Retrophin, Inc.
Retrophin, Inc. (Form: 10-Q, Received: 11/04/2016 15:04:34)
 
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 September 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 November 3, 2016 was 37,732,329 .
 


Table of Contents

RETROPHIN, INC.
Form 10-Q
September 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 reports in Form 10-Q for the periods ended March 31, 2016 and June 30, 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)
 
September 30, 2016
 
December 31, 2015
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
23,895

 
$
37,805

Marketable securities
250,408

 
191,799

Accounts receivable, net
14,955

 
12,458

Inventory, net
3,253

 
2,536

Prepaid expenses and other current assets
3,553

 
2,378

Prepaid taxes

 
8,107

Note receivable, current
46,526

 
46,849

Total current assets
342,590

 
301,932

Property and equipment, net
382

 
428

Other assets
1,974

 
1,859

Prepaid tax assets
3,240

 

Intangible assets, net
183,298

 
161,536

Goodwill
936

 
936

Note receivable, long term

 
45,573

Total assets
$
532,420

 
$
512,264

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
3,066

 
$
7,639

Accrued expenses
40,376

 
23,820

Guaranteed minimum royalty
2,000

 
2,000

Other current liabilities
1,143

 
958

Taxes payable
3,879

 

Business combination-related contingent consideration
6,570

 
13,754

Derivative financial instruments, warrants
28,960

 
38,810

Total current liabilities
85,994

 
86,981

Convertible debt
44,257

 
43,766

Other non-current liabilities
2,461

 
3,066

Guaranteed minimum royalty, less current portion
8,281

 
8,885

Business combination-related contingent consideration, less current portion
75,370

 
45,267

Deferred income tax liability, net
8,462

 
24,328

Total liabilities
224,825

 
212,293

Stockholders' Equity:
 

 
 

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

 

Common stock $0.0001 par value; 100,000,000 shares authorized; 37,703,996 and 36,465,853 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
4

 
4

Additional paid-in capital
412,348

 
365,802

Accumulated deficit
(104,453
)
 
(65,153
)
Accumulated other comprehensive loss
(304
)
 
(682
)
Total stockholders' equity
307,595

 
299,971

Total liabilities and stockholders' equity
$
532,420

 
$
512,264

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

3

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net product sales
$
33,945

 
$
28,005

 
$
96,265

 
$
69,444

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Cost of goods sold
1,573

 
513

 
3,351

 
1,424

Research and development
18,428

 
14,064

 
50,775

 
34,974

Selling, general and administrative
23,848

 
22,308

 
66,178

 
56,856

Legal fee settlement
5,212

 

 
5,212

 

Change in fair value of contingent consideration
5,256

 
6,906

 
10,741

 
7,026

Impairment of intangible assets

 
4,710

 

 
4,710

Total operating expenses
54,317

 
48,501

 
136,257

 
104,990

 
 
 
 
 
 
 
 
Operating loss
(20,372
)
 
(20,496
)
 
(39,992
)
 
(35,546
)
 
 
 
 
 
 
 
 
Other income (expenses), net:
 

 
 

 
 
 
 
Other income (expenses), net
151

 
(314
)
 
156

 
35

Interest expense, net
(299
)
 
(695
)
 
(609
)
 
(7,415
)
Debt early payment penalty

 

 

 
(2,250
)
Finance expense

 

 

 
(600
)
Change in fair value of derivative instruments
(10,126
)
 
29,991

 
(4,849
)
 
(36,180
)
Gain on sale of assets

 
140,004

 

 
140,004

Loss on extinguishment of debt

 
(4,151
)
 

 
(4,151
)
Litigation settlement gain

 

 

 
15,500

Bargain purchase gain

 

 

 
49,063

Total other income (loss), net
(10,274
)
 
164,835

 
(5,302
)
 
154,006

 
 
 
 
 
 
 
 
Income (loss) before provision for income taxes
(30,646
)
 
144,339

 
(45,294
)
 
118,460

 
 
 
 
 
 
 
 
Income tax benefit (expense)
(6,467
)
 
(38,761
)
 
5,994

 
1,246

 
 
 
 
 
 
 
 
Net income (loss)
$
(37,113
)
 
$
105,578

 
$
(39,300
)
 
$
119,706

 
 
 
 
 
 
 
 
Net earnings (loss) per common share, basic
$
(1.00
)
 
$
2.95

 
$
(1.07
)
 
$
3.67

Net earnings (loss) per common share, diluted
$
(1.00
)
 
$
1.78

 
$
(1.07
)
 
$
3.30

Weighted average common shares outstanding, basic
36,980,356

 
35,741,877

 
36,728,911

 
32,650,408

Weighted average common shares outstanding, diluted
36,980,356

 
42,752,859

 
36,728,911

 
36,800,536

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 

 
 

 
 
 
 
Net income (loss)
$
(37,113
)
 
$
105,578

 
$
(39,300
)
 
$
119,706

Foreign currency translation
17

 
14

 
19

 
8

Unrealized gain (loss) on marketable securities
308

 
(876
)
 
(397
)
 
(4,395
)
Comprehensive income (loss)
$
(36,788
)
 
$
104,716

 
$
(39,678
)
 
$
115,319

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 STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
For the Nine Months Ended September 30,
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
Net income (loss)
$
(39,300
)
 
$
119,706

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

 
 

Depreciation and amortization
11,953

 
9,417

Realized gain (loss) on marketable securities
(11
)
 
293

Gain upon divestiture of Pediatric Priority Review Voucher

 
(140,004
)
Gain upon divestiture of assets to Turing Pharmaceuticals

 
(914
)
Deferred income tax benefit
(10,999
)
 
(11,791
)
Interest income from notes receivable
(1,605
)
 

Legal fee settlement
5,212

 

Non-cash interest expense
1,551

 
1,818

Amortization of premiums on marketable securities
853

 

Amortization of debt discount and deferred financing costs
491

 
1,175

Lease liability

 
32

Loss on early retirement of debt

 
4,151

Impairment of intangible assets

 
4,710

Loss on disposal of fixed assets

 
112

Legal accrual reversal
(2,967
)
 

Bargain purchase gain

 
(49,063
)
Share based compensation
22,034

 
18,748

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

 
1,050

Change in estimated fair value of liability classified warrants
4,849

 
36,180

Change in estimated fair value of contingent consideration
10,741

 
7,026

Payments related to change in fair value of contingent consideration
(772
)
 
(203
)
Changes in operating assets and liabilities, net of business acquisitions:
 

 
 

Accounts receivable
(2,486
)
 
(5,540
)
Inventory
(712
)
 
(1,284
)
Prepaid expenses and other current assets
(822
)
 
(1,912
)
Accounts payable and accrued expenses
3,278

 
(1,172
)
Income taxes payable
3,879

 
9,628

Net cash provided by operating activities
5,167

 
2,163

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Purchase of fixed assets
(61
)
 
(35
)
Cash paid for intangible assets
(7,632
)
 
(5,271
)
Proceeds from the sale/maturity of marketable securities
92,609

 
4,977

Purchase of marketable securities
(152,016
)
 
(94,793
)
Proceeds from maturity of note receivable
47,500

 

Security deposits
(115
)
 

Cash received upon divestiture of asset

 
148,411

Cash paid upon acquisition, net of cash acquired
(500
)
 
(33,430
)
Net cash provided by (used in) investing activities
(20,215
)
 
19,859

 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Payment of acquisition-related contingent consideration-Manchester
(3,257
)
 
(2,220
)
Payment of acquisition-related contingent consideration-Asklepion
(1,082
)
 
(307
)
Payment of guaranteed minimum royalty
(1,500
)
 
(1,500
)
Proceeds from exercise of warrants
5,998

 
4,372

Payment of other liability
(750
)
 
(1,000
)
Proceeds from exercise of stock options
2,225

 
5,237

Excess benefit related to stock compensation
(439
)
 
834

Repayment of credit facility

 
(45,000
)
Proceeds received from issuance of common stock

 
149,454

Financing costs from issuance of common stock

 
(9,500
)
Net cash provided by financing activities
1,195

 
100,370

 
 
 
 
Effect of exchange rate changes on cash
(57
)
 

Net change in cash
(13,910
)
 
122,392

Cash, beginning of year
37,805

 
18,204

 
 
 
 
Cash, end of period
$
23,895

 
$
140,596

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 135 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 cystine (kidney) stone formation in patients with homozygous 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. In the third quarter of 2016, we announced positive top-line data from the Phase 2 DUET study of sparsentan for the treatment of FSGS. We will work with the FDA in the near future to determine the most expeditious path forward to gain approval for sparsentan. Sparsentan was granted orphan drug designation in the U.S. and EU in January 2015 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. 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 is providing 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 is providing 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 retroactively adopted the new guidance in 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 did 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. The adoption of this standard will not have a material impact 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 its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This 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 affected by this ASU . This ASU is not expected to have a material impact on the Company’s financial statements.
In October 2016, the FASB issued No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance changes the accounting for income tax effects of intra-entity transfers of assets other than inventory. Under the new guidance, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The new guidance will be effective for the Company starting in fiscal year 2018 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements as well as whether to adopt the new guidance early.
NOTE 4.  INCOME TAXES
The following table summarizes our effective tax rate and income tax (expense) benefit for the three and nine months ended September 30, 2016 and 2015 (in thousands except for percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Effective tax rate
(21.1
)%
 
26.9
%
 
13.2
%
 
(1.1
)%
Income tax (expense) benefit
(6,467
)
 
(38,761
)
 
5,994

 
1,246

For the three and nine months ended September 30, 2016, we recognized an income tax expense of $6.5 million and an income tax benefit $6.0 million , respectively, representing an effective tax rate of (21.1)% and 13.2% , respectively. Under GAAP, quarterly effective tax rates may vary

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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.
The difference between the expected statutory federal tax benefit of 35% and the (21.1)% effective tax expense for the three months ended September 30, 2016, was primarily attributable to the increase in valuation allowance against our deferred tax assets, partially offset by the tax benefit of prior year return to provision true-ups.
The difference between the expected statutory federal tax benefit of 35% and the 13.2% effective tax benefit for the nine months ended September 30, 2016, was primarily attributable to the increase in valuation allowance against our deferred tax assets.
For the three and nine months ended September 30, 2015, we recognized income tax expense of $38.8 million and an income tax benefit of $1.2 million , respectively, representing an effective tax rate of 26.9% and (1.1)% , respectively. The difference between the expected statutory federal tax expense of 35% and the (1.1)% effective tax benefit for the nine months ended September 30, 2015, was primarily attributable to the current and deferred tax expense recorded on the sale of our Priority Review Voucher, offset by the partial release of the US federal valuation allowance.
At September 30, 2016, we had gross unrecognized tax benefits of  $1.5 million  compared to  $3.3 million  at December 31, 2015, representing a net decrease of  $1.8 million  during the nine months ended September 30, 2016. If recognized, none 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 nine months ended September 30, 2016.
We are currently under income tax audit examination for our United States federal income tax return for 2014. At this time, we do not anticipate that the conclusion of the audit will have a material effect on the financial statements.
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 ("NDA") 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 is expected to be approximately 17 years once the 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

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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 .
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 was 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

NOTE 6. MARKETABLE SECURITIES
 The Company's marketable securities as of September 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. 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. Interest and dividends on securities classified as available-for-sale are included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. During the nine months ended September 30, 2016 , investment activity for the Company included $92.6 million in maturities and purchases of $152.0 million , all relating to debt based marketable securities.

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Marketable securities consisted of the following ( in thousands ):
 
September 30, 2016
 
December 31, 2015
Marketable other than equity securities:
 
 
 
Commercial paper
$
37,251

 
$
31,864

Corporate debt securities
173,669

 
125,547

Securities of government sponsored entities
39,488

 
34,388

Total Marketable Securities:
$
250,408

 
$
191,799

The following is a summary of short-term marketable securities classified as available-for-sale as of September 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
 
$
37,302

 
$

 
$
(51
)
 
$
37,251

Corporate debt securities
Less than 1
 
96,929

 
18

 
(57
)
 
96,890

Securities of government-sponsored entities
Less than 1
 
9,500

 

 

 
9,500

Total maturity less than 1 year
 
 
143,731

 
18

 
(108
)
 
143,641

Corporate debt securities
1 to 2
 
76,909

 
24

 
(154
)
 
76,779

Securities of government-sponsored entities
1 to 2
 
30,012

 

 
(24
)
 
29,988

Total maturity 1 to 2 years
 
 
106,921

 
24

 
(178
)
 
106,767

Total available-for-sale securities
 
 
$
250,652

 
$
42

 
$
(286
)
 
$
250,408

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 September 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.

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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 $10.1 million and $4.8 million for the three and nine months ended September 30, 2016 , respectively, and a gain on the change in the estimated fair value of warrants of $30.0 million and a loss on the change in the estimated fair value of warrants of $36.2 million for the three and nine months ended September 30, 2015, respectively.
The Company calculated the fair value of the warrants using the Monte Carlo Simulation as of September 30, 2016 and December 31, 2015 , using the following assumptions:
 
September 30, 2016
 
December 31, 2015
Fair value of common stock
$
22.38

 
$
19.29

Remaining life of the warrants (in years)
1.4 - 3.3 years

 
2.1 - 4.0 years

Risk-free interest rate
.66-.89%

 
1.11-1.59%

Expected volatility
55-80%

 
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 September 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 $74.7 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 September 30, 2016 ( in thousands ):

As of September 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
$
250,408

 
$

 
$
250,408

 
$


 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liability related to warrants
$
28,960

 
$

 
$

 
$
28,960

Business combination-related contingent consideration
$
81,940

 
$

 
$

 
$
81,940


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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 nine months ended September 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
(14,699
)
Change in estimated fair value of liability classified warrants
4,849

Balance at September 30, 2016
$
28,960

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 nine months ended September 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
10,741

Acquisition of L-UDCA
25,000

Contractual payments
(3,149
)
Contractual payments accrued at September 30, 2016
(9,756
)
Foreign currency impact
83

Balance at September 30, 2016
$
81,940

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 nine month periods ended September 30, 2016 , the Company incurred charges of $5.3 million and $10.7 million , respectively, in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the revaluation of the contingent consideration liabilities. For the three month period ended September 30, 2016, $1.6 million , $1.8 million and $1.9 million are related to the increase in contingent consideration liabilities for the products Chenodal, Cholbam and product candidate L-UDCA, respectively. For the nine month period ended September 30, 2016, $4.4 million , $4.4 million and $1.9 million are related to the increase in contingent consideration liabilities for the products Chenodal, Cholbam and product candidate L-UDCA, respectively. In each case, the value increased due to changes in the estimated timing of payments. During the three and nine month periods ended September 30, 2015 , the Company incurred charges of $6.9 million and $7.0 million , respectively, in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
NOTE 9. INTANGIBLE ASSETS
As of September 30, 2016 , the net book value of amortizable intangible assets was approximately $183.3 million .

13


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

September 30, 2016
 
December 31, 2015
Finite-lived intangible assets
$
212,722

 
$
179,096

Less: accumulated amortization
(29,424
)
 
(17,560
)
Net carrying value
$
183,298

 
$
161,536

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

Three Months Ended September 30,
 
Nine Months Ended September 30,

2016
 
2015
 
2016
 
2015
Research and development
$
82

 
$
200

 
$
245

 
$
614

Selling, general and administrative
3,987

 
3,675

 
11,619

 
8,803

Total amortization expense
$
4,069

 
$
3,875

 
$
11,864

 
$
9,417

NOTE 10.  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 September 30, 2016 and December 31, 2015 , the aggregate carrying value of the Notes was $44.3 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 September 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 September 30, 2016 and December 31, 2015 consisted of the following ( in thousands ):
 
September 30, 2016
 
December 31, 2015
Government rebates payable
$
4,470

 
$
3,158

Compensation related costs
6,387

 
7,143

Legal fees  (1)
4,050

 
882

Accrued royalties and contingent consideration
13,194

 
4,688

Research and development
6,694

 
4,281

Selling, general and administrative
1,417

 
2,704

Miscellaneous accrued
4,164

 
964

 
$
40,376

 
$
23,820

(1) Included in 2016 balance is $3.2 million , the cash portion of the legal fee settlement. See Note 13 for details.
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
 
September 30, 2016
 
September 30, 2015
 
Shares
 
Net Income
 
EPS
 
Shares
 
Net Income
 
EPS
Basic Earnings per Share
36,980,356

 
$
(37,113
)
 
$
(1.00
)
 
35,741,877

 
$
105,578

 
$
2.95

Dilutive shares related to warrants

 

 


 
2,053,934

 

 


Change in fair value of derivative instruments

 

 


 

 
(29,991
)
 


Convertible debt

 

 


 
2,642,160

 
518

 


Restricted stock

 

 


 
409,166

 

 


Stock options

 

 


 
1,905,722

 

 


Dilutive net earnings (loss) per share
36,980,356

 
$
(37,113
)
 
$
(1.00
)
 
42,752,859

 
$
76,105

 
$
1.78

 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
Shares
 
Net Income
 
EPS
 
Shares
 
Net Income
 
EPS
Basic net earnings (loss) per share
36,728,911

 
$
(39,300
)
 
$
(1.07
)
 
32,650,408

 
$
119,706

 
$
3.67

Convertible debt

 

 


 
2,642,160

 
1,553

 


Restricted stock

 

 


 
331,073

 

 


Stock options

 

 


 
1,176,895

 

 

Dilutive net earnings (loss) per share
36,728,911

 
$
(39,300
)
 
$
(1.07
)
 
36,800,536

 
$
121,259

 
$
3.30

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

 

 
0.3

 

Convertible debt
2.6

 

 
2.6

 

Options
6.7

 
1.8

 
6.1

 
1.1

Warrants
1.8

 

 
1.8

 
2.7

Total anti-dilutive shares
11.4

 
1.8

 
10.8

 
3.8

NOTE 13.  COMMITMENTS AND CONTINGENCIES
Leases and Sublease Agreements
California Offices
San Diego Office
On September 15, 2016 the Company signed a lease for the second floor of 3721 Valley Centre Drive in San Diego, California. This location will become the Company's headquarters in December 2016, when renovations are expected to be completed. Lease commencement is based upon occupation of the premises which is estimated to be December 16, 2016. For GAAP, lease commencement is the day the Company takes control of the premises, which was September 15, 2016. The Company rents this office space for approximately $1.1 million per annum plus escalations. The lease is expected to expire 91 months from the first full month of occupation, or July 31, 2024. The Company negotiated a tenant allowance of $1.5 million paid by the landlord to help with the renovations of the facility.
On September 8, 2014, the Company entered into a lease agreement for its current corporate headquarters located in San Diego, California. The Company rents this office space for approximately $0.5 million per annum plus escalations. The lease commenced on October 1, 2014 and expires on December 31, 2017.
Carlsbad Office - Vacated
In October 2014, the Company ceased use of this facility and all employees moved into the current 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. The Company's lease for the two suites which encompass this facility expires on June 30, 2017. The Company has sublet the two suites through the expiration of the lease.
Massachusetts Office

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On July 31, 2014, the Company entered into a sublease agreement for office space located in Cambridge, Massachusetts. The Company rents this office space for approximately $0.8 million 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. The Company rents this office space for approximately $0.5 million per annum plus escalations.
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 September 30, 2016 ( in thousands ):
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating leases
$
10,663

 
$
1,288

 
$
3,138

 
$
1,218

 
$
5,019

Note payable, including contractual interest
52,037

 
2,070

 
49,967

 

 

Sales support services
3,158

 
416

 
833

 
1,909

 

Product supply contracts
1,117

 
867

 
250

 

 

 
$
66,975

 
$
4,641

 
$
54,188

 
$
3,127

 
$
5,019

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 million to the Company and an additional $0.6 million 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 Company and Mr. Shkreli have entered into a binding term sheet with respect to a settlement, under which the $2.025 million judgment against Mr. Shkreli would offset and satisfy certain existing legal fees that Mr. Shkreli claimed should be advanced to him by the Company, as described more fully below.
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, 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 disputed its obligation to pay the amount in full. The Company and Mr. Shkreli have entered into a binding term sheet with respect to a settlement under which the Company will advance $2.8 million in legal fees to Mr. Shkreli’s counsel, representing a portion of the existing legal fees related to these proceedings that Mr. Shkreli claims should be

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advanced. The Company will also undertake an obligation to advance an additional $2 million in future legal fees in the event the matter proceeds to trial. The Company expects to receive payment from its directors’ and officers’ insurance carriers for a portion of the legal fees it advances, although the amount it will receive from the insurance carriers is not currently estimable. In addition, the legal fees the Company advances will be subject to reimbursement by Mr. Shkreli under Delaware law in the event it is ultimately determined that Mr. Shkreli is not entitled to be indemnified by the Company in these proceedings.
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 disputed its obligation to pay the amount in full. The Company and Mr. Shkreli have entered into a binding term sheet with respect to a settlement under which the significant majority of the existing legal fees related to these proceedings that Mr. Shkreli claims should be advanced will be offset and satisfied by the $2.025 million judgment against Mr. Shkreli in the Donoghue v. Retrophin, Inc. case described above. The Company will advance $0.4 million in legal fees to Mr. Shkreli’s counsel, representing a portion of the remaining existing legal fees related to these proceedings that Mr. Shkreli claims should be advanced. The legal fees the Company advances will be subject to reimbursement by Mr. Shkreli under Delaware law in the event it is ultimately determined that Mr. Shkreli is not entitled to be indemnified by the Company in these proceedings.
In July 2016, the Company received a demand for payment from the United States Internal Revenue Service (“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 , which has since been reduced to $2.4 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.  The Company currently believes the IRS will not enforce the tax levy against the Company once the IRS receives certain payments from Mr. Shkreli. The Company’s settlement with Mr. Shkreli enables the delivery of these payments to the IRS. Once these payments are received and the IRS has confirmed the tax levy has been satisfied, the remaining terms of the settlement will become effective. The settlement will satisfy the Company’s obligation in full to provide advancement or indemnification for existing legal fees in the proceedings described above.
As of September 30, 2016, the Company has recorded expenses related to the settlement of approximately $5.2 million on its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), of which approximately $3.2 million consists of cash payments. The remainder consists of the $2.025 million offset judgment against Mr. Shkreli in the Donoghue v. Retrophin, Inc. case described above. The expense does not include the additional $2 million in future legal fees that the Company will be obligated to advance in the event the criminal and SEC actions involving Mr. Shkreli proceed to trial. Although the Company expects to receive payment from its directors’ and officers’ insurance carriers for a portion of the legal fees it will advance as part of the contemplated settlement, the Company has not yet recorded any gain contingency for such payments as the amount it will receive from the insurance carriers is not currently estimable. While the Company believes the contemplated settlement is probable, it has not yet been finalized, and therefore the settlement may not be consummated on the currently anticipated terms, if at all.
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 and Performance Based Restricted Stock Units
The following table summarizes the Company’s restricted stock activity during the nine months ended September 30, 2016 :
 
Number of
Restricted Stock Units
 
Weighted
Average
Grant Date Fair
Value
Outstanding December 31, 2015
429,666

 
$
20.38

Granted
245,000

 
17.52

Vested
(120,501
)
 
18.49

Forfeited/canceled
(54,835
)
 
15.39

Outstanding September 30, 2016
499,330

 
$
19.98


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At September 30, 2016 , unamortized stock compensation for restricted stock awards was $6.7 million , with a weighted-average recognition period of 1.1 years.
Performance Based Restricted Stock Awards
During the nine months ended September 30, 2016 , the Company granted 130,000 performance based restricted stock awards, included in the Restricted Stock Awards table above.
Stock Options
The following table summarizes stock option activity during the nine months ended September 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
1,685,250

 
16.72

 
 
 
 
Exercised
(220,109
)
 
10.11

 
 
 
 
Forfeited/canceled
(273,450
)
 
20.61

 
 
 
 
Outstanding at September 30, 2016
6,857,275

 
$
17.05

 
8.13
 
$
49,301

At September 30, 2016 , unamortized stock compensation for stock options was $42.5 million , with a weighted-average recognition period of 2.0 years .
At September 30, 2016 , outstanding options to purchase 3.4 million shares of common stock were exercisable with a weighted-average exercise price per share of $14.41 .
Share Based Compensation
The following table sets forth total non-cash stock-based compensation by operating statement classification for the three and nine months ended September 30, 2016 and 2015 ( in thousands ):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Research and development
$
2,934

 
$
2,692

 
$
8,061

 
$
6,660

Selling, general & administrative
4,814

 
5,489

 
13,973

 
12,088

Total
$
7,748

 
$
8,181

 
$
22,034

 
$
18,748

Exercise of Warrants
During the three and nine months ended September 30, 2016, the Company issued 882,533 and 897,533 shares of common stock, respectively, upon the exercise of warrants for cash received by the Company in the amount of $5.9 million and $6.0 million , respectively. The Company reclassified $14.5 million and $14.7 million , respectively, of 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 $2.9 million for both periods was recorded as other expense in the consolidated financial statements of the Company.
At September 30, 2016 and December 31, 2015 , warrants to purchase 1,768,015 and 2,665,548 shares of common stock, respectively, were outstanding.
NOTE 15. INVENTORY
Inventory, net of reserves, consisted of the following at September 30, 2016 and December 31, 2015 ( in thousands ):
 
September 30, 2016
 
December 31, 2015
Raw materials
$
778

 
$
289

Finished goods
2,475

 
2,247

Total inventory
$
3,253

 
$
2,536

The inventory reserve was $0.6 million and $0.3 million at September 30, 2016 and December 31, 2015 , respectively.
NOTE 16. RECEIVABLES
Accounts Receivables

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Accounts receivable, net of reserves for prompt pay discounts and doubtful accounts, was $15.0 million and $12.5 million at September 30, 2016 and December 31, 2015 , respectively. The total reserves for both periods were immaterial.
Notes Receivables
The 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 discount rate of 2.8% . The accretion on the notes receivable totaled $0.3 million and $1.6 million for the three and nine month periods ending September 30, 2016 , respectively, and is recorded in interest expense, net, in the Consolidated Statements of Operations and Comprehensive Income (Loss).
The first anniversary payment was received on July 2, 2016. The present value of the remaining notes receivable is $46.5 million and is recorded in current assets at September 30, 2016 . At December 31, 2015 , notes receivable was recorded in long term assets with a present value of $45.6 million . There are no indications for impairment as of September 30, 2016 and December 31, 2015.
NOTE 17. SUBSEQUENT EVENT
On November 1, 2016, the Company signed a legal settlement with its former Chief Executive Officer ("CEO") relating to his claims for advancement of legal fees relating to his defense for actions while employed by the Company. See Note 13 for further discussion.
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 135 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.
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 cystine (kidney) stone formation in patients with severe homozygous cystinuria.

19


On September 7, 2016, we announced positive top-line results from the Phase 2 DUET study of sparsentan in patients with focal segmental glomerulosclerosis (FSGS). In the DUET study, the mean reduction of proteinuria from baseline after eight weeks of treatment for all patients treated with 200, 400, and 800 mg/day of sparsentan (n=64) was 44.8 percent, compared to a mean reduction of proteinuria for all patients receiving 300 mg/day of irbesartan (n=32) of 18.5 percent (p=0.006). Further, the mean reduction of proteinuria from baseline after eight weeks of treatment for all patients treated with 400 mg and 800 mg doses of sparsentan (n=51) was 47.4 percent, compared to a mean proteinuria reduction of 19.0 percent for patients receiving 300 mg of irbesartan (n=25) in these two dose cohorts (p=0.011). The comparison of individual sparsentan dose cohorts to irbesartan showed clear signals of relative improvement, but did not reach statistical significance.
Top-line results suggest sparsentan was generally safe and well-tolerated in the DUET study. One serious adverse event, anemia, classified as potentially related to treatment, occurred in the sparsentan group but did not result in study discontinuation during the eight-week blinded treatment period . There were no withdrawals due to fluid retention during the eight-week blinded treatment period. All patients who completed the eight-week treatment period entered the ongoing open label extension study, and the vast majority of these patients continue to receive therapy.
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
PIPELINECHARTQ2A01.JPG
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

20


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 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. In the third quarter of 2016, we announced positive top-line data from the Phase 2 DUET study of sparsentan for the treatment of FSGS. We will work with the FDA in the near future to determine the most expeditious path forward to gain approval for sparsentan. Sparsentan was granted orphan drug designation in the U.S. and EU in January 2015 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

21


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 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 is providing 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 is providing funding and in-kind research support to help Retrophin advance this program.
Results of Operations
Results of operations for the three and nine month periods ended September 30, 2016 compared to the three and nine month periods ended September 30, 2015 .
Net Product Sales:
The following table provides information regarding net product sales ( in thousands ):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Net product sales
$
33,945

 
$
28,005

 
$
5,940

 
$
96,265

 
$
69,444

 
$
26,821

The increase in sales for the three and nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Cost of goods sold
$
1,573

 
$
513

 
$
1,060

 
$
3,351

 
$
1,424

 
$
1,927

Research and development
18,428

 
14,064

 
4,364

 
50,775

 
34,974

 
15,801

Selling, general and administrative
23,848

 
22,308

 
1,540

 
66,178

 
56,856

 
9,322

Legal fee settlement
5,212

 

 
5,212

 
5,212

 

 
5,212

Change in fair value of contingent consideration
5,256

 
6,906

 
(1,650
)
 
10,741

 
7,026

 
3,715

Impairment of intangible assets

 
4,710

 
(4,710
)
 

 
4,710

 
(4,710
)
 
$
54,317

 
$
48,501

 
$
5,816

 
$
136,257

 
$
104,990

 
$
31,267

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 $4.4 million for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 is primarily due to support of on-going clinical and non-clinical efforts for sparsentan and RE-024 of $4.2 million and share-based compensation expense of $0.2 million.

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The increase in research and development costs of $15.8 million for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 is due to support of on-going clinical and non-clinical efforts for sparsentan and RE-024 of $14.1 million, salaries and share-based compensation expense of $1.1 million, and other increases due to the advancement and ramp up of clinical and preclinical research of $0.6 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 functions, outside legal and professional services, amortization and facilities costs.
The increase in selling, general and administrative expenses of $1.5 million for the three months ended September 30, 2016 as compared to the three months ended 2015 , is primarily due to an increase in sales and marketing programs of $1.3 million, higher professional fees of $0.5 million and higher information technology ("IT") costs of $0.5 million, offset by lower compensation costs of $0.8 million. These increased expenses are a result of the planned build out of the Company's sales force and sales support services.
The increase in selling, general and administrative expenses of $9.3 million for the nine months ended September 30, 2016 as compared to the nine months ended 2015 , is primarily due to an increase in personnel and related compensation of $4.2 million as a result of the planned build out of the Company's sales force and sales support services, amortization expense of $2.6 million from acquired assets, sales and marketing support and promotional materials of $3.6 million, increased IT software, data warehousing and other IT costs of $1.2 million, and higher foreign operations expenses related to increased activity of $0.7 million offset by the settlement of an open account payable with our former outside legal counsel of $3.0 million.
Legal fee settlement
Legal fee settlement of $5.2 million in the third quarter of 2016 relates to amounts the company is obligated to advance for legal fees to the Company's former Chief Executive Officer in defense of ligation for his actions while holding that title. See Note 13 to FInancial Statements for discussion.
Change in the valuation of contingent consideration
During the three and nine month periods ended September 30, 2016 , the Company incurred charges of $5.3 million and $10.7 million , respectively, for the change in the valuation of contingent consideration, shown in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For the three month period ended September 30, 2016, $1.6 million , $1.8 million and $1.9 million is related to the increase in contingent consideration liabilities for the products Chenodal, Cholbam and product candidate L-UDCA, respectively. For the nine month period ended September 30, 2016, $4.4 million , $4.4 million and $1.9 million is related to the increase in contingent consideration liabilities for the products Chenodal, Cholbam and product candidate L-UDCA, respectively. The value increased due to changes in the estimated timing of payments. During the three and nine month periods ended September 30, 2015 , the Company incurred charges of $6.9 million and $7.0 million, respectively, for the change in the valuation of contingent consideration, 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Other income, net
$
151

 
$
(314
)
 
$
465

 
$
156

 
$
35

 
$
121

Interest expense, net
(299
)
 
(695
)
 
396

 
(609
)
 
(7,415
)
 
6,806

Finance expense

 

 

 

 
(600
)
 
600

Change in fair value of derivative instruments
(10,126
)
 
29,991

 
(40,117
)
 
(4,849
)
 
(36,180
)
 
31,331

Debt early payment penalty

 

 

 

 
(2,250
)
 
2,250

Loss on extinguishment of debt

 
(4,151
)
 
4,151

 

 
(4,151
)
 
4,151

Litigation settlement gain

 

 

 

 
15,500

 
(15,500
)
Gain on sale of assets

 
140,004

 
(140,004
)
 

 
140,004

 
(140,004
)
Bargain purchase gain

 

 

 

 
49,063

 
(49,063
)
 
$
(10,274
)
 
$
164,835

 
$
(175,109
)
 
$
(5,302
)
 
$
154,006

 
$
(159,308
)
Interest expense, net
Interest expense, net, decreased by $0.4 million for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015.  This decrease was due primarily to an increase in interest income from investments in the current year.
Interest expense, net, decreased by $6.8 million for the nine months ended September 30, 2016 as compared to the nine months ended September 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

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warrants issued for remediation of debt covenant violations (warrants issued in the first quarter of 2015), lower amortization of debt discount of $0.7 million, and increased interest income in the nine months ended September 30, 2016 of $2.3 million, of which $1.0 million related to interest on notes receivable and $1.3 million related to interest on investments.
Change in fair value of derivative instruments
For the three and nine months ended September 30, 2016 , the Company recognized a loss of $10.1 million and $4.8 million , respectively. For the three and nine months ended September 30, 2016, the loss resulted from increases in the stock price during the reporting period.
For the three and nine months ended September 30, 2015 , the Company recognized a gain of $30.0 million and a loss of $36.2 million , respectively, due to volatility in the Company's stock price.
Litigation Settlement Gain
For the nine months ended September 30, 2015 , the Company recognized a gain of $15.5 million related to a litigation settlement in which the Company alleged that Questcor violated antitrust laws in connection with its acquisition of rights to the drug Synacthen.
Gain on sale of assets
For the three and nine months ended September 30, 2015 , the Company recognized a gain of $140.0 million on the sale of the Pediatric PRV to Sanofi.
Bargain Purchase Gain
For the nine months ended September 30, 2015 , the Company recognized a bargain purchase gain on the acquisition of Cholbam.
Income Tax Benefit:
In the third quarter of 2016, the Company recorded tax expense of $6.5 million, primarily relating to the limitation of utilization of United States federal orphan drug and research and development tax credits.
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 September 30, 2016 and December 31, 2015 ( in thousands ):
 
September 30, 2016
 
December 31, 2015
Cash & Cash Equivalents
$
23,895

 
$
37,805

Marketable securities
250,408

 
191,799

Accumulated Deficit
(104,453
)
 
(65,153
)
Stockholders' Equity
307,595

 
299,971

 
 
 
 
Net Working Capital
$
256,596

 
$
214,951

Net Working Capital Ratio
3.98

 
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 $44.3 million and $43.8 million , at September 30, 2016 and December 31, 2015 , respectively.
Cash Flows from Operating Activities
Cash provided by operating activities was $5.2 million for the nine months ended September 30, 2016 compared to $2.2 million provided in the nine months ended September 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 increase of $3.0 million was primarily due to increases in operating assets and liabilities.
Cash Flows from Investing Activities
Cash used in investing activities for the nine months ended September 30, 2016 was $20.2 million compared to $19.9 million provided by investing activities for the nine months ended September 30, 2015 . The change in cash is primarily due to the sale of the Pediatric PRV in 2015 and the maturity of the related note receivable in 2016. The Company received $148.4 million at the close of the sale and $47.5 million on the first anniversary of the close. The proceeds from the sale were invested in marketable securities in both 2015 and 2016. Included in the 2016 marketable securities activity is the maturity and reinvestment of proceeds of debt instruments purchased in the prior year.

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Cash Flows from Financing Activities
For the nine months ended September 30, 2016 , cash provided by financing activities was $1.2 million compared to $100.4 million provided by financing activities during the nine months ended September 30, 2015 . In 2015, cash of $140 million, net of fees, was provided from the Company's follow-on public offering. A portion of this cash was used to extinguish $45 million in outstanding debt.
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.
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 $2.5 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

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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 Excha