Adamas Pharmaceuticals, Inc.
Adamas Pharmaceuticals Inc (Form: 10-Q, Received: 08/04/2016 16:05:12)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2016

 

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 No. 001-36399

 


 

ADAMAS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

42-1560076
(I.R.S. Employer
Identification Number)

 

 

 

 

 

1900 Powell Street, Suite 750

 

 

Emeryville, CA

 

94608

(Address of Principal Executive Offices)

 

(Zip Code)

 

(510) 450-3500

(Registrant’s Telephone Number, Including Area Code)

 


 

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

 

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

 

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

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer
(Do not check if a
smaller reporting
company)

Smaller reporting company

 

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

 

Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of August 1, 2016   was 21,929,038 .

 

 


 

Table of Contents

ADAMAS PHARMACEUTICALS, INC.

INDEX

 

 

 

 

 

 

 

Page

PART I.  

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2016 and 2015 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2016 and 2015 (unaudited)

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

 

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

 

20 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28 

 

 

Item 4.

 

Controls and Procedures

 

28 

 

 

 

 

 

 

 

PART II.  

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29 

 

 

Item 1A.

 

Risk Factors

 

31 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

62 

 

 

Item 4.

 

Mine Safety Disclosures

 

62 

 

 

Item 5.

 

Other Information

 

62 

 

 

Item 6.

 

Exhibits

 

62 

SIGNATURES  

 

63 

 

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ADAMAS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

109,272

 

$

33,104

 

Available-for-sale securities

 

 

46,854

 

 

73,691

 

Accounts receivable

 

 

860

 

 

1,284

 

Prepaid expenses and other current assets

 

 

6,335

 

 

5,108

 

Total current assets

 

 

163,321

 

 

113,187

 

Property and equipment, net

 

 

3,375

 

 

2,353

 

Available-for-sale securities, non-current

 

 

1,906

 

 

13,165

 

Other assets

 

 

38

 

 

38

 

Total assets

 

$

168,640

 

$

128,743

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

4,720

 

$

3,052

 

Accrued liabilities

 

 

7,843

 

 

8,457

 

Other current liabilities

 

 

267

 

 

298

 

Total current liabilities

 

 

12,830

 

 

11,807

 

Non-current liabilities

 

 

649

 

 

749

 

Total liabilities

 

 

13,479

 

 

12,556

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value — 5,000,000 shares authorized, and zero shares issued and outstanding at June 30, 2016 and December 31, 2015

 

 

 —

 

 

 —

 

Common stock, $0.001 par value — 100,000,000 shares authorized, 21,912,782 and 18,505,462 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

27

 

 

23

 

Additional paid-in capital

 

 

247,957

 

 

178,473

 

Accumulated other comprehensive income (loss)

 

 

32

 

 

(158)

 

Accumulated deficit

 

 

(92,855)

 

 

(62,151)

 

Total stockholders’ equity

 

 

155,161

 

 

116,187

 

Total liabilities and stockholders’ equity

 

$

168,640

 

$

128,743

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ADAMAS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenue

    

$

222

    

$

398

    

$

397

    

$

624

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,224

 

 

8,705

 

 

16,746

 

 

16,238

 

General and administrative, net

 

 

8,058

 

 

5,846

 

 

14,699

 

 

10,765

 

Total operating expenses

 

 

17,282

 

 

14,551

 

 

31,445

 

 

27,003

 

Loss from operations

 

 

(17,060)

 

 

(14,153)

 

 

(31,048)

 

 

(26,379)

 

Interest and other income, net

 

 

184

 

 

102

 

 

344

 

 

180

 

Loss before income taxes

 

 

(16,876)

 

 

(14,051)

 

 

(30,704)

 

 

(26,199)

 

Provision for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

54

 

Net loss 

 

$

(16,876)

 

$

(14,051)

 

$

(30,704)

 

$

(26,253)

 

Net loss per share, basic and diluted

 

$

(0.78)

 

$

(0.78)

 

$

(1.43)

 

$

(1.47)

 

Weighted average shares used in computing net loss per share, basic and diluted

 

 

21,650

 

 

17,955

 

 

21,452

 

 

17,800

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ADAMAS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Net loss

 

$

(16,876)

 

$

(14,051)

 

$

(30,704)

 

$

(26,253)

 

Unrealized gain on available-for-sale securities

 

 

21

 

 

7

 

 

190

 

 

134

 

Comprehensive loss

 

$

(16,855)

 

$

(14,044)

 

$

(30,514)

 

$

(26,119)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ADAMAS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2016

    

2015

 

Cash flows from operating activities

 

 

    

 

 

    

 

Net loss

 

$

(30,704)

 

$

(26,253)

 

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

328

 

 

156

 

Stock-based compensation

 

 

5,184

 

 

4,582

 

Net accretion of discounts and amortization of premiums of available-for-sale securities

 

 

407

 

 

609

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accrued interest of available-for-sale securities

 

 

226

 

 

(38)

 

Prepaid expenses and other assets

 

 

(1,227)

 

 

(652)

 

Accounts receivable

 

 

424

 

 

163

 

Accounts payable

 

 

1,525

 

 

(181)

 

Accrued liabilities and other liabilities

 

 

(674)

 

 

(2,433)

 

Net cash used in operating activities

 

 

(24,511)

 

 

(24,047)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,244)

 

 

(447)

 

Purchases of available-for-sale securities

 

 

 —

 

 

(18,435)

 

Maturities of available-for-sale securities

 

 

37,653

 

 

10,085

 

Net cash provided by (used in) investing activities

 

 

36,409

 

 

(8,797)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from public offerings, net of offering costs

 

 

61,822

 

 

8,507

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

2,122

 

 

637

 

Proceeds from employee stock purchase plan

 

 

326

 

 

181

 

Net cash provided by financing activities

 

 

64,270

 

 

9,325

 

Net increase (decrease) in cash and cash equivalents

 

 

76,168

 

 

(23,519)

 

Cash and cash equivalents at beginning of period

 

 

33,104

 

 

61,446

 

Cash and cash equivalents at end of period

 

$

109,272

 

$

37,927

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

Public offering costs in accounts payable

 

$

 —

 

$

110

 

Public offering receivable

 

$

 —

 

$

257

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

267

 

$

444

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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ADAMAS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.     DESCRIPTION OF BUSINESS

 

Adamas Pharmaceuticals, Inc. (the “Company”) is a pharmaceutical company focused on the development and commercialization of therapeutics targeting chronic disorders of the central nervous systems (“CNS”). The Company seeks to achieve this by enhancing the pharmacokinetic profiles of approved drugs to create novel therapeutics for use alone and in fixed-dose combination products. The Company is currently developing two wholly-owned product candidates. The first product candidate is ADS-5102 (amantadine hydrochloride) extended-release capsules for the treatment of levodopa-induced dyskinesia (“LID”) associated with the treatment of Parkinson’s disease. The Company has obtained an orphan designation for ADS-5102 in that indication. Also, the Company is exploring the utility of ADS-5102 for the treatment of walking impairment in patients with multiple sclerosis. The second product candidate is ADS-4101, an extended-release version of an FDA-approved single-agent compound for the treatment of epilepsy (partial onset seizures).

 

In addition, the Company contributed to the development of   two medicines , which have been exclusively licensed to Forest Laboratories Holdings Limited (“Forest Laboratories” or “Forest”), an indirect wholly-owned subsidiary of Allergan plc: Namzaric™ (memantine hydrochloride extended-release and donepezil hydrochloride) capsules; and Namenda XR ® (memantine hydrochloride) extended-release capsules.

In January 2016, the Company completed a follow-on public offering of 2,875,000 shares of its common stock, which includes the exercise in full by the underwriters of their option to purchase 375,000 shares of common stock, at an offering price of $23.00 per share. Proceeds from the follow-on public offering were approximately $61.8 million, net of underwriting discounts and offering-related transaction costs.

 

The Company was incorporated in the State of Delaware on November 15, 2000. The Company’s headquarters and operations are located in Emeryville, California. The Company has four insignificant subsidiaries.

 

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the Company believes are necessary for a fair presentation of the periods presented. The condensed consolidated balance sheet at December 31, 2015 was derived from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These interim financial results are not necessarily indicative of results to be expected for the full fiscal year or any other future period and should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC.

 

Liquidity and Financial Condition

 

To date, nearly all of the Company’s resources have been dedicated to the research and development of its products .   T he Company has not generated any commercial revenue from the sale of its products , and does not anticipate the generation of any commercial product revenue until it receives the necessary regulatory approval to launch one of its products.

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Based upon the current status of, and plans for, its product development, the Company believes that the existing cash, cash equivalents, and investments of $158.0 million as of June 30, 2016 will be adequate to satisfy the Company’s capital needs through at least the next twelve months. However, the process of developing and commercializing products requires significant research and development, preclinical testing and clinical trials, manufacturing arrangements, as well as regulatory approvals. These activities, together with the Company’s general and administrative expenses, are expected to result in significant operating losses until the commercialization of the Company’s products or license agreements generate sufficient revenue to offset   expenses. While the Company had net income during 2014 and 2013, it has not generated any commercial revenue from sales of its products. Under its license agreement with Forest, the Company received the final milestone payment in 2014, and is not entitled to receive any royalties for sales of Namzaric until mid-2020 and Namenda XR until mid-2018. To achieve sustained profitability, the Company, alone or with others, must successfully develop its product candidates, obtain required regulatory approvals, and successfully manufacture and market its products.

 

Use of Estimates

 

 

The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, clinical trial accruals, fair value of assets and liabilities, income taxes, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

 

Forward Stock Split

 

In March 2014, the Board of Directors of the Company and stockholders approved a forward stock split of the Company’s common and preferred stock. As a result, common and preferred stock, stock options and warrants to purchase common and preferred stock were adjusted in the ratio of 2 :1, effective March 24, 2014. All common and preferred shares and per share amounts presented in these condensed consolidated financial statements for all periods have been retroactively adjusted to reflect the 2 -for-1 forward stock split. No fractional shares were issued.

 

Revenue Recognition

 

The Company recognizes revenue when all four of the following criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured. Revenue under license arrangements is recognized based on the performance requirements of the contract. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.

 

The Company generates revenue from collaboration and license agreements for the development and commercialization of products. Collaboration and license agreements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined objectives , and royalties on sales of commercialized products. The Company’s performance obligations under the collaboration and license agreements may include the license or transfer of intellectual property rights, obligations to provide research and development services and related materials , and obligations to participate on certain development and/or commercialization committees with the partners.

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For revenue agreements with multiple-element arrangements, the Company allocates revenue to each non-contingent element based on the relative-selling-price of each element in an arrangement. When applying the relative-selling-price method, the Company determines the selling price for each deliverable using the following estimation hierarchy: (i) vendor-specific objective evidence of fair value of the deliverable, if it exists, (ii) third-party evidence of selling price, if vendor-specific objective evidence is not available or (iii)  the vendor’s best estimate of selling price, if neither vendor-specific nor third-party evidence is available. Revenue allocated is then recognized when the four basic revenue recognition criteria, mentioned above, are met for each element .

 

The Company recognizes payments that are contingent upon achievement of a substantive milestone in their entirety in the period in which the milestone is achieved. Milestones are defined as events that can only be achieved based on the Company’s performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones subject to this guidance. Further, the amounts received must relate solely to prior performance, be reasonable relative to all of the deliverables and payment terms within the agreement and commensurate with the Company’s performance to achieve the milestone after commencement of the agreement.

 

Amounts related to research and development funding and full-time equivalents assigned to the license agreement are recognized as the related services or activities are performed, in accordance with the contract terms.

 

Clinical Trial Accruals

 

The Company’s clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations (“CROs”) that conduct and manage clinical trials on the Company’s behalf.

 

The Company estimates clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage clinical trials on its behalf. In accruing service fees, the Company obtains the reported level of patient enrollment at each site and estimates the time period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

 

Research and Development

 

Research and development (“R&D”) expenses include salaries and related compensation, contractor and consultant fees, external clinical trial expenses performed by contract research organizations (“CRO”), licensing fees, acquired intellectual property with no alternative future use, and facility and administrative expense allocations. In addition, the Company funds R&D at research institutions under agreements that are generally cancelable at its option. Research costs typically consist of applied research and preclinical and toxicology work. Pharmaceutical manufacturing development costs consist of product formulation, chemical analysis, and the transfer and scale-up of manufacturing at the Company’s contract manufacturers. Clinical development costs include the costs of Phase 1, Phase 2, and Phase 3 clinical trials. These costs are a significant component of the Company’s research and development expenses.

 

The Company accrues costs for clinical trial activities performed by contract research organizations and other third parties based upon the estimated amount of work completed on each study as provided by the CRO. These estimates are reviewed for reasonableness by the Company’s   internal clinical personnel, and the Company aims to match the accrual to actual services performed by the organizations as determined by patient enrollment levels and related activities. The Company monitors patient enrollment levels and related activities using available information; however, if

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the Company underestimates activity levels associated with various studies at a given point in time, the Company could be required to record significant additional R&D expenses in future periods when the actual activity level becomes known. The Company charges all such costs to R&D expenses. Non-refundable advance payments are capitalized and expensed as the related goods are delivered or services are performed.

 

Basic and Diluted Net Loss Per Share

 

Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. Common stock equivalents are options granted under the Company’s stock awards plans and are calculated under the treasury stock method. Common equivalent shares from unexercised stock options and unvested restricted stock units are excluded from the computation when there is a loss as their effect is anti-dilutive, or if the exercise price of such options is greater than the average market price of the stock for the period. The Company incurred net losses for all periods presented and there were no reconciling items for potentially dilutive securities. For the three and six months ended June 30, 2016, approximately 5,714,000 and 5,542,000 , respectively, shares of potentially dilutive securities were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive. For the three and six months ended June 30, 2015, approximately 1,496,000 and 1,798,000 , respectively, shares of potentially dilutive securities were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive.  

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation of stock options granted to employees and directors and for employee stock purchase plan shares by estimating the fair value of stock-based awards using the Black-Scholes option-pricing model. The Company accounts for stock-based compensation of restricted stock units granted to employees based on the closing price of the Company’s common stock on the date of grant. The fair value of stock-based awards are recognized and amortized over the applicable vesting period. All stock options awarded to non-employees are accounted for at the fair value of the consideration received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model. Stock options granted to non-employees are subject to periodic revaluation at each reporting date as the underlying equity instruments vest.

 

In order to estimate the value of share-based awards, the Company uses the Black-Scholes model, which requires the use of certain subjective assumptions. The most significant subjective assumptions are management’s estimates of the expected volatility and the expected term of the award. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from any of these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers . The amendment in this ASU provides guidance on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard will replace most existing revenue recognition guidance. On July 9, 2015, the FASB approved a one-year deferral of the effective date of this standard to 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017. Early adoption prior to the original effective date is not permitted. Since the issuance of ASU 2014-09, the FASB has issued several amendments which clarify certain points, including ASU 2016-08, Principal versus Agent Considerations (Reporting

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Revenue Gross versus Net) , ASU 2016-10, Identifying Performance Obligations and Licensing , ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting , and ASU 201-16, Narrow-Scope Improvements and Practical Expedients .   The Company has not yet selected a transition method nor has it determined the effect s of the standard s on its consolidated financial statements.  

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern . This ASU provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a Company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this update are effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company is evaluating the impact the revised guidance will have on its consolidated financial statements .  

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes . Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. Current guidance requiring the offsetting of deferred tax assets and liabilities of a tax-paying component of an entity and presentation as a single noncurrent amount is not affected. This ASU is effective for public business entities issuing financial statements for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements as of the beginning of an interim or annual reporting period. Entities may apply the update prospectively to all deferred tax assets and liabilities and taxes, or retrospectively for all periods presented. The effects of this update on the Company’s consolidated financial statements are not expected to be material.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases . The authoritative guidance significantly amends the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteria in the new revenue recognition standard are met. For public business entities, this guidance is effective for fiscal periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect the new guidance will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation . The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016. The Company is currently evaluating the effect the new guidance will have on its consolidated financial statements.

 

 

3.     FAIR VALUE MEASUREMENTS

 

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

 

·

Level 1 inputs , which include quoted prices in active markets for identical assets or liabilities;

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·

Level 2 inputs , which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For available-for-sale securities, the Company reviews trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

·

Level 3 inputs , which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies , or similar valuation techniques, as well as significant management judgment or estimation.

 

The following table represents the fair value hierarchy for the Company’s financial assets and liabilities which require fair value measurement on a recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

June 30, 2016

 

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

99,243

 

$

99,243

 

$

 —

 

$

 —

 

Corporate debt

 

 

22,606

 

 

 —

 

 

22,606

 

 

 —

 

U.S. Treasury notes

 

 

26,154

 

 

 —

 

 

26,154

 

 

 —

 

Total assets measured at fair value

 

$

148,003

 

$

99,243

 

$

48,760

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2015

 

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

23,430

 

$

23,430

 

$

 —

 

$

 —

 

Corporate debt

 

 

56,787

 

 

 —

 

 

56,787

 

 

 —

 

U.S. Treasury notes

 

 

30,069

 

 

 —

 

 

30,069

 

 

 —

 

Total assets measured at fair value

 

$

110,286

 

$

23,430

 

$

86,856

 

$

 —

 

 

Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

 

Corporate debt and U.S. Treasury notes are measured at fair value using L evel 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

 

There were no   transfers to or from Level 1 and Level 2 during the three and six months ended June 30, 2016.

 

4.     INVESTMENTS

 

The Company’s investments consist of corporate debt and U.S. Treasury notes classified as available-for-sale securities.

 

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The Company limits the amount of investment exposure as to institution, maturity, and investment type. To mitigate credit risk, the Company invests in investment grade corporate debt and United States Treasury notes. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and shown separately as a component of accumulated other comprehensive loss within stockholders' equity. Realized gains and losses are reclassified from other comprehensive loss to other income (expense) on the condensed consolidated statements of operations when incurred. The Company may pay a premium or receive a discount upon the purchase of available-for-sale securities. Interest earned and gains realized on available-for-sale securities and amortization of discounts received and accretion of premiums paid on the purchase of available-for-sale securities are included in investment income.

 

The following table is a summary of amortized cost, unrealized gain and loss, and the fair value of available-for-sale securities as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

June 30, 2016

 

 

 

 

 

 

Gross Unrealized

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

22,603

 

$

7

 

$

(4)

 

$

22,606

 

U.S. Treasury notes

 

 

26,125

 

 

29

 

 

 —

 

 

26,154

 

Total

 

$

48,728

 

$

36

 

$

(4)

 

$

48,760

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

46,827

 

$

31

 

$

(4)

 

$

46,854

 

Long-term investments

 

 

1,901

 

 

5

 

 

 —

 

 

1,906

 

Total

 

$

48,728

 

$

36

 

$

(4)

 

$

48,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

December 31, 2015

 

 

 

 

 

 

Gross   Unrealized

 

Gross   Unrealized

 

 

 

 

    

Amortized   Cost

    

Gains

    

Losses

    

Fair Value

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

56,892

 

$

 —

 

$

(105)

 

$

56,787

 

U.S. Treasury notes

 

 

30,122

 

 

1

 

 

(54)

 

 

30,069

 

Total

 

$

87,014

 

$

1

 

$

(159)

 

$

86,856

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

73,817

 

$

1

 

$

(127)

 

$

73,691

 

Long-term investments

 

 

13,197

 

 

 —

 

 

(32)

 

 

13,165

 

Total

 

$

87,014

 

$

1

 

$

(159)

 

$

86,856

 

 

Short -term and long-term investments include s accrued interest of   $0 .2 million and $4,000 respectively, as of June 30, 2016. Short-term and long-term investments includes accrued interest of $0.4 million and $ 36,000 , respectively, as of December 31, 2015. The Company has not incurred any realized gains or losses on investments for the three and six months ended June 30, 2016 and 2015. Investments are classified as short-term or long-term depending on the underlying investment’s maturity date. Long-term investments held by the Company have a maturity date range of greater than 12 months and a maximum of 14 months as of June 30, 2016.

 

5.      License Agreements

 

In November 2012, the Company granted Forest an exclusive license, with right to sublicense, certain of the Company’s intellectual property rights relating to human therapeutics containing memantine in the United States. In connection with these rights, Forest markets and sells Namzaric and Namenda XR for the treatment of moderate to severe dementia related to Alzheimer’s disease. Pursuant to the agreement, Forest made an upfront payment of $65.0 million. The Company earned and received additional cash payments totaling $95.0 million upon achievement by Forest of certain development and regulatory milestones. Under the agreement, external costs incurred related to the

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prosecution and litigation of intellectual property rights are reimbursable.  For the   six months ended June 30, 2016 , reimbursed expenses amounting to $1 .2 million are reflected as a reduction to general and administrative, net.

 

The Company is entitled to receive royalties on net sales in the United States by Forest, its affiliates, or any of its sublicensees of controlled-release versions of memantine products covered by the terms of the license agreement. Beginning in May 2020, the Company will be entitled to receive royalties in the low to mid-teens from Forest for sales of Namzaric in the United States . Beginning in June 2018, the Company will be entitled to receive royalties in the low to mid-single digits for sales of Namenda XR in the United States. Forest’s obligation to pay royalties with respect to fixed-dose memantine-donepezil products, including Namzaric, continues until the later of (i) 15 years after the commercial launch of the first fixed-dose memantine-donepezil product by Forest in the United States or (ii) the expiration of the Orange Book listed patents for which Forest obtained rights from the Company covering such product. Forest’s obligation to pay royalties with respect to Namenda XR continues until the expiration of the Orange Book listed patents covering such products. However, Forest’s obligation to pay royalties for any product covered by the license is eliminated in any quarter where there is significant competition from generics.

 

6.     WARRANTS TO PURCHASE COMMON STOCK

 

In conjunction with various financings between 2002 and 2012, the Company issued warrants to purchase 758,994 shares of convertible preferred stock and 127,780 shares of common stock. The relative fair value of these warrants was determined using the Black-Scholes model and was amortized to interest expense over the term of each loan, unless subsequently modified.

 

Immediately prior to the completion of the Company’s IPO in 2014, 206,162 of the warrants to purchase common stock were either exercised for cash or automatically net exercised for a total issuance of 199,837 shares of common stock, pursuant to the terms of the warrants. In July 2015, warrants to purchase an aggregate of 7,116 shares of common stock were exercised in a cashless exercise, resulting in the issuance of 3,484 shares of common stock. As of both June 30, 2016 and December 31, 2015, there were no warrants to purchase common stock outstanding.

 

 

 

7.     COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

The Company leases approximately 18,500 square feet of office space in Emeryville, California under an operating lease that expires April 30, 2020. The lease provides for periods of escalating rent. The total cash payments over the life of the lease are divided by the total number of months in the lease period and the average rent is charged to expense each mon th during the lease period.

 

As of June 30, 2016, future minimum lease payments under the non-cancelable facility operating lease   were as follows (in thousands):

 

 

 

 

 

 

 

    

June 30, 2016

 

2016 (remaining)

    

$

299

 

2017

 

 

615

 

2018

 

 

634

 

2019

 

 

653

 

2020

 

 

224

 

Thereafter

 

 

 —

 

Total

 

$

2,425

 

 

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Contingencies

 

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown, because it involves claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

 

Indemnification

 

In accordance with the Company’s amended and restated certificate of incorporation and amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving in such capacity. There have been no claims to date, and the Company has a directors and officers liability insurance policy that may enable it to recover a portion of any amounts paid for future claims.

 

Litigation

 

In November 2012, the Company granted Forest an exclusive license to certain of the Company’s intellectual property rights relating to human therapeutics containing memantine in the United States. Under the terms of that license agreement, Forest has the right to enforce such intellectual property rights which are related to its right to market and sell Namzaric and Namenda XR for the treatment of moderate to severe dementia related to Alzheimer’s disease. The Company has a right to participate in, but not control, such enforcement actions by Forest.

 

As of the date of this filing, several companies have submitted Abbreviated New Drug Applications, or ANDAs, to the FDA requesting permission to manufacture and market generic versions of Namenda XR, on which the Company is entitled to receive royalties from Forest beginning in June 2018. In the notices, these companies allege that the patents associated with Namenda XR, some of which are owned by Forest or licensed by Forest from Merz Pharma GmbH & Co. KGaA, and others of which are owned by the Company and licensed by the Company exclusively to Forest in the United States, are invalid, unenforceable, and/or will not be infringed by the companies’ manufacture, use, or sale of generic versions of Namenda XR. The Company, Forest, Merz Pharma GmbH & Co. KGaA, and Merz Pharmaceuticals GmbH (together Merz) filed lawsuits in the U.S. District Court for the District of Delaware for infringement of the relevant patents against all of these companies. The parties are collectively seeking judgment that (i) the defendants have infringed the patents at issue, (ii) the effective date of any approval of the defendants’ ANDAs shall not be earlier than the expiration date of the last to expire of the relevant patents, including any extensions or exclusivities, (iii) the defendants be enjoined from commercially manufacturing, using, offering for sale, or selling in the United States, or importing into the United States, any products that infringe or induce or contribute to the infringement of the patents at issue prior to the expiration date of the last to expire of the patents, including extensions and exclusivities, and (iv) the Company, Forest, and Merz be awarded monetary relief, in addition to any attorneys’ fees, costs, and expenses relating to the actions.

 

The Company and Forest have entered into a series of settlement agreements with the Namenda XR ANDA filers, except for one defendant with respect to the certain patents subject to the Markman ruling described below .   Entry dates for generic Namenda XR are governed by the settlement agreements in that action. Subject to those agreements, t he earliest date on which any of these agreements grants a license to market generic version of Namenda XR is January 31, 2020 or in the alternative, an option to launch an authorized generic version of Namenda XR beginning on January 31, 2021.

 

In January 2016, the Delaware District Court issued a claim construction (Markman) ruling in the Namenda XR litigation that includes findings of indefiniteness as to certain claim terms in the asserted patents licensed by the Company to Forest . On July 26 , 2016, the District Court issued a final judgment of invalidity on those patents based

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upon the Markman ruling. The Company and Forest plan to appeal that final judgment to the United States Court of Appeals for the Federal Circuit .

 

Additionally, as of the date of this filing, four companies have submitted ANDAs requesting permission to manufacture and market generic versions of Namzaric, on which the Company is entitled to receive royalties from Forest beginning in May 2020. The Company and Forest have begun to file lawsuits alleging infringement of the relevant patents against Namzaric ANDA filers , who are seeking to launch generic versions of Namzaric, in the same court as heard the Namenda XR litigation .   As of the date of this filing, the Company and Forest have settled with two defendant s , granting a license to market generic version s of Namzaric in 2029 , although that date may not apply in any future settlements .   The Markman hearing for these lawsuits is scheduled for November 2016 and the trial is scheduled for October 2017.

 

Because the Namzaric enforcement actions were filed within the requisite 45-day period provided in the U.S. Food, Drug and Cosmetic Act, there are stays preventing FDA approval of the ANDAs involved in both litigations for 30 months or until a court decision adverse to the patents. The 30-month stays for the Namzaric ANDAs will expire beginning in January 2018.

 

From time to time, the Company may be party to legal proceedings, investigations, and claims in the ordinary course of its business. Other than the matters described above, the Company is not presently a party to any material legal proceedings.

 

 

8.     STOCKHOLDERS’ EQUITY

 

Common Stock

 

The amended and restated certificate of incorporation authorizes the Company to issue 100,000,000  shares of common stock. Common stockholders are entitled to dividends as and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. Each share of common stock is entitled to one vote.

 

The Company has classified payments received for all unvested shares of common stock issued upon the early exercise of stock options as employee deposits (a liability) as these options are not considered to be substantively exercised until vested. At June 30, 2016 and December 31, 2015, zero and 3,000 shares of common stock, respectively, from early exercised options were unvested.

 

Controlled Equity Offering

 

On June 1, 2015, the Company entered into a Controlled Equity Offering Sales Agreement (“Sales Agreement”), with Cantor Fitzgerald & Co. (“Cantor”), as sales agent, pursuant to which the Company may, at its discretion, issue and sell common stock from time to time with a value of up to a maximum of $25.0 million in an at-the-market offering. All sales of shares have been made pursuant to a shelf registration statement that was declared effective by the Securities and Exchange Commission (“SEC”) on June 1, 2015. Cantor has acted as sole sales agent for any sales made under the Sales Agreement for a 3% commission on gross proceeds. The common stock has been sold at prevailing market prices at the time of the sale, and, as a result, prices have varied . Unless otherwise terminated earlier, the Sales Agreement continues to be in effect until all shares available under the Sales Agreement have been sold. During the six months ended June 30, 2016, there were no additional shares sold under the Sales Agreement. As of June 30, 2016, the Company had sold a total of 509,741 shares of common stock under the Sales Agreement at an average price of $20.04 for net proceeds of $9.7 million.

 

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Public Offering

 

On January 6, 2016, the Company completed a follow-on public offering of 2,875,000 shares of common stock, which includes the exercise in full by the underwriters of their option to purchase 375,000 shares of common stock, at an offering price of $23.00 per share. Proceeds from the follow-on public offering were approximately $61.8 million, net of underwriting discounts and offering-related transaction costs.

 

Shares reserved for Future Issuance

 

Shares of Company’s common stock reserved for future issuance are as follows:

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2016

 

2015

 

Common stock awards issued and outstanding

 

5,541,423

 

5,328,378

 

Authorized for future issuance under 2014 Equity Incentive Plan

 

1,559,689

 

1,463,415

 

Authorized for future issuance under 2016 Inducement Plan

 

371,250

 

 —

 

Employee Stock Purchase Plan

 

555,894

 

394,148

 

Total

 

8,028,256

 

7,185,941

 

 

 

 

9.     STOCK-BASED COMPENSATION

 

Stock Compensation Plans

 

In 2014, the Company’s board of directors adopted, and in March 2014 the Company’s stockholders approved, the 2014 Equity Incentive Plan (the “2014 Plan”), which became effective on the completion of the IPO. The number of shares of the Company’s common stock reserved for issuance pursuant to the 2014 Plan will automatically increase on the first day of each fiscal year for a period of up to 10 years, commencing on the first day of the fiscal year following 2014, in an amount equal to 4% of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding fiscal year, or a lesser number of shares as determined by the Company’s board of directors. For 2016, the common stock available for issuance under the 2014 Plan increased by 739,708 shares of common stock.

 

In March 2016, the Company’s board of directors approved the 2016 Inducement Plan (the “Inducement Plan”) under which 450,000 shares of the Company’s common stock were made available for issuance. Options granted under the Inducement Plan may have terms of up to ten years. Consistent with the 2014 Plan, options granted generally vest over four years and vest at a rate of 25% upon the first anniversary of the issuance date and 1/48th  per month thereafter. Restricted stock units granted vest at a rate of 25% per year over four years. The Inducement Plan was adopted by the board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the NASDAQ Listing Rules.

 

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The stock option and related activity under all of the Company’s stock compensation plans is summarized as follows:

 

 

 

 

 

 

 

 

 

 

Outstanding Options

 

 

 

 

 

Weighted Average

 

Stock Options

    

Number of Shares

    

Exercise Price

 

Balances, December 31, 2015

 

5,328,378

 

$

8.57

 

Granted

 

867,300

 

 

14.60

 

Exercised

 

(509,139)

 

 

4.17

 

Forfeited

 

(326,344)

 

 

13.26

 

Expired

 

(7,546)

 

 

17.43

 

Balances, June 30, 2016

 

5,352,649

 

$

9.67

 

Vested and expected to vest, June 30, 2016

 

5,183,169

 

$

9.55

 

Vested, June 30, 2016

 

2,931,502

 

$

6.86

 

 

The restricted stock unit and related activity under the Company’s stock compensation plans is summarized as follows:

 

 

 

 

 

 

 

 

 

Outstanding Units

 

 

 

 

Weighted Average

 

 

 

 

Grant Date

Restricted Stock Units

    

Number of Shares

    

Fair Value

Unvested, December 31, 2015

 

 —

 

$

 —

Granted

 

191,774

 

 

14.49

Vested

 

 —

 

 

 —

Forfeited

 

(3,000)

 

 

13.66

Unvested, June 30, 2016

 

188,774

 

$

14.50

 

Employee Stock Purchase Plan

In February 2014, the Company’s board of directors adopted and, in March 2014, the Company’s stockholders approved, the 2014 Employee Stock Purchase Plan (the “ESPP”), which became effective on the completion of the Company’s IPO. Beginning January 1, 2015 and continuing through and including January 1, 2024, the amount of common stock reserved for issuance under the ESPP will increase annually on that date by the lesser of (i) one percent (1%) of the total number of shares of common stock outstanding on such December 31, (ii) 520,000 shares of common stock, or (iii) a number of shares as determined by the board of directors prior to the beginning of each year, which shall be the lesser of (i) or (ii) above. For 2016, the common stock available for issuance under the ESPP increased by 184,927 shares of common stock.

 

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Stock-Based Compensation

 

The following table reflects stock-based compensation expense recognized for the three and six months ended June 30, 2016 and 2015, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Research and development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees

 

$

691

 

$

586

 

$

1,276

 

$

1,096

 

Nonemployee consultants

 

 

40

 

 

180

 

 

122

 

 

412

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees

 

 

1,877

 

 

1,552

 

 

3,710

 

 

2,824

 

Nonemployee consultants

 

 

23

 

 

122

 

 

76

 

 

250

 

Total expense

 

$

2,631

 

$

2,440

 

$

5,184

 

$

4,582

 

 

As of June 30, 2016, there was total unrecognized compensation cost related to unvested options of approximately $23.4 million. This cost is expected to be recognized over a period of 2.7 years .   As of June 30, 2016, there was total unrecognized compensation cost related to unvested RSU’s of approximately $2.6 million. This cost is expected to be recognized over a period of 3.8 years.

 

 

 

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ITEM 2.  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 our condensed consolidated financial statements and related notes included elsewhere in this report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk factors.”

 

Overview

 

We are a pharmaceutical company focused on the development and commercialization of therapeutics targeting chronic disorders of the central nervous system (“CNS”). We seek to achieve this by enhancing the pharmacokinetic profiles of approved drugs to create novel therapeutics for use alone and in fixed-dose combination products. Our business strategy is twofold. We intend to develop and commercialize our wholly-owned products. In addition, we may form partnerships with companies that have an already established CNS market presence.

 

Our therapeutic programs address the following indications : levodopa-induced dyskinesia (“LID”) associated with Parkinson’s disease (“PD”), walking impairment in multiple sclerosis (“MS”), epilepsy, and Alzheimer’s disease .

 

Parkinson’s disease is a progressive neurodegenerative disorder that causes a variety of symptoms, such as tremors, rigidity, slowed movements , and postural instability. The most commonly prescribed treatments for PD are levodopa-based therapies. With these medicines, patients initially receive relief from symptoms of PD for much of the day. This period of relief is known as ON time. As the effects of levodopa wear off, the symptoms of PD return. This is known as OFF time. PD impacts over 800,000 people in the United States, while motor complications affect about 400,000 of these patients , and LID occurs in about 150,000 patients. LID can occur at the onset of levodopa initiation; it eventually occurs in approximately 90 percent of patients who have had PD for 10 years. There are no medicines approved in the United States for the treatment of LID

 

We have substantially completed a clinical development program with ADS-5102 for the treatment of LID, including a positive Phase 2/3 study, two positive Phase 3 trials and a fully-enrolled and ongoing open-label safety study. Results from both Phase 3 studies demonstrated a statistically significant improvement for patients who received ADS-5102 versus placebo as assessed by the Unified Dyskinesia Rating Scale. In both Phase 3 studies, a statistically significant increase in ON time without troublesome LID was observed, as was a statistically significant decrease in OFF time versus placebo , a key secondary endpoint .   The types of adverse events (“AEs”) reported with ADS-5102 were consistent with the known safety profile of amantadine, and the safety results were consistent across trials. In 2016, we plan to submit our first New Drug Application (“NDA”) for ADS-5102 (amantadine hydrochloride ) extended-release capsules for the treatment of LID. 

 

We are also developing ADS-5102 for the treatment of walking impairment in patients with MS, another CNS disorder , afflicting approximately 275,000 Americans. According to a 2013 survey of MS in America, approximately 75 percent of individuals with MS experience clinically significant walking impairment .  

 

In June 2016, we reported positive data from our Phase 2 study of ADS-5102 for the treatment of walking impairment in MS. A key walking assessment was the timed 25-foot walk test, a well-established outcome measure. At four weeks, a statistically significant placebo-adjusted improvement in walking speed was seen in the patients on ADS-5102. The types of AEs reported with ADS-5102 were consistent with the known safety profile of amantadine.

 

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We are also developing   another molecule, ADS-4101, for the treatment of partial onset seizures in epilepsy .   There are approximately 2.2 million Americans living with epilepsy, a disease where seizure control is difficult to achieve. ADS-410 1 is an enhanced version of an approved anti-epileptic and is expected to enter clinical testing in 2016.

In 2012, we entered into an exclusive license agreement with Forest Laboratories Holdings Limited (“Forest Laboratories” or “Forest”), an indirect wholly-owned subsidiary of Allergan plc .   T wo commercially available medicines have resulted from the partnership : Namzaric™ (memantine hydrochloride extended-release and donepezil hydrochloride) capsules and Namenda XR ®   (memantine hydrochloride) extended-release capsules, launched in May 2015 and June 2013, respectively , for an indication relating to Alzheimer’s disease. We expect to begin receiving royalties on net sales of Namenda XR in 2018 and Namzaric in 2020 .

Financial operations overview

Summary

Our revenue to date has been generated primarily from license, milestone, and development revenue pursuant to our license agreement with Forest. We have not generated any commercial product revenue. As of June 30, 2016 , we had an accumulated deficit of $ 92.9  million . Although we reported net income in each of the years ended December 31, 2014, 2013, and 2012, this was primarily due to the recognition of revenue pursuant to our license agreement with Forest. There are no further milestone payments to be earned under our license agreement with Forest. We cannot assure you that we will receive additional license revenue in the future. We incurred significant losses in the first half of 2016, in 2015, and prior to 2012 , and expect to incur significant and increasing losses in the foreseeable future as we advance our product candidates into later stages of development and, if approved, commercialization.

 

We expect to continue to incur significant research and development expenses as we continue to advance our product candidates through clinical development. In addition, we plan to commercialize ADS-5102, if approved, and potentially other wholly-owned product candidates by developing a commercial organization, including a sales force targeting neurologists and movement disorder specialists in the United States, and possibly through distribution agreements and license agreements with CNS-focused pharmaceutical companies. Because of the numerous risks and uncertainties associated with drug development and commercialization , we are unable to predict the timing or amount of expenses incurred or when, or if, we will be able to achieve sustained profitability.

 

Under our agreement with Forest, beginning in May 2020, we are entitled to receive tiered royalties in the low to mid-teens for sales of Namzaric in the United States. In addition, we are also entitled to receive tiered royalties in the low to mid-single digits from Forest for sales of Namenda XR in the United States beginning in June 2018 ; however, we do not expect the Namenda XR royalties will make a significant financial contribution to our business. Pursuant to the agreement, we received a non-refundable upfront license fee of $65.0 million in 2012, which we recognized on a straight-line basis from November 2012 to February 2013. We also earned and received additional cash payments totaling $95.0 million upon achievement by Forest of certain development and regulatory milestones, which we recognized in 2013 and 2014.

 

Prior to our initial public offering of our common stock, or IPO, in April 2014, we had raised an aggregate of approximately $87.2 million through the sale of convertible preferred stock and $1.0 million through the exercise of preferred stock warrants. In 2014, we issued and sold 3,081,371 shares of common stock in our IPO and received net proceeds of approximately $42.6 million, which included partial exercise of the underwriters’ option to purchase additional shares and after deducting underwriting discounts and offering expenses. In connection with the completion of our IPO, all convertible preferred stock converted into common stock. On June 1, 2015, we entered into a Controlled Equity Offering Sales Agreement, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering value of up to $25.0 million. As of June 30, 2016 , we had issued 509,741 shares of common stock and raised net proceeds of $ 9.7 million under the Sales Agreement. In January 2016, we raised $61.8 million from the sale of 2,875,000 shares of common stock in a follow-on public offering.

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As of June 30, 2016 , we had cash, cash equivalents, and available-for-sale securities of $ 158.0  million.

 

Revenue

 

We have not generated any revenue from commercial product sales to date. Our revenue to date has been generated primarily from non-refundable upfront license payments, milestone payments, reimbursements for research and development expenses and full-time equivalents assigned under our license agreement with Forest, and to a lesser degree reimbursement for research and development expenses from NIH grants and government contracts. We do not expect to recognize any further milestone payments under our license agreement with Forest, while reimbursements for full-time equivalents assigned to the license agreement are expected to remain at modest levels in future periods. Beginning in May 2020, we will be entitled to receive royalties in the low to mid-teens from Forest for sales of Namzaric in the United States and in June 2018, we will be entitled to receive royalties in the low to mid-single digits for sales of Namenda XR in the United States. We were also awarded a continuation of an NIH grant for $1.0 million in August 2014, which we will administer, but conduct through subcontractors.

 

Research and development expenses

 

Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our wholly-owned product candidates, as well as the development of product candidates pursuant to our agreement with Forest. We recognize all research and development costs as they are incurred.

 

Research and development expenses consist of:

 

·

fees paid to clinical investigators, clinical trial sites, consultants, and vendors, including clinical research organizations, or CROs, in conjunction with implementing, conducting, and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work, and statistical compilation and analysis;

 

·

expenses related to production of clinical supplies, including fees paid to contract manufacturing organizations, or CMOs;

 

·

expenses related to compliance with regulatory requirements;

 

·

other consulting fees paid to third parties; and

 

·

employee-related expenses, which include salaries, benefits, and stock-based compensation.

 

The following table summarizes our research and development expenses incurred during the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

    

2016

    

2015

    

    

2016

    

2015

 

Product candidates

    

 

 

    

 

 

 

 

 

 

    

 

 

 

ADS-5102

 

$

8,053

 

$

8,396

 

 

$

14,237

 

$

15,771

 

Other research and development expenses

 

 

1,171

 

 

309

 

 

 

2,509

 

 

467

 

Total research and development expenses

 

$

9,224

 

$

8,705

 

 

$

16,746

 

$

16,238

 

 

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The program-specific expenses summarized in the table above include costs directly attributable to our product candidates. Other research and development expenses include costs not allocated to a specific program. We allocate research and development salaries, benefits, stock-based compensation, and indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses. We have reallocated certain other research and development expenses to program-specific expenses for the three and six months ended June 30, 2015 in order to consistently classify our product candidate expenses between periods.

 

The largest component of our total operating expenses has historically been our investment in research and development activities, including the clinical development of our product candidates. We anticipate incur ring significant research and development expenses as we continue our clinical trials for ADS-5102 for the treatment of LID and walking impairment associated with MS, ADS-4101 for treatment of epilepsy, and potentially initiate additional clinical-stage programs in more indications or for future product candidates. The process of conducting the necessary clinical research to obtain FDA approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors including but not limited to the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability, and commercial viability. Furthermore, in the past we have entered into licensing arrangements with other pharmaceutical companies to develop and commercialize our product candidates, and we may enter into additional licensing arrangements or collaborations in the future. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future licensing or collaboration arrangements or how such arrangements would affect our development plans or capital requirements. As a result of the uncertainties discussed above, 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.

 

General and administrative expenses, net

 

General and administrative expenses, net consist primarily of personnel and related benefit costs, facilities, professional services, insurance, and public company related expenses, reduced by reimbursement from Forest for external costs related to supporting prosecution and litigation of intellectual property rights under our license agreement. We anticipate our general and administrative expenses will increase as we continue to support our clinical and potentially commercial-stage programs. If ADS-5102 is approved by the FDA, we plan to market and sell through our own sales force targeting neurologists and movement disorder specialists in the United States, which will further increase general and administrative expenses , and possibly through distribution agreements and license agreements with CNS-focused pharmaceutical companies .

 

Interest and other income (expense), net

 

Interest and other income (expense), net consists primarily of interest received on our investments.

 

Critical accounting policies and significant judgments and estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We have discussed the development, selection , and disclosure

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of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant and material changes in our critical accounting policies during the six months ended June 30, 2016 , as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2015 .

 

Results of operations

 

Comparison of the three and six months ended June 30, 2016 and 2015  

 

The following table summarizes our results of operations for the three and six months ended June 30, 2016 and 2015 (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30,

 

Increase/

 

% Increase/

 

 

June 30,

 

Increase/

 

% Increase/

 

 

    

2016

    

2015

    

(Decrease)

    

(Decrease)

 

  

2016

    

2015

    

(Decrease)

    

(Decrease)

 

Revenue

 

$

222

 

$

398

 

$

(176)

 

(44)

%  

  

$

397

 

$

624

 

$

(227)

 

(36)

%

Research and development expenses

 

 

9,224

 

 

8,705

 

 

519

 

6

%  

  

 

16,746

 

 

16,238

 

 

508

 

3

%

General and administrative expenses, net

 

 

8,058

 

 

5,846

 

 

2,212

 

38

%  

  

 

14,699

 

 

10,765

 

 

3,934

 

37

%

Interest and other income, net

 

 

184

 

 

102

 

 

82

 

80

%  

  

 

344

 

 

180

 

 

164

 

91

%

 

Revenue

 

Revenue for the three and six months ended June 30, 2016 was $ 0.2 million and $ 0.4 million, respectively, compared to $ 0.4 million and $ 0.6 million, respectively, for the same periods in the prior year. Revenue for both periods in 2016 and 2015 was primarily related to reimbursement of certain expenses as provided for in our license agreement with Forest, as well as from government contracts.

 

Research and development expenses

 

Research and development expenses increased by $ 0.5 million, or 6% to $ 9.2 million for the three months ended June 30, 2016 .   There were increased expenses to support the preparation of the new drug application for ADS-5102 for the treatment of LID , in addition expenses related to preclinical work associated with ADS-4101 for the treatment of epilepsy (partial onset seizures ) .   The increase was offset by a decrease in research and development expenses attributed to the conclusion of two P hase 3 clinical trials for ADS-5102 for the treatment of LID.   Included in research and development expenses was stock-based compensation expense, which was unchanged at $ 0.7 million for the three months ended June 30, 2016 , compared to the same period in the prior year.  

 

Research and development expenses increased by $ 0.5 million , or 3% to $ 16.7 million for the six months ended June 30, 2016   from $ 16.2 million for the six months ended June 30, 2015 . We were engaged in increased   effort s to support the preparation of the new drug application for ADS-5102 for the treatment of LID , in addition expenses related to preclinical work associated with ADS-4101 for the treatment of epilepsy (partial onset seiz u r e s) in the first six months of 2016 as compared to the prior year .   The increase was offset by a decrease in research and development expenses attributed to the concl usion of two P hase 3 clinical trials for the treatment of LID. Included in research and development expenses was stock-based compensation expense, which was $ 1.4 million compared to $ 1.5 million for the six months ended June 30, 2016 and 2015 , respectively .

 

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General and administrative expenses, net

 

General and administrative expenses, net, increased by $ 2.2  million, or 38% , to $ 8.1  million for the three months ended June 30, 2016 from $ 5.8  million for the three months ended June 30, 2015 . The increase in general and administrative expenses was due primarily to increase d costs associated with establishing commercial capabilities in anticipation of the commercial launch of ADS-5102 for the treatment of LID, pending regulatory approval , including an increase in headcount-related expenses. We anticipate general and administrative expenses will increase through the remaining quarters of 2016, reflecting increased investment in pre-commercial activities. General and administrative expenses also included stock-based compensation expense of $ 1.9 million compared to $ 1.7 million for the three months ended June 30, 2016 and 2015 , respectively.

 

General and administrative expenses, net, increased by $ 3.9  million, or 37% , to $ 14.7  million for the six months ended June 30, 2016 from $ 10.8  million for the six months ended June 30, 2015 . The increase in general and administrative expenses was primarily due to in creased costs associated with establishing commercial capabilities in anticipation of the commercial launch of ADS-5102 for the treatment of LID, pending regulatory approval, including an increase in headcount-related expenses. General and administrative expenses also included stock-based compensation expense of $ 3.8 million compared to $ 3.1 million for the six months ended June 30, 2016 and 2015 , respectively.

 

Interest and other income, net

 

Interest and other income, net, for the three and six months ended June 30, 2016 was $ 0.2 million   and $ 0.3 million, respectively, compared to $ 0.1 and $ 0.2 million for the three and six months ended June 30, 2015 . Net interest income is primarily due to interest income earned on investments.

 

Liquidity, capital resources and plan of operation

 

We have funded our operations primarily through $160.0 million of payments received pursuant to our license agreement with Forest, $88.2 million sales of convertible preferred stock and warrants, and $114.1 million pursuant to sales of our common stock. In April 2014, we completed our IPO and raised net proceeds of $42.6 million, including the underwriters’ partial exercise of their option to purchase additional shares. On June 1, 2015, we entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co., pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering value of up to $25.0 million. As of June 30, 2016 , we had issued 509,741 shares of common stock and raised net proceeds of $ 9.7 million under the Sales Agreement. On January 6, 2016, we completed a follow-on public offering of 2,875,000 shares of common stock, which includes the exercise in full by the underwriters of their option to purchase 375,000 shares of common stock, at an offering price of $23.00 per share. Proceeds from the follow-on public offering were approximately $61.8 million, net of underwriting discounts and offering-related transaction costs.

 

We have not generated any revenue from the sale of products. We incurred losses and generated negative cash flows from operations since inception through the year ended December 31, 2011. Although we recognized a profit and positive cash flow in 2014, 2013, and 2012 as a result of payments received pursuant to our license agreement with Forest, we received our final milestone payment from Forest in December 2014 .   W e do not currently receive any royalties from Forest, nor do we have other license agreements or collaborations from which we might expect milestone or royalty revenue. Consequently, we expect to incur substantial and increasing losses for the foreseeable future. Our principal sources of liquidity were our cash, cash equivalents, and investments, which totaled $ 158.0 million as of June 30, 2016 .

 

We believe our existing cash, cash equivalents, and investments will be sufficient to fund our projected operating requirements, including operations related to the continued development of ADS-5102 for the treatment of LID, for at least the next 12 months. However, it is possible that we will not achieve the progress that we expect, because the actual costs and timing of drug development, particularly clinical studies, and regulatory approvals are difficult to

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predict, subject to substantial risks and delays, and often vary depending on the particular indication and development strategy.

 

We expect to continue significant spending in connection with the development and commercialization of our product candidates, particularly for ADS-5102 for the treatment of LID, as well as other indications. In order to continue these activities, we may decide to raise additional funds through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, asset sales, and other marketing and distribution arrangements . Sufficient additional funding may not be available on acceptable terms, or at all. If adequate funds are not available in the future, we may need to delay, reduce the scope of, or put on hold our clinical studies, research and development programs, or commercialization efforts.

 

The following table summarizes our cash flows for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2016

    

2015

 

Net cash (used in) provided by:

    

 

 

    

 

 

 

Operating activities

 

$

(24,511)

 

$

(24,047)

 

Investing activities

 

 

36,409

 

 

(8,797)

 

Financing activities

 

 

64,270

 

 

9,325

 

Net increase (decrease) in cash and cash equivalents

 

$

76,168

 

$

(23,519)

 

 

Net cash used in operating activities was $ 24.5 million for the six months ended June 30, 2016 compared to $ 24.0 million for the same period in the prior year. Net loss of $ 30.7 million for the six months ended June 30, 2016 included net non-cash adjustments of $ 5.9 million, which consisted primarily of stock-based compensation of $ 5.2 million. Net loss of $ 26.3 million for the six months ended June 30, 2015 included non-cash adjustments of $ 5.3 million, primarily related to $ 4.6 million in stock-based compensation. The primary use of cash from operating activities for the six months ended June 30, 2016 was to fund the ongoing clinical studies , product development activities , and NDA preparation activities related to ADS-5102 for the treatment of LID .

 

Net cash provided by investing activities was $ 36.4 million for the six months ended June 30, 2016 compared to net cash used in investing activities of $ 8.8 million for the same period in the prior year. Net cash provided by investing activities for the six months ended June 30, 2016 was a result of $ 37.7 million of maturities of available-for-sale securities offset by purchases of $ 1.2 million of property and equipment. Net cash used in investing activities for the six months ended June 30, 2015 was a result of purchases of $ 18.4 million of available-for-sale securities and $ 0.4 million of property and equipment , offset by $ 10.1 million of maturities of available-for-sale securities .

 

Net cash provided by financing activities was $ 64.3  million for the six months ended June 30, 2016 , compared to $ 9.3 million for the six months ended June 30, 2015 . In the period ended June 30, 2016 , we received net cash proceeds of $ 61.8 million related to the sale of common stock under a follow-on public offering, compared to the same period in the prior year in which we received $ 8.5 million in net cash proceeds related to the sale of common stock under a controlled equity offering. In the six months ended June 30, 2016 ,   we received cash proceeds of $ 2.4 million related to the exercise of stock options   and purchases of common stock under the Employee Stock Purchase Plan , compared to the same period in the prior year, in which we received $ 0.8 million related to the exercise of stock options   and purchases of common stock under the Employee Stock Purchase Plan .

 

Off-balance sheet arrangements

 

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

 

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Contractual obligations  

Our future contractual obligations at June 30, 2016, were not materially different than at December 31, 2015.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As of June 30, 2016 , we had cash, cash equivalents, and investments of $ 158.0  million, compared to $120.0 million as of December 31, 2015, consisting of cash and cash equivalents, as well as investments in short and long-term investment grade available-for-sale securities. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are primarily short-term in duration and our holdings in U.S. government bonds and corporate debt securities mature prior to our expected need for liquidity, we believe that our exposure to interest rate risk is not significant and, as a consequence, a one percentage point movement in market interest rates would not have a significant impact on the total realized value of our portfolio. We actively monitor changes in interest rates.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized , and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2016 . Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2016 , our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting .

 

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PART II. OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

In November 2012, we granted Forest Laboratories Holdings Limited (“Forest Laboratories” or “Forest”), an indirect wholly-owned subsidiary of Allergan plc, an exclusive license to certain of our intellectual property rights relating to human therapeutics containing memantine in the United States. Under the terms of that license agreement, Forest has the right to enforce such intellectual property rights which are related to its right to market and sell Namzaric and Namenda XR for the treatment of moderate to severe dementia related to Alzheimer’s disease. We have a right to participate in, but not control, such enforcement actions by Forest.

 

As of the date of this filing, s everal companies have submitted Abbreviated New Drug Applications, or ANDAs, to the FDA requesting permission to manufacture and market generic versions of Namenda XR, on which we are entitled to receive royalties from Forest beginning in June 2018. In the notices, these companies allege that the patents associated with Namenda XR, some of which are owned by Forest or licensed by Forest from Merz Pharma GmbH & Co. KGaA, and others of which are owned by us and licensed by us exclusively to Forest in the United States, are invalid, unenforceable, and/or will not be infringed by the companies’ manufacture, use, or sale of generic versions of Namenda XR. We, Forest, Merz Pharma GmbH & Co. KGaA, and Merz Pharmaceuticals GmbH (together Merz) filed lawsuits in the U.S. District Court for the District of Delaware for infringement of the relevant patents against all of these companies. The parties are collectively seeking judgment that (i) the defendants have infringed the patents at issue, (ii) the effective date of any approval of the defendants’ ANDAs shall not be earlier than the expiration date of the last to expire of the relevant patents, including any extensions or exclusivities, (iii) the defendants be enjoined from commercially manufacturing, using, offering for sale, or selling in the United States, or importing into the United States, any products that infringe or induce or contribute to the infringement of the patents at issue prior to the expiration date of the last to expire of the patents, including extensions and exclusivities, and (iv)  we, Forest, and Merz be awarded monetary relief, in addition to any attorneys’ fees, costs, and expenses relating to the actions.

 

We and Forest have entered into a series of settlement agreements with the Namenda XR ANDA filers, except for one defendant with respect to the certain patents subject to the Markman ruling described below .   Entry dates for the generic Namenda XR are governed by the terms of these settlement agreements. Subject to those agreements, t he earliest date on which any of these agreements grants a license to market generic version of Namenda XR is January 31, 2020 or in the alternative, an option to launch an authorized generic version of Namenda XR beginning on January 31, 2021.

 

In January 2016, the Delaware District Court issued a claim construction (Markman) ruling in the Namenda XR litigation that includes findings of indefiniteness as to certain claim terms in the asserted patents licensed by us to Forest . On July 26 , 2016, the District Court issued a final judgment of invalidity on those patents based upon the Markman ruling. We and Forest plan to appeal that final judgment to the United States Court of Appeals for the Federal Circuit .

 

Additionally, as of the date of this filing, four companies have submitted ANDAs requesting permission to manufacture and market generic versions of Namzaric, on which we are entitled to receive royalties from Forest beginning in May 2020. We and Forest have begun to file lawsuits alleging infringement of the relevant patents against Namzaric ANDA filers , who are seeking to launch generic versions of Namzaric, in the same court as heard the Namenda XR litigation .   As of the date of this filing, we and Forest have settled with two defendants, granting a license to market generic versions of Namzaric in 2029, although that date may not apply in any future settlements .   The Markman hearing for these lawsuits is scheduled for November 2016 and the trial is scheduled for October 2017.

 

Because the Namzaric enforcement actions were filed within the requisite 45-day period provided in the U.S. Food, Drug and Cosmetic Act, there are stays preventing FDA approval of the ANDAs involved in both litigations for 30 months or until a court decision adverse to the patents. The 30-month stays for the Namzaric ANDAs will expire beginning in January 2018.

 

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From time to time, we may be party to legal proceedings, investigations, and claims in the ordinary course of its business. Other than the matters described above, we are not currently a party to any material legal proceedings.

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ITEM 1A. RISK FACTORS

 

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations, and future growth prospects. Our business could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes.

 

Risks related to the development and commercialization of our current and future product candidates, including ADS-5102

 

Our success depends heavily on the timely approval and successful commercialization of our product candidates, including ADS-5102. If we are unable to successfully commercialize our product candidates or if we experience significant delays in doing so, our business will be materially harmed.

 

We have invested a significant portion of our efforts and financial resources into the development of our product candidates, including ADS-5102, an oral once daily controlled-release version of the FDA-approved drug amantadine, for the treatment of levodopa-induced dyskinesia (“LID”) , for the treatment of walking impairment in patients with multiple sclerosis (“MS”), and potentially other indications , as well as ADS-4101 for the treatment of partial onset seizures in epilepsy . Our ability to generate product revenue will depend heavily on the successful development, regulatory approval, and eventual commercialization of ADS-5102 and other product candidates. The success of our product candidates will depend on numerous factors, including:

 

·

successfully completing the development program for ADS-5102 and other product candidates in a timely manner;

 

·

receiving marketing approval for ADS-5102 and other product candidates from the FDA in a timely manner;

 

·

successfully establishing and maintaining commercial manufacturing with third parties;

 

·

commercializing ADS-5102 and other product candidates, if approved, including sales and distribution of the product;

 

·

acceptance by the medical community and patients of the approved product;

 

·

the placement of ADS-5102 approved products on payers’ formulary tiers and the reimbursement rates established for the approved products;

 

·

effectively competing with other approved or used medicines;

 

·

continued demonstration of an acceptable safety profile of the approved products following approval; and

 

·

obtaining, maintaining, enforcing, and defending intellectual property rights and claims.

 

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business.

 

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If ADS-5102 for the treatment of LID fails to receive approval by regulatory authorities, our business will be adversely impacted and substantially harmed.

 

We cannot give any assurance that the Phase 3 clinical program for the treatment of LID will adequately demonstrate the safety and effectiveness to receive regulatory approval or that our new drug application (“NDA”) for ADS-5102 for the treatment of LID will be approved by regulatory authorities. Although we have substantially completed the clinical trial program for ADS-5102 for the treatment of LID, except for the long-term open-label safety study of ADS-5102 for the treatment of LID, we do not know if the clinical package for ADS-5102 for the treatment LID will adequately demonstrate sufficient safety and efficacy to the satisfaction of the FDA to achieve regulatory approval. In addition, NDAs are complex, multipart documents that must meet strict regulatory requirements to be acceptable for regulatory approval. NDAs must include preclinical and clinical study data and chemistry, manufacturing, and controls data. Additionally, we have neither filed nor had an NDA approved previously. Failure to achieve regulatory approval for ADS-5102 for the treatment of LID would harm our business .

 

Although we have completed clinical trials of ADS-5102 for the treatment of LID, a clinical trial with ADS-5102 is ongoing for LID and other indications and could result in clinical findings not consistent with previously reported positive clinical results. This could lead us to experience delays in the submission of our NDA or failure to receive regulatory approval, which would have a material and adverse impact on our business.

 

In completing our clinical trial program for ADS-5102 for the treatment of LID, and pursuing clinical trials in other indications for ADS-5102, we may experience numerous unforeseen events during, or as a result of, clinical studies that could delay or prevent our ability to receive regulatory approval or commercialize ADS-5102, including that:

 

·

clinical studies may produce negative or inconclusive results or raise significant safety concerns, and we may decide, or regulators may require us, to conduct additional clinical studies or abandon product development programs;

 

·

even if clinical studies demonstrate statistically significant efficacy and acceptable safety, the FDA or similar authorities outside the United States may not consider the results of our studies to be sufficient for approval of ADS-5102;

 

·

our clinical sites and clinical investigators may fail to comply with, or inconsistently apply, the trial protocols, regulatory requirements including Good Clinical Practices, contractual obligations, and the rating assessments;

 

·

our third-party vendors, including our CROs may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

·

we might have to suspend or terminate clinical studies for various reasons, including a finding that our product candidates have unanticipated serious side effects or other unexpected characteristics or that the patients are being exposed to unacceptable health risks;

 

·

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements; and

 

·

the supply or quality of ADS-5102 or other materials necessary to conduct clinical studies may be insufficient or inadequate.

 

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If we are required to conduct additional clinical studies or other testing of ADS-5102 beyond those that we currently contemplate, if we are unable to successfully complete clinical studies or other testing of ADS-5102, if the results of these studies or tests are not positive or are only modestly positive, or if there are safety concerns, we may:

 

·

be delayed in obtaining marketing approval;

 

·

not obtain marketing approval at all;

 

·

obtain approval for indications that are not as broad as intended;

 

·

have the product removed from the market after obtaining marketing approval;

 

·

be subject to additional post-marketing testing requirements; or

 

·

be subject to restrictions on how the product is distributed, marketed, or used.

 

Any of these unforeseen events could impair our ability to gain approval of ADS-5102 or commercialize ADS-5102 and harm our business and results of operations.

 

We will face risks in the development of our other product candidates similar to those we face with ADS-5102.

 

The risks relating to the development of our other product candidates are the same as, or similar to, the risks relating to the development of ADS-5102.

 

Our product candidates, including ADS-5102, have not been manufactured in a commercially validated process, nor at a scale that may be required to meet future market demand. There are risks associated with developing and validating manufacturing and packaging processes and scaling up on a timely basis.

 

Our product candidates, including ADS-5102, have not been manufactured in a commercially validated process, nor at a scale that may be required to meet possible future market demand. There are risks associated with developing and validating manufacturing and packaging processes and scaling up including, among others, delaying submission of an NDA, inability to gain regulatory approval, higher manufacturing costs, potential problems with process scale-up, process reproducibility, stability issues, lot consistency, capacity constraints, and timely availability of raw materials or equipment.

 

Our product candidates, including ADS-5102, are complex to manufacture, and manufacturing disruptions may occur that could delay the launch or commercialization of our product candidates.

 

Our product candidates, including ADS-5102, include extended-release versions of existing drugs. The manufacture and packaging of extended-release versions of drugs are substantially more complex than the manufacture and packaging of the immediate-release versions of drugs. Even after the manufacturing process for an extended-release product has been scaled up to commercial levels and numerous commercial lots have been produced, manufacturing disruptions may occur. Such problems may prevent the production of lots that meet the specifications required for sale of the product and may be difficult and expensive to resolve. If any such issues were to arise with respect to ADS-5102 or our future product candidates, our business, financial results, or stock price could be adversely affected.

 

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Our product candidates, including ADS-5102, may fail to achieve the degree of market acceptance by physicians, patients, healthcare payers, and others in the medical community necessary for commercial success, negatively impacting our business.

 

Our product candidates, including ADS-5102, may fail to gain sufficient market acceptance by physicians, hospital administrators, patients, healthcare payers, and others in the healthcare community. The degree of market acceptance of our products, after FDA approval, will depend on a number of factors, including:

 

·

the prevalence and severity of any side effects;

 

·

efficacy, duration of response, and potential advantages compared to alternative treatments;

 

·

the price;

 

·

the willingness of physicians to change their current treatment practices;

 

·

convenience and ease of administration compared to alternative treatments;

 

·

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

·

the strength of marketing and distribution support; and

 

·

the availability of third-party insurance coverage or reimbursement.

 

The failure of our product candidates, including ADS-5102, to achieve market acceptance would negatively impact our business .

 

We currently have only limited commercial capabilities and no sales or distribution personnel. If we are unable to develop or obtain through outsourcing, sales , marketing , and distribution capabilit ies , we will not be successful in commercializing ADS-5102 or other future product candidates .

 

We have only a limited   commercial infrastructure and have no experience in the commercialization, sale, marketing, or distribution of pharmaceutical products , like ADS-5102, if approved . To achieve commercial success for any approved product, including ADS-5102, we must either develop a sales and marketing organization or outsource these functions to third parties. We expect that the primary focus of our commercialization efforts will be in the United States .   W e intend to develop our own sales force to commercialize ADS-5102 and our other product candidates, or we may enter into partnership agreements to commercialize our products . Commercialization of ADS-5102 and other future product candidates outside of the United States, to the extent pursued, is likely to require collaboration with one or more third parties.

 

There are risks involved with both establishing our own commercial capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time-consuming, and if our product candidates fail to gain approval, our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

 

In addition, we also may not be successful in entering into arrangements with third parties to sell and market our future product candidates or may be unable to do so on terms that are favorable to us. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our future products, including ADS-5102.

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Failure to successfully obtain coverage and reimbursement of our products in the United States will substantially harm our business.

 

Our ability to commercialize any products successfully in the United States will depend in part on the extent to which coverage and reimbursement for these products becomes available from third-party payers, including government health administration authorities, such as those that administer the Medicare and Medicaid programs, and private health insurers. Third-party payers decide which medications they will cover by placement on their formularies and at what reimbursement levels. A primary trend in the U.S. healthcare industry is cost containment. Third-party payers have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payers are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot assure you that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. If coverage and reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate that we successfully develop, including ADS-5102.

 

There may be significant delays in obtaining coverage and reimbursement for approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA. Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, distribution, marketing, and sale. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the use of the product, the clinical setting in which it is used, and generic competitor availability, and may be based on initial payments for generic competitors or payments allowed for lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private third-party payers and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices than in the United States. In the United States, private third-party payers often rely upon Medicare coverage and reimbursement policies and payment limitations in setting their own coverage and reimbursement policies. Our inability to promptly obtain coverage, reimbursement, and profitable payment rates from both government funded and private third-party payers for new products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products, and our overall financial condition.

 

We face substantial competition, which may result in others discovering, developing, or commercializing products before or more successfully than we do.

 

The development and commercialization of new pharmaceutical products is highly competitive. We face competition with respect to our current product candidates, including ADS-5102, and will face competition with respect to any future products that we may seek to develop or commercialize from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies worldwide. For example, ADS-5102, if approved for the treatment of LID, may face competition from various drugs approved for treatment of Parkinson’s disease, though not LID, such as Azilect (Teva Pharmaceuticals Industries, Ltd.), Requip XL (GlaxoSmithKline plc), Mirapex ER (Boehringer Ingelheim Pharmaceuticals Inc.), Neupro Patch (UCB, Inc.), Sinemet (Merck & Co., Inc.), Parcopa (Jazz Pharmaceuticals, Inc.), Rytary (Impax), and Duopa (Abbvie). ADS-5102 may also face competition from drugs currently in development for LID from a number of pharmaceutical companies, such as Merck, Novartis, Osmotica Pharmaceuticals Corp., or Osmotica, Avanir Pharmaceuticals, Newron Pharmaceuticals S.p.A, Neurolixis, Amarantus BioScience, Addex Pharma, and Neurim Pharmaceuticals Ltd. Other products in late stage development for Parkinson’s disease includes product candidates from Kyowa Hakko, Acorda, Neuroderm, Acadia, Bial-Portela CSA, Genervon Biopharmaceuticals, Pharma Two B, and Depomed.

 

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Many of our competitors, including a number of large pharmaceutical companies that compete directly with us, have significantly greater financial resources and expertise in research and development, manufacturing, conducting clinical trials, obtaining regulatory approvals, and commercializing approved products than we do. These third parties will compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical study sites, and patient registration for clinical studies, as well as in acquiring technologies and products complementary to, or necessary for, our programs.   Finally, many of our competitors are large pharmaceutical companies that will have a greater ability to reduce prices for their competing drugs in an effort to gain market share and undermine the value proposition that we might otherwise be able to offer to payers.

 

ADS-5102 will also face competition from generic versions of immediate-release amantadine and potentially from other extended-release versions of amantadine that may be in development. For example, while immediate-release amantadine is not approved for use in Parkinson’s disease for the treatment of LID, some physicians may still prescribe it for such conditions. In addition, one competitor, Osmotica, has posted a notice on clinicaltrials.gov regarding its conduct of two Phase 3 clinical trials of extended-release amantadine for LID.

 

If we are unable to obtain orphan exclusivity for ADS-5102 for the treatment of LID, our business could be substantially harmed .  

 

Under the Orphan Drug Act, the FDA may designate a drug product as an orphan drug if it is a drug or biologic intended to treat a rare disease or condition. For example, in July 2015, the FDA granted Osmotica orphan drug designation for its amantadine hydrochloride product candidate for the treatment of LID, for which it has recently announced plans to file an NDA in 2016. Generally, if a drug product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug product is entitled to a period of marketing exclusivity, which may preclude the FDA from approving another marketing application for the same drug product for the same therapeutic indication. The applicable period of exclusivity is up to seven (7) years in the United States. Even though we have orphan drug designation for ADS-5102 for the treatment of LID, we may not be the first to obtain marketing approval. If Osmotica or any of our other competitors obtain orphan drug exclusivity for their product candidate in one of our target indications using the same active moiety as in our product candidate, the marketing application for our drug product in that target indication could be delayed for so long as the competitor has orphan drug exclusivity for its product.

 

Even if we are first to obtain marketing approval for ADS-5102 for the treatment of LID, the FDA could still subsequently approve the same drug with the same active moiety for the same condition, if the FDA concludes that the later drug is safer, more effective, or makes a major contribution to patient care. As a matter of law, orphan drug designation does not shorten a drug’s development or regulatory review time, nor does it give the drug any advantage in the regulatory review or approval process.

 

If generic manufacturers obtain approval for generic versions of our products, including ADS-5102, or of products with which we compete, our business may suffer.

 

Under the U.S. Food, Drug and Cosmetic Act, or FDCA, the FDA can approve an Abbreviated New Drug Application, or ANDA, for a generic version of a branded drug without the ANDA applicant undertaking the clinical testing necessary to obtain approval to market a new drug. Generally, in place of such clinical studies, an ANDA applicant usually needs only to submit data demonstrating that its product has the same active ingredient(s) ,   strength, dosage form , route of administration  and that it is bioequivalent to the branded product.

 

The FDCA requires that an applicant for approval of a generic form of a branded drug certify either that its generic product does not infringe any of the patents listed by the owner of the branded drug in the Approved Drug Products with Therapeutic Equivalence Evaluations , also known as the Orange Book, or that those patents are not enforceable. This process is known as a paragraph IV challenge. Upon receipt of the paragraph IV notice, the owner has 45 days to bring a patent infringement suit in federal district court against the company seeking ANDA approval of a

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product covered by one of the owner’s patents. The discovery, trial, and appeals process in such suits can take several years. If this type of suit is commenced, the FDCA provides a 30-month stay on the FDA’s approval of the competitor’s application. This type of litigation is often time-consuming and costly and may result in generic competition if the patents at issue are not upheld or if the generic competitor is found not to infringe the owner’s patents. Such litigation has been commenced by Forest and us to enforce certain patents related to Namenda XR and Namzaric. See “Part II. Item 1. Legal Proceedings” for more information.

 

If the litigation is resolved in favor of the ANDA applicant or the challenged patent expires during the 30-month stay period, the stay is lifted and the FDA may thereafter approve the application based on the standards for approval of ANDAs. Once an ANDA is approved by the FDA, the generic manufacturer may market and sell the generic form of the branded drug in competition with the branded medicine.

 

If serious or other adverse side effects are identified during the development of ADS-5102 or any other product candidates, we may need to abandon our development of that product candidate, which would materially and adversely harm our business.

 

Our product candidate, ADS-5102, along with our other earlier stage product candidates, are still in clinical or preclinical development. The risk of failure during development is high. It is impossible to predict when or if any of our product candidates will demonstrate safety and efficacy sufficient to warrant regu latory approval. Although the safety profile of amantadine, the active pharmaceutical ingredient in ADS-5102, is already characterized in the approved label for amantadine (i.e., Symmetrel ® ), there can be no assurance that our Phase 3 program for ADS-5102 for the treatment of LID, our Phase 2 program for ADS-5102 for walking impairment associated with MS or future studies in other indications, will not reveal additional safety or tolerability issues. In such an event, we might need to delay or abandon development and potential approval of ADS-5102 entirely or for certain indications. If we are forced to delay or abandon development of our product candidates, our business, results of operations, and financial condition will be materially and adversely harmed.

 

If ADS-5102 is approved by regulatory authorities, post-marketing safety issues with ADS-5102, its reference product, or other components of ADS-5102 could decrease the potential sales of ADS-5102, result in adverse labeling changes, use restrictions, product withdrawal, or product liability litigation.

 

Discovery of previously unknown problems, or increased focus on a known problem, with an approved product may result in restrictions on its permissible uses, including withdrawal of the medicine from the market.

 

If we or others identify additional undesirable side effects caused by ADS-5102 after approval:

 

·

regulatory authorities may require the addition of labeling statements, specific warnings, contraindications, or field alerts to physicians and pharmacies;

 

·

regulatory authorities may withdraw their approval of the product and require us to take our approved drugs off the market;

 

·

we may be required to change the way the product is administered, conduct additional clinical trials, change the labeling of the product, or implement a Risk Evaluation and Mitigation Strategy (REMS);

 

·

we may have limitations on how we promote our drugs;

 

·

third-party payers may limit coverage or reimbursement for ADS-5102;

 

·

sales of ADS-5102 may decrease significantly;

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·

we may be subject to litigation or product liability claims; and

 

·

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product and could substantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from its sale.

 

ADS-5102 may also be affected by the safety and tolerability of its parent drugs or drugs with similar mechanisms of action. Although amantadine, which is a component of ADS-5102, has been used in patients for many years, newly observed toxicities or worsening of known toxicities in preclinical studies or in subjects in clinical studies receiving amantadine, or reconsideration of known toxicities of compounds in the setting of new indications, could result in increased regulatory scrutiny of our products and product candidates. The FDA has substantial discretion in the NDA approval process and may refuse to approve any application if the FDA concludes that the risk/benefit analysis of a potential drug treatment for a specific indication does not warrant approval. Thus, although the parent drug for, or a drug related to, one of our product candidates may be approved by the FDA in a particular indication, the FDA may conclude that our product candidate’s risk/benefit profile does not warrant approval in a different indication, and the FDA may refuse to approve our product candidate. Such conclusion and refusal would prevent us from developing and commercializing our product candidates and severely harm our business and financial condition. Following consumption, ADS-5102 capsules are broken down by the body, during which time the active drug and other breakdown substances are released into the bloodstream. While these breakdown substances are generally regarded as safe, it is possible that there could be unexpected toxicity associated with them that will cause ADS-5102 to be poorly tolerated by, or toxic to, humans. Any unexpected toxicity of, or suboptimal tolerance to, the product or product candidates could reduce their sales of approved products and delay or prevent commercialization of our product candidates.

 

In addition, problems with approved products marketed by third parties that utilize the same therapeutic target or that belong to the same therapeutic class as amantadine could adversely affect the commercialization of ADS-5102.

 

If a safety issue emerges post-approval, we may become subject to costly product liability litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

·

decreased demand for any product candidates or products that we may develop;

 

·

the inability to commercialize any products that we may develop;

 

·

injury to our reputation and significant negative media attention;

 

·

withdrawal of patients from clinical studies or cancellation of studies;

 

·

significant costs to defend the related litigation;

 

·

substantial monetary awards to patients; and

 

·

loss of revenue.

 

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We currently hold $10.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur at our current stage of development. Insurance coverage is increasingly expensive. If and when our product candidates are approved and we launch such products commercially, we may not be able to obtain insurance coverage at a reasonable cost or in amounts adequate to satisfy any liability or associated costs that may arise in the future. These events could harm our business and results of operations and cause our stock price to decline.