Retrophin, Inc.
Retrophin, Inc. (Form: 10-Q, Received: 08/05/2016 06:11:35)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
  OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
 RETROPHIN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-36257
 
27-4842691
 
 
(State or other
jurisdiction of
incorporation or
organization)
 
(Commission File
No.)
 
(I.R.S. Employer
Identification No.)
 
12255 El Camino Real, Suite 250,
San Diego, CA 92130
(Address of Principal Executive Offices)
_________________________________
(760) 260-8600
(Registrant’s Telephone number including area code)
_________________________________
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 þ  No     ¨
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes þ  No   ¨
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨ No þ
 The number of shares of outstanding common stock, par value $0.0001 per share, of the Registrant as of August 4, 2016 was 36,731,132 .
 


Table of Contents

RETROPHIN, INC.
Form 10-Q
June 30, 2016
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents

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 “Risks 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, 2015 , in our quarterly report in Form 10-Q for the three months ended March 31, 2016 and in this Form 10-Q and information contained in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 
We file reports with the 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. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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.

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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
June 30, 2016
 
December 31, 2015
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
21,155

 
$
37,805

Marketable securities
200,359

 
191,799

Accounts receivable, net
16,566

 
12,458

Inventory, net
2,713

 
2,536

Prepaid expenses and other current assets
3,365

 
2,378

Prepaid taxes
8,499

 
8,107

Note receivable, current
47,500

 
46,849

Total current assets
300,157

 
301,932

Property and equipment, net
381

 
428

Other asset
1,859

 
1,859

Intangible assets, net
184,432

 
161,536

Goodwill
936

 
936

Note receivable, long term
46,206

 
45,573

Total assets
$
533,971

 
$
512,264

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
6,285

 
$
7,639

Accrued expenses
23,159

 
23,820

Guaranteed minimum royalty
2,000

 
2,000

Other current liabilities
1,187

 
958

Business combination-related contingent consideration
14,077

 
13,754

Derivative financial instruments, warrants
33,360

 
38,810

Total current liabilities
80,068

 
86,981

Convertible debt
44,092

 
43,766

Other non-current liabilities
2,548

 
3,066

Guaranteed minimum royalty, less current portion
8,488

 
8,885

Business combination-related contingent consideration, less current portion
72,300

 
45,267

Deferred income tax liability, net
12,103

 
24,328

Total liabilities
219,599

 
212,293

Stockholders' Equity:
 

 
 

Preferred stock $0.001 par value; 20,000,000 shares authorized; 0 issued and outstanding as of June 30, 2016 and December 31, 2015

 

Common stock $0.0001 par value; 100,000,000 shares authorized; 36,725,130 and 36,465,853 issued and outstanding as of June 30, 2016 and December 31, 2015, respectively
4

 
4

Additional paid-in capital
381,687

 
365,802

Accumulated deficit
(67,340
)
 
(65,153
)
Accumulated other comprehensive income (loss)
21

 
(682
)
Total stockholders' equity
314,372

 
299,971

Total liabilities and stockholders' equity
$
533,971

 
$
512,264

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

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Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net product sales
$
33,311

 
$
24,068

 
$
62,319

 
$
41,440

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Cost of goods sold
1,021

 
637

 
1,778

 
912

Research and development
17,675

 
10,563

 
32,347

 
20,910

Selling, general and administrative
23,205

 
19,692

 
42,330

 
34,547

Change in valuation of contingent consideration
2,789

 
120

 
5,485

 
120

Total operating expenses
44,690

 
31,012

 
81,940

 
56,489

 
 
 
 
 
 
 
 
Operating loss
(11,379
)
 
(6,944
)
 
(19,621
)
 
(15,049
)
 
 
 
 
 
 
 
 
Other income (expenses), net:
 

 
 

 
 
 
 
Other income (expenses), net
(206
)
 
522

 
4

 
349

Interest expense, net
(147
)
 
(2,922
)
 
(309
)
 
(6,720
)
Finance expense

 

 

 
(600
)
Change in fair value of derivative instruments
(9,063
)
 
(29,418
)
 
5,277

 
(66,171
)
Loss on extinguishment of debt

 
(2,250
)
 

 
(2,250
)
Litigation settlement gain

 
15,500

 

 
15,500

Bargain purchase gain

 

 

 
49,063

Total other income (loss), net
(9,416
)
 
(18,568
)
 
4,972

 
(10,829
)
 
 
 
 
 
 
 
 
Loss before provision for income taxes
(20,795
)
 
(25,512
)
 
(14,649
)
 
(25,878
)
 
 
 
 
 
 
 
 
Income tax benefit (expense)
7,392

 
(15
)
 
12,462

 
40,006

 
 
 
 
 
 
 
 
Net income (loss)
$
(13,403
)
 
$
(25,527
)
 
$
(2,187
)
 
$
14,128

 
 
 
 
 
 
 
 
Net earnings (loss) per common share, basic
$
(0.37
)
 
$
(0.73
)
 
$
(0.06
)
 
$
0.45

Net earnings (loss) per common share, diluted
$
(0.37
)
 
$
(0.73
)
 
$
(0.20
)
 
$
0.44

Weighted average common shares outstanding, basic
36,683,429

 
34,957,134

 
36,601,807

 
31,079,053

Weighted average common shares outstanding, diluted
36,683,429

 
34,957,134

 
38,063,285

 
34,827,405

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 

 
 

 
 
 
 
Net income (loss)
$
(13,403
)
 
$
(25,527
)
 
$
(2,187
)
 
$
14,128

Foreign currency translation
71

 
(30
)
 
2

 
(7
)
Unrealized loss on marketable securities
(157
)
 
(298
)
 
(706
)
 
(3,519
)
Comprehensive income (loss)
$
(13,489
)
 
$
(25,855
)
 
$
(2,891
)
 
$
10,602

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

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Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
 
For the Six Months Ended June 30,
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
Net income (loss)
$
(2,187
)
 
$
14,128

Adjustments to reconcile net income to net cash used in operating activities:
 

 
 

Depreciation and amortization
7,858

 
5,536

Realized gain on marketable securities

 
(107
)
Gain upon divestiture of assets to Turing Pharmaceuticals

 
(914
)
Deferred income tax benefit
(12,286
)
 
(40,021
)
Interest income from notes receivable
(1,285
)
 

Non-cash interest expense
1,179

 
1,154

Amortization of premiums on marketable securities
666

 

Amortization of debt discount and deferred financing costs
326

 
1,010

Lease liability

 
(125
)
Legal accrual reversal
(2,967
)
 

Bargain purchase gain

 
(49,063
)
Share based compensation
14,286

 
10,567

Derivative financial instruments, warrants, issued, recorded in interest expense

 
1,050

Change in estimated fair value of liability classified warrants
(5,277
)
 
66,171

Change in estimated fair value of contingent consideration
5,485

 
113

Payments related to change in fair value of contingent consideration
(550
)
 
(90
)
Changes in operating assets and liabilities, net of business acquisitions:
 

 
 

Accounts receivable
(4,104
)
 
(3,508
)
Inventory
(174
)
 
(640
)
Prepaid expenses and other current assets
(1,197
)
 
(420
)
Accounts payable and accrued expenses
650

 
(3,417
)
Net cash provided by operating activities
423

 
1,424

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Purchase of fixed assets
(24
)
 
(29
)
Cash paid for intangible assets
(4,881
)
 
(2,497
)
Proceeds from the sale/maturity of marketable securities
59,874

 
282

Purchase of marketable securities
(68,517
)
 

Cash received upon divestiture of asset

 
3,311

Cash paid upon acquisition, net of cash acquired
(500
)
 
(33,430
)
Net cash used in investing activities
(14,048
)
 
(32,363
)
 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Payment of acquisition-related contingent consideration-Manchester
(2,125
)
 
(1,228
)
Payment of acquisition-related contingent consideration-Asklepion
(644
)
 

Payment of guaranteed minimum royalty
(1,000
)
 
(1,000
)
Proceeds from exercise of warrants
90

 
586

Payment of other liability
(500
)
 
(500
)
Proceeds from exercise of stock options
1,572

 
2,669

Excess benefit related to stock compensation
(236
)
 

Proceeds received from issuance of common stock

 
149,454

Financing costs from issuance of common stock

 
(9,500
)
Net cash used in (provided by) financing activities
(2,843
)
 
140,481

 
 
 
 
Effect of exchange rate changes on cash
(182
)
 

Net change in cash
(16,650
)
 
109,542

Cash, beginning of year
37,805

 
18,204

 
 
 
 
Cash, end of period
$
21,155

 
$
127,746

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

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Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATMENTS
NOTE 1.  DESCRIPTION OF BUSINESS
Organization and Description of Business
In this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “we”, “our”, “us”, “Retrophin” and the “Company” refer to Retrophin, Inc., a Delaware corporation, as well as our direct and indirect subsidiaries. We are a fully integrated biopharmaceutical company with approximately 130 employees headquartered in San Diego, California dedicated to delivering life-changing therapies to people living with rare diseases who have few, if any, treatment options. Our approach centers on our pipeline, featuring clinical-stage assets and pre-clinical discovery programs targeting rare diseases with significant unmet medical needs. Our research and development efforts are supported by revenues from the Company's marketed products, Chenodal ® , Cholbam ® and Thiola ® . In addition 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, catastrophic or rare diseases and that we believe offer attractive growth characteristics.
Products on the Market:
Chenodal ® (chenodeoxycholic acid) 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 also been the standard of care for cerebrotendinous xanthomatosis (“CTX”) patients for more than three decades and the Company is currently pursuing adding this indication to the label.
Cholbam ® (cholic acid) 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 ® (tiopronin) is approved in the United States for the prevention of cysteine (kidney) stone formation in patients with cystinuria.
Product Candidates:
Sparsentan , also known as RE-021, is an investigational therapeutic agent which acts as both a potent angiotensin receptor blocker (“ARB”), as well as a selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A . We have secured a license to sparsentan from Ligand Pharmaceuticals, Inc. and Bristol-Myers Squibb Company (who referred to it as DARA). We are developing sparsentan as a treatment for focal segmental glomerulosclerosis ("FSGS") , which is a leading cause of end-stage renal disease and Nephrotic Syndrome (“NS”). There are no U.S. Food and Drug Administration ("FDA") approved pharmacological treatments for FSGS and the off-label armamentarium is limited to ACE/ARBs, steroids, and immunosuppressant agents, which are effective in only a subset of patients. We estimate that there are at least 40,000 FSGS patients in the United States. We have completed enrollment for our DUET Phase 2 clinical study of sparsentan for the treatment of FSGS and we anticipate having a top line data read out in the third quarter of 2016. Depending on the robustness of the data obtained in the DUET study, we may be able to support an application for accelerated approval for sparsentan on the basis of proteinuria as a surrogate endpoint. Sparsentan was granted orphan drug designation in the U.S. and EU in January and November 2015, respectively.
We are developing RE-024, a novel small molecule, as a potential treatment for pantothenate kinase-associated neurodegeneration (" PKAN"). PKAN is a genetic neurodegenerative disorder that is typically diagnosed in the first decade of life. Consequences of PKAN include dystonia, dysarthria, rigidity, retinal degeneration, and severe digestive problems. PKAN is estimated to affect 1 to 3 persons per million. There are currently no viable treatment options for patients with PKAN. RE-024 is a phosphopantothenate prodrug therapy that aims to restore levels of this key substrate in PKAN patients. Certain international health regulators have approved the initiation of dosing RE-024 in PKAN patients under physician-initiated studies in accordance with local regulations in their respective countries. The Company filed a Investigational New Drug application ("U.S. IND") for RE-024 with the FDA in the first quarter of 2015 to support the commencement of a Company-sponsored Phase 1 study, which was successfully completed during 2015. RE-024 was granted orphan drug designation by the FDA in May 2015 and was granted fast track designation by the FDA in June 2015. On February 24, 2016, we announced RE-024 was granted orphan drug designation from the European Commission. The Company continues discussions with the FDA and the European Medicines Agency ("EMA") regarding the initiation of a potential registration-enabling efficacy trial in PKAN patients.
L-UDCA is a liquid formulation of ursodeoxycholic acid being developed for the treatment of a rare liver disease called primary biliary cholangitis (PBC). Retrophin expects to file a New Drug Application with the FDA in 2017 and, if approved, plans to make L-UDCA commercially available to the subset of PBC patients who have difficulty swallowing. There are no liquid formulations of ursodeoxycholic acid currently approved by the FDA.
RE-034 is a synthetic hormone analog of the first 24 amino acids of the 39 amino acids contained in adrenocorticotropic hormone ("ACTH") incorporated into a novel formulation developed by the Company. RE-034 exhibits similar physiological actions as endogenous ACTH by binding to all five melanocortin receptors (pan-MCR), resulting in its anti-inflammatory and immunomodulatory effects. Retrophin has successfully manufactured RE-034 at proof-of-concept scale using a novel formulation process that allows modulation of the release of the active ingredient from the site of administration. The Company is exploring strategic options for development of RE-034, including the evaluation of external partnership and out-licensing opportunities.

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Preclinical:
NGLY1
The Company entered into a research collaboration with the Grace Science Foundation and the Warren Family Research Center for Drug Discovery and Development at the University of Notre Dame for the development of a novel therapeutic for patients with NGLY1 deficiency, a rare genetic disorder. NGLY1 deficiency is believed to be caused by a deficiency in an enzyme called N-glycanase-1, which is encoded by the gene NGLY1. The condition is characterized by a variety of symptoms, including global developmental delay, movement disorder, seizures, and ocular abnormalities. Under this collaboration, the Grace Science Foundation will provide support and funding to Retrophin to enable discovery efforts that aim to validate and address a new molecular target that may be relevant to NGLY1 deficiency. The Warren Family Research Center for Drug Discovery and Development at the University of Notre Dame will provide funding and in-kind research support to help Retrophin advance this program.
NOTE 2.  BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2016, and amended on March 2, 2016. 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, 2015 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.
NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Adoption of New Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of as a deferred charge. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2015. The Company adopted the new guidance effective March 31, 2016. The adoption of the new guidance did not have a material impact on the Company’s financial statements. See Note 10 for further discussion.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred taxes. This ASU requires that all deferred tax assets and liabilities, along with any related valuation allowances, be classified as noncurrent on the balance sheet. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax jurisdictions. This ASU is effective for annual and interim reporting periods ending after December 15, 2016. Early adoption is permitted, and the new guidance may be applied either prospectively or retrospectively. We adopted this guidance prospectively as of December 31, 2015. Therefore, prior periods have not been adjusted to reflect this adoption. This change in accounting principle does not change our results of operations, cash flows or stockholders’ equity.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.
In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers. Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration for which the entity expects to be entitled for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption of this ASU is permitted but not before the original effective date (annual periods beginning after December 15, 2016). We are currently evaluating the impact, if any, the adoption of this standard will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This standard amends Topic 330, Inventory , which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. When this standard is adopted, an entity should measure in scope inventory

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at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption of this standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact, if any, the adoption of this standard will have on our consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-09, Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with GAAP) or account for forfeitures when they occur. The ASU is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Certain detailed transition provisions apply if an entity elects to early adopt. We are currently evaluating the impact, if any, the adoption of this standard will have on our consolidated financial statements.
In June 2016, the FASB issued 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 it's 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 Accounting Standards 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 currently holds available for sale debt securities that are effected by this ASU and is currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
NOTE 4.  INCOME TAXES
The Company’s income tax benefit for the three months ended June 30, 2016 and 2015 of $7.4 million and $0 , respectively, reflect effective tax rates of 35.6% and 0% , respectively, and income tax benefit of $12.5 million and $40.0 million , respectively, reflect effective tax rates of 85.1% and 154.6% for the six months ended June 30, 2016 and 2015, respectively, inclusive of discrete income and loss items recorded in the quarterly financial statements. Under GAAP, quarterly effective tax rates may vary significantly depending on the actual operating results in the various tax jurisdictions and significant transactions, as well as changes in the valuation allowance related to the expected recovery of deferred tax assets.
For the six months ended June 30, 2016 , when compared to the same period in 2015, the decrease in the tax benefit and effective income tax rate was primarily attributable to the release of a U.S. federal valuation allowance in 2015. At June 30, 2016 , we had gross unrecognized tax benefits of  $6.7 million  compared to  $3.3 million  at December 31, 2015, representing a net increase of  $3.4 million  during the six months ended  June 30, 2016 . If recognized,  $5.2 million  of unrecognized tax benefits would affect the Company’s effective tax rate.  We did not recognize any interest and penalties related to unrecognized tax benefits during the three month ended June 30, 2016.
We are currently not under income tax audit examination in any material jurisdictions in which we operate.

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NOTE 5. BUSINESS COMBINATION
Acquisition of Liquid Ursodeoxycholic Acid (L-UDCA)
On June 20, 2016, the Company announced the signing of a definitive agreement to purchase the rights, titles, and ownership of L-UDCA from Asklepion. Retrophin intends to file a New Drug Application with the FDA for L-UDCA for the treatment of PBC in 2017.
The acquisition was accounted for under the purchase method of accounting in accordance with Accounting Standard Codification ("ASC") 805. The fair value of assets acquired and liabilities assumed was based upon a valuation and the Company’s estimates. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from acquired product rights for L-UDCA, licenses, trade names and developed technologies, present value and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Management's valuation is preliminary. Once the valuation is complete, the Company will make any necessary adjustments.
The purchase included $25.5 million for an intangible asset with a definite life related to product rights for the U.S. The useful life related to the acquired product rights are expected to be approximately 17 years once NDA is approved by the FDA.
The contingent consideration of $25.0 million (present value) recorded during the period ended June 30, 2016, is related to an agreement to pay an additional cash amount in the form of milestones and sales royalties through 2035. The accrued contingent consideration was recorded as a liability at acquisition-date fair value using the income approach with an assumed discount rate of 12.0% over the applicable term.
The purchase price allocation of $25.5 million as of the acquisition completion date of June 16, 2016 is as follows ( in thousands ):
Cash paid upon consummation
$
500

Present value of contingent consideration
25,000

Total purchase price
$
25,500

 
 
Fair Value of Assets Acquired and Liabilities Assumed
 
Acquired product rights: L-UDCA (intangible  asset)
$
25,500

Total purchase price
$
25,500

Unaudited pro forma information for the transaction is not presented, because the effects of such transaction are considered immaterial to the Company.
Acquisition of Cholic Acid
On January 12, 2015, the Company announced the signing of a definitive agreement under which it acquired the exclusive right to purchase from Asklepion, all worldwide rights, titles, and ownership of Cholbam (cholic acid) for the treatment of bile acid synthesis defects, if approved by the FDA. Under the terms of the agreement, Retrophin paid Asklepion an upfront payment of $5.0 million and agreed to pay milestones based on FDA approval and net product sales, plus tiered royalties on future net sales of Cholbam.
On March 18, 2015, the Company announced that the FDA had approved Cholbam capsules, the first FDA approved treatment for pediatric and adult patients with bile acid synthesis disorders due to single enzyme defects, and for patients with peroxisomal disorders (including Zellweger spectrum disorders). As a result of the approval, Retrophin exercised its right to purchase from Asklepion all worldwide rights, titles, and ownership of Cholbam and related assets. The FDA also granted Asklepion a Pediatric Priority Review Voucher ("PRV"), awarded to encourage development of new drugs and biologics for the prevention and treatment of rare pediatric diseases. A Pediatric PRV is transferable and provides the bearer with FDA priority review classification for a new drug application. The Pediatric PRV was transferred to Retrophin under the original terms of the agreement with Asklepion.
On March 31, 2015, the Company completed its acquisition from Asklepion of all worldwide rights, titles and ownership of Cholbam, including all related contracts, data assets, intellectual property, regulatory assets and the Pediatric PRV, in exchange for a cash payment of $28.4 million , in addition to approximately 661,279 shares of the Company’s common stock (initially valued at $9 million at the time of the definitive agreement with Asklepion, and $15.8 million at the acquisition completion date). The Company is also required to pay contingent consideration consisting of milestones and tiered royalties with a present value of $39.1 million .
The original asset value of the Pediatric PRV was recognized at $96.3 million . In this valuation process, we considered various factors which included data from recent sales of similar vouchers. The consideration paid to Asklepion did not value the Pediatric PRV because the issuance of a Pediatric PRV is extremely rare. Therefore when the FDA granted the Pediatric PRV with the Cholbam approval, a bargain purchase gain resulted.
The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805. The fair value of assets acquired and liabilities assumed was based upon a valuation and the Company’s estimates. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from acquired product rights to Cholbam, the Pediatric PRV, trade names and developed technologies, present value and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
The purchase included $83.2 million of intangible assets with definite lives related to product rights with values of $75.9 million for the U.S. and $7.3 million for the international rights. The useful lives related to the acquired product rights are expected to be approximately 10 years .

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The contingent consideration of $39.1 million recorded during the year ended December 31, 2015 was related to an agreement to pay an additional cash amount based on the product performance through 2025. The accrued contingent consideration was recorded as a liability at acquisition-date fair value using the income approach with assumed discount rates of 19.0% over the applicable term. The undiscounted amount the Company could pay under the contingent consideration agreement as of December 31, 2015 was up to $16.3 million .
Service fees with a net present value of $2.9 million were recorded during the year ended December 31, 2015. The net present value is based upon $4.0 million in total payments over a four year period starting as of the acquisition date.
As part of the business combination the Company recorded a deferred tax liability of $39.9 million . The deferred tax liability is derived from the difference in the Company's book basis and tax basis in the assets acquired of $88.5 million . The tax rate utilized was 45.4% .
The purchase price allocation of $91.3 million as of the acquisition completion date of March 31, 2015 was as follows ( in thousands ):
Cash paid upon consummation
$
33,430

Present value of contingent consideration and service fees
42,010

Fair Value of 661,279 shares issued to Asklepion
15,844

Total Purchase Price
$
91,284

 
 
Fair Value of Assets Acquired and Liabilities Assumed
 
Acquired product rights: Cholbam (Intangible  Asset)
$
83,200

Pediatric Priority Review Voucher
96,250

Inventory
777

Deferred tax liability
(39,880
)
Total Allocation of Purchase Price
$
140,347

Bargain Purchase Gain
(49,063
)
Total Purchase Price
$
91,284

Unaudited pro forma information for the transaction was not presented, because the effects of such transaction were considered immaterial to the Company.
NOTE 6. MARKETABLE SECURITIES
 The Company's marketable securities as of June 30, 2016 and December 31, 2015 were comprised of available-for-sale marketable securities which are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income. The amortized cost of debt securities in this category are adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. 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. During the six months ended June 30, 2016 , investment activity for the Company included $59.9 million in maturities and purchases of $68.5 million , all relating to debt based marketable securities.
Marketable securities consisted of the following ( in thousands ):
 
June 30, 2016
 
December 31, 2015
Marketable other than equity securities:
 
 
 
Commercial paper
$
40,823

 
$
31,864

Corporate debt securities
130,023

 
125,547

Securities of government sponsored entities
29,513

 
34,388

Total Marketable Securities:
$
200,359

 
$
191,799


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The following is a summary of short-term marketable securities classified as available-for-sale as of June 30, 2016 ( in thousands ):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Marketable other than equity securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
40,841

 
$
2

 
$
(20
)
 
$
40,823

Corporate debt securities
Less than 1
 
92,226

 
26

 
(25
)
 
92,227

Securities of government-sponsored entities
Less than 1
 
5,000

 

 

 
5,000

Total maturity less than 1 year
 
 
138,067

 
28

 
(45
)
 
138,050

Corporate debt securities
1 to 2
 
37,718

 
103

 
(25
)
 
37,796

Securities of government-sponsored entities
1 to 2
 
24,511

 
3

 
(1
)
 
24,513

Total maturity 1 to 2 years
 
 
62,229

 
106

 
(26
)
 
62,309

Total available-for-sale securities
 
 
$
200,296

 
$
134

 
$
(71
)
 
$
200,359

The following is a summary of short-term marketable securities classified as available-for-sale as of December 31, 2015 ( in thousands ):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Marketable Other than Equity Securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
31,899

 
$
6

 
$
(41
)
 
$
31,864

Corporate debt securities
Less than 1
 
69,859

 

 
(164
)
 
69,695

Total maturity less than 1 year
 
 
101,758

 
6

 
(205
)
 
101,559

Corporate debt securities
1 to 2
 
56,162

 

 
(310
)
 
55,852

Securities of government-sponsored entities
1 to 2
 
34,522

 
2

 
(136
)
 
34,388

Total maturity 1 to 2 years
 
 
90,684

 
2

 
(446
)
 
90,240

Total available-for-sale securities
 
 
$
192,442

 
$
8

 
$
(651
)
 
$
191,799

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 for other-than-temporary declines in fair value below cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, and the intent to sell, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. As of June 30, 2016 and December 31, 2015 , the Company believed the cost basis for available-for-sale investments was recoverable in all material respects.
NOTE 7.  DERIVATIVE FINANCIAL INSTRUMENTS
Since 2013, the Company has issued five tranches of common stock purchase warrants to secure financing, remediate covenant violations and provide consideration for credit facility amendments extinguished in 2015.
The Company accounts for derivative financial instruments in accordance with FASB ASC 815-40, Derivative and Hedging – Contracts in Entity’s Own Equity , pursuant to which instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company’s warrants are classified as liability instruments due to an anti-dilution provision that provides for a reduction to the exercise price of the warrants if the Company issues additional equity or equity linked instruments in the future at an effective price per share less than the exercise price then in effect.
The warrants are re-measured at each balance sheet date based on estimated fair value. Changes in estimated fair value are recorded as non-cash adjustments within other income (expenses), net, in the Company’s accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  The Company recorded a loss on the change in the estimated fair value of warrants of $9.1 million and a gain on the change in the estimated fair value of warrants of $5.3 million for the three and six months ended June 30, 2016 , respectively, and a loss on the change in the estimated fair value of warrants of $29.4 million and $66.2 million for the three and six months ended June 30, 2015, respectively.

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The Company calculated the fair value of the warrants using the Monte Carlo Simulation as of June 30, 2016 and December 31, 2015 , using the following assumptions:
 
June 30, 2016
 
December 31, 2015
Fair value of common stock
$
17.81

 
$
19.29

Remaining life of the warrants (in years)
1.6 - 3.5 years

 
2.1 - 4.0 years

Risk-free interest rate
.53-.79%

 
1.11-1.59%

Expected volatility
65-85%

 
75-85%

Dividend yield
%
 
%
Expected volatility is based on analysis of the Company’s volatility, as well as the volatilities of guideline companies. The risk free interest rate is based on the U.S. Treasury security rates for the remaining term of the warrants at the measurement date.
NOTE 8.  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 counterparties 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.
In estimating the fair value of the Company’s derivative liabilities, the Company used the Monte Carlo Simulation as of June 30, 2016 and December 31, 2015 . Based on the fair value hierarchy, the Company classified the derivative liability within Level 3.
In estimating the fair value of the Company’s contingent consideration, the Company used the comparable uncontrolled transaction (“CUT”) method for royalty payments based on projected revenues. Based on the fair value hierarchy, the Company classified 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, notes receivable, and accounts payable, due to their short term nature. We estimate the fair value of convertible debt is $67.3 million , considering factors such as market conditions, prepayment and make-whole provisions, variability in pricing from multiple lenders and term of 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 June 30, 2016 ( in thousands ):

As of June 30, 2016

Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Asset:
 
 
 
 
 
 
 
Marketable securities, available-for-sale
$
200,359

 
$

 
$
200,359

 
$


 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liability related to warrants
$
33,360

 
$

 
$

 
$
33,360

Business combination-related contingent consideration
$
86,377

 
$

 
$

 
$
86,377


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The following table presents the Company’s asset 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, 2015 ( in thousands ):
 
As of December 31, 2015
 
Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Asset:
 
 
 
 
 
 
 
Marketable securities, available-for-sale
$
191,799

 
$

 
$
191,799

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liability related to warrants
$
38,810

 
$

 
$

 
$
38,810

Business combination-related contingent consideration
$
59,021

 
$

 
$

 
$
59,021

The following table sets forth a summary of changes in the estimated fair value of the Company’s derivative financial instruments-warrants liability for the six months ended June 30, 2016 ( in thousands ):

Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
Balance at January 1, 2016
$
38,810

Reclassification of derivative liability to equity upon exercise of warrants
(173
)
Change in estimated fair value of liability classified warrants
(5,277
)
Balance at June 30, 2016
$
33,360

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  At each reporting period, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820. See Note 7 for further discussion of derivative financial instruments relating to warrants.
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 six months ended June 30, 2016 ( in thousands ):
 
Fair Value Measurements
of
Acquisition-Related
Contingent Consideration
(Level 3)
Balance at January 1, 2016
$
59,021

Increase from revaluation of contingent consideration
5,485

Acquisition of L-UDCA
25,000

Contractual payments
(1,510
)
Contractual payments accrued at June 30, 2016
(1,677
)
Foreign currency impact
58

Balance at June 30, 2016
$
86,377

The fair value of contingent consideration liabilities was determined by applying a form of the income approach (a level 3 input), based upon the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions included in the calculations were the earn-out period payment probabilities, 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 and six month periods ended June 30, 2016 , the Company incurred charges of $2.8 million and $5.5 million , respectively, in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the revaluation of the contingent consideration liabilities. For the three month period ended June 30, 2016, $1.5 million and $1.3 million are related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively. For the six month period ended June 30, 2016, $2.9 million and $2.6 million are related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively. In each case, the value increased due to changes in the estimated timing of payments. During the three and six month periods ended June 30, 2015 , the Company incurred charges of $0.1 million , in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
NOTE 9. INTANGIBLE ASSETS
As of June 30, 2016 , the net book value of amortizable intangible assets was approximately $184.4 million .

13


The following table sets forth amortizable intangible assets as of June 30, 2016 and December 31, 2015 ( in thousands ):

June 30, 2016
 
December 31, 2015
Finite-lived intangible assets
$
209,787

 
$
179,096

Less: accumulated amortization
(25,355
)
 
(17,560
)
Net carrying value
$
184,432

 
$
161,536

The following table summarizes amortization expense for the three and six months ended June 30, 2016 and 2015 ( in thousands ):

Three Months Ended June 30,
 
Six Months Ended June 30,

2016
 
2015
 
2016
 
2015
Research and development
$
81

 
$
193

 
$
163

 
$
414

Selling, general and administrative
3,829

 
3,614

 
7,632

 
5,128

Total amortization expense
$
3,910

 
$
3,807

 
$
7,795

 
$
5,542

NOTE 10.  NOTES PAYABLE
Convertible Notes Payable
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 senior convertible notes due in 2019 (the “Notes”) which are convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price is subject to customary anti-dilution protection. The Notes bear interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The Notes mature on May 30, 2019 unless earlier converted or repurchased in accordance with the terms, and there are no contractual payments due prior to that date. At June 30, 2016 and December 31, 2015 , the aggregate carrying value of the Notes was $44.1 million and $43.8 million , respectively.
As of March 31, 2016, the Company retrospectively adopted FASB ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This ASU amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of as a deferred charge. At June 30, 2016 and December 31, 2015 the debt issuance costs related to the Notes was $0.1 million .
NOTE 11. ACCRUED EXPENSES
Accrued expenses at June 30, 2016 and December 31, 2015 consisted of the following ( in thousands ):
 
June 30, 2016
 
December 31, 2015
Government rebates payable
$
3,826

 
$
3,158

Compensation related costs
4,765

 
7,143

Accrued royalties and contingent consideration
5,069

 
4,688

Research and development
5,725

 
4,281

Selling, general and administrative
1,619

 
2,704

Miscellaneous accrued
2,155

 
1,846

 
$
23,159

 
$
23,820

NOTE 12.  EARNINGS (LOSS) PER SHARE
Basic and diluted net earnings (loss) per common share is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, restricted stock units, warrants and shares issuable upon conversion of the 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.

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Basic and diluted net earnings (loss) per share is calculated as follows (net income amounts are stated in thousands) :
 
Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
Shares
 
Net Income
 
EPS
 
Shares
 
Net Income
 
EPS
Basic Earnings per Share
36,683,429

 
$
(13,403
)
 
$
(0.37
)
 
34,957,134

 
$
(25,527
)
 
$
(0.73
)
Dilutive earnings per share
36,683,429

 
$
(13,403
)
 
$
(0.37
)
 
34,957,134

 
$
(25,527
)
 
$
(0.73
)
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
Shares
 
Net Income
 
EPS
 
Shares
 
Net Income
 
EPS
Basic net earnings (loss) per share
36,601,807

 
$
(2,187
)
 
$
(0.06
)
 
31,079,053

 
$
14,128

 
$
0.45

Dilutive shares related to derivative warrants
1,461,478

 

 


 

 

 


Change in fair value of derivative instruments

 
(5,277
)
 


 

 

 


Convertible debt

 

 


 
2,642,160

 
1,035

 


Restricted stock

 

 


 
292,027

 

 


Stock options

 

 


 
814,165

 

 

Dilutive net earnings (loss) per share
38,063,285

 
$
(7,464
)
 
$
(0.20
)
 
34,827,405

 
$
15,163

 
$
0.44

For the three and six months ended June 30, 2016 and 2015 , the following shares were excluded because they were anti-dilutive ( share amounts in millions ):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Restricted stock units
0.3

 

 
0.3

 

Convertible debt
2.6

 
2.6

 
2.6

 

Options
6.1

 
2.6

 
5.9

 
1.2

Warrants
2.7

 

 

 
3.3

Total anti-dilutive shares
11.7

 
5.2

 
8.8

 
4.5

NOTE 13.  COMMITMENTS AND CONTINGENCIES
Leases and Sublease Agreements
California Offices
San Diego Office
On September 8, 2014, the Company entered into a lease agreement for its corporate headquarters located in San Diego, California. The Company rents this office space for approximately $540,000 per annum plus escalations. The lease commenced on October 1, 2014 and expires on December 31, 2017.
Carlsbad Office - Vacated
In October 2014, Retrophin ceased use of this facility and all employees moved into the new headquarters facility in San Diego, California. As a result of vacating this location, the Company recorded a loss of $0.2 million in the year ended December 31, 2014. On March 27, 2015 the Company was able to sublease a portion of this facility for the remaining lease term. The Company is in a listing agreement with a broker to market the remaining Carlsbad space for sublease. The Company's leases for the two suites which encompass this facility expire on February 28, 2017 and June 30, 2017.
Massachusetts Office
On July 31, 2014, the Company entered into a sublease agreement for new office space located in Cambridge, Massachusetts. The Company rents this office space for approximately $815,000 per annum. The sublease expires on December 31, 2016.
New York Office
On December 30, 2015, the Company amended the lease agreement for its offices in New York, New York to extend the lease term through November 2018. This Company rents this office space for approximately $550,000 per annum in rent plus escalations.

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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.
Contractual Commitments
The following table summarizes our principal contractual commitments, excluding open orders that support normal operations, as of June 30, 2016 ( in thousands ):
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating leases
$
2,140

 
$
1,054

 
$
1,086

 
$

 
$

Note payable, including contractual interest
52,037

 
2,070

 
49,967

 

 

Sales support services
3,262

 
416

 
833

 
2,013

 

Product supply contracts
1,515

 
1,265

 
250

 

 

Purchase order commitments
444

 
219

 
225

 

 

 
$
59,398

 
$
5,024

 
$
52,361

 
$
2,013

 
$

Legal Proceedings
On September 19, 2014, purported shareholders of the Company sued Martin Shkreli, the Company’s former Chief Executive Officer, in federal court in the Southern District of New York (Donoghue v. Retrophin, Inc., Case No. 14-cv-7640). The Company is a nominal defendant in this action. The plaintiffs sought, on behalf of the Company, disgorgement of short-swing profits from Mr. Shkreli under section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78(p)(b)). The Court has approved a settlement between the parties, under which Mr. Shkreli is obligated to pay $2,025,000 to the Company and an additional $625,000 to Plaintiffs to compensate them for their legal fees.  Mr. Shkreli defaulted on the judgment and the Company and the Plaintiffs took steps to collect it.  The Company did not record anything related to the judgment on its financial statements for 2015. Any related amounts received will be recorded against equity when collected.  On February 18, 2016, Mr. Shkreli sought leave from the Court to move for a protective order to block the enforcement of the judgment.  The Company and Plaintiffs’ counsel also sought leave to file motions in connection with their enforcement efforts.  On March 16, 2016, the Court granted the parties leave to file their respective motions and ordered that all enforcement efforts be stayed for thirty days.  On May 24, 2016, Plaintiffs’ counsel informed the Court that the parties had entered into an agreement under which Plaintiffs’ counsel were to be paid in full, and that pursuant to that agreement they had no further stake in the matter and would not participate in future case events. Under that agreement, the Company paid $8,249 to Plaintiffs’ counsel to compensate them for certain disbursements which Plaintiffs’ counsel had made in connection with their efforts to enforce the judgment, and the Company also assumed control over all restraining notices and subpoenas previously served by Plaintiffs’ counsel. At a status conference on June 10, 2016, the Court ordered Mr. Shkreli and the Company to keep the Court updated on the progress of their settlement negotiations. To date, none of the parties have filed any of the motions which they previously sought leave to file. The resolution of this matter is tied to the resolution of the United States Internal Revenue Service (“IRS”) tax levy discussed below.
On October 20, 2014, a purported shareholder of the Company filed a putative class action complaint in federal court in the Southern District of New York against the Company, Mr. Shkreli, Marc Panoff, and Jeffrey Paley (Kazanchyan v. Retrophin, Inc., Case No. 14-cv-8376). On December 16, 2014, a second, related complaint was filed in the Southern District of New York against the same defendants (Sandler v. Retrophin, Inc., Case No. 14-cv-9915). The complaints assert violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with defendants’ public disclosures during the period from November 13, 2013 through September 30, 2014. In December 2014, plaintiff Kazanchyan filed a motion to appoint lead plaintiff, to approve lead counsel, and to consolidate the two related actions. On February 10, 2015, the Court consolidated the two actions, appointed lead plaintiff, and approved lead counsel. Lead plaintiff filed a consolidated amended complaint on March 4, 2015, which again named the Company, Mr. Shkreli, Mr. Panoff, and Mr. Paley as defendants, but which also named Steven Richardson, Stephen Aselage, and Cornelius Golding as additional defendants. On May 26, 2015, with the consent of the lead plaintiff, the court ordered that the claims against Mr. Paley be dismissed. The remaining defendants, including the Company, filed motions to dismiss the consolidated amended complaint, which were fully-briefed as of October 29, 2015. On December 1, 2015, counsel jointly informed the Court that the parties had reached a comprehensive settlement, subject to Court approval. On January 29, 2016, the parties filed motion for preliminary approval of the settlement and supporting papers, including a stipulation of settlement. On February 2, 2016, the Court preliminarily approved the settlement. On June 10, 2016, the Court approved the settlement, directed implementation of the settlement, and ordered the action dismissed with prejudice. The settlement amount has been paid by the Company’s insurer.
In January 2015, the Company received a subpoena relating to a criminal investigation by the U.S. Attorney for the Eastern District of New York. The subpoena requested information regarding, among other things, the Company’s relationship with Mr. Shkreli and individuals or entities that had been investors in investment funds previously managed by Mr. Shkreli. The Company has been informed that it is not a target of the U.S. Attorney’s investigation, and is cooperating with the investigation. On December 17, 2015, an indictment against the Company’s former Chief Executive Officer,

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Martin Shkreli, and its former outside counsel, Evan Greebel, was unsealed in the United States District Court for the Eastern District of New York. A superseding indictment reflecting additional charges was filed on June 3, 2016. The Company has also been cooperating with a parallel investigation by the U.S. Securities and Exchange Commission (the “SEC”). On December 17, 2015, the SEC filed a civil complaint against Mr. Shkreli, Mr. Greebel, MSMB Capital Management LLC, and MSMB Healthcare Management LLC in the United States District Court for the Eastern District of New York. In connection with these proceedings, Mr. Shkreli, as well as a number of other current and former directors, officers and employees, have sought advancement of their legal fees from the Company. Mr. Shkreli, in particular, claims that the Company owes him in excess of $5 million in legal fees that he has incurred defending these actions. The Company disputes its obligation to pay the amount in full and has been negotiating with Mr. Shkreli over the amount to be paid. The resolution of this matter is tied to the resolution of the IRS tax levy discussed below. If the parties cannot agree on a resolution, the amount due will be addressed through litigation.
On August 17, 2015, the Company filed a lawsuit in federal district court for the Southern District of New York against Martin Shkreli, asserting that he breached his fiduciary duty of loyalty during his tenure as the Company’s Chief Executive Officer and a member of its Board of Directors (Retrophin, Inc. v. Shkreli, 15-CV-06451(NRB)). On August 19, 2015, Mr. Shkreli served a demand for JAMS arbitration on Retrophin, claiming that Retrophin had breached his December 2013 employment agreement. In response to Mr. Shkreli’s arbitration demand, the Company has asserted counterclaims in the arbitration that are substantially similar to the claims it previously asserted in the federal lawsuit against Mr. Shkreli. The parties have selected an arbitration panel. On Mr. Shkreli’s application, and with the Company’s consent, the federal Court has granted a stay of the federal lawsuit pending a determination by the arbitration panel whether the Company’s counterclaims will be litigated in the arbitration, as the Company is seeking. On April 22, 2016, the arbitration panel granted the parties’ request for a stay of the proceedings pending settlement discussions. In connection with these proceedings, Mr. Shkreli has sought advancement of his legal fees from the Company relating to his defense of the Company’s claims against him. Mr. Shkreli claims that he has to date incurred in excess of $2.8 million in fees, including fees incurred in negotiating with the Company over advancement. The Company disputes its obligation to pay the amount in full and has been negotiating with Mr. Shkreli over the amount to be paid. The resolution of this matter is tied to the resolution of the IRS tax levy discussed below. If the parties cannot agree on a resolution, the amount due will be addressed through litigation.
In July 2016, the Company received a demand for payment from the IRS regarding a levy issued by the IRS in March 2016 with respect to unpaid federal income taxes personally owed by Mr. Shkreli for the year ended December 31, 2014, for approximately $4.0 million . The levy sought to collect any property or rights to property (such as money, credits and bank deposits) in the Company’s possession that belong to or are owed to Mr. Shkreli.  The Company believes that it is uncertain, as a matter of law, whether and how the tax levy applies to the Company’s advancement obligations to Mr. Shkreli.  As indicated above, the amounts of the Company’s advancement obligations to Mr. Shkreli are subject to dispute.  The Company intends to seek a private letter ruling from the IRS for a formal decision with respect to the applicability of the tax levy.
The Company believes it is probable that it will incur some amount of loss related to Mr. Shkreli’s claims for advancement (as described above), either to the IRS or to Mr. Shkreli. However, there is significant uncertainty as to the outcome of this matter such that the amount of the loss is not estimable at the present time. Prior to its receipt of the IRS tax levy, the Company and Mr. Shkreli had negotiated a potential resolution of this matter. However, the existence of the tax levy has prevented the parties from pursuing that resolution and made uncertain the amount of any obligation that the company may actually incur to the IRS or to Mr. Shkreli, as the case may be. Accordingly, as of June 30, 2016 no accruals for loss contingencies had been recorded.
From time to time the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition.
NOTE 14.  SHARE BASED COMPENSATION
Restricted Shares
Service Based Restricted Stock Awards
The following table summarizes the Company’s restricted stock activity during the six months ended June 30, 2016 :
 
Number of
Restricted Stock Units
 
Weighted
Average
Grant Date Fair
Value
Outstanding December 31, 2015
429,666

 
$
20.38

Granted
130,000

 
16.01

Vested
(77,666
)
 
16.63

Forfeited/canceled
(34,335
)
 
12.07

Outstanding June 30, 2016
447,665

 
$
20.40

At June 30, 2016 , unamortized stock compensation for restricted stock awards was $6.4 million , with a weighted-average recognition period of 1.2 years .
Performance Based Restricted Stock Awards
During the three and six months ended June 30, 2016 , the Company issued 70,000 performance based restricted stock awards.

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Stock Options
The following table summarizes stock option activity during the six months ended June 30, 2016 :
 
Shares
Underlying
Options
 
Weighted
Average
Exercise
Price
 
Weighted Average Remaining Contractual Life (years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2015
5,665,584

 
$
17.05

 
8.75
 
$
31,542

Granted
1,381,750

 
16.09

 
 
 
 
Exercised
(166,611
)
 
9.43

 
 
 
 
Forfeited/canceled
(157,741
)
 
20.58

 
 
 
 
Outstanding at June 30, 2016
6,722,982

 
$
16.96

 
8.21
 
$
26,854

At June 30, 2016 , unamortized stock compensation for stock options was $46.8 million , with a weighted-average recognition period of 2.0 years .
At June 30, 2016 , outstanding options to purchase 2.9 million shares of common stock were exercisable with a weighted-average exercise price per share of $13.84 .
Share Based Compensation
The following table sets forth total non-cash stock-based compensation by operating statement classification for the three and six months ended June 30, 2016 and 2015 ( in thousands ):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Research and development
$
2,641

 
$
1,749

 
$
5,127

 
$
3,968

Selling, general & administrative
4,852

 
3,245

 
9,159

 
6,599

Total
$
7,493

 
$
4,994

 
$
14,286

 
$
10,567

Exercise of Warrants
During the three and six months ended June 30, 2016, the Company issued 15,000 shares of common stock upon the exercise of warrants for cash received by the Company in the amount of $0.1 million . The Company reclassified $0.2 million derivative liability to equity for the value of these warrants on the date of exercise. The warrants were revalued immediately prior to exercise and the change in the fair value of $0.1 million was recorded as other expense in the consolidated financial statements of the Company.
At June 30, 2016 and December 31, 2015 , warrants to purchase 2,650,548 and 2,665,548 shares of common stock, respectively, were outstanding.
NOTE 15. INVENTORY
Inventory, net of reserves, consisted of the following at June 30, 2016 and December 31, 2015 ( in thousands ):
 
June 30, 2016
 
December 31, 2015
Raw materials
$
232

 
$
289

Finished goods
2,481

 
2,247

Total inventory
$
2,713

 
$
2,536

The inventory reserve was $0 and $0.3 million at June 30, 2016 and December 31, 2015 , respectively.
NOTE 16. RECEIVABLES
Accounts Receivables
Accounts receivable, net of reserves for prompt pay discounts and doubtful accounts, was $16.6 million and $12.5 million at June 30, 2016 and December 31, 2015 , respectively. The total reserves for both periods were immaterial.
Notes Receivables
Notes receivable arose from the Company's sale of a Pediatric PRV in July 2015 to Sanofi for $245.0 million . $150.0 million was received upon closing, and $47.5 million is due on each of the first and second anniversaries of the closing. In accordance with GAAP, the Company recorded the future short term and long term notes receivable at their present value of $46.2 million and $44.9 million , respectively, at the date of the sale using a

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discount rate of 2.8% . The accretion on the notes receivable totaled $0.6 million and $1.3 million for the three and six month periods ending June 30, 2016 , respectively, and is recorded in interest expense, net, in the Consolidated Statements of Operations and Comprehensive Income (Loss). The present value of the current and long-term notes receivable are $47.5 million and $46.2 million , respectively, and $46.8 million and $45.6 million , respectively, as of June 30, 2016 and December 31, 2015 . The Company noted no indications for impairment as of June 30, 2016 .
NOTE 17.    SUBSEQUENT EVENT
Maturity of Note Receivable
On July 1, 2016 the Company received $47.5 million from Sanofi . This is the second of three payments related to the PRV sale agreement whereby the Company transfered the PRV To Sanofi in 2015. See Note 16 for further discussion.
Cholic Acid territory transfer for Australia
On July 15, 2016 the Company signed a binding memorandum of understanding ("MOU") with Asklepion in which the Company agreed to transfer to Asklepion the Cholic Acid Product Data Assets and Cholic Acid Know-How solely in the territory of Australia. Under the MOU, Asklepion will have the right to license its territory rights but will remain responsible for performance by its licensees. As consideration for the transfer, Asklepion will pay a royalty to the Company based on net sales within the territory.
San Diego - New Lease
On July 26, 2016, the Company entered into a Lease Agreement (the "Lease") with Kilroy Realty, LP, a Delaware limited partnership, whereby it leased approximately 23,107 square feet of space located at 3721 Valley Centre Drive, San Diego, that will house our corporate headquarters. The Lease has a term of seven years and seven months , commencing on December 20, 2016; an annual base rent of approximately $1.1 million  per annum plus escalations; a five year option renewal of the Lease at market rent; and additional rent for the proportionate share of the expense for the operation, maintenance and repair of the common areas.
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, 2015 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, 2015 , filed with the Securities and Exchange Commission (SEC) on February 26, 2016, and amended on March 2, 2016. Past operating results are not necessarily indicative of results that may occur in future periods.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item IA, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
Overview
We are a fully integrated biopharmaceutical company with approximately 130 employees headquartered in San Diego, California dedicated to delivering life-changing therapies to people living with rare diseases who have few, if any, treatment options. Our approach centers on our pipeline, featuring clinical-stage assets and pre-clinical discovery programs targeting rare diseases with significant unmet medical needs. Our research and development efforts are supported by revenues from the Company's marketed products, Chenodal ® , Cholbam ® and Thiola ® . In addition 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, catastrophic or rare diseases and that we believe offer attractive growth characteristics.
We currently sell the following three products:
Chenodal ® (chenodeoxycholic acid) 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 also been the standard of care for cerebrotendinous xanthomatosis (“CTX”) patients for more than three decades and we are currently pursuing adding this indication to the label.

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Cholbam ® (cholic acid) 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 ® (tiopronin) is approved in the United States for the prevention of cysteine (kidney) stone formation in patients with severe homozygous cystinuria.
On June 20, 2016 we announced the signing of a definitive agreement to purchase the rights, titles, and ownership of a liquid formulation of ursodeoxycholic acid (L-UDCA or ursodiol) from Asklepion Pharmaceuticals, LLC. We intend to file a New Drug Application with the U.S. Food and Drug Administration for the liquid formulation of L-UDCA for the treatment of primary biliary cholangitis (PBC) in 2017. The total purchase price of the acquisition was $25.5 million . See Note 5 for further discussion.

Products and Research and Development Programs
Products on the Market:
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 Food and Drug Administration (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's Abbreviated New Drug Application, or ANDA, for Chenodal was approved by the FDA for the treatment of gallstones; Chenodal is manufactured for Manchester Pharmaceuticals LLC ("Manchester") under this ANDA. Manchester subsequently obtained Orphan Drug Designation for Chenodal for the treatment of CTX, a rare autosomal recessive lipid storage disease, in 2010.
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. 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

20


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
The FDA approved Cholbam 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. Approximately 30 patients have transitioned from the open label extension trial to commercial product. The estimated incidence of bile acid synthesis disorders due to single enzyme defects is 1 to 9 per million live births.
Kolbam, the branded name of Cholbam in Europe, is indicated in Europe for the treatment of 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, encompassing the following single enzyme defects:
sterol 27-hydroxylase (presenting as cerebrotendinous xanthomatosis, CTX) deficiency;
2- (or alpha-) methylacyl-CoA racemase (AMACR) deficiency; and
cholesterol 7 alpha-hydroxylase (CYP7A1) deficiency.
Thiola (Tiopronin)
Thiola is 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, stone passage and multiple potential surgical procedures. The prevalence of cystinuria in the United States is estimated to be 10,000 to 12,000, indicating that there may be as many as 4,000 to 5,000 individuals affected with cystinuria severe enough to make them candidates for Thiola.
Product Candidates:
Sparsentan
Sparsentan , also known as RE-021, is an investigational therapeutic agent which acts as both a potent angiotensin receptor blocker (“ARB”), as well as a selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A . We have secured a license to sparsentan from Ligand Pharmaceuticals, Inc. and Bristol-Myers Squibb Company (who referred to it as DARA). We are developing sparsentan as a treatment for FSGS, which is a leading cause of end-stage renal disease and Nephrotic Syndrome (“NS”). There are no FDA approved pharmacological treatments for FSGS and the off-label armamentarium is limited to ACE/ARBs, steroids, and immunosuppressant agents, which are effective in only a subset of patients. We estimate that there are at least 40,000 FSGS patients in the United States. We have completed enrollment for our DUET Phase 2 clinical study of sparsentan for the treatment of FSGS and we anticipate having a top line data read out in the third quarter of 2016. Depending on the robustness of the data obtained in the DUET study, we may be able to support an application for accelerated approval for sparsentan on the basis of proteinuria as a surrogate endpoint. Sparsentan was granted orphan drug designation in the U.S. and E.U. in January and November 2015, respectively.
RE-024
We are developing RE-024, a novel small molecule, as a potential treatment for PKAN. PKAN is a genetic neurodegenerative disorder that is typically diagnosed in the first decade of life. Consequences of PKAN include dystonia, dysarthria, rigidity, retinal degeneration, and severe digestive problems. PKAN is estimated to affect 1 to 3 persons per million. There are currently no viable treatment options for patients with PKAN. RE-024 is a phosphopantothenate replacement therapy that aims to restore levels of this key substrate in PKAN patients. Certain international health regulators have approved the initiation of dosing RE-024 in PKAN patients under physician-initiated studies in accordance with local regulations in their respective countries. The Company filed a U.S. IND for RE-024 with the FDA in the first quarter of 2015 to support the commencement of a Company-sponsored Phase 1 study, which was successfully completed during 2015. The FDA granted RE-024 orphan drug designation in May 2015 and fast track designation by the FDA in June 2015. On February 24, 2016, we announced RE-024 was granted orphan drug designation from the European Commission. The Company continues discussion with the FDA and the EMA regarding the initiation of a potential registration-enabling efficacy trial in PKAN patients.
L-UDCA
Liquid ursodeoxycholic acid is a liquid formulation of ursodeoxycholic acid being developed for the treatment of a rare liver disease called PBC. The Company expects to file a New Drug Application with the FDA in 2017, and if approved, plans to make L-UDCA commercially available to the subset of PBC patients who have difficulty swallowing. There are no liquid formulations of ursodeoxycholic acid currently approved by the FDA.
RE-034
RE-034 is a synthetic hormone analog of the first 24 amino acids of the 39 amino acids contained in adrenocorticotropic hormone ("ACTH") incorporated into a novel formulation developed by the Company. RE-034 exhibits similar physiological actions as endogenous ACTH by binding to all five melanocortin receptors (pan-MCR), resulting in its anti-inflammatory and immunomodulatory effects. Retrophin has successfully

21


manufactured RE-034 at proof-of-concept scale using a novel formulation process that allows modulation of the release of the active ingredient from the site of administration. The Company is exploring strategic options for development of RE-034, including the evaluation of external partnership and out-licensing opportunities.
Preclinical:
NGLY1
The Company entered into a research collaboration with the Grace Science Foundation and the Warren Family Research Center for Drug Discovery and Development at the University of Notre Dame for the development of a novel therapeutic for patients with NGLY1 deficiency, a rare genetic disorder. NGLY1 deficiency is believed to be caused by a deficiency in an enzyme called N-glycanase-1, which is encoded by the gene NGLY1. The condition is characterized by a variety of symptoms, including global developmental delay, movement disorder, seizures, and ocular abnormalities. Under this collaboration, the Grace Science Foundation will provide support and funding to Retrophin to enable discovery efforts that aim to validate and address a new molecular target that may be relevant to NGLY1 deficiency. The Warren Family Research Center for Drug Discovery and Development at the University of Notre Dame will provide funding and in-kind research support to help Retrophin advance this program.
Results of Operations
Results of operations for the three and six month periods ended June 30, 2016 compared to the three and six month periods ended June 30, 2015 .
Net Product Sales:
The following table provides information regarding net product sales ( in thousands ):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
Increase
 
2016
 
2015
 
Increase
Net product sales
$
33,311

 
$
24,068

 
$
9,243

 
$
62,319

 
$
41,440

 
$
20,879

The increase in sales for the three and six months ended June 30, 2016 over the prior year is due to increased patient counts for Chenodal and Thiola, and our acquisition of Cholbam on March 31, 2015.
Operating Expenses:
The following table provides information regarding operating expenses ( in thousands ):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
Increase
 
2016
 
2015
 
Increase
Cost of goods sold
$
1,021

 
$
637

 
$
384

 
$
1,778

 
$
912

 
$
866

Research and development
17,675

 
10,563

 
7,112

 
32,347

 
20,910

 
11,437

Selling, general and administrative
23,205

 
19,692

 
3,513

 
42,330

 
34,547

 
7,783

Change in valuation of contingent consideration
2,789

 
120

 
2,669

 
5,485

 
120

 
5,365

 
$
44,690

 
$
31,012

 
$
13,678

 
$
81,940

 
$
56,489

 
$
25,451

Research and development expenses
We make significant investments in research and development in support of our development programs. Research and development costs are expensed as incurred and primarily include salary and benefit costs, fees paid to clinical research organizations, and supply costs.
The increase in research and development costs of $7.1 million for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 is primarily due to support of on-going efforts for Sparsentan, RE-024 and preclinical activities of $5.0 million, shared-based compensation expense of $1.0 million and other increases due to the advancement and ramp up of clinical and preclinical research of $1.1 million.
The increase in research and development costs of $11.4 million for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 is due to support of on-going efforts for Sparsentan, RE-024 and preclinical activities $8.2 million, salaries and share-based compensation expense of $1.5 million, and other increases due to the advancement and ramp up of clinical and preclinical research of $1.7 million.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily include salary and benefit costs for employees included in our sales, marketing, finance, information technology, legal and administrative organizations, outside legal and professional services, amortization and facilities costs.
The increase in selling, general and administrative expenses of $3.5 million for the three months ended June 30, 2016 as compared to the three months ended 2015 , is primarily due to an increase in personnel and compensation costs of $1.9 million, sales and marketing commercial programs of $1.4 million, and growth in foreign operations of $0.7 million, offset by lower legal fees in the current year of $0.5 million. These increased expenses are a result of the planned build out of the Company's sales force and sales support services.

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The increase in selling, general and administrative expenses of $7.8 million for the six months ended June 30, 2016 as compared to the six months ended 2015 , is primarily due to an increase in personnel and compensation of $4.8 million as a result of the planned build out of the Company's sales force and sales support services, amortization expense increase of $2.3 million from the acquisition of the Cholbam, sales and marketing support and promotional materials of $2.5 million, increases from growth in foreign operations of $1.2 million, offset by the settlement of an open account payable with our former outside legal counsel of $3.0 million.
Change in the valuation of contingent consideration
During the three and six month periods ended June 30, 2016 , the Company incurred charges of $2.8 million and $5.5 million , respectively, in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). For the three month period ended June 30, 2016, $1.5 million and $1.3 million is related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively. For the six month period ended June 30, 2016, $2.9 million and $2.6 million is related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively. The value increased due to changes in the estimated timing of payments. During the three and six month periods ended June 30, 2015 , the Company incurred charges of $0.1 million and $0.1 million, respectively, shown in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
Other Income/Expenses:
The following table provides information regarding other income (loss), net ( in thousands ):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
Increase (decrease)
 
2016
 
2015
 
Increase (decrease)
Other income, net
$
(206
)
 
$
522

 
$
(728
)
 
$
4

 
$
349

 
$
(345
)
Interest expense, net
(147
)
 
(2,922
)
 
2,775

 
(309
)
 
(6,720
)
 
6,411

Finance expense

 

 

 

 
(600
)
 
600

Change in fair value of derivative instruments
(9,063
)
 
(29,418
)
 
20,355

 
5,277

 
(66,171
)
 
71,448

Loss on extinguishment of debt

 
(2,250
)
 
2,250

 

 
(2,250
)
 
2,250

Litigation settlement gain

 
15,500

 
(15,500
)
 

 
15,500

 
(15,500
)
Bargain purchase gain

 

 

 

 
49,063

 
(49,063
)
 
$
(9,416
)
 
$
(18,568
)
 
$
9,152

 
$
4,972

 
$
(10,829
)
 
$
15,801

Interest expense, net
Interest expense, net, decreased by $2.8 million for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.  This decrease was due primarily to a reduction of interest expense of $1.4 million on the credit facility (extinguished in the third quarter of 2015) and lower amortization of debt discount of $0.3 million. The remaining change was due to increased interest income, of which $0.6 million related to interest on notes receivable and $0.5 million related to interest on investments.
Interest expense, net, decreased by $6.4 million for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 due to a reduction of interest expense of $2.7 million on the credit facility (extinguished in the third quarter of 2015), $1.1 million related to warrants issued for remediation of debt covenant violations (warrants issued in the first quarter of 2015), lower amortization of debt discount of $0.6 million, and increased interest income in the six months ended June 30, 2016, of which $1.3 million related to interest on notes receivable and $0.7 million related to interest on investments.
Change in fair value of derivative instruments
For the three and six months ended June 30, 2016 , the company recognized a loss of $9.1 million and a gain of $5.3 million , respectively. For the three months ended June 30, 2016, the loss resulted from an increase of the stock price during the reporting period. For the six months ended June 30, 2016, the gain resulted from a decrease in the stock price during the reporting period.
For the three and six months ended June 30, 2015 , the company recognized a loss of $29.4 million and $66.2 million, respectively, due to an increase in the derivative liability related to warrants, resulting from an increase in the Company's stock price.
Bargain Purchase Gain
For the six months ended June 30, 2015 , the Company recognized a bargain purchase gain on the acquisition of Cholbam.
Income Tax Benefit:
In the second quarter of 2016, the Company recorded total tax benefit of $7.4 million , primarily relating to the utilization of United States federal orphan drug and research and development tax credits.

23


Liquidity and Capital Resources
We believe that our available cash and short-term investments as of the date of this filing will be sufficient to fund our anticipated level of operations for at least the next 12 months. Management believes that our operating results will vary from quarter to quarter and year to year depending upon various factors including revenues, general and administrative expenses, and research and development expenses.
The Company had the following financial performance at June 30, 2016 and December 31, 2015 ( in thousands ):
 
June 30, 2016
 
December 31, 2015
Cash & Cash Equivalents
$
21,155

 
$
37,805

Marketable securities
200,359

 
191,799

Accumulated Deficit
(67,340
)
 
(65,153
)
Stockholders' Equity
314,372

 
299,971

 
 
 
 
Net Working Capital
$
220,089

 
$
214,951

Net Working Capital Ratio
3.75

 
3.47

Convertible Notes Payable
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 senior convertible notes due in 2019 which are convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price is subject to customary anti-dilution protection. The Notes bear interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The Notes mature on May 30, 2019 unless earlier converted or repurchased in accordance with the terms. The aggregate carrying value of the Notes was $44.1 million and $43.8 million , at June 30, 2016 and December 31, 2015 , respectively.
Cash Flows from Operating Activities
Cash provided by operating activities was $0.4 million for the six months ended June 30, 2016 compared to $1.4 million provided in the six months ended June 30, 2015 . After disregarding non-cash changes such as derivative liability fluctuations, share based compensation, bargain purchase gain adjustments, and deferred tax asset reserves, the decrease of $1.0 million was primarily due to increases in operating expenses offset by increases in revenue.
Cash Flows from Investing Activities
Cash used in investing activities for the six months ended June 30, 2016 was $14.0 million compared to $32.4 million used for the six months ended June 30, 2015 . The decrease of $18.4 million was partially attributable to cash used of $33.4 million in the purchase of Cholbam in 2015, offset by cash used to purchase marketable securities (net of marketable security maturities) of $8.6 million in 2016, and cash provided by the divestiture of assets of $3.3 million in 2015 .
Cash Flows from Financing Activities
For the six months ended June 30, 2016 , cash used by financing activities was $2.8 million compared to $140.5 million provided during the six months ended June 30, 2015 . In 2015, cash of $140 million, net of fees, was provided from the Company's follow-on public offering.
Funding Requirements
We believe that our available cash and short-term investments as of the date of this filing will be sufficient to fund our anticipated level of operations for at least the next 12 months. This belief is based on many factors, however some factors are beyond our control. Factors that may affect financing requirements include, but are not limited to:
revenue growth of our marketed products;
the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;
the timing of, and costs involved in, seeking and obtaining marketing approvals for our products, and in maintaining quality systems standards for our products;
our ability to manufacture sufficient quantities of our products to meet expected demand;
the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, litigation costs and the results of litigation;
our ability to enter into collaboration, licensing or distribution arrangements and the terms and timing of these arrangements;
the potential need to expand our business, resulting in additional payroll and other overhead expenses;
the potential acquisition or in-licensing of other products or technologies; and
the emergence of competing technologies or other adverse market or technological developments.

24


Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies.
Other Matters
Adoption of New Accounting Standards
See Note 3 to our unaudited Condensed Consolidated Financial Statements in this report for a discussion of adoption of new accounting standards.
Recently Issued Accounting Pronouncements
See Note 3 to our unaudited Condensed Consolidated Financial Statements in this report for a discussion of recently issued accounting pronouncements.
Off Balance Sheet Arrangements
None.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
We invest our excess cash and marketable securities primarily in United States government backed securities, asset-backed securities, and debt instruments of financial institutions and corporations with investment-grade credit ratings. These instruments have various short and long-term maturities, not exceeding two years. We do not utilize derivative financial instruments, derivative commodity instruments, or other market risk sensitive instruments, positions or transactions. Accordingly, we believe that, while the instruments held are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive investments. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would decrease our available for sale marketable securities by approximately $2.0 million if the Company were to sell the securities.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports required by the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change to our internal control over financial reporting that occurred during the quarter covered by this report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our evaluation did not identify significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2016 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION 
Item 1.  Legal Proceedings
The information required by this Item is incorporated herein by reference to Notes to unaudited Condensed Consolidated Financial Statements--Note 13 Commitments and Contingencies: Legal Proceedings in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
The following risk factors do not reflect any material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 , other than the revisions to the risk factors set forth below with an asterisk (*) next to the title. The following information sets

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forth risk factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. If any of the following risks actually occur, our business, operating results, prospects or financial condition could be harmed. Additional risks not presently known to us, or that we currently deem immaterial, may also affect our business operations.
Risks Related to the Commercialization of Our Products
The commercial success of Chenodal, Cholbam and Thiola depends on them being considered to be effective drugs with advantages over other therapies.
The commercial success of our products Chenodal, Cholbam and Thiola depends on them being considered to be effective drugs with certain advantages over other therapies. A number of factors, as discussed in greater detail below, may adversely impact the degree of acceptance of these products, including their efficacy, safety, price and benefits over competing therapies, as well as the reimbursement policies of third-party payers, such as government and private insurance plans.
If unexpected adverse events are reported in connection with the use of any of these products, physician and patient acceptance of the product could deteriorate and the commercial success of such product could be adversely affected. We are required to report to the FDA events associated with our products relating to death or injury. Adverse events could result in additional regulatory controls, such as a requirement for costly post-approval clinical studies or revisions to our approved labeling which could limit the indications or patient population for a product or could even lead to the withdrawal of a product from the market.
If physicians, patients and third-party payers do not accept our products, we may be unable to generate significant revenues.
Our drugs may not gain or maintain market acceptance among physicians and patients. Effectively marketing our products and any of our drug candidates, if approved, requires substantial efforts, both prior to launch and after approval. Physicians may elect not to prescribe our drugs, and patients may elect not to request or take them, for a variety of reasons including:
lower demonstrated efficacy, safety and/or tolerability compared to other drugs;
prevalence and severity of adverse side-effects;
lack of cost-effectiveness;
lack of coverage and adequate reimbursement availability from third-party payers;
a decision to wait for the approval of other therapies in development that have significant perceived advantages over our drug;
convenience and ease of administration;
other potential advantages of alternative treatment methods; and
ineffective marketing and/or distribution support.
If our drugs fail to achieve or maintain market acceptance, we will not be able to generate significant revenues.
*Changes in reimbursement practices of third-party payers could affect the demand for our products and the prices at which they are sold.
The business and financial condition of healthcare-related businesses will continue to be affected by efforts of governments and third-party payers to contain or reduce the cost of healthcare through various means. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for sparsentan, RE-024 and L-UDCA, or any other product candidate that we develop, restrict or regulate post-approval activities and affect our ability to profitably sell sparsentan, RE-024 and L-UDCA or any other product candidate for which we obtain marketing approval.
Our products are sold to patients whose healthcare costs are met by third-party payers, such as government programs, private insurance plans and managed-care programs. These third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. Levels of reimbursement, if any, may be decreased in the future, and future healthcare reform legislation, regulations or changes to reimbursement policies of third party payers may otherwise adversely affect the demand for and price levels of our products, which could have a material adverse effect on our sales and profitability.
Economic, social, and congressional pressure may result in individuals and government entities increasingly seeking to achieve cost savings through mechanisms that limit coverage or payment for our products. For example, state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring prior authorization for use of drugs. Managed care organizations continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs. This may result in managed care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on prices and reimbursement for our products.
We may not be able to rely on orphan drug exclusivity for Cholbam/Kolbam or any of our products.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. We have obtained orphan designation for Cholbam/Kolbam in the U.S. and EU. Generally, if a product with an orphan drug designation

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subsequently receives the first marketing approval for the indication for which it has such designation, that product is entitled to a period of marketing exclusivity, which precludes the applicable regulatory authority from approving another marketing application for the same drug for the same indication for that time period. The applicable period is seven years in the United States and ten years in Europe. Even though we have been awarded orphan drug exclusivity for Cholbam in the United States, we may not be able to maintain it. For example, if a competitive product that contains the same active moiety and treats the same disease as our product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product and we may effectively lose orphan drug exclusivity. Similarly, if a competitive product that contains the same active moiety and treats the same disease as our product candidate is approved for orphan drug exclusivity before our product candidate, we may not be able to obtain approval for our product candidate until the expiration of the competitive product’s orphan drug exclusivity unless our product candidate is shown to be clinically superior to the competitive product.
Additional competitors could enter the market, including with generic versions of our products, and sales of our affected products may decline materially.
Under the Hatch-Waxman Amendments of the Federal Food, Drug, and Cosmetic Act (the "FDC Act"), a pharmaceutical manufacturer may file an abbreviated new drug application ("ANDA"), seeking approval of a generic copy of an approved innovator product or an NDA under Section 505(b)(2) that relies on the FDA’s prior findings of safety and effectiveness in approving the innovator product. A Section 505(b)(2) NDA may be for a new or improved version of the original innovator product. The Hatch-Waxman Amendments also provide for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA acceptance) of an ANDA or Section 505(b)(2) NDA. In addition, the FDC Act provides, subject to certain exceptions, a period during which an FDA-approved drug may be afforded orphan drug exclusivity. In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic or Section 505(b)(2) applicant that seeks to market its product before expiration of the patents must include in the ANDA what is known as a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving notice the innovator sues to enforce its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.
Chenodal and Thiola are subject to immediate competition from compounded and generic entrants, as the ANDA and NDA for these drug products have no remaining patent or nonpatent exclusivity. If a generic version is approved, sales of our product would be negatively impacted, which could have a material adverse impact on our sales and profitability.
We are dependent on third parties to manufacture and distribute our pharmaceutical products who may not fulfill their obligations.
We have no manufacturing capabilities and rely on third party manufacturers who are sole source suppliers for manufacturing of Chenodal Thiola, and Cholbam. The facilities used by our third party manufacturers must be approved by the FDA, or in the case of Kolbam in the European Union, the European Medicines Agency. Our dependence on third parties for the manufacture of our products may harm our profit margin on the sale of products and our ability to deliver products on a timely and competitive basis. If our third party manufacturers are unable to manufacture to specifications or in compliance with applicable regulatory requirements, our ability to commercialize our products will be adversely impacted and could affect our ability to gain market acceptance for our products and negatively impact our revenues.
We currently have no in-house distribution channels for Chenodal, Thiola or Cholbam and we are dependent on a third-party distributor, Dohmen Life Sciences Services, to distribute such products. We rely on this distributor for all of our proceeds from sales of Chenodal, Thiola and Cholbam in the United States. The outsourcing of our distribution function is complex, and we may experience difficulties that could reduce, delay or stop shipments of such products. If we encounter such distribution problems, and we are unable to quickly enter into a similar agreement with another distributor on substantially similar terms, distribution of Chenodal, Thiola and/or Cholbam could become disrupted, resulting in lost revenues, provider dissatisfaction, and/or patient dissatisfaction.
Governments outside the United States tend to impose strict price controls and reimbursement approval policies, which may adversely affect our prospects for generating revenue.
In some countries, particularly European Union countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time (6 to 12 months or longer) after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our prospects for generating revenue, if any, could be adversely affected and our business may suffer.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate product revenue.
Risks Related to the Development of our Product Candidates
*Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates which could prevent or significantly delay their regulatory approval.
Our efforts to develop certain of our product candidates are at an early stage. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and initial results from a clinical trial do not necessarily predict final results. We cannot assure that any future clinical trials of sparsentan, RE-024 and/or L-UDCA will ultimately be successful.

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Before obtaining regulatory approval to conduct clinical trials of our product candidates, we must conduct extensive preclinical tests to demonstrate the safety of our product candidates in animals. Preclinical testing is expensive, difficult to design and implement, and can take many years to complete. A failure of one or more of our preclinical studies can occur at any stage of testing.
We will only obtain regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA, and in the case of foreign commercialization, to the applicable foreign regulatory authorities, in well-designed and conducted clinical trials, that our product candidates are safe and effective and otherwise meet the appropriate standards required for approval for a particular indication.
There can be no assurance that the DUET Phase 2 clinical study for sparsentan will meet its primary endpoint or that the data will support an application for accelerated approval by the FDA or that the FDA will accept a proteinuria endpoint. Likewise, there can be no assurance that any future clinical study for RE-024 will demonstrate that RE-024 is safe and effective for treating PKAN or that the data obtained from any such clinical trials will support an application for accelerated approval by the FDA.
Clinical trials can be lengthy, complex and extremely expensive processes with uncertain results. Our product candidates are intended to treat FSGS and PKAN, each of which is a rare disease. Given that these development candidates are in the early stages of required testing, we may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible patients willing and able to participate in the clinical trials required by the FDA or foreign regulatory agencies. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. To date, we are not aware of any pharmaceutical product to treat PKAN or FSGS that has been approved by the FDA or EMA specifically for the treatment of these indications. As a result, we cannot be sure what endpoints the FDA and/or EMA will require us to measure in later-stage clinical trials of our product candidates.
We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to obtain regulatory approval or commercialize our product candidates, including:
our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect to be promising;
regulators may require us to conduct studies of the long-term effects associated with the use of our product candidates;
regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
the FDA or any non-United States regulatory authority may impose conditions on us regarding the scope or design of our clinical trials or may require us to resubmit our clinical trial protocols to institutional review boards for re-inspection due to changes in the regulatory environment;
the number of patients required for our clinical trials may be larger than we anticipate or participants may drop out of our clinical trials at a higher rate than we anticipate;
our third-party contractors or clinical investigators may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner;
we might have to suspend or terminate one or more of our clinical trials if we, regulators or institutional review boards determine that the participants are being exposed to unacceptable health risks;
regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
the cost of our clinical trials may be greater than we anticipate;
the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate or we may not be able to reach agreements on acceptable terms with prospective clinical research organizations; and
the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
be delayed in obtaining, or may not be able to obtain, marketing approval for one or more of our product candidates;
obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval; and
have the product removed from the market after obtaining marketing approval.
Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will be initiated as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates. Such delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.

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In addition, we depend on independent clinical investigators and contract research organizations (“CROs”) to conduct our clinical trials under agreements with us. The CROs play a significant role in the conduct of our clinical trials. Failure of the CROs to meet their obligations could adversely affect clinical development of our product candidates. The independent clinical investigators are not our employees and we cannot control the timing or amount of resources they devote to our studies. If their performance is substandard, it could delay or prevent approval of our FDA applications.
FDA approval for a product requires substantial or extensive preclinical and clinical data and supporting documentation. The approval process may take years and may involve on-going requirements as well as post marketing obligations. For example, we have certain postmarketing requirements and commitments associated with Cholbam. FDA approval once obtained, may be withdrawn. If the regulatory approval for Thiola, Chenodal and/or Cholbam are withdrawn for any reason, it would have a material adverse impact on our sales and profitability. Further, we face risks relating to the postmarking obligations and commercial acceptance of Cholbam, which was approved by the FDA on March 17, 2015.
*We face substantial risks related to the commercialization of our product candidates.
We have invested a significant portion of our efforts and financial resources in the development and acquisition of our most advanced product candidates, sparsentan, RE-024 and L-UDCA. Our ability to generate product revenue from these development stage compounds, which we do not expect will occur for at least the next several years, if ever, may depend heavily on the successful development and commercialization of these product candidates. The successful commercialization of our future product candidates will depend on several factors, including the following:
obtaining supplies of sparsentan, RE-024 and subsequent product candidates for completion of our clinical trials on a timely basis;
successful completion of pre-clinical and clinical studies;
obtaining marketing approvals from the FDA and similar regulatory authorities outside the United States;
establishing commercial-scale manufacturing arrangements with third-party manufacturers whose manufacturing facilities are operated in compliance with cGMP regulations;
launching commercial sales of the product, whether alone or in collaboration with others;
acceptance of the product by patients, the medical community and third-party payers;
reimbursement from medical, medicaid or private payers;
competition from other companies;
successful protection of our intellectual property rights from competing products in the United States and abroad; and
a continued acceptable safety and efficacy profile of our product candidates following approval.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization.
Undesirable side effects caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale.
In addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:
regulatory authorities may require the addition of restrictive labeling statements;
regulatory authorities may withdraw their approval of the product; and
we may be required to change the way the product is administered or conduct additional clinical trials.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from its sale or adversely affect our reputation.
*We may not be able to obtain orphan drug exclusivity for our product candidates. If our competitors are able to obtain orphan drug exclusivity for their products that are the same drug as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Although we have obtained orphan designation for sparsentan and RE-024, and expect to seek orphan drug designations from the FDA for RE-034, there can be no assurance that there will be any benefits associated with such designation, or that the FDA will grant orphan status. There can be no assurance that we will successfully obtain such designations. If we are unable to secure orphan status in either Europe or the United States it may have a material negative effect on our share price.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, that product is entitled to a period of marketing exclusivity, which precludes the applicable regulatory authority from approving another marketing application for the same drug for the same indication for that time period. The applicable period is seven years in the United States and ten

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years in Europe. Obtaining orphan drug exclusivity for sparsentan and RE-024 may be important to the product candidate’s success. Even if we obtain orphan drug exclusivity, we may not be able to maintain it. For example, if a competitive product that contains the same active moiety and treats the same disease as our product candidate is shown to be clinically superior to our product candidate, any orphan drug exclusivity we have obtained will not block the approval of such competitive product and we may effectively lose what had previously been orphan drug exclusivity. Similarly, if a competitive product that contains the same active moiety and treats the same disease as our product candidate is approved before our product candidate is approved, we may not be able to obtain approval for our product candidate until the expiration of the competitive product’s orphan drug exclusivity unless our product candidate is shown to be clinically superior to the competitive product.
Risks Related to our Products and Product Candidates
*Our products may not achieve or maintain expected levels of market acceptance or commercial success.
The success of our products is dependent upon achieving and maintaining market acceptance. Commercializing products is time consuming, expensive and unpredictable. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees, successfully commercialize new products or current products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success.
Further, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of the affected products. Accordingly, new data about our products, or products similar to our products, could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal.
Our current products and any products that we bring to the market, including sparsentan, RE-024 and L-UDCA if they receive marketing approval-may not gain market acceptance by physicians, patients, third-party payers, and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
the prevalence and severity of any side effects, including any limitations or warnings contained in a product’s approved labeling;
the efficacy and potential advantages over alternative treatments;
the pricing of our product candidates;
relative convenience and ease of administration;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support and timing of market introduction of competitive products;
publicity concerning our products or competing products and treatments; and
sufficient third-party insurance coverage or reimbursement.
Even if a potential or current product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will not be known until after it is launched. Our efforts to educate patients, the medical community, and third-party payers on the benefits of our product may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by the conventional technologies marketed b