# SUPERNUS PHARMACEUTICALS, INC. (SUPN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SUPERNUS PHARMACEUTICALS, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1356576/000135657623000016/supn-20221231.htm
Accession: 0001356576-23-000016
Filing date: 2023-03-09
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/SUPN/
All MD&A years: /company/SUPN/mda/
Previous year: /company/SUPN/mda/fy2021/ (FY 2021)
Next year: /company/SUPN/mda/fy2023/ (FY 2023)

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto, appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information in this discussion and analysis contains forward-looking statements reflecting our current expectations and involving risk and uncertainties. For example, statements regarding our expectations as to our plans and strategy for our business, future financial performance, expense levels, and liquidity sources are forward-looking statements. Our actual results and the timing of those events could differ materially from those discussed in our forward-looking statements because of many factors, including those set forth under the "Risk Factors" section and elsewhere in this report.

Unless the content requires otherwise, the words "Supernus," "we," "our" and "the Company" refer to Supernus Pharmaceuticals, Inc. and/or one or more of its subsidiaries, as the case may be. These terms are used solely for the convenience of the reader. Supernus Pharmaceuticals, Inc. and each of its subsidiaries are distinct legal entities. For example, MDD US Operations, LLC, a wholly-owned indirect subsidiary of Supernus Pharmaceuticals, Inc., is the exclusive licensee and distributor of APOKYN in the United States and its territories. Adamas Operations, LLC, a wholly-owned indirect subsidiary of Supernus Pharmaceuticals, Inc., wholly owns the patents and patent applications related to GOCOVRI and Osmolex ER and has a license agreement with Supernus Pharmaceuticals, Inc., granting Supernus Pharmaceuticals, Inc. rights to market and sell GOCOVRI and Osmolex ER.

Overview

We are a biopharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. Our diverse neuroscience portfolio includes approved treatments for epilepsy, migraine, attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson’s Disease (PD), cervical dystonia, chronic sialorrhea, dyskinesia in PD patients receiving levodopa-based therapy, and drug-induced extrapyramidal reactions in adult patients. The Company is developing a broad range of novel CNS product candidates including new potential treatments for hypomobility in PD, epilepsy, depression, and other CNS disorders.

We have a portfolio of commercial products and product candidates.

Commercial Products

•Trokendi XR® (topiramate) is the first once-daily extended-release topiramate product indicated for the treatment of epilepsy in patients 6 years of age and older in the United States (U.S.) market. It is also indicated for the prophylaxis of migraine headache in adults and adolescents 12 years and older.

•Oxtellar XR® (oxcarbazepine) is indicated as therapy for the treatment of partial-onset seizures in patients 6 years of age and older. It is also the first once-daily extended-release oxcarbazepine product indicated for the treatment of epilepsy in the U.S. market.

•Qelbree® (viloxazine extended-release capsules) is a novel non-stimulant product indicated for the treatment of ADHD in adults and pediatric patients 6 years and older. On April 2, 2021, the U.S. Food and Drug Administration (FDA) approved Qelbree for the treatment of ADHD in pediatric patients 6 to 17 years of age. In May 2021, the Company launched Qelbree for pediatric patients in the U.S. On April 29, 2022, the FDA approved Qelbree for treatment of ADHD in adult patients. The Company launched Qelbree for adult patients in May 2022.

•GOCOVRI® (amantadine) extended-release capsules is the first and only FDA approved medicine indicated for the treatment of dyskinesia in patients with PD receiving levodopa-based therapy, with or without concomitant dopaminergic medications, and as an adjunctive treatment to levodopa/carbidopa with PD experiencing "off" episodes.

•APOKYN® (apomorphine hydrochloride injection) is a product indicated for the acute, intermittent treatment of hypomobility, "off" episodes ("end-of-dose wearing off" and unpredictable "on/off" episodes) in patients with advanced PD.

•XADAGO® (safinamide) is a once-daily product indicated as adjunctive treatment to levodopa/carbidopa in patients with PD experiencing "off" episodes.

•Osmolex ER® (amantadine) extended-release is a once-daily product for the treatment of PD and drug-induced extrapyramidal reactions in adult patients.

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•MYOBLOC® (rimabotulinumtoxinB injection) is a product indicated for the treatment of cervical dystonia and chronic sialorrhea in adults. It is the only botulinum toxin type B available on the market.

Research and Development

We are committed to the development of innovative product candidates in neurology and psychiatry, including the following:

[[GREPCENT_TABLE]]
[["Product Candidate","Indication","Development","NDA"],["SPN-830","Continuous treatment of motor fluctuations (\"off\" episodes) in PD patients","","Complete Response Letter (CRL) received from FDA in October 2022"],["SPN-820","Treatment-resistant depression","Phase II"],["SPN-817","Treatment-resistant seizures","Phase I"]]
[[/GREPCENT_TABLE]]

SPN-830 (apomorphine infusion device)

SPN-830 is a late-stage drug/device combination product candidate for the continuous treatment of motor fluctuations ("off" episodes) in PD patients that are not adequately controlled with oral levodopa and one or more adjunct PD medications. If approved, it would be the only continuous infusion of apomorphine available in the U.S. and an important step for PD patients that would have otherwise been candidates for potentially invasive surgical procedures, such as deep brain stimulation. Continuous slow infusion may also limit some of the side effects of a bolus injection of apomorphine.

In December 2021, we resubmitted the NDA to the FDA. In February 2022, we received a notice from the FDA that the resubmission of the NDA for SPN-830 was considered as a Standard Review and was assigned a PDUFA target action date in early October 2022. In October 2022, the FDA issued a Complete Response Letter (CRL) regarding the NDA for SPN-830. The CRL requires additional information and analysis related to the infusion device and drug product across several areas of the NDA including, but not limited to, labeling, product quality and manufacturing, device performance and risk analysis. In addition, the FDA mentions that approval of the NDA requires inspections that could not be completed in a timely manner due to COVID-19 travel restrictions. The CRL does not request additional efficacy and safety clinical studies. The FDA has made an initial determination that the amendment to the Company’s application in response to the CRL will be subject to a Class 2, or six-month, review timeline. In February 2023, the FDA granted the Company a Type C meeting request to discuss the CRL with the meeting scheduled in April 2023.

SPN-820 (NV-5138)

SPN-820 is a first-in-class, orally active small molecule that activates brain mechanistic target of rapamycin complex 1 (mTORC1), a gatekeeper of cellular metabolism and renewal. SPN-820 binds to and modulates sestrin, which senses amino acid availability in the brain, a potent natural activator of mTORC1.

SPN-817 (huperzine A)

SPN-817 represents a novel mechanism of action (MOA) for an anticonvulsant. SPN-817 is a novel synthetic form of

huperzine A, whose MOA includes potent acetylcholinesterase inhibition, with pharmacological activities in CNS conditions such as epilepsy. The development will initially focus on the drug's anticonvulsant activity, which has been shown in preclinical models to be effective for the treatment of partial seizures and Dravet Syndrome. SPN-817 is in clinical development and has received Orphan Drug designation for several epilepsy indications from the FDA.

Adamas Reorganization

In the first quarter of 2022 and subsequent to the Adamas Acquisition, the Company completed a reorganization of the Adamas legal entities in an effort to obtain operational, legal and other benefits that also resulted in certain state tax efficiencies. The reorganization had no effect on the consolidated financial statements other than certain state tax efficiencies. (See Note 12, Income Taxes.

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COVID-19 Impact

While the impact of the ongoing COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the year ended December 31, 2022, we continue to closely monitor the events and circumstances surrounding the COVID-19 pandemic and its impact on all aspects of our business operations. Since the situation surrounding the COVID-19 pandemic remains fluid and the duration uncertain, the long-term nature and extent of the impacts of the pandemic on our business operations and financial position cannot be reasonably estimated at this time. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for additional information on risk factors that could impact our business and our results.

Operational Highlights

Qelbree Update

•Total IQVIA prescriptions were 117,635 in the fourth quarter of 2022, an increase of 24% compared to total prescriptions of 94,681 in the third quarter of 2022. In January 2023, the most recent month available, total prescriptions reached 42,881.

•Continued healthy growth in the U.S. attention-deficit hyperactivity disorder market with 2022 total number of prescriptions reaching more than 90 million, an increase of 9% compared to 2021, according to IQVIA.

•The average price per Qelbree prescription continued to increase in the fourth quarter of 2022, driven by increases in the average daily dose and prescription size.

•Executed a second significant pharmacy benefit manager contract effective January 2023, and continued making progress in securing and improving managed care coverage.

•Qelbree continues to expand its base of prescribers, with approximately 16,822 prescribers in the fourth quarter of 2022, up from 14,265 prescribers from the third quarter of 2022.

Product Pipeline Update

SPN-830 (apomorphine infusion device) - Continuous treatment of motor fluctuations (“off” episodes) in Parkinson's Disease (PD)

•The Company will be meeting with the FDA in April 2023 to discuss the CRL received in October 2022. The Company will announce the timing for our resubmission after our discussion with the FDA.

SPN-820 - Novel first-in-class activator of mTORC1

•The Phase II multi-center randomized double-blind placebo-controlled parallel design study of SPN-820 in adults with treatment-resistant depression is ongoing. The study will examine the efficacy and safety of SPN-820 over a course of five weeks of treatment in approximately 270 patients. The primary outcome measure is the change from baseline to end of treatment period on the Montgomery-Asberg Depression Rating Scale (MADRS) Total Score, a standard depression rating scale.

SPN-817 – A novel product candidate for the treatment of epilepsy

•The Company has commenced an open-label Phase II clinical study of SPN-817 in patients with treatment-resistant seizures. Depending on rate of enrollment, the Company expects to have data in the first half of 2024.

Critical Accounting Policies and the Use of Estimates

The significant accounting policies and basis of presentation for our consolidated financial statements are described in Part II, Item 8—Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements. Our consolidated financial statements are prepared in accordance with the U.S. generally accepted accounting principles (U.S. GAAP), requiring us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and other related disclosures. Some judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions.

We believe the judgments, estimates, and assumptions associated with the following critical accounting policies have the greatest potential impact on our consolidated financial statements:

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•Revenue recognition; and

•Impairment of intangible assets.

Revenue Recognition

Our principal source of revenue is product sales. Revenue from product sales is recognized when physical control of our products is transferred to our customers, who are primarily pharmaceutical wholesalers, specialty pharmacies, and distributors. Product sales are recorded net of various forms of variable consideration, including: estimated rebates; sales discounts; and an estimated liability for future product returns (collectively, "sales deductions").

The variability in the net transaction price for our products arises primarily from the aforementioned sales deductions. Significant judgment is required in estimating certain sales deductions, including rebates and returns. In making these estimates, we consider: historical experience; product price increases; current contractual arrangements under applicable payor programs; unbilled claims; processing time lags for claims; inventory levels in the wholesale, specialty pharmacy, and retail distribution channel; and product life cycle. We adjust our estimates at the earlier of when the most likely amount of consideration we expect to receive changes, or when the consideration becomes fixed. Variable consideration on product sales is only recognized when it is probable that a significant reversal will not occur. If actual results in the future vary from our estimates, we adjust our estimates in the period identified. These adjustments could materially affect net product sales and earnings in the period in which the adjustment(s) is recorded. Refer to Part II, Item 8—Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, for further discussion on each of the different sales deductions. While sales rebates have been relatively predictable based on historical experience such that there have not been material changes in estimates in prior periods, there have been critical estimates associated with rebates and returns that may result in significant variability as further discussed below.

Returns

We maintain a return policy that allows our customers to return products within a specified period of time. Sales of our products are not subject to a general right of return; however, we will accept return of expired product 6 months prior to and up to 12 months subsequent to the product's expiry date for certain products. Our products have a shelf life of up to 48 months from date of manufacture. The product return accrual is estimated principally based on historical experience, the level and estimated shelf life of inventory in the distribution channel, changes in the current wholesaler prices, our return policy and expected market events, including generic competition. The time lag from date of sale of our products when we accrue our provision for product returns and the time at which we issue credit for expired product can occur up to several years after the sale of our product. Estimates associated with our provision for product returns are particularly susceptible to adjustment given the extensive time lag. In regards to Trokendi XR, the Company has entered into settlement agreements with third parties, permitting the sale of a generic version of Trokendi XR on or after January 1, 2023. The Company is actively monitoring returns activity in light of the loss of exclusivity and potential sales decline based on timing of generic entry. The recent entry of a generic competitor may cause our future Trokendi XR product return rates to change from historical trends, and this change could have a material effect on the future provision for product returns. Historically, we have experienced changes in estimates in return reserve calculations, but those adjustments have not been material to net earnings. However, given the extensive number of inputs and assumptions, described above, future changes in our return reserves could be material.

Rebates

Rebates are discounts which we pay under either public sector or private sector health care programs. Rebates paid under public sector programs are generally mandated under law, whereas private sector rebates are generally contractually negotiated by us with managed care providers. Both types of rebates vary over time. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, the factors used in the calculations of the accruals for that rebate include the identification of the products subject to the rebate, applicable price terms and estimated lag time between sale and payment of the rebate, which can be significant. In order to establish the rebate accruals, we use both internal and external data to estimate the level of inventory in the distribution channel and the rebate claims processing lag time for each type of rebate. To estimate the rebate percentage or net price, we track sales by product and by customer or payer. We evaluate inventory data reported by wholesalers, available prescription volume information, product pricing, historical experience and other factors in order to determine the adequacy of our accruals. We regularly monitor our accruals and record adjustments when rebate trends, rebate programs and contract terms, legislative changes, or other significant events indicate that a change in reserve is appropriate. Historically, adjustments to rebate accruals have not been material to net earnings.

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Specifically, a significant portion of rebates we pay are on state Medicaid programs. We participate in state Medicaid programs wherein the lag time from the date of sale of our product when we accrue for provision for rebates and the ultimate invoicing by the individual state Medicaid program can occur up to several quarters after the sale of our product. Because of the time lag for Medicaid, in any particular quarter, our adjustments may incorporate revisions of accruals for prior periods. Estimates associated with our participation in state Medicaid programs are particularly susceptible to adjustment given the extensive time lag. Historically, adjustments to rebate accruals have not been material to net earnings, but there continues to be an extensive time lag related to certain programs that could result in variability in future periods.

For a roll-forward of the accrued sales deductions, see the section entitled Results of Operations - Revenues - Sales deductions and related accruals.

Impairment of Indefinite-Lived Intangible Assets

In 2020, the Company acquired the right to further develop and commercialize SPN-830 (apomorphine infusion device), a late-stage product candidate (IPR&D intangible asset). The In Process Research and Development (IPR&D) intangible asset represents the estimate of the fair value of acquired technology which has not yet reached technological feasibility. The primary basis for determining the technological feasibility is obtaining specific regulatory approvals. IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the IPR&D project. Upon completion of the development project, the IPR&D will be amortized over its estimated useful life. We review intangible assets with indefinite lives for impairment annually or more often if impairment indicators are identified. Our annual evaluation is generally based on an assessment of qualitative factors to determine whether it is more likely than not the fair value of the asset is less than its carrying amount. If the Company is unable to conclude that the indefinite intangible asset is not impaired during its qualitative assessment, the Company will perform a quantitative assessment by estimating the fair value of the indefinite-lived intangible asset and comparing the fair value to the carrying amount. The significant inputs and assumptions used to estimate the fair value of the IPR&D intangible asset include: the timing and probability of success of clinical and regulatory approvals for the IPR&D asset, the estimated future cash flows from product sales, and the timing and projection of costs and expenses. We believe that the timing and probability of success of clinical and regulatory approval for the IPR&D asset is key and directly drives the timing and realization of the estimated future cashflows from product sales and the incurrence of costs and expenses. The drug regulatory approval process is inherently uncertain, lengthy, and difficult. The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. In addition, the actual review and approval process time required may vary substantially based upon the type, complexity, and novelty of the product or disease. Any adverse action by the FDA can potentially impact our estimated fair value of the IPR&D intangible asset. In October 2022, the FDA issued a CRL regarding the NDA for SPN-830. We consider the positive results of clinical trials, industry benchmarks, available market data, and recent communications with the FDA regarding SPN-830 in determining the probability of technical and regulatory success input and assumption. The carrying amount of the indefinite-lived intangible asset was $124.0 million as of December 31, 2022. Although we believe the assumptions, judgments, and estimates we have used in our assessments are reasonable and appropriate, a material change in any of our assumptions or external factors could lead to impairment charges. If the IPR&D project is abandoned or regulatory approvals are not obtained, we may have a full or partial impairment charge related to the IPR&D, calculated as the excess carrying value of the IPR&D assets over the estimated fair value.

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Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2022, compared to the year ended December 31, 2021. Our Annual Report on Form 10-K for the year ended December 31, 2021, includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2020, in Part II,

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

Revenues 

Revenues consist primarily of net product sales of our commercial products in the U.S., supplemented by royalty revenues from our collaborative licensing arrangements. The following table provides information regarding our revenues during the years ended December 31, 2022 and 2021 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,","","Change"],["","2022","","2021","","Amount","","Percent"],["Net product sales"],["Trokendi XR","$","261,221","","","$","304,817","","","$","(43,596)","","","(14)","%"],["Oxtellar XR","115,345","","","110,708","","","4,637","","","4","%"],["GOCOVRI","104,421","","","9,778","","","94,643","","","**"],["APOKYN","75,305","","","99,233","","","(23,928)","","","(24)","%"],["Qelbree","61,322","","","9,879","","","51,443","","","**"],["Other(1)","31,818","","","33,089","","","(1,271)","","","(4)","%"],["Total net product sales","649,432","","","567,504","","","81,928","","","14","%"],["Royalty revenues","17,806","","","12,271","","","5,535","","","45","%"],["Total revenues","$","667,238","","","$","579,775","","","$","87,463","","","15","%"]]
[[/GREPCENT_TABLE]]

______________________________

(1) Includes net product sales of MYOBLOC, XADAGO and Osmolex ER.

** Indicates calculation result is equal to or greater than 100%. Net product sales of GOCOVRI represents sales subsequent to the completion of the Adamas Acquisition in November 2021. In addition, Qelbree was launched in May 2021.

Net Product Sales

Net product sales increased by $81.9 million from $567.5 million in 2021 to $649.4 million in 2022. The increase in net product sales was primarily due to the $94.6 million increase in net product sales of GOCOVRI, subsequent to the completion of the Adamas Acquisition in November 2021, as well as a $51.4 million increase in net product sales of Qelbree, which was launched in May 2021. Partially offsetting this increase was a $43.6 million decrease in net product sales of Trokendi XR and a $23.9 million decrease in net product sales of APOKYN primarily attributable to the decline in unit demand due to competitive headwinds.

Sales deductions and related accruals

We record accrued product returns and accrued product rebates as current liabilities in Accrued product returns and rebates, on our consolidated balance sheets. We record sales discounts as a reduction against Accounts receivable, net on the consolidated balance sheets. Both amounts are generally affected by changes in gross product sales, changes in the provision for net product sales deductions, and the timing of payments/credits.

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The following table provides a summary of activities with respect to accrued product returns and rebates for the years ended December 31, 2022 and 2021 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Accrued Product Returns and Rebates"],["","Product Returns","","Product Rebates","","Allowance for Sales Discounts","","Total"],["Balance at December 31, 2021","$","35,127","","","$","97,597","","","$","13,537","","","$","146,261"],["Provision"],["Provision for sales in current year","22,129","","","437,323","","","76,079","","","535,531"],["Adjustments relating to prior year sales","(3,866)","","","(155)","","","(3)","","","(4,024)"],["Total provision","18,263","","","437,168","","","76,076","","","531,507"],["Less: Actual payments/credits","(8,382)","","","(428,108)","","","(76,618)","","","(513,108)"],["Balance at December 31, 2022","$","45,008","","","$","106,657","","","$","12,995","","","$","164,660"],["Balance at December 31, 2020","$","29,603","","","$","96,589","","","$","11,404","","","$","137,596"],["Adamas Acquisition liabilities assumed","223","","","2,194","","","271","","","2,688"],["Provision"],["Provision for sales in current year","15,762","","","370,273","","","69,383","","","455,418"],["Adjustments relating to prior year sales","(3,069)","","","1,335","","","19","","","(1,715)"],["Total provision","12,693","","","371,608","","","69,402","","","453,703"],["Less: Actual payments/credits","(7,392)","","","(372,794)","","","(67,540)","","","(447,726)"],["Balance at December 31, 2021","$","35,127","","","$","97,597","","","$","13,537","","","$","146,261"]]
[[/GREPCENT_TABLE]]

Accrued product returns and rebates

The accrued product returns balance increased from $35.1 million as of December 31, 2021 to $45.0 million as of December 31, 2022 due to timing of related return activity and an increase in provision for product returns primarily for Qelbree.

The accrued product rebates balance increased from $97.6 million as of December 31, 2021 to $106.7 million as of December 31, 2022 due to timing of payments and the increase in the provision.

Provision for returns and rebates

The provision for product returns increased from $12.7 million in 2021 to $18.3 million in 2022. This increase was primarily attributable to an increase in volume of products sold with the launch of Qelbree for pediatric patients in the second quarter of 2021 and for adults in second quarter of 2022, partially offset by lower sales of Trokendi XR.

The provision for product rebates increased from $371.6 million in 2021 to $437.2 million in 2022. The increase was primarily attributable to higher sales volume, as well as higher per patient payments under both government and commercial managed care programs.

The provision for sales discounts increased from $69.4 million in 2021 to $76.1 million in 2022. The increase is due to higher gross sales primarily due to launch of Qelbree and the acquired commercial products from the Adamas Acquisition in November 2021.

Adjustments related to prior year sales

Adjustments related to prior year sales in 2022 of $4.0 million was less than 1% of both net product sales and total provision for the year ended December 31, 2022. Adjustments related to prior year sales in 2021 of $1.7 million was less than 1% of both net product sales an total provision for the year ended December 31, 2021.

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Royalty Revenues

The following table provides information regarding our royalty revenues for the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Royalty revenues","$","17,806","","","$","12,271","","","$","5,535","","","45%"]]
[[/GREPCENT_TABLE]]

Royalty revenues increased by approximately $5.5 million, or 45%, in 2022 compared to 2021, primarily due to the full year of Namzaric royalties associated with the Adamas Acquisition. The Company recognized noncash royalty revenues of $9.8 million, $9.4 million for the years ended December 31, 2022 and 2021, respectively.

Cost of Goods Sold

The following table provides information regarding our cost of goods sold for the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Cost of goods sold","$","87,221","","","$","75,061","","","$","12,160","","","16%"]]
[[/GREPCENT_TABLE]]

Cost of goods sold includes the cost of royalties; cost of materials, including active pharmaceutical ingredients (API); and cost to manufacture, including tableting, packaging, personnel, overhead, stability testing, and distribution.

Cost of goods sold increased from $75.1 million in 2021 to $87.2 million in 2022. The increase was primarily due to higher Qelbree sales, offset by lower royalty expense compared to the same period in the prior year.

Research and Development Expenses

The following table provides information regarding our research and development (R&D) expenses for the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Research and development expense","$","74,552","","","$","90,467","","","$","(15,915)","","","(18)%"]]
[[/GREPCENT_TABLE]]

R&D expenses decreased from $90.5 million in 2021 to $74.6 million in 2022. The decrease was primarily due to the $15.0 million write-down of the investment in Navitor LLC in 2021 which was attributable to a single in-process research and development (IPR&D) asset and recorded in R&D expense in the first quarter of 2021. Refer to Note 5, Investments in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of the write-down of the investment in Navitor LLC in 2021.

Selling, General, and Administrative Expense

The table below provides information regarding our selling, general, and administrative (SG&A) expenses for the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Selling and marketing expense","$","267,788","","","$","199,709","","","$","68,079","","","34%"],["General and administrative expense","109,433","","","105,050","","","4,383","","","4%"],["Total","$","377,221","","","$","304,759","","","$","72,462","","","24%"]]
[[/GREPCENT_TABLE]]

Selling and Marketing Expense

Selling and marketing expenses increased from $199.7 million in 2021 to $267.8 million in 2022. The increase was primarily due to increased marketing expenditures of $46.7 million primarily for activities to support the launch of Qelbree to the adult population and the Qelbree direct-to-consumer campaign, which substantially occurred in the third quarter of 2022, as well as higher sales and corporate accounts management expenditures to the commercial products including those acquired from the Adamas Acquisition.

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General and Administrative Expense

General and administrative expenses increased from $105.1 million in 2021 to $109.4 million in 2022. The increase was primarily due to higher professional and consulting costs and increased employee-related costs mainly to support IT and finance operations related to the ransomware incident, financial reporting and Adamas integration in 2022.

Amortization of Intangible Assets

The following table provides information regarding the amortization expense for intangible assets during the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Amortization of intangible assets","$","82,630","","","$","29,989","","","$","52,641","","","**"]]
[[/GREPCENT_TABLE]]

______________________________

** Indicates calculation result is equal to or greater than 100%.

Amortization of intangible assets increased for the year ended December 31, 2022, primarily due to the amortization of definite-lived intangible assets acquired in the Adamas Acquisition.

Contingent Consideration (Gain) Expense

The following table provides information regarding the contingent consideration expense during the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Contingent consideration (gain) expense","$","(510)","","","$","(6,530)","","","$","6,020","","","(92)%"]]
[[/GREPCENT_TABLE]]

Contingent consideration gain recorded for the years ended December 31, 2022 and December 31, 2021 of $0.5 million and $6.5 million, respectively. The decrease in contingent consideration gain was primarily due to $6.5 million gain recorded in 2021 due to the write-down of the sales-based contingent consideration liabilities associated with the USWM Acquisition.

Other Income (Expense)

The following table provides the components of other income (expense) during the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Interest and other income, net","$","21,689","","","$","10,569","","","$","11,120","","","**"],["Interest expense","(4,654)","","","(19,696)","","","(15,042)","","","76%"],["Interest expense on nonrecourse liability related to sale of future royalties","(2,416)","","","(3,727)","","","(1,311)","","","35%"],["Total","$","14,619","","","$","(12,854)","","","$","27,473","","","**"]]
[[/GREPCENT_TABLE]]
______________________________

** Indicates calculation result is equal to or greater than 100%.

Interest and other income, net includes primarily interest earned from cash, cash equivalents, and marketable securities holdings. Interest and other income, net increased from $10.6 million 2021 to $21.7 million in 2022. The increase in interest and other income, net was primarily due to $12.9 million recorded in 2022 in connection with the gain associated with the Navitor investment. The decrease in interest expense of $15.0 million was primarily related to the Company's adoption of ASU 2020-06.

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Income Tax Expense

The following table provides information regarding our income tax expense during the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","2022 vs 2021 Change"],["","2022","","2021","","Dollar","","Percent"],["Income tax expense","$","32","","","$","19,751","","","$","(19,719)","","","**"],["Effective tax rate","0.1","%","","27.0","%"]]
[[/GREPCENT_TABLE]]
______________________________

** Indicates calculation result is equal to or greater than 100%.

Income tax expense was $32 thousand and $19.8 million for the years ended December 31, 2022 and December 31, 2021, respectively. The change in income tax expense and effective income tax rate was primarily due to tax benefits associated with the Adamas legal entities reorganization in the first quarter of 2022.

Net Earnings

The following table provides information regarding our net earnings during the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Change"],["","2022","","2021","","Amount","","Percent"],["Net earnings","$","60,711","","","$","53,424","","","$","7,287","","","14%"]]
[[/GREPCENT_TABLE]]

The increase in net earnings was primarily due to the decrease in income tax expense and interest expense, and an increase in interest income for the year ended December 31, 2022 compared to the same period in 2021.

Summary of Cash Flows

The following table summarizes the major sources and uses of cash for the periods set forth below (dollars in thousands):

[[GREPCENT_TABLE]]
[["","December 31,","","Change"],["","2022","","2021","","Amount"],["Net cash provided by (used in):"],["Operating activities","$","116,826","","","$","127,127","","","$","(10,301)"],["Investing activities","(216,663)","","","(81,913)","","","(134,750)"],["Financing activities","(10,477)","","","(130,420)","","","119,943"],["Net change in cash and cash equivalents","$","(110,314)","","","$","(85,206)","","","$","(25,108)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities is comprised of two components: cash provided by operating earnings; and cash provided by (used in) changes in working capital. The net cash provided by operating activities was $116.8 million in 2022 compared to $127.1 million in 2021. The year over year change was primarily driven by decrease in working capital which reflects the timing impacts of cash collections on receivables and settlement of payables, offset by an increase in operating earnings and non-cash items.

Investing Activities

Net cash used in investing activities was $216.7 million in 2022 compared to $81.9 million in 2021. The year over year change of $134.8 million was primarily attributed to the following:

•Cash outflows related to marketable securities activity were higher by $435.2 million in 2022 compared to 2021 due to higher purchases of marketable securities offset by lower proceeds from sales and maturities of marketable securities;

•Cash outflows in 2021 of $311.7 million related to the Adamas acquisition;

•Cash inflow from cash distribution received in 2021 of $12.9 million related to investment in Navitor.

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Financing Activities

Net cash used in financing activities was $10.5 million in 2022 compared to $130.4 million provided in the same period in 2021. This year over year change is primarily attributable to the repayment of the acquired debt from the Adamas Acquisition in prior year partially offset by the payment of a contingent consideration milestone associated with the USWM Acquisition in the first quarter of 2022 and the increase in proceeds from the issuance of common stock.

Liquidity and Capital Resources

Cash and cash equivalents, marketable securities, and long term marketable securities presented below are as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","December 31, 2022"],["Cash and cash equivalents","$","93,120"],["Marketable securities","368,214"],["Long term marketable securities","93,896"],["Total","$","555,230"]]
[[/GREPCENT_TABLE]]

We have financed our operations primarily with cash generated from product sales, supplemented by revenues from royalty and licensing arrangements, as well as proceeds from the sale of equity and debt securities. Continued cash generation is highly dependent on the success of our commercial products, as well as the success of our product candidates if approved by the FDA. While we expect continued profitability in future years, we anticipate there may be significant variability from year to year in the level of our profits particularly due to the commercial launch of Qelbree in May 2021; continued market and payor pressures for our commercial products; and the likely unfavorable impact of the loss of patent exclusivity for Trokendi XR in January 2023.

The Company believes its balances of cash, cash equivalents and unrestricted marketable securities, which totaled $555.2 million as of December 31, 2022, along with cash generated from ongoing operations and continued access to debt markets, will be sufficient to satisfy its cash requirements over the next 12 months and beyond.

We may, from time to time, consider raising additional capital through: new collaborative arrangements; strategic alliances; additional equity and/or debt financings; or financing from other sources, especially in conjunction with opportunistic business development initiatives. We will continue to actively manage our capital structure and to consider all financing opportunities that could strengthen our long-term financial profile. Any such capital raises may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

Our material cash requirements include the following contractual and other obligations.

Convertible Notes due 2023

As of December 31, 2022, the outstanding principal on the 0.625% Convertible Senior Notes due 2023 (2023 Notes) was $402.5 million. No 2023 Notes were converted as of December 31, 2022. Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions), issuing 402,500 convertible note hedge options. The Convertible Note Hedge Transactions are expected to reduce the potential dilution of the Company's common stock upon conversion of the 2023 Notes. Concurrently with entering into the Convertible Note Hedge Transactions, we also entered into separate warrant transactions, issuing a total of 6,783,939 warrants (the Warrant Transactions). Refer to Note 9, Convertible Senior Notes Due 2023 in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

Secured Uncommitted Credit Line

During the first quarter of 2023, we entered into an uncommitted demand secured credit line with a financial institution for up to $150.0 million (the "Credit Line"). Although as of the March 1, 2023 the Company has not drawn from the Credit Line. The Credit Line is secured primarily by our portfolio of marketable securities, which is primarily comprised of corporate and U.S. government agency and municipal debt securities, and it contains collateral maintenance requirements. Pursuant to the terms of the Credit Line, the lender may terminate the Credit Line and/or demand full or partial payment of amounts borrowed thereunder at any time.

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Leases

Our operating lease commitments include leases of fleet vehicles, leases of certain facilities, including the lease of the current headquarters office and laboratory space. As of December 31, 2022, we have fixed lease payment obligations of $50.8 million, with $8.3 million payable within 12 months. Refer to Note 13, Leases in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

Manufacturing Purchase Obligations

In October 2021, we entered into an amendment to the Merz Agreement which increased the price of the annual purchase commitment of MYOBLOC from €3.0 million to approximately €3.9 million. For further discussion on the embedded operating lease related to the Merz Agreement, refer to Note 13, Leases in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

Milestone Payment Obligations

The Company has contingent consideration milestones payable related to the Adamas Acquisition. The possible outcomes for the contingent consideration range, on an undiscounted basis, from $0 to $50.9 million. One Milestone Payment is payable (subject to certain terms and conditions) upon the first occurrence of the achievement of aggregate worldwide net sales of GOCOVRI in excess of $150 million during any consecutive 12-month period ending on or before December 31, 2024 (Milestone 2024). Another Milestone Payment is payable (subject to certain terms and conditions) upon the first occurrence of the achievement of aggregate worldwide net sales of GOCOVRI in excess of $225 million during any consecutive 12-month period ending on or before December 31, 2025 (Milestone 2025 and, together with Milestone 2024, the Milestones). Each Milestone may only be achieved once.

We also have contingent consideration milestones payable related to the USWM Acquisition. On February 18, 2022, the FDA accepted the SPN-830 NDA for review, and we paid the resulting $25 million milestone in the first quarter of 2022. In addition, there are two other regulatory and developmental contingent consideration milestone payments: the first is a $25 million milestone due upon the FDA's regulatory approval and $30 million upon commercial launch of SPN-830. If SPN-830 is approved by the FDA and commercially launched, we expect these milestones to become due and be paid in between 2023 and 2024.

Navitor Development Agreement

We have obligations from the Development Agreement with Navitor we entered into in April 2020. The Company can terminate the Development Agreement upon 30 days' notice. Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) for treatment-resistant depression. The Company will bear all of Phase I and Phase II development costs incurred by either party, up to a maximum of $50 million. In addition, the Company will incur certain other research and development support costs.

Royalty Payments

We obtained exclusive licenses from third parties for proprietary rights to support our commercial products and product candidates. We are obligated to pay royalties to third parties, computed as a percentage of net product sales, for each respective product under a license agreement, beginning upon commercialization. The amount of future royalty obligations are dependent on future net product sales of each of the respective products under a license agreement.

Other Obligations

We have other obligations in which the timing, likelihood and, in some situations, the amount of such payments are not known, which include the following:

•any milestone payments which may become payable to third parties under license agreements or contractual agreements regarding our clinical trials, or those which may become payable upon achieving sales and developmental milestones per contractual agreements.

•any future royalty payments to third parties.

•liabilities related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing and the amounts associated with the resolution of these positions is uncertain. As such, we are unable to make a reasonably reliable estimate regarding the timing of payments beyond 12 months.

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Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Recently Issued Accounting Pronouncements

For a discussion of new accounting pronouncements, see Note 2 in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report.