CATALYST PHARMACEUTICALS, INC. (CPRX) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction our consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption “Risk Factors” in Item 1A of this report.

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:

Overview

We are a commercial-stage, patient-centric biopharmaceutical company focused on in-licensing, developing, and commercializing novel high-quality medicines for patients living with rare and difficult to treat diseases. We utilize concerted diligence efforts in search of therapies that will improve the lives of those who suffer from rare or difficult to treat diseases. With an unwavering patient focus embedded in everything we do, we are committed to providing innovative, best-in-class medications with the hope of making a meaningful impact on those affected by these conditions.

Our flagship U.S. commercial product is FIRDAPSE® (amifampridine) Tablets 10 mg approved for the treatment of Lambert-Eaton myasthenic syndrome, or LEMS, for adults and for children ages six and up. Further, on January 24, 2023, we closed our acquisition of FYCOMPA® and are now also marketing that product in the United States. FYCOMPA® (perampanel) CIII is a prescription medication used alone or with other medicines to treat focal onset seizures with or without secondarily generalized seizures in people with epilepsy aged four and older and with other medicines to treat primary generalized tonic-clonic seizures in people with epilepsy aged 12 and older. Finally, on July 18, 2023, we closed our acquisition of an exclusive license for North America for vamorolone, a novel corticosteroid treatment for patients suffering from Duchenne Muscular Dystrophy (DMD). On October 26, 2023, the FDA approved AGAMREE® (vamorolone) oral suspension 40 mg/ml for the treatment of DMD. We are currently planning the commercial launch of AGAMREE® in the United States during the first quarter of 2024.

FIRDAPSE®

On November 28, 2018, we received approval from the FDA for our new drug application, or NDA, for FIRDAPSE® Tablets 10 mg for the treatment of adult patients (ages 17 and above) with LEMS, and in January 2019, we launched FIRDAPSE® in the United States. Further, on September 29, 2022, the FDA approved our supplemental NDA (sNDA) to expand the indicated age range for FIRDAPSE® Tablets 10 mg to include pediatric patients, six years of age and older for the treatment of LEMS.

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We sell FIRDAPSE® through a field force experienced in neurologic, central nervous system or rare disease products consisting at this time of approximately 35 field personnel, including sales (Regional Account Managers), thought leader liaisons, patient assistance and insurance navigation support (Patient Access Liaisons), and payor reimbursement (National Account Managers). We also have a field-based force of 10 medical science liaisons who are helping educate the medical community about scientific literature concerning LEMS and FIRDAPSE®.

Additionally, for the last few years we have contracted with an experienced inside sales agency that works to generate leads through telemarketing to targeted physicians. This inside sales agency allowed our sales efforts to not only reach the neuromuscular specialists who regularly treat LEMS patients, but also the roughly 9,000 neurology and neuromuscular healthcare providers that may be treating a LEMS patient who can benefit from FIRDAPSE®. However, effective January 1, 2024 we have terminated that arrangement. We also use non-personal promotion to reach the 20,000 neurologists who are potential LEMS treaters and the 16,000 oncologists who might be treating a LEMS patient with small cell lung cancer. Further, we continue to make available at no-cost a LEMS voltage gated calcium channel antibody diagnostic testing program for use by physicians who suspect that one of their patients may have LEMS and wish to reach a definitive diagnosis.

Finally, we are continuing to expand our digital and social media activities to introduce our products and services to potential patients and their healthcare providers. We also work with several rare disease advocacy organizations (including the Myasthenia Gravis Foundation of America and the National Organization for Rare Disorders) to help increase awareness and level of support for patients living with LEMS and to provide education for the physicians who treat these rare diseases and the patients they treat.

We are supporting the distribution of FIRDAPSE® through Catalyst Pathways®, our personalized treatment support program for patients who enroll in it. Catalyst Pathways® is a single source for personalized treatment support, education and guidance through the challenging dosing and titration regimen required to reach an effective therapeutic dose. It also includes distributing the drug through a very small group of exclusive specialty pharmacies (primarily AnovoRx), which is consistent with the way that most drug products for ultra-orphan diseases are distributed and dispensed to patients. We believe that by using specialty pharmacies in this way, the difficult task of navigating the health care system is far better for the patient needing treatment for their rare disease and the health care community in general.

In order to help patients with LEMS afford their medication, we, like other pharmaceutical companies which are marketing drugs for ultra-orphan conditions, have developed an array of financial assistance programs that are available to reduce patient co-pays and deductibles to a nominal affordable amount. A co-pay assistance program designed to keep out-of-pocket costs to not more than $10 per month (currently less than $2 per month) is available for all LEMS patients with commercial coverage who are prescribed FIRDAPSE®. Our FIRDAPSE® co-pay assistance program is not available to patients enrolled in state or federal healthcare programs, including Medicare, Medicaid, VA, DoD, or TRICARE. Separately, we are donating, and committing to continue to donate, money to qualified, independent charitable foundations dedicated to providing assistance to any U.S. LEMS patients in financial need. Subject to compliance with regulatory requirements, our goal is that no LEMS patient is ever denied access to their medication for financial reasons.

In January 2023, we received Paragraph IV Certification Notice Letters from three generic drug manufacturers advising that they had each submitted an Abbreviated New Drug Application (ANDA) to the FDA seeking authorization from the FDA to manufacture, use or sell a generic version of FIRDAPSE® in the United States. The notice letters each alleged that the six patents listed in the FDA Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) in connection with FIRDAPSE® are not valid, not enforceable, and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in these ANDA submissions. Under the Federal Food, Drug and Cosmetic Act (FDCA), as amended by the Drug Price Competition and Patent Term Restoration Act of 1984, as amended, we had 45 days from receipt of the notice letters to determine if there were grounds to bring a lawsuit and, if so, to commence patent infringement lawsuits against these generic drug manufacturers in a federal district court, which would trigger a statutory stay precluding the FDA from final approval of the subject ANDA until May 2026 or entry of judgment holding the patents invalid, unenforceable, or not infringed, whichever occurs first. In that regard, after conducting the necessary due diligence, we filed lawsuits on March 1, 2023 in the U.S. District Court for the District of New Jersey against each of the three generic drug manufacturers who notified us of their ANDA submissions, thus triggering the stay. Further, in October 2023, we received a Paragraph IV Certification Notice Letter from a fourth generic drug manufacturer, and we filed a similar lawsuit against this manufacturer in November 2023 in the U.S. District Court for the District of New Jersey.

We intend to vigorously protect and defend our intellectual property for FIRDAPSE® and, although there can be no assurance, we believe that our patent estate will protect FIRDAPSE® from generic competition.

On August 4, 2023, we submitted an sNDA to increase the indicated maximum daily dosage of FIRDAPSE® tablets from 80 mg to 100 mg for the treatment of LEMS. On October 13, 2023, we announced that the FDA had accepted for review our sNDA and assigned a Prescription Drug User Fee Act (PDUFA) action date of June 4, 2024. There can be no assurance that the FDA will approve our sNDA.

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We are advised by our sub-licensee for FIRDAPSE® in Japan, DyDo Pharma, Inc. (DyDo), that on December 18, 2023, based on a preliminary favorable interim data analysis after six months into the safety phase of its registration study to evaluate the efficacy and safety of FIRDAPSE® for the treatment of LEMS, they filed a Japan NDA with the Pharmaceuticals and Medical Devices Agency (PMDA) in Japan seeking approval to commercialize the product in Japan. The review period is expected to be approximately nine months from the submission date, and there can be no assurance that the NDA filing made by DyDo will be approved.

Further, upon acceptance of the Japan NDA by the PMDA, which occurred on December 18, 2023, our license for FIRDAPSE® automatically expanded to include other key markets in Asia and Latin America, and we are currently initiating plans to seek opportunities to expand FIRDAPSE®’s global footprint through strategic partnerships (with the current focus on the Asia Pacific and Latin American regions).

FYCOMPA®

On December 17, 2022, we entered into an agreement with Eisai for the acquisition of the U.S. rights to FYCOMPA® (perampanel) CIII. FYCOMPA® is a selective non-competitive antagonist of AMPA receptors, the major subtype of ionotropic glutamate receptors. It was the first, and still the only, drug of its class to be approved for epilepsy. Studies suggest that AMPA receptor antagonism can lead to reduced overstimulation and anticonvulsant effects, as well as inhibiting seizure generation and spread. FYCOMPA® is a controlled substance and is approved with a box warning label.

FYCOMPA® is used to treat certain types of focal onset seizures (seizures that involve only one part of the brain) in adults and children four years of age and older. It is also used in combination with other medications to treat certain types of primary generalized tonic-clonic seizures (also known as a “grand mal” seizure, a seizure that involves the entire body) in adults and children 12 years of age or older. Perampanel is in a class of medications called anticonvulsants. It works by decreasing abnormal electrical activity in the brain.

On January 24, 2023, we closed our acquisition of the U.S. rights to FYCOMPA®. In connection with the acquisition, we purchased Eisai’s regulatory approvals and documentation, product records, intellectual property, inventory, and other matters relating to the U.S. rights for FYCOMPA®, in exchange for an upfront payment of $160 million in cash. We also agreed to pay Eisai an additional cash payment of $25 million if a requested patent extension for FYCOMPA® until June 8, 2026 was approved by the U.S. Patent and Trademark Office (USPTO), which did not occur. Finally, we agreed to pay Eisai royalty payments after patent protection for FYCOMPA® expires, which royalty payments will be reduced upon generic equivalents to FYCOMPA® entering the market.

In conjunction with the closing of the asset purchase, we entered into two additional agreements with Eisai; a TSA and a Supply Agreement. Under the TSA, a U.S. subsidiary of Eisai provided us with certain transitional services, and under the Supply Agreement, Eisai agreed to manufacture FYCOMPA® for us for at least seven years at prices listed in the Supply Agreement (to be updated on a yearly basis). As of December 31, 2023, the transition services under the TSA have been completed.

Initially, following the closing of the acquisition, we began to market FYCOMPA® in the U.S. through Eisai under the TSA as we built our FYCOMPA® marketing and sales team, and in May 2023, we took over the marketing program for FYCOMPA®. In that regard, we have hired approximately 35 sales and marketing personnel to support FYCOMPA®, most of whom previously worked in Eisai’s U.S. sales division marketing FYCOMPA®. We have also hired seven medical science liaisons to help us educate the medical community who treat epilepsy about scientific literature regarding epilepsy and FYCOMPA®.

We are supporting patients using FYCOMPA® through an Instant Savings Card Program. Through the program, eligible commercially insured patients could pay as little as $10 for their FYCOMPA® co-pay (with a maximum savings of $1,300 per year). The FYCOMPA® instant savings card program is not available to patients enrolled in state or federal healthcare programs, including Medicare, Medicaid, VA, DoD, or TRICARE.

Patent protection for FYCOMPA® is primarily from two patents listed in the Orange Book. The first, U.S. patent no. 6,949,571 (the ‘571 patent) will expire May 23, 2025, including patent term extension. Although the Company had requested that the USPTO reconsider this expiration date in favor of a June 8, 2026 expiration date, the request for reconsideration of the agency’s patent term extension calculation was denied and the Company has exhausted its reasonable avenues for an extension of that patent term. The Company will update the Orange Book to reflect the May 23, 2025 expiration date at the appropriate time. The second FYCOMPA® patent in the Orange Book is U.S. Patent No. 8,772,497 (the ‘497 patent), which expires on July 1, 2026. The ‘497 patent has been the subject of previous Paragraph IV certifications from three NDA filers.

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On February 20, 2023, we received a Paragraph IV Certification Notice Letter from a company that appears to have filed the first ANDA for the oral suspension formulation for FYCOMPA®. The same company sent a similar letter to us later in February with a similar certification for the tablet formulation for FYCOMPA®, the fourth such certification for this formulation. Both of these letters were paragraph IV certifications of non-infringement, non-validity, and unenforceability of the ‘497 patent for FYCOMPA® but each application, like the previous Paragraph IV notices from ANDA filers, does not challenge the ‘571 patent. Accordingly, the FDA may not approve any ANDA prior to expiration of the ‘571 patent, including patent term extension. Similar to the actions with the FIRDAPSE® Paragraph IV Certifications described above, after due diligence we filed lawsuits on April 5, 2023 in the U.S. District Court for the District of New Jersey against the drug manufacturer who notified us of their ANDA submissions for both FYCOMPA® formulations, thus triggering the 30 month stay for each application.

AGAMREE®

On June 19, 2023, we entered into the AGAMREE® License Agreement and the Investment Agreement with Santhera. Under the AGAMREE® License Agreement, we contracted to obtain an exclusive North America license, manufacturing and supply agreement for Santhera’s investigational product candidate, AGAMREE® (vamorolone), a novel corticosteroid for the treatment of DMD. Under the Investment Agreement, we agreed to make a strategic investment into Santhera.

Both transactions closed on July 18, 2023. Under the AGAMREE® License Agreement, upon closing, we made a $75 million payment to Santhera in return for the exclusive North American license for AGAMREE®. Additionally, following approval of the NDA for the drug, on October 26, 2023, we became obligated to make a milestone payment of $36 million to Santhera, $26 million of which Santhera has advised us was used to make milestone payments that they owe to third parties. The $36 million payment was made during the fourth quarter of 2023. We may also be obligated to pay future regulatory and commercial milestone payments to Santhera tied to calendar year sales of AGAMREE®, as well as commercial royalties. In addition to the rights to commercialize the product in North America, the AGAMREE® License Agreement provides us with the right of first negotiation for AGAMREE® in Europe and Japan should Santhera pursue partnership opportunities in those territories. Additionally, we will hold the North American rights to any future approved indications for AGAMREE®.

Concurrent with the closing of the AGAMREE® License Agreement, we made a strategic investment into Santhera in which we acquired 1,414,688 of Santhera’s post-reverse split ordinary shares (representing approximately 11.26% of Santhera’s outstanding ordinary shares following the transaction) at an investment price of CHF 9.477 per share (corresponding to a mutually agreed volume weighted average price prior to signing), with the approximately $15.7 million USD in equity investment proceeds, inclusive of the approximately $13.5 million USD fair value of the investment in Santhera and approximately $2.2 million USD of transaction costs included in acquired in-process research and development, to be used by Santhera for Phase IV studies of AGAMREE® in DMD and future development of additional indications for AGAMREE®. At February 26, 2024, the closing price of Santhera’s common shares on the SIX Swiss Exchange was CHF 11.36 per share.

DMD, the most common form of muscular dystrophy, is a rare and life-threatening neuromuscular disorder characterized by progressive muscle dysfunction, ultimately leading to loss of ambulation, respiratory failure, and fatality. Current standard treatment for DMD involves corticosteroids, which often come with significant side effects. It is estimated that between 11,000 and 13,000 patients in the U.S. are affected by DMD, with approximately 70% of patients currently receiving a corticosteroid treatment. Steroids are expected to remain the backbone of therapy for DMD patients and dosed concomitantly with other therapies.

AGAMREE®’s unique mode of action is based on differential effects on glucocorticoid and mineralocorticoid receptors and modifying further downstream activity. As such, it is considered a novel corticosteroid with dissociative properties in maintaining efficacy that we hope has the potential to demonstrate comparable efficacy to corticosteroids, with the potential for a better-tolerated side effect profile. This mechanism of action may allow vamorolone to emerge as an effective alternative to the current standard of care corticosteroids in children, adolescents, and adult patients with DMD. In the pivotal VISION-DMD study, vamorolone met the primary endpoint Time to Stand (TTSTAND) velocity versus placebo (p=0.002) at 24 weeks of treatment and showed a good safety and tolerability profile. The most commonly reported adverse events versus placebo from the VISION-DMD study were cushingoid features, vomiting, and vitamin D deficiency. Adverse events were generally of mild to moderate severity.

On October 13, 2023, Santhera announced that the European Union’s Committee for Medicinal Products for Human Use (CHMP) adopted a positive position in favor of AGAMREE® for the treatment of DMD patients aged four and older. In its recommendation for approval, CHMP acknowledged that there was a positive benefit-risk profile of AGAMREE® in such patient population, including certain safety benefits of AGAMREE® compared to standard of care corticosteroids in the treatment of DMD. On October 26, 2023, the U.S. FDA approved Santhera’s NDA for AGAMREE® for use in treating DMD in patients aged two years and older. As part of the previously described transaction, Santhera has transferred the approved New Drug Application to us. Further, on December 18, 2023, the European Commission (EC) granted to Santhera marketing authorization for AGAMREE® for the treatment of DMD in patents ages four years and older and on January 12, 2024, Santhera announced that AGAMREE® had received approval by the Medicines and Healthcare products Regulatory Agency (MHRA) in the United Kingdom. On January 15, 2024, Santhera announced that AGAMREE® was commercially launched in Germany.

We currently expect to launch AGAMREE® in the U.S. during the first quarter of 2024. We are incurring substantial commercialization expenses, including sales, marketing, analytical infrastructure, patient services, patient advocacy, and other commercialization related expenses, in preparation for the launch of the product in the U.S. We incurred a portion of such commercialization expenses during the fourth quarter of 2023 and we are incurring additional expenses during the first quarter of 2024. We anticipate minimal sales and marketing personnel expansion to market AGAMREE®, with approximately 10 additional commercial team members required, due to the synergy of this product within our existing neuromuscular franchise. We will support the distribution of AGAMREE® through our Catalyst Pathways® patient services program to ensure that patients have access to a dedicated, personalized support team that assists families through the AGAMREE® patient journey, from answering questions to coordinating financial assistance programs for eligible patients.

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We have established a joint steering committee with Santhera that will oversee the lifecycle management and development of AGAMREE® for additional indications beyond DMD. Under our AGAMREE® License Agreement with Santhera, we have agreed to purchase commercial supply of AGAMREE® from Santhera at agreed upon rates.

To support the approval of AGAMREE®, a randomized, double-blind, placebo and prednisone-controlled multinational trial of vamorolone was carried out in 121 patients with DMD. The study included patients ages four to less than seven years of age at time of enrollment in the study who were corticosteroid naïve and ambulatory. The trial met the primary (time to stand velocity after 24 weeks for vamorolone, 6 mg/kg per day vs placebo) and several sequential secondary motor function endpoints. Study participants receiving vamorolone, 2 mg/kg per day, and vamorolone, 6 mg/kg per day, showed improvements in multiple functional endpoints over the 24-week treatment period as compared to placebo. The statistical thresholds for the primary outcome and several secondary outcomes for vamorolone treatment were met, and vamorolone demonstrated efficacy across both dose ranges. The differences in time to stand from supine velocity (TTSTAND) were clinically meaningful. The differences in 6-minute walk test (6MWT) were also clinically meaningful.

AGAMREE® has New Chemical Entity exclusivity that expires in October 2028. AGAMREE® also enjoys Orphan Drug Exclusivity expiring in October 2030. AGAMREE® is further protected by six Orange Book listed patents expiring as early as May 28, 2029 and as late as July 16, 2040. The Company has also requested Patent Term Extension and will update the relevant expiration date in the Orange Book upon a final determination by the USPTO. The earliest a generic could file an ANDA is October 26, 2027. If we were to pursue a patent infringement action if any such ANDA challenges any of AGAMREE®’s Orange Book patents, then the automatic statutory 30-month stay would prevent FDA approval of the ANDA until April 26, 2031.

Business Development

We continue to advance our strategic initiatives and portfolio expansion efforts, focusing on broadening and diversifying our rare (orphan) Neurology product portfolio with innovative therapies that address critical unmet medical needs and expanding the geographical footprint of our existing products. In that regard, we are currently exploring clinically differentiated and adequately de-risked opportunities, with a keen focus on products to treat rare (orphan) central nervous system (CNS) and adjacent rare (orphan) diseases. These prospects include evaluating companies with existing commercial drug products or drugs in development, for potential partnerships, licensing, geographical expansion opportunities with our existing products, and/or asset acquisitions. We continue to employ a disciplined, comprehensive, and exhaustive approach to identifying and evaluating opportunities that we believe will add significant value to our company over the near, mid, and long term. However, no additional definitive agreements have been entered into to date, and there can be no assurance that these initiatives will be successful.

Capital Resources

At December 31, 2023, we had cash and cash equivalents of approximately $137.6 million. Further, on January 9, 2024, we completed a public offering of 10 million shares of our common stock, raising net proceeds of approximately $140.1 million. The proceeds from this offering will be used to potentially acquire new products and for general corporate purposes.

Based on our current financial condition and forecasts of available cash, we believe that we have sufficient funds to support our operations for at least the next 12 months. There can be no assurance that we will continue to be successful in commercializing FIRDAPSE® and FYCOMPA®, that our commercialization of AGAMREE® will be successful, or that we will continue to be profitable and cash flow positive. Further, there can be no assurance that if we need additional funding in the future, whether such funding will be available to us on acceptable terms.

Basis of Presentation

Revenues.

During the fiscal year ended December 31, 2023, we generated revenues from product sales of FIRDAPSE® primarily in the U.S. and FYCOMPA® in the U.S. We expect these revenues to fluctuate in future periods based on our sales of FIRDAPSE® and FYCOMPA®. We received approval from Health Canada on July 31, 2020, for FIRDAPSE® for the symptomatic treatment of LEMS and as of December 31, 2020, our sub-licensee KYE Pharmaceuticals launched FIRDAPSE® in Canada. During the fiscal year ended December 31, 2023, revenues generated under our collaboration agreement with KYE Pharmaceuticals were immaterial. We expect our revenues from the KYE collaboration agreement to fluctuate in future periods based on our collaborator’s ability to sell FIRDAPSE® in Canada.

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For the fiscal year ended December 31, 2023, we did not generate revenues under our collaborative agreement with Endo. We do not expect to generate revenue in future periods as a result of Endo informing us in the fourth quarter of 2023 that they are discontinuing work on the collaboration for development and commercialization of vigabatrin and that they wish to terminate the arrangement.

For the fiscal year ended December 31, 2023, we generated $1.9 million in revenues from our collaborative agreement with DyDo. We expect our revenue from the DyDo license agreement to fluctuate in future periods based on DyDo’s ability to meet various regulatory milestones set forth in such agreement.

Cost of Sales.

Cost of sales consists of third-party manufacturing costs, freight, royalties, and indirect overhead costs associated with sales of our products. Cost of sales may also include period costs related to certain inventory manufacturing services, inventory adjustments charges, unabsorbed manufacturing and overhead costs and manufacturing variances.

Research and Development Expenses.

Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. The major components of research and development costs include acquired IPR&D, preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, consulting, and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs related to our product development efforts. Prior to January 2023, all of our research and development resources have been devoted to the development of FIRDAPSE®, CPP-109 (our version of vigabatrin), and formerly CPP-115, and until we acquire or license new products we currently expect that our future development costs will be attributable principally to the continued development of FIRDAPSE®, FYCOMPA® and AGAMREE®.

Our cost accruals for clinical studies and trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical study and trial sites and clinical research organizations (CROs). In the normal course of our business we contract with third parties to perform various clinical study and trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the clinical study or trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our consolidated financial statements to the actual services received and efforts expended. As such, expense accruals related to preclinical and clinical studies or trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific study or trial contract. We monitor service provider activities to the extent possible; however, if we underestimate activity levels associated with various studies or trials at a given point in time, we could be required to record significant additional research and development expenses in future periods. Preclinical and clinical study and trial activities require significant up-front expenditures. We anticipate paying significant portions of a study or trial’s cost before they begin and incurring additional expenditures as the study or trial progresses and reaches certain milestones.

Selling, General and Administrative Expenses.

During 2019, we actively committed funds to developing our commercialization program for FIRDAPSE® and we have continued to incur substantial commercialization expenses, including sales, marketing, patient services, patient advocacy and other commercialization related expenses as we have continued our sales program for FIRDAPSE®. We are also now incurring substantial commercialization expenses for FYCOMPA® and substantial commercialization expenses for AGAMREE®, as we prepare for the planned launch of AGAMREE® during the first quarter of 2024.

Our general and administrative expenses consist primarily of salaries and personnel expenses for accounting, corporate, compliance, and administrative functions. Other costs include administrative facility costs, regulatory fees, insurance, and professional fees for legal including litigation cost, IT, accounting, and consulting services.

Amortization of Intangible Assets.

Amortization of intangible assets consists of the amortization of the FYCOMPA® product rights, which are amortized using the straight-line method over its estimated useful life of 5 years, and the RUZURGI® product rights, which are amortized using the straight-line method over its estimated useful life of 14.5 years. We also capitalized the $36 million of milestone payment paid to Santhera during the fourth quarter of 2023 which is being amortized over the product’s estimated useful life of 10.5 years.

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Stock-Based Compensation.

We recognize expense for the fair value of all stock-based awards to employees, directors, and consultants in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). For stock options, we use the Black-Scholes option valuation model in calculating the fair value of the awards.

Income Taxes.

Our effective income tax rate is the ratio of income tax expense over our income before income taxes.

As of December 31, 2023, 2022 and 2021, we had no federal net operating loss carry-forwards. Additionally, we had state net operating loss carry-forwards of approximately $0, $0 and $28 million, respectively, available to reduce future Florida taxable income for the years ended December 31, 2023, 2022 and 2021.

Recently Issued Accounting Standards.

For discussion of recently issued accounting standards, please see Note 2, “Basis of Presentation and Significant Accounting Policies,” in the consolidated financial statements included in this report.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make judgments, 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 consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The amounts of assets and liabilities reported in our consolidated balance sheets and the amounts reported in our consolidated statements of comprehensive income are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, valuation of intangible assets, leases, preclinical study and clinical trial expenses, stock-based compensation and valuation allowance for deferred tax assets. The accounting policies described below are not intended to be a comprehensive list of all of our accounting policies but represent the accounting estimates which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Our consolidated financial statements and the notes thereto included elsewhere in this report contain accounting policies and other disclosures as required by U.S. GAAP.

Revenue Recognition.

Revenue from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts with our customer, payors, and other indirect customers relating to the sale of our products. These reserves are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates as of December 31, 2023, 2022 and 2021 and, therefore, the transaction price was not reduced further during the years ended December 31, 2023, 2022 and 2021. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. Refer to Note 2, “Basis of Presentation and Significant Accounting Policies,” in the consolidated financial statements included in this report for further details on revenue recognition.

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Valuation of Intangible Assets.

We have acquired and continue to acquire significant intangible assets that we record at fair value at the acquisition date. Transactions involving the purchase or sale of intangible assets are usually based on a discounted cash flow analysis. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, cost of capital and market participants. Each of these factors can significantly affect the value of the intangible asset. We engage independent valuation experts who review our critical assumptions and calculations for acquisitions of significant intangibles. We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If the affected assets are deemed not recoverable, we would estimate the fair value of the assets and record an impairment loss. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.

Stock-Based Compensation.

We recognize stock-based compensation for the fair value of all share-based payments, including grants of stock options and restricted stock units. For stock options, we use the Black-Scholes option valuation model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. Expected volatility is based on reviews of historical volatility of our common stock. The estimated expected option life is based upon the simplified method. Under this method, the expected option life is presumed to be the mid-point between the vesting date and the end of the contractual term. We will continue to use the simplified method until we have sufficient historical exercise data to estimate the expected life of the options. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the expected life of our stock option awards. For the years ended December 31, 2023 and 2022, the assumptions used were an estimated annual volatility of 68.0% to 71.0% and 68.4% to 69.5%, expected holding periods of 4.5 to 5.2 years and 4.5 years, and risk-free interest rates of 3.55% to 4.92% and 1.27% to 4.07%, respectively.

Results of Operations

Years Ended December 31, 2023 and 2022

Revenues.

For the fiscal year ended December 31, 2023, we recognized total revenues of $398.2 million which included $396.5 million in net revenue from product sales primarily in the U.S. compared to $214.2 million in total revenues, which included $213.9 million in net revenues from product sales for the fiscal year ended December 31, 2022. FIRDAPSE® net sales were approximately $258.4 million for the fiscal year ended December 31, 2023 and FYCOMPA® net sales were approximately $138.1 million for the period between January 24, 2023 (date of acquisition) and December 31, 2023. All net revenue from product sales during the fiscal year ended December 31, 2022 were from sales of FIRDAPSE®.

The increase of approximately $182.6 million in net product revenues when comparing the fiscal year ended December 31, 2023 and 2022 was primarily due to the acquisition of FYCOMPA® during January 2023, and related product sales, and increases in FIRDAPSE® sales volumes of approximately 12% (which included patients who were transferred to FIRDAPSE® in the first and second quarter of 2022 when RUZURGI® was removed from the market) and net price increases. Net revenues from product sales of FIRDAPSE® increased by 20.8% from 2022 to 2023.

Product revenue for FYCOMPA® in 2024 will be affected by differences in variable consideration (gross-to-net) compared to 2023, when revenues were booked under Eisai’s cost arrangements with distributors and government authorities. Starting on January 1, 2024, all such costs are tied to arrangements between us and those distributors and government agencies, which costs are likely to be higher than Eisai’s costs, thereby increasing the gross-to-net deductions for FYCOMPA® and correspondingly decreasing FYCOMPA® net product revenue.

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For the fiscal year ended December 31, 2023, we also recognized $1.7 million in license and other revenue, as compared to $0.3 million during the fiscal year ended December 31, 2022. The increase was primarily due to the milestone achieved as a result of DyDo submitting a Japan NDA for FIRDAPSE® to the PMDA on December 18, 2023.

Cost of Sales.

Cost of sales was approximately $52.0 million for the fiscal year ended December 31, 2023, compared to $34.4 million for the fiscal year ended December 31, 2022. Cost of sales in both periods consisted principally of royalty payments, which are based on net revenue as defined in the applicable license agreements. For FIRDAPSE®, royalties are payable on the terms set forth below in Liquidity and Capital Resources—Contractual Obligations and Arrangements, and increase by 3% when net sales (as defined in the applicable license agreement) exceed $100 million in any calendar year. Cost of sales for FYCOMPA® for the fiscal year ended 2023 consisted of product costs and excludes the amortization of the FYCOMPA® intangible assets. See Note 9 of the Notes to Consolidated Financial Statements included elsewhere in this report.

Amortization of Intangible Assets.

Amortization of intangible assets was approximately $32.6 million for the fiscal year ended December 31, 2023 compared to $1.1 million for fiscal year ended December 31, 2022. Amortization of intangible assets consists of the amortization of the FYCOMPA® rights, which are amortized using the straight-line method over its estimated useful life of 5 years, and the RUZURGI® rights, which are amortized using the straight-line method over its estimated useful life of 14.5 years. We also capitalized a $36 million milestone payment paid to Santhera during the fourth quarter of 2023 which is being amortized over the product’s estimated useful life of 10.5 years.

Research and Development Expenses.

Research and development expenses for the years ended December 31, 2023 and 2022 were approximately $93.2 million and $19.8 million, respectively, and represented approximately 30% and 18% of total operating costs and expenses, respectively. Research and development expenses for the years ended December 31, 2023 and 2022 were as follows (in thousands):

Research and development expenses increased approximately $73.4 million during year ended December 31, 2023 when compared to the same period in 2022. The increase is primarily attributable to the $81.5 million IPR&D purchase consideration for the acquisition of the license in North America for AGAMREE® during the third quarter of 2023. This was partially offset by decreases in costs relating to closing out sites for both our MuSK-MG clinical trial and our previously operated expanded access program.

We expect that research and development expenses will continue to be significant in 2024 and beyond as we execute on our strategic initiative and portfolio expansion efforts, with a keen focus on products to treat rare and difficult to treat diseases.

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Selling, General and Administrative Expenses.

Selling, general and administrative expenses for the years ended December 31, 2023 and 2022 were approximately $133.7 million and $57.1 million, respectively, and represented approximately 43% and 51% of total operating costs and expenses for the years ended December 31, 2023, and 2022, respectively. Selling, general and administrative expenses for the years ended December 31, 2023 and 2022 were as follows (in thousands):

For the year ended December 31, 2023, selling, general and administrative expenses increased approximately $76.6 million when compared to the same period in 2022. The increase was primarily attributable to the direct fees payable under the TSA associated with net product sales of FYCOMPA® of approximately $15.7 million, increases of approximately $22.5 million in selling (commercialization) expenses due to the acquisition of FYCOMPA®, which consist primarily of commercial systems implementation costs, hiring of the sales force and supporting personnel and an approximately $22.2 million increase in employee compensation and stock based compensation related to the increase in headcount resulting from the acquisitions of FYCOMPA® and AGAMREE®, and annual merit increases. SG&A excludes the amortization of the RUZURGI® intangible asset. See Note 9 of the Notes to Consolidated Financial Statements included elsewhere in this report.

We expect that selling, general and administrative expenses will continue to be substantial in future periods as we continue our efforts to increase our revenues from FIRDAPSE®, continue our efforts to market FYCOMPA®, take steps to prepare for the commercial launch of AGAMREE® in 2024, and take steps to continue to expand our business.

Stock-Based Compensation.

Total stock-based compensation for the years ended December 31, 2023 and 2022 was $14.3 million and $7.9 million, respectively. In 2023 and 2022, grants were principally for stock options relating to year-end bonus awards and grants to new employees.

Other Income, Net.

We reported other income, net in all periods, primarily relating to interest on our investment of our cash and cash equivalents of $7.7 million and $2.9 million for the fiscal years ended December 31, 2023 and 2022, respectively. The increase in other income, net for the fiscal year ended December 31, 2023 of approximately $4.8 million when compared to the same period in 2022 is primarily due to higher yields on investments offset by $2.0 million of accretion expense related to payments arising from our acquisition of RUZURGI®.

Since Santhera’s shares are traded on the SIX Swiss Exchange, they have a readily determinable fair value, and as a result the investment is measured quarterly, at fair value, with changes reported in other income, net.

The components of other income, net were as follows (in thousands):

Income Taxes.

Our effective income tax rate was 24.4% and 20.7% for fiscal years ended December 31, 2023 and 2022, respectively. Differences in our effective tax and the statutory federal income tax rate of 21% are driven by state income taxes and anticipated annual permanent differences offset by equity compensation deductions. Our effective tax rate is affected by many factors, including the number of stock options exercised in any period, and our effective tax rate is likely to fluctuate in future periods (and may be higher in future periods than it was in the 2023 fiscal year).

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We had no uncertain tax positions as of December 31, 2023 and 2022.

Net Income.

Our net income was approximately $71.4 million in the year ended December 31, 2023 ($0.67 per basic and $0.63 per diluted share) as compared to $83.1 million in the year ended December 31, 2022 ($0.80 per basic and $0.75 per diluted share).

Years Ended December 31, 2022 and 2021

The information comparing results of operations for the year ended 2022 compared to 2021 was included in our Annual Report on Form 10-K for 2022 filed with the SEC on March 15, 2023.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through multiple offerings of our securities and revenues from product sales. At December 31, 2023 we had cash and cash equivalents aggregating $137.6 million and working capital of $143.3 million. At December 31, 2022, we had cash and cash equivalents aggregating $298.4 million and working capital of $263.2 million. At December 31, 2023, substantially all of our cash and cash equivalents were deposited with one financial institution, and such balances were in excess of federally insured limits. Further, as of such date, substantially all such funds were invested in money market accounts and U.S. Treasuries.

Based on forecasts of available cash, we believe that we have sufficient resources to support our currently anticipated operations for at least the next 12 months from the date of this report. There can be no assurance that we will remain profitable or that we will be able to obtain any additional funding that we may require in the future.

In the future, we may require additional working capital to support our operations depending on our future success with FIRDAPSE®, FYCOMPA® and AGAMREE® sales, or the products we acquire and continue to develop and whether our results continue to be profitable and cash flow positive. There can be no assurance as to the amount of any such funding that will be required for these purposes or whether any such funding will be available to us if and when it is required.

In that regard, our future funding requirements will depend on many factors, including:

We may raise additional funds through public or private equity offerings, debt financings, corporate collaborations or other means. We also may seek governmental grants for a portion of the required funding for our clinical trials and preclinical trials. We may further seek to raise capital to fund additional product development efforts or product acquisitions, even if we have sufficient funds for our planned operations. Any sale by us of additional equity or convertible debt securities could result in dilution to our stockholders. There can be no assurance that any such required additional funding will be available to us at all or available on terms acceptable to us. Further, to the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs, which could have an adverse effect on our business.

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On September 8, 2023, we filed a shelf registration statement with the SEC to sell up to $500 million of common stock, preferred stock, warrants to purchase common stock, debt securities and units consisting of one or more of such securities (the 2023 Shelf Registration Statement). The 2023 Shelf Registration Statement (file no. 333-274427) became effective upon filing. On January 9, 2024, we completed a public offering of 10 million shares of our common stock under the 2023 Shelf Registration Statement, raising net proceeds of approximately $140.1 million.

Cash Flows.

Net cash provided by operating activities was $143.6 million and $116.0 million, respectively, for the years ended December 31, 2023 and 2022. During the year ended December 31, 2023, net cash provided by operating activities was primarily attributable to our net income of $71.4 million, increases of $10.8 million in accounts payable and $5.8 million in accrued expenses and other liabilities, $81.5 million in acquired IPR&D and $45.8 million in non-cash expenses. This was partially offset by increases of $43.1 million in accounts receivable, net, $4.7 million in inventory and $5.8 million prepaid expenses and other current assets, a decrease of $0.3 million in operating lease liability and $17.8 million in deferred taxes. During the year ended December 31, 2022, net cash provided by operating activities was primarily attributable to our net income of $83.1 million, a decrease of $1.1 million in inventory, increases of $1.2 million in accounts payable and $16.4 million in accrued expenses and other liabilities, $4.9 million in deferred taxes, $4.1 million in acquired research and development inventory expensed from asset acquisition and of $10.2 million of non-cash expenses. This was partially offset by increases of $3.8 million in accounts receivable, net and $0.8 million in prepaid expenses and other current assets and a decrease of $0.3 million in operating lease liability.

Net cash used in investing activities during the year ended December 31, 2023 was $293.5 million and consisted primarily of payments in connection with asset acquisitions of $198.3 million, acquired IPR&D of $81.5 million and the purchase of equity securities of $13.5 million. Net cash provided by investing activities during the year ended December 31, 2022 was $9.2 million and consisted primarily of proceeds from the sale of available-for-sale securities of $19.2 million, offset partially by payments in connection with asset acquisitions of $10.0 million.

Net cash used in financing activities during the year ended December 31, 2023 was $10.9 million, consisting primarily of payment of liabilities arising from asset acquisition of $12.7 million, partially offset by proceeds from the exercise of stock options of $2.8 million. Net cash provided by financing activities during the year ended December 31, 2022 was $1.7 million, consisting primarily of proceeds from the exercise of stock options, partially offset by repurchases of common stock.

Contractual Obligations and Arrangements.

We have entered into the following contractual arrangements with respect to sales of FIRDAPSE®:

For the year ended December 31, 2023, we recognized an aggregate of approximately $39.5 million of royalties payable under these license agreements, which is included in cost of sales in the accompanying consolidated statements of operations and comprehensive income.

Further, if DyDo is successful in obtaining the right to commercialize FIRDAPSE® in Japan, we will pay royalties to our licensor on net sales in Japan equal to a similar percentage to the royalties that we are currently paying for non-U.S. sales under our original FIRDAPSE® License Agreement for North America.

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For the year ended December 31, 2023, we recognized an aggregate of approximately $3.7 million of royalties payable to Jacobus.

We have entered into the following contractual arrangements with respect to sales of FYCOMPA®:

We have entered into the following contractual arrangements with respect to AGAMREE® (vamorolone):

We also have entered into the following contractual arrangements:

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Off-Balance Sheet Arrangements.

We do not have any off-balance sheet arrangements as such term is defined in rules promulgated by the SEC.

Caution Concerning Forward-Looking Statements

This report contains “forward-looking statements”, as that term is defined in the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, plans or objectives for future operations and anticipated results of operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, “believes”, “anticipates”, “proposes”, “plans”, “expects”, “intends”, “may”, and other similar expressions are intended to identify forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or other achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Item 1A – Risk Factors.”

The continued successful commercialization of FIRDAPSE® (amifampridine), FYCOMPA® (perampanel) CIII, and the successful launch and commercialization of AGAMREE® (vamorolone) are highly uncertain. Factors that will affect our success include the uncertainty of:

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Our current plans and objectives are based on assumptions relating to the continued commercialization of FIRDAPSE® and FYCOMPA®, the commercialization of AGAMREE® and on our plans to seek to acquire or in-license additional products. Although we believe that our assumptions are reasonable, any of our assumptions could prove inaccurate. Considering the significant uncertainties inherent in the forward-looking statements we have made herein, which reflect our views only as of the date of this report, you should not place undue reliance upon such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.