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.

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, hypomobility in Parkinson’s Disease (PD), cervical dystonia, and chronic sialorrhea. We are developing a broad range of novel CNS product candidates including new potential treatments for attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson’s disease, epilepsy, depression, and rare CNS disorders.

On April 21, 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (mTORC1 activator) (SPN-820) in treatment-resistant depression (TRD). Initiation of Phase II clinical program is targeted in the fourth quarter of 2021.

Table of Contents

completed on June 9, 2020, the Company added three established commercial products and a product candidate in late-stage development to its portfolio.

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 the United States (U.S.) market. It is also indicated for the prophylaxis of migraine headache.

•Oxtellar XR (oxcarbazepine) is indicated as therapy of partial onset seizures in adults and children 6 years to 17 years of age and is the first once-daily extended release oxcarbazepine product indicated for the treatment of epilepsy in the U.S.

•APOKYN (apomorphine hydrochloride injection) is a product indicated for the acute, intermittent treatment of hypomobility or “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 Parkinson’s disease experiencing “off” episodes.

•MYOBLOC (rimabotulinumtoxinB) is a product indicated for the treatment of cervical dystonia and sialorrhea in adults, and it is the only Type B toxin available on the market.

Product Candidates

•SPN-812 (viloxazine hydrochloride), a novel non-stimulant product candidate for the treatment of ADHD.

•SPN-830 (Apomorphine Infusion Pump) is a late-stage drug/device combination product candidate for the continuous prevention of “off” episodes in PD.

•SPN-817, a novel product candidate for the treatment of severe epilepsy.

•SPN-820 is a first-in-class, orally active small molecule that directly activates brain mTORC1 and is a novel product candidate for treatment resistant depression.

Operational Highlights

SPN-812 - Novel non-stimulant for the treatment of ADHD in children and adults

•In February 2021, we received notice from the FDA that the NDA resubmission for SPN-812 for the treatment of ADHD in pediatric patients is considered a Class I resubmission, thereby assigning a timeline of two months for review by the FDA and establishing a new Prescription Drug User Fee Act (PDUFA) target action date in early April 2021. We are preparing for the commercial launch of SPN-812 for the treatment of ADHD in pediatric patients in the second quarter of 2021, if approved by the FDA.

•In December 2020, we announced positive results from a Phase III trial in adult patients with ADHD. Assuming approval for pediatric patients, we plan to submit a supplemental NDA (sNDA) to the FDA for SPN-812 in adults in the second half of 2021.

SPN-830 (Apomorphine infusion pump) - Continuous treatment of motor fluctuations (“on-off” episodes) in PD

•We are scheduled to meet with the FDA in March 2021 in a Type A meeting to discuss the contents of the Refusal to File (RTF) letter it received in November 2020 regarding its NDA for SPN-830. In the letter, the FDA requested certain documents and reports to be submitted in support of the application. We believe additional testing of the device will be necessary to support the SPN-830 NDA resubmission. We plan to resubmit the SPN-830 NDA after completing discussions with the FDA and the required activities for filing.

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

•Development activities are ongoing, including a multiple-ascending dose study in healthy volunteers, with the goal of initiating a Phase II clinical program in treatment-resistant depression by the end of 2021.

Table of Contents

We expect to incur significant research and development expenses related to the continued development of each of our product candidates from 2020 through FDA approval or until the program terminates. See Part I, Item I—Business for a complete description of our product and product candidates and development programs.

Intellectual property portfolio

We continue to expand our intellectual property portfolio to provide additional protection for our technologies, products, and product candidates. See Part I, Item I—Business, Intellectual Property, and Exclusivity, for a complete description of our intellectual property position.

COVID-19 Impact

In March 2020, we began to observe the impact of the COVID-19 pandemic in the U.S and globally and the impact it may have on our business operations and our financial results. The macroeconomic impacts of COVID-19 are significant and continue to evolve, as exhibited by, among other things, a rise in unemployment, changes in consumer behavior, and market volatility.

The full impact of the COVID-19 pandemic on our business remains uncertain and subject to change. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business operations and have assessed the impact of the COVID-19 pandemic on our consolidated financial statements. Although the COVID-19 pandemic has not significantly impacted our consolidated financial statements as of and for the year ended December 31, 2020, it may have a future impact, especially if the severity worsens, the duration lengthens, or the nature of the effects changes.

The effects of the pandemic may vary significantly across different aspects of our business operations. We do not and cannot yet know the full extent of the potential impact on our execution of clinical trials, new product launches, including SPN-812, our manufacturing and supply chain, or related impacts on our business or financial condition. These effects could include the adverse impact on research and development activities as a result of a disruption in clinical projects; adverse impact on selling and marketing efforts as a result of temporarily halting in-person interactions by our sales force with healthcare providers; adverse impact on net product sales as a result of decreased new prescriptions due to fewer patient visits to physicians to begin treatment; potential changes in payor segment mix; increased use of co-pay programs due to rising unemployment; and potential future disruption to our supply chain and manufacturing operations.

These effects could have a material impact on the Company’s liquidity, cash flows, capital resources, and business operations. Financial effects could include impairment of intangible and long-lived assets, increased sales deductions that could adversely impact our net product sales, and cash collections and adjustments for market volatility for items subject to fair value measurement, such as marketable securities. See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for additional information on risk factors that could impact our business and our results.

For the year ended December 31, 2020, except for the effects already cited, there has been no material impact on our operations, liquidity, and financial position due to the COVID-19 pandemic. We expect to continue to generate positive cash flows and to meet our short-term liquidity needs.

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:

•Revenue recognition;

•Business combination accounting and valuation of acquired assets, including goodwill and intangible assets;

•Valuation of contingent consideration;

•Inventories produced in preparation of product launches; and

Table of Contents

•Income taxes.

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. 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 discussion on each of the different sales deductions.

Business Combination Accounting and Valuation of Acquired Assets, Including Goodwill and Intangible Assets

The Company completed the USWM Acquisition on June 9, 2020, and accounted for the transaction as a business combination. To determine whether the acquisition should be accounted for as a business combination or as an asset acquisition, the Company made certain judgments regarding whether the acquired set of activities and assets met the definition of a business. Significant 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.

As of December 31, 2020, the total estimated purchase price was $380.3 million and the preliminary estimate of fair value of the acquired intangible assets at the acquisition date was $355 million, of which $123 million was estimated fair value of the IPR&D asset and the remaining $232 million is fair value of the acquired definite-lived intangible assets. We also have recorded a preliminary estimate of $77.9 million goodwill at the acquisition date related to the business combination. When identifiable intangible assets, including in-process research and development (IPR&D) asset, are acquired, we determine the fair values of the assets as of the acquisition date. An income approach, which generally relies upon projected cash flow models, was used in estimating the fair value of the acquired intangible assets. Some of the more significant inputs and assumptions used in the intangible asset valuation include: the timing and probability of success of clinical events or regulatory approvals for the IPR&D asset; the estimated future cash flows from product sales resulting from approved products and IPR&D asset; the timing and projection of costs and expenses, including costs to complete the IPR&D asset; tax rates; and discount rates.

During the measurement period, if we obtain new information regarding facts and circumstances that existed as of the Closing Date that, if known, would have resulted in revised estimates of fair values of acquired assets, assumed liabilities or contingent consideration, the Company will accordingly revise its estimates of fair values and purchase price allocation.

Intangible assets with indefinite lives are not amortized but are tested for impairment at least annually or when indicators of impairment 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. Significant judgment is required in assessing the qualitative factors. 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. Estimating fair value of the indefinite-lived intangible assets require the use of significant estimates and assumptions. We rely upon cash flow projections attributable to the indefinite-lived intangible asset in estimating the fair value. Some of the more significant inputs and assumptions in estimating fair value are the same inputs and assumptions described above for estimating fair value of the acquired intangible assets.

Intangible assets with definite useful lives are amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When performing our impairment assessment for definite-lived intangible assets, we rely upon cash flow projections attributable to the asset group to determine if the carrying value of the asset group is recoverable, on an undiscounted cash flow basis. If the carrying value of a definite lived intangible asset is not recoverable, we will recognize impairment in the amount by which the carrying value of the asset exceeds its fair value. Some of the more significant inputs and assumptions in estimating fair value are the same inputs and assumptions described above for estimating fair value of the acquired intangible assets.

Table of Contents

Changes to assumptions used in the cash flow projections could result in an impairment. Impairments will be recorded within the impairment of intangible assets in our consolidated statements of earnings.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination and is not amortized. Goodwill is subject to impairment testing at least annually or more often if and when events or circumstances indicate goodwill may be impaired. We are organized and operate as a single reporting unit, and therefore the goodwill impairment test is performed using our overall market value compared to our book value of net assets at the reporting unit level.

Valuation of Contingent Consideration

We record contingent consideration resulting from a business combination at its fair value on the acquisition date. As of December 31, 2020, we recorded $76.7 million of contingent consideration liability. Some of the more significant inputs and assumptions used in determining the fair value of the contingent consideration include: probability and timing of milestone achievements, such as the probability and timing of obtaining regulatory approval; estimated amount and timing of projected revenues from the Products; and discount rates.

A contingent consideration liability arose in connection with the USWM Acquisition, which was accounted for as a business combination. During the measurement period, if we obtain new information regarding facts and circumstances that existed as of the Closing Date that, if known, would have resulted in revised estimates of fair values of acquired assets, assumed liabilities or contingent consideration, the Company will accordingly revise its estimates of fair values and purchase price allocation. In addition, on a quarterly basis, we revalue the contingent consideration liability and record increases or decreases in their fair value as an adjustment to operating earnings.

Changes to the contingent consideration liability can result from adjustments to discount rates, accretion of the discount rates due to the passage of time, changes in our estimates of the timing of achievement the milestones which includes both regulatory and developmental and commercial milestones, changes in the probability of certain clinical events or changes in the assumed probability associated with regulatory approval. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration expense recorded and, therefore, our results of operations in any given period.

Inventories Produced in Preparation of Product Launches

We capitalize inventories produced in preparation for product launches when future commercialization of a product is probable and when a future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the product. Capitalization of such inventory begins when we determine that (i) positive clinical trial results have been obtained in order to support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide future economic benefit, in excess of capitalized costs.

As of December 31, 2020, we capitalized $19.1 million of pre-launch inventory for SPN-812. In assessing and making the determination to capitalize inventory prior to product launch, we are required to use significant judgments and assumptions to evaluate and consider a number of factors, including: the product candidate’s current status in the regulatory approval process; results from the related pivotal clinical trial; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; historical experience; as well as potential impediments to approval; such as product safety or efficacy; commercialization potential; and market trends.

We estimate a range of likely commercial prices based on our comparable commercial products. We consider the product candidate’s stability data for all pre-approval production to date to determine whether there is an adequate expected shelf life for the capitalized pre-launch production costs. We also consider the likely selling price to determine if there is a sufficient profit margin to fully recover the cost of the inventory.

We periodically analyze our pre-launch inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value and write-down such inventories as appropriate. In addition, our products are subject to strict quality control and monitoring, which we perform throughout the manufacturing process. If certain batches or units of a product no longer meet quality specifications or become obsolete due to expiration, we record a charge to write down such unmarketable inventory to its estimated realizable value.

Table of Contents

Income taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are determined based on the difference between the financial reporting and tax reporting bases. These differences are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. If our estimate of the tax effect of reversing temporary differences is not reflective of actual outcomes, is modified to reflect new developments or interpretations of the tax law, revised to incorporate new accounting principles or changes in the expected timing or manner of the reversal, our results of operations could be materially impacted.

A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets will not be realized. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized based on all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, results of recent operations, and our historical earnings experience by taxing jurisdiction. Significant judgment is required in making this assessment and, to the extent future expectations change, we would assess the recoverability of our deferred tax assets at that time. If we determine that the deferred tax assets are not realizable in a future period, we will record adjustments to income tax expense in that period, and such adjustments may be material.

Uncertain tax positions, for which management's assessment is more than a 50% probability that the position will be sustained upon examination by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. Significant judgment is required in making this assessment, and, therefore, we re-evaluate uncertain tax positions and consider various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. Our estimates for unrecognized tax benefits may be subject to material adjustments until matters are resolved with taxing authorities or statutes expire. If our estimates are not representative of actual outcomes, our results of operations could be materially impacted.

Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2020, compared to the year ended December 31, 2019. Our Annual Report on Form 10-K for the year ended December 31, 2019, includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018, in Part II,

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

Revenues

Our primary source of revenue is from the sale of our commercial products. The table below lists our net product sales by product and royalty revenues from our collaborative licensing arrangements (dollars in thousands):

Years Ended December 31, Change

Net product sales

Net Product Sales

The $126.0 million and 33% increase in net product sales for the year ended December 31, 2020, as compared to the prior year, was primarily due to the inclusion of $91.0 million in net product sales, consequent to the completion of the USWM acquisition on June 9, 2020. The combined annual growth of Trokendi XR and Oxtellar XR was $35.0 million or 9% as compared to 2019.

Table of Contents

Trokendi XR net product sales increased by 8% in 2020 as compared to 2019. This increase was attributable to the favorable impact of the price increase taken in January 2020, coupled with favorable improvements in sales deductions that offset a decline in unit demand. Oxtellar XR net product sales increasedby 12% in 2020 as compared to 2019. This increase was primarily attributable to the favorable impact of both unit demand and a price increase in January 2020.

Sales deductions and related accruals

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

The following table provides a summary of activities with respect to accrued product returns and rebates for the years ended December 31, 2020 and 2019 (dollars in thousands):

Accrued Product Returns and Rebates

ProductRebates ProductReturns Allowance forSales Discounts Total

Provision

Adjustments relating to prior year sales (888) 549 (43) (382)

Provision

The total provision for sales deductions on gross product sales increased by $63.5 million, or approximately 16.8%, from $378.4 million in 2019 to $441.8 million in 2020. This increase was primarily attributable to the year over year increase in the provision for product rebates, from $306.5 million in 2019 to $350.1 million in 2020.

The year over year increase in the provision for product rebates of $43.5 million was primarily attributable to greater utilization of our patient co-pay programs and higher per patient payments under both Medicaid and commercial managed care programs.

The provision for product returns of $23.9 million in 2020 increased from $10.7 million in 2019. The increase is primarily due to unfavorable actual returns experienced in the first quarter of 2020 for discontinued Trokendi XR commercial blister pack configurations, for which all production and distribution ceased in 2017.

The provision for sales discounts increased by $6.8 million, from $61.1 million in 2019 to $67.9 million in 2020. The increase is due to impact of price increase.

Adjustments related to prior year sales were $13.8 million, which included the $10.7 million aforementioned adjustment for discontinued Trokendi XR configuration, against $509.4 million of net product sales in 2020 and $0.4 million against $383.4 million of net product sales in 2019.

Table of Contents

Royalty Revenue

Royalty revenue includes royalties from the following products (dollars in thousands):

Change

(1) Royalty from net product sales of Mydayis, a product of Takeda Pharmaceuticals Company Ltd.

(2) Noncash royalty revenue pursuant to an agreement with Healthcare Royalty Partners III, L.P. (HC Royalty). HC Royalty receives royalty payments from United Therapeutics Corporation (United Therapeutics), based on net product sales of United Therapeutics’ product Orenitram.

Royalty revenue increased by approximately $1.7 million, or 18%, in 2020 compared to 2019, primarily due to increased product sales of Orenitram.

Cost of Goods Sold

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

Change

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 good sold increased by $35.8 million to $52.5 million in 2020 as compared to 2019. The increase was primarily attributable to the inclusion of the cost of goods sold of the acquired products from the USWM Acquisition. Royalty payments associated with APOKYN and XADAGO made up the majority of this cost increase. Inventory and cost of goods sold associated with the acquired inventory balances for USWM Acquisition products were subject to a purchase accounting step-up in fair market value. Refer to Part II, Item 8—Financial Statements and Supplementary Data, Note 3, USWM Acquisition, in the Notes to the Consolidated Financial Statements for further discussion of the USWM Acquisition.

Table of Contents

Research and Development Expenses

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

Change

Direct Project Costs (1)

Indirect Project Costs (1)

(1) Direct costs, which include personnel costs and related benefits, are recorded on a project-by-project basis. Many of our R&D costs are not attributable to any individual project because we share resources across several development projects. Indirect costs that support a number of our R&D activities are recorded in the aggregate, including stock-based compensation.

(2) R&D program terminated in 2020.

(3) On April 21, 2020, we entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in treatment-resistant depression (TRD).

R&D expenses increased by $6.9 million in 2020 as compared to 2019. Thisincrease consists of a $10 million option fee paid in conjunction with the Navitor collaboration for SPN-820, a reduction of direct project costs of $4.5 million, and an increase in indirect project costs of $1.4 million.

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):

Change

Table of Contents

Selling and Marketing Expense

Selling and marketing expenses increased by $24.8 million in 2020 compared to the same period in 2019. The increase was primarily attributable to increased marketing expenses and professional consulting spend related to the commercial products, including the acquired commercial products from the USWM Acquisition and preparations for the launch of SPN-812.

General and Administrative Expense

General and administrative expenses increased by $22.7 million in 2020, compared to the same period in 2019. The change was primarily due to an increase in business development expenses, including $12.5 million of acquisition-related transaction cost and post-acquisition integration costs.

Amortization of Intangible Assets

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

Change

Amortization of intangible assets increased for the year ended December 31, 2020, primarily due to the amortization of the definite-lived intangible assets acquired in the USWM Acquisition.

Contingent Consideration Expense

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

Change

Contingent consideration expense $ 1,900 $ — $ 1,900 **

Contingent consideration expense recorded for the year ended December 31, 2020 of $1.9 million reflects the periodic fair value remeasurement of the contingent milestones payable to USWM in connection with the closing of the USWM Acquisition in June 2020. The expense recognized in 2020 is from the increase in the fair value of the contingent consideration liabilities, which was primarily due to the changes made in the assumptions on the expected timing of the achievement of milestones and changes to the estimate of projected revenues that did not qualify as measurement period adjustments.

During 2020, the Company recorded a measurement period adjustment of $40.9 million, which was recorded against goodwill and therefore did not have an impact on the results of operations in 2020. These measurement period adjustments were based on new information obtained by the Company regarding the facts and circumstances that existed as of the Closing Date of June 9, 2020. Refer to Note 3, USWM Acquisition in Item 8—Financial Statements and Supplementary Data in this report.

Other (Expense) Income

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

Change

Interest income includes primarily interest earned from cash, cash equivalents, and marketable securities holdings of $16.0 million and $21.3 million for the years ended December 31, 2020, and 2019, respectively. The year over year decrease in interest income, $2.9 million, was primarily due to decreased marketable securities holdings, mainly resulting from cash outlays for transaction related costs pertaining to the USWM Acquisition purchase price consideration plus the investment in Navitor and option fee paid to Navitor related to the NV-5138 (SPN-820) program license agreement.

Table of Contents

Both the interest expense related to the 2023 Notes issued in March 2018 and noncash interest expense related to our nonrecourse royalty liability generally remained unchanged from 2019 to 2020.

Income Tax Expense

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

Effective tax rate 24.7 % 23.3 %

The increase in our income tax expense was primarily due to year over year increase in earnings. The increase in the effective tax rate is primarily due to the favorable impact to the 2019 effective tax rate of a decrease in our uncertain tax position reserve because of the expiring statute of limitations.

Net Earnings

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

Change

The increase in net earnings was primarily due to increased net product sales generated from our commercial products, offset by period over period increased operating expenses, including transaction costs related to the USWM Acquisition.

Liquidity and Capital Resources

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, Trokendi XR, Oxtellar XR, APOKYN, MYOBLOC, and XADAGO, as well as the success of our product candidates if approved by the U.S. Food and Drug Administration (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 as we move forward with the anticipated commercial launch of SPN-812, assuming FDA approval, and the likely unfavorable impact of the upcoming loss of patent exclusivity for Trokendi XR in January 2023.

We believe our existing cash and cash equivalents, marketable securities, and cash received from product sales will be sufficient to finance ongoing operations, develop and launch our new products, and fund label expansions for existing products. To continue to grow our business over the long-term, we plan to commit substantial resources to: product development and clinical trials of product candidates; business development, including acquisitions and product in-licensing; and supportive functions such as compliance, finance, management of our intellectual property portfolio, information technology systems, and personnel. In each case, spending would be commensurate with the growth and needs of the business.

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.

Table of Contents

Financial Condition

Cash and cash equivalents, marketable securities, long term marketable securities, working capital, convertible notes, and total stockholder’s equity as of the periods presented below are as follows (dollars in thousands):

Total cash and cash equivalents, marketable securities, and long term marketable securities decreased in 2020 by $166.0 million to $772.9 million in 2020 compared to 2019.Transaction related uses of capital equaled $331.9 million, consisting of $298.5 million USWM Acquisition purchase price consideration, $8.4 million acquisition-related transaction costs, $15 million investment in Navitor and $10 million option fee paid to Navitor related to the NV-5138 (SPN-820) program license agreement. Net cash generated from operations of $138.4 million and net proceeds from the sale and maturity of marketable securities sales offset the transaction related outlays in 2020.

Working capital increased in 2020 as compared to 2019 by $73.3 million, primarily driven by increased operating earnings, reduced by incremental cash absorbed by operations in 2020.

As of December 31, 2020, 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, 2020. 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, the Company also entered into separate warrant transactions, issuing a total of 6,783,939 warrants (the Warrant Transactions). See Note 9, Convertible Senior Notes Due 2023 in the Notes to the Consolidated Financial Statements for further discussion of the 2023 Notes and our other indebtedness.

Stockholders’ equity increased in 2020 as compared to 2019 by $149.4 million, primarily due to net earnings of $127.0 million, issuance of common stock of $4.4 million, and share-based compensation of $16.6 million.

Summary of Cash Flows

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

December 31,

Net cash provided by (used in):

Net change in cash and cash equivalents $ 107,259 $ (10,867)

Table of Contents

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, $138.4 million, was primarily driven by increased operating earnings, reduced by incremental cash absorbed by increased working capital.

Cash utilized in working capital reflects the timing impacts of cash collections on receivables and settlement of payables, as described below.

The changes in cashflows related to operating assets and liabilities are as follows (dollars in thousands):

Years Ended December 31,

(Increase) Decrease in:

Increase (Decrease) in:

Table of Contents

Investing Activities

Net cash used in investing activities decreased by $123.2 million, for the year ended December 31, 2020, from $157.9 million in 2019 to $34.7 million in 2020. The change in 2020 primarily reflects the sale of marketable securities of $378.4 million in 2020, offset by outlays for the USWM Acquisition of $298.5 million, the equity investment in Navitor of $15.0 million and the purchase of marketable securities of $95.9 million. Purchases of marketable securities of $409.7 million in 2019 resulted from investment of excess cash in long-term marketable securities.

Financing Activities

Net cash provided by financing activities decreased to $3.6 million for the year ended December 31, 2020 from $3.9 million provided in the same period in 2019. This year over year change is primarily attributable to cash outflows from finance lease activity partially offset by the increase in proceeds from the issuance of common stock

Contractual Obligations and Commitments

The following table summarizes our non-cancellable long-term contractual obligations and commitments as of December 31, 2020, except as noted below (dollars in thousands):

(1) Relates to the 2023 Notes (see Note 6, Convertible Senior Notes due 2023, in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report.)

(2) Our commitments for operating leases relate to our leases of fleet vehicles and the lease of the current headquarters office and laboratory space, as of December 31, 2020.

(3) As part of the USWM Acquisition, the Company assumed the remaining commitments of USWM Enterprises and its subsidiaries. Under the contract manufacturing agreement with Merz for the manufacture and supply of MYOBLOC, NeuroBloc and NerBloc (finished products), the Company has an annual minimum purchase quantity requirement of finished products amounting to an estimated €3.0 million. In addition, the existing license and distribution agreement for XADAGO requires an annual minimum promotional spend to support the marketing of XADAGO for the first five years of the agreement. As of December 31, 2020, the remaining contractual obligation is $3.7 million for the period from June 2021 to July 2022. (See Note 3, USWM Acquisition, for further discussion on the USWM Acquisition and Note 10, Leases, for further discussion on the finance lease related to the Merz Agreement, in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report).

(4) This table does not include the following:

•contingent consideration milestones payable related to the USWM Acquisition. (See Note 3, USWM Acquisition, in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further discussion on the USWM Acquisition).

•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, as the timing, and likelihood of such payments are not known.

•any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known.

•contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above.

Table of Contents

•agreements related to product sales deduction liabilities for our commercial products.

•obligations from the Development Agreement with Navitor. In April 2020, the Company entered into the Development Agreement with Navitor. 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.

•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.

•nonrecourse liability as of December 31, 2020. We are contractually obligated to pay to HC Royalty all royalty payments earned by us under a licensing agreement with United Therapeutics for Orenitram. Although we have recorded a liability of $18.7 million as of December 31, 2020, related to this obligation, it is a non-recourse liability for which we have no obligation to make any cash payments to HC Royalty under any circumstances. Accordingly, this obligation has no impact on our liquidity at any time, hence the non-recourse liability has not been included in the table above.

We have also entered into a purchase and sale agreement with Rune HealthCare Limited (Rune), where we obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments owing to Rune under this agreement. If we receive approval to market and sell any products based on the Rune product concept for SPN-809, we will be obligated to pay royalties at a low single digit percentage rate on worldwide net product sales.

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The primary objective of our investment activities is to preserve our capital to fund operations and to facilitate business development activities. We also seek to maximize income from our investments without assuming significant interest rate risk, liquidity risk, or risk of default by investing in investment grade securities with maturities of four years or less. Our exposure to market risk is confined to investments in cash, cash equivalents, marketable securities, and long term marketable securities. As of December 31, 2020, we had unrestricted cash, cash equivalents, marketable securities, and long term marketable securities of $772.9 million.

In connection with the 2023 Notes, we have separately entered into Convertible Note Hedge Transactions and Warrant Transactions to reduce the potential dilution of the Company’s common stock upon conversion of the 2023 Notes, and to partially offset the cost to purchase the Convertible Note Hedge Transactions, respectively.

Our cash and cash equivalents consist primarily of cash held at banks and investments in highly liquid financial instruments with an original maturity of three months or less. Our marketable securities, which are reported at fair value, consist of investments in U.S. Treasury bills and notes; bank certificates of deposit; various U.S. governmental agency debt securities; corporate and municipal debt securities; and other fixed income securities. We place all investments with governmental, industrial, or financial institutions whose debt is rated as investment grade. We generally hold these securities to maturities of one to four years. Because of the relatively short period that we hold our investments and because we generally hold these securities to maturity, we do not believe that an increase in interest rates would have any significant impact on the realizable value of our investments. We do not have any currency or other derivative financial instruments other than outstanding warrants to purchase common stock and the convertible note hedges.

Table of Contents

We may contract with clinical research organizations (CROs) and investigational sites globally. Currently, we have only one ongoing trial, for SPN-817, outside the U.S. We do not hedge our foreign currency exchange rate risk. Transactions denominated in currencies other than the U.S. dollar are recorded based on exchange rates at the time such transactions arise. As of December 31, 2020, and December 31, 2019, substantially all of our liabilities were denominated in the U.S. dollar.

Inflation generally affects us by increasing our cost of labor and the cost of services provided by our vendors. We do not believe that inflation and changing prices over the years ended December 31, 2020, and 2019 had a significant impact on our consolidated results of operations.

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Supernus Pharmaceuticals, Inc.

Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm 86

Consolidated Balance Sheets 90

Consolidated Statements of Earnings 91

Consolidated Statements of Comprehensive Earnings 92

Consolidated Statements of Changes in Stockholders' Equity 93

Consolidated Statements of Cash Flows 94

Notes to Consolidated Financial Statements 95

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Supernus Pharmaceuticals, Inc.:

Opinion on the ConsolidatedFinancial Statements

We have audited the accompanying consolidated balance sheets of Supernus Pharmaceuticals, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive earnings, changes in stockholders’ equity, and cash flows for each of the years in the three‐year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‐year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have 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, 2020, 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 March 8, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated 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 consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accrued sales deductions related to product returns

As disclosed in Notes 2 and 17 to the consolidated financial statements, the Company recorded accrued product returns of $29,603 (dollars in thousands) as of December 31, 2020. The related provision for product returns is reflected as a reduction of gross product sales, and is recorded at the time of sale when the customer takes title to the product. Sale of the Company’s products are not subject to a general right of return; however, the Company will accept return of expired product six months prior to and up to 12 months subsequent to the product’s expiry date. The Company's products have a shelf life of up to 48 months from date of manufacture.

We identified the evaluation of accrued sales deductions related to Trokendi XR and Oxtellar XR product returns, and specifically the assessment of the expected long-term return rates, as a critical audit matter. The assessment of the expected long-term return rates included a comparison to actual returns experience and involved a high degree of auditor judgment due to the significant passage of time between product sale and the time at which the Company issues credit for expired product.

Table of Contents

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the accrued sales deductions process. This included a control over the expected long-term return rate assumptions used in estimating the accrued product returns. We assessed the Company’s long-term return rate assumptions by evaluating the consistency of those assumptions with the trend of actual historical return rates. We compared prior period expected long-term return rate assumptions against actual return rates experience.

Fair value of IPR&D asset

As discussed in Note 3 to the consolidated financial statements, the Company recorded $123,000 (dollars in thousands) for an acquired in process research and development intangible (IPR&D) asset as a result of the acquisition of US WorldMeds Partners, LLC on June 9, 2020. The acquired IPR&D asset is related to the infusion pump product candidate used in the treatment of Parkinson’s patients, for which the Company determined the estimated fair value using an income approach. The fair value of the IPR&D asset is based on the projected cash flows from the infusion pump, which include estimates of revenues, expenses, and operating profit, and risks related to the viability of and commercial potential for alternative treatments. The projected cash flows were discounted at a rate commensurate with their associated level of risk.

We identified the evaluation of the fair value of the IPR&D asset as a critical audit matter. Specifically, a high degree of auditor judgment was required to evaluate the timing and amount of projected revenues associated with the infusion pump.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s IPR&D asset valuation process, including controls related to the assessment of the timing and amount of projected revenue associated with the infusion pump. We evaluated the Company’s assumptions for the timing and amount of projected revenue from commercialization of the pump by comparing to relevant industry data and studies. We performed sensitivity analysis around the timing and amount of the projected revenue compared to industry data and studies.

/s/ KPMG LLP

We have served as the Company's auditor since 2015.

Baltimore, Maryland

March 8, 2021

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Supernus Pharmaceuticals, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Supernus Pharmaceuticals, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive earnings, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated March 8, 2021 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired USWM Enterprises during 2020, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, USWM Enterprises’ internal control over financial reporting associated with total assets of 8.8% (excluding the goodwill and other intangible assets, which are included within the scope of the assessment) and total revenues of 17.5% included in the consolidated financial statements of the Company as of and for the year ended December 31, 2020. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of USWM Enterprises.

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 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 of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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.

Table of Contents

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/ KPMG LLP

Baltimore, Maryland

March 8, 2021

Table of Contents

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

Assets

Current assets

Prepaid expenses and other current assets 18,682 11,611

Deferred income taxes — 32,063

Liabilities and stockholders’ equity

Current liabilities

Accounts payable and accrued liabilities $ 78,934 $ 49,714

Contingent consideration, current portion 30,900 —

Contingent consideration, long term 45,800 —

Operating lease liabilities, long term 28,579 30,440

Deferred income tax liabilities 35,215 —

Stockholders’ equity

Accumulated other comprehensive earnings, net of tax 8,975 7,417

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Earnings

(in thousands, except share and per share data)

Years Ended December 31,

Revenue

Licensing revenue — — 750

Costs and expenses

Contingent consideration expense 1,900 — —

Other (expense) income

Earnings per share

Weighted-average shares outstanding

(a) Excludes amortization of acquired intangible assets.

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Earnings

(in thousands)

Years Ended December 31,

Other comprehensive earnings (loss):

Unrealized gain (loss) on marketable securities, net of tax 1,558 10,575 (2,411)

Other comprehensive earnings (loss), net of tax 1,558 10,575 (2,411)

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2018, 2019 and 2020

(in thousands, except share data)

Shares Amount

Cumulative effect of adoption of ASC 606 — — — — 2,322 2,322

Equity issued on conversion of convertible notes — — 56,215 — — 56,215

Purchase of convertible note hedges, net of tax — — (70,137) — — (70,137)

Unrealized loss on marketable securities, net of tax — — — (2,411) — (2,411)

Unrealized gain on marketable securities, net of tax — — — 10,575 — 10,575

Unrealized gain on marketable securities, net of tax — — — 1,558 — 1,558

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Years Ended December 31,

Cash flows from operating activities

Amortization of deferred financing costs and debt discount 16,581 15,708 11,848

Realized gains from sales of marketable securities (4,352) (301) —

Changes in fair value of contingent consideration 1,900 — —

Deferred income tax (benefit) provision 568 (5,832) (4,167)

Changes in operating assets and liabilities:

Cash flows from investing activities

Acquisition of USWM, net of cash acquired (298,541) — —

Investment in Navitor Pharmaceuticals, Inc. (15,000) — —

Purchases of property and equipment (3,449) (2,736) (844)

Cash flows from financing activities

Proceeds from issuance of convertible notes — — 402,500

Convertible notes issuance financing costs — — (10,435)

Proceeds from issuance of warrants — — 65,688

Payments on finance lease liability (802) — (92,897)

Supplemental cash flow information:

Cash paid for interest on convertible notes $ 2,516 $ 2,516 $ 1,342

Cash paid for Biscayne acquisition $ — $ — $ 15,000

Noncash investing and financing activity:

Contingent consideration liability related to USWM acquisition $ 76,700 $ — $ —

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

1. Organization and Business

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a biopharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. The Company's diverse neuroscience portfolio includes approved treatments for epilepsy, migraine, hypomobility in Parkinson’s Disease, cervical dystonia, and chronic sialorrhea. The Company is developing a broad range of novel CNS product candidates including new potential treatments for attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson’s disease, epilepsy, depression, and rare CNS disorders.

The Company has five commercial products: Trokendi XR, Oxtellar XR, APOKYN, XADAGO, and MYOBLOC. In addition, the Company has two late-stage development products included in its product candidates portfolio.

2020 USWM Acquisition and Navitor Development Agreements

On April 21, 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in treatment-resistant depression (TRD). Refer to Note 12, Investments in Unconsolidated VIEs, for further discussion on the Navitor Development Agreement.

On April 28, 2020, the Company entered into a Sale and Purchase Agreement with US WorldMeds Partners, LLC to acquire the CNS portfolio of USWM Enterprises, LLC (USWM Enterprises) (USWM Acquisition). With the acquisition, completed on June 9, 2020, the Company added three established commercial products, APOKYN, XADAGO, and MYOBLOC, and a product candidate in late-stage development, SPN-830 (apomorphine infusion pump), to its portfolio. Refer to Note 3, USWM Acquisition, for further discussion on the USWM Acquisition.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).

The Company, which is primarily located in the United States (U.S.), operates in one operating segment.

Reclassifications

Certain prior year amounts in the consolidated balance sheets, statements of cashflows, and statements of earnings have been reclassified to conform to the current year presentation, including a reclassification made to present amortization of intangible assets separately. This was previously included in Selling, general and administrative expenses and now is recorded as a component of Amortization of intangible assets on the consolidated statements of earnings. These reclassifications did not affect operating earnings or other consolidated financial statements for the years ended December 31, 2020, 2019, and 2018.

Consolidation

The Company’s consolidated financial statements include the accounts of: Supernus Pharmaceuticals, Inc.; Supernus Europe Ltd.; Biscayne Neurotherapeutics, Inc. and its wholly owned subsidiary; MDD US Enterprises, LLC (formerly USWM Enterprises, LLC) and its wholly owned subsidiaries. These are collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

The consolidated financial statements reflect the consolidation of entities in which the Company has a controlling financial interest. In determining whether there is a controlling financial interest, the Company considers if it has a majority of the voting interests of the entity, or if the entity is a variable interest entity (VIE) and if the Company is the primary beneficiary. In determining the primary beneficiary of a VIE, the Company evaluates whether it has both: the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and the obligation to absorb losses of, or the right to receive benefits from the VIE that could potentially be significant to that VIE. The Company's judgment with respect to its level of influence or control of an entity involves the consideration of various factors, including the form of an ownership interest; representation in the entity’s governance; the size of the investment; estimates of future cash flows; the ability to participate in policymaking decisions; and the rights of the other investors to participate in the decision making process, including the right to liquidate the entity, if applicable. If the Company is not the primary beneficiary of the VIE, and an ownership interest is maintained in the entity, the interest is accounted for under the equity or cost methods of accounting, as appropriate.

The Company continuously assesses whether it is the primary beneficiary of a VIE as changes to existing relationships or future transactions may affect its conclusions.

Use of Estimates

The Company bases its estimates on historical experience; various forecasts; information received from its service providers; information from other sources, including public and proprietary sources; and other assumptions that the Company believes are reasonable under the circumstances. Actual results could differ materially from the Company’s estimates. The Company periodically evaluates the methodologies employed in making its estimates on an ongoing basis.

The extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition and results of operations is highly uncertain and subject to change. As a result, certain of our estimates and assumptions, including the provision for sales deductions, the creditworthiness of customers entering into revenue arrangements, the valuation of the assets and liabilities acquired in the USWM Acquisition, and the fair values of our financial instruments, require increased judgment and carry a higher degree of variability and volatility that could result in material changes to our estimates in future periods.

Cash and Cash Equivalents

The Company considers all investments in highly liquid financial instruments with an original maturity of three months or less to be cash equivalents.

Marketable Securities

Marketable securities consist of investments in U.S. Treasury bills and notes; bank certificates of deposit; various U.S. government agency debt securities; corporate and municipal debt securities; and other fixed income securities. The Company places all investments with governmental, industrial, or financial institutions whose debt is rated as investment grade.

The Company's investments are classified as available-for-sale and are carried at fair value. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

Any unrealized holding gains or losses on debt securities, including their tax effect, are reported as components of Other comprehensive earnings (loss) in the consolidated statement of comprehensive earnings. Realized gains and losses, included in Interest and other income, net in the consolidated statement of earnings, are determined using the specific identification method for determining the cost of securities sold.

The Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020, using the allowance approach. Declines in fair value below amortized cost related to credit losses (i.e., impairment due to credit losses) are included in the consolidated statement of earnings, with a corresponding allowance established. If the estimate of expected credit losses decreases in subsequent periods, the Company will reverse the credit losses through current period earnings and adjust the allowance accordingly. Refer to Recently Issued Accounting Pronouncements in this Note 2.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Business Combinations and Contingent Considerations

In determining whether an acquisition should be accounted for as a business combination or as an asset acquisition, the Company makes certain judgments regarding whether the acquired set of activities and assets meets the definition of a business. Significant 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.

If the acquired set of activities and assets does not meet the definition of a business, the transaction is accounted for as an asset acquisition. In an asset acquisition, any acquired research and development that does not have an alternative future use is charged to expense as of the acquisition date, and no goodwill is recorded.

If the acquired set of activities and assets meets the definition of a business, the Company applies the acquisition method of accounting and accounts for the transaction as a business combination. In a business combination, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, if applicable, is recorded as goodwill. The Company accounted for the USWM Acquisition as a business combination.

In a business combination, the operating results of the acquired business are included in the Company’s consolidated statement of earnings, beginning on the effective acquisition date. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Significant judgment is involved in the determination of the fair value assigned to assets acquired and liabilities assumed in a business combination, as well as the estimated useful lives of assets. These estimates can materially affect our consolidated results of operations and financial position. The fair value of intangible assets, including acquired in-process research and development (IPR&D), are determined using information available as of the acquisition date and are based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include but are not limited to: the probability of regulatory approval, revenue growth, and appropriate discount rate. Depending on the facts and circumstances, the Company may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.

While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed as of the acquisition date, estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information related to facts and circumstances existing as of the acquisition date and evaluate these estimates and assumptions. The Company records any adjustments to the Company’s preliminary estimates to goodwill based on the facts and circumstances existing as of the acquisition date (measurement period adjustments).

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to our consolidated statements of earnings in the period that these adjustments are identified.

Contingent Considerations

The USWM Acquisition involved potential future payments contingent upon the achievement of certain milestones primarily related to the development and commercial sale of the acquired IPR&D, SPN-830 (apomorphine infusion pump), including product development milestones and sales-based milestone payments on future product sales. The fair value of the contingent consideration liability is determined as of the acquisition date using estimated or forecast inputs. These inputs include the estimated amount and timing of projected revenues, probability and timing of milestone achievement, probability of IPR&D achieving regulatory approval, revenue volatility, and the estimated discount rates and risk-free rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period prior to the resolution of the contingency, the contingent consideration liability is remeasured at current fair value, with changes recorded in earnings in the period of remeasurement.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

The determination of the initial and subsequent fair value of the contingent consideration liability requires significant judgment by management. Changes in any of the inputs not related to facts and circumstances existing as of the acquisition date may result in a significant fair value adjustment, which can impact the results of operations in the period in which the adjustment is made. Changes that are not measurement period adjustments are reported on the consolidated statement of earnings in Contingent consideration expense.

Additional information regarding the USWM Acquisition is included in Note 3, USWM Acquisition.

Accounts Receivable, Net

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts due from customers, less an allowance for doubtful accounts, sales discounts, and sales allowances. The Company extends credit without requiring collateral.

The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors, including: the financial condition and payment history of customers; an overall review of collections experience on other accounts; and economic factors or events expected to affect future collections experience. Payment terms for receivables are based on customary commercial terms and are predominantly less than one year.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk concentrations consist of cash, cash equivalents, marketable securities, and accounts receivable. The counterparties are various corporations, governmental institutions, and financial institutions of high credit standing.

Substantially all of the Company's cash, cash equivalents, and marketable securities are maintained in U.S. government agency debt and debt of well-known, investment grade corporations. Deposits held with banks may exceed the amount of governmental insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and therefore, these bear minimal default risk.

The following table shows the percentage of the Company's sales made to and percentage of accounts receivables from wholesalers and distributors representing more than 10% of the Company's total net product sales and more than 10% of the Company's accounts receivables, net:

Percentage of Net Product Sales Percentage of Accounts Receivable, net

Refer to Note 4, Disaggregated Revenues, for the concentration of net product sales.

Inventories

Inventories are recorded at the lower of cost or net realizable value, include materials, labor, direct costs and indirect costs. These are valued using the first-in, first-out method. The Company writes down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value. Expired inventory is destroyed, and the related costs are recognized as Cost of goods sold in the consolidated statement of earnings.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Inventories Produced in Preparation of Product Launches

The Company capitalizes inventories produced in preparation for product launches when future commercialization of a product is probable and when a future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the product. Capitalization of such inventory begins when the Company determines that (i) positive clinical trial results have been obtained in order to support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide a future economic benefit in excess of capitalized costs.

In evaluating whether these conditions are met, the Company considers the following factors: the product candidate’s current status in the regulatory approval process; results from the related pivotal and supportive clinical trials; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; completion of the regulatory applications; consequent acceptance by the regulatory agency; potential impediments to the approval process such as product safety or efficacy concerns, potential labeling restrictions, and other impediments: historical experience with manufacturing and commercializing similar products as well as the manufacture of the relevant product candidate; and the Company’s manufacturing environment, and supply chain in determining logistical constraints that could hamper approval or commercialization.

In assessing the economic benefit that the Company is likely to realize, the Company considers the shelf life of the product in relation to the expected timeline for approval; patent related or contractual issues that may prevent or delay commercialization and product stability data of all pre-approval production to assess the adequacy of expected shelf life; viability of commercialization taking into account competitive dynamics in the marketplace and market acceptance; and anticipated future sales and anticipated reimbursement strategies that may prevail with respect to the product, to determine product profit margin.

In applying the lower of cost or net realizable value to pre-launch inventory, the Company estimates a range of likely commercial prices based on the pricing of competitive commercial products and pre-launch discussions with managed care providers.

The Company could be required to write down previously capitalized costs related to pre-launch inventories upon a change in facts and circumstances, including, among other potential factors, a denial or significant delay of approval by regulatory bodies, a delay in commercialization, or other adverse factors.

Intangible Assets

Intangible assets consist of definite-lived intangible assets: acquired developed technology and product rights, and patent defense costs, and an indefinite-lived intangible asset: acquired IPR&D.

Patent defense costs are legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Patent defense costs are charged to expense in the event of an unsuccessful litigation outcome.

Definite-lived intangible assets are carried at cost less accumulated amortization, with amortization calculated on a straight line basis over the estimated useful lives of the assets. The Company evaluates the estimated remaining useful life of its intangible assets annually, or when events or changes in circumstances warrant a revision to the remaining periods of amortization.

Acquired IPR&D in a business combination is considered an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon successful completion of the project, the Company will determine as to the then-useful life of the intangible asset. This is generally determined as the period over which the substantial majority of the cash flows are expected to be generated. The capitalized amount is then amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. During the period prior to completion or abandonment, the IPR&D asset is not amortized but tested for impairment on an annual basis or when potential indicators of impairment are identified.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment, operating and finance lease assets, and definite-lived intangible assets. The Company assesses the recoverability of its long-lived assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset would be compared to the carrying value of the asset to determine whether the asset's value is recoverable. If impairment is determined, the Company writes down the asset to its estimated fair value and records an impairment loss equal to the excess of the carrying value of the long-lived asset over its estimated fair value in the period at which such a determination is made.

Impairment of Indefinite-Lived Intangible Assets

For indefinite-lived intangible assets, such as the acquired IPR&D asset, the Company evaluates impairment annually in the fourth quarter or more frequently if impairment indicators exist. The annual evaluation is generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. The Company considers various factors including but is not limited to significant or adverse changes in the legal and regulatory environment, adverse clinical trial results, significant trial delays, inability to obtain governmental approval, inability to commercialize a product candidate the introduction or advancement of competitive products, and product candidates, or other events that indicate it is more likely than not that fair value is less than its carrying value. If the Company is unable to conclude whether the indefinite-lived intangible asset is not impaired after considering the totality of events and circumstances during its qualitative assessment, the Company performs a quantitative assessment by estimating the fair value of the indefinite-lived intangible asset and comparing the fair value to the carrying amount. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, the Company writes down the indefinite-lived intangible asset to its estimated fair value, and an impairment loss equal to the difference between the assets fair value and carrying value is recognized in the consolidated statement of earnings in the period at which such determination is made.

Evaluating for goodwill impairment requires judgment, including evaluating current economic and competitive circumstances, estimating future cash flows, future growth rates, future profitability, and the expected life over which projected cash flows would occur.

Goodwill and Goodwill Impairment Assessment

Goodwill is calculated as the excess of the consideration paid consequent to completing an acquisition compared to the net assets recognized in a business combination. Goodwill represents the future economic benefits from the other acquired assets that could not be individually identified and separately quantified.

The Company evaluates goodwill for possible impairment at least annually (during the fourth quarter of each fiscal year), or more often, if and when events and circumstances indicate that goodwill may be impaired. The annual evaluation is generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. This includes but is not limited to significant adverse changes in the business climate, market conditions, or other events that indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the Company is unable to conclude whether the goodwill is not impaired after considering the totality of events and circumstances during its qualitative assessment, the Company performs a quantitative assessment by estimating the fair value of the reporting unit and comparing the fair value to the carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the Company writes down the goodwill to the estimated fair value, and an impairment loss equal to the difference is recognized in the consolidated statement of earnings in the period at which such determination is made.

Evaluating for impairment requires judgment, including identifying reporting units and estimating future cash flows. The Company estimates the fair values of its reporting unit using discounted cash flow models or other valuation models, such as comparative transactions or market multiples.

100

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Interest Expense

Interest expense includes stated interest and the amortization of deferred financing costs and debt discount incurred by the Company in connection with the issuance of $402.5 million of 0.625% Convertible Senior Notes due 2023, (see Note 6). The Company amortizes the deferred financing costs and debt discount over the term of the debt, using the effective interest method.

Revenue Recognition

The Company recognizes revenue in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company does not adjust revenue for any financing effects in transactions where the Company expects the period between the transfer of the goods or services and collection to be less than one year.

No contract assets or liabilities were recorded as of December 31, 2020, or 2019.

Revenue from Product Sales

The Company’s customers are primarily pharmaceutical wholesalers, specialty pharmacies, and pharmaceutical distributors. Customers purchase product to fulfill orders from retail pharmacy chains and independent pharmacies of varying size and purchasing power. The Company recognizes gross revenue when its products are shipped from a third party fulfillment center and physically received by its customers. The Company's customers take control of its products, including title and ownership, upon the physical receipt of its products at their facilities. Customer orders are generally fulfilled within a few days of order receipt, resulting in minimal order backlog. There are no minimum product purchase requirements with our customers.

The Company recognizes revenue from product sales in an amount that reflects the consideration the Company expects to ultimately receive in exchange for those goods. Product sales are recorded net of various forms of variable consideration, including: provision for estimated rebates; provision for estimated future product returns; and an estimated provision for discounts. These are collectively considered "sales deductions."

As described below, variability in the net transaction price for the Company’s products arises primarily from the aforementioned sales deductions. Significant judgment is required in estimating certain sales deductions. In making these estimates, the Company considers: 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. The Company adjusts its estimates of revenue either when the most likely amount of consideration it expects 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, the Company adjusts its 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.

Sales Deductions

The Company records product sales net of the following sales deductions:

Rebates:

Rebates are discounts which the Company pays 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 the Company with managed care providers. Both types of rebates vary over time.

Public sector rebate programs encompass: various Medicaid drug rebate programs; Medicare gap coverage programs; programs covering public health service institutions; and programs covering government entities. All federal employees and agencies purchase drugs under the Federal Supply Schedule.

101

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Private sector rebate programs include: contractual agreements with managed care providers, under which the Company pays fees to gain access to that provider’s patient drug formulary; and Company-sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise be obligated to pay to their managed care provider in order to fill their prescription.

Rebates are owed upon dispensing our product to a patient; i.e., filling a prescription. The accrual balance for rebates consists of the following three components. First, because rebates are generally invoiced and paid in arrears, the accrual balance consists of an estimate of the amount expected to be incurred for prescriptions dispensed in the current quarter. Second, the accrual balance also includes an estimate for known or estimated prior quarters’ unpaid rebates, covering those prescriptions dispensed in past quarters but for which no invoice has yet been received. Third, the accrual balance includes an estimate for rebates that will be prospectively owed for prescriptions filled in future quarters. This estimate pertains to a product that has been sold by the Company to wholesalers or distributors and which resides either as wholesaler/distributor inventory or as inventory held at pharmacies. As of the end of the reporting period, this product has not been dispensed to a patient.

The Company’s estimates of expected rebate claims vary by program and by type of customer because the period between the date at which the prescription is filled and the date the Company receives and pays the invoice varies substantially. For each of its products, the Company bases its estimates of expected rebate claims on multiple factors, including: historical levels of deductions; contractual terms with managed care providers; actual and anticipated changes in product price; prospective changes in managed care fee for service contracts; prospective changes in co-payment assistance programs; and anticipated changes in program utilization rates; i.e., patient participation rates under each specific program.

The Company records an estimated liability for rebates at the time the customer takes title to the product (i.e., at the time of sale to wholesalers/distributors). This liability is recorded as a reduction to gross product sales, and an increase in Accrued product returns and rebates. The liability is recorded as a component of current liabilities on the consolidated balance sheets.

The sensitivity of the Company’s estimates to subsequent adjustment varies by program and by type of customer. If actual rebates vary from estimated amounts, the Company adjusts the balances of such accrued rebates to reflect actual experience. These adjustments could materially affect the estimated liability balance, net product sales, and earnings in the period in which these adjustments are made.

Returns:

Sales of the Company’s products are not subject to a general right of return. A product that has been used to fill patient prescriptions is no longer subject to any right of return. However, the Company will accept a return of product that is damaged or defective when shipped from its third party fulfillment centers.

The Company will also accept a return of expired product six months prior to and up to 12 months subsequent to the product’s expiry date for certain products. Expired or defective returned product cannot be re-sold and is therefore destroyed.

The Company records an estimated liability for product returns at the time the customer takes title to the product (i.e., at time of sale). The liability is reflected as a reduction to gross product sales, and an increase in Accrued product returns and rebates. This liability is recorded as a component of current liabilities on the consolidated balance sheets. The Company estimates the liability for returns primarily based on the actual returns experience for its commercial products.

Because the Company’s products have a shelf life up to 48 months from the date of manufacture, and because the Company accepts return of product up to 12 months post its expiry date, there is a time lag of several years between the time when the product is sold and the time when the Company issues credit on the expired product.

The Company’s returns policy generally permits product returns to be processed at the current wholesaler price rather than at historical acquisition price; hence, the Company’s estimated liability for product returns is affected by price increases taken subsequent to the date of sale and prior to its return.

At the time the Company adjusts its estimates for product returns, such adjustment affects the estimated liability, product sales, and earnings in the period of adjustment. Those adjustments may be material to our financial results.

102

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Sales discounts:

Distributors and wholesalers of the Company's pharmaceutical products are generally offered various forms of consideration, including allowances, service fees and prompt payment discounts, for distributing our products. Distributor and wholesaler allowances and service fees arise from contractual agreements and are estimated as a percentage of the price at which the Company sells product to them. In addition, distributors and wholesalers are offered a prompt pay discount for payment within a specified period. Prompt pay discounts are estimated as a percentage of the price at which the Company sells product.

The Company accounts for these discounts at the time of sale as a reduction to gross product sales.

License Revenue

The Company has entered into collaboration agreements to commercialize certain of its products outside of the U.S. Those agreements include the right to use the Company’s intellectual property as a functional license and generally include an up-front license fee and ongoing milestone payments upon the achievement of certain specific events. These agreements may also require minimum royalty payments based on sales of products that use the applicable intellectual property.

Up-front license fees are recognized once the license has been executed between the Company and its licensee.

Milestones are a form of variable consideration recognized when either the underlying events have transpired (i.e., event-based milestone) or when the sales-based targets have been met by the collaborative partner (i.e., sales-based milestone). Both types of milestone payments are nonrefundable. The Company evaluates whether achieving the milestone is considered probable and estimates the amount of the milestone to be included in the transaction price using the most likely amount method. The value of the associated milestone is not included in the transaction price if it is probable that a significant revenue reversal would occur. This estimation is based on management’s judgment and may require assessing factors that are outside of the Company’s influence, such as: likelihood of regulatory success; availability of third party information; and expected time period until achievement of the event. These factors are evaluated based on the specific facts and circumstances.

Event-based milestones are recognized in the period that the related event, such as regulatory approval, occurs. Milestones that are not within the control of the Company, such as approval from regulatory authorities, or where attainment of the specified event is dependent on the success of a third-party, are not considered probable until the specified event occurs.

Sales-based milestones are recognized as revenue only when the sales-based target is achieved.

There are no guaranteed minimum amounts owed to the Company related to license and collaboration agreements.

Royalty Revenue

The Company recognizes noncash royalty revenue for amounts earned pursuant to its royalty agreement with United Therapeutics Corporation (United Therapeutics), based on estimated product sales of Orenitram by United Therapeutics (see Note 4). This agreement includes the right to use the Company’s intellectual property as a functional license.

In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 21). Consequent to this agreement, the Company recorded a nonrecourse liability related to this transaction and amortizes this liability as noncash royalty revenue. Sales of Orenitram by United Therapeutics result in payments from United Therapeutics to HC Royalty, in accordance with this agreement.

The Company also recognizes noncash interest expense related to the nonrecourse liability and accrues interest expense at an estimated effective interest rate (see Note 19). This interest rate is determined based on projections of HC Royalty’s rate of return.

Royalty revenue also includes cash royalty amounts received from other collaboration partners, including from Takeda Pharmaceutical Company Ltd., based on net product sales of Takeda's product, Mydayis, in the current period. Royalty revenue is only recognized when the underlying product sale by Takeda has occurred. The Takeda arrangement also includes Takeda's right to use the Company’s intellectual property as a functional license.

103

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

There are no guaranteed minimum amounts owed to the Company related to any of these royalty revenue agreements.

Cost of Goods Sold

The cost of goods sold consists primarily of materials; third-party manufacturing costs; freight and distribution costs; direct labor; cost of royalties; cost to write down inventory to net realizable value and manufacturing overhead costs, including quality control and assurance.

Research and Development Expenses

Research and development expenditures are expensed as incurred. These expenses include: employee salaries, benefits, and share-based compensation; cost of contract research and development services provided by third parties; costs for preclinical and clinical studies; cost of acquiring or manufacturing clinical trial materials; regulatory costs; research facilities costs; depreciation expense and allocated occupancy expenses; and license fees and milestone payments related to in-licensed products and technologies. Acquired IPR&D assets that are used for research and development and have no future alternative use are expensed as incurred in-process research and development.

The Company estimates preclinical and clinical trial expenses based on services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs), and other service providers that perform services on the Company’s behalf. In recording service fees, the Company estimates the cost of those services performed on behalf of the Company during the current period and compares those costs with the cumulative expenses recorded and payments made for such services. As appropriate, the Company accrues additional expense for services that have been delivered or defers nonrefundable advance payments until the related services are performed.

If the actual timing of the performance of services or the level of effort varies from our estimate, the Company adjusts its accrued expenses, or its deferred advance payments, accordingly. If the Company subsequently determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the remaining portion of that advance payment is charged to expense in the period in which such determination is made.

Share-Based Compensation

Stock Options

The Company recognizes share-based compensation expense over the service period, using the straight-line method. Employee share-based compensation for stock options is determined using the Black-Scholes option-pricing model to compute the fair value of option grants as of their grant date. Forfeitures are accounted for as incurred. The Company uses the following assumptions for estimating the fair value of option grants:

•Fair Value of Common Stock—The fair value of the common stock underlying the option grants is determined based on observable market prices of the Company’s common stock.

•Expected Volatility—Volatility is a measure of the amount by which the Company’s share price has historically fluctuated or is expected to fluctuate on a daily basis and is expected to fluctuate (i.e., expected volatility) in the future.

•Dividend Yield—The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. Dividend yield is therefore zero.

•Expected Term—This is the period of time during which options are expected to remain unexercised. For the years ended December 31, 2020, and 2019, we determined the expected term based on the historical exercise behavior of the stock option plan participants. Options have a maximum contractual term of ten years.

•Risk-Free Interest Rate—This is the observed U.S. Treasury Note rate as of the week each option grant is issued, with a term that most closely resembles the expected term of the option.

104

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Restricted Stock Units (RSUs)

Share-based compensation expense is recorded based on amortizing the fair market value of the RSU as of the date of the grant over the implied service period. RSUs generally vest one year from the date of the grant and are subject to continued service requirements. Forfeitures are accounted for as incurred.

Performance Stock Units (PSUs)

Performance-Based Awards

Share-based compensation expense for performance-based awards is recognized based on amortizing the fair market value of the award as of the grant date over the periods during which the achievement of the performance target is probable. Performance-based awards require certain performance targets to be achieved in order for the award to vest. Vesting occurs on the date of achievement of the performance target. Forfeitures are accounted for as incurred.

Market-Based Awards

Share-based compensation expense for market-based awards is recognized on a straight-line basis over the requisite service period, regardless of whether the market condition has been satisfied. Market-based PSU awards vest upon the achievement of the performance target. Forfeitures are accounted for as incurred.

The Company estimates the fair value of these awards as of the grant date using a Monte Carlo simulation that incorporates option-pricing inputs. This simulation covers the period from the grant date through the end of the derived requisite service period. Volatility as of the grant date is estimated based on historical daily volatility of the Company's common stock over a period of time, which is equivalent to the expected term of the award. The risk-free interest rate is based on the U.S. Treasury Note rate, as of the week, the award is issued, with a duration that most closely resembles the expected term of the award.

Leases

On January 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (New Lease Standard) using the modified retrospective transition approach. We applied the new standard to all leases existing at the date of initial application. Refer to the discussion under Recently Issued Accounting Pronouncements in Note 2.

The Company determines if an arrangement is a lease considering whether there is an identified asset and the contract conveys the right to control its use. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Right-of-use (ROU) assets and lease liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. The Company calculates the present value of future payments by using an estimated incremental borrowing rate, which approximates the rate at which the Company would borrow, on a secured basis and over a similar term. This rate is estimated based on information available at the commencement date of the lease and may differ for individual leases or portfolios of leased assets. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and lease liabilities.

Lease expense for operating leases is recognized on a straight-line basis over the expected lease term and recognized as an operating cost. The finance lease asset related to a manufacturing facility is amortized on a straight-line basis over the lease term. Interest expense on finance lease liability is also recognized over the lease term.

Some of the Company’s leases include options to terminate prior to the end of the lease term or to extend the lease for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

The Company’s lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes, or other costs. Variable lease costs are expensed as incurred on the consolidated statements of earnings. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

105

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

Advertising Expense

Advertising expense includes the cost of promotional materials and activities, such as printed materials and digital marketing, marketing programs, and speaker programs. The cost of the Company's advertising efforts is expensed as incurred.

The Company incurred approximately $54.5 million, $40.8 million, and $43.3 million in advertising expense for the years ended December 31, 2020, 2019, and 2018, respectively. These expenses are recorded as a component of Selling, general and administrative expenses in the consolidated statements of earnings.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are determined based on differences between their financial reporting and tax reporting bases. These differences are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently estimated as the largest amount of the tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities. These estimates are based on full knowledge of the position and relevant facts.

The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense in the relevant period.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted

ASU 2016-02, Leases (Topic 842) and subsequently issued related amendments codified in ASC 842, Leases, (the New Lease Standard), effective January 1, 2019, requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under the previous GAAP, ASC 840, on the balance sheet and provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

The Company adopted the New Lease Standard using the modified retrospective transition approach on January 1, 2019, by applying the New Lease Standard to all leases existing at the date of the initial adoption and not restating comparative periods. The adoption of the New Lease Standard resulted in recognition of lease assets and lease liabilities as of January 1, 2019, of approximately $4.0 million. The Company elected the package of practical expedients permitted under the transition guidance, which, among other things, allowed the Company to carryforward the historical lease classification, the assessment on whether a contract was or contains a lease, and the initial direct costs for any leases that existed prior to January 1, 2019. Refer to Note 10, Leases.

106

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) - The new standard, issued in July 2016, requires credit losses on financial assets to be measured as the net amount expected to be collected, rather than based on actual incurred losses. For available-for-sale debt securities, the new standard did not revise the definition of impairment. The new standard also eliminated the concept of "other than temporary" from the impairment model for available-for-sale debt securities. Changes to the impairment model include recognition of credit losses on available-for-sale debt securities using the allowance method and limiting the allowance to the amount by which fair value is below amortized cost. The Company adopted the new standard effective January 1, 2020, using the modified retrospective approach. The adoption of the standard did not have a material impact on its consolidated financial statements.

ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) - The new standard, issued in August 2018, improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its consolidated financial statements.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract - The new standard, issued in August 2018, aligns the requirements for capitalizing implementation costs incurred under a service contract for a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or to obtain internal-use software. This includes hosting arrangements that include an internal-use software license. This ASU also requires that the implementation costs of a hosting arrangement under a service contract be expensed over the term of the hosting arrangement, including reasonably certain renewals. The Company adopted the new standard effective January 1, 2020, using the prospective transition approach. The adoption of the standard did not have a material impact on its consolidated financial statements.

ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 - The new standard, issued in November 2018, clarifies when transactions between participants in a collaborative arrangement are within the scope of Topic 606. The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in December 2019, simplifies the accounting for income taxes. This guidance will be effective on January 1, 2021, on a prospective basis, with early adoption permitted. ASU 2019-12 amends the requirements related to the accounting for “hybrid” tax regimes. Such regimes are tax jurisdictions that impose the greater of two taxes — one based on income or one based on items other than income. Under ASU 2019-02, an entity should include the amount of tax based on income in the tax provision and should record any incremental amount recorded as a tax not based on income. The Company will adopt the standard effective January 1, 2021. It is not expected to have a material effect on our consolidated financial statements.

ASU 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 - The new standard, issued in January 2020, clarifies the interaction of the equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain contracts and purchased options accounted under Topic 815. The amendment clarifies that an entity can elect to adopt the measurement alternative, which is if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred before applying or upon discontinuing the equity method. ASU 2020-01 will be effective on January 1, 2021. The Company will adopt the standard effective January 1, 2021. It is not expected to have a material effect on our consolidated financial statements.

ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity - The new standard, issued in August 2020, simplifies the accounting and disclosures for convertible instruments and contracts. Under ASU 2020-06, entities must apply the if-converted method to all convertible instruments; the treasury stock method is no longer available. This guidance will be effective on January 1, 2022, on a prospective basis, with early adoption

107

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (Continued)

permitted but not earlier than January 1, 2021. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

3.USWM Acquisition

On June 9, 2020 (the Closing Date), the Company completed its acquisition of all of the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), a privately-held biopharmaceutical company, pursuant to the Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the Agreement). Under the terms of the Agreement, the Company acquired the right to further develop and commercialize APOKYN, XADAGO, and the Apomorphine Infusion Pump (SPN-830) in the U.S., and MYOBLOC worldwide (the Products) for an upfront cash payment of $297.2 million, subject to working capital adjustments, and the potential for additional contingent consideration payments of up to $230 million.

The potential $230 million in contingent consideration payments includes up to $130 million for the achievement of certain SPN-830 regulatory and commercial activities (regulatory and developmental contingent consideration payments) and up to $100 million related to future sales performance of the Products (sales-based contingent consideration payments). The regulatory and developmental contingent consideration payments include a $25 million milestone due upon the U.S. Food and Drug Administration's (FDA) acceptance of the SPN-830 New Drug Application (NDA) for review. The remaining $105 million of the $130 million contingent consideration payments include payments upon the FDA's regulatory approval and commercial launch of SPN-830. One of the regulatory milestones has a time-based mechanism for full or partial achievement. The $100 million sales-based contingent consideration payments include a $35 million milestone due upon achievement of certain U.S. net product sales of APOKYN during 2021. The remaining $65 million of the $100 million sales-based contingent consideration payments relate to the achievement of certain net product sales of the Products in 2022 and 2023.

SUPN US Equity

SUPN · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SUPN US Equity☆

SUPN · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SUPN US Equity