agreement") with Shire. Pursuant to this agreement, Shire granted us a non-exclusive
license to certain patents owned by Shire for certain activities with respect to our NDA No. 204325 for an extended-release
amphetamine liquid suspension. Under the terms of the agreement, after receiving regulatory approval by the FDA of our
NDA for Adzenys ER, in October 2017, we paid a lump sum, non-refundable license fee of an amount less than $1.0 million.
This license fee was capitalized and is being amortized over the life of the longest associated patent. We are paying a single
digit royalty on net sales of Adzenys ER during the life of the relevant Shire patents.
Due to the uncertainty of when these royalty payments will be made for Adzenys XR-ODT and Adzenys ER, they are
not presented in the table above. The license fees are paid and recorded as an intangible asset and amortized over the term of
the license. The royalties are being recorded as cost of goods sold in the same period as the net sales upon which they are
calculated.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as
defined in the rules and regulations of the SEC, including any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
111
Table of Contents
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K
for further discussion of recent accounting pronouncements.
ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk
Market risk
We are exposed to market risk related to changes in interest rates as it impacts our interest income. As of December 31,
2018, we had cash and cash equivalents of $46.5 million. Our primary exposure to market risk is interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates as our cash equivalents are invested in interest-bearing
money market funds. The goals of our investment policy are liquidity and capital preservation to fund our operations. Due to
the short-term duration and low risk profile of our cash equivalents portfolio, a 10% change in interest rates would not have a
material effect on interest income we recognize or the fair market value of our investments. Accordingly, we would not
expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market
interest rates.
Interest risk
The interest rates on our notes payable are fixed. Therefore, we are not exposed to market risk from changes in interest
rates as it relates to these interest-bearing obligations.
Effects of Inflation
We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods
presented herein.
JOBS ACT
In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in the United States. Section 107
of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards.
Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period
and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards
is required for non-emerging growth companies.
ITEM 8. Financial Statements and Supplementary Data
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those
financial statements is found in Item 15.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated
the effectiveness 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
112
Table of Contents
Act")), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal
executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures
were effective.
Management's Report on Internal Control Over Financial Reporting and Attestation Report of the Registered
Public Accounting Firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for
our company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial
officer and effected by the company's board of preparation of financial statements for external purposes in accordance with
GAAP and directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of our company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our company's assets that could
have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Our management, with the participation of our principal executive and principal financial officer, assessed the
effectiveness of our internal control over financial reporting as of December 31, 2018, based on criteria for effective internal
control over financial reporting established in Internal Control—Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that our
internal control over financial reporting was effective as of December 31, 2018, based on those criteria.
Inherent Limitations of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate.
113
Table of Contents
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
Except as set forth below, information required by this item will be included under the captions Elections of Directors,
Information Regarding the Board of Directors and Corporate Governance, Executive Compensation and Other Information,
and Section 16(a) Beneficial Ownership Reporting Compliance contained in our definitive Proxy Statement to be filed with
the Commission within 120 days after the conclusion of our year ended December 31, 2018 (the "Proxy Statement") pursuant
to General Instructions G(3) of Form 10-K and is incorporated herein by reference.
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors,
including those officers responsible for financial reporting. Our code of business conduct and ethics is available on our
website, which is located at www.neostx.com. We intend to disclose any amendments to the code, or any waivers of its
requirements, on our website, or in a current report on Form 8-K as may be required by law or applicable NASDAQ rules.
ITEM 11. Executive Compensation
We maintain an employee compensation program and benefit plans in which our executive officers are participants.
Copies of these plans and programs are set forth or incorporated by reference as Exhibits to this report. The information
required by this item will be included in our Proxy Statement under the caption Executive Compensation and Other and is
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item will be included under the captions Security Ownership of Certain Beneficial Owners
and Management and Executive Compensation contained in our Proxy Statement and is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Party Transactions, and Director Independence
Information required by this item will be included under the captions Certain Relationships and Related Transactions
and Information Regarding the Board of Directors contained in our Proxy Statement and is incorporated herein by reference.
ITEM 14. Principal Accounting Fees and Services
Information required by this item will be included under the captions Selection of Independent Registered Public
Accounting Firm contained in our Proxy Statement and is incorporated herein by reference.
114
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PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial statements of Neos Therapeutics, Inc., together with the report
thereon of RSM US LLP, required to be filed pursuant to Part II, Item 8 of this Annual Report on Form 10-K, are
included on pages F-2 through F-39, as follows:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2018, 2017 and
2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
(2) Financial Statement Schedule.
Schedule II—Valuation and Qualifying Accounts
(3) The exhibits required by Items 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the
exhibits and are incorporated herein.
(b) Exhibits:
[Exhibit Index to be inserted by the Printer]
ITEM 16. Form 10-K Summary
None.
115
Table of Contents
Neos Therapeutics, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Neos Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Neos Therapeutics, Inc. and Subsidiaries (the
"Company") as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss,
stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2018 and the
related notes to the consolidated financial statements and schedule (collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018
and 2017, and the results of its operations and its cash flows for the each of the three years in the period ended December 31,
2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2010.
Dallas, Texas
March 18, 2019
F-2
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances for chargebacks and cash discounts of
$
$1,865 and $1,154 at December 31, 2018 and December 31, 2017,
respectively
$
$
Inventories
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Total current liabilities
Long-Term Liabilities:
Long-term debt, net of current portion
Derivative liability
Deferred rent
Other long-term liabilities
Total long-term liabilities
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
or outstanding at December 31, 2018 and December 31, 2017
Common stock, $0.001 par value, 100,000,000 authorized at December 31, 2018
and December 31, 2017; 49,710,104 and 49,676,303 issued and outstanding,
respectively, at December 31, 2018; 29,030,757 and 28,996,956 issued and
outstanding, respectively, at December 31, 2017
Treasury stock, at cost, 33,801 shares at December 31, 2018 and December 31,
December 31,
2018
2017
46,478 $
—
31,969
18,448
27,801
10,367
4,032
88,678
7,914
14,616
149
111,357 $
12,730 $
35,818
8,557
57,105
43,217
2,017
989
184
46,407
—
50
13,671
11,732
3,575
79,395
8,203
16,348
162
104,108
11,460
20,944
896
33,300
58,938
1,660
1,083
180
61,861
—
29
2017
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
(352)
325,130
(316,983)
—
7,845
111,357 $
(352)
274,584
(265,308)
(6)
8,947
104,108
$
See notes to consolidated financial statements.
F-3
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Revenues:
Net product sales
Cost of goods sold
Gross profit (loss)
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Loss from operations
Interest expense
Loss on debt extinguishment
Other income, net
Net loss
2018
Year Ended December 31,
2017
2016
$
49,988 $
27,132 $
10,033
26,928
23,060
8,508
44,133
13,915
(43,496)
(8,974
)
—
795
(51,675) $
14,030
13,102
8,957
46,881
13,805
(56,541)
(10,085
)
—
854
(65,772) $
11,734
(1,701)
12,207
49,291
12,625
(75,824)
(6,937
)
(1,187)
1,197
(82,751)
$
Weighted average common shares outstanding used to
compute net loss per share, basic and diluted
32,288,555
24,751,091
16,052,390
Net loss per share of common stock, basic and
diluted
$
(1.60) $
(2.66) $
(5.16)
See notes to consolidated financial statements.
F-4
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive loss:
Gain (loss) on short-term investments
Reclassification of gains included in net loss
Total other comprehensive income (loss)
Comprehensive loss
2018
Year Ended December 31,
2017
2016
$
(51,675) $
(65,772) $
(82,751)
6
—
6
$
(51,669) $
(5)
—
(5)
(65,777) $
2
(3)
(1)
(82,752)
See notes to consolidated financial statements.
F-5
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except shares)
Preferred Stock
Common Stock
Treasury Stock
Amount
Shares
Amount
Balance, December 31, 2015
Proceeds from exercise of options and warrants
Share-based compensation expense
Purchase of treasury stock
Net unrealized loss on investments
Net loss
Balance, December 31, 2016
Issuance of common stock, net of issuance costs
Issuance of common stock upon conversion of convertible
notes
Shares issued from exercise of stock options
Purchase of treasury stock
Share-based compensation expense
Recognition of beneficial conversion feature on
convertible notes
Net unrealized loss on investments
Net loss
Balance, December 31, 2017
Issuance of common stock, net of issuance costs
Issuance of common stock upon RSU conversion
Shares issued for exercise of stock options
Payroll tax withheld for RSU releases
Share-based compensation expense
Net unrealized loss on investments
Net loss
Balance, December 31, 2018
Shares
Amount
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Shares
16,025,155 $
54,747
—
—
—
—
16,079,902 $
12,019,639
929,967
1,249
—
—
—
—
—
29,030,757 $
20,651,524
26,991
832
—
—
—
—
49,710,104 $
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
(Deficit)
16
—
—
—
—
—
16
12
1
—
—
—
—
—
—
29
21
—
—
—
—
—
—
50
(9,197) $
—
—
(9,709)
—
—
(18,906) $
(171) $
—
—
(61)
—
—
(232) $
195,314 $
13
3,460
—
—
—
198,787 $
—
—
64,548
—
—
(14,895)
—
—
—
—
(33,801) $
—
—
—
—
—
—
—
(33,801) $
—
—
(120)
—
—
—
—
(352) $
—
—
—
—
—
—
—
(352) $
6,585
—
—
4,051
613
—
—
274,584 $
47,271
—
—
(46)
3,321
—
—
325,130 $
(116,785) $
—
—
—
—
(82,751)
(199,536) $
—
—
—
—
—
—
—
(65,772)
(265,308) $
—
—
—
—
—
—
(51,675)
(316,983) $
— $
—
—
—
(1)
—
(1) $
—
—
—
—
—
—
(5)
—
(6) $
—
—
—
—
—
6
—
— $
78,374
13
3,460
(61)
(1)
(82,751)
(966)
64,560
6,586
—
(120)
4,051
613
(5)
(65,772)
8,947
47,292
—
—
(46)
3,321
6
(51,675)
7,845
See notes to consolidated financial statements.
F-6
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows From Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense
Depreciation and amortization of property and equipment
Amortization of patents and other intangible assets
Changes in fair value of earnout, derivative and warrant liabilities
Amortization of senior debt discounts
Amortization of short-term investment purchase discounts
Deferred interest on debt
Loss on debt extinguishment
Gain on sale of equipment
Other adjustments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Deferred contract sales organization fees
Other assets
Accounts payable
Accrued expenses
Net cash used in operating activities
Cash Flows From Investing Activities:
Purchases of short-term investments
Sales and maturities of short-term investments
Proceeds from sale-leaseback of equipment
Capital expenditures
Intangible asset expenditures
Net cash provided by (used in) investing activities
Cash Flows From Financing Activities:
Proceeds from Deerfield debt note, net of fees
Prepayment of senior debt and fee
Proceeds from sale of equipment
Proceeds from the issuance of common stock, net of issuance cost
Payments made on borrowings
Payments made to purchase treasury stock
Payment of payroll taxes withheld for releases of restricted stock units
Payments made on behalf of Deerfield
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and Cash Equivalents:
Beginning
Ending
Supplemental Disclosure of Noncash Transactions:
Exit Fee liability incurred in connection with Second Amendment to Facility
Derivative Liability incurred in connection with First Amendment to Facility
Capital lease liability from purchase of equipment
Issuance of senior secured convertible notes in lieu of interest payment
Issuance of common stock upon conversion of senior secured convertible notes
Capital lease liability from sale-leaseback transactions
Prepaid assets included in accounts payable
Beneficial conversion feature incurred on convertible notes
Deferred contract sales organization fees
Supplemental Cash Flow Information:
Interest paid
Year Ended December 31,
2017
2018
2016
$
(51,675 )
$
(65,772 )
$
(82,751 )
3,321
1,750
1,737
(387 )
961
(131 )
—
—
—
48
(14,130 )
1,365
—
(444 )
1,270
14,874
(41,441 )
(17,906 )
36,491
—
(1,361 )
(5 )
17,219
—
—
—
47,292
(8,425 )
—
(46 )
(90 )
38,731
14,509
31,969
46,478
750
611
105
—
—
—
—
—
—
8,158
$
$
$
$
$
$
$
$
$
$
$
4,051
1,363
1,660
(509 )
1,316
(126 )
2,111
—
(23 )
(91 )
(7,536 )
(6,190 )
720
(414 )
3,008
13,171
(53,261 )
(48,015 )
45,118
3,222
(2,497 )
(361 )
(2,533 )
—
—
—
64,560
(989 )
(120 )
—
(40 )
63,411
7,617
24,352
31,969
—
2,107
—
6,586
6,586
3,222
654
613
—
6,769
$
$
$
$
$
$
$
$
$
$
$
3,460
1,598
1,662
18
406
(156 )
4,738
942
(922 )
5
(2,232 )
(3,022 )
(123 )
(1,278 )
2,377
4,632
(70,646 )
(66,088 )
50,816
—
(3,550 )
(500 )
(19,322 )
58,419
(26,063 )
415
13
(9,166 )
(61 )
—
—
23,557
(66,411 )
90,763
24,352
—
—
—
—
—
—
—
—
597
2,857
$
$
$
$
$
$
$
$
$
$
$
See notes to consolidated financial statements.
F-7
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and nature of operations
Neos Therapeutics, Inc., a Delaware corporation, and its subsidiaries (the "Company") is a fully integrated
pharmaceutical company. The Company has developed a broad, proprietary modified-release drug delivery technology that
enables the manufacture of single and multiple ingredient extended-release pharmaceuticals in patient- and caregiver-friendly
orally disintegrating tablet and liquid suspension dosage forms. The Company has a pipeline of extended-release
pharmaceuticals including three approved products for the treatment of attention deficit hyperactivity disorder ("ADHD").
Adzenys XR-ODT was approved by the US Food and Drug Administration (the "FDA") on January 27, 2016 and launched
commercially on May 16, 2016. The Company received approval from the FDA for Cotempla XR-ODT, its methylphenidate
XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19, 2017, and the Company initiated an early
experience program with limited product availability on September 5, 2017 before launching this product nationwide on
October 2, 2017. Also, the Company received approval from the FDA for Adzenys ER oral suspension ("Adzenys ER") on
September 15, 2017 and launched this product on February 26, 2018. In addition, the Company manufactures and markets a
generic Tussionex (hydrocodone and chlorpheniramine) ("generic Tussionex"), extended-release liquid suspension for the
treatment of cough and upper respiratory symptoms of a cold. In addition to its marketed products, the Company is
developing NT-0400, its XR-ODT product candidate for nausea and vomiting and NT0502, its product candidate for the
treatment of sialorrhea.
Note 2. Summary of significant accounting policies
Basis of Presentation: The consolidated financial statements are presented in accordance with accounting principles
generally accepted in the United States of America ("GAAP"), and with the rules and regulations of the Securities and
Exchange Commission ("SEC").
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its four
wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
Concentration of credit risk: Accounts receivable subjects the Company to concentrations of credit risk. Accounts
receivable were due from fourteen customers in the years ended December 31, 2018 and 2017, respectively. Three customers
accounted for 96% and 94% of the accounts receivable at December 31, 2018 and 2017, respectively.
There were fifteen, fourteen and thirteen customers that accounted for all gross revenue in the years ended December 31,
2018, 2017 and 2016, respectively. Of which, three customers accounted for 93% of the gross revenue for the years ended
December 31, 2018 and 2017, respectively, and two customers accounted for 82% of the gross revenue for the year ended
December 31, 2016.
Segment information: Operating segments are defined as components of an enterprise about which separate discrete
information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The
F-8
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Company views its operations and manages its business in one operating segment, which is the development, manufacturing
and commercialization of pharmaceuticals.
Reclassifications: In 2017, the Company reclassified certain patents from Other assets to Intangible assets, net as
reported on the condensed consolidated balance sheets. There was no impact to the Company's consolidated statements of
operations.
Liquidity: During 2018, 2017 and 2016, the Company produced operating losses and used cash to fund operations.
Management intends to achieve profitability through revenue growth from pharmaceutical products developed with its
extended-release technologies. The Company does not anticipate it will be profitable until after the successful
commercialization of its approved products, Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. In November 2018,
the Company completed an offering of its common stock and restructured its outstanding debt to reduce and possibly delay
the amount of principal payable in cash. Accordingly, management has performed the review required for going concern
accounting and believes the Company presently has sufficient liquidity to continue to operate for the next twelve months after
the filing of this Report on Form 10-K.
Cash equivalents: The Company invests its available cash balances in bank deposits and money market funds. The
Company considers highly liquid investments with original maturities of three months or less at the date of purchase to be
cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured
limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the
depository institutions in which those deposits are held. The Company's primary objectives for investment of available cash
are the preservation of capital and the maintenance of liquidity.
Short-term investments: Short-term investments, if any, consist of debt securities that have original maturities greater
than three months but less than or equal to one year and are classified as available-for-sale securities. Such securities are
carried at estimated fair value, with any unrealized holding gains or losses reported, net of material tax effects reported, as
accumulated other comprehensive income or loss, which is a separate component of stockholders' equity (deficit). Realized
gains and losses, and declines in value judged to be other-than-temporary, if any, are included in other income in the
consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed
to be other-than-temporary results in a reduction in fair value charged to earnings in that period, and a new cost basis for the
security is established. Dividend and interest income are recognized in other income when earned. The cost of securities sold
is calculated using the specific identification method. The Company places all investments with government agencies, or
corporate institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable
securities with maturities greater than one year from the balance sheet date, if any, as non-current assets.
Allowance for doubtful accounts: The allowance for doubtful accounts is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management determines the adequacy of the allowance based on
reviews of individual accounts, historical losses, existing economic conditions and estimates based on management's
judgments in specific matters. Accounts are written off as they are deemed uncollectible based on periodic review of the
accounts. There is no allowance for doubtful accounts at December 31, 2018 or December 31, 2017, as management believes
that all receivables are fully collectible.
F-9
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Inventories: In 2016, inventories were stated at the lower of cost (first in, first out) or market and, effective January 1,
2017, inventory is now required to be measured at the lower of cost (first in, first out) or net realizable value. The change to
stating inventories at the lower of cost or net realizable value in 2017 was adopted prospectively and did not have a
significant effect on the Company's ongoing financial reporting as valuing inventory at the lower of cost or net realizable
value approximated the prior policy of valuing inventory at the lower of cost or market. Inventories have been reduced by an
allowance for excess and obsolete inventories. Cost elements include material, labor and manufacturing overhead. Inventories
consist of raw materials, work in process and finished goods.
Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is
probable, pre-launch inventories are expensed into research and development. Manufacturing costs for the production of
Adzenys XR-ODT incurred after the January 27, 2016 FDA approval date, for the production of Cotempla XR-ODT incurred
after June 30, 2017, following the FDA approval date of June 19, 2017, and for the production of Adzenys ER incurred after
September 30, 2017, following the FDA approval date of September 15, 2017, are being capitalized into inventory.
Property and equipment: Property and equipment is recorded at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets, ranging from three to ten years.
Leasehold improvements are amortized using the straight-line method over the shorter of the respective lease term or the
estimated useful lives of the assets.
Intangible assets: Intangible assets subject to amortization, which principally include proprietary modified-release
drug delivery technology, the costs to acquire the rights to Tussionex Abbreviated New Drug Application and patents, are
recorded at cost and amortized over the estimated lives of the assets, which primarily range from 10 to 20 years. The
Company estimates that the patents it has filed have a future beneficial value. Therefore, costs associated with filing for its
patents are capitalized. Once the patent is approved and commercial revenue realized, the costs associated with the patent are
amortized over the useful life of the patent. If the patent is not approved, the costs will be expensed.
Impairment of long-lived assets: Long-lived assets such as property and equipment and intangibles subject to
amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset group may not be recoverable. Such assets are also evaluated for impairment in light of the Company's continuing
losses. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the
carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. No impairment charges
were recorded for the years ended December 31, 2018, 2017 or 2016.
Derivative liabilities: The Company evaluates its debt and equity issuances to determine if those contracts or
embedded components of those contracts qualify as derivatives requiring separate recognition in the Company's financial
statements. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each
balance sheet date and recorded as a liability and the change in fair value is recorded in other income (expense) in the
consolidated results of operations. In circumstances where there are multiple embedded instruments that are required to be
bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative
F-10
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that
become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument is expected within twelve months of the balance sheet date.
When the Company has determined that the embedded conversion options should not be bifurcated from their host
instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion
options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at
the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized over the term of the related debt to their stated date of redemption and are classified in
interest expense in the consolidated results of operations.
Revenue recognition: Revenue is recognized when a customer obtains control of promised goods or services, in an
amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The
Company makes estimates of the net sales price, including estimates of variable consideration (e.g., savings offers, prompt
payment discounts, product returns, wholesaler fees, wholesaler chargebacks and estimated rebates) to be incurred on the
selling price of the respective product sales, and recognizes the estimated amount as revenue when it transfers control of the
product to its customers (e.g., upon delivery). Variable consideration is determined using either an expected value or a most
likely amount method. The estimate of variable consideration is also subject to a constraint such that some or all of the
estimated amount of variable consideration will only be included in the transaction price to the extent that it is probable that a
significant reversal of revenue (in the context of the contract) will not occur when the uncertainty associated with the variable
consideration is subsequently resolved. Estimating variable consideration and the related constraint will require the use of
significant management judgment and other market data. The Company provides for prompt payment discounts, wholesaler
fees and wholesaler chargebacks based on customer contractual stipulations. The Company analyzes recent product return
history and other market data obtained from its third party logistics providers ("3PLs") to determine a reliable return rate.
Additionally, management analyzes historical savings offers and rebate payments based on patient prescriptions dispensed for
Adzenys XR ODT, Cotempla XR ODT and Adzenys ER and information obtained from third party providers to determine
these respective variable considerations.
The Company sells its generic Tussionex, Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to a limited number
of pharmaceutical wholesalers, all subject to rights of return. Pharmaceutical wholesalers buy drug products directly from
manufacturers. Title to the product passes upon delivery to the wholesalers, when the risks and rewards of ownership are
assumed by the wholesaler (freight on board destination). These wholesalers then resell the product to retail customers such
as food, drug and mass merchandisers.
F-11
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Disaggregation of revenue
The following table disaggregates the Company's net product sales by product:
Adzenys XR-ODT
Cotempla XR-ODT
Adzenys ER
Generic Tussionex
Net product sales
2018
Year Ended December 31,
2017
(in thousands)
2016
$
$
26,631 $
19,014
(27)
4,370
49,988 $
20,377 $
1,590
—
5,165
27,132 $
3,803
—
—
6,230
10,033
Net product sales represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments
for branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER include savings offers, prompt payment discounts,
wholesaler fees, estimated rebates to be incurred on the selling price of the respective product sales and estimated allowances
for product returns.
Gross to net sales adjustments for generic Tussionex include prompt payment discounts, estimated allowances for
product returns, wholesaler fees, estimated government rebates and estimated chargebacks to be incurred on the selling price
of generic Tussionex related to the respective product sales.
The Company recognizes total gross product sales less gross to net sales adjustments as revenue based on shipments
from 3PLs to the Company's wholesaler customers.
Savings offers for branded products
The Company offers savings programs for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to patients covered
under commercial payor plans in which the cost of a prescription to such patients is discounted. The Company records the
amount of redeemed savings offers based on information from third-party providers against the estimated discount recorded
as accrued expenses. The estimated discount is recorded as a gross to net sales adjustments at the time revenue is recognized.
Prompt payment discounts
Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance
against accounts receivable and as a gross to net sales adjustments at the time revenue is recognized.
Wholesale distribution fees
Wholesale distribution fees are based on definitive contractual agreements for the management of the Company's
products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is
recognized.
F-12
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Rebates
The Company's branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are subject to commercial managed
care and government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating
managed care organizations and federal and/or state governments. Calculations related to rebate accruals of branded products
are estimated based on information from third-party providers.
The Company's generic Tussionex product is subject to state government-managed Medicaid programs whereby
discounts and rebates are provided to participating state governments. Generic Tussionex government rebates are estimated
based upon rebate payment data available from sales of the Company's generic Tussionex product over the past three years.
Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is
recognized. Historical trends of estimated rebates will be continually monitored and may result in future adjustments to such
estimates.
Product returns
Wholesalers' contractual return rights are limited to defective product, product that was shipped in error, product ordered
by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or
other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product
starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses
and as a gross to net sales adjustments at the time revenue is recognized.
The Company analyzed recent branded product return history and other market data obtained from the Company's 3PLs
as well as data available from sales of its branded products to determine a reliable return rate for branded Adzenys XR-ODT,
Cotempla XR-ODT and Adzenys ER. Generic Tussionex product returns were estimated based upon return data available
from sales of the Company's generic Tussionex product over the past three years.
Wholesaler chargebacks for generic product
The Company's generic Tussionex products are subject to certain programs with wholesalers whereby pricing on
products is discounted below wholesaler list price to participating entities. These entities purchase products through
wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the
discounted price back to the Company. Estimated chargebacks are recorded as a discount allowance against accounts
receivable and as a gross to net sales adjustments at the time revenue is recognized based on information provided by third
parties.
Due to estimates and assumptions inherent in determining the amount of generic Tussionex returns, rebates and
chargebacks, the actual amount of returns, claims for rebates and chargebacks may be different from the estimates, at which
time reserves would be adjusted accordingly. Wholesale distribution fees and the allowance for prompt pay discounts are
recorded at the time of shipment and such fees and allowances are recorded in the same period that the related revenue is
recognized.
Research and development costs: Research and development costs are charged to operations when incurred and
include salaries and benefits, facilities costs, overhead costs, raw materials, laboratory and
F-13
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
clinical supplies, clinical trial costs, contract services, fees paid to regulatory authorities for review and approval of the
Company's product candidates and other related costs. During the third quarter of 2016, the Company reclassified its
approved product and facility regulatory fees out of research and development expense and into cost of sales commensurate
with the commercial launch of Adzenys XR-ODT. The Company has reclassified all such applicable regulatory fees for prior
quarters and prior years out of research and development expense and into cost of goods sold in accordance with this
approach.
Distribution expenses: Costs invoiced to the Company by its third party logistics firm are classified as cost of goods
sold in the consolidated statements of operations.
Shipping and handling costs: Amounts billed to customers for shipping and handling fees for the delivery of goods are
classified as cost of goods sold in the consolidated statements of operations.
Advertising costs: Advertising costs are comprised of print and electronic media placements that are expensed as
incurred. The Company recognized advertising costs of $0.6 million, $0.4 million and $7.4 million during the years ended
December 31, 2018, 2017 and 2016 respectively.
Share-based compensation: Share-based compensation awards, including grants of employee stock options, restricted
stock, restricted stock units ("RSUs") and modifications to existing stock options, are recognized in the statement of
operations based on their fair values. Compensation expense related to awards to employees is recognized on a straight-line
basis, based on the grant date fair value, over the requisite service period of the award, which is generally the vesting term.
The fair value of the Company's stock-based awards to employees and directors is estimated using the Black-Scholes option
pricing model, which requires the input of subjective assumptions, including (1) the expected stock price volatility, (2) the
expected term of the award, (3) the risk-free interest rate and (4) expected dividends.
For performance-based stock awards, compensation expense is recognized on a straight-line basis, based on the grant
date fair value, over the performance period or through the vesting date, whichever is longer. Management monitors the
probability of achievement of the performance conditions and adjusts stock-based compensation expense, if necessary.
After the closing of the Company's IPO, the Company's board of directors has determined the fair value of each share of
underlying common stock based on the closing price of the Company's common stock as reported by the NASDAQ Global
Market on the date of grant.
Under ASU No. 2017-09 guidance for accounting for share-based payments, the Company has elected to continue
estimating forfeitures at the time of grant and, if necessary, revise the estimate in subsequent periods if actual forfeitures
differ from those estimates. Ultimately, the actual expense recognized over the vesting period will only be for those options
that vest. The adoption of this standard in 2017 did not have a material impact on the Company's business, financial position,
results of operations or liquidity.
Beginning in July 2016, the Company began recording stock compensation expense in the same income statement line as
the cash compensation of the employee with the option in accordance with Staff Accounting Bulletin ("SAB") Topic 14 due
to the increased number and amount of options and option compensation.
F-14
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Paragraph IV litigation costs: Legal costs incurred by the Company in the enforcement of the Company's intellectual
property rights are charged to expense as incurred.
Income taxes: Income taxes are accounted for using the liability method, under which deferred taxes are determined
based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted
tax laws that will be in effect when the differences are expected to reverse.
Management evaluates the Company's tax positions in accordance with guidance on accounting for uncertainty in
income taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more
likely than not that the position will be sustained upon examination. As of December 31, 2018 and 2017, the Company has
unrecognized tax benefits associated with uncertain tax positions in the consolidated financial statements. These uncertain tax
positions were netted against net operating losses (NOL's) with no separate reserve for uncertain tax positions required.
Deferred tax assets should be reduced by a valuation allowance if current evidence indicates that it is considered more
likely than not that these benefits will not be realized. In evaluating the objective evidence that historical results provide, the
Company considered that three years of cumulative operating losses was significant negative evidence outweighing
projections for future taxable income. Therefore, at December 31, 2018 and 2017, the Company determined that it is more
likely than not that the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance
to reduce deferred tax assets to zero. The Company may not ever be able to realize the benefit of some or all of the federal
and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness
of the loss carryforwards.
Recent accounting pronouncements: In August 2018, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding
certain disclosures. The standard is effective for public entities for the fiscal years ending after December 15, 2020, with early
adoption permitted for the removed disclosures and delayed adoption permitted for the new disclosures. The removed and
modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis.
The Company is currently evaluating the impact of adopting ASU 2018-13 on its consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740)—Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118, which was issued to state the income tax accounting implications of the
Tax Cuts and Jobs Act of 2017 (the "TCJA"). The guidance clarifies the measurement period timeframe, changes in
subsequent reporting periods and reporting requirements as a result of the TCJA. The measurement period begins in the
period that includes the TCJA's enactment date, which was December 22, 2017, and as a result the Company has reflected the
impact of this ASU on the deferred tax calculation as of December 31, 2017.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic
220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a
reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the
TCJA, and requires certain disclosures about
F-15
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
stranded tax effects. ASU 2018-02 is effective for entities for fiscal years beginning after December 15, 2018 with early
adoption permitted, and shall be applied either in the period of adoption or retrospectively to each period (or periods) in
which the effect of the change in the corporate income tax rate in the TCJA is recognized. This standard became effective for
the Company standard on January 1, 2019. The adoption of this standard will not have a material impact on the Company's
consolidated results of operations or financial position.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the
vesting conditions, or the classification of the award changes as a result of the modification. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. This standard became
effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company's
consolidated results of operations or financial position.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This ASU was designed to reduce the diversity in practice of how the eight specified
items are presented and classified in the statement of cash flows, including debt prepayment or debt extinguishment costs.
The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those years. This standard became effective for the Company on January 1, 2018. The adoption of this
standard did not have a significant effect on the Company's ongoing financial reporting as the Company had classified its debt
prepayment and debt extinguishment costs in the Condensed Consolidated Statements of Cash Flows in accordance with the
amendments.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (the "New Lease Standard"). Under the new
guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the
commencement date: 1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured
on a discounted basis; and 2) a right-of-use ("ROU") asset, which is an asset that represents the lessee's right to use, or control
the use of, a specified asset for the lease term. In January, July and December 2018, the FASB issued additional amendments
to the new lease guidance relating to, transition, and clarification. The July 2018 amendment, ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements, provides an optional transition method that allows entities to elect to apply the standard
prospectively at its effective date, versus recasting the prior periods presented.
Pursuant to ASU No. 2018-11, the Company will elect to use the effective date approach at transition. Therefore, no
adjustments will be made to amounts in prior period financial statements. Capital leases will be accounted for in substantially
the same manner as capital leases are accounted for under existing GAAP. Operating leases will be accounted for in a manner
similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of
those leases.
The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15,
2018, with early adoption permitted. The Company plans to adopt this standard on the effective date of January 1, 2019.
F-16
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
The Company is substantially complete with its evaluation of the new standard as it relates to its operating lease
disclosed in Note 15 "Commitments and Contingencies". The remaining steps in the implementation process include
finalizing lease liability and right of use asset schedules and the review and evaluation of disclosures and presentation in the
Company's financial statements. In addition, an evaluation of whether there are existing contracts that may contain embedded
leases has been performed and the Company is evaluating the impact of its findings. However, it does not expect that the
identification of any embedded leases will result in a material impact to the consolidated financial statements and disclosures
upon the adoption of this standard. In addition, the Company made an accounting policy election to combine the lease and
non-lease components and the short-term lease practical expedients allowed under ASC 842. The adoption of ASC 842 will
lead to an increase in the assets and liabilities recorded on the balance sheets primarily due to the lease agreement attributable
to leased office space. This New Lease Standard will not have a material impact on the Company's balance sheets,
consolidated statements of comprehensive loss or cash flows from operations. The Company will continue to monitor
additional modifications, clarifications or interpretations undertaken by the FASB that may impact its current conclusions and
will expand its analysis to include any new lease arrangements initiated prior to adoption.
We expect to recognize approximately $3.0 million to $4.8 million of additional assets and corresponding liabilities on
our balance sheet as of the beginning of fiscal 2019 and will record any cumulative effect of adopting the New Lease
Standard as an adjustment to the opening balance of Retained Earnings. We do not expect that any adjustment to Retained
Earnings at adoption will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (the "New
Revenue Standard"). The New Revenue Standard replaces transaction and industry-specific revenue recognition guidance
under current U.S. GAAP with a principles-based approach for determining revenue recognition. The New Revenue Standard
requires an entity to recognize the amount of revenue based on the value of transferred goods or services to customers. There
is also additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers.
The New Revenue Standard became effective for the Company on January 1, 2018. For purposes of providing
comparable periods upon adoption, the Company applied the full retrospective transition method, which required the
Company to restate each prior reporting period presented. The impact of the New Revenue Standard relates to the Company's
accounting for branded net product sales. There are no changes to the net product sales of generic Tussionex revenue since
the Company has estimated product returns since inception of recognizing revenue in August 2014.
As a result, the Company revised its results for branded net product sales revenue which commenced in May 2016 with
the launch of Adzenys XR-ODT for the years ended December 31, 2016 and 2017 and applicable interim periods within those
years, as if the New Revenue Standard had been effective for those periods.
The Company implemented internal controls and key system functionality to enable the preparation of financial
information and reached conclusions on key accounting assessments related to the New Revenue Standard, including
management's assessment that the impact of accounting for costs incurred to obtain a contract is immaterial.
F-17
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Under the New Revenue Standard, 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. Therefore, the Company is required to make estimates of the net sales price, including estimates of variable
consideration (e.g., savings offers, prompt payment discounts, product returns, wholesaler fees and estimated rebates) to be
incurred on the selling price of the respective branded product sales, and recognize the estimated amount as revenue, when it
transfers control of the product to its customers (e.g., upon shipment or delivery). Variable consideration must be determined
using either an expected value or most likely amount method. The estimate of variable consideration is also subject to a
constraint such that some or all of the estimated amount of variable consideration will only be included in the transaction
price to the extent that it is probable that a significant reversal of revenue (in the context of the contract) will not occur when
the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the
related constraint require the use of significant management judgment and other market data. To implement the New Revenue
Standard, the Company analyzed recent branded product return history and other market data obtained from its 3PLs as well
as data available from sales of its branded products to determine a reliable return rate. Additionally, management analyzed
historical savings offers, prompt payment discounts, wholesaler fees and rebates payments based on patient prescriptions
dispensed of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and information obtained from third-party providers to
determine these respective variable considerations. Management has concluded that estimates of the above variable
considerations are reasonably constrained, and estimates can be used for recognizing branded total gross product sales less
gross to net sales adjustments as revenue beginning January 1, 2018. The Company had restated it's Consolidated Financial
Statements for the years ended on December 31, 2017 and 2016 in the 8-K filed with SEC on December 11, 2018 for the
adoption of the New Revenue Standard. Refer to Impacts to Previously Reported Results below for the impact of adoption of
the New Revenue Standard included in the Company's condensed consolidated statements of operations.
Adoption of the New Revenue Standard resulted in the recognition of additional net branded product sales revenue of
$2.1 million and $0.9 million for years ended December 31, 2017 and 2016, respectively, partially offset by associated
increased cost of goods sold of $1.6 million and $0.3 million, respectively. As a result, the net loss reported was reduced by
$0.5 million and $0.6 million reflecting the gross profit from the accelerated revenue and associated cost of goods sold for
years ended December 31, 2017 and 2016, respectively. The net loss per share of common stock, basic and diluted reported
was improved by $0.02 and $0.03 per share for December 31, 2017 and 2016, respectively. The adoption of the New
Revenue Standard reduced the net operating loss carry forward for 2017 and 2016, respectively; however, there was no
impact to the provision for income taxes because the Company's deferred tax asset benefits are fully reserved for
December 31, 2017 and 2016, respectively. In addition, adoption of the New Revenue Standard resulted in a decrease in
reported total current assets by $3.2 million as of December 31, 2017, due to the elimination of deferred cost of goods sold
and wholesaler fees. Reported total current liabilities decreased by $4.3 million as of December 31, 2017, due to the
elimination of deferred revenue partially offset by increases in accrued expenses for contract obligations related to savings
offers, product returns and rebates. See Impacts of New Revenue Standard to Previously Reported Results below for the
impact of adoption of the New Revenue Standard on the Company's consolidated financial statements.
F-18
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of significant accounting policies (Continued)
Impacts of New Revenue Standard to Previously Reported Results
Adoption of the new revenue standard impacted the Company's reported results as follows:
Condensed consolidated statements of operations:
Revenue: net product sales
Cost of goods sold
Gross profit (loss)
Net loss attributable to common stock
Net loss per share of common stock, basic and
diluted
2017
New
Revenue
Standard
Adjustment
As
Reported
Year Ended December, 31
As
Adjusted
As
Reported
(In thousands, except per share data)
2016
New
Revenue
Standard
Adjustment
As
Adjusted
$
25,018 $
12,391
12,627
(66,247)
2,114 $
1,639
475
475
27,132 $
14,030
13,102
(65,772)
9,154 $
11,437
(2,283)
(83,333)
879 $
297
582
582
10,033
11,734
(1,701)
(82,751)
(2.68)
0.02
(2.66)
(5.19)
0.03
(5.16)
Condensed consolidated statements of balance sheet:
Inventories
Other current assets
Total current assets
Accrued expenses
Deferred revenue
Total current liabilities
Accumulated deficit
Total liabilities and stockholder's equity
$
December 31, 2017
New
Revenue
Standard
Adjustment
As
Reported
13,459 $
5,093
82,640
10,570
14,676
37,602
(266,365)
107,353
(1,727) $
(1,518)
(3,245)
10,374
(14,676)
(4,302)
1,057
(3,245)
As
Adjusted
11,732
3,575
79,395
20,944
—
33,300
(265,308)
104,108
Adoption of the New Revenue Standard had no impact to cash from or used in operating, financing, or investing on the
Company's consolidated statements of cash flows.
Note 3. Net loss per share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number
of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included
when their effect is dilutive. Potentially dilutive securities, which include warrants, outstanding stock options under the stock
option plan and shares issuable in future periods, such as RSU awards, have been excluded from the computation of diluted
net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used
to compute basic and diluted shares outstanding due to the Company's net loss position. Restricted stock is considered legally
issued and outstanding on the grant date, while RSUs are not considered legally issued and outstanding until the RSUs vest.
Once the RSUs are vested, equivalent common shares will be issued or issuable to the grantee and therefore the RSUs are not
considered for inclusion in total common shares issued and outstanding until vested.
F-19
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Net loss per share (Continued)
The following potentially dilutive securities outstanding were excluded from consideration in the computation of diluted
net loss per share of common stock for the years ended December 31, 2018, 2017 and 2016, respectively, because including
them would have been anti-dilutive:
Series C Redeemable Convertible Preferred Stock Warrants (as
converted)
Stock options outstanding
RSUs granted, not released
Note 4. Fair value of financial instruments
2018
70,833
3,446,885
75,314
December 31,
2017
70,833
2,454,973
85,000
2016
70,833
2,107,344
—
The Company records financial assets and liabilities at fair value. The carrying amounts of certain financial assets and
liabilities including cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued liabilities
and deferred revenue, approximated their fair value due to their short maturities. The remaining financial instruments were
reported on the Company's consolidated balance sheets at amounts that approximate current fair values based on market
based assumptions and inputs.
As a basis for categorizing inputs, the Company uses a three tier fair value hierarchy, which prioritizes the inputs used to
measure fair value from market based assumptions to entity specific assumptions as follows:
Level 1:
Unadjusted quoted prices for identical assets in an active market.
Level 2:
Level 3:
Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for
substantially the full-term of the asset.
Prices or valuation techniques that require inputs that are both unobservable and significant to the overall
fair value measurement. They reflect management's own assumptions about the assumptions a market
participant would use in pricing the asset.
The following table presents the hierarchy for the Company's financial instruments measured at fair value on a recurring
basis for the indicated dates:
Cash and cash equivalents
Total financial assets
Earnout liability
Derivative liability (see Note 11)
Total financial liabilities
Fair Value as of December 31, 2018
Level 1
Level 2
Level 3
Total
27,419 $
27,419 $
— $
—
— $
(in thousands)
19,059 $
19,059 $
— $
—
— $
— $
— $
37 $
2,017
2,054 $
46,478
46,478
37
2,017
2,054
$
$
$
$
F-20
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Fair value of financial instruments (Continued)
Cash and cash equivalents
Short-term investments
Total financial assets
Earnout liability
Derivative liability (see Note 11)
Total financial liabilities
Fair Value as of December 31, 2017
Level 1
Level 2
Level 3
Total
$
$
$
$
31,969 $
—
31,969 $
— $
—
— $
(in thousands)
— $
18,448
18,448 $
— $
—
— $
— $
—
— $
170 $
1,660
1,830 $
31,969
18,448
50,417
170
1,660
1,830
The Company's Level 1 assets included bank deposits, certificates of deposit and actively traded money market funds
with an original maturity of 90 days or less at December 31, 2018 and 2017. Asset values were considered to approximate fair
value due to their short-term nature.
The Company's Level 2 assets included commercial paper and corporate bonds with maturities of less than one year that
are not actively traded which were classified as available-for-sale securities. The level 2 cash equivalents consist of U.S.
agency bonds and corporate commercial paper that mature in less than 90 days which are valued using quoted prices and
other data values. The estimated fair values of these securities were determined by third parties using valuation techniques
that incorporate standard observable inputs and assumptions such as quoted prices for similar assets, benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.
The Company's cash and cash equivalents and short-term investments had quoted prices at December 31, 2018 and 2017
as shown below:
Bank deposits and money market funds
Financial and corporate debt securities
Bank deposits and money market funds
Financial and corporate debt securities
Amortized Cost
December 31, 2018
Unrealized Loss
(in thousands)
Market Value
$
$
27,419 $
19,059
46,478 $
— $
—
— $
27,419
19,059
46,478
Amortized
Cost
December 31, 2017
Unrealized
Loss
(in thousands)
Market
Value
$
$
31,969 $
18,454
50,423 $
— $
(6)
(6) $
31,969
18,448
50,417
The Company's Level 3 liability included the fair value of the earnout liability and the fair value of the Deerfield Private
Design Fund III, L.P. and Deerfield Special Situations Fund, L.P. derivative liability at December 31, 2018 and 2017.
F-21
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Fair value of financial instruments (Continued)
The fair value of the earnout liability was determined after taking into consideration valuations using the Monte Carlo
method based on assumptions at December 31, 2017 and revised at December 31, 2018. These revisions were primarily due
to an updated revenue forecast for the Company's generic Tussionex and the use of a directly-calculated revenue volatility of
42% based on data for potential comparable publicly-traded companies in the generic drug manufacturing space including the
Company, whereas previously an unlevered equity volatility of 50% had been selected. Significant changes to these
assumptions would result in increases/decreases to the fair value of the earnout liability. The methodologies and significant
inputs used in the determination of the fair value of the earnout liability were as follows:
Date of Valuation
Valuation Method
Volatility (annual)
Risk-free rate (annual)
Time period from valuation until end of earnout
Earnout Target 1 (thousands)
Earnout Target 2 (thousands)
Discount rate
Fair value of liability at valuation date (thousands)
December 31, 2018
Earnout Liability
12/31/2018
Monte Carlo
42%
2.53% - 3.29%
.5 - 9.5
$13,700
$18,200
21.35% - 21.68%
$37
December 31, 2017
Earnout Liability
12/31/2017
Monte Carlo
42%
1.62% - 2.88%
.5 - 9.5
$13,700
$18,200
14.72% - 15.98%
$170
The fair value of the derivative liability was determined after taking into consideration valuations using the Monte Carlo
method based on assumptions at December 31, 2018 and 2017. There were no significant changes in the pricing assumptions
during the year ended December 31, 2018. The methodologies and significant inputs used in the determination of the fair
value of the debt derivative liability were as follows:
Date of Valuation
Valuation Method
Volatility (annual)
Time period from valuation until maturity of debt (yrs.)
Cumulative probability of a change in control prepayment implied by model
Cumulative probability of other accelerated prepayments implied by model
Discount rate
Fair value of liability at valuation date (thousands)
12/31/2018
Monte Carlo
N/A
3.4
25.1%
13.7%
23.12%
$2,017
12/31/2017
Monte Carlo
N/A
4.4
27%
17%
16.20%
$1,660
Derivative Liability
Significant changes to these assumptions in the preceding valuation tables would result in increases/decreases to the fair
value of the earnout liability and derivative liability.
F-22
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Fair value of financial instruments (Continued)
Changes in Level 3 liabilities measured at fair value for the periods indicated were as follows:
Balance at December 31, 2016
Addition of Deerfield derivative liability
Change in fair value
Balance at December 31, 2017
Change in fair value
Balance at December 31, 2018
Note 5. Inventories
Inventories at the indicated dates consist of the following:
Raw materials
Work in progress
Finished goods
Inventory at cost
Inventory reserve
Note 6. Property and equipment
Property and equipment, net at the indicated dates consists of the following:
Assets under capital lease
Leasehold improvements
Manufacturing, packaging and lab equipment
Office furniture and equipment
Assets under construction
Level 3
Liabilities
(in thousands)
232
2,107
(509)
1,830
224
2,054
$
$
$
$
$
December 31,
2018
2017
(in thousands)
3,845 $
2,704
4,259
10,808
(441)
10,367 $
3,476
6,155
2,470
12,101
(369)
11,732
December 31,
2018
2017
(in thousands)
3,327 $
4,340
6,821
2,164
188
16,840
3,222
4,195
5,300
1,656
1,056
15,429
Accumulated depreciation and amortization (including $633 and $157 at
December 31, 2018 and 2017, respectively, applicable to capital leases)
(8,926)
7,914 $
(7,226)
8,203
$
F-23
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Property and equipment (Continued)
Depreciation and amortization expense related to property and equipment was $1,750,000, $1,363,000 and $1,598,000
for the years ended December 31, 2018, 2017 and 2016, respectively. Depreciation and amortization expense is recorded in
cost of goods sold, research and development, or general and administrative expenses in the accompanying consolidated
statements of operations. As noted in Note 7, the Company sold and leased back a substantial portion of its operating assets in
a series of capital lease transactions.
On October 20, 2016, the Company utilized a third party auctioneer to conduct an auction of certain fully-depreciated
equipment assets, resulting in net proceeds of approximately $415,000 which were paid during the fourth quarter of 2016 and
were recorded as a gain on sale and included in other income (loss) in the Company's consolidated statement of operations.
Note 7. Sale-leaseback transaction
The Company accounts for the sale and leaseback transactions discussed below as capital leases under the provisions of
Accounting Standards Codification Topic 840-40, Leases—Sale Leaseback Transactions. Accordingly, the leased assets are
recorded in property and equipment and the capitalized lease obligations are included in long-term liabilities at the present
value of the future lease payments in accordance with the terms of the lease (see Note 12). Lease payments are applied using
the effective interest rate inherent in the leases. Depreciation of the property and equipment is included within depreciation
and amortization in the consolidated statements of operations and consolidated statements of cash flows.
In 2012, the Company negotiated financing arrangements with Essex Capital Corporation ("Essex") which provided for
the sale-leaseback of up to $6.5 million of the Company's property and equipment with a bargain purchase option at the end
of the respective lease. These financing arrangements were executed in five separate tranches that occurred in February, July
and November 2013, and March 2014. The two February leases and the July lease had been fully satisfied before 2017. The
November 2013 leases for a total of $1.0 million of assets expired in April 2017 and the related $161,000 gain was fully
amortized at that time and the $100,000 lease buy-out option liability was fully satisfied. The March 2014 lease for $795,000
of assets expired in September 2017 and the related $116,000 gain was fully amortized at that time and the lease buy-out
option liability of $79,000 was fully satisfied.
In February 2017, the Company entered into an agreement with Essex for the sale-leaseback of newly acquired assets of
up to $5.0 million to finance its capital expenditures. Each lease under this master agreement is for an initial term of
36 months and has an option to purchase the equipment at the end of the respective lease that management considers to be a
bargain purchase option. Under this agreement, the Company entered into leases and sold assets with a total capitalized cost
of $481,000 and $2,742,000 at effective interest rates of 14.3% and 14.9% on February 13, 2017 and June 30, 2017,
respectively. The February sale resulted in net gains of $14,000 which has been deferred and is being amortized over the
36-month term of the lease. There was no gain or loss on the June 2017 sale.
For the years ended December 31, 2018, 2017 and 2016, approximately $5,000, $44,000 and $507,000, respectively, of
the net gain on sale-leasebacks was recognized in other income on the condensed consolidated statements of operations.
F-24
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Intangible assets
Major components of intangible assets, net at the indicated dates consist of the following:
Proprietary modified-release drug delivery technology
Tussionex ANDA
CPI profit sharing
Patents
Other
Accumulated amortization
December 31,
2018
2017
(in thousands)
15,600 $
4,829
2,043
2,307
1,035
25,814
(11,198)
14,616 $
15,600
4,829
2,043
2,302
1,035
25,809
(9,461)
16,348
$
$
As part of the June 15, 2009 reorganization of the Company as Neos Therapeutics, Inc., the Company performed a
purchase price allocation analysis. The proprietary modified-release drug delivery technology was valued at $15.6 million
based on projected cash flows expected to be generated from this technology. The $15.6 million is being amortized over
20 years.
On August 28, 2014, the Company completed an acquisition of the rights to Tussionex ANDA from Cornerstone and
Coating Place, Inc. ("CPI") which was accounted for as an asset acquisition. Prior to the acquisition, the Company,
Cornerstone and CPI shared profits generated by the sale and manufacture of the product under a development and
manufacturing agreement, and Cornerstone had commercialization rights to the product. The Company paid $4.2 million to
Cornerstone to buy out their rights to commercialize and derive future profits from the product and entered into an agreement
whereby Cornerstone transferred certain assets associated with the product to the Company. Legal fees of $90,000 associated
with this buyout agreement have been capitalized as part of the purchase price. Additional estimated earnout costs due to
Cornerstone of $589,000, recorded at fair value by the Company based upon a valuation provided by a third-party valuation
firm, were capitalized as part of the purchase price of this intangible asset. This earnout amount was revalued at
December 31, 2018, 2017 and 2016, resulting in a $133,000 decrease, a $62,000 decrease and an $18,000 increase in the
estimated fair value of the earnout, respectively, which is recorded in other income (expense), net in the Company's
consolidated statements of operations. In addition, the Company paid $2.0 million to CPI to buy out their rights to future
profits from the collaboration and entered into an agreement whereby CPI will continue to supply a component of the
product. Legal fees of $43,000 associated with this buyout agreement have been capitalized as part of the purchase price of
this intangible asset. These two intangible assets have an expected life of ten years and are being amortized on a straight-line
basis beginning September 2014.
Patents utilized in the manufacturing of the Company's generic Tussionex product which total $352,000 are being
amortized over their expected useful life of 10 years. Patents utilized in the manufacturing of Adzenys XR-ODT which total
$599,000 are being amortized over their expected useful life, including $535,000 being amortized for approximately 16 years
beginning with the approval of Adzenys XR-ODT on January 27, 2016 and $64,000 being amortized for approximately
15 years beginning in December 2017. Patents utilized in the manufacturing of Cotempla XR-ODT which total $83,000 are
being amortized over their expected useful life of approximately 15 years, beginning with
F-25
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Intangible assets (Continued)
the approval of Cotempla XR-ODT on June 19, 2017. Patents utilized in the manufacturing of Adzenys ER which total
$451,000 are being amortized over their expected useful life of approximately 15 years, beginning with the approval of
Adzenys ER on September 15, 2017.
Total amortization expense for intangible assets was $1,737,000, $1,660,000 and 1,662,000 for each of the years ended
December 31, 2018, 2017 and 2016.
Aggregate amortization of intangible assets for each of the next five years and thereafter is as follows:
Year ending
2019
2020
2021
2022
2023
Thereafter
Note 9. Income taxes
December 31,
(in thousands)
1,737
1,737
1,737
1,737
1,642
5,205
13,795
$
$
The Company applies FASB ASC topic 740, "Income Taxes" or ASC 740 which addresses the determination of whether
tax benefits claimed, or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC
740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition,
classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The Company is generally subject to tax examination for a period of three years after tax returns are filed. Therefore, the
statute of limitations remains open for tax years 2015 and forward. However, when a company has net operating loss
carryovers, those tax years remain open until three years after the net operating losses are utilized. Therefore, the tax years
remain open back to 2004.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017. The
legislation significantly changes U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a
maximum of 35% to a flat 21% rate, effective January 1, 2018.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases
of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S.
corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act of 2017, the Company revalued its ending net
deferred tax assets
F-26
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Income taxes (Continued)
at December 31, 2017 and recognized a reduction of $20.6 million in deferred tax assets with a corresponding reduction in the
valuation allowance.
The significant components of deferred income tax assets and liabilities consist of the following:
Deferred Tax Assets:
Net operating loss
Share-based compensation
R&D tax credit
Other reserves
Capital lease liability
State deferreds
Inventory
Accrued rebates
Other current assets
Other
Total deferred tax assets
Deferred Tax Liabilities:
Intangible assets
Property and equipment
Total deferred tax liabilities
Valuation allowance
Net deferred tax asset (liability)
December 31,
2018
2017
(in thousands)
$
37,818 $
1,757
2,378
1,616
390
1,236
103
4,902
—
2,456
52,656
(1,571)
(999)
(2,570)
(50,086)
$
— $
32,193
1,340
1,696
1,069
563
397
829
561
319
2,597
41,564
(1,846)
(747)
(2,593)
(38,971)
—
At December 31, 2018, the Company has gross federal net operating loss carry-forwards of $275,628,000 and research
and development credits of $2,493,000, which begin to expire in 2024. The Company has tax effected state net operating loss
carry-forwards of $3,166,000 and $3,136,000 at December 31, 2018 and 2017, respectively. Utilization of the net operating
loss carry-forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The Company has performed an
analysis to determine the impact of any ownership change(s) under Section 382 of the Internal Revenue Code. Due to an
ownership change in 2017, the amount of federal net operating loss that will expire unused due to the Section 382 limitation
is $98,009,000. The amount of federal research and development credit that will expire unused is $350,000. The deferred tax
assets and related valuation allowances for both carryforwards have been reduced accordingly. It has been determined that the
Company did not undergo an ownership change in 2018 and therefore there was no further impact to the ability of the
Company to utilize the carryforward of the federal net operating loss or the federal research and development tax credit
beyond those limits previously established by prior ownership changes.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company
has no accrued interest related to its uncertain tax positions as they all relate to
F-27
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Income taxes (Continued)
timing differences that would adjust the Company's net operating loss carryforward and do not require recognition. As a
result of these timing differences, at December 31, 2018 and December 31, 2017, the Company had gross unrecognized tax
benefits related to uncertain tax positions of $3,956,000 and $7,261,000, respectively. The Company has no other tax
positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within
12 months of the reporting date. Changes in unrecognized benefits in any given year are recorded as a component of deferred
tax expense. A tabular rollforward of the Company's gross unrecognized tax benefits is below:
Beginning Balance
Decrease based on tax positions taken during a current period
Ending Balance
December 31,
2018
2017
(in thousands)
7,261 $
(3,305)
3,956 $
5,081
2,180
7,261
$
$
The Company has recorded a valuation allowance of $50,086,000 at December 31, 2018 and $38,971,000 at
December 31, 2017 to fully reserve its net deferred tax assets. The Company has assessed the likelihood that the deferred tax
assets will be realized and determined that it is more likely than not that all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment. Due to the uncertainty of
realizing the deferred tax asset, the Company has placed a valuation allowance against the entire deferred tax asset. The
Company may not ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to
ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards. The change in the
valuation allowance was a increase of 11,118,000 and an decrease of $29,037,000 for the years ended December 31, 2018 and
December 2017, respectively. As a result of the TCJA reduction in the U.S. corporate income tax rate, the Company reduced
its deferred tax assets in 2017 by $20,547,000 with a corresponding reduction in the valuation allowance.
A reconciliation of the Company's Federal statutory tax rate of 21% to the Company's effective income tax rate is as
follows:
U.S. Statutory Tax Rate
Change in Valuation Allowance
Deferred Tax Adjustments
Federal Rate Change
State tax expense, net
Provision to Return and Other Adjustments
Tax Expense / (Benefit)
F-28
Year Ended
December 31,
2018
2017
21 %
(21.5)%
0 %
0 %
1.8 %
(1.3)%
0 %
34%
44%
(47)%
(31)%
2%
(2)%
0%
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Accrued expenses
Accrued expenses as of December 31, 2018 and 2017 consist of the following:
Accrued savings offers
Accrued rebates
Accrued customer returns
Accrued payroll and benefits
Accrued wholesaler fees
Other accrued expenses
Total accrued expenses
Note 11. Long-term debt
December 31,
2018
December 31,
2017
(in thousands)
$
$
11,289 $
7,762
5,157
4,555
4,249
2,806
35,818 $
7,168
4,008
2,711
2,534
2,345
2,178
20,944
Long-term debt at the indicated dates consists of the following:
Deerfield senior secured credit facility, net of discount of $3,334 and $2,843,
respectively
Capital leases, maturing through November 2022
Less current portion
Long-term debt
December 31,
2018
2017
(in thousands)
$
$
49,916 $
1,858
51,774
(8,557)
43,217 $
57,156
2,678
59,834
(896)
58,938
Senior secured credit facility: On May 11, 2016, the Company entered into a $60.0 million senior secured credit
facility (the "Facility") with Deerfield Private Design Fund III, L.P. (662/3% of Facility) and Deerfield Special Situations
Fund, L.P. (331/3% of Facility) (collectively, "Deerfield"), as lenders. In February 2017, the Company closed an underwritten
public offering of 5,750,000 shares of its common stock at a public offering price of $5.00 per share (see Note 12). Deerfield,
the Company's senior lender, participated in the purchase of the Company's common shares as part of this public offering, and
as a result, was classified as a related party at the time of the corresponding transactions.
Approximately $33 million of the $60.0 million Facility proceeds was used to prepay the existing $24.3 million principal
and $0.1 million of accrued interest related to the senior Loan and Security Agreement (the "LSA") with Hercules
Technology III, L.P., ("Hercules"), the $1.1 million LSA end of term fee, a LSA prepayment charge of $243,000 and the
$5.9 million of principal and $1.3 million of interest on the 10% amended and restated subordinated note (the "Note") that
was issued by the Company to Essex, which were otherwise payable in 2016 and 2017. Principal on the Facility was due in
three equal annual installments beginning in May 2019 and continuing through May 2021, with a final payment of principal,
interest and all other obligations under the Facility due May 11, 2022. Interest is due quarterly beginning in June 2016, at a
rate of 12.95% per year. The Company had an option, which it exercised, to defer payment of each of the first four interest
payments, adding such amounts to the
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Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Long-term debt (Continued)
outstanding loan principal. The aggregate $6.6 million in deferred interest payments (the "Accrued Interest") was due and
payable on June 1, 2017. Borrowings under the Facility are collateralized by substantially all of the Company's assets, except
the assets under capital lease. The terms of the Facility require the Company to maintain cash on deposit of not less than
$5.0 million.
On June 1, 2017 (the "Amendment Date"), the Company and Deerfield entered into a First Amendment (the
"Amendment") to the Facility which extended the date to repay the Accrued Interest under the Facility to June 1, 2018 (the
"PIK Maturity Date"), which could have been extended to June 1, 2019 at the election of the Company if certain conditions
had been met as specified in the Amendment. However, as described below, the accrued interest amount was converted into
shares of common stock.
The right to payment of the Accrued Interest was memorialized in the form of senior secured convertible notes (the
"Convertible Notes") issued to Deerfield on the Amendment Date. Interest was due quarterly at a rate of 12.95% per year.
The principal amount of the Convertible Notes issued under the Amendment and all accrued and unpaid interest thereon was
to become due and payable upon written notice from Deerfield, and if either (a) the Company did not meet certain quarterly
sales milestones specified in the Amendment or (b) the Company had not received and publicly announced FDA approval of
the new drug applications on or before the applicable Prescription Drug User Fee Act (the "PDUFA") goal date as set forth on
the schedules to Amendment. Per the Amendment, the Company will prepay all of the outstanding obligations under the
Facility and the Convertible Notes upon the occurrence of a change in control or a sale of substantially all of the Company's
assets and liabilities. The Amendment increased the staggered prepayment fees for prepayments due upon a change of control
or any other prepayment made or required to be made by the Company by 300 basis points from June 1, 2017 through the
period ending prior to May 11, 2020 for the change in control prepayment fees and through the period ending prior to
May 11, 2022 for any other prepayments, respectively (the "Prepayment Premiums"). Such Prepayment Premiums, as
amended, range from 12.75% to 2%.
The $6.6 million of Convertible Notes was convertible into shares of the Company's common stock at the noteholder's
option at any time up to the close of business on the date that is five days prior to the PIK Maturity Date. The per share
conversion price was the greater of (a) 95% of the average of the volume weighted average prices per share of the Company's
common stock on the NASDAQ Global Market for the three trading day period immediately preceding such conversion, and
(b) $7.00. Deerfield cannot own more than 9.985% of the Company's outstanding shares at any one time, and the aggregate
conversion cannot exceed 19.9% of the Company's outstanding common stock as of June 1, 2017.
On October 26, 2017, Deerfield provided a conversion notice electing to convert the entire $6.6 million of Convertible
Notes into shares of the Company's common stock at a conversion price of $7.08 per share. The conversion price was based
on 95% of the average of the volume weighted average prices per share of the Company's common stock on the NASDAQ
Global Market for the three trading day period immediately preceding such conversion. This resulted in issuing 929,967
shares of the Company's common stock to Deerfield on this date and the Convertible Notes were cancelled.
In conjunction with the Amendment to the Facility and the related issuance of the Convertible Notes, the Company
entered into a Registration Rights Agreement (the "Registration Agreement") which required the Company to file a
registration statement with the SEC to register the shares of
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Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Long-term debt (Continued)
common stock issued or issuable upon conversion of the Convertible Notes (the "Conversion Shares") (subject to certain
adjustment for stock split, dividend or other distribution, recapitalization or similar events, the "Registrable Securities")
within 30 days from June 1, 2017, which was to become effective per the SEC no later than 75 days thereafter. The Company
filed a registration statement on Form S-3 to comply with the Registration Agreement on June 30, 2017, which became
effective on July 11, 2017. This filing covered 940,924 shares, which is the number of shares that would be issued at the floor
conversion rate of $7.00 per share. The Company is also required to, among other things, maintain the effectiveness of such
registration statement, continue to file the required SEC filings on a timely basis, use its best efforts to ensure that the
registered securities are listed on each securities exchange on which securities of the same class or series as issued by the
Company are then listed and comply with any Financial Industry Regulatory Authority ("FINRA") requests. The Company's
obligations with respect to each registration end at the date which is the earlier of (a) when all of the Registrable Securities
covered by such registration have been sold or (b) when Deerfield or any of its transferees or assignees under the Registration
Agreement cease to hold any Registrable Securities. For each registration, the Company shall bear all reasonable expenses,
other than underwriting discounts and commissions, and shall reimburse Deerfield or any assignee or transferee for up to
$25,000 in legal fees. The Company had satisfied all of its obligations under this Registration Agreement and did not pay any
damages pursuant to this agreement; therefore, no liability had been recorded (see Note 15), and as of September 30, 2018,
Deerfield or any of its transferees or assignees under the Registration Agreement reported that it had ceased to hold any
Registrable Securities.
The Company has accounted for the Amendment as a debt modification as the instruments were not substantially
different; therefore, the remaining debt discount on the original Facility is being amortized using the effective interest method
over the remaining term of the modified debt. The Company evaluated the Amendment together with the Convertible Notes
to determine if those contracts or embedded components of those contracts qualified as derivatives requiring separate
recognition. This evaluation identified a derivative liability of $2.1 million for the fair value of the change in control and
other accelerated payment features as the prepayment fees resulted in premiums that were greater than 10%. As of
December 31, 2018, the fair value of the derivative is $2.0 million (see Note 4). As the change in control and other
accelerated payments terms, including the prepayment fees, were applied to the entire debt per the terms of the amended
Facility, the corresponding debt discount will be amortized using the effective interest method over the remaining term of the
Facility. The fees paid to or on behalf of the creditor for the debt modification totaled $40,000 and were recorded as
additional debt discount on the amended Facility to be amortized to interest expense using the effective interest method over
the term of the Facility. The Company's evaluation also determined that the embedded conversion options should not be
bifurcated as derivatives from the Convertible Notes host instruments. Therefore, the Company recorded a $0.6 million
discount to the convertible notes for the intrinsic value of the embedded conversion option based upon the difference between
the fair value of the underlying common stock on June 1, 2017 and the effective conversion price embedded in the
Convertible Notes, which will be amortized using the effective interest method to interest expense over the one-year term of
the Convertible Notes. The Company recorded a $0.6 million corresponding credit to a beneficial conversion feature
classified as additional paid in capital on June 1, 2017 in stockholders' (deficit) equity in the Company's financial statements.
In connection with the Facility, the Company paid a $1,350,000 yield enhancement fee to Deerfield, approximately
$173,000 of legal costs to the Company's attorneys and $58,000 of legal costs
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Long-term debt (Continued)
on behalf of Deerfield's attorneys, all of which were recorded as debt discount and amortized over the six-year term of the
Facility, using the effective interest method.
On November 5, 2018, the Company and Deerfield entered into an amendment (the "Second Amendment") to the
Facility pursuant to which the Company agreed to pay $7.5 million of principal under the Facility otherwise due in May 2019
upon completion of an underwritten public offering of the Company's shares of its common stock for gross proceeds of at
least $30.0 million, plus additional shares of the Company's shares of its common stock for additional gross proceeds of at
least $4.5 million (the "November Offering"). The remaining $52.5 million of principal under the Facility is due as follows:
$7.5 million on May 11, 2019, $15.0 million on May 11, 2020 (the "2020 Principal Payment"), $15.0 million on May 11,
2021 and $15.0 million on May 11, 2022; provided, that the 2020 Principal Payment due date shall be extended to May 11,
2021 or May 11, 2022 subject to certain achievement of net sales. If all or any of the principal are prepaid or required to be
prepaid under the Second Agreement prior to December 31, 2021, then the Company shall pay, in addition to such
prepayment and accrued interest thereon, a prepayment premium equal to 6.25% of the amount of principal prepaid.
Additionally, the Company shall pay all interest which, absent such prepayment, would have accrued on the principal prepaid
through May 11, 2020 in connection with a prepayment due to a Change of Control of the Company or through December 31,
2020 in connection with any other prepayment, whether voluntary or in an Event of Default. If such prepayment occurs after
December 31, 2021 then no prepayment premium is due. In addition, upon the payment in full of the Obligations (whether
voluntarily, in the connection with a Change of Control or an Event of Default and whether before, at the time of or after the
Maturity Date, the Company shall pay to Deerfield a non-refundable exit fee in the amount of $750,239, which shall be due
and payable in cash.
Pursuant to the Second Amendment, upon the effectiveness thereof, the Company amended and restated its outstanding
notes under the Second Agreement in the form of senior secured convertible notes (the "A&R Notes"). Under the terms of the
Second Amendment and the A&R Notes, beginning on or about May 11, 2019, the Company will have the right to pay
principal and future interest in shares of Common Stock not to exceed 2,135,625 shares in the aggregate. The payment share
price will be 93% of the lesser of (A) the Last Bid Price prior to the payment date and (B) the arithmetic average of the
volume weighted average price on each of the ten consecutive trading days immediately preceding the payment date.
Principal may not be satisfied at a price less than $3.00 per share, and the Company may not issue to Deerfield a number of
shares upon any such payment to the extent that, upon such issuance, the number of shares beneficially owned by Deerfield
and its affiliates would exceed 4.985% of the total number of shares of the Company's common stock then issued and
outstanding (the "4.985% Cap"). Additionally, Deerfield has the right to convert the remaining principal into shares of
Common Stock not to exceed 3,796,668 shares in the aggregate (collectively, the "Conversion Shares"); provided, that the
Lenders may only convert up to 50% of the remaining principal on or before November 5, 2019. Deerfield's per share
conversion price will be 95% reducing to a maximum 83% by one full percentage point for each full or partial calendar
month between the date of the applicable conversion and the date on which such principal payment would otherwise be due,
of the greater of (A) the average of the volume weighted average prices per share of the Common Stock on the NASDAQ
Global Market for the three trading day period immediately preceding such conversion, and (B) $10.00 (subject to adjustment
for Stock Events e.g. stock dividend, stock split etc.). Deerfield may not acquire a number of shares upon any such
conversion to the extent that, upon such
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Long-term debt (Continued)
conversion, the number of shares beneficially owned by Deerfield and its affiliates would exceed the 4.985% Cap.
In conjunction with the Second Amendment to the Facility and the related issuance of the A&R Notes, the Company
entered into a Registration Rights Agreement (the "Second Registration Agreement") which required the Company to file a
registration statement with the SEC to register the shares of common stock issued or issuable upon conversion of the A&R
Notes within 30 days from November 5, 2018, which was to become effective per the SEC no later than 75 days thereafter.
The filing deadline was subsequently extended to December 21, 2018. The Company filed a registration statement on
Form S-3 to comply with the Second Registration Agreement on December 11, 2018, which became effective on
December 20, 2018. This filing covered 3,796,668 shares, which is the maximum number of shares that may be converted.
The Company is also required to, among other things, maintain the effectiveness of such registration statement, continue to
file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each
securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with
any FINRA requests. The Company's obligations with respect to each registration end at the date which is the earlier of
(a) when all of the Registrable Securities covered by such registration have been sold or (b) when Deerfield or any of its
transferees or assignees under the Second Registration Agreement cease to hold any Registrable Securities. For each
registration, the Company shall bear all reasonable expenses, other than underwriting discounts and commissions, and shall
reimburse Deerfield or any assignee or transferee for up to $25,000 in legal fees. The Company had satisfied all of its
obligations under the Second Registration Agreement and did not pay any damages pursuant to this agreement; therefore, no
liability had been recorded (see Note 15).
Pursuant to the A&R Notes, if the Company fails to provide the number of Conversion Shares, then the Company would
have to pay damages to Deerfield or subsequent holder or any designee for each day after the third business day after receipt
of notice of conversion that such conversion is not timely effected. The Facility also contains certain customary nonfinancial
covenants, including limitations on the Company's ability to transfer assets, engage in a change of control, merge or acquire
with or into another entity, incur additional indebtedness and distribute assets to shareholders. Upon an event of default, the
lenders may declare all outstanding obligations accrued under the Facility to be immediately due and payable, and exercise its
security interests and other rights. As of December 31, 2018, the Company was in compliance with the covenants under the
Facility.
Debt discount amortization for the Facility, including the Amendment after June 1, 2017, was calculated using the
effective interest rates of 15.03% on the original facility debt and 25.35% on the Convertible Notes and after the Second
Amendment on November 5, 2018, using the effective interest rate of 16.69%, charged to interest expense and totaled
$961,000 and $1,316,000 for the years ended December 31, 2018 and 2017, respectively.
Senior debt: In March 2014, the Company entered into the LSA, which was subsequently amended in August 2014,
September 2014, December 2014 and June 2015. As amended, the LSA provided a total commitment of $25.0 million,
available in four draws. Borrowings under the LSA were collateralized by substantially all of the Company's assets, except
the Company's intellectual property and assets under capital lease. The first draw of $10.0 million, ("Tranche 1"), was issued
during March 2014 and was used in its entirety to repay outstanding principal under a previous credit facility. The second
draw of $5.0 million, ("Tranche 2"), was issued during September 2014. The third draw
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Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Long-term debt (Continued)
("Tranche 3") in the amount of $5.0 million was issued in March 2015, and the fourth and final draw ("Tranche 4") in the
amount of $5.0 million was issued in June 2015.
Each draw was to be repaid in monthly installments, comprised of interest-only monthly payments until May 2016,
when installments of interest and principal calculated over a thirty-month amortization period commenced. A balloon
payment of the entire principal balance outstanding on October 1, 2017 and all accrued but unpaid interest thereunder was
due and payable on October 1, 2017. The interest rate was 9% per annum for Tranche 1 and Tranche 4 and 10.5% per annum
for Tranche 2 and Tranche 3. An end of term charge of $1.1 million was payable at the earliest to occur of (1) October 1,
2017, (2) the date the Company prepaid its outstanding Secured Obligations, as defined therein, or (3) the date the Secured
Obligations became due and payable. As such, the end of term charge of $1.1 million was paid on May 11, 2016 when the
Company prepaid its outstanding Secured Obligations, as defined therein.
In connection with the LSA, the Company issued the Hercules Warrants which consisted of 60,000 Series C warrants in
March 2014 and 110,000 Series C warrants in September 2014 at the then current price of $5.00 per share. The Hercules
Warrants became warrants with a term of five years for the purchase of 70,833 shares of common stock at a price of $12.00
per share upon the closing of the Company's IPO and were therefore reclassified from warrant liability to Additional Paid in
Capital within Stockholders' Equity at July 22, 2015.
LSA end of term charge amortization totaled $121,000 for the year ended December 31, 2016. LSA debt discount
amortization charged to interest expense totaled $104,000 for the year ended December 30, 2016.
The early prepayment of the LSA with some of the proceeds from the Facility resulted in a $1,187,000 loss on debt
extinguishment which is separately shown in the consolidated statement of operations for the year ended December 31, 2016.
10% subordinated note: The Company had a Note in the aggregate principal amount of $5.9 million that was issued by
the Company to Essex which was to mature in March 2017. Interest was to be accrued and added to the principal balance
until such time as the Company achieved positive EBITDA for three consecutive months. During the year ended
December 31, 2016, interest expense of $263,000 was accrued. On May 11, 2016, the Company prepaid the $5.9 million
outstanding aggregate principal and $1.3 million in accrued and unpaid interest.
Capital lease obligations: Capital lease obligations consist of sale-leaseback and equipment leases, both of which
include options to purchase. As described in Notes 7 and 17, during the years ended December 31, 2017, 2014 and 2013, the
Company entered into agreements with Essex for the sale-leaseback of existing and newly acquired assets with a total
capitalized cost of $3.2 million, $795,000 and $5.5 million, respectively, which are classified as capital leases. The
approximate imputed interest rate on these leases is 14.9%, 14.5% and 14.5%, respectively. Total interest expense on all
capital leases was $341,000, $263,000 and 204,000 for the years ended December 31, 2018, 2017 and 2016 respectively.
Future capital lease obligations were included in the long-term liabilities on the ompany's condensed consolidated balance
sheets.
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Long-term debt (Continued)
Future minimum capital lease payments through the years ending December 31, 2022 are as follows:
Year ending:
2019
2020
2021
2022
Total minimum lease payments
Less amount representing interest
Future minimum lease payments
Future principal payments of long-term debt, including capital leases, are as follows:
Year ending:
2019
2020
2021
2022
Future principal payments
Less unamortized debt discount
Less current portion of long-term debt
Total long-term debt
Note 12. Common stock
December 31,
(in thousands)
1,257
798
21
20
2,096
(238)
1,858
December 31,
(in thousands)
8,557
15,761
15,020
15,770
55,108
(3,334)
(8,557)
43,217
$
$
$
$
$
$
On July 28, 2015, the Company closed its initial public offering ("IPO") whereby the Company sold 5,520,000 shares of
common stock, at a public offering price of $15.00 per share, which includes 720,000 shares of common stock resulting from
the underwriters' exercise of their over-allotment option at the IPO price on July 23, 2015. Proceeds from the Company's IPO,
net of underwriting discounts and commissions and other offering costs, were $75.0 million.
In connection with the IPO, the Company's Board of Directors approved a 1-for-2.4 reverse stock split of the Company's
common stock which also resulted in a proportional adjustment to the conversion ratios of the preferred stock and the
preferred stock warrants. All references to common stock and per share amounts in these condensed financial statements and
accompanying footnotes have been retroactively adjusted for all periods presented to give effect to this reverse stock split.
In February 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a
public offering price of $5.00 per share, which included 750,000 shares of its common stock resulting from the underwriters'
exercise of their over-allotment option on February 17, 2017. Deerfield, the Company's senior lender, participated in the
purchase of the Company's common
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Common stock (Continued)
shares as part of this public offering, and as a result, was classified as a related party at the time of the corresponding
transactions. The net proceeds to the Company from this offering, after deducting underwriting discounts and commissions
and other offering expenses payable by the Company, were approximately $26.7 million.
On June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of its common stock at a
public offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million.
The Company also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of its common
stock which was exercised in full on July 26, 2017. The net proceeds to the Company through July 26, 2017 from this
offering, after deducting offering expenses payable by the Company, were approximately $34.3 million.
The shares of common stock for both the June 2017 and February 2017 offerings were offered pursuant to a shelf
registration statement on Form S-3, including a base prospectus, filed by the Company on August 1, 2016, and declared
effective by the SEC on August 12, 2016. This shelf registration statement covers the offering, issuance and sale by the
Company of up to an aggregate of $125.0 million of its common stock, preferred stock, debt securities, warrants and/or units
(the "Shelf"). The Company simultaneously entered into a sales agreement with Cowen and Company, LLC, as sales agent, to
provide for the offering, issuance and sale by the Company of up to $40.0 million of its common stock from time to time in
"at-the-market" offerings under the Shelf (the "Sales Agreement").
During the year ended December 31, 2017, the Company sold an aggregate 749,639 shares of common stock under the
Sales Agreement, at an average sale price of approximately $5.01 per share for gross proceeds of $3.7 million and net
proceeds of $3.6 million and paying total compensation to the sales agent of approximately $0.1 million.
On October 26, 2017, Deerfield provided a conversion notice electing to convert the entire $6.6 million of Convertible
Notes into shares of the Company's common stock at a conversion price of $7.08 per share. The conversion price was based
on 95% of the average of the volume weighted average prices per share of the Company's common stock on the NASDAQ
Global Market for the three trading day period immediately preceding such conversion. This resulted in issuing 929,967
shares of the Company's common stock to Deerfield on this date and the Convertible Notes were cancelled.
During the year ended December 31, 2018, the Company sold an aggregate 651,525 shares of common stock under the
Sales Agreement, at an average sale price of approximately $6.25 per share for gross proceeds of $4.1 million and net
proceeds of $3.9 million and paying total compensation to the sales agent and other costs of approximately $0.2 million.
On November 5, 2018, the Company filed Supplement No. 1 to the prospectus dated August 12, 2016, which reduced
the size of the continuous offering by the Company under such prospectus relating to the offering of Common Stock pursuant
to the Sales Agreement. Following the reduction, the Company is authorized to issue up to $7,825,113 of its common stock
pursuant to the Sales Agreement (inclusive of amounts previously sold thereunder prior to the date hereof). Aggregate gross
proceeds of sales of the Company's common stock under the Sales Agreement total $7,825,113, and sales of common stock
under the Sales Agreement have been suspended.
On November 8, 2018, the Company closed an underwritten public offering of 19,999,999 shares of its common stock at
a public offering price of $2.30 per share, which includes 2,608,695 shares of its common stock resulting from the
underwriters' exercise of their over-allotment option at the public
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Common stock (Continued)
offering price. The net proceeds to the Company from this offering, after deducting underwriting discounts and commissions
and other offering expenses payable by the Company were approximately $43.4 million. This offering met the criteria for the
November Offering.
As of December 31, 2018, $5.2 million of the Company's common stock, preferred stock, debt securities, warrants
and/or units remained available to be sold pursuant to the Shelf.
During the year ended December 31, 2018, the Company issued 26,991 shares of common stock pursuant to the
conversion of vested RSUs and 832 shares of common stock pursuant to the exercise of vested stock options.
Note 13. Share-based Compensation
Share-based Compensation Plans
In July 2015, the Company adopted the Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan ("2015 Plan")
which became effective immediately prior to the closing of the IPO and initially had 767,330 shares of common stock
reserved for issuance. On January 1, 2016 and each January 1 thereafter, the number of shares of common stock reserved and
available for issuance under the 2015 Plan shall be cumulatively increased by five percent of the number of shares of stock
issued and outstanding on the immediately preceding December 31 or such lesser number of shares determined by the
administrator of the 2015 Plan. Accordingly, on January 1, 2019, 2018 and 2017, the Company added 2,483,815 shares,
1,449,847 shares and 803,049 shares, respectively, to the option pool. The 2015 Plan superseded the Neos Therapeutics, Inc.
2009 Equity Plan ("2009 Plan"), originally adopted in November 2009 and which had 1,375,037 shares reserved and
available for issuance. Effective upon closing of the IPO, the Company's board of directors determined not to grant any
further awards under the 2009 Plan.
The shares of common stock underlying any awards that are forfeited, canceled, reacquired by the Company prior to
vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) under the 2009 Plan will be
added to the shares of common stock available under the 2015 Plan. This number is subject to adjustment in the event of a
stock split, stock dividend or other change in the Company's capitalization. The 2015 Plan is administered by the Company's
compensation committee. The Company's compensation committee has full power to select, from among the individuals
eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to
determine the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Company's
compensation committee may delegate authority to grant certain awards to the Company's chief executive officer. Through
December 31, 2018, the Company has granted options, restricted stock and RSUs. The exercise price per share for the stock
covered by a stock award granted shall be determined by the administrator at the time of grant but shall not be less than
100 percent of the fair market value on the date of grant. Unexercised stock awards under the 2015 Plan expire after the
earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally
expire 90 days after termination of employment.
The 2009 Plan allowed the Company to grant options to purchase shares of the Company's common stock and to grant
restricted stock awards to members of its management and selected members of the Company's board of directors. Restricted
stock awards are recorded as deferred
F-37
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Share-based Compensation (Continued)
compensation and amortized into compensation expense, on a straight-line basis over a defined vesting period ranging from 1
to 48 months. Options were granted to officers, employees, nonemployee directors and consultants, and independent
contractors of the Company. The Company also granted performance based awards to selected management. The
performance options vested over a three-year period based on achieving certain operational milestones and the remaining
options vest in equal increments over periods ranging from two to four years. Unexercised options under the 2009 Plan expire
after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which
generally expire 90 days after termination of employment. All terminated options are available for reissuance under the 2015
Plan. Since the inception of the 2015 Plan through December 31, 2018, 82,635 shares related to forfeited 2009 Plan options
were added to the shares available under the 2015 Plan. During year ended December 31, 2018, 73,331 shares related to
forfeited 2009 Plan options were added to the shares available under the 2015 Plan. As of December 31, 2018, 1,793,905
shares of common stock remain available for grant under the 2015 Plan.
In June 2018, the Company adopted the Neos Therapeutics, Inc. 2018 Inducement Plan (the "Inducement Plan") which
had 800,000 shares of common stock reserved and available for issuance. The Inducement Plan allows the Company to grant
equity awards to induce highly-qualified prospective officers and employees who are not currently employed by the Company
to accept employment and provide them with a proprietary interest in the Company. The Inducement Plan is administered by
the Company's compensation committee. The exercise price per share for the stock covered by a stock award granted
pursuant to the Inducement Plan shall be determined by the administrator at the time of grant but shall not be less than
100 percent of the fair market value on the date of grant. Unexercised stock awards under the Inducement Plan expire after
10 years following the grant date. Under the Company's employment agreement dated June 27, 2018 with Gerald
McLaughlin, the Company's Chief Executive Officer, the Company granted Mr. McLaughlin, under the Inducement Plan, an
option to purchase 600,000 shares of the Company's common stock, which vests in equal annual installments over four years
from Mr. McLaughlin's start date. In addition, on July 30, 2018, the Company granted Mr. McLaughlin, under the
Inducement Plan, an option to purchase 200,000 shares of the Company's common stock. The shares underlying this option
shall vest subject to certain performance metrics to be evaluated for the fiscal year ending December 31, 2019. As of
December 31, 2018, no shares of common stock remain available for grant under the Inducement Plan.
Share-based Compensation Expense
The Company has reported share-based compensation expense for the years ended December 31, 2018, 2017 and 2016,
respectively, in its condensed consolidated statements of operations as follows:
Cost of goods sold
Research and development
Selling and marketing
General and administrative
2018
Year Ended December 31,
2017
(in thousands)
2016
$
$
470 $
344
731
1,776
3,321 $
390 $
394
913
2,354
4,051 $
311
304
723
2,122
3,460
F-38
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Share-based Compensation (Continued)
The total share based compensation expense included in the table above is attributable to stock options and RSUs of
$3.1 million and $261,000, respectively, for the year ended December 31, 2018. The total share based compensation expense
included in the table above is attributable to stock options, RSUs and restricted stock of $3.9 million, $86,000 and $71,000,
respectively, for the year ended December 31, 2017. The total share based compensation expense included in the table above
is attributable to stock options and restricted stock of $3.4 million and $91,000, respectively, for the year ended December 31,
2016.
As of December 31, 2018, there was $5.1 million of compensation costs adjusted for any estimated forfeitures, related to
non-vested stock options and RSUs granted under the Company's equity incentive plans not yet recognized in the Company's
financial statements. The unrecognized compensation cost is expected to be recognized over a weighted average period of
2.5 years for stock options and 2.9 years for RSUs. There is no unrecognized compensation cost associated with grants of
restricted stock.
Stock Options
During the year ended December 31, 2018, the Company's board of directors granted 953,539 options under the 2015
Plan. In June and July 2018, the Company granted 600,000 and 200,000 options, respectively, under the Inducement Plan to
Gerald McLaughlin, the Company's Chief Executive Officer, at an exercise price of $6.20 and $5.55 per share, respectively.
The Company estimates the fair value of all stock options on the grant date by applying the Black-Scholes option pricing
valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and
sensitive in the determination of compensation cost. Prior to the IPO, given the absence of an active market for the
Company's common stock prior to its IPO, the Company's board of directors was required to estimate the fair value of its
common stock at the time of each option grant primarily based upon valuations performed by a third-party valuation firm.
The weighted-average key assumptions used in determining the fair value of options granted during the period indicated
are as follows:
Estimated dividend yield
Expected stock price volatility
Weighted-average risk-free interest rate
Expected life of option in years
Weighted-average option fair value at grant
F-39
Year Ended December 31,
2017
2018
2016
0%
60%
2.75%
6.13
3.930
$
0%
60%
2.01%
6.06
4.090
$
0%
60%
1.18%
6.15
5.800
$
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Share-based Compensation (Continued)
A summary of outstanding and exercisable options as of December 31, 2018, 2017 and 2016, and the activity from
December 31, 2015 through December 31, 2018, is presented below:
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Granted
Exercised
Expired, forfeited or cancelled
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Granted
Exercised
Expired, forfeited or cancelled
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Granted
Exercised
Expired, forfeited or cancelled
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Number of
Options
Weighted-Average
Exercise Price
Intrinsic
Value
(in thousands)
1,352,283 $
229,000 $
859,257
(10,886)
(93,310)
2,107,344 $
595,424 $
570,432
(1,249)
(221,554)
2,454,973 $
1,137,766 $
1,753,539
(832)
(760,795)
3,446,885 $
1,643,011 $
13.607 $
3.385 $
10.385
1.231
17.780
12.173 $
9.715 $
7.220
0.223
10.325
11.195 $
10.919 $
6.786
0.320
11.281
8.935 $
10.627 $
964
2,504
1,128
881
4,764
2,890
70
70
The weighted-average remaining contractual life of options outstanding and exercisable on December 31, 2018 was 7.9
and 6.6 years, respectively. The option exercise price for all options granted in the year ended December 31, 2018 ranged
from $4.76 to $10.40 per share.
Restricted Stock Units
On May 1, 2017, the Company granted 78,750 RSUs to members of its management which vest in four equal annual
installments, beginning May 1, 2018. On October 2, 2017, the Company granted 6,250 RSUs to a member of its management
which vest in four equal annual installments, beginning October 2, 2018. On March 1, 2018, the Company granted 93,750
RSUs to members of its management which vest in four equal annual installments, beginning March 1, 2019.
The Company satisfies its RSUs by issuing the Company's common shares when RSUs vest and are issued. In addition,
when RSUs vest and are issued, RSU recipients may elect to have the Company withhold units as consideration for the tax
withholding obligation for their vested RSUs. During the year ended December 31, 2018, 33,748 vested RSUs were
converted into an equivalent 26,991 shares of common stock. The Company withheld 6,757 shares of its common stock to
partially satisfy tax withholding obligations upon vesting of the RSUs for the year ended December 31, 2018.
F-40
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Share-based Compensation (Continued)
A summary of outstanding RSUs as of December 31, 2018 and 2017 and the activity from December 31, 2017 through
December 31, 2018, is presented below:
Outstanding at December 31, 2016
Granted
Exercised
Expired, forfeited or cancelled
Outstanding at December 31, 2017
Granted
Converted
Withheld for tax obligation
Expired, forfeited or cancelled
Outstanding at December 31, 2018
Restricted stock
Number of
RSUs
Weighted-Average
Fair Value
— $
85,000
—
—
85,000 $
93,750
(26,991)
(6,757)
(69,688)
75,314 $
—
7.15
7.15
8.30
7.34
7.34
7.77
7.93
The Company did not issue any shares of restricted stock for the years ended December 31, 2018, 2017 and 2016. On
October 16, 2017, October 17, 2016 and October 16, 2015, 14,895 shares, 9,709 shares and 9,197 shares, respectively, of
restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock.
The Company had no unvested restricted stock as of December 31, 2018 and 2017, and had 35,513 shares of unvested
restricted stock with a weighted average fair value of $2.55 as of December 31, 2016. For the years ended December 31,
2018, 2017 and 2016, there were no shares of restricted stock granted or forfeited.
Note 14. Treasury stock
The Company has the authority to repurchase common stock from former employees, officers, directors or other persons
who performed services for the Company at the lower of the original purchase price or the then-current fair market value. On
October 16, 2017, October 17, 2016 and October 16, 2015, 14,895 shares, 9,709 shares and 9,197 shares, respectively, of
restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock and
such shares were added back into the treasury stock of the Company, increasing total treasury stock to 33,801 shares as of
December 31, 2017 and 2018. On February 19, 2015, the Company's board of directors approved the cancellation of the
Company's 55,905 shares of treasury stock which had been repurchased at the original purchase price of $0.002 in 2013.
F-41
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Commitments and contingencies
Registration Payment Arrangement: On November 5, 2018, in conjunction with the Second Amendment to the Facility
and the related issuance of the Convertible Notes, the Company entered into the Registration Agreement which required the
Company to file a registration statement with the SEC to register the Registrable Securities (see Note 8) within 30 days from
November 5, 2018, which was to become effective per the SEC no later than 75 days thereafter. The filing deadline was
subsequently extended to December 21, 2018. The Company filed a registration statement on Form S-3 to comply with the
Registration Agreement on December 11, 2018, which became effective on December 20, 2018. This filing covered
3,796,668 shares, which is the number of shares that would be issued up to the Exchange Cap as (defined in the agreement).
The Company is also required to, among other things, maintain the effectiveness of such registration statement, continue to
file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each
securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with
any FINRA requests. Upon any Registration Failure, the Company shall pay additional damages to the Holder for each
30-day period (prorated for any partial period) after the date of such Registration Failure in an amount in cash equal to two
percent of the original principal amount of the Convertible Notes. The Company's obligations with respect to each
registration end at the date which is the earlier of (a) when all of the Registrable Securities covered by such registration have
been sold or (b) when Deerfield or any of its transferees or assignees under the Registration Agreement cease to hold any of
the Registrable Securities. For each registration filing, the Company shall bear all reasonable expenses, other than
underwriting discounts and commissions, and shall reimburse Deerfield or any assignee or transferee for up to $25,000 in
legal fees. The Company currently expects to satisfy all of its obligations under the Registration Agreement and does not
expect to pay any damages pursuant to this agreement; therefore, no liability has been recorded.
Patent Infringement Litigation: On October 31, 2017, the Company received a paragraph IV certification from Teva
Pharmaceuticals USA, Inc. ("Teva") advising the Company that Teva has filed an ANDA with the FDA for a generic version
of Cotempla XR-ODT, in connection with seeking to market its product prior to the expiration of patents covering Cotempla
XR-ODT. The certification notice alleged that the three U.S. patents listed in the FDA's Orange Book for Cotempla
XR-ODT, one with an expiration date in April 2026 and two with expiration dates in June 2032, will not be infringed by
Teva's proposed product, are invalid and/or are unenforceable. On December 13, 2017, the Company filed a patent
infringement lawsuit in federal district court in the District of Delaware against Teva alleging that Teva infringed the
Company's Cotempla XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Cotempla
XR-ODT prior to the expiration of the Company's patents. This lawsuit automatically stayed, or barred, the FDA from
approving Teva's ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered,
whichever is earlier. On December 21, 2018, the Company entered into a Settlement Agreement (the "Teva Settlement
Agreement") and a Licensing Agreement (the "Teva Licensing Agreement" and collectively with the Settlement Agreement,
the "Teva Agreement") with Teva. The Teva Agreement resolved all ongoing litigation involving the Company's Cotempla
XR-ODT patents and Teva's ANDA. Under the Teva Agreement, the Company granted Teva the right to manufacture and
market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain
circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The
Teva Agreement has been submitted to the applicable governmental agencies.
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Commitments and contingencies (Continued)
On July 25, 2016, the Company received a paragraph IV certification from Actavis Laboratories FL, Inc. ("Actavis")
advising the Company that Actavis had filed an Abbreviated New Drug Application ("ANDA") with the FDA for a generic
version of Adzenys XR-ODT. The certification notice alleged that the four U.S. patents listed in the FDA's Orange Book for
Adzenys XR-ODT, one with an expiration date in April 2026 and three with expiration dates in June 2032, will not be
infringed by Actavis's proposed product, are invalid and/or are unenforceable. On September 1, 2016, the Company filed a
patent infringement lawsuit in federal district court against Actavis alleging that Actavis infringed the Company's Adzenys
XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the
expiration of the Company's patents. On October 17, 2017, the Company entered into a Settlement Agreement (the "Actavis
Settlement Agreement") and a Licensing Agreement (the "Actavis Licensing Agreement" and collectively with the Actavis
Settlement Agreement, the "Actavis Agreement") with Actavis. The Actavis Agreement resolved all ongoing litigation
involving the Company's Adzenys XR-ODT patents and Actavis's ANDA. Under the Actavis Agreement, the Company
granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on
September 1, 2025, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S.
District Court for the District of Delaware. The Actavis Agreement has been submitted to the applicable governmental
agencies.
Other Litigation: On March 7, 2018, the Company received a citation advising the Company that the County of Harris
Texas (the "County") filed a lawsuit on December 13, 2017 against the Company and various other alleged manufacturers,
promoters, sellers and distributors of opioid pharmaceutical products. Through this lawsuit, the County seeks to recoup as
damages some of the expenses it allegedly has incurred to combat opioid use and addiction. The County also seeks punitive
damages, disgorgement of profits and attorneys' fees. While the Company believes that the lawsuit is without merit and
intends to vigorously defend against it, the Company is not able to predict at this time whether this proceeding will have a
material impact on its results of operations.
Defined contribution plans: The Company maintains a defined contribution plan covering substantially all employees
under the provisions of Section 401(k) of the Internal Revenue Code ("Code"). As the Company has elected a Safe-Harbor
provision for the 401(k) Plan, participants are always fully vested in their employer contributions. Employees may contribute
annually up to the lesser of 50% of their compensation or the applicable limit established by the Code. Effective January 1,
2015, the Company amended its 401(k) plan to provide a Company matching contribution on 100% of a participant's
contribution for the first 3% of their salary deferral and 50% of the next 2% of their salary deferral. For the years ended
December 31, 2018, 2017 and 2016, the Company recorded $576,000, $419,000 and $371,000, respectively, of expense for
401(k) contributions.
Operating leases: The Company leases its Grand Prairie, Texas office space and manufacturing facility under an
operating lease which expires in 2024. In addition, the Company has a 60-month lease for office space in Blue Bell,
Pennsylvania for its commercial operations which commenced on May 1,
F-43
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Commitments and contingencies (Continued)
2016. Total future minimum lease payments under these operating leases with noncancelable terms are as follows:
Year ending December 31,
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Future minimum lease payments
$
$
1,107
1,161
1,057
1,055
1,055
1,106
6,541
The Company accounts for rent expense on long-term operating leases on a straight-line basis over the life of the lease
resulting in a deferred rent balance of $989,000 and $1,083,000 at December 31, 2018 and December 31, 2017, respectively.
The Company is also liable for a share of operating expenses for both premises as defined in the lease agreements. The
Company's share of these operating expenses for both locations was $206,000 and $243,000 for the years ended
December 31, 2018 and 2017. Rent expense for these leases, excluding the share of operating expenses, was $1,011,000,
$1,010,000 and $1,011,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Cash incentive bonus plan: In July 2015, the Company adopted the Senior Executive Cash Incentive Bonus Plan
("Bonus Plan"). The Bonus Plan provides for cash payments based upon the attainment of performance targets established by
the Company's compensation committee. The payment targets will be related to financial and operational measures or
objectives with respect to the Company, or corporate performance goals, as well as individual targets. The Company has
recorded $666,000, $701,000 and $464,000 of compensation expense for the years ended December 31, 2018, 2017 and 2016,
respectively, under the Bonus Plan.
Note 16. License agreements
On December 21, 2018, the Company entered into the Teva Agreement with Teva. Under the Teva Licensing
Agreement, the Company granted Teva a non-exclusive license to certain patents owned by the Company by which Teva has
the right to manufacture and market its generic version of Cotempla XR-ODT under its ANDA beginning on July 1, 2026, or
earlier under certain circumstances. The Teva Licensing Agreement has been submitted to the applicable governmental
agencies (see Note 15).
On October 23, 2018, the Company entered into an Exclusive License Agreement ("NeuRx License") with NeuRx
Pharmaceuticals LLC for the exclusive worldwide right to research, develop, manufacture, make, have made, use, distribute,
sell, have sold, offer for sale, import, export and otherwise commercialize NRX-101 for the treatment, prevention and
diagnosis of any and all diseases and conditions. The NeuRx License provides for an upfront payment of $175,000,
development and milestone payments and royalties based on annual net sales, as defined in the agreement. Royalties are to be
paid on a country-by-country and licensed product-by-licensed product basis, during the period of time beginning on the first
commercial sale of such licensed product in such country and continuing until the later of: (i) the expiration of the
last-to-expire valid claim in any licensed patent in such
F-44
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Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. License agreements (Continued)
country that covers such licensed product in such country; and/or (ii) expiration of regulatory exclusivity of such licensed
product in such country.
On October 17, 2017, the Company entered into the Actavis Agreement with Actavis. Under the Actavis Licensing
Agreement, the Company granted Actavis a non-exclusive license to certain patents owned by the Company by which
Actavis has the right to manufacture and market its generic version of Adzenys XR-ODT under its ANDA beginning on
September 1, 2025, or earlier under certain circumstances. The Actavis Licensing Agreement has been submitted to the
applicable governmental agencies (see Note 15).
On July 23, 2014, the Company entered into a Settlement Agreement and an associated License Agreement (the "2014
License Agreement") with Shire LLC ("Shire") for a non-exclusive license to certain patents for certain activities with respect
to the Company's New Drug Application (the "NDA") No. 204326 for an extended-release orally disintegrating amphetamine
polistirex tablet. In accordance with the terms of the 2014 License Agreement, following the receipt of the approval from the
FDA for Adzenys XR-ODT, the Company paid a lump sum, non-refundable license fee of an amount less than $1.0 million in
February 2016. The Company is paying a single digit royalty on net sales of Adzenys XR-ODT during the life of the patents.
On January 26, 2017, the Company sent a letter to Shire, notifying Shire that the Company has made a Paragraph IV
certification to the FDA that in the Company's opinion and to the best of its knowledge, the patents owned by Shire that
purportedly cover the Company's Adzenys ER are invalid, unenforceable and/or will not be infringed by the commercial
manufacture, use or sale of Adzenys ER. On March 6, 2017, the Company entered into a License Agreement (the "2017
License Agreement") with Shire, pursuant to which Shire granted the Company a non-exclusive license to certain patents
owned by Shire for certain activities with respect to the Company's NDA No. 204325 for an extended-release amphetamine
liquid suspension. In accordance with the terms of the 2017 License Agreement, following the receipt of the approval from
the FDA for Adzenys ER, the Company paid a lump sum, non-refundable license fee of an amount less than $1.0 million in
October 2017. The Company will also pay a single digit royalty on net sales of Adzenys ER during the life of the relevant
Shire patents.
Such license fees are capitalized as an intangible asset and are amortized into cost of goods sold over the life of the
longest associated patent. The royalties are recorded as cost of goods sold in the same period as the net sales upon which they
are calculated.
Additionally, each of the 2014 and 2017 License Agreements contains a covenant from Shire not to file a patent
infringement suit against the Company alleging that Adzenys XR-ODT or Adzenys ER, respectively, infringes the Shire
patents.
Note 17. Related party transactions
In February 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a
public offering price of $5.00 per share, which includes 750,000 shares of the Company's common stock resulting from the
underwriters' exercise of their over-allotment option at the public offering price on February 17, 2017 (see Note 12). On
June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of its common stock at a public
offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. The
Company also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares
F-45
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Related party transactions (Continued)
of its common stock (see Note 12). Deerfield, the Company's senior lender, participated in the purchase of the Company's
common shares as part of both public offerings, and as a result, is classified as a related party. The Company is obligated
under a $60.0 million senior secured credit Facility that was issued by the Company to Deerfield. On June 1, 2017, the
Company and Deerfield entered into an Amendment to the Company's existing Facility with Deerfield which extended the
date to repay the Accrued Interest under the Facility to June 1, 2018, which may have been extended to June 1, 2019 at the
election of the Company if certain conditions have been met as specified in the Amendment. The right to payment of the
Accrued Interest was memorialized in the form of Convertible Notes issued to Deerfield on the Amendment Date. On
October 26, 2017, Deerfield provided a conversion notice electing to convert the entire $6.6 million of Convertible Notes into
shares of the Company's common stock at a conversion price of $7.08 per share. The conversion price was based on 95% of
the average of the volume weighted average prices per share of the Company's common stock on the NASDAQ Global
Market for the three trading day period immediately preceding such conversion. This resulted in issuing 929,967 shares of the
Company's common stock to Deerfield on this date and the Convertible Notes were cancelled.
On November 5, 2018, the Company and Deerfield entered into the Second Amendment to the Facility pursuant to
which the Company agreed to pay $7.5 million of principal under the Facility otherwise due in May 2019 upon completion of
the November Offering. The Second Amendment provides an option for the $15.0 million principal on the Facility due in
May 2020 to be paid in either May 2021 or May 2022 upon the achievement of certain revenue milestones as described in the
Second Amendment. Also, pursuant to the Second Amendment, the Company amended and restated its outstanding notes
under the Facility in the form of senior secured convertible notes. The Company has the right to pay principal and future
interest in shares of Common Stock not to exceed 2,135,625 shares in the aggregate. Additionally, subject to the terms of the
amended and restated convertible notes, Deerfield has the right to convert the remaining principal under the Facility into
shares of Common Stock not to exceed 3,796,668 shares in the aggregate at a conversion price of 95% of the greater of the
average of the volume weighted average price per share of the Common Stock for the three trading day period immediately
preceding such conversion and $10.00. On November 8, 2018, the Company closed an underwritten public offering of
19,999,999 shares of its common stock at a public offering price of $2.30 per share, which includes 2,608,695 shares of its
common stock resulting from the underwriters' exercise of their over-allotment option at the public offering price. The net
proceeds to the Company from this offering, after deducting underwriting discounts and commissions and other offering
expenses payable by the Company were approximately $43.4 million. Deerfield also participated in the purchase of the
Company's common shares as part of this offerings (see Note 11).
Note 18. Selected Quarterly Financial Data (Unaudited)
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results of the interim periods. Operating results for these periods are not necessarily
indicative of the operating results for a full year. Historical results are not necessarily indicative of results to be expected in
future periods. Selected quarterly
F-46
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Selected Quarterly Financial Data (Unaudited) (Continued)
financial data for years ended December 31, 2018 and 2017, are as follows (in thousands, except share and per share
amounts):
Net sales(1)
Gross profit (1)
$
Net loss attributable to common stock $
Weighted average common shares
outstanding used to compute net loss per
share, basic and diluted(2)
Net loss per share of common stock, basic
Quarter Ended
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
10,729 $
5,508
(14,436) $
11,363 $
4,376
(15,207) $
12,503 $
5,546
(12,695) $
15,393
7,631
(9,337)
28,996,956
29,008,909
29,625,792
41,415,358
and fully diluted(3):
$
(0.50) $
(0.52) $
(0.43) $
(0.23)
Net sales(1)
Gross profit (1)
$
Net loss attributable to common stock $
Weighted average common shares
outstanding used to compute net loss per
share, basic and diluted(2)
Net loss per share of common stock, basic
Quarter Ended
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
5,631 $
881
(17,221) $
5,179 $
2,362
(18,645) $
7,100 $
4,277
(16,254) $
9,222
5,582
(13,652)
19,624,712
22,613,382
27,884,983
28,746,608
and fully diluted(3):
$
(0.88) $
(0.82) $
(0.58) $
(0.47)
(1) The Company began selling Adzenys XR-ODT on May 16, 2016, initiated an early experience program for Cotempla
XR-ODT with limited product availability on September 5, 2017 before launching this product nationwide on
October 2, 2017 and launched Adzenys ER on February 26, 2018. Net product sales represent total gross product sales
less gross to net sales adjustments. Gross to net sales adjustments for branded Adzenys XR-ODT, Cotempla XR-ODT
and Adzenys ER include savings offers, prompt payment discounts, wholesaler fees, estimated rebates to be incurred
on the selling price of the respective product sales and estimated allowances for product returns. The Company began
selling generic Tussionex in August 2014. Gross to net sales adjustments for generic Tussionex include prompt
payment discounts, estimated allowances for product returns, wholesaler fees, estimated government rebates and
estimated chargebacks to be incurred on the selling price of generic Tussionex related to the respective product sales.
The Company recognizes total gross product sales less gross to net sales adjustments as revenue based on shipments
from 3PLs to the Company's wholesaler customers. Also, the net loss amounts reflect the sales and marketing
expenses associated with the commercialization of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER.
(2)
In February 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a
public offering price of $5.00 per share, which included 750,000 shares of its
F-47
Table of Contents
Neos Therapeutics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Selected Quarterly Financial Data (Unaudited) (Continued)
common stock resulting from the underwriters' exercise of their over-allotment option on February 17, 2017. On
June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of the its common stock at a
public offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of
$0.2 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 720,000
shares of its common stock which was exercised in full on July 26, 2017. On October 26, 2017, Deerfield provided a
conversion notice electing to convert the entire $6.6 million of Convertible Notes into shares of the Company's
common stock at a conversion price of $7.08 per share. The conversion price was based on 95% of the average of the
volume weighted average prices per share of the Company's common stock on the NASDAQ Global Market for the
three trading day period immediately preceding such conversion. This resulted in issuing 929,967 shares of the
Company's common stock to Deerfield on this date and the Convertible Notes were cancelled. On November 8, 2018,
the Company closed an underwritten public offering of 19,999,999 shares of its common stock at a public offering
price of $2.30 per share, which includes 2,608,695 shares of its common stock resulting from the underwriters'
exercise of their over-allotment option at the public offering price. These transactions produced a significant increase
in the number of shares outstanding which will impact the year-over-year comparability of the Company's loss per
share calculations.
(3) Loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly loss
per share may not necessarily equal the total for the year.
Note 19. Subsequent event
On January 1, 2019, in accordance with the Evergreen Provisions of the 2015 Plan, the Company added 2,483,815
shares to the option pool, increasing the total number of shares reserved and available for issuance under the 2015 Plan to
4,277,720 shares.
F-48
Table of Contents
Exhibit
number
3.1
3.2
4.1
4.2
10.1
10.2
10.3+
10.4+
10.5+
10.6+
10.7+
10.8
10.9†
Fourth Amended and Restated Certificate of Incorporation of the Registrant, as amended and
currently in effect (Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q
(001-37508), filed with the SEC on September 4, 2015, incorporated herein by reference).
Description of exhibit
Amended and Restated Bylaws of the Registrant, as amended and currently in effect (Filed as an
Exhibit to the Registrant's quarterly report on Form 10-Q (001-37508), filed with the SEC on
September 4, 2015, incorporated herein by reference).
Form of common stock certificate (Filed as an Exhibit to the Registrant's registration statement on
Form S-1 (333-205106), filed with the SEC on July 13, 2015, incorporated herein by reference).
Form of warrant to purchase common stock (Filed as an Exhibit to the Registrant's registration
statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by
reference).
Amended and Restated Investors' Rights Agreement, dated as of June 9, 2015 (Filed as an Exhibit to
the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19,
2015, incorporated herein by reference).
Amendment and Waiver, dated as of February 5, 2016, amending the Amended and Restated
Investors' Rights Agreement of the Registrant (Filed as an Exhibit to the Registrant's annual report
on Form 10-K (001-37508), filed with the SEC on March 18, 2016, incorporated herein by
reference).
Neos Therapeutics, Inc. 2009 Equity Plan (Filed as an Exhibit to the Registrant's registration
statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by
reference).
Form of option agreements under 2009 Equity Plan (Filed as an Exhibit to the Registrant's
registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated
herein by reference).
Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan and forms of option agreements
thereunder (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106),
filed with the SEC on July 13, 2015, incorporated herein by reference).
Senior Executive Cash Incentive Bonus Plan (Filed as an Exhibit to the Registrant's quarterly report
on Form 10-Q (001-37508), filed with the SEC on November 13, 2015, incorporated herein by
reference).
Form of Indemnification Agreement between the Registrant and each of its executive officers and
directors (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106),
filed with the SEC on July 13, 2015, incorporated herein by reference).
Third Amended and Restated Subordinated Promissory Note, dated as of December 31, 2013, issued
to Essex Capital Corporation, as amended (Filed as an Exhibit to the Registrant's registration
statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by
reference).
Loan and Security Agreement, by and between the Registrant, Hercules Technology III, L.P. and
Hercules Technology Growth Capital, Inc., in its capacity as administrative agent for itself and
Hercules Technology III, L.P. dated as of March 28, 2014, as amended (Filed as an Exhibit to the
Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015,
incorporated herein by reference).
Table of Contents
Exhibit
number
10.10†
10.11†
10.12
10.13†
10.14†
10.15+
10.16+
10.17+
10.18†
10.19
10.20
10.21
Settlement Agreement, by and between the Registrant and Shire LLC, dated as of July 23, 2014
(Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with
the SEC on June 19, 2015, incorporated herein by reference).
Description of exhibit
License Agreement, by and between the Registrant and Shire LLC, dated as of July 23, 2014 (Filed
as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the
SEC on June 19, 2015, incorporated herein by reference).
Commercial Lease Agreement, by and between Riverside Business Green, L.P., and Neos
Therapeutics, LP, dated as of June 29, 1999, as amended (Filed as an Exhibit to the Registrant's
registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated
herein by reference).
Supply Agreement, by and between the Registrant and Coating Place, Inc., dated as of August 28,
2014 (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed
with the SEC on June 26, 2015, incorporated herein by reference).
Asset Purchase Agreement, by and between the Registrant and Cornerstone BioPharma, Inc., dated
as of August 28, 2014 (Filed as an Exhibit to the Registrant's registration statement on Form S-1
(333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference).
Amended and Restated Employment Agreement, by and between the Registrant and Vipin Garg,
dated as of July 10, 2015 (Filed as an Exhibit to the Registrant's registration statement on Form S-1
(333-205106), filed with the SEC on July 13, 2015, incorporated herein by reference).
Amended and Restated Employment Agreement, by and between the Registrant and Richard
Eisenstadt, dated as of July 10, 2015 (Filed as an Exhibit to the Registrant's registration statement on
Form S-1 (333-205106), filed with the SEC on July 13, 2015, incorporated herein by reference).
Amended and Restated Employment Agreement, by and between the Registrant and Thomas
McDonnell, dated as of July 10, 2015 (Filed as an Exhibit to the Registrant's registration statement
on Form S-1 (333-205106), filed with the SEC on July 13, 2015, incorporated herein by reference).
License Agreement by and among the Registrant and Shire LLC, dated as of March 6, 2017. (Filed
as an Exhibit to the Registrant's quarterly report on Form 10-Q (001-37508), filed with the SEC on
May 10, 2017, incorporated herein by reference).
First Amendment to Facility Agreement, dated as of June 1, 2017, by and among Neos
Therapeutics, Inc., Deerfield Private Design Fund III, L.P. and Deerfield Special Situation
Fund, L.P. (including schedules and exhibits thereto). (Filed as an Exhibit to the Registrant's current
report on Form 8-K, filed with the SEC on June 5, 2017, incorporated herein by reference).
Registration Rights Agreement, dated June 1, 2017, by and among Neos Therapeutics, Inc.,
Deerfield Private Design Fund III, L.P. and Deerfield Special Situation Fund, L.P. (Filed as an
Exhibit to the Registrant's current report on Form 8-K, filed with the SEC on June 5, 2017,
incorporated herein by reference).
Settlement Agreement, by and between the Registrant and Actavis Laboratoris FL, Inc., dated as of
October 17, 2017 (Filed as an Exhibit to the Registrant's annual report on Form 10-K (001-37508),
filed with the SEC on March 15, 2017, incorporated herein by reference).
Table of Contents
Exhibit
number
10.22*†
Settlement Agreement, by and between the Registrant and Teva Pharmaceuticals USA, Inc., dated
as of December 21, 2018.
Description of exhibit
21.1*
Subsidiaries of the Registrant
23.1*
24.1*
31.1*
31.2*
Consent of RSM US LLP.
Power of Attorney (included on signature page).
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1**
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Document.
101.DEF *
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Link Document.
*
Filed herewith.
** The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and
will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such
certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as
amended, or the Securities Act of 1934, as amended, except to the extent that the Registrant specifically incorporates
it by reference.
†
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and
this exhibit has been submitted separately to the SEC.
+
Indicates a management contract or compensatory plan.
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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, in the city of Grand Prairie, State
of Texas, on the 18th day of March 2019.
NEOS THERAPEUTICS, INC.
By:
/s/ GERALD MCLAUGHLIN
Gerald McLaughlin
Chief Executive Officer
Power of Attorney
We, the undersigned directors and officers of Neos Therapeutics, Inc. (the "Company"), hereby severally constitute and
appoint Gerald McLaughlin and Richard Eisenstadt, and each of them singly, our true and lawful attorneys, with full power to
them, and to each of them singly, to sign for us and in our names in the capacities indicated below, to file any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act, this report has been signed by the following persons in the capacities
and on the dates indicated.
Signature
Title
Date
/s/ GERALD MCLAUGHLIN
Gerald McLaughlin
/s/ RICHARD EISENSTADT
Richard Eisenstadt
/s/ ALAN HELLER
Alan Heller
/s/ GREG ROBITAILLE
Greg Robitaille
/s/ BETH HECHT
Beth Hecht
/s/ BRYANT FONG
Bryant Fong
Chief Executive Officer and Director (Principal
Executive Officer)
March 18, 2019
Chief Financial Officer (Principal Financial and
Accounting Officer)
March 18, 2019
Director
Director
Director
Director
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
Table of Contents
Signature
Title
Date
/s/ JOHN SCHMID
John Schmid
/s/ LINDA SZYPER
Linda Szyper
/s/ JAMES ROBINSON
James Robinson
Director
March 18, 2019
Director
Director
March 18, 2019
March 18, 2019
Table of Contents
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the year ended December 31, 2018
Allowance for chargebacks
Allowance for cash discounts
Sales offers
Reserve for wholesaler fees
Reserve for returns
Rebates
For the year ended December 31, 2017
Allowance for chargebacks
Allowance for cash discounts
Sales offers
Reserve for wholesaler fees
Reserve for returns
Rebates
For the year ended December 31, 2016
Allowance for chargebacks
Allowance for cash discounts
Sales offers
Reserve for wholesaler fees
Reserve for returns
Rebates
Balance
at
beginning
of period
Additions
charged to
costs and
expenses
Deductions
and
Payments
Balance
at end of
period
(1) $
(1)
(2)
(2)
(2)
(2)
(1) $
(1)
(2)
(2)
(2)
(2)
(1)
(1)
(2)
(2)
(2)
(2)
816 $
337
7,168
2,345
2,711
4,008
779 $
171
2,070
509
1,157
544
940
99
—
361
429
110
8,565 $
3,519
71,303
17,414
3,803
18,746
10,146 $
1,814
30,978
8,244
1,792
7,837
10,504
772
5,816
2,838
764
519
(8,067) $
(3,305)
(67,183)
(15,510)
(1,357)
(14,991)
(10,109) $
(1,648)
(25,880)
(6,408)
(238)
(4,373)
(10,665)
(700)
(3,746)
(2,690)
(36)
(85)
1,314
551
11,288
4,249
5,157
7,763
816
337
7,168
2,345
2,711
4,008
779
171
2,070
509
1,157
544
(1) Shown as a reduction of accounts receivable and gross sales as indicated in column heading.
(2) Shown as accrued expenses and a reduction of gross sales.
SETTLEMENT AGREEMENT
Exhibit 10.22
This Settlement Agreement (including Exhibits A, B, and C, the “Agreement”) is made and entered into this 21st
day of December, 2018 (the “Execution Date”), by and between, on the one hand, Neos Therapeutics, Inc. and Neos
Therapeutics, LP (collectively, “Neos”), and on the other hand, Teva Pharmaceuticals USA, Inc. (“Teva”) (collectively, the
“Parties,” or each separately, a “Party”).
RECITALS
A. WHEREAS Neos owns U.S. Patent Nos. 8,840,924 (“the ‘924 Patent”), 9,072,680 (“the ‘680 patent”), and
9,089,496 (“the ‘496 Patent”), which patents are listed in the U.S. Food and Drug Administration (“FDA”) publication
Approved Drug Products With Therapeutic Equivalence Evaluations in connection with COTEMPLA XR-ODT™ brand
methylphenidate extended-release orally disintegrating tablets, which products Neos sells in the United States of America,
including its territories, possessions, and the Commonwealth of Puerto Rico (the “Territory”), under New Drug Application
(“NDA”) No. 205489;
B. WHEREAS Teva provided notice to Neos that it has submitted a 21 U.S.C. § 355(j)(2)(A)(vii)(IV)
certification (“Paragraph IV Certification”) to, and seeks approval from, the FDA to market the generic extended-release
orally disintegrating tablets containing 8.6 mg, 17.3 mg, or 25.9 mg of methylphenidate that are described in Abbreviated
New Drug Application (“ANDA”) 210924, prior to the expiration of the ‘924 Patent, the ‘680 Patent, and the ‘496 Patent;
C. WHEREAS Neos has prosecuted, and Teva has defended, an action for patent infringement in the United
States District Court for the District of Delaware (the “Court”) regarding the generic extended-release orally disintegrating
tablets that are described in ANDA 210924 and the Paragraph IV Certification, which action is captioned Neos
Therapeutics, Inc. et al. v. Teva Pharmaceuticals USA, Inc., Civil Action No. 17-1793-CFC (the “Action”);
D. WHEREAS, subject to the terms and conditions herein, Neos has agreed to grant Teva a non-exclusive
license and sublicense, as applicable, to manufacture, have manufactured, use, sell, offer to sell, import, and distribute the
generic extended-release orally disintegrating tablets described in the Teva ANDA (as defined in the License Agreement) in
or for the Territory as of the date, and upon the terms, set forth in the License Agreement defined and referred to in Section 2
of this Settlement Agreement;
E. WHEREAS, as a result of this Settlement Agreement, there may be supply and sales in or for the Territory
of the generic extended-release orally disintegrating tablets described in the Teva ANDA in advance of the expiration of the
above-identified patents, which supply and sales otherwise may not have occurred until after the expiration of the asserted
patents; and
F. WHEREAS the Parties are willing to settle the Action on the terms set forth herein.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
1
NOW THEREFORE, in consideration of the promises and mutual covenants set forth herein, the sufficiency of
which is hereby acknowledged, the Parties hereby agree as follows.
1. Stipulation And Order. In consideration of the mutual benefits of entering into this Agreement, the
Parties shall enter into and cause to be filed with the Court, within three (3) days of the Execution Date, a stipulation and
order resolving the Action, substantially in the form annexed hereto as Exhibit A (the “Stipulation And Order”). If the Court
does not grant the Stipulation And Order substantially in the form annexed hereto as Exhibit A, the Parties agree to confer in
good faith and revise that document consistent with the requirements of the Court.
2. License Agreement. Contemporaneously with the execution of this Agreement, Neos and Teva shall enter
into a non-exclusive license and sublicense agreement in the form annexed hereto as Exhibit B (the “License Agreement”).
3. Legal Fees. Each Party shall pay its own fees and costs, including attorney fees, incurred in connection
with the Action and in connection with the preparation, execution, and performance of this Agreement.
4. Legal Compliance. The Parties shall submit this Agreement, the License Agreement, the Stipulation And
Order, and Exhibit C (the “Settlement Documents”) to the appropriate personnel at the Federal Trade Commission (“FTC”)
and the Antitrust Division of the Department of Justice (the “DOJ”) as soon as practicable after the Execution Date, and in no
event later than ten (10) days after the Execution Date.
(a) To the extent that any legal or regulatory issue or barrier arises with respect to the Settlement
Documents, or any subpart thereof, the Parties shall use commercially reasonable efforts to modify the Settlement Documents
to address any such legal or regulatory issue or barrier (including for example any objection by the FTC or DOJ) while
maintaining the material terms of the transaction. Should the FTC or DOJ, as the case may be, object to any such
modification, the Parties agree to continue to use commercially reasonable efforts to modify, as many times as necessary, the
Settlement Documents as required above in this Section 4.
(b) For purposes of the Settlement Documents, “commercially reasonable efforts” shall mean such
reasonable, diligent, and good-faith efforts as a Party would normally use to accomplish a similar objective under similar
circumstances.
5. Released Claims. In addition to the dismissal of the Action, as set forth in the Stipulation And Order, and
in consideration of the representations, warranties, and covenants contained in this Settlement Agreement and the License
Agreement, Neos and Teva make the following releases, which shall be effective upon the entry of the Stipulation And Order
by the Court in the Action:
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
2
(a) Teva for itself and its Affiliates hereby irrevocably releases and discharges Neos and its Affiliates,
predecessors, successors, assigns, directors, officers, employees, agents, suppliers, distributors, importers, manufacturers, and
customers from all causes of action, demands, claims, damages, and liabilities of any nature, whether known or unknown,
arising between Teva and/or its Affiliates and Neos and/or its Affiliates from or in connection with the Action, the Teva
ANDA, the generic products described by the Teva ANDA, and/or Neos’s COTEMPLA XR-ODT™ brand methylphenidate
extended-release orally disintegrating tablet products and accruing or occurring prior to the Execution Date, including,
without limitation, all claims, defenses, and/or counterclaims that Teva and/or its Affiliates have asserted or could have
asserted in the Action or in any other court or patent office proceeding in connection with the Teva ANDA or the products
described by the Teva ANDA that any of the Licensed Patents, as defined in the License Agreement, is invalid,
unenforceable, not properly listed in Approved Drug Products With Therapeutic Equivalence Evaluations (“the Orange
Book”), not subject to the proper use codes in the Orange Book, and/or not infringed by the filing of the Teva ANDA and/or
the sale of the generic products described by the Teva ANDA in the Territory (all of the above collectively, the “Teva
Released Claims”). For the avoidance of doubt, the release granted under this Section 5(a) shall not apply to any product
aside from the products described by the Teva ANDA or NDA 205489, or to any ANDA other than the Teva ANDA. Teva
retains all rights set forth in Section 10 of the License Agreement.
(b) Neos for itself and its Affiliates hereby irrevocably releases and discharges Teva and its Affiliates,
predecessors, successors, assigns, directors, officers, employees, agents, suppliers, distributors, importers, manufacturers, and
customers from all causes of action, demands, claims, damages, and liabilities of any nature, whether known or unknown,
arising between Neos and/or its Affiliates and Teva and/or its Affiliates from or in connection with the Action, the Teva
ANDA, the generic products described by the Teva ANDA, and/or Neos’s COTEMPLA XR-ODT™ brand methylphenidate
extended-release orally disintegrating tablet products and accruing or occurring prior to the Execution Date, including,
without limitation, all claims that Neos and/or its Affiliates have asserted or could have asserted in the Action or in any other
proceeding that any of the Licensed Patents, as defined in the License Agreement, is infringed by the Teva ANDA and/or the
sale of the generic products described by the Teva ANDA in the Territory (all of the above collectively, the “Neos Released
Claims”). For the avoidance of doubt, the release granted under this Section 5(b) shall not apply to any product aside from
the products described by the Teva ANDA or NDA 205489, or to any ANDA other than the Teva ANDA. Neos retains all
rights set forth in Section 10 of the License Agreement.
(c) this Agreement shall constitute a final settlement between the Parties in the Territory in connection
with the Action and the Teva ANDA, and neither Teva nor its Affiliates shall institute any new challenge or litigation against
Neos and/or its Affiliates with respect to any of the Licensed Patents, as defined in the License Agreement, and ANDA
210924, or actively assist or cooperate with any other party in any such challenge or litigation unless so ordered by the Court
or compelled by law. Notwithstanding this Section 5, Teva may (1) re-certify and/or maintain a “Paragraph IV Certification”
in the Teva ANDA (as defined in the
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
3
License Agreement) with respect to the Licensed Patents or amend the Teva ANDA to contain a “Paragraph IV
Certification” with respect to any patent listed in the Orange Book for COTEMPLA XR-ODT™ brand methylphenidate
extended-release orally disintegrating tablets (and send corresponding notice of such certification); (2) challenge the
infringement, validity, enforceability or patentability of any claim of the Licensed Patents in any litigation or proceeding in
any court with respect to any product other than the Licensed Products (as defined in the License Agreement) or any ANDA
other than the Teva ANDA; or (3) file a petition with the U.S. Patent and Trademark Office requesting reexamination, inter
partes review, or other post grant review of any claims of any Licensed Patents for which Neos or its Affiliates initiates a
district court litigation against Teva with a claim of infringement with respect to any product other than the Licensed
Products, as defined by the License Agreement, or any ANDA other than the Teva ANDA. Further, notwithstanding this
Section 5, the Neos Released Claims do not preclude Neos from asserting infringement of any of the Licensed Patents, as
defined in the License Agreement, in any action or proceeding against Teva and/or any of its Affiliates involving any Teva
product other than the Licensed Products, as defined in the License Agreement.
(d) Neither Party shall release any agent or consultant retained by the Party in connection with the Action
or any attorney who represented such Party in the Action from maintaining the confidentiality of non-public information to
which such agent, consultant or attorney had access in connection with the Action or grant any waivers with respect to such
maintenance, unless so ordered by the Court or compelled by law; and
agents, consultants, or attorneys referred to under Section 5(d) herein.
(e) to the extent necessary, each Party shall cooperate with the other to enforce the obligations of such
6. ACKNOWLEDGMENTS. Teva and Neos acknowledge as follows:
(a) TEVA ACKNOWLEDGES THAT IT MAY HEREAFTER DISCOVER CLAIMS OR FACTS IN
ADDITION TO OR DIFFERENT FROM THOSE WHICH IT NOW KNOWS OR BELIEVES TO EXIST WITH
RESPECT TO THE TEVA RELEASED CLAIMS, THE FACTS AND CIRCUMSTANCES ALLEGED IN THE ACTION,
AND/OR THE SUBJECT MATTER OF THIS AGREEMENT, WHICH, IF KNOWN OR SUSPECTED AT THE TIME
OF EXECUTING THIS AGREEMENT, MAY HAVE MATERIALLY AFFECTED THIS AGREEMENT.
NEVERTHELESS, UPON THE EFFECTIVENESS OF THE RELEASE OF THE TEVA RELEASED CLAIMS AS SET
FORTH IN SECTION 5 ABOVE, TEVA HEREBY ACKNOWLEDGES THAT THE TEVA RELEASED CLAIMS
INCLUDE WAIVERS OF ANY RIGHTS, CLAIMS, OR CAUSES OF ACTION THAT MIGHT ARISE AS A RESULT
OF SUCH DIFFERENT OR ADDITIONAL CLAIMS OR FACTS. TEVA ACKNOWLEDGES THAT IT
UNDERSTANDS THE SIGNIFICANCE AND POTENTIAL CONSEQUENCES OF SUCH A RELEASE OF
UNKNOWN UNITED STATES JURISDICTION CLAIMS AND OF SUCH A SPECIFIC WAIVER OF RIGHTS. TEVA
INTENDS THAT THE CLAIMS RELEASED BY IT UNDER THIS RELEASE BE
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
4
CONSTRUED AS BROADLY AS POSSIBLE TO THE EXTENT THEY RELATE TO UNITED STATES
JURISDICTION CLAIMS. TEVA IS AWARE OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES
AS FOLLOWS:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor
at the time of executing the release, which if known by him or her, must have materially affected his or her
settlement with the debtor.”
TEVA AGREES TO EXPRESSLY WAIVE ANY RIGHTS IT MAY HAVE UNDER THIS CODE SECTION OR UNDER
FEDERAL, STATE, OR COMMON LAW STATUTES OR JUDICIAL DECISIONS OF A SIMILAR NATURE, AND
KNOWINGLY AND VOLUNTARILY WAIVES ALL SUCH UNKNOWN CLAIMS.
(b) NEOS ACKNOWLEDGES THAT IT MAY HEREAFTER DISCOVER CLAIMS OR FACTS IN
ADDITION TO OR DIFFERENT FROM THOSE WHICH IT NOW KNOWS OR BELIEVES TO EXIST WITH
RESPECT TO THE NEOS RELEASED CLAIMS, THE FACTS AND CIRCUMSTANCES ALLEGED IN THE ACTION,
AND/OR THE SUBJECT MATTER OF THIS AGREEMENT, WHICH, IF KNOWN OR SUSPECTED AT THE TIME
OF EXECUTING THIS AGREEMENT, MAY HAVE MATERIALLY AFFECTED THIS AGREEMENT.
NEVERTHELESS, UPON THE EFFECTIVENESS OF THE RELEASE OF THE NEOS RELEASED CLAIMS AS SET
FORTH IN SECTION 5 ABOVE, NEOS HEREBY ACKNOWLEDGES THAT THE NEOS RELEASED CLAIMS
INCLUDE WAIVERS OF ANY RIGHTS, CLAIMS, OR CAUSES OF ACTION THAT MIGHT ARISE AS A RESULT
OF SUCH DIFFERENT OR ADDITIONAL CLAIMS OR FACTS. NEOS ACKNOWLEDGES THAT IT
UNDERSTANDS THE SIGNIFICANCE AND POTENTIAL CONSEQUENCES OF SUCH A RELEASE OF
UNKNOWN UNITED STATES JURISDICTION CLAIMS AND OF SUCH A SPECIFIC WAIVER OF RIGHTS. NEOS
INTENDS THAT THE CLAIMS RELEASED BY IT UNDER THIS RELEASE BE CONSTRUED AS BROADLY AS
POSSIBLE TO THE EXTENT THEY RELATE TO UNITED STATES JURISDICTION CLAIMS. NEOS IS AWARE OF
CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor
at the time of executing the release, which if known by him or her, must have materially affected his or her
settlement with the debtor.”
NEOS AGREES TO EXPRESSLY WAIVE ANY RIGHTS IT MAY HAVE UNDER THIS CODE SECTION OR UNDER
FEDERAL, STATE, OR COMMON LAW STATUTES OR JUDICIAL DECISIONS OF A SIMILAR NATURE, AND
KNOWINGLY AND VOLUNTARILY WAIVES ALL SUCH UNKNOWN CLAIMS.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
5
7. Confidentiality. The terms of this Settlement Agreement shall be maintained in strict confidence by the
Parties except: (a) as provided by Section 4 of this Agreement; (b) that Neos may disclose such terms as may be necessary or
useful in connection with any litigation or other proceeding relating to any of the Licensed Patents (as defined in the License
Agreement), so long as Neos notifies Teva 14 days prior to such disclosure and such disclosure is made pursuant to either:
(1) the highest level of confidentiality under a protective order; or (2) a confidentiality agreement that restricts access to
outside counsel only; (c) that any Party may disclose such terms if and as required by law, including, without limitation, SEC
reporting requirements, disclosure requirements to a Party’s bondholders, noteholders, or debtholders, or the disclosure
requirements of any stock exchange that a Party is subject to; (d) that Teva may disclose such terms to the FDA or to its
manufacturers, suppliers and distributors as may be necessary or useful in obtaining and maintaining final approval of the
Teva ANDA and launching the generic products that are the subject of the Teva ANDA when and as permitted by the License
Agreement, so long as Teva requests that the FDA and such manufacturers, suppliers and distributors, as applicable, maintain
such terms in confidence; (e) that any party may disclose the terms of this Agreement to its Affiliates and/or any Third Party
in connection with a potential or actual merger, reorganization, investment, change of control, or sale of all or substantially all
of the applicable business or assets of the party to which this Agreement relates, and/or to any Third Party in connection with
any divestiture of the Teva ANDA, Neos NDA, or any of the Licensed Patents, so long as such disclosure is made pursuant to
a confidentiality agreement that is at least as restrictive with respect to access as the terms of this Agreement; (f) that any
Party may disclose such terms to its accountants, auditors, and/or attorneys as required for them to perform their duties, so
long as such disclosure is made subject to a confidentiality agreement or professional confidentiality obligation; and (g) that
the Parties may each issue a press release disclosing that the Parties have settled the Action, and that Teva has received a
license under the Licensed Patents, as defined in the License Agreement, that will permit Teva to commercially launch the
Licensed Products on the Launch Date, as those terms are defined in the License Agreement, or earlier in certain
circumstances, so long as such press release is approved by the other Parties, which approval shall not be unreasonably
delayed, conditioned, or withheld. The Parties acknowledge and agree that, upon its filing with the Court, the Stipulation
And Order will be a matter of public record and shall not be subject to any confidentiality restrictions. The Parties further
agree that, upon the filing of the Stipulation And Order with the Court, the fact that the Parties have settled the Action will be
a matter of public record and shall not be subject to any confidentiality restrictions, but that the terms of such settlement shall
be maintained in confidence as provided by this Section 7.
8. Term and Termination. This Agreement shall continue from the Execution Date until the earlier of:
(a) the expiration of the last to expire of the Licensed Patents, as defined by the License Agreement; or (b) the date of a Final
Court Decision, as defined by the License Agreement, that all of the claims of all of the Licensed Patents, as defined by the
License Agreement, are invalid, not infringed, or unenforceable. The releases and discharges set forth in Section 5 of this
Agreement shall survive the expiration or termination of this Agreement and the confidentiality obligations set forth in
Section 7 of this Agreement shall survive for a
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
6
period of fifteen (15) years from the Execution Date, notwithstanding any earlier expiration or termination of this Settlement
Agreement. The License Agreement shall remain in full force and effect pursuant to its own terms notwithstanding the
expiration or termination of this Agreement.
9. No Assignment. This Agreement may not be assigned or transferred to a Third Party, as defined in the
License Agreement, without the express prior written consent of the other Parties hereto, which shall not be unreasonably
withheld, conditioned, or delayed, except to a successor to all or substantially all of the business of the assigning or
transferring Party to which this Agreement pertains (whether by sale of stock or assets, merger, consolidation, reorganization,
divestiture, change in control, or otherwise) in which case the Party shall assign this Agreement to such successor. The
covenants, rights, and obligations of a Party under this Agreement shall inure to the benefit of and be binding upon any
successor or permitted assignee of the Party. Any purported assignment in violation of this Section 9 of the Agreement shall
be null and void ab initio and of no force or effect.
10. Notice. Any notice required or permitted to be given or sent under this Agreement shall be hand delivered
or sent by express delivery service to the Parties at the addresses indicated below.
If to Neos, to:
with a copy to:
If to Teva, to:
Mr. Richard Eisenstadt
Chief Financial Officer
Neos Therapeutics, Inc.
2940 North Highway 360
Suite 400
Grand Prairie, Texas 75050
Peter J. Armenio, P.C.
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue
New York, New York 10010
Colman B. Ragan, Esq.
Vice President & General Counsel
North America Intellectual Property Litigation
Teva Pharmaceuticals USA, Inc.
400 Interpace Parkway
Parsippany, NJ 07054
with a copy to:
Michael Nutter, Esq.
Winston & Strawn LLP
35 W. Wacker Drive
Chicago, IL 60601
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
7
Any such notice shall be deemed to have been received on the date actually received. Either Party may change its notice
information above by giving the other Parties written notice, delivered in accordance with this Section.
11. Entire Agreement. This Agreement, as defined herein to include Exhibits A, B, and C, constitutes the
complete and final agreement between the Parties with respect to the subject matter hereof and supersedes and terminates any
prior or contemporaneous agreements and/or understandings between the Parties, whether oral or in writing, relating to such
subject matter. There are no covenants, promises, agreements, warranties, representations, conditions, or understandings,
either oral or written, between the Parties relating to such subject matter other than as are set forth in this Agreement. No
alteration, amendment, change, waiver, or addition to this Agreement shall be binding upon any of the Parties unless reduced
to writing and signed by an authorized officer of each Party. Each Party in deciding to execute this Agreement has retained
counsel and has not relied on any understanding, agreement, representation, or promise by any Party that is not explicitly set
forth herein.
12. Governing Law. This Agreement shall be governed, interpreted, and construed in accordance with the
laws of the State of Delaware, without giving effect to choice of law principles. The Parties irrevocably agree that the federal
district court in the State of Delaware shall have exclusive jurisdiction to deal with any disputes arising out of or in
connection with this Agreement and that, accordingly, any proceeding arising out of or in connection with this Agreement
shall be brought in the United States District Court for the District of Delaware. Notwithstanding the foregoing, if there is
any dispute for which the federal district court in the State of Delaware does not have subject matter jurisdiction, the state
courts in Delaware shall have jurisdiction. In connection with any dispute arising out of or in connection with this
Agreement, each Party hereby expressly consents and submits to the personal jurisdiction of the federal and state courts in the
State of Delaware.
13. Severability. Subject to the provisions and the mechanisms of Section 4 above, if any provision of this
Agreement is declared illegal, invalid, or unenforceable by a court having competent jurisdiction, it is mutually agreed that
this Agreement shall endure except for the part declared invalid or unenforceable by order of such court; provided, however,
that in the event that the terms and conditions of this Agreement are materially altered, the Parties will, in good faith,
renegotiate the terms and conditions of this Agreement to reasonably replace such invalid or unenforceable provisions in light
of the intent of this Agreement.
14. Waiver. Any delay or failure in enforcing a Party’s rights under this Agreement, or any acquiescence as to
a particular default or other matter, shall not constitute a waiver of such Party’s rights to the enforcement of such rights, nor
operate to bar the exercise or enforcement thereof at any time or times thereafter, except as to an express written and signed
waiver as to a particular matter for a particular period of time.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
8
15. Counterparts. This Agreement shall become binding when any one or more counterparts hereof,
individually or taken together, bears the signatures of all of the Parties. This Agreement may be executed in any number of
counterparts (including facsimile or e-mail counterparts), each of which shall be an original as against a Party whose
signature appears thereon, but all of which taken together shall constitute one and the same instrument.
16. Representations and Warranties. Each Party hereby represents and warrants that: (a) it has approved the
execution of this Agreement and has authorized and directed the signatory officer below to execute and deliver this
Agreement; (b) it has the full right and power to enter into this Agreement, and there are no other persons or entities whose
consent or joinder in this Agreement is necessary to make fully effective those provisions of this Agreement that obligate,
burden, or bind it; (c) when executed by it, this Agreement shall constitute a valid and binding obligation of the Party,
enforceable in accordance with its terms; and (d) it has not transferred, assigned, or pledged to any third party, whether or not
Affiliated, the right to bring, pursue, or settle any of the claims, defenses, or counterclaims in the Action.
17. Construction. This Agreement has been jointly negotiated and drafted by the Parties through their
respective counsel and no provision shall be construed or interpreted for or against any of the Parties on the basis that such
provision, or any other provision, or the Agreement as a whole, was purportedly drafted by a particular Party. Unless
specified otherwise, all references to periods of days for taking certain actions in this Agreement shall be construed to refer to
business days. All references to an Affiliate or Affiliates in this Agreement shall have the meaning provided by Section 1.4
of the License Agreement.
* * * * *
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
9
IN WITNESS WHEREOF, and intending to be legally bound, this Agreement has been executed by the duly
authorized representatives of the Parties.
NEOS THERAPEUTICS, INC.
NEOS THERAPEUTICS, LP
/s/ Richard Eisenstadt
By:
Name: Richard Eisenstadt
Title: Chief Financial Officer
/s/ Richard Eisenstadt
By:
Name: Richard Eisenstadt
Title: Chief Financial Officer
TEVA PHARMACEUTICALS USA, INC.
TEVA PHARMACEUTICALS USA, INC.
/s/ Hafrun Fridriksdottir
By:
Name: Hafrun Fridriksdottir
Title: EVP Global R&D
/s/ Colman Ragan
By:
Name: Colman Ragan
Title: VP & GC North America
IP Litigation
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10
EXHIBIT A
Stipulation And Order
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
NEOS THERAPEUTICS, INC.
and NEOS THERAPEUTICS, LP,
Plaintiffs,
v.
TEVA PHARMACEUTICALS USA, INC.,
Defendant.
)
)
)
)
)
)
)
)
)
Civil Action No. 17-1793-CFC
The Court, upon the consent and request of Plaintiffs Neos Therapeutics, Inc. and Neos Therapeutics, LP
(collectively, “Plaintiffs”) and Defendant Teva Pharmaceuticals USA, Inc. (“Teva”), hereby acknowledges the following
Stipulation and issues the following Order.
STIPULATION AND ORDER
STIPULATION
1. This Court has subject matter jurisdiction over the above-captioned patent infringement action (the
“Action”) and personal jurisdiction over Plaintiffs and Teva for purposes of this Action only. Venue is proper in this Court as
to Plaintiffs and Teva for purposes of this Action only.
2. In the Action, Plaintiffs have asserted claims against Teva for infringement of U.S. Patent Nos.
8,840,924 (“the ‘924 patent”), 9,072,680 (“the ‘680 patent”); and 9,089,496 (“the ‘496 patent”), in connection with Teva’s
submission of Abbreviated New Drug Application (“ANDA”) No. 210924 directed to generic extended-release orally
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
disintegrating tablets containing 8.6 mg, 17.3 mg, or 25.9 mg of methylphenidate to the U.S. Food and Drug Administration
(“FDA”).
3. In response to Plaintiffs’ charges of patent infringement, Teva has denied Plaintiffs’ claims and alleged
certain defenses and counterclaims, including that the ‘924 patent, ‘680 patent, and the ‘496 patent are invalid and/or not
infringed by the generic extended-release orally disintegrating tablet products that are the subject of ANDA No. 210924. To
date, no decision has been obtained in the Action regarding Plaintiffs’ claims of infringement, the validity of the ‘924 patent,
‘680 patent, and the ‘496 patent, and/or whether any commercial making, using, selling, or offering to sell within the United
States, or importing into the United States, of the generic products described by ANDA No. 210924 would infringe those
patents.
4. For purposes of resolving the Action, Teva admits that the submission of ANDA No. 210924 to the
FDA for the purpose of obtaining regulatory approval to engage in the commercial manufacture, use, and/or sale of the
generic methylphenidate products described therein within the United States before the expiration the ‘924 patent, ‘680
patent, and the ‘496 patent was a technical act of infringement of each of those patents under 35 U.S.C. § 271(e)(2)(A). This
admission is without prejudice to any claim, defense, or counterclaim in any possible future action or proceeding between
Teva and Plaintiffs regarding the ‘924 patent, the ‘680 patent, and/or the ‘496 patent and a product other than the generic
products described by ANDA No. 210924.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
2
Action, including the allegations and averments contained therein, should be dismissed, without prejudice.
5. Both parties agree that all other claims, defenses, and counterclaims set forth in the pleadings in the
ORDER
IS HEREBY ORDERED, ADJUDGED AND DECREED THAT:
Accordingly, pursuant to the above Stipulation, and upon the consent and request of Plaintiffs and Teva, IT
1. The filing of ANDA No. 210924 was a technical act of infringement of the ‘924 patent, ‘680 patent,
and the ‘496 patent under 35 U.S.C. § 271(e)(2)(A). No decision in the Action has been obtained by either party regarding
the validity of the ‘924 patent, ‘680 patent, and the ‘496 patent and/or whether any commercial making, using, selling, or
offering to sell within the United States, or importing into the United States, of the generic products described by ANDA
No. 210924 would infringe those patents.
allegations and averments contained therein, are hereby dismissed, without prejudice.
2. All other claims, defenses, and counterclaims set forth in the pleadings in the Action, including the
3. Teva, its officers, agents, servants, employees, and attorneys, and all other persons in active concert or
participation with any of them who receive actual notice of this Order by personal service or otherwise, are hereby enjoined
from commercially manufacturing, using, offering to sell, or selling within the United States, or importing into the United
States, the generic extended-release orally disintegrating tablet products described by ANDA No. 210924
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
3
during the life of the ‘924 patent, ‘680 patent, and the ‘496 patent, including any extensions and pediatric exclusivities, absent
a license agreement or other authorization by Plaintiffs.
Stipulation And Order.
4. Plaintiffs and Teva each expressly waive any right to appeal or otherwise move for relief from this
5. Each party is to bear its own attorneys’ fees and costs.
Order.
6. This Court retains jurisdiction over Plaintiffs and Teva for purposes of enforcing this Stipulation And
7. This Stipulation And Order shall finally resolve the Action.
8. This Stipulation And Order is without prejudice to any claim, defense, or counterclaim in any possible
future action or proceeding between Teva and Plaintiffs regarding the ‘924 patent, ‘680 patent, and the ‘496 patent and a
product other than the generic extended-release orally disintegrating tablet products described by ANDA No. 210924.
9. Nothing herein prohibits or is intended to prohibit: (a) Teva from maintaining any “Paragraph IV
Certification” pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(IV) or pursuant to 21 C.F.R. § 314.94(a)(12) with respect to ANDA
No. 210924; or (b) the U.S. Food and Drug Administration from granting final approval of Teva’s ANDA No. 210924 at any
time.
10. The Clerk of the Court is directed to enter this Stipulation And Order forthwith.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
4
SO ORDERED:
This day of ,
HONORABLE COLM F. CONNOLLY
UNITED STATES DISTRICT JUDGE
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
5
EXHIBIT B
License Agreement
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
LICENSE AGREEMENT
This License Agreement (including Exhibit C, the “License Agreement”) is made and entered into this 21st day of
December, 2018 (the “Execution Date”), by and between, on the one hand, Neos Therapeutics, Inc. and Neos Therapeutics,
LP (collectively, “Neos”), and on the other hand, Teva Pharmaceuticals USA, Inc. (“Teva”) (collectively, the “Parties,” or
each separately, a “Party”).
RECITALS
A. WHEREAS Neos owns certain U.S. patents listed in the FDA publication Approved Drug Products With
Therapeutic Equivalence Evaluations in connection with the COTEMPLA XR-ODT™ brand methylphenidate
extended-release orally disintegrating tablets sold in the Territory, as hereinafter defined, under the Neos NDA, as hereinafter
defined; and
B. WHEREAS Teva has sought approval from the U.S. Food and Drug Administration (“FDA”) to market
generic extended-release orally disintegrating tablets containing 8.6 mg, 17.3 mg, or 25.9 mg of methylphenidate in the
Territory under the Teva ANDA, as hereinafter defined; and
C. WHEREAS Teva has represented that it is a First Filer, as hereinafter defined; and
D. WHEREAS, pursuant to the settlement agreement to which this License Agreement is Exhibit B (the
“Agreement”), executed contemporaneously with this License Agreement, Neos and Teva have agreed to settle the patent
infringement litigation described therein related to Teva’s filing of the Teva ANDA with the FDA; and
E. WHEREAS, as part of such settlement, Neos and Teva agreed to enter into this License Agreement, which,
as of the date and upon the terms set forth herein, grants Teva a non-exclusive license and sublicense, as applicable, under the
Licensed Patents, as hereinafter defined, to manufacture and/or sell in the Territory the Licensed Products, as hereinafter
defined.
NOW THEREFORE, in consideration of the promises and mutual covenants set forth herein, the sufficiency of
which is hereby acknowledged, the Parties hereby agree as follows.
1. Definitions
1.1 “‘924 Patent” shall mean U.S. Patent No. 8,840,924, including all corrections, extensions, and
pediatric exclusivities, and any continuations, continuations-in-part, divisionals, reissues, or reexaminations thereof, in each
case whether granted or allowed before, on, or after the Execution Date.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
1.2 “‘680 Patent” shall mean U.S. Patent No. 9,072,680, including all corrections, extensions, and
pediatric exclusivities, and any continuations, continuations-in-part, divisionals, reissues, or reexaminations thereof, in each
case whether granted or allowed before, on, or after the Execution Date.
1.3 “‘496 Patent” shall mean U.S. Patent No. 9,089,496, including all corrections, extensions, and
pediatric exclusivities, and any continuations, continuations-in-part, divisionals, reissues, or reexaminations thereof, in each
case whether granted or allowed before, on, or after the Execution Date.
1.4 “Affiliate” shall mean any person or legal entity directly or indirectly, through one or more
intermediary, controlling, controlled by, or under common control with the Party, where control shall mean: (a) in the case of
a corporate entity, the direct or indirect ownership of more than fifty percent (50%) of the outstanding voting securities of an
entity or such other relationship as results in the actual control over the management, assets, business, and affairs of an entity;
and (b) in the case of a non-corporate entity, the direct or indirect power to either: (i) direct the management and policies of
the non-corporate entity; or (ii) elect more than fifty percent (50%) of the members of the governing body of such
non-corporate entity. The term “Affiliate” does not include API Affiliate or Wholesaler Affiliate, as defined below.
1.5 “ANDA” shall mean an Abbreviated New Drug Application.
1.6 “API Affiliate” shall mean a subsidiary or Affiliate of a Party whose primary business is the
manufacture and sale of active pharmaceutical ingredients (“API”). An API Affiliate shall not be deemed to be an Affiliate
of a Party for purposes of this Agreement. For clarity, Teva’s API Affiliates as of the Execution Date include, without
limitation, Teva API Inc.
ingredient; (b) that is Marketed in the Territory without the Trademark; and (c) that is Marketed under the Neos NDA.
1.7 “Authorized Generic” shall mean a generic product: (a) having the Compound as the sole active
1.8 “Compound” shall mean methylphenidate.
1.9 “Effective Date” shall mean the date that the Stipulation And Order is entered by the Court.
1.10 “FDA” shall mean the U.S. Food and Drug Administration or any successor agency.
1.11 “Final Court Decision” shall mean a decision of a court or the U.S. Patent Trial and Appeal
Board from which no appeal has been or can be taken, excluding any petition for a writ of certiorari or other proceedings
before the United States Supreme Court.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
2
1.12 “First Filer” shall mean any party that filed a substantially complete ANDA seeking FDA
approval to Market a Generic Equivalent in the Territory before the expiration of one or more of the Licensed Patents with
the FDA on the same day that the first such ANDA was filed with the FDA.
1.13 “Generic Equivalent” shall mean: (a) a pharmaceutical product that has been approved by or
submitted for approval to FDA for Marketing in the Territory pursuant to an ANDA or a paper NDA (an application under 21
U.S.C. § 355(b)(2)) as a generic equivalent to any of the NDA Products; or (b) an Authorized Generic.
FDA.
1.14 “GMPs” shall mean then current good manufacturing practice regulations promulgated by the
1.15 “Launch Date” shall mean July 1, 2026, unless accelerated as explicitly provided herein.
1.16 “Licensed Patents” shall mean, collectively, the ‘924 Patent, the ‘680 Patent, and the ‘496 Patent,
and any other patents either owned, in-licensed, or acquired, now or in the future, by Neos or any of its Affiliates that would,
in the absence of the Teva License granted under this License Agreement, be infringed by the Manufacture, having
Manufactured, and/or Marketing by Teva of the Licensed Products in or for the Territory as of the Launch Date, including
any corrections, extensions, pediatric exclusivities, continuations, continuations-in-part, divisionals, reissues, or
reexaminations thereof.
subject of the Teva ANDA, as that term is defined in Section 1.27.
1.17 “Licensed Products” shall mean the extended-release orally disintegrating tablets that are the
1.18 “Manufacture” shall mean to make, or to have made, a pharmaceutical product in accordance
with GMPs and the provisions of an ANDA or NDA covering such product, and “Manufacturing” shall have a corresponding
meaning.
1.19 “Market” shall mean to offer, sell, or offer to sell a pharmaceutical product in accordance with all
applicable laws and/or to use, import, or export such product for such purposes under all applicable laws, and “Marketing”
shall have a corresponding meaning.
1.20 “NDA Products” shall mean the extended-release orally disintegrating tablets containing 8.6 mg,
17.3 mg, or 25.9 mg of methylphenidate Marketed under the Trademark in the Territory that contain the Compound as the
sole active ingredient and that are approved for Marketing in the Territory pursuant to the Neos NDA, as defined below.
1.21 “Neos NDA” shall mean New Drug Application No. 205489.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
3
1.22 “Officially Discontinue” shall mean any of: (a) delisting the products described in Neos NDA
with the FDA; (b) delisting the Licensed Patents from the Orange Book unless Neos reasonably determines in good faith that
such delisting is required under applicable law; (c) seeking action with the FDA to withdraw COTEMPLA XR-ODT™ from
the market, unless required, requested or recommended by the FDA or another governmental authority to do so; or
(d) deleting, removing, or canceling any National Drug Code(s) for COTEMPLA XR-ODT™from the applicable National
Drug File.
1.23 “Permitted Modification” shall mean any supplement of, modification to, or replacement of,
ANDA No. 210924 that does not change the active ingredient, dosage form, reference listed drug (unless the reference listed
drug is first changed for NDA No. 205489), or AB rating of any generic product defined by said ANDA. For the avoidance
of doubt, a modification or replacement of ANDA No. 210924 to change the active ingredient or add a second active
ingredient is not a Permitted Modification. For the avoidance of doubt, a modification or replacement of ANDA No. 210924
to change the dosage form to an oral liquid dosage form is not a Permitted Modification.
Exhibit A.
1.24 “Stipulation And Order” shall mean the document attached to the Settlement Agreement as
the date on which this License Agreement expires or terminates as provided in Section 12 of this License Agreement.
1.25 “Term” shall mean the period of time from the Execution Date of this License Agreement until
the Commonwealth of Puerto Rico.
1.26 “Territory” shall mean the United States of America, including its territories, possessions, and
1.27 “Teva ANDA” shall mean Teva’s ANDA No. 210924 as supplemented and amended as of the
Execution Date of this License Agreement and including any Permitted Modification after the Execution Date of this License
Agreement.
Agreement.
1.28 “Teva License” shall have the meaning assigned to such term in Section 2.1 of this License
1.29 “Third Party” shall mean any person or entity other than the Parties and their Affiliates.
1.30 “Trademark” shall mean the trademark COTEMPLA XR-ODT™.
1.31 “Wholesaler Affiliate” shall mean a subsidiary or Affiliate of a Party whose primary business is
wholesale distribution of pharmaceutical products. A Wholesaler Affiliate shall not be deemed to be an Affiliate of a Party.
For clarity, Teva’s Wholesaler Affiliates as of the Execution Date include, without limitation, Anda, Inc.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
4
2. Teva License/Waiver of Exclusivities
Affiliates (and to the extent necessary, its suppliers, distributors, and customers, as the case may be):
2.1 Licensed Products. Effective on and after the Launch Date, Neos grants to Teva and its
the Licensed Patents to Manufacture, have Manufactured, and Market the Licensed Products in or for the Territory; and
(a) a non-exclusive, fully paid up, royalty-free license and sublicense, as applicable, under
license and sublicense provided in Section 2.1(a) with respect to the Licensed Products.
(b) a waiver of any regulatory, statutory, or other exclusivities necessary to effectuate the
In addition, during the period of one hundred eighty (180) consecutive calendar days prior to the Launch Date, Neos grants to
Teva a non-exclusive license and sublicense, as applicable, to Manufacture or have Manufactured Licensed Products in or for
the Territory solely to the extent reasonably necessary to enable Teva to launch such Licensed Products in the Territory on or
after the Launch Date. Teva may Manufacture Licensed Products earlier to the extent necessary and related to FDA
approval. The licenses and sublicenses granted under this Section 2.1 are referred to herein as the “Teva License.” Teva
shall not have any right to sublicense, transfer, or assign any of its rights under the Teva License, except to the extent
expressly permitted under Section 13.2 of this License Agreement.
Agreement, prior to the Launch Date, Teva may engage in the following pre-booking activities:
2.2 Pre-Booking Activities. Notwithstanding anything to the contrary contained in this License
(a) Discussions with potential customers to make them aware of the upcoming availability of
the Licensed Products from Teva as of the Launch Date, starting not earlier than [***] consecutive calendar days prior to the
Launch Date;
consecutive calendar days prior to the Launch Date.
(b) Importation of the Licensed Products into the Territory starting not earlier than [***]
not earlier than [***] consecutive calendar days prior to the Launch Date.
(c) Offering the Licensed Products for sale and entering into non-binding contracts starting
For avoidance of doubt, the performance by Teva of any of the activities expressly provided for in this Section 2.2 during the
times expressly provided for in this Section 2.2 shall not be construed as Marketing of the Licensed Products prior to the
Launch Date for purposes of Section 12.2(a) of this License Agreement.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
5
2.3 Regulatory Delay. No provision of this License Agreement shall be affected by any delay in the
approval of the Teva ANDA by the FDA, or the failure of Teva to obtain FDA approval of the Teva ANDA, except to the
extent that such provision is affected by the delay of the Launch Date.
2.4 No Interference; No Discontinuation. Subject to Teva’s compliance with the terms of this
License Agreement and the Settlement Agreement — and except for good faith reasons of safety and/or efficacy based on
legitimate, objective evidence or pursuant to an FDA request or court order — Neos and/or its Affiliates shall not, directly or
indirectly, seek to interfere with Teva’s efforts to: (a) obtain FDA approval of the Licensed Products; or (b) Market the
Licensed Products as of the date and under the terms provided by this License Agreement. Subject to Teva’s compliance,
neither shall Neos nor any of its Affiliates Officially Discontinue the products described in the Neos NDA prior to the
expiration of the Licensed Patents, unless required, requested, or recommended to do so by the FDA or other governmental
authority or applicable law.
2.5 Confirmation of Regulatory Waiver. During the Term, within ten (10) business days of
receiving a written request from Teva delivered in accordance with Section 13 of this License Agreement, Neos shall submit
to the FDA, and/or shall cause its Affiliates to submit to the FDA, appropriate and reasonable documentation (in a form
acceptable to FDA and all subject to review by Teva prior to submission) evidencing the licenses, covenants not to sue and
waivers set forth in this agreement, including but not limited to a letter in the form provided in Exhibit C to the Settlement
Agreement. If requested in writing by Teva or the FDA, Neos shall further authenticate any true and correct copy of the
Settlement Documents provided to the FDA by Teva. Should the FDA request additional confirmation or documentation of
the licenses, covenants not to sue and waivers set forth in this agreement, the Parties agree to use commercially reasonable
efforts to reach agreement with respect to providing any such requested additional confirmation or documentation.
2.6 No Consent For FDA Approval. Nothing in this License Agreement or any of the other
Settlement Documents shall be interpreted as Neos or its Affiliates consenting to the accuracy or sufficiency of any scientific,
medical, bioequivalence, regulatory, or other information contained in the Teva ANDA and/or consenting to the FDA
approving the Teva ANDA on the basis of any such information.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
6
3. No Unauthorized Manufacturing or Marketing. Except to the extent expressly permitted by
Section 2.1, Section 2.2, Section 5, or Section 6 of this License Agreement, unless this License Agreement is earlier
terminated in accordance with the terms thereof, neither Teva, nor any of its Affiliates, nor any of its API Affiliates, nor any
of its Wholesaler Affiliates shall under any circumstances commercially Manufacture or Market any Licensed Product in the
Territory prior to the expiration of all of the Licensed Patents, including any extensions and pediatric exclusivities.
4. Neos’s Retained Rights
4.1 Retained Rights. Except for the non-exclusive licenses and sublicenses granted to Teva under
Section 2.1 of this License Agreement, and the additional rights granted under Section 2.2 of this License Agreement, nothing
herein shall be construed as granting or conveying to Teva any licenses, sublicenses, or other rights under the Licensed
Patents or any other of Neos’s intellectual property, all such rights being retained by Neos.
4.2 Third Party Licenses. Teva hereby acknowledges that Neos’s retained rights include, without
limitation, the right to grant licenses and/or sublicenses, as applicable, to any Third Party under any of the Licensed Patents
to, among other things, Manufacture and/or Market in the Territory any Generic Equivalent.
4.3 Authorized Generics. Teva hereby acknowledges that Neos’s retained rights include, without
limitation, the right to grant licenses and/or sublicenses, as applicable, to any Third Party under any of the Licensed Patents
to, among other things, Manufacture and/or Market in the Territory an Authorized Generic. Teva further acknowledges that
Neos’s retained rights include, without limitation, the right to Manufacture and/or Market in the Territory an Authorized
Generic.
5. Potential Acceleration Of The Launch Date
5.1 Effect Of Certain Agreements Or An Authorized Generic
(a) [***]
(b) [***]
5.2 Effect Of A Final Court Decision. If there is a Final Court Decision regarding a Generic
Equivalent holding all then asserted, adjudicated, and unexpired claims of the Licensed Patents invalid, canceled,
unenforceable, and/or not infringed by a Generic Equivalent, then the Launch Date shall automatically be amended to the date
of such Final Court Decision provided such Final Court Decision precedes the existing Launch Date.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
7
5.3 Effect Of A Market Erosion. In the event that there is a Market Erosion, as defined in
Section 5.3(a) of this License Agreement, and there is no extenuating Force Majeure Event, as defined in Section 5.3(b) of
this License Agreement, then the Launch Date in this License Agreement shall automatically be amended as defined in
Section 5.3(c) of this License Agreement.
(a) [***]
(b) If any Market Erosion defined by Section 5.3(a) of this License Agreement occurs as the
result of a Force Majeure Event, and Neos timely provides notice and documentation of such Force Majeure Event to Teva,
then it will be deemed as if no such Market Erosion has occurred. For purposes of this Section 5.3(b), a “Force Majeure
Event” shall be defined as any of the following: fire, explosion, earthquake, flood, other natural disasters, or other acts of
God; new acts, regulations, or Laws of any Governmental Entity; war (whether or not declared), acts of terrorism, or failure
of public utilities; or insolvency of any Third-Party manufacturer of the Compound or any of the NDA Products. In the event
of a Force Majeure Event, Neos shall timely notify Teva and take reasonable steps to mitigate or otherwise remedy the impact
of such event.
(c) [***]
5.4 Effect Of Multiple Accelerations. In the event that more than one of the automatic amendments
of the Launch Date provided for by Sections 5.1, 5.2 and/or 5.3 occurs during the Term, the Launch Date shall be the earliest
such amended date.
6. Effect Of A Launch At Risk
6.1 [***]
(a) [***]
(b) [***]
[***]
6.2 [***]
6.3 In response to any At Risk Launch, including during any Teva At Risk Period, Neos shall be
entitled to authorize any Third Party to Market an Authorized Generic in the Territory, and/or Market an Authorized Generic
in the Territory itself or through an Affiliate, all without any notice or compensation to Teva. Section 5.1(b) of this License
Agreement shall not be triggered by any such action unless the Authorized Generic in question is still being
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
8
shipped within or into the Territory by Neos or its authorized Third Party more than ten (10) days after the expiration of the
Teva At Risk Period.
6.4 [***]
7. Quality Assurance. Teva represents and warrants to Neos that all Licensed Products Marketed by Teva
will be commercially Manufactured, stored, shipped, handled, and Marketed by it and its designees in accordance with
then-current GMPs and all applicable laws, rules, and regulations.
8. Confidentiality. The terms of this License Agreement shall be maintained in strict confidence by the
Parties except: (a) as provided by Section 4 of the Settlement Agreement; (b) that Neos may disclose such terms as may be
necessary or useful in connection with any litigation or other proceeding relating to any of the Licensed Patents, so long as
Neos notifies Teva 14 days prior to such disclosure and such disclosure is made pursuant to either: (1) the highest level of
confidentiality under a protective order; or (2) a confidentiality agreement that restricts access to outside counsel only; (c) that
any Party may disclose such terms if and as required by law, including, without limitation, SEC reporting requirements,
disclosure requirements to a Party’s bondholders, noteholders, or debtholders, or the disclosure requirements of any stock
exchange that a Party is subject to; (d) that Teva may disclose such terms to the FDA or to its manufacturers, suppliers and
distributors as may be necessary or useful in obtaining and maintaining final approval of the Teva ANDA and launching the
generic products that are the subject of the Teva ANDA when and as permitted by the License Agreement, so long as Teva
requests that the FDA and such manufacturers, suppliers and distributors, as applicable, maintain such terms in confidence;
(e) that any party may disclose the terms of this Agreement to its Affiliates and/or any Third Party in connection with a
potential or actual merger, reorganization, investment, change of control, or sale of all or substantially all of the applicable
business or assets of the party to which this Agreement relates, and/or to any Third Party in connection with any divestiture of
the Teva ANDA, Neos NDA, or any of the Licensed Patents, so long as such disclosure is made pursuant to a confidentiality
agreement that is at least as restrictive with respect to access as the terms of this Agreement; (f) that any Party may disclose
such terms to its accountants, auditors, and/or attorneys as required for them to perform their duties, so long as such
disclosure is made subject to a confidentiality agreement or professional confidentiality obligation; and (g) that the Parties
may each issue a press release disclosing that the Parties have settled the Action, and that Teva has received a license under
the Licensed Patents that will permit Teva to commercially launch the Licensed Products on the Launch Date, or earlier in
certain circumstances, so long as such press release is approved by the other Parties, which approval shall not be
unreasonably delayed, conditioned, or withheld. The Parties acknowledge and agree that, upon its filing with the Court, the
Stipulation And Order will be a matter of public record and shall not be subject to any confidentiality restrictions. The Parties
further agree that, upon the filing of the Stipulation And Order with the Court, the fact that the Parties have settled the Action
will be a matter of public record and shall not be subject
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
9
to any confidentiality restrictions, but that the terms of such settlement shall be maintained in confidence as provided by this
Section 8.
9. Representations
Section 1.12 of this License Agreement.
9.1 Teva represents that, to the best of its knowledge and belief, Teva is a First Filer, as defined by
Third Party granting such party a license to Market a Generic Equivalent in the Territory.
9.2 Neos represents that, as of the Execution Date, Neos has not entered into any agreement with any
9.3 Each Party represents and warrants to the other Parties that the execution and delivery by such
Party of this License Agreement and the performance of its obligations under this License Agreement and the Settlement
Agreement have been duly authorized by all necessary corporate action and do not conflict with the terms of any other
contract, agreement, arrangement, or understanding to which such Party is a party.
Licensed Patents to Teva under the terms and conditions set forth in the Agreement and this License Agreement.
9.4 Neos represents and warrants that it has the right to license and/or sublicense, as applicable, the
9.5 Neos represents and warrants that the terms of the License Agreement being offered to Teva are
and will be equivalent to or better than the terms being offered by Neos or its Affiliates to any Third Party with respect to any
license(s) or other permissions(s) to Generic Equivalent(s) (“Third Party Agreement”) with respect to Sections 2.1, 2.2, 5, and
6 of this License Agreement (License, Pre-Booking Activities, Accelerators, and At Risk Launch). If Neos and/or its
Affiliates enters into a Third Party Agreement providing such Third Party with more favorable terms with respect to Sections
2.1, 2.2, 5, and/or 6, of this License Agreement, then the applicable terms in this License Agreement will be automatically
amended to provide such more favorable terms to Teva. Neos shall notify Teva of any more favorable terms within five
(5) business days.
9.6 Each Party represents and warrants to the other Parties that the explicit terms of the Agreement
and this License Agreement reflect the sole consideration being exchanged between or among any of the Parties in connection
with settling the Action and resolving their dispute regarding the Teva ANDA and that no other form of compensation or
other accommodation has been made between or among any of the Parties.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10
10. Covenants; Patent Challenges and Listings; Limitations on Representations
10.1 Covenants; Patent Listings and Paragraph IV Certifications.
(a) [***]
(b) During the Term, and provided that Teva and its Affiliates comply with the terms of this
License Agreement and the Settlement Agreement, Neos and its Affiliates covenant not to sue Teva or its Affiliates, or any of
their predecessors, successors, parents, subsidiaries, shareholders, assigns, licensees, sublicensees, agents, administrators,
attorneys, directors, officers, employees, representatives, manufacturers, importers, suppliers, distributors, customers, and
insurers, or support or encourage any Third Party to sue, for infringement of any United States or foreign patents owned,
exclusively licensed or otherwise controlled, wholly or in part, now or in the future, by Neos and/or any of its Affiliates in
connection with the making, using, selling, or offering for sale of the Licensed Products in the Territory and/or the making or
having made the Licensed Products outside of the Territory solely for importation into the Territory for subsequent use, sale,
or offer for sale in the Territory. Neos and its Affiliates shall impose this covenant not to sue on any Third Party to which
Neos or any of its Affiliates may after the Execution Date assign, license or otherwise transfer or grant any patent rights
subject to this covenant not to sue.
(c) For all patents listed in the FDA publication Approved Drug Products With Therapeutic
Equivalent Evaluations now or in the future for COTEMPLA XR-ODT™ and/or the Neos NDA, the foregoing covenant not
to sue shall hereby be treated as a non-exclusive license to such patents in connection with the Teva ANDA solely for the
purpose of allowing Teva and/or its Affiliates to file and maintain with the FDA a certification pursuant to 21 U.S.C.
§ 355(j)(2)(A)(vii)(IV) (as amended or replaced) with respect thereto. In connection with the Teva ANDA, Teva shall have
the right to maintain its existing certifications and/or re-certify under 21 U.S.C. § 355(j)(2)(A)(vii)(IV) (as amended or
replaced) against any Licensed Patents listed in the FDA publication Approved Drug Products With Therapeutic Equivalent
Evaluations in connection with COTEMPLA XR-ODT™ as of the Execution Date. In connection with the Teva ANDA, Teva
also shall have the right to file a new certification under 21 U.S.C. § 355(j)(2)(A)(vii)(IV) (as amended or replaced) against
any Licensed Patents listed in the FDA publication Approved Drug Products With Therapeutic Equivalent Evaluations in
connection with COTEMPLA XR-ODT™ after the Execution Date.
10.2 Limitation on Representations and Warranties. NEITHER PARTY SHALL BE DEEMED
TO MAKE ANY REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, EXCEPT AS
SPECIFICALLY SET FORTH HEREIN. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING,
WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE ARE HEREBY DISCLAIMED BY EACH PARTY. IN NO EVENT SHALL EITHER PARTY
HAVE ANY LIABILITY TO THE OTHER FOR INDIRECT, PUNITIVE, CONSEQUENTIAL, OR OTHER REMOTE
MEASURES OF DAMAGES IN CONNECTION WITH ANY LICENSED PRODUCTS SOLD OR
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
11
DISTRIBUTED BY SUCH PARTY OR OTHERWISE ARISING IN RESPECT OF THIS LICENSE AGREEMENT.
10.3 Certain Rights Unaffected. The Parties acknowledge that nothing set forth in this License
Agreement, including, without limitation, the provisions of Section 10.2 above, shall be deemed to limit or otherwise affect
the availability of any rights or remedies arising at law or equity to which Neos may be entitled as a result of the sale or
distribution in the Territory by Teva or any Affiliate of the Licensed Products or any Generic Equivalent prior to the Launch
Date set forth in this License Agreement.
11. Trademarks and Trade Names
11.1 Teva shall have no right to use the Trademark or any of Neos’s or its Affiliates’ corporate names,
brands, or logos and shall have no rights to or under any intellectual property or regulatory exclusivities or approvals held by
Neos or its Affiliates (including patents or other intellectual property relating to the consistency, formulation, or
manufacturing processes for the NDA Product) other than to the extent of the Teva License.
12. Term and Termination
12.1 Expiration. Unless earlier terminated in accordance with the terms hereof, the term of this
License Agreement (the “Term”) shall extend from the Effective Date until the earlier of: (a) the expiration of the last to
expire of the Licensed Patents; or (b) the date of a Final Court Decision that all of the Licensed Patents are invalid or
unenforceable. For the avoidance of doubt, the Licensed Patents include all extensions and pediatric exclusivities, in each
case whether granted or allowed before, on, or after the Execution Date, and the Term shall run until the last to expire of such
extensions and pediatric exclusivities, whenever granted.
12.2 Breach. Each Party may terminate this License Agreement and its obligations hereunder in the
event of a material breach by the other Party that remains uncured for thirty (30) calendar days after the other Party specifies
in reasonable detail in writing the nature of the breach and demands its cure.
(a) The Parties acknowledge and agree that any Marketing by Teva and/or any of its
Affiliates, API Affiliates, or Wholesaler Affiliates of any of the Licensed Products in the Territory prior to the Launch Date
(as such Launch Date may be accelerated pursuant to the explicit terms of Section 5 above, and with the exception of
Pre-Booking Activities described in Section 2.2) and outside of any Teva At Risk Period specifically provided for by
Section 6 above shall constitute such a significant breach of this License Agreement that Neos may terminate this License
Agreement immediately without any notice or opportunity to cure.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
12
12.3 Expiration or termination of this License Agreement shall not relieve the Parties of any obligation
accruing prior to such expiration or termination. Any expiration or early termination of this License Agreement shall be
without prejudice to the rights of any Party against any other Party accrued or accruing under this License Agreement prior to
termination.
13. Miscellaneous
be hand delivered or sent by express delivery service to the Parties at the addresses indicated below.
13.1 Notice. Any notice required or permitted to be given or sent under this License Agreement shall
If to Neos, to:
with a copy to:
If to Teva, to:
Mr. Richard Eisenstadt
Chief Financial Officer
Neos Therapeutics, Inc.
2940 North Highway 360
Suite 400
Grand Prairie, Texas 75050
Peter J. Armenio, P.C.
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue
New York, New York 10010
Colman B. Ragan, Esq.
Vice President & General Counsel
North America Intellectual Property Litigation
Teva Pharmaceuticals USA, Inc.
400 Interpace Parkway
Parsippany, NJ 07054
with a copy to:
Michael Nutter, Esq.
Winston & Strawn LLP
35 W. Wacker Drive
Chicago, IL 60601
Any such notice shall be deemed to have been received on the date actually received. Either Party may change its notice
information above by giving the other Parties written notice, delivered in accordance with this Section.
any Third Party without the prior written consent of the other Parties,
13.2 Assignment. This License Agreement shall not be assignable in whole or in part by any Party to
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
13
which shall not be unreasonably withheld, delayed, or conditioned. Notwithstanding the foregoing, any Party may assign its
rights and obligations under the Settlement Agreement and/or this License Agreement to any of its Affiliates. Further, Teva
may assign this License Agreement to any successor to all or substantially all of the business of Teva, whether through a
merger, reorganization, consolidation, change of control, sale of stock, sale of all or substantially all of the applicable
business or assets of Teva to which this Agreement relates, so long as such successor agrees in writing for the benefit of Neos
and its Affiliates to assume all of the obligations of Teva hereunder. In addition, Neos may assign this License Agreement to
any Third Party successor or assign of any of the Licensed Patents or the COTEMPLA XR-ODT™ business generally, so long
as such successor agrees in writing for the benefit of Teva and its Affiliates to assume all of the obligations of a Plaintiff
hereunder. This License Agreement shall be binding upon, and inure to the benefit of, the permitted successors and assigns
of each Party. Any purported assignment of a Party’s rights or obligations under the Settlement Agreement and/or this
License Agreement in violation of the foregoing shall be null and void ab initio and of no force or effect.
13.3 Amendment. This License Agreement may not be changed, waived, discharged, or terminated
orally, but only by an instrument in writing signed by the Party against which enforcement of such change, waiver, discharge
or termination is sought.
13.4 Superiority of Agreements. The Parties agree that the provisions of this License Agreement,
together with the Agreement and any permitted amendments to either such agreement, supersede and shall prevail over any
statements, understandings, promises, or provisions contained in any prior discussions, arrangements, or communications
between the Parties or in any documents passing between the Parties. Notwithstanding anything herein to the contrary, the
Agreement and this License Agreement shall be construed together in a consistent manner as reflecting a single intent and
purpose.
13.5 Governing Law. This License Agreement shall be governed, interpreted, and construed in
accordance with the laws of the State of Delaware, without giving effect to choice of law principles. The Parties expressly
exclude application of the United Nations Convention for the International Sale of Goods. The Parties irrevocably agree that
the federal district court in the State of Delaware shall have exclusive jurisdiction to deal with any disputes arising out of or in
connection with this License Agreement and that, accordingly, any such proceeding arising out of or in connection with this
License Agreement shall be brought in the United States District Court for the District of Delaware. Notwithstanding the
foregoing, if there is any dispute for which the federal district court in the State of Delaware does not have subject matter
jurisdiction, the state courts in Delaware shall have jurisdiction. In connection with any dispute arising out of or in
connection with this License Agreement, each Party hereby expressly consents and submits to the personal jurisdiction of the
federal and state courts located in the State of Delaware.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
14
13.6 Counterparts. This License Agreement may be executed simultaneously in several counterparts,
including facsimile and/or e-mail counterparts, each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
shall not affect its interpretation.
13.7 Captions. The captions of this License Agreement are solely for convenience of reference and
13.8 Negation of Agency. Nothing contained herein shall be deemed to create any relationship,
whether in the nature of agency, joint venture, partnership, or otherwise, between Teva and Neos. No Party shall be
authorized to bind or obligate any other Party in any manner. Nothing in this License Agreement, the Settlement Agreement,
or any of the Settlement Documents shall be interpreted as Neos or its Affiliates consenting to the accuracy or sufficiency of
any scientific, medical, bioequivalence, regulatory, or other information contained in the Teva ANDA and/or consenting to
the FDA approving the Teva ANDA on the basis of any such information. Nothing in this License Agreement, the Settlement
Agreement, or any of the Settlement Documents shall be interpreted as Teva or its Affiliates consenting to the accuracy or
sufficiency of any scientific, medical, bioequivalence, regulatory, or other information contained in NDA 205489 and/or
consenting to the FDA approving NDA 205489 on the basis of any such information.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
* * * * *
15
IN WITNESS WHEREOF, and intending to be legally bound, the undersigned have executed this License
Agreement as of the date and year first above written.
NEOS THERAPEUTICS, INC.
NEOS THERAPEUTICS, LP
/s/ Richard Eisenstadt
By:
Name: Richard Eisenstadt
Title: Chief Financial Officer
/s/ Richard Eisenstadt
By:
Name:Richard Eisenstadt
Title: Chief Financial Officer
TEVA PHARMACEUTICALS USA, INC.
TEVA PHARMACEUTICALS USA, INC.
/s/ Hafrun Fridriksdottir
By:
Name: Hafrun Fridriksdottir
Title: EVP Global R&D
/s/ Colman Ragan
By:
Name:Colman Ragan
Title: VP & GC North America
IP Litigation
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
16
EXHIBIT C
Confirmatory Letter To FDA
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
17
Dear [FDA],
Pursuant to 21 C.F.R. § 314.94(a)(12)(v), Neos Therapeutics, Inc. and Neos Therapeutics, LP (collectively, “Neos”)
hereby state that:
1. Neos is the owner of New Drug Application No. 205489 and U.S. Patent Nos. 8,840,924; 9,072,680; and
9,089,496; and
2. Neos and Teva Pharmaceutical USA, Inc. (“Teva”) have reached a settlement of the following litigation
pending in the U.S. District Court for the District of Delaware concerning ANDA No. 210924: Neos
Therapeutics, Inc. et al. v. Teva Pharmaceuticals USA, Inc., Civil Action No. 17-1793-CFC (D. Del.); and
3. Under the confidential terms of the settlement agreed to by Neos and Teva, and using the exact language
of 21 C.F.R. § 314.94(a)(12)(v), Neos “has a licensing agreement” with Teva that permits Teva to sell the generic
product defined by ANDA No. 210924 as of July 1, 2026 under license from Neos. Given this licensing agreement,
and under the terms and conditions set forth therein, Neos “consents to approval of ANDA No. 210924” as soon as it
is otherwise eligible for FDA approval. Given the licensing agreement referenced above, there are no patent
disputes preventing effective approval of ANDA No. 210924 as soon as it is otherwise eligible for FDA approval.
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A
COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
18
SUBSIDIARIES
Subsidiary
Neos Therapeutics, LP
Neos Therapeutics Brands, LLC
Neos Therapeutics Commercial, LLC
PharmaFab Texas, LLC
1.
2.
3.
4.
Exhibit 21.1
State of Jurisdiction
Texas
Delaware
Delaware
Texas
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-228748,
No. 333-219108 and No. 333-212809) and Form S-8 (No. 333-226044, No. 333-223696, No. 333-216698, No. 333-210267
and No. 333-205937) of Neos Therapeutics, Inc. of our report dated March 18, 2019, relating to the consolidated financial
statements and the financial statement schedule of Neos Therapeutics, Inc. appearing in this Annual Report on Form 10-K of
Neos Therapeutics, Inc. for the year ended December 31, 2018.
Exhibit 23.1
/s/ RSM US LLP
Dallas, Texas
March 18, 2019
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Gerald McLaughlin, certify that:
1. I have reviewed this Annual Report on Form 10-K of Neos Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 18, 2019
By:
/s/ GERALD MCLAUGHLIN
Gerald McLaughlin
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Richard Eisenstadt, certify that:
1. I have reviewed this Annual Report on Form 10-K of Neos Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting
Date: March 18, 2019
By:
/s/ RICHARD EISENSTADT
Richard Eisenstadt
Chief Financial Officer (Principal Financial Officer)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald McLaughlin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge, the Annual Report on Form 10-K of Neos Therapeutics, Inc. for the period ended
December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of Neos Therapeutics, Inc.
/s/ GERALD MCLAUGHLIN
Gerald McLaughlin
President and Chief Executive Officer
(Principal Executive Officer)
March 18, 2019
I, Richard Eisenstadt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge, the Annual Report on Form 10-K of Neos Therapeutics, Inc. for the period ended
December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of Neos Therapeutics, Inc.
/s/ RICHARD EISENSTADT
Richard Eisenstadt
Chief Financial Officer
(Principal Financial Officer)
March 18, 2019
The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended (Exchange Act), and are not to be incorporated by reference into any filing
of Neos Therapeutics, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after
the date hereof, regardless of any general incorporation language in such filing.