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10-Q
ACADIA PHARMACEUTICALS INC filed this Form 10-Q on 08/08/2017
Entire Document
 
acad-10q_20170630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-50768

 

ACADIA PHARMACEUTICALS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

06-1376651

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

3611 Valley Centre Drive, Suite 300

San Diego, California

92130

(Address of Principal Executive Offices)

(Zip Code)

(858) 558-2871

(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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

  

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Total shares of common stock outstanding as of the close of business on July 31, 2017:

 

Class 

 

Number of Shares Outstanding 

Common Stock, $0.0001 par value

 

122,400,306

 

 

 

 


 

ACADIA PHARMACEUTICALS INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

PAGE NO.

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

12

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

19

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

19

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

20

 

 

 

 

 

Item 1A.

 

Risk Factors

 

21

 

 

 

 

 

Item 6.

 

Exhibits

 

49

 

 

 

SIGNATURES

 

50

 

 

 

i


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ACADIA PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

June 30,

2017

 

 

December 31,

2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

143,789

 

 

$

163,620

 

Investment securities, available-for-sale

 

 

273,531

 

 

 

365,416

 

Accounts receivable, net

 

 

11,594

 

 

 

5,903

 

Interest and other receivables

 

 

784

 

 

 

1,237

 

Inventory

 

 

6,003

 

 

 

4,175

 

Prepaid expenses

 

 

8,044

 

 

 

7,546

 

Total current assets

 

 

443,745

 

 

 

547,897

 

Property and equipment, net

 

 

3,296

 

 

 

3,081

 

Intangible assets, net

 

 

6,277

 

 

 

7,015

 

Restricted cash

 

 

2,475

 

 

 

2,375

 

Other assets

 

 

522

 

 

 

785

 

Total assets

 

$

456,315

 

 

$

561,153

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,588

 

 

$

3,912

 

Accrued liabilities

 

 

37,325

 

 

 

36,029

 

Deferred revenue

 

 

 

 

 

2,644

 

Total current liabilities

 

 

40,913

 

 

 

42,585

 

Long-term liabilities

 

 

262

 

 

 

157

 

Total liabilities

 

 

41,175

 

 

 

42,742

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000,000 shares authorized at June 30, 2017 and

   December 31, 2016; no shares issued and outstanding at June 30, 2017 and

   December 31, 2016

 

 

 

 

 

 

Common stock, $0.0001 par value; 225,000,000 shares authorized at June 30, 2017 and

   December 31, 2016; 122,336,580 shares and 121,367,169 shares issued and

   outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

12

 

 

 

12

 

Additional paid-in capital

 

 

1,504,778

 

 

 

1,452,272

 

Accumulated deficit

 

 

(1,089,553

)

 

 

(933,979

)

Accumulated other comprehensive (loss) income

 

 

(97

)

 

 

106

 

Total stockholders’ equity

 

 

415,140

 

 

 

518,411

 

Total liabilities and stockholders’ equity

 

$

456,315

 

 

$

561,153

 

 

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

 

 

1


 

ACADIA PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

30,475

 

 

$

97

 

 

$

45,761

 

 

$

97

 

Collaborative revenue

 

 

 

 

 

 

 

 

 

 

 

4

 

Total revenues

 

 

30,475

 

 

 

97

 

 

 

45,761

 

 

 

101

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

2,224

 

 

 

526

 

 

 

4,487

 

 

 

526

 

License fees and royalties

 

 

982

 

 

 

248

 

 

 

1,657

 

 

 

248

 

Research and development

 

 

34,180

 

 

 

20,478

 

 

 

69,589

 

 

 

43,253

 

Selling, general and administrative

 

 

61,523

 

 

 

50,768

 

 

 

127,268

 

 

 

78,259

 

Total operating expenses

 

 

98,909

 

 

 

72,020

 

 

 

203,001

 

 

 

122,286

 

Loss from operations

 

 

(68,434

)

 

 

(71,923

)

 

 

(157,240

)

 

 

(122,185

)

Interest income, net

 

 

993

 

 

 

601

 

 

 

1,956

 

 

 

1,101

 

Net loss

 

$

(67,441

)

 

$

(71,322

)

 

$

(155,284

)

 

$

(121,084

)

Net loss per common share, basic and diluted

 

$

(0.55

)

 

$

(0.63

)

 

$

(1.27

)

 

$

(1.08

)

Weighted average common shares outstanding, basic and diluted

 

 

122,122

 

 

 

113,308

 

 

 

121,888

 

 

 

112,327

 

 

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

 

 

2


 

ACADIA PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(67,441

)

 

$

(71,322

)

 

$

(155,284

)

 

$

(121,084

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investment securities

 

 

(188

)

 

 

(111

)

 

 

(199

)

 

 

196

 

Foreign currency translation adjustments

 

 

(3

)

 

 

1

 

 

 

(4

)

 

 

(1

)

Comprehensive loss

 

$

(67,632

)

 

$

(71,432

)

 

$

(155,487

)

 

$

(120,889

)

 

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

 

 

3


 

ACADIA PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(155,284

)

 

$

(121,084

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

33,815

 

 

 

25,838

 

Amortization of premiums and accretion of discounts on investment securities,

   available for sale

 

 

(297

)

 

 

(223

)

Amortization of intangible assets

 

 

738

 

 

 

246

 

Depreciation

 

 

577

 

 

 

342

 

Loss on disposal of assets

 

 

 

 

 

5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(5,691

)

 

 

(293

)

Interest and other receivables

 

 

453

 

 

 

298

 

Inventory

 

 

(1,927

)

 

 

(2,512

)

Prepaid expenses and other current assets

 

 

(498

)

 

 

(4,623

)

Restricted cash

 

 

(100

)

 

 

(2,000

)

Other assets

 

 

263

 

 

 

(782

)

Accounts payable

 

 

(324

)

 

 

(648

)

Accrued liabilities

 

 

1,253

 

 

 

7,001

 

Deferred revenue

 

 

(2,644

)

 

 

513

 

Long-term liabilities

 

 

105

 

 

 

(35

)

Net cash used in operating activities

 

 

(129,561

)

 

 

(97,957

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of investment securities

 

 

(250,007

)

 

 

(326,629

)

Maturities of investment securities

 

 

341,990

 

 

 

159,260

 

Intangible assets

 

 

 

 

 

(8,000

)

Purchases of property and equipment

 

 

(749

)

 

 

(787

)

Net cash provided by (used in) investing activities

 

 

91,234

 

 

 

(176,156

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

18,500

 

 

 

289,429

 

Proceeds from settlement agreement

 

 

 

 

 

14,320

 

Net cash provided by financing activities

 

 

18,500

 

 

 

303,749

 

Effect of exchange rate changes on cash

 

 

(4

)

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(19,831

)

 

 

29,636

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

163,620

 

 

 

102,138

 

End of period

 

$

143,789

 

 

$

131,774

 

Supplemental disclosure of noncash information:

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued liabilities

 

$

43

 

 

$

254

 

Stock-based compensation capitalized in inventory

 

$

99

 

 

$

355

 

 

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

 

 

4


 

ACADIA PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Business

ACADIA Pharmaceuticals Inc. (the “Company”), based in San Diego, California, is a biopharmaceutical company focused on the development and commercialization of innovative medicines to address unmet medical needs in central nervous system disorders. The Company was originally incorporated in Vermont in 1993 as Receptor Technologies, Inc. and reincorporated in Delaware in 1997.

On April 29, 2016, the U.S. Food and Drug Administration (“FDA”) approved the Company’s first drug, NUPLAZID® (pimavanserin), for the treatment of hallucinations and delusions associated with Parkinson’s disease psychosis (“PD Psychosis”). NUPLAZID became available for prescription in the United States on May 31, 2016.

 

 

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are recorded net of customer allowances for distribution fees, prompt payment discounts, chargebacks, and doubtful accounts. Allowances for distribution fees, prompt payment discounts and chargebacks are based on contractual terms. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. At June 30, 2017, the Company determined that an allowance for doubtful accounts was not required. No accounts were written off during the periods presented.

License Fees and Royalties

The Company expenses amounts paid to acquire licenses associated with products under development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when acquired. Acquisitions of technology licenses are charged to expense or capitalized based upon management’s assessment regarding the ultimate recoverability of the amounts paid and the potential for alternative future use. The Company has determined that technological feasibility for its product candidates is reached when the requisite regulatory approvals are obtained to make the product available for sale.

In connection with the FDA approval of NUPLAZID in April 2016, the Company made a one-time milestone payment of $8.0 million pursuant to its 2006 license agreement with the Ipsen Group in which the Company licensed certain intellectual property rights that complement its patent portfolio for its serotonin platform, including NUPLAZID. The Company capitalized the $8.0 million payment as an intangible asset and is amortizing the asset on a straight-line basis over the estimated useful life of the licensed patents through the second half of 2021. The Company recorded amortization expense related to its intangible asset of $0.4 million and $0.7 million for the three and six months ended June 30, 2017, respectively. As of June 30, 2017, estimated future amortization expense related to the Company’s intangible asset was $0.7 million for the remainder of 2017, $1.5 million for each of 2018, 2019, and 2020, and $1.0 million for 2021.

Royalties incurred in connection with the Company’s license agreement with the Ipsen Group, as disclosed in Note 9, are expensed to license fees and royalties as revenue from product sales is recognized.

5


 

Revenue Recognition

Product Sales, Net

The Company’s net product sales consist of U.S. sales of NUPLAZID and are recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title to the product and associated risk of loss has passed to the customer, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured.

NUPLAZID was approved by the FDA on April 29, 2016 and the Company commenced shipments of NUPLAZID to specialty pharmacies (“SPs”) and specialty distributors (“SDs”) in late May 2016. Prior to April 1, 2017, the Company deferred sales of NUPLAZID and recognized revenue when an SP dispensed product to a patient based on the fulfillment of a prescription and when an SD sold product to a government facility, long-term care pharmacy, or in-patient hospital pharmacy. In the second quarter of 2017 the Company determined that it has sufficient volume of activity to reasonably estimate its allowances for rebates and chargebacks and began recognizing NUPLAZID revenue, net of estimated allowances for rebates, price adjustments, returns, chargebacks, and prompt payment discounts, at the point of sale to the SPs and SDs which is commonly referred to as the “sell-in” revenue recognition model. As a result, the Company recorded a one-time adjustment during the three months ended June 30, 2017, to recognize deferred revenue on previously shipped product. The impact of this adjustment resulted in additional net revenue of $3.6 million for the three months ended June 30, 2017.

The effect on income from operations and on net income is that the Company is able to recognize revenue earlier on this sell-in method, net of a provision for estimated allowances, since the Company can record revenue once sold to the SP or SD rather than waiting until the product is sold to the end user on a sell-through basis, which it had done for periods prior to April 1, 2017.

Product shipping and handling costs are included in cost of product sales.

The Company recognizes revenue from product sales net of the following allowances and reflects each of these as either a reduction to the related accounts receivable or as an accrued liability, depending on how the amount is settled:

Distribution Fees: Distribution fees include distribution service fees paid to the SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost (“WAC”), fees for data, and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements with, or statutory requirements pertaining to, Medicaid and Medicare benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company’s estimates for expected utilization of rebates is based on historical data received from the SPs and SDs since product launch. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs at a discounted price. The SDs charge back to the Company the difference between the price initially paid by the SDs and the discounted price paid to the SDs by these entities. The Company also incurs group purchasing organization fees for transactions through certain purchasing organizations. The Company estimates sales with these entities and accrues for anticipated chargebacks and organization fees, based on the applicable contractual terms.  If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-Payment Assistance: The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Returns: Consistent with industry practice, the Company offers the SPs and SDs limited product return rights for damages, shipment errors, and expiring product; provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company does not allow product returns for product that has been dispensed to a patient. As the Company receives inventory reports from the SPs and SDs and has the ability to control the amount of product that is sold to the SPs and SDs, it is able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at its estimate, the Company also considers historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

6


 

 

 

 

3. Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, employee stock purchase plan rights, and warrants are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for the periods presented as their effect would be anti-dilutive. The Company incurred net losses for all periods presented and there were no reconciling items for potentially dilutive securities. More specifically, at June 30, 2017 and 2016, stock options, employee stock purchase plan rights, and warrants totaling approximately 16,563,000 shares and 14,404,000 shares, respectively, were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive.

 

 

4. Stock-Based Compensation

    The following table summarizes the total stock-based compensation expense included in the Company’s statements of operations for the periods presented (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of product sales

 

$

881

 

 

$

189

 

 

$

1,761

 

 

$

189

 

Research and development

 

 

6,420

 

 

 

4,780

 

 

 

11,721

 

 

 

9,176

 

Selling, general and administrative

 

 

10,943

 

 

 

8,914

 

 

 

20,333

 

 

 

16,473

 

 

 

$

18,244

 

 

$

13,883

 

 

$

33,815

 

 

$

25,838

 

 

 

5. Balance Sheet Details

Inventory consisted of the following (in thousands):

 

 

 

June 30,

2017

 

 

December 31,

2016

 

Raw material

 

$

4,088

 

 

$

1,820

 

Finished goods

 

 

1,915

 

 

 

2,355

 

 

 

$

6,003

 

 

$

4,175

 

Accrued liabilities consisted of the following (in thousands):  

 

 

 

June 30,

2017

 

 

December 31,

2016

 

Accrued compensation and benefits

 

$

11,072

 

 

$

14,382

 

Accrued consulting and professional fees

 

 

9,767

 

 

 

9,488

 

Accrued research and development services

 

 

6,077

 

 

 

8,551

 

Accrued sales allowances

 

 

5,792

 

 

 

1,999

 

Other

 

 

4,617

 

 

 

1,609

 

 

 

$

37,325

 

 

$

36,029

 

 

 

7


 

6. Investment Securities

Investment securities, all classified as available-for-sale, consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair

Value

 

U.S. Treasury notes

 

$

31,794

 

 

$

 

 

$

(11

)

 

$

31,783

 

Government sponsored enterprise securities

 

 

62,079

 

 

 

 

 

 

(29

)

 

 

62,050

 

Corporate debt securities

 

 

53,012

 

 

 

 

 

 

(22

)

 

 

52,990

 

Commercial paper

 

 

126,753

 

 

 

2

 

 

 

(47

)

 

 

126,708

 

 

 

$

273,638

 

 

$

2

 

 

$

(109

)

 

$

273,531

 

 

 

 

December 31, 2016

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair

Value

 

U.S. Treasury notes

 

$

82,484

 

 

$

6

 

 

$

(3

)

 

$

82,487

 

Government sponsored enterprise securities

 

 

73,789

 

 

 

1

 

 

 

(5

)

 

 

73,785

 

Corporate debt securities

 

 

79,190

 

 

 

 

 

 

(72

)

 

 

79,118

 

Commercial paper

 

 

129,861

 

 

 

165

 

 

 

 

 

 

130,026

 

 

 

$

365,324

 

 

$

172

 

 

$

(80

)

 

$

365,416

 

 

At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and the Company’s intent and ability to hold the investment until recovery of its amortized cost basis. The Company intends, and has the ability, to hold its investments in unrealized loss positions until their amortized cost basis has been recovered. Based on its evaluation, the Company determined that its unrealized losses were not other-than-temporary at June 30, 2017 and December 31, 2016. As of June 30, 2017 and December 31, 2016, all of the Company’s available-for-sale investment securities had contractual maturity dates of less than one year.

 

 

7. Fair Value Measurements

The Company’s investments include cash equivalents and available-for-sale investment securities consisting of a money market fund, U.S. Treasury notes, and high quality, marketable debt instruments of corporations and government sponsored enterprises in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. All investment securities have a credit rating of at least A3/A- or better, or P-1/A-1 or better, as determined by Moody’s Investors Service or Standard & Poor’s.

The Company’s cash equivalents and available-for-sale investment securities are classified within the fair value hierarchy as defined by authoritative guidance. The Company’s investment securities classified as Level 1 are valued using quoted market prices. The Company obtains the fair value of its Level 2 financial instruments from third party pricing services. The pricing services utilize industry standard valuation models whereby all significant inputs, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, or other market-related data, are observable. The Company validates the prices provided by the third-party pricing services by reviewing their pricing methods and matrices, and obtaining market values from other pricing sources. After completing the validation procedures, the Company did not adjust or override any fair value measurements provided by these pricing services as of June 30, 2017 and December 31, 2016.

The Company does not hold any securities classified as Level 3, which are securities valued using unobservable inputs. The Company has not transferred any investment securities between the classification levels.

8


 

The recurring fair value measurements of the Company’s cash equivalents and available-for-sale investment securities at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

June 30,

2017

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Money market fund

 

$

70,664

 

 

$

70,664

 

 

$

 

 

$

 

U.S. Treasury notes

 

 

31,783

 

 

 

31,783

 

 

 

 

 

 

 

Government sponsored enterprise securities

 

 

102,878

 

 

 

 

 

 

102,878

 

 

 

 

Corporate debt securities

 

 

52,990

 

 

 

 

 

 

52,990

 

 

 

 

Commercial paper

 

 

155,924

 

 

 

 

 

 

155,924

 

 

 

 

 

 

$

414,239

 

 

$

102,447

 

 

$

311,792

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

December 31,

2016

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Money market fund

 

$

129,292

 

 

$

129,292

 

 

$

 

 

$

 

U.S. Treasury notes

 

 

82,487

 

 

 

82,487

 

 

 

 

 

 

 

Government sponsored enterprise securities

 

 

88,773

 

 

 

 

 

 

88,773

 

 

 

 

Corporate debt securities

 

 

82,857

 

 

 

 

 

 

82,857

 

 

 

 

Commercial paper

 

 

140,024

 

 

 

 

 

 

140,024

 

 

 

 

 

 

$

523,433

 

 

$

211,779

 

 

$

311,654

 

 

$

 

 

 

8. Stockholders’ Equity

Public Offerings

In August 2016, the Company raised net proceeds of approximately $215.9 million from the sale of 6,969,696 shares of its common stock in a follow-on public offering, including 909,090 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.

In January 2016, the Company raised net proceeds of approximately $281.6 million from the sale of 10,344,827 shares of its common stock in a follow-on public offering. In connection with the January 2016 offering, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with 667, L.P., Baker Brothers Life Sciences, L.P. and 14159, L.P. (the “Baker Entities”), all of which are existing stockholders of the Company and are affiliated with two of its directors, Julian C. Baker and Dr. Stephen R. Biggar. Under the Registration Rights Agreement, the Company agreed that, if the Baker Entities demand that the Company register their shares of its common stock, par value $0.0001 per share, for resale under the Securities Act of 1933, as amended (the “Securities Act”), the Company would be obligated to effect such registration. The Company’s registration obligations under the Registration Rights Agreement cover all shares of its common stock then held or later acquired by the Baker Entities (including approximately $75.0 million and $43.0 million of shares that the Baker Entities purchased at the public offering price in the January 2016 and August 2016 offerings, respectively), will continue in effect for up to 10 years, and include the Company’s obligation to facilitate certain underwritten public offerings of its common stock by the Baker Entities in the future. The Company has agreed to bear all expenses incurred by it in effecting any registration pursuant to the Registration Rights Agreement as well as the legal expenses of the Baker Entities of up to $50,000 per underwritten public offering effected pursuant to the Registration Rights Agreement. On April 1, 2016, pursuant to the Registration Rights Agreement, the Company filed a registration statement covering all shares owned by the Baker Entities as of March 31, 2016.

  

 

 

9


 

9. Commitments and Contingencies

Royalty Payments

Pursuant to the terms of its 2006 license agreement with the Ipsen Group, the Company is required to make royalty payments of two percent of net sales of NUPLAZID.

Corporate Credit Card Program

In connection with the Company’s credit card program, the Company established a letter of credit in 2016 for $2.0 million, which has automatic annual extensions and is fully secured by restricted cash.

Legal Proceedings

In March 2015, following the Company’s announcement of the update to the timing of its planned NDA submission to the FDA for NUPLAZID for the treatment of PD Psychosis and the subsequent decline of the price of its common stock, two putative securities class action complaints (captioned Rihn v. ACADIA Pharmaceuticals Inc., Case No. 15-cv-0575-BTM-DHB, and Wright v. ACADIA Pharmaceuticals Inc., Case No. 15-cv-0593- BTM-DHB) were filed in the U.S. District Court for the Southern District of California (the “Court”) against the Company and certain of its current and former officers. The complaints generally alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements regarding the timing of the Company’s planned NDA submission to the FDA for NUPLAZID, thereby artificially inflating the price of its common stock. The complaints sought unspecified monetary damages and other relief. On April 10 and June 1, 2015, the Court entered orders deferring the defendants’ response to the Rihn and Wright complaints until after the Court appointed a lead plaintiff and assigned lead counsel. On May 12, 2015, several putative stockholders filed separate motions to consolidate the two actions and be appointed lead plaintiff. On September 8, 2015, the Court issued an order consolidating the two actions, appointing lead plaintiff, and assigning lead counsel. On November 16, 2015, lead plaintiff filed a consolidated complaint with the Court which, like the prior complaints, accuses the defendants of making materially false and misleading statements regarding the anticipated timing of the Company’s planned NDA submission to the FDA for NUPLAZID. On January 15, 2016, the defendants filed a motion to dismiss the consolidated complaint. On September 19, 2016, the Court issued an order denying the motion to dismiss the consolidated complaint. On March 13, 2017, the parties signed a Stipulation of Settlement setting forth the terms of the proposed settlement. On June 9, 2017, the Court preliminarily approved the settlement (the “Preliminary Approval Order”).  Among other things, the Preliminary Approval Order set an opt-out deadline of August 29, 2017; an objection deadline of September 13, 2017; and a final approval hearing for October 3, 2017.

 

 

10. Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating when it will adopt this guidance. The adoption of this ASU will modify the Company’s current classification within the consolidated statement of cash flows but is not expected to materially impact the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted only as of annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the timing and impact of the adoption of this guidance on the Company’s consolidated financial statements.

10


 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. This guidance was effective for annual reporting periods beginning after December 15, 2016, including interim periods within those years. The Company adopted this guidance in the first quarter of 2017 using the modified retrospective transition method. Accordingly, the Company increased its deferred tax assets by $36.8 million, with a corresponding increase to its valuation allowance, to record previously unrecognized excess tax benefits. Additionally, the Company elected to make an accounting policy change to recognize forfeitures as they occur. As a result, the Company recorded an increase to additional paid-in capital and a corresponding increase to accumulated deficit of $0.3 million, respectively, to reflect the incremental stock-based compensation expense that would have been recognized in prior years pursuant to the modified guidance. Additionally, the Company increased its deferred tax assets by $0.1 million, with a corresponding increase to its valuation allowance, to record the excess tax benefit from the change.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires a lessee to recognize a lease liability and a right-of-use asset for all leases with lease terms of more than 12 months. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. Companies are required to adopt this guidance using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. While the Company is still evaluating the timing and impact of the adoption of this guidance on its consolidated financial statements, it anticipates that the adoption could result in an increase in the assets and liabilities recorded on its consolidated balance sheet.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles. This ASU, as amended, is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The original guidance was effective for annual reporting periods beginning after December 15, 2016. However, in July 2015, the FASB agreed to delay the effective date by one year, with early adoption permitted, but not before the original effective date of the standard. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company anticipates adopting ASU 2014-09 on January 1, 2018. The Company’s evaluation of the guidance is ongoing, including the assessment of the adoption method, the evaluation of the Company’s contracts with its customers, and the evaluation of information necessary to restate prior period financial statements. At present, the Company has one source of revenue: the sale of NUPLAZID to its customers. The Company’s evaluation of the customer contracts governing these sales is still underway. However, recognition of the Company’s revenue under the new standard is expected to be materially consistent with the Company’s current revenue recognition policy, which uses the sell-in method. The new standard is not expected to materially impact the timing or amounts of revenue recognized.

 

 

11


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our consolidated 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, or this Quarterly Report, and the audited financial statements and notes thereto as of and for the year ended December 31, 2016 included with our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. Past operating results are not necessarily indicative of results that may occur in future periods.

This Quarterly Report contains forward-looking statements. These forward-looking statements involve a number of risks and uncertainties. Such forward-looking statements include statements about the benefits to be derived from NUPLAZID® (pimavanserin) and from our drug candidates, the potential market opportunities for pimavanserin and our drug candidates, our strategy for the commercialization of NUPLAZID, our plans for exploring and developing pimavanserin for indications other than Parkinson’s disease psychosis, our plans and timing with respect to seeking regulatory approvals, the potential commercialization of any of our drug candidates that receive regulatory approval, the progress, timing, results or implications of clinical trials and other development activities involving NUPLAZID and our drug candidates, our strategy for discovering, developing and, if approved, commercializing drug candidates, our existing and potential future collaborations, our estimates of future payments, revenues and profitability, our estimates regarding our capital requirements, future expenses and need for additional financing, possible changes in legislation, and other statements that are not historical facts, including statements which may be preceded by the words “believes,” “expects,” “hopes,” “may,” “will,” “plans,” “intends,” “estimates,” “could,” “should,” “would,” “continues,” “seeks,” “aims,” “projects,” “predicts,” “pro forma,” “anticipates,” “potential” or similar words. For forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise publicly any forward-looking statements. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, the risk factors set forth under the section captioned “Risk Factors” in this Quarterly Report.

Overview

Background

We are a biopharmaceutical company focused on the development and commercialization of innovative medicines to address unmet medical needs in central nervous system, or CNS, disorders. We have a portfolio of product opportunities led by our novel drug, NUPLAZID (pimavanserin), which was approved by the U.S. Food and Drug Administration, or FDA, on April 29, 2016 for the treatment of hallucinations and delusions associated with Parkinson’s disease psychosis, or PD Psychosis, and is the only drug approved in the United States for this condition. NUPLAZID is a selective serotonin inverse agonist, or SSIA, preferentially targeting 5-HT2A receptors. Through this novel mechanism, NUPLAZID demonstrated significant efficacy in reducing the hallucinations and delusions associated with PD Psychosis in our Phase III pivotal trial and has the potential to avoid many of the debilitating side effects of existing antipsychotics, none of which are approved by the FDA in the treatment of PD Psychosis. We hold worldwide commercialization rights to pimavanserin. We launched NUPLAZID in the United States in May 2016.

We believe that pimavanserin has the potential to address important unmet medical needs in neurological and psychiatric disorders in addition to PD Psychosis and we plan to continue to study the use of pimavanserin in multiple disease states.

For example, we believe Alzheimer’s disease represents one of our most important opportunities for further exploration. In December 2016, we announced positive top-line results from our Phase II study exploring the utility of pimavanserin for the treatment of Alzheimer’s disease psychosis, or AD Psychosis, a disorder for which no drug is currently approved by the FDA. We plan to continue to advance the evaluation of pimavanserin in this patient population in a Phase III study planned to begin in the second half of 2017. Additionally, in October 2016, we announced that we initiated another study, SERENE, for Alzheimer’s patients. SERENE is a Phase II study evaluating pimavanserin for the treatment of Alzheimer’s disease agitation and aggression, or collectively AD Agitation, a debilitating condition for which there is no drug approved by the FDA.

We also believe schizophrenia represents a disease with multiple unmet or ill-served needs and we are currently exploring the utility of pimavanserin in this area. Despite a large number of FDA-approved therapies for schizophrenia, current drugs do not adequately address some very important symptoms of schizophrenia, such as the inadequate response to current antipsychotic treatment of psychotic symptoms and negative symptoms. In November 2016, we announced that we initiated two studies evaluating the adjunctive use of pimavanserin in patients with schizophrenia. ENHANCE-1 is a Phase III study evaluating pimavanserin for adjunctive treatment of schizophrenia in patients with an inadequate response to their current antipsychotic therapy. ADVANCE is a Phase II study evaluating pimavanserin for adjunctive treatment in patients with negative symptoms of schizophrenia.

12


 

Depression is another disorder with a high unmet need that we believe represents an attractive development opportunity for pimavanserin. Preclinical and clinical studies have shown that patients with depression often do not receive adequate relief from an antidepressant medication and, due to side effects of currently available therapies, many patients discontinue their medication, significantly increasing their chance of relapse. Preclinical and clinical evidence suggests 5-HT2A antagonism may be an effective adjunctive therapy to currently prescribed antidepressants. In December 2016, we announced that we initiated CLARITY, a Phase II study evaluating pimavanserin for adjunctive treatment in patients with major depressive disorder, or MDD, who have an inadequate response to standard antidepressant therapy.

We maintain a website at www.acadia-pharm.com to which we regularly post copies of our press releases as well as additional information about us. Our filings with the SEC are available free of charge through our website as soon as reasonably practicable after being electronically filed with or furnished to the SEC. Interested persons can subscribe on our website to email alerts that are sent automatically when we issue press releases, file our reports with the SEC or post certain other information to our website. Information contained in our website does not constitute a part of this Quarterly Report or our other filings with the SEC.

Financial Operations Overview

Product and Collaborative Revenues

Net product sales consist of sales of NUPLAZID, our first and only commercial product to date. The FDA approved NUPLAZID in April 2016 and we launched the product in the United States in May 2016.

Prior to the generation of revenue from NUPLAZID, our revenues had been generated substantially from payments under our current and past collaboration agreements. Our prior collaboration agreement with Allergan plc focused on muscarinic product candidates for the treatment of glaucoma terminated in 2015 and we will not be receiving any further payments under that agreement. Our continuing collaboration agreement with Allergan involves the development of product candidates in the area of chronic pain. Under this continuing agreement, we are eligible to receive payments upon achievement of development and regulatory milestones, as well as royalties on future product sales, if any. We no longer receive research funding from this agreement and additional payments are dependent upon the advancement of an applicable product candidate. Our continuing collaboration agreement with Allergan in chronic pain is subject to termination upon notice by Allergan.

Cost of Product Sales

Cost of product sales consists of third-party manufacturing costs, freight, and indirect overhead costs associated with sales of NUPLAZID. Cost of product sales may also include period costs related to certain inventory manufacturing services, inventory adjustment charges, unabsorbed manufacturing and overhead costs, and manufacturing variances.

License Fees and Royalties

License fees and royalties consist of milestone payments expensed or capitalized and subsequently amortized under our 2006 license agreement with the Ipsen Group. License fees and royalties also include royalties of two percent due to the Ipsen Group based upon net sales of NUPLAZID.

Research and Development Expenses

Our research and development expenses have consisted primarily of fees paid to external service providers, salaries and related personnel expenses, facilities and equipment expenses, and other costs incurred related to pre-commercial product candidates. We charge all research and development expenses to operations as incurred. Our research and development activities have primarily focused on NUPLAZID (pimavanserin) which was approved by the FDA for the treatment of hallucinations and delusions associated with PD Psychosis in April 2016. We currently are responsible for all costs incurred in the ongoing development of pimavanserin and we expect to continue to make substantial investments in clinical studies of pimavanserin for indications other than PD Psychosis, including Alzheimer’s disease, schizophrenia and depression. Additionally, in connection with the FDA approval of NUPLAZID, we committed to conduct post-marketing studies, including a randomized, placebo-controlled withdrawal study in PD Psychosis patients treated with NUPLAZID and randomized, placebo-controlled eight-week studies in predominantly frail and elderly patients that would add to the NUPLAZID safety database by exposing an aggregate of at least 500 patients to NUPLAZID. We will be responsible for all costs incurred for these post-marketing studies.

We use external service providers to manufacture our product candidates and for the majority of the services performed in connection with the preclinical and clinical development of pimavanserin. Historically, we have used our internal research and development resources, including our employees and discovery infrastructure, across several projects and many of our costs have not

13


 

been attributable to a specific project. Accordingly, we have not reported our internal research and development costs on a project basis. To the extent that external expenses are not attributable to a specific project, they are included in other programs. The following table summarizes our research and development expenses by project for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Costs of external service providers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NUPLAZID (pimavanserin)

 

$

18,230

 

 

$

9,841

 

 

$

38,140

 

 

$

20,999

 

Other programs

 

 

41

 

 

 

118

 

 

 

64

 

 

 

341

 

Subtotal

 

 

18,271

 

 

 

9,959

 

 

 

38,204

 

 

 

21,340

 

Internal costs

 

 

9,489

 

 

 

5,739

 

 

 

19,664

 

 

 

12,737

 

Stock-based compensation

 

 

6,420

 

 

 

4,780

 

 

 

11,721

 

 

 

9,176

 

Total research and development

 

$

34,180

 

 

$

20,478

 

 

$

69,589

 

 

$

43,253

 

Although NUPLAZID was approved by the FDA for the treatment of hallucinations and delusions associated with PD Psychosis, at this time, due to the risks inherent in clinical development, we are unable to estimate with certainty the costs we will incur for the ongoing development of pimavanserin in additional indications, including those within Alzheimer’s disease, schizophrenia, and depression. Due to these same factors, we are unable to determine with any certainty the anticipated completion dates for our current research and development programs. Clinical development and regulatory approval timelines, probability of success, and development costs vary widely. While our current development efforts are primarily focused on advancing the development of pimavanserin in additional indications other than PD Psychosis, we anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment of the commercial potential of each opportunity and our financial position. We cannot forecast with any degree of certainty which product opportunities will be subject to future collaborative or licensing arrangements, when such arrangements will be secured, if at all, and to what degree any such arrangements would affect our development plans and capital requirements. Similarly, we are unable to estimate with certainty the costs we will incur for post-marketing studies that we committed to conduct in connection with FDA approval of NUPLAZID.

We expect our research and development expenses to increase and continue to be substantial as we conduct studies pursuant to our post-marketing commitments and pursue the development of pimavanserin in additional indications other than PD Psychosis, including our studies within the Alzheimer’s disease, schizophrenia, and depression indications. The lengthy process of completing clinical trials and supporting development activities and seeking regulatory approval for our product opportunities requires the expenditure of substantial resources. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, could cause our research and development expenses to increase and, in turn, have a material adverse effect on our results of operations.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of salaries and other related costs, including stock-based compensation expense, for our commercial personnel, including our specialty sales force, our medical education professionals, and our personnel serving in executive, finance, business development, and business operations functions. Also included in selling, general and administrative expenses are fees paid to external service providers to support our commercial activities associated with NUPLAZID, professional fees associated with legal and accounting services, and costs associated with patents and patent applications for our intellectual property. We expect our selling, general and administrative expenses to increase in future periods to support commercial activities associated with NUPLAZID and our further development of pimavanserin in additional indications other than PD Psychosis.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements. We have identified the accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results may differ substantially from these estimates under different assumptions or conditions. Except for the update set forth below, there have been no significant changes to our critical accounting policies and estimates since December 31, 2016. For a description of our other critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2016.

14


 

Revenue Recognition

Product Sales, Net

Our net product sales consist of U.S. sales of NUPLAZID and are recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title to the product and associated risk of loss has passed to the customer, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. NUPLAZID was approved by the FDA on April 29, 2016 and we commenced shipments of NUPLAZID to specialty pharmacies, or SPs, and specialty distributors, or SDs, in late May 2016. Prior to April 1, 2017, we utilized the “sell-though” revenue recognition model with respect to sales of NUPLAZID, meaning that we deferred the recognition of revenue from sales of NUPLAZID until product was dispensed to patients by the specialty pharmacies, or SPs, or sold to government facilities and long-term care and in-patient hospital pharmacies by the specialty distributors, or SDs. In the second quarter, we determined we have sufficient volume of activity to reasonably estimate our allowances for rebates and chargebacks, and began recognizing NUPLAZID revenue using the “sell-in” revenue recognition model pursuant to which we recognize NUPLAZID revenue at the point of sale to the SPs and SDs. Product shipping and handling costs are included in cost of product sales.

We recognize revenue from product sales net of the following allowances and reflect each of these as either a reduction to the related account receivable or as an accrued liability, depending on how the amount is settled:

Distribution Fees: Distribution fees include distribution service fees paid to the SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost, or WAC, fees for data, and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements with, or statutory requirements pertaining to, Medicaid and Medicare benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. Our estimates for expected utilization of rebates is based on historical data received from the SPs and SDs since product launch. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs at a discounted price. The SDs charge back to us the difference between the price initially paid by the SDs and the discounted price paid to the SDs by these entities. We also incur group purchasing organization fees for transactions through certain purchasing organizations. We estimate sales with these entities and accrue for anticipated chargebacks and organization fees, based on the applicable contractual terms.  If actual future chargebacks vary from these estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-Payment Assistance: We offer co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Returns: Consistent with industry practice, we offer the SPs and SDs limited product return rights for damages, shipment errors, and expiring product; provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. We do not allow product returns for product that has been dispensed to a patient. As we receive inventory reports from the SPs and SDs and have the ability to control the amount of product that is sold to the SPs and SDs, we are able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at our estimate, we also consider historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

Results of Operations

Fluctuations in Operating Results

Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the progress and timing of expenditures related to our commercial activities associated with NUPLAZID and the extent to which we generate revenue from product sales, our development of pimavanserin in additional indications other than in PD Psychosis, the progress and timing of expenditures related to studies pursuant to our post-marketing commitments, and the timing and amount of payments received pursuant to our current collaboration and any potential future collaborations. Due to these fluctuations, we believe

15


 

that the period-to-period comparisons of our operating results are not a good indication of our future performance. Further, we expect our sales allowances to vary from quarter to quarter due to fluctuations in our Medicare Part D Coverage Gap liability and the volume of purchases eligible for government mandated discounts and rebates, as well as changes in discount percentages that may be impacted by potential future price increases and other factors.

Comparison of the Three Months Ended June 30, 2017 and 2016

Product Sales, Net

Net product sales, comprised of NUPLAZID, which we launched in May 2016, were $30.5 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively.

As a result of the change in our accounting method for revenue recognition of NUPLAZID sales, in the second quarter of 2017, from the sell-through method to the sell-in method, we recorded a one-time adjustment during the three months ended June 30, 2017, to recognize deferred revenue on previously shipped product, resulting in additional net revenue of $3.6 million during the three months ended June 30, 2017.

Cost of Product Sales

Cost of product sales was $2.2 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively, or approximately 7% and 542% of net product sales, respectively. Costs of sales increased for the three months ended June 30, 2017 as compared to the same period in 2016 due to greater sales volumes and lower manufacturing levels resulting in lower inventory cost absorption. The cost of product sales during the three months ended June 30, 2016 exceeded net product sales recognized due to certain manufacturing services and other period costs that are not directly correlated with sales volumes. Product sold during the three months ended June 30, 2017 and 2016 was manufactured with raw material that was previously charged to research and development expense prior to FDA approval of NUPLAZID. This zero cost raw material did not materially impact our cost of product sales and related product gross margins for the three months ended June 30, 2017 and 2016.

License Fees and Royalties

License fees and royalties were $1.0 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively, and include amortization related to the milestone paid to the Ipsen Group upon FDA approval of NUPLAZID in 2016 and royalties due to the Ipsen Group of two percent of net sales of NUPLAZID. The increase in license fees and royalties during the three months ended June 30, 2017 as compared to the same period in 2016 is primarily due to the increase in sales volume during the current period and due to a full three months of amortization related to the Ipsen Group milestone payment being included in the current period.

Research and Development Expenses

Research and development expenses increased to $34.2 million for the three months ended June 30, 2017, including $6.4 million in stock-based compensation expense, from $20.5 million for the three months ended June 30, 2016, including $4.8 million in stock-based compensation expense. The increase in research and development expenses was due to an increase of $8.3 million in external service costs and an increase of $5.4 million in personnel and related costs and stock-based compensation expense associated with the expansion of our research and development organization. The increase in external service costs was primarily due to increased clinical and personnel-related costs associated with the development of pimavanserin in indications other than PD Psychosis, including Alzheimer’s disease, schizophrenia, and depression. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $61.5 million for the three months ended June 30, 2017, including $10.9 million in stock-based compensation expense, from $50.8 million for the three months ended June 30, 2016, including $8.9 million in stock-based compensation expense. The increase in selling, general and administrative expenses was due to an increase of $8.6 million in personnel and related costs and stock-based compensation expenses, as well as an increase of $1.7 million in external service costs. The increase in personnel and related costs was largely due to costs associated with our specialty sales force that we hired in the second quarter of 2016 and further expanded in the first half of 2017.

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Comparison of the Six Months Ended June 30, 2017 and 2016

Product Sales, Net

Net product sales, comprised of sales of NUPLAZID, which we launched in May 2016, were $45.8 million and $0.1 million for the six months ended June 30, 2017 and 2016, respectively.

As a result of the change in our accounting method for revenue recognition of NUPLAZID sales, in the second quarter of 2017, from the sell-through method to the sell-in method, we recorded a one-time adjustment during the six months ended June 30, 2017, to recognize deferred revenue on previously shipped product, resulting in additional net revenue of $3.6 million during the three months ended June 30, 2017.

The following table provides a summary of activity with respect to our sales allowances and accruals for the six months ended June 30, 2017 (in thousands):

 

 

Distribution Fees, Discounts & Chargebacks

 

 

Rebates, Co-Pay Assistance & Returns

 

 

Total

 

Balance as of December 31, 2016

 

$

201

 

 

$

1,798

 

 

$

1,999

 

Provision related to current period sales

 

 

4,779

 

 

 

7,166

 

 

 

11,945

 

Credits/payments for current period sales

 

 

(4,324

)

 

 

(2,067

)

 

 

(6,391

)

Credits/payments for prior period sales

 

 

(201

)

 

 

(1,560

)

 

 

(1,761

)

Balance as of June 30, 2017

 

$

455

 

 

$

5,337

 

 

$

5,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Product Sales

Cost of product sales was $4.5 million and $0.5 million for the six months ended June 30, 2017 and 2016, respectively, or approximately 10% and 542% of net product sales, respectively. Costs of sales increased for the six months ended June 30, 2017 as compared to the same period in 2016 due to greater sales volumes and lower manufacturing levels resulting in lower inventory cost absorption. The cost of product sales during the six months ended June 30, 2016 exceeded net product sales recognized due to certain manufacturing services and other period costs that are not directly correlated with sales volumes. Product sold during the six months ended June 30, 2017 and 2016 was manufactured with raw material that was previously charged to research and development expense prior to FDA approval of NUPLAZID. This zero cost raw material did not materially impact our cost of product sales and related product gross margins for the six months ended June 30, 2017 and 2016.

License Fees and Royalties

License fees and royalties were $1.7 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively, and include amortization related to the milestone paid to the Ipsen Group upon the FDA approval of NUPLAZID in 2016 and royalties due to the Ipsen Group of two percent of net sales of NUPLAZID. The increase in license fees and royalties during the six months ended June 30, 2017 as compared to the same period in 2016 is due to the increase in sales volume during the current period and due to a full six months of amortization related to the Ipsen Group milestone payment being included in the current period.

Research and Development Expenses

Research and development expenses increased to $69.6 million for the six months ended June 30, 2017, including $11.7 million in stock-based compensation expense, from $43.3 million for the six months ended June 30, 2016, including $9.2 million in stock-based compensation expense. The increase in research and development expenses was due to an increase of $16.9 million in external service costs and an increase of $9.5 million in personnel and related costs and stock compensation expense associated with the expansion of our research and development organization. The increase in external service costs was primarily due to increased clinical and personnel-related costs associated with the development of pimavanserin in indications other than PD Psychosis, including Alzheimer’s disease, schizophrenia, and depression, partially offset by a decrease in regulatory costs related to the FDA’s Psychopharmacologic Drugs Advisory Committee meeting that occurred in March 2016, with no comparable cost during the six months ended June 30, 2017.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $127.3 million for the six months ended June 30, 2017, including $20.3 million in stock-based compensation expense, from $78.3 million for the six months ended June 30, 2016, including $16.5 million in stock-based compensation expense. The increase in selling, general and administrative expenses was due to an

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increase of $26.2 million in external service costs and an increase of $22.4 million in personnel and related costs and stock-based compensation expense. The increase in external service costs was primarily due to costs incurred related to our commercial activities for NUPLAZID, as well as additional medical education programs. Further, we made additional charitable contributions in 2017 as compared to 2016. The increase in personnel and related costs was largely due to costs associated with our specialty sales force that we hired in the second quarter of 2016 and further expanded in the first half of 2017.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through sales of our equity securities, payments received under our collaboration agreements, debt financings, and interest income. For example, in January and August 2016, we raised total net proceeds of approximately $497.5 million in follow-on public offerings, and in 2014 we raised net proceeds of $196.8 million in a public offering of our common stock. We anticipate that the level of cash used in our operations will increase in future periods in order to fund our ongoing and planned commercial activities for NUPLAZID, our ongoing and planned development activities for pimavanserin in additional indications other than PD Psychosis, and studies to be conducted pursuant to our post-marketing commitments. We expect that our cash, cash equivalents, and investment securities will be sufficient to fund our planned operations through at least the next twelve months.

We may require significant additional financing in the future to fund our operations. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:

 

the progress in, and the costs of, our ongoing and planned development activities for pimavanserin, post-marketing studies for NUPLAZID to be conducted over the next several years, ongoing and planned commercial activities for NUPLAZID, and other research and development programs;

 

the costs of maintaining and developing our sales and marketing capabilities for NUPLAZID;

 

the costs of establishing, or contracting for, sales and marketing capabilities for other product candidates;

 

the amount of U.S. product sales from NUPLAZID;

 

the costs of preparing applications for regulatory approvals for NUPLAZID in jurisdictions other than the United States, and potentially in additional indications other than PD Psychosis and for other product candidates, as well as the costs required to support review of such applications;

 

the costs of manufacturing and distributing NUPLAZID;

 

our ability to obtain regulatory approval for, and subsequently generate product sales from, NUPLAZID in jurisdictions other than the United States or in additional indications other than PD Psychosis, or from other product candidates;

 

the costs of acquiring additional product candidates or research and development programs;

 

the scope, prioritization and number of our research and development programs;

 

our ability to enter into new collaboration and license agreements;

 

the extent to which we are obligated to reimburse collaborators or collaborators are obligated to reimburse us for costs under collaboration agreements;

 

the costs involved in filing, prosecuting, enforcing, and defending patent claims and other intellectual property rights;

 

the costs of securing manufacturing arrangements for clinical or commercial production of NUPLAZID or other product candidates; and

 

the costs associated with litigation, including the costs incurred in defending against any product liability claims that may be brought against us related to NUPLAZID.

Unless and until we can generate significant cash from our operations, we expect to satisfy our future cash needs through our existing cash, cash equivalents and investment securities, public or private sales of our securities, debt financings, strategic collaborations, or by licensing all or a portion of our product candidates or technology. In the past, periods of turmoil and volatility in the financial markets have adversely affected the market capitalizations of many biotechnology companies, and generally made equity and debt financing more difficult to obtain. These events, coupled with other factors, may limit our access to additional financing in the future. This could have a material adverse effect on our ability to access sufficient funding. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If funds are not available, we will be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts. We also may be required to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would

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otherwise choose. Additional funding, if obtained, may significantly dilute existing stockholders and could negatively impact the price of our stock.

We have invested a substantial portion of our available cash in a money market fund, U.S. Treasury notes, and high quality, marketable debt instruments of corporations and government sponsored enterprises in accordance with our investment policy. Our investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of our investments to preserve principal and maintain liquidity. All investment securities have a credit rating of at least A3/A- or better, or P-1/A-1 or better, as determined by Moody’s Investors Service or Standard & Poor’s. Our investment portfolio has not been adversely impacted by the disruptions in the credit markets that have occurred in the past. However, if there are future disruptions in the credit markets, there can be no assurance that our investment portfolio will not be adversely affected.

At June 30, 2017, we had $417.3 million in cash, cash equivalents, and investment securities, compared to $529.0 million at December 31, 2016. This $111.7 million decrease was primarily due to cash used in operations, which increased to $129.6 million for the six months ended June 30, 2017 compared to $98.0 million for the six months ended June 30, 2016. This increased use of cash in operations of $31.6 million was primarily due to the increase in our net loss, offset by an increase of $8.0 million in non-cash stock-based compensation.

Net cash provided by investing activities totaled $91.2 million for the six months ended June 30, 2017 compared to net cash used in investing activities of $176.2 million for the six months ended June 30, 2016. Net cash provided by investing activities for the six months ended June 30, 2017 compared to net cash used in investing activities for the comparable period of 2016 was primarily due to a decrease in purchases of investment securities attributable to the January 2016 follow-on public offering that contributed approximately $281.6 million in net proceeds available for investment in the six months ended June 30, 2016, with no comparable cash proceeds in the six months ended June 30, 2017. Also contributing to the net cash used in investing activities for the six months ended June 30, 2016 was the payment of an $8.0 million regulatory milestone pursuant to our license agreement with the Ipsen Group in connection with the FDA approval of NUPLAZID with no comparable payment made in the six months ended June 30, 2017.

Net cash provided by financing activities decreased to $18.5 million for the six months ended June 30, 2017 compared to $303.7 million for the six months ended June 30, 2016. This decrease in net cash provided by financing activities for the six months ended June 30, 2017 was primarily attributable to the January 2016 follow-on public offering that contributed approximately $281.6 million in total net proceeds in the six months ended June 30, 2016 with no comparable proceeds in the six months ended June 30, 2017.

Off-Balance Sheet Arrangements

To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships.

Recent Accounting Pronouncements

See Item 1 of Part I, “Notes to Condensed Consolidated Financial Statements — Note 10 — Recent Accounting Pronouncements”.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We invest our excess cash in investment-grade, interest-bearing securities. The primary objective of our investment activities is to preserve principal and liquidity. To achieve this objective, we invest in a money market fund, U.S. Treasury notes, and high quality marketable debt instruments of corporations and government sponsored enterprises with contractual maturity dates of generally less than two years. All investment securities have a credit rating of at least A3/A- or better, or P-1/A-1 or better, as determined by Moody’s Investors Service or Standard & Poor’s. We do not have any direct investments in auction-rate securities or securities that are collateralized by assets that include mortgages or subprime debt. If a 10 percent change in interest rates were to have occurred on June 30, 2017, this change would not have had a material effect on the fair value of our investment portfolio as of that date.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods

19


 

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 (our principal executive officer and principal financial officer, respectively), 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 provide only reasonable and not absolute assurance of achieving the desired control objectives. 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. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As of June 30, 2017, 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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2017.

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 in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In March 2015, following our announcement of the update to the timing of our planned NDA submission to the FDA for NUPLAZID for the treatment of PD Psychosis and the subsequent decline of the price of our common stock, two putative securities class action complaints (captioned Rihn v. ACADIA Pharmaceuticals Inc., Case No. 15-cv-0575-BTM-DHB, and Wright v. ACADIA Pharmaceuticals Inc., Case No. 15-cv-0593- BTM-DHB) were filed in the U.S. District Court for the Southern District of California, or the Court, against us and certain of our current and former officers. The complaints generally alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements regarding the timing of our planned NDA submission to the FDA for NUPLAZID, thereby artificially inflating the price of our common stock. The complaints sought unspecified monetary damages and other relief. On April 10 and June 1, 2015, the Court entered orders deferring the defendants’ response to the Rihn and Wright complaints until after the Court appointed a lead plaintiff and assigned lead counsel. On May 12, 2015, several putative stockholders filed separate motions to consolidate the two actions and be appointed lead plaintiff. On September 8, 2015, the Court issued an order consolidating the two actions, appointing lead plaintiff, and assigning lead counsel. On November 16, 2015, lead plaintiff filed a consolidated complaint with the Court which, like the prior complaints, accuses the defendants of making materially false and misleading statements regarding the anticipated timing of our planned NDA submission to the FDA for NUPLAZID. On January 15, 2016, we filed a motion to dismiss the consolidated complaint. On September 19, 2016, the Court issued an order denying the motion to dismiss the consolidated complaint. On December 6, 2016, the parties had a mediation and agreed in principle to settle the action. On March 13, 2017, the parties signed a Stipulation of Settlement setting forth the terms of the proposed settlement. On June 9, 2017, the Court preliminarily approved the settlement (the “Preliminary Approval Order”).  Among other things, the Preliminary Approval Order set an opt-out deadline of August 29, 2017; an objection deadline of September 13, 2017; and a final approval hearing for October 3, 2017.

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ITEM 1A.

RISK FACTORS

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report and in our other public filings in evaluating our business. The risk factors set forth below that are marked with an asterisk (*) did not appear as separate risk factors in, or contain changes to the similarly titled risk factor included in, Item 1A to our Annual Report. If any of the following risks actually occurs, our business, financial condition, results of operations, and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Risks Related to Our Business

Our prospects are highly dependent on the successful commercialization of NUPLAZID, which received approval in April 2016 from the U.S. Food and Drug Administration, or FDA, as a treatment for hallucinations and delusions associated with Parkinson’s disease psychosis, and became available for prescription in the United States in May 2016. To the extent NUPLAZID is not commercially successful, our business, financial condition and results of operations may be materially adversely affected and the price of our common stock may decline.*

NUPLAZID is our only drug that has been approved for sale and it has only been approved for the treatment of hallucinations and delusions associated with Parkinson’s disease psychosis, or PD Psychosis, in the United States. We are focusing a significant portion of our activities and resources on NUPLAZID, and we believe our prospects are highly dependent on, and a significant portion of the value of our company relates to, our ability to successfully commercialize NUPLAZID in the United States.

Successful commercialization of NUPLAZID is subject to many risks. Prior to NUPLAZID, we had never, as an organization, launched or commercialized any product, and there is no guarantee that we will be able to successfully commercialize NUPLAZID for its approved indication. There are numerous examples of failures to meet high expectations of market potential, including by pharmaceutical companies with more experience and resources than us. While we have established our commercial team and have hired our U.S. sales force, we will need to maintain and further develop the team in order to successfully coordinate the commercialization of NUPLAZID. Even if we are successful in maintaining and continuing to develop our commercial team, there are many factors that could cause the commercialization of NUPLAZID to be unsuccessful, including a number of factors that are outside our control. Because no drug has previously been approved by the FDA for the treatment of hallucinations and delusions associated with PD Psychosis, it is especially difficult to estimate NUPLAZID’s market potential. The commercial success of NUPLAZID depends on the extent to which patients and physicians recognize and diagnose PD Psychosis and accept and adopt NUPLAZID as a treatment for hallucinations and delusions associated with PD Psychosis, and we do not know whether our or others’ estimates in this regard will be accurate. For example, if the patient population suffering from hallucinations and delusions associated with PD Psychosis is smaller than we estimate or if physicians are unwilling to prescribe or patients are unwilling to take NUPLAZID due to its “boxed” warning or other reasons, the commercial potential of NUPLAZID will be limited. We have limited information about how physicians, patients and payors have responded and will respond to the pricing of NUPLAZID, including because as part of our initial launch strategy we provided free product as samples and through a 30-day free supply period of NUPLAZID, and do not know whether patients that initially use NUPLAZID will continue to do so after the sample or 30-day free supply period ends. Additionally, in April 2017, we increased the price of NUPLAZID and began providing free product for a 14-day period rather than a 30-day period, and we have limited information about how physicians, patients and payors have responded or will respond to these changes. Physicians may not prescribe NUPLAZID and patients may be unwilling to use NUPLAZID if coverage is not provided or reimbursement is inadequate to cover a significant portion of the cost. Additionally, any negative development for NUPLAZID in our post-marketing commitments, in clinical development in additional indications, or in regulatory processes in other jurisdictions, may adversely impact the commercial results and potential of NUPLAZID. Thus, significant uncertainty remains regarding the commercial potential of NUPLAZID.

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If the launch or commercialization of NUPLAZID is unsuccessful or perceived as disappointing, our stock price could decline significantly and the long-term success of the product and our company could be harmed.

If we do not obtain regulatory approval of NUPLAZID for other indications in the United States, or for any indications in foreign jurisdictions, we will not be able to market NUPLAZID for other indications or in other jurisdictions, which will limit our commercial revenues.*

While NUPLAZID (pimavanserin) has been approved by the FDA for the treatment of hallucinations and delusions associated with PD Psychosis, it has not been approved by the FDA for any other indications, and it has not been approved in any other jurisdiction for this indication or for any other indication. In order to market NUPLAZID for other indications or in other jurisdictions, we must obtain regulatory approval for each of those indications and in each of the applicable jurisdictions, and we may never be able to obtain such approval. Approval of NUPLAZID by the FDA for the treatment of hallucinations and delusions associated with PD Psychosis does not ensure that the foreign jurisdictions will also approve NUPLAZID for that indication, nor does it ensure that NUPLAZID will be approved by the FDA for any other indication. In the fourth quarter of 2016, we announced top-line results from a Phase II study with pimavanserin in AD Psychosis as well as the initiation of four clinical studies of pimavanserin in several other indications. However, there is no guarantee that any of these studies will be successful, or that the FDA or any regulatory authority in foreign jurisdictions will approve NUPLAZID for any of those indications. The research, testing, manufacturing, labeling, approval, sale, import, export, marketing, and distribution of pharmaceutical product candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, whose regulations differ from country to country. We will be required to comply with different regulations and policies of the jurisdictions where we seek approval for our product candidates, and we have not yet identified all of the requirements that we will need to satisfy to submit NUPLAZID for approval for other indications or in other jurisdictions. This will require additional time, expertise and expense, including the potential need to conduct additional studies or development work for other jurisdictions beyond the work that we have conducted to support our NDA submission in PD Psychosis. In addition, strategic considerations need to be taken into account when determining whether and when to submit NUPLAZID for approval in other jurisdictions. For example, in the fourth quarter of 2016, the European Medicines Agency, or EMA, approved our proposed pediatric investigation plan related to our planned submission of a marketing authorization application, or MAA, for NUPLAZID in Europe. However, in light of our continuing clinical development of pimavanserin in indications other than PD Psychosis, and the time-limited data exclusivity currently granted by the EMA that commences on first approval of a product in Europe, we deferred submission of the MAA and we do not yet have a revised estimate of when we will make that filing. If we do not receive marketing approval for NUPLAZID for any other indication or from any regulatory agency other than the FDA, we will never be able to commercialize NUPLAZID for any other indication in the United States or for any indication in any other jurisdiction. Even if we do receive additional regulatory approvals, we may not be successful in commercializing those opportunities.

If the results or timing of regulatory filings, the regulatory process, regulatory developments, clinical trials or preclinical studies, or other activities, actions or decisions related to NUPLAZID do not meet our or others’ expectations, the market price of our common stock could decline significantly.

Even though the FDA has granted approval of NUPLAZID for the treatment of hallucinations and delusions associated with PD Psychosis, the terms of the approval may limit its commercial potential. Additionally, NUPLAZID is still subject to substantial, ongoing regulatory requirements.

Even though the FDA has granted approval of NUPLAZID, the scope and terms of the approval may limit our ability to commercialize NUPLAZID and, therefore, our ability to generate substantial sales revenues. The FDA has approved NUPLAZID only for the treatment of hallucinations and delusions associated with PD Psychosis. The label for NUPLAZID also contains a “boxed” warning that elderly patients with dementia-related psychosis treated with antipsychotic drugs are at an increased risk of death, and that NUPLAZID is not approved for the treatment of patients with dementia-related psychosis unrelated to the hallucinations and delusions associated with PD Psychosis.

Additionally, in connection with the FDA approval, we have committed to conduct the following post-marketing studies: (i) a randomized, placebo-controlled withdrawal study in PD Psychosis patients treated with NUPLAZID, (ii) studies to collect additional data to add to the NUPLAZID safety database from an aggregate of at least 500 predominantly frail and elderly subjects on NUPLAZID in one or more randomized, placebo-controlled studies of eight or more weeks duration, (iii) a drug-drug interaction study with NUPLAZID and a strong CYP3A4 inducer, and (iv) re-analysis of tissue samples from certain previously conducted pre-clinical studies. If we fail to comply with our post-marketing commitments, or if the results of the post-marketing studies, or any other ongoing or planned clinical studies of NUPLAZID, are negative, the FDA could decide to withdraw approval, add warnings or narrow the approved indication in the product label.

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The manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for NUPLAZID will also continue to be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing processes, good clinical practices, international council for harmonization guidelines and good laboratory practices, which are regulations and guidelines enforced by the FDA for all of our nonclinical and clinical development and for any clinical trials that we conduct post-approval.

Discovery of any issues post-approval, including any safety concerns, such as unexpected side effects or drug-drug interaction problems, adverse events of unanticipated severity or frequency, or concerns over misuse or abuse of the product, problems with the facilities where the product is manufactured, packaged or distributed, or failure to comply with regulatory requirements, may result in, among other things, restrictions on NUPLAZID or on us, including:

 

withdrawal of approval, addition of warnings or narrowing of the approved indication in the product label;

 

requirement of a Risk Evaluation and Mitigation Strategy to mitigate the risk of off-label use in populations where the FDA may believe that the potential risks of use may outweigh its benefits;

 

voluntary or mandatory recalls;

 

warning letters;

 

suspension of any ongoing clinical studies;

 

refusal by the FDA or other regulatory authorities to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product approvals;

 

restrictions on operations, including restrictions on the marketing or manufacturing of the product or the imposition of costly new manufacturing requirements; or

 

seizure or detention, or refusal to permit the import or export of products.

If any of these actions were to occur, we may have to discontinue the commercialization of NUPLAZID, limit our sales and marketing efforts, conduct further post-approval studies, and/or discontinue or change any other ongoing or planned clinical studies, which in turn could result in significant expense and delay or limit our ability to generate sales revenues.

NUPLAZID has only been studied in a limited number of patients and in limited populations. As we continue to commercialize it, NUPLAZID is becoming available to a much larger number of patients and in broader populations, and we do not know whether the results of NUPLAZID use in such larger number of patients and broader populations will be consistent with the results from our clinical studies.*

Prior to commencing our commercial launch of NUPLAZID in May 2016, NUPLAZID was administered only to a limited number of patients and in limited populations in clinical studies, including our successful pivotal -020 Phase III trial with NUPLAZID for the treatment of PD Psychosis, or the -020 Study. While the FDA granted approval of NUPLAZID based on the data included in the NDA, including data from the -020 Study, we do not know whether the results when a large number of patients and broader populations are exposed to NUPLAZID, including results related to safety and efficacy, will be consistent with the results from earlier clinical studies of NUPLAZID that served as the basis for the approval of NUPLAZID. New data relating to NUPLAZID, including from adverse event reports and post-marketing studies in the United States, and from other ongoing clinical studies, may result in changes to the product label and may adversely affect sales, or result in withdrawal of NUPLAZID from the market. The FDA and regulatory authorities in other jurisdictions may also consider the new data in reviewing NUPLAZID marketing applications for indications other than in PD Psychosis and/or in other jurisdictions, or impose additional post‑approval requirements. If any of these actions were to occur, it could result in significant expense and delay or limit our ability to generate sales revenues.

We currently have very limited experience as a company in marketing and distributing pharmaceutical products and rely on a limited network of third party distributors and pharmacies to distribute NUPLAZID. If we are unable to effectively commercialize NUPLAZID, we may not be able to generate adequate product revenues.*

NUPLAZID is our only drug that has been approved for sale by any regulatory body, and it became available for prescription in the United States on May 31, 2016. As such, while we have established our commercial team, hired our U.S. sales force and launched NUPLAZID in the United States, we currently have limited experience commercializing pharmaceutical products as an organization. In order to successfully market NUPLAZID, we must maintain and continue to develop our sales, marketing, managerial, compliance, and related capabilities or make arrangements with third parties to perform these services. If we are unable to maintain and develop adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize NUPLAZID and may not become profitable.

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We employ our own internal specialty sales force to commercialize NUPLAZID for the treatment of PD Psychosis as part of our commercialization strategy in the United States. We will need to maintain and further develop our sales force as we continue our commercialization efforts, and we will be competing with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. For example, we recently expanded our sales force by hiring additional sales representatives to market NUPLAZID to pharmacists and physicians in long-term care facilities. These efforts will continue to be expensive and time-consuming, and we cannot be certain that we will be able to successfully maintain and further develop our sales force.

Additionally, our strategy in the United States includes distributing NUPLAZID solely through a limited network of third-party specialty distributors and specialty pharmacies. While we have entered into agreements with each of these distributors and pharmacies to distribute NUPLAZID in the United States, they may not perform as agreed or they may terminate their agreements with us. Also, we may need to enter into agreements with additional distributors or pharmacies, and there is no guarantee that we will be able to do so on commercially reasonable terms or at all. If we are unable to maintain and, if needed, expand, our network of specialty distributors and specialty pharmacies, we would be exposed to substantial distribution risk.

In the event we are unable to effectively develop and maintain our commercial team, including our U.S. sales force, or maintain and, if needed, expand, our network of specialty distributors and specialty pharmacies, our ability to effectively commercialize NUPLAZID and generate product revenues would be limited.

If we are unable to effectively train and equip our sales force, our ability to successfully commercialize NUPLAZID will be harmed.*

Prior to its launch in May 2016, none of the members of our sales force had ever promoted NUPLAZID. In addition, NUPLAZID is the first drug approved by the FDA for the treatment of hallucinations and delusions associated with PD Psychosis. As a result, we are and will continue to be required to expend significant time and resources to train our sales force to be credible, persuasive, and compliant with applicable laws in marketing NUPLAZID for the treatment of hallucinations and delusions associated with PD Psychosis to neurologists, select psychiatrists, and pharmacists and physicians in long-term care facilities. In addition, we must ensure that consistent and appropriate messages about NUPLAZID are being delivered to our potential customers by our sales force. If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits of NUPLAZID and its proper administration, our efforts to successfully commercialize NUPLAZID could be put in jeopardy, which would negatively impact our ability to generate product revenues.

NUPLAZID may not gain acceptance among physicians, patients, and the medical community, thereby limiting our potential to generate revenues.*

The degree of market acceptance by physicians, healthcare professionals and third-party payors of NUPLAZID, and any other product for which we obtain regulatory approval, and our profitability and growth, will depend on a number of factors, including:

 

the ability to provide acceptable evidence of safety and efficacy;

 

the scope of the approved indication(s) for the product;

 

the inclusion of any warnings or contraindications in the product label;

 

the relative convenience and ease of administration;

 

the prevalence and severity of any adverse side effects;

 

the availability of alternative treatments;

 

pricing and cost effectiveness, which may be subject to regulatory control;

 

effectiveness of our or our collaborators’ sales and marketing strategy; and

 

our ability to obtain sufficient third-party insurance coverage or adequate reimbursement levels.

If a product does not provide a treatment regimen that is at least as beneficial as the current standard of care or otherwise does not provide patient benefit, that product will not achieve market acceptance and will not generate sufficient revenues to achieve or maintain profitability.

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With respect to NUPLAZID specifically, successful commercialization will depend on whether and to what extent physicians, long-term care facilities and pharmacies, over whom we have no control, determine to utilize NUPLAZID. NUPLAZID is available to treat hallucinations and delusions associated with PD Psychosis, an indication for which no other FDA-approved pharmaceutical treatment exists. Because of this, it is particularly difficult to estimate NUPLAZID’s market potential and how physicians, payors and patients will respond to changes in the price of NUPLAZID. Industry sources and analysts have a divergence of estimates for the near- and long-term market potential of NUPLAZID, and a variety of assumptions directly impact the estimates for NUPLAZID’s market potential, including assumptions regarding the prevalence of PD Psychosis, the rate of diagnosis of PD Psychosis, the prevalence and rate of hallucinations and delusions in patients diagnosed with PD Psychosis, the rate of physician adoption of NUPLAZID, the potential impact of payor restrictions regarding NUPLAZID, and patient adherence and compliance rates. Small differences in these assumptions can lead to widely divergent estimates of the market potential of NUPLAZID. For example, certain research suggests that patients with Parkinson’s disease may be hesitant to report symptoms of PD Psychosis to their treating physicians for a variety of reasons, including apprehension about societal stigmas relating to mental illness. Research also suggests that physicians who typically treat patients with Parkinson’s disease may not ask about or identify symptoms of PD Psychosis. For these reasons, even if PD Psychosis occurs in high rates among patients with Parkinson’s disease, it may be underdiagnosed. Even if PD Psychosis is diagnosed, physicians may not prescribe treatment for hallucinations and delusions associated with PD Psychosis, and if they do prescribe treatment, they may prescribe other drugs, even though they are not approved in PD Psychosis, instead of NUPLAZID. Additionally, NUPLAZID is approved only for the treatment of hallucinations and delusions associated with PD Psychosis, rather than for the treatment of PD Psychosis and/or other symptoms of PD Psychosis, which may cause confusion for prescribing physicians. This confusion could result in physicians not prescribing NUPLAZID for patients diagnosed with PD Psychosis. The label for NUPLAZID also contains a “boxed” warning that elderly patients with dementia-related psychosis treated with antipsychotic drugs are at an increased risk of death, and that NUPLAZID is not approved for the treatment of patients with dementia-related psychosis unrelated to the hallucinations and delusions associated with PD Psychosis. This warning may discourage physicians from prescribing NUPLAZID to patients diagnosed with PD Psychosis, including those with dementia. In addition, even if NUPLAZID is prescribed for the treatment of hallucinations and delusions associated with PD Psychosis, issues may arise with respect to patient adherence and compliance rates. For example, the recommended dosing of NUPLAZID is two 17 mg tablets, taken together once a day. Patients may elect, whether at the direction of their physician or otherwise, to take only one tablet a day instead of two, to take tablets at different times during the day, or to otherwise not adhere to the recommended dosing, any of which could result in far lower efficacy. If patients do not adhere to the recommended dosing of NUPLAZID, patients and physicians may believe that NUPLAZID is less effective, and as a result they may stop taking it and prescribing it. Although we are currently developing a 34 mg capsule for NUPLAZID to, among other things, try to mitigate this risk, it is not anticipated to be commercially available until the second half of 2018.  

Thus, the commercial success of NUPLAZID depends on acceptance by patients and physicians, and there are a number of factors that could skew our or others’ estimates about prescribing behaviors and market adoption.

Our ability to generate product revenues will be diminished if NUPLAZID does not receive coverage from payors or sells for inadequate prices, or if patients have unacceptably high co-pay amounts.*

Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Even if we obtain coverage for NUPLAZID, or other products we may market, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients may not use NUPLAZID if coverage is not provided or reimbursement is inadequate to cover a significant portion of its cost.

In addition, the market for NUPLAZID depends significantly on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available, even if not approved for the indication for which NUPLAZID is approved.

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Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. The current environment is putting pressure on companies to price products below what they may feel is appropriate. Selling NUPLAZID at less than an optimized price could impact our revenues and overall success as a company. In April 2017, we increased the price of NUPLAZID however, we do not know if the price we have selected for NUPLAZID is the optimized price. Additionally, we do not know whether and to what extent third-party payors will react to any possible future changes in the price of NUPLAZID. In the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for NUPLAZID may differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of NUPLAZID to each payor separately, with no assurance that coverage will be obtained. If we are unable to obtain coverage of, and adequate payment levels for, NUPLAZID or any other products we may market to third-party payors, physicians may limit how much or under what circumstances they will prescribe or administer them and patients may decline to purchase them. This in turn could affect our ability to successfully commercialize NUPLAZID, or any other products we may market, and thereby adversely impact our profitability, results of operations, financial condition, and future success.

We are subject to federal, state and foreign healthcare laws and regulations and implementation of or changes to such healthcare laws and regulations could adversely affect our business and results of operations.*

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell NUPLAZID, and any other potential products, as described in greater detail in the Government Regulation section of our Annual Report. If we are found to be in violation of any of these laws or any other federal or state regulations, we may be subject to administrative, civil and/or criminal penalties, damages, fines, individual imprisonment, exclusion from federal health care programs, and the restructuring of our operations. Any of these could have a material adverse effect on our business and financial results. Since many of these laws have not been fully interpreted by the courts, there is an increased risk that we may be found in violation of one or more of their provisions. Any action against us for violation of these laws, even if we ultimately are successful in our defense, will cause us to incur significant legal expenses and divert our management’s attention away from the operation of our business.

In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. We may face competition from lower-priced products in foreign countries that have placed price controls on pharmaceutical products. In addition, there may be importation of foreign products that compete with NUPLAZID, and any other products we may market, which could negatively impact our profitability.

We expect that the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we may receive for any approved product, including NUPLAZID. There have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future. Congress also could consider subsequent legislation to replace elements of the ACA that are repealed. At this time, the full effect that the ACA will have on our business in the future remains unclear. An expansion in the government’s role in the U.S. healthcare industry may increase congressional or governmental agency scrutiny on price increases such as the one we implemented for NUPLAZID in April 2017, cause general downward pressure on the prices of prescription drug products, lower reimbursements for providers using NUPLAZID or any other product for which we obtain regulatory approval, reduce product utilization and adversely affect our business and results of operations. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize NUPLAZID or any other products for which we may receive regulatory approval.

If our operations are found to be in violation of any of the laws or regulations described above, comparable laws and regulations of non-U.S. jurisdictions or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from th