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 appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Form 10-K, including those set forth under “Forward-looking Statements” and “Risk Factors,” as revised and supplemented by those risks described from time to time in other reports which we file with the SEC.
Overview
We are building a leading, diversified specialty pharmaceutical company committed to improving the lives of people living with serious medical conditions. We commercialize our pain portfolio, consisting of Xtampza ER, Nucynta ER and Nucynta IR (collectively the “Nucynta Products”), Belbuca, and Symproic, in the United States.
Xtampza ER, an abuse-deterrent, oral formulation of oxycodone, was approved by the United States Food and Drug Administration (“FDA”) in April 2016 for the management of severe and persistent pain that requires an extended treatment period with a daily opioid analgesic and for which alternative treatment options are inadequate. We commercially launched Xtampza ER in June 2016.
The Nucynta Products are extended-release (“ER”) and immediate-release (“IR”) formulations of tapentadol. Nucynta ER is indicated for the management of severe and persistent pain that requires an extended treatment period with a daily opioid analgesic, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is indicated for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults and pediatric patients aged 6 years and older with a body weight of at least 40 kg. We began shipping and recognizing product sales on the Nucynta Products in January 2018 and began marketing the Nucynta Products in February 2018. In August 2023, the FDA granted New Patient Population exclusivity in pediatrics for Nucynta IR. This grant extended the period of U.S. exclusivity for Nucynta IR from June 27, 2025 to July 3, 2026.
On March 22, 2022, we acquired BioDelivery Sciences International, Inc. (“BDSI”), a specialty pharmaceutical company working to deliver innovative therapies for individuals living with serious and debilitating chronic conditions (the “BDSI Acquisition”). Upon closing of the BDSI Acquisition, we acquired Belbuca and Symproic.
Belbuca is a buccal film that contains buprenorphine, a Schedule III opioid, and was approved by the FDA in October 2015 for severe and persistent pain that requires an extended treatment period with a daily opioid analgesic and for which alternative options are inadequate. Symproic was approved by the FDA in March 2017 for the treatment of opioid-induced constipation (“OIC”) in adult patients with chronic non-cancer pain, including patients with chronic pain related to prior cancer or its treatment who do not require frequent (e.g., weekly) opioid dosage escalation. We began shipping and recognizing product sales related to Belbuca and Symproic in March 2022.
Financial Operations Overview
Product Revenues
Product revenues through the year ended December 31, 2023 were primarily generated from sales of Xtampza ER, the Nucynta Products, Belbuca, and Symproic. In accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606”)product sales are recorded upon delivery of products to customers (upon the transfer of control of the product to the customer), net of a provision for estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns.
Cost of Product Revenues
Cost of product revenues include amortization and impairment expense for the intangible assets acquired in connection with business combinations and asset acquisitions, royalty expenses, the cost of active pharmaceutical ingredient, the cost of producing finished goods that correspond with revenue for the reporting period, as well as certain period costs
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related to freight, packaging, stability and quality testing. Refer to Note 5, License Agreements, and Note 11, Goodwill andIntangible Assets, for further detail around the intangible assets acquired from the BDSI Acquisition, the Nucynta Intangible Asset and royalty expenses.
Research and Development Expenses
Research and development expenses have historically consisted of product development expenses incurred in identifying, developing, and testing product candidates including stock-based compensation; costs associated with conducting our clinical and non-clinical activities, including clinical and non-clinical trials that we conduct for post-marketing requirements; and costs for laboratory supplies, depreciation of lab equipment, and other expenses including allocated expenses for rent and maintenance of facilities. These costs have historically been expensed as incurred.
As of April 1, 2022, we focused entirely on commercial products rather than research and development and redirected resources from research and development activities. As such, there were no expenses incurred in research and development after the three months ended March 31, 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation and travel expenses for our employees. Other selling, general and administrative expenses include facility-related costs and professional fees for directors, accounting and legal services, and expenses associated with obtaining and maintaining patents. As we continue to invest in the commercialization of our products, we expect our selling, general and administrative expenses to continue to be substantial for the foreseeable future.
Interest Expense
Interest expense consists primarily of cash and non-cash interest costs related to our debt, including the term loan issued in March 2022 in connection with the BDSI Acquisition (the “2022 Term Loan”), the term notes (the “2020 Term Loan”) and convertible notes (the “2026 Convertible Notes”) issued in February 2020 in connection with the Nucynta Acquisition, and convertible notes issued in February 2023 (the “2029 Convertible Notes”).
On March 22, 2022 the outstanding balance related to the 2020 Term Loan was fully paid in connection with the closing of the BDSI Acquisition and establishment of the 2022 Term Loan.
Interest Income
Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.
Provision for Income Taxes
The provision for income taxes reflects expense or tax benefit for federal and state income taxes, as well as the impact of non-deductible expenses. During the year ended December 31, 2021, we removed the valuation allowance on the substantial majority of our deferred tax assets, resulting in the recognition of a discrete deferred tax benefit of $78.0 million in 2021.
Critical Accounting Policies and Significant Judgments and Estimates
Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. Estimates include revenue recognition, including the estimates of product returns, discounts and allowances related to commercial sales of our products, estimates related to the fair value of assets acquired and liabilities assumed, including acquired intangible assets and the fair value of inventory acquired, estimates utilized in the ongoing valuation of inventory related to potential unsalable product, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, intangible assets and deferred tax valuation allowances. We base our estimates and assumptions on
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historical experience when available and on various factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results. While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements appearing elsewhere in this Form 10-K, we believe the following accounting policies to be most critical to the significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our accounting policy for revenue recognition will have a substantial impact on reported results and relies on certain estimates. Estimates are based on historical experience, current conditions and various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.
Product Revenue
Our only source of revenue to date has been generated by sales of our products, which are primarily sold to distributors (“customers”), which in turn sell the product to pharmacies and others for the treatment of patients. Revenue for product sales is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. This generally occurs upon delivery to our customers when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable. Therefore, product sales are recorded upon delivery to our customers net of estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, as well as estimated product returns.
Sales Deductions
Sales deductions consist primarily of provisions for: (i) rebates and incentives, including managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances; (ii) product returns, including return estimates for our products; and (iii) trade allowances and chargebacks, including fees for distribution service fees, prompt pay discounts, and chargebacks. We estimate the amount of variable consideration that should be included in revenue under the expected value method for all sales deductions other than trade allowances, which are estimated under the most likely amount method. These provisions reflect our best estimates of the amount of revenue to which we are entitled based on the terms of our contracts.
Provisions for rebates and incentives are based on the estimated amount of rebates and incentives to be claimed on the related sales from the period. As our rebates and incentives are based on products dispensed to patients, we are required to estimate the expected value of claims at the time of product delivery to distributors. Given that distributors sell the product to pharmacies, which in turn dispense the product to patients, claims can be submitted significantly after the related sales are recognized. Our estimates of these claims are based on the historical experience of existing or similar programs, including current contractual and statutory requirements, specific known market events and trends, industry data, and estimated distribution channel inventory levels. Accruals and related reserves required for rebates and incentives are adjusted as new information becomes available, including actual claims. If actual results vary, we may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.
Provisions for product returns, including returns for Xtampza, the Nucynta Products, Belbuca and Symproic, are based on product-level returns rates, including processed as well as unprocessed return claims, in addition to relevant market events and other factors. Estimates of the future product returns are made at the time of revenue recognition to determine the amount of consideration to which we expect to be entitled (that is, excluding the products expected to be returned).
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At the end of each reporting period, we analyze trends in returns rates and update our assessment of variable consideration for returns. To the extent we receive amounts in excess of what we expect to be entitled to receive due to a product return, we do not recognize revenue when we transfer products to customers but instead recognize those excess amounts received as a refund liability. We update the measurement of the refund liability at the end of each reporting period for changes in expectations about the amount of refunds with the corresponding adjustments recognized as revenue (or reductions of revenue).
We provide the right of return to our customers for an 18-month window beginning six months prior to expiration and up until twelve months after expiration. Our customers short-pay an existing invoice upon notice of a product return claim. Adjustments to the preliminary short-paid claims are processed when the return claim is validated and finalized. Our return policy requires that product is returned and that the return is claimed within the 18-month window. Refer to Note 3, Revenue from Contracts with Customers, for more information.
Provisions for trade allowances and chargebacks are primarily based on customer-level contractual terms. Accruals and related reserves are adjusted as new information becomes available, which generally consists of actual trade allowances and chargebacks processed. Actual results may differ from these estimates under different assumptions or conditions.
Business Combination Accounting and Valuation of Acquired Assets
We completed the BDSI Acquisition on March 22, 2022, which was accounted for as a business combination. To determine whether the acquisition should be accounted for as a business combination or as an asset acquisition, we made certain judgments regarding whether the acquired set of activities and assets met the definition of a business. Judgment is required in assessing whether the acquired processes or activities, along with their inputs, would be substantive to constitute a business, as defined by U.S. GAAP.
The acquisition method of accounting requires that we recognize the assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the acquisition date net fair values of the assets acquired and the liabilities assumed. The determination of the fair value of the acquired assets and liabilities assumed is a critical accounting estimate because the estimation of fair values requires significant management judgment and requires various assumptions based on non-observable inputs that are included in valuation models. An income approach, which generally relies upon projected cash flow models, is used in estimating the fair value of the acquired intangible assets and the fair value of acquired inventory. These cash flow projections are based on management’s estimates of economic and market conditions including the estimated future cash flows from revenues of acquired assets, the timing and projection of costs and expenses and the related profit margins, tax rates, and an appropriate discount rate.
During the measurement period, which occurs before finalization of the purchase price allocation, changes in assumptions and estimates that result in adjustments to the fair values of assets acquired and liabilities assumed, if based on facts and circumstances existing at the acquisition date, are recorded on a retroactive basis as of the acquisition date, with the corresponding offset to goodwill. Any adjustments not based on facts and circumstances existing at the acquisition date, or if subsequent to the conclusion of the measurement period, will be recorded to our consolidated statements of operations.
Intangible Assets
We record the fair value of acquired finite-lived intangible assets as of the transaction date. Intangible assets are then amortized over their estimated useful lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized, which is generally based on our cash flow projections. Future events, such as competition, technological advances, or other changes, are subject to uncertainty and could cause subsequent evaluations to cash flow projections. We test intangible assets for potential impairment whenever triggering events or circumstances present an indication of impairment. If the sum of expected undiscounted future cash flows of the intangible assets (or asset group) is less than the carrying amount of such assets, the intangible assets would be written down to the estimated fair value, calculated based on the present value of expected future cash flows. As of December 31, 2023, our intangible assets included those acquired in connection with the BDSI Acquisition and the Nucynta Intangible Asset.
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Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse.
We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized. In determining the extent to which a valuation allowance for deferred tax assets is required, we evaluate all available evidence including projections of future taxable income, carryback opportunities, reversal of certain deferred tax liabilities, and other tax planning strategies, all of which are subject to uncertainty. Certain deferred tax assets, such as net operating losses and tax credits, expire at varying dates and are generally subject to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC 382”). Significant judgment is required in making these evaluations, including comparing future annual income projections to the expiration dates and annual limitations of such assets. To the extent our future expectations change, we would have to assess the recoverability of these deferred tax assets at that time.
As a result of sustained positive earnings history as demonstrated through cumulative earnings, we are using projections of future taxable income as a source of realizing our deferred tax assets. We have maintained a valuation allowance on the portion of our deferred tax assets that are not more likely than not to be realized due to tax limitation or other conditions of $5.8 million as of December 31, 2023.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes the results of our operations for the years ended December 31, 2023 and 2022:
Years Ended December 31,
(in thousands)
Cost of product revenues
Intangible asset amortization and impairment 145,760 136,255
Operating expenses
Research and development — 3,983
Loss on extinguishment of debt (23,504) —
Income (loss) before income taxes 75,733 (28,847)
Provision for (benefit from) income taxes 27,578 (3,845)
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Product revenues, net
Product revenues, net were $566.8 million for the year ended December 31, 2023 (“2023”), compared to $463.9 million for the year ended December 31, 2022 (“2022”), representing a $102.9 million increase. The $102.9 million increase is primarily due to increases in revenue for Belbuca of $55.6 million, Xtampza ER of $38.6 million, the Nucynta Products of $6.3 million, and Symproic of $4.2 million, partially offset by decreases in other revenue of $1.8 million.
The increase in revenue for Belbuca of $55.6 million and Symproic of $4.2 million is primarily due to a full year of revenue in 2023, compared to a partial year of revenue in 2022 due to the timing of the BDSI Acquisition.
The increase in revenue for Xtampza ER of $38.6 million is primarily due to lower gross-to-net adjustments primarily related to provisions for rebates and higher gross price, partially offset by lower sales volume and higher gross-to-net adjustments related to provisions for returns.
The increase in revenue for the Nucynta Products of $6.3 million is primarily due to lower gross-to-net adjustments primarily related to provisions for rebates and returns and higher gross price, partially offset by decreased sales volume.
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization) was $94.8 million for 2023, compared to $118.2 million for 2022. The $23.4 million decrease was primarily related to 2022 including higher cost of product revenues related to the step-up basis in inventory acquired from BDSI as well as lower sales volume in 2023 for Xtampza and the Nucynta Products.
Intangible asset amortization was $145.8 million for 2023, compared to $136.3 million for 2022. The $9.5 million increase in intangible asset amortization was due to a full year of amortization expense recognized in 2023 related to the intangible assets acquired from BDSI of which $435.0 million of consideration was allocated to our acquired intangible assets, compared to a partial year of amortization expense in 2022. This increase was partially offset by a decrease in amortization expense as a result of the FDA granting New Patient Population exclusivity in pediatrics for Nucynta IR to July 3, 2026, resulting in an extension of the estimated useful life of the underlying intangible asset. The intangible assets are amortized on a straight-line basis over the respective estimated useful lives.
Operating expenses
We did not recognize research and development expenses in 2023, compared to $4.0 million recognized in 2022. The $4.0 million decrease was due to redirection of resources from research and development activities during 2022 as we shifted our focus to supporting our commercial products rather than research and development.
Selling, general and administrative expenses were $159.2 million for 2023, compared to $172.2 million for 2022. The $13.0 million decrease was primarily related to:
Interest expense and Interest income
Interest expense was $83.3 million for 2023, compared to $63.2 million for 2022. The $20.1 million increase was primarily due to the 2022 Term Loan that we entered into in connection with the BDSI Acquisition, higher interest rates impacting our variable rate term loan debt, and higher interest expense due to the issuance of the 2029 Convertible Notes (offset by the partial repurchase of the 2026 Convertible Notes).
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Interest income was $15.6 million for 2023, compared to $1.0 million for 2022. The $14.6 million increase was primarily due to a higher overall balance invested in 2023 compared to 2022 and higher interest rates earned on cash equivalents and marketable securities.
Loss on extinguishment of debt
We recognized a $23.5 million loss on extinguishment of debt in 2023 in connection with the repurchase of a portion of our 2026 Convertible Notes. This transaction involved a contemporaneous exchange of cash between us and holders of the 2026 Convertible Notes participating in the issuance of the 2029 Convertible Notes. The repurchase of the 2026 Convertible Notes and issuance of the 2029 Convertible Notes were deemed to have substantially different terms based on the present value of the cash flows immediately prior to and after the exchange. Therefore, the repurchase of the 2026 Convertible Notes was accounted for as a debt extinguishment.
Income Taxes
The provision for income taxes was $27.6 million for 2023, compared to a $3.8 million benefit from income taxes for 2022. The tax provision for 2023 was impacted by non-deductible costs, including non-deductible costs associated with the debt extinguishment that occurred in the first quarter of 2023 as well as non-deductible costs related to stock-based compensation, including 162(m) limitations. In 2022, we recognized a deferred tax benefit, partially offset by state income tax expense. The provision for income taxes in 2022 primarily consisted of state income tax for states for which our state-level NOLs did not fully offset state-level taxable income. The effective tax rate was 36.4% and 13.3% for 2023 and 2022, respectively.
Liquidity and Capital Resources
Sources of Liquidity
Historically, we have funded our operations primarily through the private placements and/or public offerings of our preferred stock, common stock, and convertible notes; commercial bank debt; and cash inflows from sales of our products. We are primarily dependent on the commercial success of Belbuca, Xtampza, and the Nucynta Products. In March 2022, our debt balance increased significantly as we modified the 2020 Term Loan with Pharmakon to an increased principal balance of $650.0 million to fund a portion of the consideration paid to complete the BDSI Acquisition. We paid $100.0 million in principal payments during the first year of the 2022 Term Loan and the remaining $550.0 million balance will be paid in equal quarterly installments over the remaining three years of the term note. As of December 31, 2023, the outstanding principal balance of the 2022 Term Loan was $412.5 million, of which $183.3 million in principal payments are due within the next 12 months. As of December 31, 2023, the outstanding principal balance of the Convertible Notes was $267.9 million, of which $26.4 million is due in 2026 and $241.5 million is due in 2029. As of December 31, 2023, and December 31, 2022, we had $238.9 million and $173.7 million in cash and cash equivalents, respectively.
We believe that our cash, cash equivalents, and marketable securities as of December 31, 2023, together with expected cash inflows from operations, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.
Borrowing Arrangements and Equity Offerings
The following transactions represent our material borrowing arrangements and equity offerings: the 2022 Term Loan, the 2026 Convertible Notes, and the 2029 Convertible Notes. Refer to Note 14, Debt, for more information.
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Cash flows
In this section, we discuss cash flows for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.
Years Ended December 31,
(in thousands)
Net cash provided by operating activities $ 274,749 $ 124,230
Net cash used in investing activities (70,812) (573,691)
Net cash (used in) provided by financing activities (140,178) 436,723
Operating activities. Cash provided by operating activities was $274.7 million in 2023, compared to $124.2 million in 2022. The $150.5 million increase in cash provided by operating activities was primarily due to the increase in cash flow from operating results, which reflects operating earnings, after adjustment for non-cash items that are included in net income, including higher intangible asset amortization as a result of the BDSI Acquisition and recognition of a loss on extinguishment of debt in connection with the repurchase of a portion of our 2026 Convertible Notes, as well as changes in working capital.
Investing activities. Cash used in investing activities was $70.8 million in 2023, compared to $573.7 million in 2022. The $502.9 million decrease in cash used in investing activities was primarily due to the use of $572.1 million for the BDSI Acquisition in 2022, net of cash acquired, partially offset by purchases and maturities of marketable securities in 2023.
Financing activities. Cash used in financing activities was $140.2 million in 2023, compared to cash provided by financing activities of $436.7 million in 2022. The $576.9 million decrease was primarily due to:
● an increase in repayments of term notes of $87.5 million; and
Funding requirements
We believe that our cash, cash equivalents, and marketable securities as of December 31, 2023, together with expected cash inflows from operations, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future. However, we are subject to all the risks common to the commercialization and development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
We have significant future capital requirements, including:
● royalties we pay on sales of certain products within our portfolio;
● operating lease obligations;
● minimum purchase obligations in connection with our contract manufacturer; and
● cash paid for income taxes.
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In addition, we have significant potential future capital requirements, including:
Contractual Obligations
Our contractual obligations as of December 31, 2023 that will affect our future liquidity include our term loan, including interest; convertible senior notes, including interest; operating lease obligations; and purchase obligations. For further detail regarding our term notes and convertible senior notes, refer to Note 14, Debt. For further detail regarding our operating lease obligations, refer to Note 15, Leases.
Our purchase obligations represent the minimum purchase obligations of up to $3.0 million per year with our contract manufacturer which are in effect as of December 31, 2023 and will remain in effect each year until the termination of our manufacturing agreement.
We also have employment agreements with executive officers that would require us to make severance payments to them if we terminate their employment without cause or the executives resign for good cause. These payments are contingent upon the occurrence of various future events, and the amounts payable under these provisions depend upon the level of compensation at the time of termination of employment, and therefore, are not calculable at this time.
Non-GAAP Financial Measures
To supplement our financial results presented on a GAAP basis, we have included information about certain non-GAAP financial measures. We believe the presentation of these non-GAAP financial measures, when viewed with our results under GAAP and the accompanying reconciliations, provide analysts, investors, lenders, and other third parties with insights into how we evaluate normal operational activities, including our ability to generate cash from operations, on a comparable year-over-year basis and manage our budgeting and forecasting. In addition, certain non-GAAP financial measures, primarily Adjusted EBITDA, are used to measure performance when determining components of annual compensation for substantially all non-sales force employees, including senior management.
We may discuss the following financial measures that are not calculated in accordance with GAAP in our quarterly and annual reports, earnings press releases and conference calls.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income or loss adjusted to exclude interest expense, interest income, the benefit from or provision for income taxes, depreciation, amortization, stock-based compensation, and other adjustments to reflect changes that occur in our business but do not represent ongoing operations. Adjusted EBITDA, as used by us, may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
There are several limitations related to the use of adjusted EBITDA rather than net income or loss, which is the nearest GAAP equivalent, such as:
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Adjusted EBITDA for the years ended December 31, 2023 and 2022 was as follows:
Years Ended December 31,
(in thousands)
Adjustments:
Loss on extinguishment of debt 23,504 —
Provision for (benefit from) income taxes 27,578 (3,845)
Impairment expense — 4,786
Litigation settlements 8,500 —
Acquisition related expenses — 31,297
Recognition of step-up basis in inventory 15,116 39,584
Adjusted EBITDA was $367.0 million for 2023 compared to $266.0 million for 2022. The $101.0 million increase was primarily due to higher revenues and gross profit before excluded costs, partially offset by higher adjusted operating expenses.
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The following is a summary of 2023 quarterly Adjusted EBITDA:
First Quarter Second Quarter Third Quarter Fourth Quarter
(in thousands)
Adjustments:
Loss on extinguishment of debt 23,504 — — —
Litigation settlements 8,500 — — —
Recognition of step-up basis in inventory 10,170 4,748 198 —
Adjusted Operating Expenses
Adjusted operating expenses is a non-GAAP financial measure that represents GAAP operating expenses adjusted to exclude stock-based compensation expense, and other adjustments to reflect changes that occur in our business but do not represent ongoing operations.
Adjusted operating expenses for the years ended December 31, 2023 and 2022 were as follows:
Years Ended December 31,
(in thousands)
Adjustments:
Litigation settlements 8,500 —
Acquisition related expenses — 31,297
Adjusted operating expenses were $123.6 million for 2023 compared to $122.0 million for 2022. The $1.6 million increase was primarily driven by:
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The following is a summary of 2023 quarterly adjusted operating expenses:
First Quarter Second Quarter Third Quarter Fourth Quarter
(in thousands)
Adjustments:
Litigation settlements 8,500 — — —
Adjusted Net Income and Adjusted Earnings Per Share
Adjusted net income is a non-GAAP financial measure that represents GAAP net income or loss adjusted to exclude significant income and expense items that are non-cash or not indicative of ongoing operations, including consideration of the tax effect of the adjustments. Adjusted earnings per share is a non-GAAP financial measure that represents adjusted net income per share. Adjusted weighted-average shares - diluted is calculated in accordance with the treasury stock, if-converted, or contingently issuable accounting methods, depending on the nature of the security.
Adjusted net income and adjusted earnings per share for the years ended December 31, 2023 and 2022 were as follows:
Years Ended December 31,
(in thousands, except share and per share data)
Adjustments:
Non-cash interest expense 8,635 8,285
Loss on extinguishment of debt 23,504 —
Impairment expense — 4,786
Litigation settlements 8,500 —
Acquisition related expenses — 31,297
Recognition of step-up basis in inventory 15,116 39,584
Income tax effect of above adjustments (1) (53,526) (60,553)
Adjusted earnings per share (2) $ 5.47 $ 3.96
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The following is a summary of 2023 quarterly adjusted net income and adjusted earnings per share:
First Quarter Second Quarter Third Quarter Fourth Quarter
(in thousands, except share and per share data)
Adjustments:
Loss on extinguishment of debt 23,504 — — —
Litigation settlements 8,500 — — —
Recognition of step-up basis in inventory 10,170 4,748 198 —
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Our primary exposure to market risk is interest rate sensitivity in connection with our investment portfolio and the 2022 Term Loan. None of these market risk sensitive instruments are held for trading purposes.
Investment Portfolio
Our investment portfolio includes financial instruments that are sensitive to interest rate risks. Our investment portfolio is used to preserve capital, maintain liquidity sufficient to meet cash flow requirements, and maximize returns commensurate with our risk appetite. We invest in instruments that meet the credit quality, diversification, liquidity, and maturity standards outlined in our investment policy.
As of December 31, 2023, our investment portfolio includes $82.0 million of cash equivalents and $71.6 million of marketable securities, which are primarily comprised of money market funds, U.S. Treasury securities, corporate debt, and government-sponsored securities. Our money market funds are short-term highly liquid investments, and our marketable securities have active secondary or resale markets to help ensure liquidity. We account for marketable securities as available-for-sale, thus, no gains or losses are realized due to changes in the fair value of our marketable securities unless we sell our investments prior to maturity or incur a credit loss. Furthermore, our investment policy includes guidelines limiting the term-to-maturity of our investments. Due to the nature of our investments, we do not believe that the fair value of our investments has a material exposure to interest rate risk.
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2022 Term Loan
The 2022 Term Loan bears interest at a rate based upon the Secured Overnight Financing Rate (“SOFR”) plus a spread adjustment of 0.26% (subject to a floor of 1.20%), plus a margin of 7.5% per annum. Based on the outstanding principal amount of the 2022 Term Loan as of December 31, 2023 of $412.5 million and the applicable interest rate, a hypothetical 1% increase or decrease in interest rates would increase or decrease future interest expense by approximately $4.1 million.
Item 8. Consolidated Financial Statements and Supplementary Data
Our Consolidated Financial Statements, together with the reports of our independent registered public accounting firms, begin on page F-1 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Because of such limitations, there is a risk that material misstatements may not be prevented
57
or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules 13a 15(f) and 15d 15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of our internal control over financial reporting. Based on our evaluation, Management has concluded that our internal control over financial reporting was effective as of December 31, 2023.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the fiscal quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Collegium Pharmaceutical, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Collegium Pharmaceutical, Inc. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 22, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 22, 2024
59
Item 9B. Other Information
Insider Trading Arrangements
During the three months ended December 31, 2023, none of our directors or officers adopted, amended, or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Other than the information regarding our executive officers provided in Part I of this report under the heading “Business — OurExecutive Officers,” the information required to be furnished pursuant to this item is incorporated herein by reference to our definitive proxy statement for the 2024 Annual Meeting of the Shareholders.
Our Board of Directors has adopted a Code of Ethics applicable to all of our employees, executive officers and directors. The Code of Ethics is available on our website at www.collegiumpharma.com. Our Board of Directors is responsible for overseeing compliance with the Code of Ethics, and our Board of Directors or an appropriate committee thereof must approve any waivers of the Code of Ethics for employees, executive officers or directors. Disclosure regarding any amendments to the Code of Ethics, or any waivers of its requirements, will be made on our website.
Insider Trading Policies
Our Board of Directors has adopted an Insider Trading Policy which governs the purchase, sales, and/or other dispositions of our securities by directors, officers, and employees. Our Insider Trading Policy is attached hereto as Exhibit 19 and incorporated herein.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference from our definitive proxy statement for the 2024 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Executive Compensation” (excluding the information under the heading “Pay Versus Performance”), “Director Compensation” and “Compensation Committee Report.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated herein by reference from our definitive proxy statement for the 2024 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Executive Compensation” (excluding the information under the heading “Pay Versus Performance”), “Director Compensation” and “Compensation Committee Report.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference from our definitive proxy statement for the 2024 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Executive Compensation” (excluding the information under the heading “Pay Versus Performance”), “Director Compensation” and “Compensation Committee Report.”
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Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated herein by reference from our definitive proxy statement for the 2024 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Executive Compensation” (excluding the information under the heading “Pay Versus Performance”), “Director Compensation” and “Compensation Committee Report.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements
Refer to Part II, Item 8 for the Consolidated Financial Statements required to be included in this Form 10-K.
Consolidated Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.
Exhibits
Exhibit Number Exhibit Description
3.2 † Amended and Restated Bylaws of Collegium Pharmaceutical, Inc. (3)
10.2 +† 2015 Employee Stock Purchase Plan. (8)
10.3 +† Performance Bonus Plan. (9)
10.4(a) +† Amended and Restated 2014 Stock Incentive Plan. (8)
10.5 † Form of Indemnification Agreement. (9)
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19 Insider Trading Policy
21.1 Subsidiaries of Collegium Pharmaceutical, Inc.
97 Compensation Recovery Policy
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†Previously filed.
+Indicates management contract or compensatory plan.
* Certain portions of the exhibits that are not material and would be competitively harmful if publicly disclosed have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. Copies of the unredacted exhibits will be furnished to the Securities and Exchange Commission (“SEC”) upon request.
63
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLLEGIUM PHARMACEUTICAL, INC.
By: /s/ Joseph Ciaffoni
Joseph Ciaffoni
Chief Executive Officer
Signature Title Date
Joseph Ciaffoni
Colleen Tupper
/s/ Michael T. Heffernan, R.Ph. Chairman of the Board February 22, 2024
Michael T. Heffernan, R.Ph.
/s/ Rita Balice-Gordon, Ph.D. Director February 22, 2024
Rita Balice-Gordon, Ph.D.
/s/ Garen G. Bohlin Director February 22, 2024
Garen G. Bohlin
/s/ John A. Fallon, M.D. Director February 22, 2024
John A. Fallon, M.D.
/s/ John G. Freund, M.D. Director February 22, 2024
John G. Freund, M.D.
/s/ Gwen Melincoff Director February 22, 2024
Gwen Melincoff
/s/ Gino Santini Director February 22, 2024
Gino Santini
/s/ Neil McFarlane Director February 22, 2024
Neil McFarlane
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
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COLLEGIUM PHARMACEUTICAL, INC.
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements Pages
Report of Independent Registered Public Accounting Firm (PCAOB ID 34) F-2
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-4
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Collegium Pharmaceutical, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Collegium Pharmaceutical, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Product Return Liability – Refer to Note 3 to the Financial Statements
Critical Audit Matter Description
Revenue is recognized when control is transferred to the customer, which occurs upon delivery, and revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer (“transaction price”). The transaction price for product sales includes variable consideration related to sales deductions and a refund liability is established for estimated product returns. At the end of each reporting period, the Company updates the estimated transaction price (including updating its assessment of whether an estimate of variable consideration should be constrained). Variable consideration, including the risk of customer concessions, is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. The Company updates the measurement of the refund liability at the end of each reporting period for changes in expectations about the amount of refunds with the corresponding adjustments recognized as revenue (or reductions of revenue).
F-2
Estimating the variable consideration and the provision for the refund liability requires significant judgment by management. Given the complexity and significant level of estimation uncertainty involved in calculating the refund liability, our audit procedures in this area required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the revenue deductions for returns and the refund liability (the “return provision”) included the following, among others:
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 22, 2024
We have served as the Company's auditor since 2016.
F-3
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
Assets
Current assets
Marketable securities 71,601 —
Prepaid expenses and other current assets 15,195 16,681
Operating lease assets 6,029 6,861
Other noncurrent assets 825 100
Liabilities and shareholders' equity
Current liabilities
Accrued rebates, returns and discounts 227,331 230,491
Current portion of term notes payable 183,333 162,500
Current portion of operating lease liabilities 988 1,112
Term notes payable, net of current portion 221,713 397,578
Operating lease liabilities, net of current portion 6,124 7,112
Commitments and contingencies (refer to Note 13)
Shareholders’ equity:
Preferred stock, $0.001 par value; authorized shares - 5,000,000 — —
Accumulated other comprehensive income 14 —
The accompanying notes are an integral part of these consolidated financial statements.
F-4
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Years Ended December 31,
Cost of product revenues
Operating expenses
Research and development — 3,983 9,451
Restructuring — — 4,578
Loss on extinguishment of debt (23,504) — —
Provision for (benefit from) income taxes 27,578 (3,845) (74,891)
Earnings (loss) per share — basic $ 1.43 $ (0.74) $ 2.05
Earnings (loss) per share — diluted $ 1.29 $ (0.74) $ 1.86
The accompanying notes are an integral part of these consolidated financial statements.
F-5
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Years Ended December 31,
Other comprehensive income:
Unrealized gains on marketable securities 14 — —
Total other comprehensive income 14 — —
The accompanying notes are an integral part of these consolidated financial statements.
F-6
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
Additional Accumulated Other Total
Shares Amount Capital Shares Amount Deficit Loss Equity
Vesting of RSUs and PSUs 511,743 — — — — — — —
Stock-based compensation — — 24,255 — — — — 24,255
Net income — — — — — 71,517 — 71,517
Vesting of RSUs and PSUs 699,285 1 — — — — — 1
Exercise of warrant 40,666 — — — — — — —
Stock-based compensation — — 22,874 — — — — 22,874