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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-36257
 RETROPHIN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
27-4842691
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
3721 Valley Centre Drive, Suite 200
San Diego, CA 92130
(Address of Principal Executive Offices)
(888) 969-7879
(Registrant's Telephone number including area code)
 
N/A
 
 
Former name, former address and former fiscal year, if changed since last report
 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
Common Stock, par value $0.0001 per share
RTRX
The Nasdaq Global Market
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No
 The number of shares of outstanding common stock, par value $0.0001 per share, of the Registrant as of May 7, 2020 was 43,155,572.
 



RETROPHIN, INC.
Form 10-Q
For the Fiscal Quarter Ended March 31, 2020

TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 

1


FORWARD-LOOKING STATEMENTS 
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "2019 10-K"), and in this Quarterly Report on Form 10-Q. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 
In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned to not unduly rely upon these statements.
We file reports with the Securities and Exchange Commission ("SEC"). The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
 
March 31, 2020
 
December 31, 2019
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
67,019

 
$
62,436

Available-for-sale debt securities, at fair value (amortized cost $290,977, allowance for credit losses of $0 as of March 31, 2020; amortized cost $335,206, allowance for credit losses of $0 as of December 31, 2019)
289,441

 
336,088

Accounts receivable, net
18,085

 
18,048

Inventory, net
6,593

 
6,082

Prepaid expenses and other current assets
5,309

 
5,015

Tax receivable
20,183

 
1,395

Total current assets
406,630

 
429,064

Property and equipment, net
2,617

 
2,891

Other non-current assets
6,803

 
14,709

Intangible assets, net
156,077

 
157,200

Goodwill
936

 
936

Total assets
$
573,063

 
$
604,800

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
9,966

 
$
26,614

Accrued expenses
41,590

 
51,745

Other current liabilities
8,435

 
8,590

Business combination-related contingent consideration
8,100

 
8,500

Total current liabilities
68,091

 
95,449

2025 Convertible debt
207,412

 
204,861

Other non-current liabilities
13,312

 
20,894

Business combination-related contingent consideration, less current portion
58,500

 
62,400

Total liabilities
347,315

 
383,604

Stockholders' Equity:
 

 
 

Preferred stock $0.0001 par value; 20,000,000 shares authorized; 0 issued and outstanding as of March 31, 2020 and December 31, 2019

 

Common stock $0.0001 par value; 100,000,000 shares authorized; 43,153,215 and 43,088,921 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
4

 
4

Additional paid-in capital
642,880

 
636,910

Accumulated deficit
(415,636
)
 
(416,444
)
Accumulated other comprehensive income (loss)
(1,500
)
 
726

Total stockholders' equity
225,748

 
221,196

Total liabilities and stockholders' equity
$
573,063

 
$
604,800

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

3


RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Net product sales
$
47,769

 
$
39,570

Operating expenses:
 
 
 
Cost of goods sold
1,370

 
1,017

Research and development
30,249


33,443

Selling, general and administrative
33,139


32,669

Change in fair value of contingent consideration
(1,922
)
 
3,169

Write off of L-UDCA IPR&D intangible asset

 
25,500

Write off of L-UDCA contingent consideration

 
(18,000
)
Total operating expenses
62,836

 
77,798

Operating loss
(15,067
)

(38,228
)
Other income (expenses), net:
 
 
 
Other expense, net
(190
)

(302
)
Interest income
1,976


2,819

Interest expense
(4,887
)

(4,865
)
Total other expense, net
(3,101
)
 
(2,348
)
Loss before income taxes
(18,168
)
 
(40,576
)
Income tax benefit (expense)
18,976


(401
)
Net income (loss)
$
808

 
$
(40,977
)






Net income (loss) per common share, basic
$
0.02


$
(0.99
)
Net income (loss) per common share, diluted
0.02

 
(0.99
)
Weighted average common shares outstanding, basic
43,122,897


41,410,314

Weighted average common shares outstanding, diluted
43,592,499

 
41,410,314

Comprehensive loss:
 
 
 
Net income (loss)
$
808

 
$
(40,977
)
Foreign currency translation
191

 
117

Unrealized gain (loss) on marketable securities
(2,417
)
 
1,469

Comprehensive loss
$
(1,418
)
 
$
(39,391
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
For the Three Months Ended March 31,
 
2020
 
2019
Cash Flows From Operating Activities:
 
 
 
Net income (loss)
$
808

 
$
(40,977
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
5,656

 
4,901

Non-cash interest expense
517

 
350

(Accretion) amortization of discounts/premiums on investments, net
138

 
(343
)
Amortization of debt discount and issuance costs
2,551

 
2,459

Provision for Inventory
420

 
189

Share based compensation
5,910

 
6,271

Change in fair value of contingent consideration
(1,922
)
 
(14,831
)
Payments related to change in fair value of contingent consideration
(6,971
)
 
(1,405
)
Write off of IPR&D intangible assets

 
25,500

Other
(25
)
 
62

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(61
)
 
40

Inventory
(958
)
 
(170
)
Tax receivable
(18,788
)
 
304

Other current and non-current operating assets
7,666

 
(9,625
)
Accounts payable and accrued expenses
(16,577
)
 
(3,103
)
Other current and non-current operating liabilities
(7,519
)
 
9,886

Net cash used in operating activities
(29,155
)
 
(20,492
)
Cash Flows From Investing Activities:
 

 
 

Purchase of fixed assets
(208
)
 
(19
)
Cash paid for intangible assets
(4,406
)
 
(3,961
)
Proceeds from the sale/maturity of marketable securities
49,153

 
72,990

Purchase of marketable securities
(4,988
)
 
(80,422
)
Net cash provided by (used in) investing activities
39,551

 
(11,412
)
Cash Flows From Financing Activities:
 

 
 

Payment of acquisition-related contingent consideration
(5,308
)
 
(905
)
Payment of guaranteed minimum royalty
(525
)
 
(509
)
Proceeds from exercise of stock options
60

 
304

Net cash used in financing activities
(5,773
)
 
(1,110
)
Effect of exchange rate changes on cash
(40
)
 
(21
)
Net change in cash and cash equivalents
4,583

 
(33,035
)
Cash and cash equivalents, beginning of year
62,436

 
102,873

Cash and cash equivalents, end of period
$
67,019

 
$
69,838

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

5


RETROPHIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except share amounts)
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Shares
Amount
 
 
 
 
 
Shares
Amount
 
 
 
 
Balance - December 31
43,088,921

$
4

 
$
636,910

 
$
726

 
$
(416,444
)
 
$
221,196

 
41,389,524

$
4

 
$
589,795

 
$
(1,529
)
 
$
(270,017
)
 
$
318,253

Share based compensation
 
 
 
5,714

 
 
 
 
 
5,714

 
 
 
 
6,370

 
 
 
 
 
6,370

Issuance of common shares under the equity incentive plan and proceeds from exercise
64,294

 
 
60

 
 
 
 
 
60

 
48,496

 
 
304

 
 
 
 
 
304

Unrealized gain (loss) on marketable securities
 
 
 
 
 
(2,417
)
 
 
 
(2,417
)
 
 
 
 
 
 
1,469

 
 
 
1,469

Foreign currency translation adjustments
 
 
 
 
 
191

 
 
 
191

 
 
 
 
 
 
117

 
 
 
117

ESPP stock purchase and expense

 
 
196

 
 
 
 
 
196

 

 
 
175

 
 
 
 
 
175

Net income (loss)
 
 
 
 
 
 
 
808

 
808

 
 
 
 
 
 
 
 
(40,977
)
 
(40,977
)
Balance - March 31
43,153,215

$
4

 
$
642,880

 
$
(1,500
)
 
$
(415,636
)
 
$
225,748

 
41,438,020

$
4

 
$
596,644

 
$
57

 
$
(310,994
)
 
$
285,711

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

6


RETROPHIN, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.  DESCRIPTION OF BUSINESS
Organization and Description of Business
Retrophin, Inc. (“we”, “our”, “us”, “Retrophin” and the “Company”) refers to Retrophin, Inc., a Delaware corporation, as well as our direct and indirect subsidiaries. Retrophin is a fully integrated biopharmaceutical company headquartered in San Diego, California, focused on identifying, developing and delivering life-changing therapies to people living with rare diseases. We regularly evaluate and, where appropriate, act on opportunities to expand our product pipeline through licenses and acquisitions of products in areas that will serve patients with serious or rare diseases and that we believe offer attractive growth characteristics.
On January 30, 2020, the World Health Organization (“WHO”) declared that the recent novel coronavirus (COVID-19) outbreak was a global health emergency, which prompted national governments to begin putting actions in place to slow the spread of COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic. The outbreak of COVID-19 has resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the fiscal quarter ended March 31, 2020, these governmental actions and the widespread economic disruption arising from the pandemic have the potential to materially impact our business and influence our business decisions. The extent and duration of the pandemic is unknown, and the future effects on our business are uncertain and difficult to predict. The Company is continuing to monitor the events and circumstances surrounding the COVID-19 pandemic, which may require adjustments to the Company’s estimates and assumptions in the future.
Clinical Programs:
Sparsentan, also known as RE-021, is an investigational product candidate with a dual mechanism of action, selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A, and a potent angiotensin receptor blocker (“ARB”). Sparsentan is currently being evaluated in two pivotal Phase 3 clinical studies in the following indications:
Focal segmental glomerulosclerosis ("FSGS") is a rare kidney disease characterized by proteinuria where the glomeruli become progressively scarred. FSGS is a leading cause of end-stage renal disease.
Immunoglobulin A nephropathy ("IgAN") is an immune-complex-mediated glomerulonephritis characterized by hematuria, proteinuria, and variable rates of progressive renal failure. IgAN is the most common primary glomerular disease.

Chenodal® has been recognized as the standard of care for cerebrotendinous xanthomatosis (“CTX”) patients for more than three decades but is not currently labeled for this indication. In January 2020, we randomized the first patients in a Phase 3 clinical trial to evaluate the effects of Chenodal in adult and pediatric patients with CTX. The pivotal study, known as the RESTORE study, is intended to support a new drug application (“NDA”) submission for marketing authorization of Chenodal for CTX in the United States.
Cooperative Research and Development Agreements ("CRADAs"):
The Company is a participant in two CRADAs, which form a multi-stakeholder approach to pool resources with leading experts, and incorporates the patient perspective early in the identification and development process. Retrophin has partnered with the National Institutes of Health’s National Center for Advancing Translational Sciences ("NCATS") and leading patients advocacy organizations, NGLY1.org and Alagille Syndrome Alliance ("ALGSA"), aimed at the identification of potential small molecule therapeutics for NGLY1 deficiency and Alagille syndrome, respectively. There are no treatment options currently approved for these diseases.
Approved products:
Chenodal (chenodiol tablets) is approved in the United States for the treatment of patients suffering from gallstones in whom surgery poses an unacceptable health risk due to disease or advanced age. Chenodal has been the standard of care for CTX patients for more than three decades.
Cholbam® (cholic acid capsules) is approved in the United States for the treatment of bile acid synthesis disorders due to single enzyme defects and is further indicated for adjunctive treatment of patients with peroxisomal disorders.
Thiola® and Thiola EC® (tiopronin tablets) are approved in the United States for the prevention of cystine (kidney) stone formation in patients with severe homozygous cystinuria.


7


NOTE 2.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2019 10-K filed with the SEC on February 24, 2020. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2019 balance sheet information was derived from the audited financial statements as of that date. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.
A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows:
Principles of Consolidation
The unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. See Note 3 for further discussion.
Research and Development Expenses
Research and development expenses are comprised of salaries and bonuses, benefits, non-cash share-based compensation, license fees, costs paid to third-party contractors to perform research, conduct clinical trials and pre/non-clinical trials, develop drug materials, and associated overhead expenses and facilities. We also incur indirect costs that are not allocated to specific programs because such costs benefit multiple development programs and allow us to increase our pharmaceutical development capabilities. These consist of internal shared resources related to the development and maintenance of systems and processes applicable to all of our programs.
Clinical Trial Expenses
Our clinical trials are conducted pursuant to contracts with contract research organizations ("CROs") that support conducting and managing clinical trials. The financial terms and activities of these agreements vary from contract to contract and may result in uneven expense levels. Generally, these agreements set forth activities that drive the recording of expenses such as start-up, initiation activities, enrollment, treatment of patients, or the completion of other clinical trial activities.
Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.
We currently have three Phase 3 clinical trials in process that are in varying stages of activity, with ongoing non-clinical support trials. As such, clinical trial expenses will vary depending on all the factors set forth above and may fluctuate significantly from quarter to quarter.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company's adoption of

8


this standard has had an immaterial impact on our condensed consolidated financial statements, and there was no recorded impact to our opening accumulated deficit balance for the cumulative-effect adjustment. As of March 31, 2020, the Company held $18.1 million in trade receivables and $289.4 million in available-for-sale debt securities. Expected credit losses on our trade receivables are estimated to be immaterial and the Company has zero recorded allowances for expected credit losses on the available-for-sale debt securities held as of March 31, 2020. See Note 16 and Note 4 for further discussion.

NOTE 3. REVENUE RECOGNITION
Product Revenue, Net
Product sales consist of Bile Acid products (Chenodal and Cholbam) and Tiopronin products (Thiola and Thiola EC). The Company sells its products through direct-to-patient distributors worldwide, with more than 95% of the revenue generated in North America.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs upon delivery to the customer. The Company receives payments from its product sales based on terms that generally are within 30 days of delivery of product to the patient.
Deductions from Revenue
Revenues from product sales are recorded at the net sales price, which includes provisions resulting from discounts, rebates and co-pay assistance that are offered to customers, health care providers, payors and other indirect customers relating to the Company’s sales of its products. These provisions are based on the amounts earned or to be claimed on the related sales and are classified as a reduction of accounts receivable (if the amount is payable to a customer) or as a current liability (if the amount is payable to a party other than a customer). Where appropriate, these reserves take into consideration the Company’s historical experience, current contractual and statutory requirements and specific known market events and trends. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. If actual results in the future vary from the Company’s provisions, the Company will adjust the provision, which would affect net product revenue and earnings in the period such variances become known. Our historical experience is that such adjustments have been immaterial.
Government Rebates: We calculate the rebates that we will be obligated to provide to government programs and deduct these estimated amounts from our gross product sales at the time the revenues are recognized. Allowances for government rebates and discounts are established based on actual payer information, which is reasonably estimated at the time of delivery, and the government-mandated discounts applicable to government-funded programs. Rebate discounts are included in other current liabilities in the accompanying consolidated balance sheets.
Commercial Rebates: We calculate the rebates that we incur due to contracts with certain commercial payors and deduct these amounts from our gross product sales at the time the revenues are recognized. Allowances for commercial rebates are established based on actual payer information, which is reasonably estimated at the time of delivery. Rebate discounts are included in other current liabilities in the accompanying consolidated balance sheets.
Prompt Pay Discounts: We offer discounts to certain customers for prompt payments. We accrue for the calculated prompt pay discount based on the gross amount of each invoice for those customers at the time of sale.
Product Returns: Consistent with industry practice, we offer our customers a limited right to return product purchased directly from the Company, which is principally based upon the product’s expiration date. Generally, shipments are only made upon a patient prescription thus returns are minimal.
Co-pay Assistance: We offer a co-pay assistance program, which is intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an identification of claims and the cost per claim associated with product that has been recognized as revenue.
The following table summarizes net product revenues for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Bile acid products
 
$
22,281


$
18,390

Tiopronin products
 
25,488


21,180

Total net product revenue
 
$
47,769

 
$
39,570



NOTE 4. MARKETABLE SECURITIES
The Company's marketable securities as of March 31, 2020 and December 31, 2019 were comprised of available-for-sale marketable securities. These securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss), unless an im

9


pairment is determined to be the result of credit-related factors or the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income (loss). Realized gains and losses and declines in value that are determined to be the result of credit losses, if any, on available-for-sale securities are included in other income or expense. Unrealized losses that are determined to be credit-related are also recorded as an allowance against the amortized cost basis. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. All available-for-sale securities are classified as current assets, even if the maturity when acquired by the Company is greater than one year due to the ability to liquidate within the next 12 months.
During the three months ended March 31, 2020, investment activity for the Company included $49.2 million in maturities and $5.0 million in purchases, all relating to debt based marketable securities.
Marketable securities consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Commercial paper
$
17,211

 
$
17,152

Corporate debt securities
267,226

 
306,436

Securities of government sponsored entities
5,004

 
12,500

Total marketable securities:
$
289,441

 
$
336,088


The following is a summary of short-term marketable securities classified as available-for-sale as of March 31, 2020 (in thousands):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Commercial paper
Less than 1
 
$
17,210

 
$
11

 
$
(10
)
 
$
17,211

Corporate debt securities
Less than 1
 
186,057

 
177

 
(597
)
 
185,637

Total maturity less than 1 year
 
 
203,267

 
188

 
(607
)
 
202,848

Corporate debt securities
1 to 2
 
82,710

 
22

 
(1,143
)
 
81,589

Securities of government-sponsored entities
1 to 2
 
5,000

 
4

 

 
5,004

Total maturity 1 to 2 years
 
 
87,710

 
26

 
(1,143
)
 
86,593

Total available-for-sale securities
 
 
$
290,977

 
$
214

 
$
(1,750
)
 
$
289,441

The following is a summary of short-term marketable securities classified as available-for-sale as of December 31, 2019 (in thousands):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Commercial paper
Less than 1
 
$
17,136

 
$
16

 
$

 
$
17,152

Corporate debt securities
Less than 1
 
191,770

 
582

 
(10
)
 
192,342

Total maturity less than 1 year
 
 
208,906

 
598

 
(10
)
 
209,494

Corporate debt securities
1 to 2
 
113,799

 
351

 
(56
)
 
114,094

Securities of government-sponsored entities
1 to 2
 
12,501

 

 
(1
)
 
12,500

Total maturity 1 to 2 years
 
 
126,300

 
351

 
(57
)
 
126,594

Total available-for-sale securities
 
 
$
335,206

 
$
949

 
$
(67
)
 
$
336,088


The primary objective of the Company’s investment portfolio is to enhance overall returns while preserving capital and liquidity. The Company’s investment policy limits interest-bearing security investments to certain types of instruments issued by institutions with primarily investment grade credit ratings and places restrictions on maturities and concentration by asset class and issuer.
The Company reviews the available-for-sale investments declines in fair value below the cost basis each quarter. For any security whose fair value is below its amortized cost basis, the Company first evaluates whether it intends to sell the impaired security, or will otherwise be more likely than not required to sell the security before recovery. If either are true, the amortized cost basis of the security is written down to its fair value at the reporting date. If neither circumstance holds true, the Company assesses whether any portion of the unrealized loss is a result of a credit loss. Any amount deemed to be attributable to credit loss is recognized in the income statement, with the amount of the loss limited to the difference between fair value and amortized cost and recorded as an allowance for credit losses. The portion of the unrealized loss related to factors other than credit losses is recognized in other comprehensive income (loss).
The following is a summary of available-for-sale debt securities in an unrealized loss position with no credit losses reported as of March 31, 2020 (in thousands):

10


 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
Description of Securities
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Commercial paper
 
$
4,981

 
$
10

 
$

 
$

 
$
4,981

 
$
10

Corporate debt securities
 
203,276

 
1,740

 

 

 
203,276

 
1,740

Securities of government-sponsored entities
 

 

 

 

 

 

   Total
 
$
208,257

 
$
1,750

 
$

 
$

 
$
208,257

 
$
1,750

The following is a summary of available-for-sale debt securities in an unrealized loss position with no credit losses reported as of December 31, 2019 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
Description of Securities
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Commercial paper
 
$

 
$

 
$

 
$

 
$

 
$

Corporate debt securities
 
74,151

 
64

 
7,509

 
2

 
81,660

 
66

Securities of government-sponsored entities
 
5,000

 
1

 

 

 
5,000

 
1

   Total
 
$
79,151

 
$
65

 
$
7,509

 
$
2

 
$
86,660

 
$
67


As of March 31, 2020 and December 31, 2019, the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis. The Company believes the unrealized losses incurred during the period are related to economic circumstances surrounding the COVID-19 pandemic, reflecting current liquidity issues as opposed to credit-related factors. The credit ratings of the securities held remain of the highest quality, and while certain securities in the portfolio may be downgraded momentarily, the Federal Reserve has allowed institutions to continue to issue debt where there is need, with the government itself purchasing such securities. Changes to leverage requirements for banks and other government relief efforts have helped to improve liquidity in the market. While securities issued by institutions in certain industries may be impacted more significantly than others, our investment holdings are primarily with institutions that are less impacted by the pandemic. Moreover, the Company continues to receive payments of interest and principal as they become due, and our expectation is that those payments will continue to be received timely. Uncertainty surrounding the COVID-19 pandemic, as well as other factors unknown to us at this time, may cause actual results to differ and require adjustments to the Company’s estimates and assumptions in the future.

NOTE 5. FUTURE ACQUISITION RIGHT AND JOINT DEVELOPMENT AGREEMENT
Censa Pharmaceuticals Inc.
In December 2017, the Company entered into a Future Acquisition Right and Joint Development Agreement (the “Option Agreement”) with Censa, which became effective in January 2018. The Company made an upfront payment of $10.0 million, agreed to fund certain development activities of Censa’s CNSA-001 program which were approximately $19.9 million through proof of concept, and paid $5.0 million related to a development milestone for the right, but not the obligation, to acquire Censa (the “Option”) on the terms and subject to the conditions set forth in a separate Agreement and Plan of Merger. The Company capitalized the upfront and milestone payments and expensed the development funding as incurred. The Company treated the upfront payment and milestone payments as an equity investment and expensed the development funding as incurred. The Company treated the upfront payment and milestone payment, both of which were consideration for the Option, as a cost-method investment with a carrying value of $15.0 million.
The Company determined that Censa was a variable interest entity ("VIE"), and concluded that the Company was not the primary beneficiary of the VIE. As such, the Company did not consolidate Censa’s results into its consolidated financial statements.
In August 2019, following a strategic review of the CNSA-001 program in patients with phenylketonuria (PKU), the Company made the decision to decline to exercise its option to acquire Censa Pharmaceuticals and discontinue its joint development program for CNSA-001. The Company wrote off the $15.0 million long term investment.

NOTE 6.  LEASES
As of March 31, 2020, the Company had two operating leases with Kilroy Realty, L.P. (the "Landlord") for office space located in San Diego, California. The Company currently occupies the office space subject to the first lease, originally signed in July 2016 and later amended in July 2017 and March 2019. In April 2019, the Company entered into a second office lease with the Landlord for approximately 77,000 square feet of an adjacent building located at 3611 Valley Centre Drive, San Diego, California. The Company plans to consolidate its corporate headquarters into the new lease space in early 2021. As a condition of the new lease, the Company has been granted an existing premises continuation option to continue leasing all or a portion of the currently occupied office space, in addition to the new lease space.

11


On February 7, 2020, the Company elected to forgo this continuation option by notifying the Landlord of its intention to vacate the premises of its existing lease. The abandonment of this leased office space, which was originally scheduled to expire in July 2024, coincides with the Company’s expected occupancy of the new office lease space in the adjacent building per the office lease effective April 2019. The Company estimates that it will vacate the existing leases in the first quarter of 2021, through which time the Company is obligated to pay all base rent, operating expenses and other obligations due under the existing lease.
Coinciding with the notice delivered to the Landlord, the Company recorded an adjustment to the ROU asset and lease liability in February 2020 to reflect the impending expiration of the existing lease. The remeasurement of the lease liability, which utilized a discount rate equal to our borrowing rate of 7.7%, resulted in a $7.0 million adjustment to the lease liability and ROU asset. The remeasured straight-line expense will be amortized over the revised lease term along with acceleration of related lease incentives.
The ROU asset and lease liability related to the new office lease will be established when the Company is granted access to the premises and has the ability to direct its use, which is expected to occur in phases during the second half of 2020 as certain spaces become available, the timing of which may be impacted due to circumstances surrounding the COVID-19 pandemic. As such, the ROU asset for the new lease will be established prior to the extinguishment of the ROU asset and lease liability for the existing lease, resulting in an overlap of ROU assets during the interim period between inception of the new lease and the expiration of the old lease.
The initial term of the new lease is 7 years, 7 months, and the Landlord has granted the Company an option to extend the term of the lease by a period of 5 years. The aggregate base rent due over the initial term of the lease is approximately $36.5 million.

Following is a schedule of the future minimum rental commitments for our operating lease reconciled to the lease liability and ROU assets as of March 31, 2020 (in thousands):
 
March 31, 2020
2020
$
1,936

2021
622

2022

2023

2024

Thereafter

Total undiscounted future minimum payments
2,558

Present value discount
(100
)
Total lease liability
2,458

Lease incentives
(1,144
)
Cash payments in excess of straight-line lease expense
(1,314
)
Total ROU asset
$



As of March 31, 2020, the ROU asset recorded to the Condensed Consolidated Balance Sheets as non-current Other Assets, was reduced to zero.

As of March 31, 2020, the current and non-current portions of the lease liability were recorded to the Condensed Consolidated Balance Sheets as follows (in thousands):
 
March 31, 2020
Other current liabilities
$
2,458

Other non-current liabilities

Total lease liabilities
$
2,458



For the three months ended March 31, 2020 and 2019, the Company recorded $0.4 million and $0.7 million, respectively, in expense related to operating leases.


12


NOTE 7.  FAIR VALUE MEASUREMENTS
Financial Instruments and Fair Value
The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The valuation techniques used to measure the fair value of the Company’s marketable securities and all other financial instruments, all of which have counter-parties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. Based on the fair value hierarchy, the Company classified marketable securities within Level 2.
The Company acquired two businesses, related to the Cholbam and Chenodal products, whose purchase price included potential future payments that are contingent on the achievement of certain milestones and percentages of future net sales derived from the products acquired. The Company recorded contingent consideration liabilities at their fair value on the acquisition date and revalues them at the end of each reporting period. In estimating the fair value of the Company’s contingent consideration, the Company uses a Monte Carlo Simulation. The determination of the contingent consideration liabilities requires significant judgements including the appropriateness of the valuation model and reasonableness of estimates and assumptions included in the forecasts of future net sales and the discount rates applied to such forecasts. Changes in these estimates and assumptions could have a significant impact on the fair value of the contingent consideration liabilities. Based on the fair value hierarchy, the Company classified the fair value measurement of contingent consideration within Level 3 because valuation inputs are based on projected revenues discounted to a present value.
Financial instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, and accounts payable, due to their short-term nature. As of March 31, 2020, the estimated fair value of the Company's 2.5% Convertible Senior Notes due 2025 was $195.6 million, considering factors such as market conditions, prepayment and make-whole provisions, variability in pricing from multiple lenders and the term of the debt.
The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of March 31, 2020 (in thousands):

As of March 31, 2020

Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
67,019

 
$
67,019

 
$

 
$

Marketable securities, available-for-sale
289,441

 

 
289,441

 

Total
$
356,460

 
$
67,019

 
$
289,441

 
$

Liabilities:
 
 
 
 
 
 
 
Business combination-related contingent consideration
$
66,600

 
$

 
$

 
$
66,600

Total
$
66,600

 
$

 
$

 
$
66,600

The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of December 31, 2019 (in thousands):
 
As of December 31, 2019
 
Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
62,436

 
$
62,436

 
$

 
$

Marketable securities, available-for-sale
336,088

 

 
336,088

 

Total
$
398,524

 
$
62,436

 
$
336,088

 
$

Liabilities:
 
 
 
 
 
 
 
Business combination-related contingent consideration
70,900

 

 

 
70,900

Total
$
70,900

 
$

 
$

 
$
70,900



13


The following table sets forth a summary of changes in the estimated fair value of the Company's business combination-related contingent consideration for the three months ended March 31, 2020 (in thousands):
 
Fair Value Measurements of Acquisition-Related Contingent Consideration
(Level 3)
Balance at January 1, 2020
$
70,900

Changes in the fair value of contingent consideration
(1,922
)
Contractual payments included in accrued liabilities at March 31, 2020
(2,278
)
Foreign currency impact
(100
)
Balance at March 31, 2020
$
66,600


The key assumptions included in the calculations for contingent consideration were the future number of patients in treatment, projected revenues, discount rate, and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments.
During the three months ended March 31, 2020, the Company recognized $(1.9) million as a reduction in operating expense on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the change in fair value of the contingent consideration liabilities. For the three months ended March 31, 2020, $1.9 million of the charges were related to the change in contingent consideration liabilities for bile acid products. The value decreased due to the timing of future payments and projected revenues.
During the three months ended March 31, 2019, the Company incurred charges of $3.2 million in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the change in fair value of the contingent consideration liabilities. For the three months ended March 31, 2019, $3.2 million of the charges were related to the increase in contingent consideration liabilities for bile acid products. The value increased due to passage of time. During the first quarter of 2019, the Company made a portfolio decision not to pursue further development of its product candidate L-UDCA. The related contingent consideration of $18.0 million was accordingly fully written off.

NOTE 8. INTANGIBLE ASSETS
As of March 31, 2020, the net book value of amortizable intangible assets was approximately $156.1 million.
The following table sets forth amortizable intangible assets as of March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020
 
December 31, 2019
Finite-lived intangible assets
$
249,783

 
$
245,802

Less: accumulated amortization
(93,706
)
 
(88,602
)
Net carrying value
$
156,077

 
$
157,200


The following table summarizes amortization expense for the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended March 31,

2020
 
2019
Research and development
$
289

 
$
286

Selling, general and administrative
4,885

 
4,445

Total amortization expense
$
5,174

 
$
4,731



NOTE 9.  CONVERTIBLE NOTES PAYABLE
Convertible Senior Notes Due 2025
On September 10, 2018, the Company completed its registered underwritten public offering of $276.0 million aggregate principal amount of 2.50% Convertible Senior Notes due 2025 ("2025 Notes"), and entered into a base indenture and supplemental indenture agreement ("2025 Indenture") with respect to the 2025 Notes. The 2025 Notes will mature on September 15, 2025 ("Maturity Date”), unless earlier repurchased, redeemed, or converted. The 2025 Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 2.50%, payable semi-annually in arrears on March 15 and September 15 of each year, commencing March 15, 2019.

14


The composition of the Company’s 2025 Notes are as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
2.50% convertible senior notes due 2025
$
276,000

 
$
276,000

Unamortized debt discount
(63,636
)
 
(65,963
)
Unamortized debt issuance costs
(4,952
)
 
(5,176
)
Total 2025 Notes, net of unamortized debt discount and debt issuance costs
$
207,412

 
$
204,861


The net proceeds from the issuance of the 2025 Notes were approximately $267.2 million, after deducting commissions and the offering expenses payable by the Company. A portion of the net proceeds from the 2025 Notes was used by the Company to repurchase $23.4 million aggregate principal amount of its then-outstanding 4.5% senior convertible notes due 2019 in privately-negotiated transactions.
Holders may convert their 2025 Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock for each of at least 20 trading days, whether or not consecutive, during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price on the applicable trading day; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (“measurement period”) if the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; (4) if the Company calls the 2025 Notes for redemption; and (5) at any time from, and including, May 15, 2025 until the close of business on the scheduled trading day immediately before the Maturity Date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, based on the applicable conversion rate.
The initial conversion rate for the 2025 Notes is 25.7739 shares of the Company’s common stock per $1,000 principal amount of 2025 Notes, which represents an initial conversion price of approximately $38.80 per share. If a “make-whole fundamental change” (as defined in the 2025 Indenture) occurs, then the Company will, in certain circumstances, increase the conversion rate for a specified period of time.
The 2025 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after September 15, 2022 and, in the case of any partial redemption, on or before the 40th scheduled trading day before the Maturity Date, at a cash redemption price equal to the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. If a fundamental change (as defined in the 2025 Indenture) occurs, then, subject to certain exceptions, holders may require the Company to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2025 Notes will be paid pursuant to the terms of the 2025 Indenture. In the event that all of the 2025 Notes are converted, the Company would be required to repay the $276.0 million principal amount and any conversion premium in any combination of cash and shares of its common stock at the Company’s option. In addition, calling the 2025 Notes for redemption will constitute a “make whole fundamental change."
The 2025 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the 2025 Notes, and equal in right of payment to the Company’s unsecured indebtedness.
The 2025 Notes are classified on the Company’s Condensed Consolidated Balance Sheets at March 31, 2020 as long-term debt.
Under ASC 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability and equity components of convertible debt instruments (such as the 2025 Notes) that may be settled entirely or partially in cash upon conversion, in a manner that reflects the issuer’s economic interest cost. The liability component of the instrument is valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. The initial carrying value of the liability component was $198.6 million. The equity component of $77.4 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2025 Notes and is recorded in additional paid-in capital on the consolidated balance sheet at the issuance date. That equity component is treated as a discount on the liability component of the 2025 Notes, which is amortized over the seven-year term of the 2025 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The Company allocated the total transaction costs of approximately $8.8 million related to the issuance of the 2025 Notes to the liability and equity components of the 2025 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2025 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.
The effective interest rate on the liability components of the 2025 Notes for the period from the date of issuance through March 31, 2020 was 7.7%. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):

15


 
 
Three Months Ended March 31,
 
 
2020
 
2019
Contractual interest expense
 
$
1,725

 
$
1,725

Amortization of debt discount
 
2,326

 
2,155

Amortization of debt issuance costs
 
224

 
224

Total interest expense for the 2025 Notes
 
$
4,275

 
$
4,104


The 2025 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The 2025 Indenture contains customary events of default with respect to the 2025 Notes, including failure to pay (for more than 30 days) interest when due and certain types of bankruptcy or insolvency involving the Company. Upon an event of default involving certain types of bankruptcy insolvency, 100% of the outstanding principal and accrued and unpaid interest on the 2025 Notes will automatically become due and payable, and upon other events of default, the trustee under the 2025 Indenture or the holders of at least 25% of the outstanding principal amount of the 2025 Notes may declare 100% of the principal and accrued and unpaid interest on the 2025 Notes to be immediately due and payable.
Senior Convertible Notes Due 2019
On May 29, 2014, the Company entered into a Note Purchase Agreement relating to a private placement by the Company of $46.0 million aggregate principal amount of 4.50% senior convertible notes due 2019 (the “2019 Notes”) which were convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price was subject to customary anti-dilution protection. The 2019 Notes bore interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes had a maturity date of May 30, 2019 and there were no contractual payments due prior to that date.
In September 2018, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $23.4 million aggregate principal amount of the 2019 Notes in privately-negotiated transactions for approximately $40.2 million in cash. The partial repurchase of the 2019 Notes resulted in a $17.0 million loss on early extinguishment of debt in September 2018.
In May 2019, the remaining $22.6 million outstanding principal amount of 2019 Notes was converted by the holders thereof into approximately 1.3 million shares of common stock.

NOTE 10. ACCRUED EXPENSES
Accrued expenses at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Government rebates payable
$
7,945

 
$
6,584

Compensation related costs
7,830

 
14,045

Accrued royalties and contingent consideration
7,199

 
7,272

Research and development
12,481

 
16,067

Selling, general and administrative
4,363

 
3,552

Miscellaneous accrued
1,772

 
4,225

Total accrued expenses
$
41,590

 
$
51,745




16


NOTE 11.  INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. The Company’s potentially dilutive shares, which include outstanding stock options, restricted stock units, warrants, and shares issuable upon conversion of the 2025 Notes, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
Basic and diluted net income (loss) per share is calculated as follows (net loss amounts are stated in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
Shares
 
Net Income
 
EPS
 
Shares
 
Net Loss
 
EPS
Basic income (loss) per share
43,122,897

 
$
808

 
$
0.02

 
41,410,314

 
$
(40,977
)
 
$
(0.99
)
ESPP
16,636

 
$

 
 
 

 
$

 
 
Restricted Stock
75,044

 
$

 
 
 

 
$

 
 
Stock Options
377,922

 
$

 
 
 

 
$

 
 
Diluted income (loss) per share
43,592,499

 
$
808

 
$
0.02

 
41,410,314

 
$
(40,977
)
 
$
(0.99
)

The following common stock equivalents have been excluded because they were anti-dilutive:
 
Three Months Ended March 31,
 
2020
 
2019
Restricted stock units
945,987

 
549,351

Convertible debt
7,113,402

 
8,410,932

Options
6,748,175

 
7,654,021

Total anti-dilutive shares
14,807,564

 
16,614,304



NOTE 12.  COMMITMENTS AND CONTINGENCIES
Research Collaboration and Licensing Agreements
As part of the Company's research and development efforts, the Company enters into research collaboration and licensing agreements with unrelated companies, scientific collaborators, universities, and consultants. These agreements contain varying terms and provisions which include fees and milestones to be paid by the Company, services to be provided, and ownership rights to certain proprietary technology developed under the agreements. Some of these agreements contain provisions which require the Company to pay royalties, in the event the Company sells or licenses any proprietary products developed under the respective agreements.
Legal Proceedings
In August 2017, Martin Shkreli, the Company’s former Chief Executive Officer, was convicted on securities fraud charges. Mr. Shkreli's conviction was subsequently affirmed upon appeal. In connection with the trial and appeal proceedings, the Company advanced a portion of Mr. Shkreli’s legal fees, of which $3.8 million was reimbursed by its directors’ and officers’ insurance carriers. Pending the outcome of Mr. Shkreli's appeal, the insurance carriers reserved their rights to assert that certain of the advanced funds pertain to claims excluded from coverage under the relevant insurance policy and are therefore recoverable by the carriers, and therefore the final amount of the reimbursement from the insurance carriers is not currently estimable.
In October 2018, Spring Pharmaceuticals, LLC (Spring) filed a lawsuit against the Company, Martin Shkreli, Mission Pharmacal Company and Alamo Pharma Services, Inc. in the United States District Court for the Eastern District of Pennsylvania alleging that the Company violated various federal and state antitrust and unfair competition laws by allegedly refusing to sell samples of the Thiola® brand drug so that Spring can conduct the bioequivalence testing needed to submit an ANDA to the FDA for approval to market a generic version of the product. The lawsuit sought injunctive relief and damages. In December 2019, the Court granted the Company's motion to dismiss the lawsuit, but granted Spring permission to amend its complaint. On February 10, 2020, Spring filed an amended complaint. Spring's amended complaint sought injunctive relief and damages. On April 1, 2020, the Company filed a motion to dismiss the amended complaint. On April 22, 2020, Spring filed a notice of voluntary dismissal, without prejudice. No amounts have been accrued related to this matter and the outcome cannot be determined.
The Company is not aware of any other proceedings or claims that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition.


17


NOTE 13.  SHARE BASED COMPENSATION
Restricted Shares
Service Based Restricted Stock Units
The following table summarizes the Company’s service based restricted stock unit activity during the three months ended March 31, 2020:
 
Number of Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Unvested December 31, 2019
763,728

 
$
19.64

Granted
585,188

 
15.51

Vested
(26,044
)
 
21.95

Forfeited/canceled
(42,089
)
 
18.67

Unvested March 31, 2020
1,280,783

 
$
17.74


At March 31, 2020, unamortized stock compensation for service based restricted stock units was $18.6 million, with a weighted-average recognition period of 2.9 years.
Performance Based Restricted Stock Units
The following table summarizes the Company’s performance based restricted stock unit activity during the three months ended March 31, 2020:
 
Number of Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Unvested December 31, 2019
233,500

 
$
20.90

Granted
150,000

 
15.46

Vested
(33,250
)
 
25.75

Forfeited/canceled

 

Unvested March 31, 2020
350,250

 
$
18.11


At March 31, 2020, unamortized stock compensation for performance based restricted stock units was $2.5 million, with a weighted-average recognition period of 1.1 years.
Stock Options
The following table summarizes stock option activity during the three months ended March 31, 2020:
 
Shares Underlying Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life (years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2019
7,371,733

 
$19.52
 
6.63
 
$
4,906

Granted
1,259,625

 

 
 
 
 
Exercised
(5,000
)
 

 
 
 
 
Forfeited/canceled
(107,415
)
 

 
 
 
 
Outstanding at March 31, 2020
8,518,943

 
$18.93
 
6.78
 
$
5,504


At March 31, 2020, unamortized stock compensation for stock options was $34.1 million, with a weighted-average recognition period of 2.9 years years.
At March 31, 2020, outstanding options to purchase 5.2 million shares of common stock were exercisable with a weighted-average exercise price per share of $19.11.

18


Share Based Compensation
The following table sets forth total share-based compensation for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Research and development
$
2,126

 
$
1,670

Selling, general & administrative
3,784

 
4,850

Total
$
5,910

 
$
6,520



NOTE 14.  INCOME TAXES
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. In addition, the CARES Act allows net operating losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has recorded an discrete income tax benefit of $19.0 million related to this legislation during the three months ended March 31, 2020. We continue to evaluate the impact of the CARES Act on our financial position, results of operations and cash flows.

NOTE 15. INVENTORY
Inventory, net of reserves, consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
 
December 31, 2019
Raw materials
$
3,085

 
$
2,713

Finished goods
3,508

 
3,369

Total inventory
$
6,593

 
$
6,082


The inventory reserve was $3.2 million and $3.1 million at March 31, 2020 and December 31, 2019, respectively.

NOTE 16. ACCOUNTS RECEIVABLE
Accounts receivable, net of reserves for prompt pay discounts and expected credit losses, was $18.1 million and $18.0 million at March 31, 2020 and December 31, 2019, respectively. The total reserves for both periods were immaterial.
The Company's adoption of ASU No. 2016-13, Financial Instruments - Credit Losses, included an assessment of our aged trade receivables balances and their underlying credit risk characteristics. Our evaluation of past events, current conditions, and reasonable and supportable forecasts about the future resulted in an expectation of immaterial credit losses.

NOTE 17. DISPOSITIONS
In June 2016, the Company acquired certain rights to its product candidate L-UDCA for $0.5 million cash. At the same time the Company established a related non-cash asset of $25.5 million for IPR&D and a liability of $25.0 million for contingent consideration related net sales royalties and milestones. As a result of our quarterly valuation update process during 2016 and 2017, the contingent liability was decreased by $2.3 million and $5.7 million, respectively, and increased by $1.0 million during 2018. The resulting balance of the L-UDCA contingent liability at December 31, 2018 was $18.0 million.
During the first quarter of 2019, the Company elected to discontinue development of the L-UDCA program, resulting in the write off of the intangible asset of $25.5 million originally recorded in 2016, and the reversal of associated contingent consideration of $18.0 million. This resulted in a net $7.5 million non-cash charge to first quarter operations.


19


NOTE: 18. AT-THE-MARKET EQUITY OFFERING PROGRAM
On February 24, 2020, the Company entered into an Open Market Sale Agreement with Jefferies LLC, as agent (“Jefferies”), pursuant to which we may offer and sell, from time to time through Jefferies, shares of our common stock having an aggregate offering price of up to $100.0 million (the “ATM Shares”). The ATM Shares will be sold pursuant to our effective registration statement on Form S-3 (Registration Statement No. 333-227182), as previously filed with the Securities and Exchange Commission. Through the period ended March 31, 2020, the Company has sold zero shares under the ATM program.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on February 24, 2020. Past operating results are not necessarily indicative of results that may occur in future periods. In addition, see the discussion under the heading “Forward-Looking Statements” immediately preceding the consolidated financial statements included under Part I of this Quarterly Report on Form 10-Q.

Overview
We are a biopharmaceutical company headquartered in San Diego, California, focused on identifying, developing and delivering life-changing therapies to people living with rare diseases.
Uncertainty Related to the COVID-19 Pandemic
In March 2020, the World Health Organization ("WHO") classified the COVID-19 outbreak as a pandemic. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the quarter ended March 31, 2020, we have been monitoring the developments and assessing areas where there is potential for our business to be impacted. Our labor force is currently working remotely, which could, among other things, negatively impact our ability to conduct research and development activities, engage in sales-related initiatives, or efficiently conduct day-to-day operations, and we are aware that other businesses with which we engage are likely operating under similar restrictions and experiencing disruptions in their own operations, which may create obstacles in the coordination of business activities. Circumstances arising from the pandemic have slowed and could continue to slow the pace of enrollment in our clinical trials or otherwise hinder patient’s abilities to comply with the clinical trial protocols and could ultimately delay the availability of results and analysis of outcomes. Disruptions in the supply chain could negatively impact our ability to source materials or manufacture and distribute product. While we do not currently anticipate a material reduction in demand for our commercialized products, we could experience a decrease in new patient identification and increased requests for patient assistance due to increased levels of unemployment, either of which would negatively impact our revenues and hinder our cash flows. Similarly, we could face challenges with regard to healthcare programs, including access and changes in coverage. Growth in revenue could also be impeded by these factors. The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities. We currently have $67.0 million in cash and cash equivalents and $289.4 million in available-for-sale securities as of March 31, 2020, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the anticipated near-term consequences of the pandemic, although liquidity constraints and access to capital markets could warrant changes to our investment strategy. While we have not yet experienced a material impact to date, the full magnitude of the pandemic cannot be measured at this time, and therefore any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter.


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Our Product Candidates and Approved Products
https://cdn.kscope.io/52c7e2470a01e1083e963453a0592805-productpipelineq319a02.jpg
*Chenodal is indicated for the treatment of patients suffering from gallstones and is also in Phase 3 for treatment of cerebrotendinous xanthomatosis ("CTX").

Product Candidate Development Activities:
Sparsentan
Sparsentan, also known as RE-021, is an investigational product candidate with a dual mechanism of action, a selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A and a potent angiotensin receptor blocker (“ARB”). Sparsentan is currently being evaluated in two pivotal Phase 3 clinical studies in the following indications:
Focal segmental glomerulosclerosis ("FSGS"), a leading cause of end-stage renal disease and nephrotic syndrome (“NS”). There are currently no United States Food and Drug Administration ("FDA") approved pharmacologic treatments for FSGS and off-label treatments are limited to ACE/ARBs, steroids, and immunosuppressant agents, which are effective in only a subset of patients. Every year approximately 5,400 patients are diagnosed with FSGS and we estimate that there are up to 40,000 FSGS patients in the United States and a similar number in Europe with approximately half of them being candidates for sparsentan. Sparsentan has orphan drug designation in the United States and European Union. In 2016, we generated positive data from our Phase 2 DUET study in FSGS. In 2018, we announced the initiation of the Phase 3 DUPLEX Study of sparsentan in FSGS. The Company continues to enroll patients with FSGS in the pivotal Phase 3 DUPLEX Study, a global, randomized, multicenter, double-blind, parallel-arm, active-controlled, clinical trial evaluating the safety and efficacy of sparsentan in approximately 300 patients. The DUPLEX Study protocol provides for an unblinded analysis of at least 190 patients to be performed after 36 weeks of treatment to evaluate the interim efficacy endpoint - the proportion of patients achieving a FSGS partial remission of proteinuria endpoint (FPRE), which is defined as urine protein-to-creatinine ratio (Up/C) ≤1.5 g/g and a >40 percent reduction in Up/C from baseline, at week 36. While the confirmatory endpoint of the study is the change in slope of estimated glomerular filtration rate (eGFR) after 108 weeks of treatment, successful achievement of the interim 36-week proteinuria endpoint is expected to serve as the basis for submission of a New Drug Application ("NDA") under the Subpart H accelerated approval pathway in the U.S. and Conditional Marketing Authorization ("CMA") consideration in Europe. Top-line data from the interim analysis are expected to become available in the first quarter of 2021, which timelines may need to be adjusted as a result of the COVID-19 pandemic once the impact of the pandemic is better known.
Immunoglobulin A nephropathy ("IgAN") is characterized by hematuria, proteinuria, and variable rates of progressive renal failure. With an estimated prevalence of more than 100,000 people in the United States and greater numbers in Europe and Asia, IgAN is the most common primary glomerular disease. Most patients are diagnosed between the ages of 16 and 35, with up to 40% progressing to end stage renal disease within 15 years. There are currently no FDA approved treatments for IgAN. The current standard of care is renin-angiotensin-aldosterone system ("RAAS") blockade with immunosuppression also being commonly used for patients with significant

21


proteinuria or rapidly progressive glomerulonephritis. In 2018, we announced that the first patient had been dosed in the PROTECT Study, a global, randomized, multicenter, double-blind, parallel-arm, active-controlled pivotal Phase 3 clinical trial evaluating the safety and efficacy of sparsentan in patients with IgAN, and the study continues to enroll. The primary efficacy endpoint in the PROTECT Study is the change in proteinuria (urine protein-to-creatinine ratio) from baseline after 36 weeks of treatment. Successful achievement of this endpoint in the first approximately 280 patients is expected to support the submission of an NDA under the Subpart H accelerated approval pathway in the U.S., as well as an application for CMA consideration in Europe. The confirmatory endpoint in the PROTECT Study is the rate of change in eGFR over the 110-week period following the initiation of randomized treatment, and additional secondary endpoints include the rate of change in eGFR over the 58-week period following the initiation of randomized treatment, as well as the rate of change in eGFR over 52-week and 104-week periods following the first six weeks of randomized treatment. Top-line data from the primary endpoint are expected to become available in the first half of 2022, which timelines may need to be adjusted as a result of the COVID-19 pandemic once the impact of the pandemic is better known. We have recently increased the sample size for the confirmatory portion of the study from 280 patients to 380 patients, while maintaining the sample size for the primary endpoint at 280 patients.
Chenodal
In January 2020, we randomized the first patients in a Phase 3 clinical trial to evaluate the effects of Chenodal in adult and pediatric patients with cerebrotendinous xanthomatosis (“CTX”). The pivotal study, known as the RESTORE study, is intended to support a new drug application (“NDA”) submission for marketing authorization of Chenodal for CTX in the United States. Chenodal has also been the standard of care for CTX patients for more than three decades but is not currently labeled for this indication.
Cooperative Research and Development Agreements ("CRADAs"):
We are a participant in two CRADAs, which form a multi-stakeholder approach to pool resources with leading experts, and incorporates the patient perspective early in the identification and development process. We have partnered with the National Institutes of Health’s National Center for Advancing Translational Sciences ("NCATS") and leading patients advocacy organizations, NGLY1.org and Alagille Syndrome Alliance ("ALGSA"), aimed at the identification of potential small molecule therapeutics for NGLY1 deficiency and Alagille syndrome, respectively. There are no treatment options currently approved for these diseases.
The Company has three approved products:
Chenodal® (chenodiol tablets)
Chenodal is a synthetic oral form of chenodeoxycholic acid, a naturally occurring primary bile acid synthesized from cholesterol in the liver, indicated for the treatment of radiolucent stones in well-opacifying gallbladders in patients in whom selective surgery would be undertaken except for the presence of increased surgical risk due to systemic disease or age.
Chenodal administration is known to reduce biliary cholesterol and the dissolution of radiolucent gallstones through suppression of hepatic synthesis of cholesterol, cholic acid and deoxycholic acid in the bile pool. Chenodal was first approved by the FDA in 1983 for the management of gallstones but its marketing was later discontinued due to lack of commercial success. In 2009, Nexgen Pharma Inc.'s ANDA for Chenodal was approved by the FDA for the treatment of gallstones. Chenodal is manufactured under this ANDA. In 2010, Chenodal was granted orphan drug designation for the treatment of CTX, a rare autosomal recessive lipid storage disease. We acquired Chenodal in March 2014.
While Chenodal is not labeled for CTX, it has been used as the standard of care for over three decades. We are working to obtain FDA approval of Chenodal for the treatment of CTX and initiated a Phase 3 clinical trial for this indication in January 2020. The prevalence of CTX is estimated in the literature to be as high as 1 in 70,000 in the overall population. Pathogenesis of CTX involves deficiency of the enzyme 27-hydroxylase (encoded by the gene CYP27A1), a rate-limiting enzyme in the synthesis of primary bile acids, including CDCA, from cholesterol. The disruption of primary bile acid synthesis in CTX leads to toxic accumulation of cholesterol and cholestanol in most tissues. Most patients present with intractable diarrhea, premature cataracts, tendon xanthomas, atherosclerosis, and cardiovascular disease in childhood and adolescence. Neurological manifestations of the disease, including dementia and cognitive and cerebellar deficiencies, emerge during late adolescence and adulthood. Oral administration of CDCA has been shown to normalize primary bile acid synthesis in patients with CTX.
Cholbam® (cholic acid capsules)
The FDA approved Cholbam (cholic acid capsules) in March 2015, the first FDA approved treatment for pediatric and adult patients with bile acid synthesis disorders due to single enzyme defects, and for adjunctive treatment of patients with peroxisomal disorders (including Zellweger spectrum disorders).  The effectiveness of Cholbam has been demonstrated in clinical trials for bile acid synthesis disorders and the adjunctive treatment of peroxisomal disorders. An estimated 200 to 300 patients are current candidates for therapy.
Kolbam, the branded name of Cholbam in Europe, is indicated in Europe for the treatment of certain inborn errors of primary bile acid synthesis, encompassing select single enzyme defects, in infants from one month of age for continuous lifelong treatment through adulthood.
Thiola® and Thiola EC® (tiopronin)
Thiola and Thiola EC are approved by the FDA for the treatment of cystinuria, a rare genetic cystine transport disorder that causes high cystine levels in the urine and the formation of recurring kidney stones. The resulting long-term damage can cause loss of kidney function in addition to substantial pain and loss of productivity associated with renal colic and stone passage. The prevalence of cystinuria in the United States is estimated t

22


o be 10,000 to 12,000, indicating that there may be as many as 4,000 to 5,000 affected individuals with cystinuria in the United States that would be candidates for Thiola.
In June 2019, we announced that the FDA approved 100 mg and 300 mg tablets of Thiola EC, a new enteric-coated formulation of Thiola. Thiola EC became available to patients in July 2019.
Results of Operations
Results of operations for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Net Product Sales:
The following table provides information regarding net product sales (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
Change
Net product revenues by product:
 
 
 
 
 
Bile acid products
$
22,281

 
$
18,390

 
$
3,891

Tiopronin products
25,488

 
21,180

 
4,308

Total net product revenues
$
47,769

 
$
39,570

 
$
8,199

The sales increase for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was due to increased patient counts, as well as the normal fluctuations in timing of new patient starts and prescription refills.
Operating Expenses:
The following table provides information regarding operating expenses (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
Change
Cost of goods sold
$
1,370

 
$
1,017

 
$
353

Research and development
30,249

 
33,443

 
(3,194
)
Selling, general and administrative
33,139

 
32,669

 
470

Change in fair value of contingent consideration
(1,922
)
 
3,169

 
(5,091
)
Write off of L-UDCA IPR&D intangible asset