10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from                  to          

Commission File Number: 001-35518

SUPERNUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-2590184
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1550 East Gude Drive, Rockville, MD	20850
(Address of principal executive offices)	(Zip Code)

(301) 838-2500

(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.  x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

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

Large accelerated filer x	Accelerated filer o
Non-accelerated filer   o	Smaller reporting company o	Emerging growth company o
(Do not check if a smaller reporting 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. o

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of the close of business on October 31, 2017 was 51,262,132.

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

	Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	1
Consolidated Statements of Operations for the three and nine months periods ended September 30, 2017 and 2016 (Unaudited)	2
Consolidated Statements of Comprehensive Income for the three and nine months periods ended September 30, 2017 and 2016 (Unaudited)	3
Consolidated Statements of Cash Flows for the nine months periods ended September 30, 2017 and 2016 (Unaudited)	4
Notes to Consolidated Financial Statements (Unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures about Market Risk	31
Item 4. Controls and Procedures	32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. Mine Safety Disclosures	36
Item 5. Other Information	36
Item 6. Exhibits	36
SIGNATURES	39

PART I — FINANCIAL INFORMATION

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

	September 30,			December 31,
	2017			2016
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	81,924		$	66,398
Marketable securities	32,626			23,723
Accounts receivable, net	56,166			41,527
Inventories, net	14,947			16,801
Prepaid expenses and other current assets	5,667			2,955
Total current assets	191,330			151,404
Long term marketable securities	123,123			75,410
Property and equipment, net	4,688			4,344
Intangible assets, net	37,162			36,350
Other non-current assets	368			331
Deferred income taxes	28,807			41,729
Total assets	$	385,478		$	309,568
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,262		$	8,055
Accrued sales deductions	59,772			41,943
Accrued expenses	26,892			27,427
Income taxes payable	6,489			7
Non-recourse liability related to sale of future royalties, current portion	5,254			3,101
Deferred licensing revenue	287			209
Total current liabilities	104,956			80,742
Deferred licensing revenue, net of current portion	1,221			1,501
Convertible notes, net	—			4,165
Non-recourse liability related to sale of future royalties, long term	22,702			27,289
Other non-current liabilities	4,936			4,002
Derivative liabilities	—			114
Total liabilities	133,815			117,813
Stockholders’ equity:
Common stock, $0.001 par value, 130,000,000 shares authorized at September 30, 2017 and December 31, 2016; 51,262,007 and 49,971,267 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	51			50
Additional paid-in capital	291,841			276,127
Accumulated other comprehensive income (loss), net of tax	252			(134		)
Accumulated deficit	(40,481		)	(84,288		)
Total stockholders’ equity	251,663			191,755
Total liabilities and stockholders’ equity	$	385,478		$	309,568

See accompanying notes.

1

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Revenue
Net product sales	$	78,066		$	55,618		$	207,763		$	148,978
Royalty revenue	2,010			1,140			4,338			3,464
Licensing revenue	322			52			1,702			187
Total revenue	80,398			56,810			213,803			152,629
Costs and expenses
Cost of product sales	4,251			3,428			11,060			8,214
Research and development	12,980			7,868			33,405			29,539
Selling, general and administrative	40,825			25,675			104,141			76,956
Total costs and expenses	58,056			36,971			148,606			114,709
Operating income	22,342			19,839			65,197			37,920
Other income (expense)
Interest income	814			378			2,002			1,071
Interest expense	—			(202		)	(148		)	(577		)
Interest expense-nonrecourse liability related to sale of future royalties	(155		)	(1,004		)	(1,274		)	(3,564		)
Changes in fair value of derivative liabilities	—			125			76			349
Loss on extinguishment of debt	(91		)	—			(295		)	(382		)
Total other income (expense)	568			(703		)	361			(3,103		)
Earnings before income taxes	22,910			19,136			65,558			34,817
Income tax expense (benefit)	6,949			(42,690		)	21,932			(42,085		)
Net income	$	15,961		$	61,826		$	43,626		$	76,902
Earnings per share:
Basic	$	0.31		$	1.25		$	0.86		$	1.56
Diluted	$	0.29		$	1.18		$	0.82		$	1.48
Weighted-average number of common shares outstanding:
Basic	51,046,375			49,516,595			50,583,726			49,395,284
Diluted	53,628,389			51,974,435			53,227,433			51,615,334

See accompanying notes.

2

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months ended September 30,					Nine Months ended September 30,
	2017		2016			2017		2016
	(unaudited)					(unaudited)
Net income	$	15,961	$	61,826		$	43,626	$	76,902
Other comprehensive income (loss):
Unrealized net gain (loss) on marketable securities, net of tax	36		(422		)	386		615
Other comprehensive income (loss):	36		(422		)	386		615
Comprehensive income	$	15,997	$	61,404		$	44,012	$	77,517

See accompanying notes.

3

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Nine Months ended September 30,
	2017			2016
	(unaudited)
Cash flows from operating activities
Net income	$	43,626		$	76,902
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on extinguishment of debt	295			382
Change in fair value of derivative liability	(76		)	(349		)
Depreciation and amortization	6,462			1,728
Amortization of deferred financing costs and debt discount	50			226
Non-cash interest expense, net/interest (income), net	(342		)	286
Non-cash interest expense on non-recourse liability related to sale of future royalties	1,274			3,564
Non-cash royalty revenue	(3,708		)	(3,464		)
Share-based compensation expense	6,447			4,454
Deferred income tax provision	13,314			(42,377		)
Changes in operating assets and liabilities:
Accounts receivable	(14,639		)	(10,312		)
Inventories	1,854			(4,866		)
Prepaid expenses and other current assets	(2,712		)	1,060
Accounts payable	(1,312		)	(1,629		)
Accrued sales deductions	17,829			12,900
Accrued expenses	2,769			2,503
Income taxes payable	6,482			811
Deferred licensing revenue	(202		)	195
Other non-current liabilities	894			(140		)
Net cash provided by operating activities	78,305			41,874
Cash flows from investing activities
Purchases of marketable securities	(78,938		)	(31,194		)
Sales and maturities of marketable securities	23,052			22,398
Purchases of property, plant and equipment	(1,273		)	(1,302		)
Deferred legal fees	(10,130		)	(12,224		)
Net cash used in investing activities	(67,289		)	(22,322		)
Cash flows from financing activities
Proceeds from issuance of common stock	4,510			1,255
Net cash provided by financing activities	4,510			1,255
Net increase in cash and cash equivalents	15,526			20,807
Cash and cash equivalents at beginning of period	66,398			33,498
Cash and cash equivalents at end of period	$	81,924		$	54,305
Supplemental cash flow information:
Cash paid for interest	$	134		$	247
Noncash financial activity:
Conversion of convertible notes and interest make-whole	$	4,546		$	2,138
Deferred legal fees included in accounts payable and accrued expenses	$	1,337		$	7,920

See accompanying notes.

4

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

For the Nine Months ended September 30, 2017 and 2016

(unaudited)

1.  Organization and Business

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. The Company markets two products, Oxtellar XR for the treatment of epilepsy and Trokendi XR for the treatment of migraine and epilepsy, and has several proprietary product candidates in clinical development that address the psychiatry market.

The Company launched Oxtellar XR and Trokendi XR in 2013 for the treatment of epilepsy and launched Trokendi XR for the prophylaxis of migraine in adolescents and adults in April 2017.

2.  Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd., collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information.

As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

In the opinion of management, the consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position, results of operations, and cash flows for the periods presented. These adjustments are of a normal recurring nature.  The Company currently operates in one business segment.

The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the Company’s future financial results.

Marketable Securities

Marketable securities consist of investments in U.S. Treasury bills and notes, certificates of deposit, various U.S. governmental agency debt securities, corporate and municipal bonds and other fixed income securities. The Company places all investments with government, industrial, or financial institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

The Company’s investments are classified as available-for-sale and are carried at estimated fair value. Any unrealized holding gains or losses are reported, net of any tax effects reported, as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method.

The Company established the Supernus Supplemental Executive Retirement Plan (SERP) for the sole purpose of receiving funds for executives from a previous SERP and providing a continuing deferral program under the Supernus SERP. As of September 30, 2017 and December 31, 2016, the fair value of the SERP was $313,000 and $275,000, respectively. The fair value of these assets is included within other non-current assets on the consolidated balance sheets. A corresponding non-current liability is also included in the consolidated balance sheets to reflect the Company’s obligation for the SERP. The Company has not made, and has no plans to make, contributions to the SERP. The securities are restricted in nature and can only be used for purposes of paying benefits under the SERP.

5

Accounts Receivable, net

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts and discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience.

The Company recorded an allowance for expected sales discounts of approximately $8.1 million and $5.6 million as of September 30, 2017 and December 31, 2016, respectively.

Inventories

Inventories, which are recorded at the lower of cost or market, include materials, labor, and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when it becomes probable that the related product candidates will receive regulatory approval and that the related costs will be recoverable through the commercial sale of the product.

Property and Equipment

Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following useful lives:

Computer equipment	3 years
Software	3 years
Lab equipment and furniture	5 - 10 years
Leasehold improvements	Shorter of lease term or useful life

Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Patent defense costs will be charged to expense in the event of an unsuccessful outcome of the ongoing litigation. Patents are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the patents. Amortization commences in the quarter after the costs are incurred. This amortization period is based initially upon the remaining patent life and is adjusted, if necessary, for any settlements or other changes to the expected useful life of the patent. The carrying value of the patents are assessed for impairment annually during the fourth quarter of each year, or more frequently if impairment indicators exist. There were no indicators of impairment identified as of September 30, 2017.

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment and patent defense costs. The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. Evaluation of impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur. Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and could require the recognition of an impairment charge equal to the excess of the carrying value of the long-lived assets over its estimated fair value.

There were no indicators of impairment identified for the Company’s long-lived assets as of September 30, 2017.

Deferred Financing Costs

Deferred financing costs consist of financing costs incurred by the Company in connection with the issuance of the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes). The Company amortizes deferred financing costs over the term of the related debt using the effective interest method. When extinguishing debt, the related deferred financing costs are written off.

6

Preclinical Study and Clinical Trial Accruals

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical investigators, and clinical research organizations (CROs) that conduct these activities on our behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services. As appropriate, we accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the advance payment will be charged to expense in the period that such determination is made.

Revenue from Product Sales

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, allowances, discounts, patient co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).

Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors takes title and ownership to the product upon physical receipt of the product and then distributes our products to pharmacies.

Sales Deductions

Allowances for estimated sales deductions are provided for the following:

·Rebates:  Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, as well as negotiated discounts with commercial healthcare providers. Rebates are amounts owed after the final dispensing of product to a benefit plan participant has occurred and are based upon contractual agreements or legal requirements with the public sector (e.g., Medicaid) and with private sector benefit providers (e.g., commercial managed care providers). The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates based on a plan provider’s utilization.

Rebates are generally invoiced and paid quarterly 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 known or estimated prior quarters’ unpaid rebates. If actual rebates vary from estimates, we may need to adjust balances of such rebates to reflect the actual expenditures of the Company with respect to these programs, which would affect revenue in the period of adjustment.

·Co-pay assistance:  Patients who pay in cash or have commercial healthcare insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. The intent of this program is to reduce the patient’s out of pocket costs when filling a prescription. Liabilities for co-pay assistance are based on actual program participation as well as estimates of program activity using data provided by third-party administrators.

·Distributor/wholesaler deductions and discounts:  U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts as consideration for distributing our products. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a percentage of the price at which the Company sells product to distributors and wholesalers. Wholesale customers are offered a prompt pay discount for payment within a specified period.

·Returns:  Sales of our products are not subject to a general right of return; however, the Company will accept product that is damaged or defective when shipped directly from our warehouse. The Company will accept expired product six months prior to and up to 12 months subsequent to its expiry date. Product that has been used to fill patient prescriptions is no longer subject to any right of return.

·Chargebacks:  Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase our product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on sales to contracted customers.

7

Revenue Recognition of License Revenue

License and Collaboration Agreements

We have entered into collaboration agreements to commercialize both Oxtellar XR and Trokendi XR outside of the U.S. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. We believe that when milestones meet all of the necessary criteria to be considered substantive, these should be recognized as revenue when achieved. As regards to up-front license fees, we have estimated the service period of the contract and are recognizing revenue on a straight-line basis over the respective service period.

Milestone Payments

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. Management may recognize milestone revenue in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. Substantive milestone payments are recognized upon achievement only if all of the following conditions are met:

·the milestone payments are non-refundable;

·achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;

·substantive effort on the partner’s part is involved in achieving the milestone; and

·the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone.

Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone. Therefore, the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period.

The Company recorded $0.3 million and $1.5 million of milestone revenue during the three and nine month periods ended September 30, 2017, respectively. No milestone revenue was recorded during the three and nine months ended September 30, 2016.

Royalty Revenue

We recognize non-cash royalty revenue for royalty amounts earned pursuant to a royalty agreement with United Therapeutics. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 14). Accordingly, the Company records non-cash royalty revenue when payments are made from United Therapeutics to HC Royalty in connection with these agreements. Royalty revenue also includes royalty amounts received from collaboration partners, including from Shire Pharmaceuticals based on net product sales of Mydayis.

Cost of Product Sales

The cost of product sales consists primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other manufacturing overhead costs.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs consist primarily of: employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with CROs; fees paid to clinical investigators who are participating in our clinical trials; fees paid to consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for, and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

8

Advertising Expense

The costs of the Company’s advertising efforts are expensed as incurred. The Company incurred approximately $9.6 million and $26.1 million in advertising costs for the three and nine months ended September 30, 2017 and approximately $4.9 million and $16.2 million in advertising costs for the three and nine months ended September 30, 2016, respectively. These expenses are recorded in the selling, general and administrative expense line of the Statement of Operations.

Share-Based Compensation

Employee share-based compensation is measured based on the estimated fair value on the grant date. The grant date fair value is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The Company recognizes expense using the straight-line method.

The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is re-measured at each reporting period. As a result, stock compensation expense for non-employee awards with vesting is affected by subsequent changes in the fair value of the Company’s common stock.

Income Taxes

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

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and relevant facts. The Company’s policy is to recognize any interest and penalties related to income taxes as income tax expense.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted in 2017

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted ASU 2016-09 on January 1, 2017 using the modified retrospective approach. As a result, the Company recorded a cumulative effect adjustment of $211,000 to increase the 2017 beginning of period additional paid-in capital balance, with an offset to accumulated deficit for historical forfeiture assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase its deferred tax asset, with an offset to accumulated deficit, primarily to recognize excess tax benefits (i.e. windfalls) from stock option exercises in prior years combined with the impact of the $211,000 adjustment to historical forfeiture expense.

New Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. This standard will be effective for the first annual period beginning after December 15, 2018, including interim periods within those periods.  Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

In July 2017, the FASB issued ASU 2017-11, “Earnings per share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” The amendments in Part I change the classification analysis of certain equity-linked financial instruments (embedded features) with down round features. When determining whether

9

certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 with a scope exception and do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The amendments in Part II of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does not expect it to have a material impact.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, as the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard eliminates diversity in the practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We expect the ASU to have a material impact on our assets and liabilities due to the addition of previously classified operating leases, but we do not expect it to have a material impact on our cash flows or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 will eliminate transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, with early adoption being permitted for periods ending after December 15, 2016. The guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures). The Company has not selected an adoption methodology.

Since ASU No. 2014-09 supersedes substantially all existing revenue recognition guidance affecting us under the current standard, it could impact revenue and cost recognition across our business processes. The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently finalizing phase one, the assessment phase, of the project.  In the assessment phase, we held revenue recognition workshops with our commercial and finance groups and reviewed a sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard. Phase two will include (a) establishing and documenting key accounting positions, (b) assessing the new disclosure requirements, business processes, and control impacts, and (c) beginning to assess the initial quantitative impacts resulting from the initial standard.  Phase three will include (a) finalizing any changes to accounting policies, (b) preparing new disclosures and implementing new business processes and controls as needed, and (c) quantifying the effect of adoption on opening retained earnings.

The Company continues to evaluate the impact of the new standard on the consolidated financial statements and related disclosures and additional differences may be identified as contracts with customers that will impact future periods are executed. The majority of

10

the Company’s revenue consists of sales of products that represent a single performance obligation where control transfers at the point in time title and risk of loss pass to the customer. The adoption of the new ASU will most likely impact our revenue recognition practices on our product sales with regards to the accounting for variable considerations such as incentives and sales deductions and the related financial statement presentation.

In addition, the Company also has licensing and collaboration arrangements, where it receives milestone and royalty payments. The provisions of the new standard may impact the timing of revenue associated with these arrangements; i.e., may result in acceleration of revenue recognition based on the transfer of control. We expect that disclosures in the notes to the consolidated financial statements related to revenue recognition will be expanded in line with the requirements of the new standard to further describe the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of assessing its accounting and forecasting considerations to ensure its ability to record, report, forecast, and analyze results under the new standard.

3.  Fair Value of Financial Instruments

The fair value of an asset or liability should represent the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants. Such transactions are assumed to occur in the principal or most advantageous market for the asset or liability. Accordingly, fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant rather than from a reporting entity’s perspective.

The Company reports assets and liabilities that are measured at fair value using a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·Level 1—Inputs are unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date.

·Level 2—Inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.); and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

·Level 3—Unobservable inputs that reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

11

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

	Fair Value Measurements at
	September 30, 2017
	(unaudited)
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	September 30,		Markets		Inputs		Inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	81,924	$	81,924	$	—	$	—
Marketable securities	32,626		1,871		30,755		—
Long term marketable securities	123,123		698		122,425		—
Marketable securities - restricted (SERP)	313		—		313		—
Total assets at fair value	$	237,986	$	84,493	$	153,493	$	—
Liabilities:
Derivative liabilities	$	—	$	—	$	—	$	—

	Fair Value Measurements at
	December 31, 2016
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	December 31,		Markets		Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	66,398	$	66,398	$	—	$	—
Marketable securities	23,723		656		23,067		—
Long term marketable securities	75,410		—		75,410		—
Marketable securities - restricted (SERP)	275		—		275		—
Total assets at fair value	$	165,806	$	67,054	$	98,752	$	—
Liabilities:
Derivative liabilities	$	114	$	—	$	—	$	114

The fair value of the restricted marketable securities is included within other non-current assets in the consolidated balance sheets.

The Company’s Level 1 assets include cash held with banks, certificates of deposit, and money market funds.

Level 2 assets include the SERP assets, commercial paper and investment grade corporate bonds and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data into their models to estimate fair value.

Level 3 liabilities include the estimated fair value of the interest make-whole liability associated with the Notes, which are recorded as derivative liabilities. The “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired on May 1, 2017.

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

12

Unrestricted marketable securities held by the Company were as follows, in thousands:

At September 30, 2017 (unaudited):

Available for Sale	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
Corporate debt securities	$	155,713	286	(250	)	$	155,749

At December 31, 2016:

Available for Sale	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
Corporate debt securities	$	99,487	86	(440	)	$	99,133

The contractual maturities of the unrestricted available for sale marketable securities held by the Company were as follows, in thousands:

	September 30,
	2017
	(unaudited)
Less Than 1 Year	$	32,626
1 year to 2 years	38,121
3 years to 4 years	85,002
Greater Than 4 Years	—
Total	$	155,749

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities. The cost of securities sold is calculated using the specific identification method.

4. Inventories

Inventories consist of the following, in thousands:

	September 30,		December 31,
	2017		2016
	(unaudited)
Raw materials	$	2,178	$	2,091
Work in process	4,690		8,874
Finished goods	8,079		5,836
	$	14,947	$	16,801

13

5.  Property and Equipment

Property and equipment consist of the following, in thousands:

	September 30,			December 31,
	2017			2016
	(unaudited)
Computer equipment	$	1,214		$	1,206
Software	1,966			1,807
Lab equipment and furniture	7,805			6,758
Leasehold improvements	2,729			2,642
Construction in progress	—			28
	13,714			12,441
Less accumulated depreciation and amortization	(9,026		)	(8,097		)
	$	4,688		$	4,344

Depreciation and amortization expense on property and equipment was approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2017, and approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, respectively.

6.  Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR.

The following sets forth the gross carrying amount and related accumulated amortization of the intangible asset, in thousands:

	Weighted-	September 30,			December 31,
	Average Life	2017			2016
	(unaudited)
Capitalized patent defense costs	5.9 - 10 years	$	43,978		$	37,633
Less accumulated amortization		(6,816		)	(1,283		)
		$	37,162		$	36,350

In March 2017, the Company entered into two settlements with various companies related to Trokendi XR patent litigation. The remaining unamortized capitalized patent defense cost for Trokendi XR is amortized through the settlement date of January 1, 2023.

Amortization expense related to intangible assets was approximately $4.1 million and $5.5 million for the three and nine months ended September 30, 2017, and approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, respectively.

There were no indicators of impairment identified.

14

7.  Accrued Expenses

Accrued expenses are comprised of the following, in thousands:

	September 30,		December 31,
	2017		2016
	(unaudited)
Accrued compensation	$	13,870	$	9,145
Accrued professional fees	2,212		6,447
Accrued clinical trial and clinical supply costs	4,251		4,350
Accrued product costs	807		1,794
Accrued interest expense	—		61
Other accrued expenses	5,752		5,630
	$	26,892	$	27,427

8.   Convertible Senior Secured Notes

The table below summarizes activity related to the Notes from their issuance on May 3, 2013 through September 30, 2017, in thousands:

Gross proceeds	$	90,000
Initial value of interest make-whole derivative reported as debt discount	(9,270		)
Conversion option reported as debt discount and APIC	(22,336		)
Conversion of debt to equity - principal	(85,425		)
Conversion of debt to equity - accretion of debt discount and deferred financing costs	25,767
Accretion of debt discount and deferred financing costs	5,429
December 31, 2016 carrying value	4,165
Conversion of debt to equity - principal	(4,575		)
Conversion of debt to equity - accretion of debt discount and deferred financing costs	360
Accretion of debt discount and deferred financing costs	50
September 30, 2017 carrying value, unaudited	$	—

During the nine months ended September 30, 2017, approximately $4.6 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 0.9 million shares of common stock in conversion of the principal amount of the Notes. As a result of the conversions, the Company incurred a loss of approximately $0.3 million on extinguishment of debt during the nine months ended September 30, 2017, which is included as a separate component of other income (expense) on the Consolidated Statement of Operations. During the nine months ended September 30, 2016, consequent to approximately $2.0 million in note conversions, the Company incurred a loss of approximately $0.4 million on extinguishment of debt.

15

9. Summary Stockholders’ Equity

The following summary table provides details related to the activity in certain captions within Stockholders’ Equity for the nine months ended September 30, 2017, in thousands.

	Common Stock		Additional Paid-in Capital		Accumulated Deficit
	(unaudited)
Balance, December 31, 2016	$	50	$	276,127	$	(84,288	)
Cumulative-effect adjustment	—		211		181
Balance at January 1, 2017	50		276,338		(84,107		)
Share-based compensation	—		6,447		—
Issuance of ESPP shares	—		908
Exercise of stock options	—		3,602		—
Equity issued on note conversion	1		4,546		—
Net income	—		—		43,626
Balance, September 30, 2017	$	51	$	291,841	$	(40,481	)

10. Share-Based Payments

The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Equity Incentive Plan (the 2012 Plan), which is stockholder approved, and provides for the grant of stock options and certain other awards, including stock appreciation rights (SAR), restricted and unrestricted stock, stock units, performance awards, cash awards and other awards that are convertible into or otherwise based on the Company’s common stock, to the Company’s key employees, directors, and consultants and advisors. The 2012 Plan is administered by the Company’s Board of Directors and provides for the issuance of up to 8,000,000 shares of the Company’s Common Stock. Option awards are granted with an exercise price equal to the estimated fair value of the Company’s Common Stock at the grant date. Option awards granted to employees, consultants and advisors generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten-year contractual terms. Option awards granted to the directors generally vest over a one year term.

Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

	Three Months ended				Nine Months ended September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
Research and development	$	356	$	253	$	1,071	$	882
Selling, general and administrative	2,004		1,230		5,376		3,572
Total	$	2,360	$	1,483	$	6,447	$	4,454

16

The following table summarizes stock option and SAR activity:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)
Outstanding, December 31, 2016	3,644,088		$	10.25	7.59
Granted	1,074,955		$	25.88
Exercised	(383,588	)	$	9.39
Forfeited or expired	(66,797	)	$	17.07
Outstanding, September 30, 2017	4,268,658		$	14.15	7.59
As of December 31, 2016:
Vested and expected to vest	3,591,528		$	10.22	7.57
Exercisable	1,503,004		$	8.62	6.49
As of September 30, 2017:
Vested and expected to vest	4,268,658		$	14.15	7.59
Exercisable	1,961,784		$	9.30	6.40

11.  Earnings per Share

Basic income per common share is determined by dividing income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted income per share is computed by dividing the income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, SAR, and potential ESPP awards, and the if-converted method is used to determine the dilutive effect of the Company’s Notes.

The following common stock equivalents were excluded in the calculation of diluted income per share because their effect would be anti-dilutive as applied to the income from continuing operations applicable to common stockholders for the three and nine months ended September 30, 2017 and 2016:

	Three Months ended September 30,		Nine Months ended September 30,
	2017	2016	2017	2016
	(unaudited)		(unaudited)
Stock options, stock appreciation rights, and ESPP awards	15,170	12,097	105,699	67,030

17

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 2017 and 2016, in thousands, except share and per share amounts:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Numerator, in thousands:
Net income used for calculation of basic EPS	$	15,961		$	61,826		$	43,626		$	76,902
Interest expense on convertible debt	(14		)	202			134			577
Changes in fair value of derivative liabilities	—			(124		)	(76		)	(349		)
Loss on extinguishment of debt	91			—			295			382
Loss on extinguishment of outstanding debt, as if converted	(273		)	(705		)	(321		)	(1,183		)
Total adjustments	(196		)	(627		)	32			(573		)
Net income used for calculation of diluted EPS	$	15,765		$	61,199		$	43,658		$	76,329
Denominator:
Weighted average shares outstanding, basic	51,046,375			49,516,595			50,583,726			49,395,284
Effect of dilutive potential common shares:
Shares underlying Convertible Senior Secured Notes	56,484			1,240,814			382,230			1,274,491
Shares issuable to settle interest make-whole derivatives	—			27,296			7,013			71,537
Stock options and stock appreciation rights	2,525,530			1,189,730			2,254,464			874,022
Total potential dilutive common shares	2,582,014			2,457,840			2,643,707			2,220,050
Weighted average shares outstanding, diluted	53,628,389			51,974,435			53,227,433			51,615,334
Net income per share, basic	$	0.31		$	1.25		$	0.86		$	1.56
Net income per share, diluted	$	0.29		$	1.18		$	0.82		$	1.48

12. Income Taxes

The following table provides a comparative summary of our income tax expense and effective tax rate for the three and nine months ended September 2017 and 2016, in thousands:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Income tax expense	$	6,949		$	(42,690	)	$	21,932		$	(42,085	)
Effective tax rate	30.3		%	-223		%	33.5		%	-120.9		%

The income tax expense for the three and nine months ended September 30, 2017 is attributable to U.S. federal and state income tax. The increase in the income tax expense and the effective tax rate for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 is primarily attributable to the release of the valuation allowance on the deferred tax assets, which resulted in an income tax benefit in the third quarter of 2016.

During the third quarter, we recorded an income tax benefit of approximately $2.9 million as a result of the Company recognizing excess tax benefits related to the employee exercise of stock options. This benefit causes the effective tax rate to be significantly less than our historical annual effective tax rate.

13. Commitments and Contingencies

The Company has concurrent leases for office and lab space that extend through April 2020. The Company may elect to extend the term of the leases for an additional five-year term. The leases provide for a tenant improvement allowance of approximately $2.1 million in the aggregate. During the three months ended September 30, 2017, none of the allowance was utilized. During the nine months ended September 30, 2017, $79,000 of the allowance was utilized. During the three and nine months ended September 30, 2016, none of the allowance was utilized. As of September 30, 2017, $0.4 million remains available for tenant improvements.

Rent expense for the leased facilities and leased vehicles for the three and nine months ended September 30, 2017 was $0.8 million and $1.9 million, respectively. Rent expense for the leased facilities and leased vehicles for the

18

three and nine months ended September 30, 2016 was approximately $0.7 million and $2.0 million, respectively.

Future minimum lease payments under non-cancelable operating leases as of September 30, 2017 are as follows, in thousands, unaudited:

Year ending December 31:

2017 (remaining)	739
2018	1,487
2019	1,344
Thereafter	454
	$	4,024

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (Afecta), the Company has exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. The Company does not owe any future milestone payments for SPN-810. The Company is obligated to pay royalties to Afecta as a low single digit percentage of worldwide net product sales.

The Company has also entered into a purchase and sale agreement with Rune HealthCare Limited (Rune), where the Company obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments due to Rune under this agreement. If the Company receives approval to market and sell any products based on the Rune product concept for SPN-809, the Company is obligated to pay royalties to Rune as a low single digit percentage of worldwide net product sales.

14. Collaboration Agreement

Royalty Revenue

In the third quarter of 2014, the Company received a $30.0 million payment pursuant to a Royalty Interest Acquisition Agreement related to the purchase by HC Royalty of certain of the Company’s rights under the agreement with United Therapeutics Corporation related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. We will retain full ownership of the royalty rights if and when a certain threshold is reached per the terms of the Agreement. We have recorded a non-recourse liability related to this transaction and have begun to amortize this amount to recognize non-cash royalty revenue as royalties are received by HC Royalty from United Therapeutics. We also recognized non-cash interest expense related to this liability that accrues at an effective interest rate, which is determined based on projections of HC Royalty’s rate of return.

We recognized non-cash royalty revenue of $1.4 million for the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016, respectively. We recognized non-cash royalty revenue of $3.7 million for the nine months ended September 30, 2017 as compared to $3.5 million for the nine months ended September 30, 2016, respectively. We recognized non-cash interest expense of $0.2 million for the three months ended September 30, 2017 as compared to $1.0 million for the three months ended September 30, 2016, respectively. We recognized non-cash interest expense of $1.3 million for the nine months ended September 30, 2017 as compared to $3.6 million for the nine months ended September 30, 2016, respectively.

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and the financial condition of the Company. The interim financial statements included in this report and this Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2017.

In addition to historical information, this Quarterly Report on Form 10-Q  contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These forward-looking statements may include declarations regarding the Company’s belief or current expectations of management, such as statements including the words “budgeted,” “anticipate,” “project,” “estimate,” “expect,” “may,” “believe,” “potential,” and similar statements or expressions, which are intended to be among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in the Company’s business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K and elsewhere in this report as well as in other reports and documents we file with the Securities and Exchange Commission from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Solely for convenience, in this Quarterly Report on Form 10-Q the trade names are referred to without the TM symbols and the trademark registrations are referred to without the circled R, but such references should not be construed as any indicator that the Company will not assert, to the fullest extent under applicable law, our rights thereto.

Overview

We are a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases.

Oxtellar XR and Trokendi XR are the first once-daily extended release oxcarbazepine and topiramate products, launched in 2013 for the treatment of epilepsy in the U.S. market. On April 5, 2017, Trokendi XR received final approval from the United States Food and Drug Administration (FDA) for the additional indication of treatment of prophylaxis of migraine headache in adults and adolescents. These products differ from immediate release products by offering once-daily dosing and unique pharmacokinetic profiles which we believe can have positive clinical effects for many patients. We believe a once-daily dosing regimen improves adherence, making it more probable that patients maintain sufficient levels of medication in their bloodstream to protect against seizures and migraines. In addition, we believe that the unique smooth and steady pharmacokinetic profiles of our once-daily formulations reduce the peak to trough blood level fluctuations that are typically associated with immediate release products and which may result in increased adverse events (AEs), more side effects and decreased efficacy.

In addition, we are developing multiple product candidates in psychiatry to address large unmet medical needs and market opportunities. We are developing SPN-810 (molindone hydrochloride) initially to treat impulsive aggression (IA) in children and adolescents who have attention deficit hyperactivity disorder (ADHD). We plan to subsequently develop SPN-810 for treatment of IA in other CNS diseases, such as autism, post-traumatic stress disorder (PTSD), bipolar disorder, schizophrenia, and some forms of dementia. There are currently no approved products indicated for the treatment of IA. We are developing SPN-812 (viloxazine hydrochloride) as a novel, non-stimulant candidate to treat children and adolescents who have ADHD.

20

The table below summarizes our current portfolio of novel products and product candidates:

Product	Indication	Status
Oxtellar XR	Epilepsy	Launched in 2013
Trokendi XR	Epilepsy	Launched in 2013
	Migraine*	Launched in 2017
SPN-810	IA**	Phase III
SPN-812	ADHD	Phase III
SPN-809	Depression	Phase II ready

*              Prophylaxis of migraine headache in adults and adolescents.

**           Initial program is in patients with ADHD, with plans to add other indications, such as IA in patients with autism, PTSD, bipolar disorder, schizophrenia, and some forms of dementia.

We are continuing to expand our intellectual property portfolio to provide additional protection for our technologies, products, and product candidates. We currently have seven U.S. patents issued covering Oxtellar XR and nine U.S. patents issued covering Trokendi XR, providing patent protection expiring no earlier than 2027 for each product.

Commercial Products

Trokendi XR

Trokendi XR, the first once-daily extended release topiramate product indicated for patients with epilepsy in the U.S. market, is designed to improve patient adherence over the current immediate release products, which must be taken multiple times per day. In April 2017, we launched Trokendi XR for the treatment of prophylaxis of migraine headache in adults and adolescents after receiving final FDA approval.

Oxtellar XR

Oxtellar XR is the only once-daily extended release oxcarbazepine product indicated for the treatment of patients with epilepsy in the U.S. as adjunctive therapy.

IMS Prescriptions

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to continue to increase through 2017 and in subsequent years. Data from Intercontinental Marketing Services (IMS) shows 474,460 prescriptions filled for both drugs during the nine months ended September 30, 2017, which is 28.1% higher than the 370,397 prescriptions reported for the nine months ended September 30, 2016.

Since the migraine launch, Trokendi XR has shown robust acceleration in prescription growth. For the third quarter of 2017, total prescriptions for Trokendi XR increased by 21,509, or 17.3%, from the second quarter of 2017. This compares to an increase of 5,955 prescriptions, or 6.4%, in the third quarter of 2016 over the second quarter of 2016. Similarly, for the same sequential quarter-to-quarter time periods, new prescriptions for Trokendi XR increased by 7,284, or 10.6%, in 2017, compared to 1,165, or 2.7%, in 2016.

Patents

We received several Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties. (See Part II, Item 1—Legal Proceedings for additional information.)

Product Candidates

SPN-810

We are developing SPN-810 as a novel treatment for IA in patients who have ADHD. SPN-810 has been granted fast-track designation by the FDA. Our Phase III clinical trial (P301) is being conducted under a Special Protocol Assessment (SPA), using an agreed-upon novel scale, developed by us with the FDA, to measure IA. We initiated two Phase III clinical trials in 2015 (P301 and P302), using the same trial design except that under the SPA, an interim analysis was conducted in the first trial when one-half of the patients (146 patients) reached randomization. The purpose of the interim analysis was to assess the efficacy of the doses being tested and allow for optimization of the trial design of both trials.

21

The interim analysis has been completed and both trials will continue through completion. The results of the interim analysis led to our discontinuing the 18 mg dose arm. Moving forward, all patients in each of the two trials will be randomized to either the 36 mg dose arm or placebo until the predetermined total number of patients are enrolled in each of the two trials. We expect patient enrollment to continue through mid-2018.

SPN-812

SPN-812 is being developed as a novel non-stimulant treatment for ADHD. During 2016, we completed a Phase IIb dose ranging trial and announced positive topline results. Subsequent to the end of Phase II meeting with the FDA in June 2017, we have initiated Phase III clinical trials for SPN-812 in September of 2017.

We expect to incur significant research and development expenses related to the continued development of each of our product candidates from 2017 through FDA approval or until the program terminates.

Collaboration

Mydayis (mixed salts of a single-entity amphetamine product) was originally developed by Shire Laboratories, the former division of Shire that subsequently became Supernus Pharmaceuticals. On June 20, 2017, Shire announced that the FDA approved Mydayis, a once-daily treatment comprised of three different types of drug-releasing beads, for patients 13 years and older with ADHD. Based on the agreement between the Company and Shire, Shire will pay to the Company a single digit percentage royalty on net sales of the product.

Critical Accounting Policies and the Use of Estimates

The significant accounting policies and bases of presentation for our consolidated financial statements are described in Note 2 “Summary of Significant Accounting Policies.” The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

We believe the following accounting policies and estimates to be critical:

Revenue Recognition

Revenue from product sales is recognized when: persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, discounts, allowances, patient co-pay assistance payments and other deductions as well as estimated product returns (collectively, “sales deductions”).

We derive our estimated sales deductions from an analysis of historical levels of deductions specific to each product, as well as contractual terms with our customers. In addition, we also consider the impact of anticipated changes in product price, sales trends and changes in managed care coverage and co-pay assistance programs.

Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Amortization commences in the quarter after the costs are incurred. This amortization period is based initially upon the remaining patent life and is adjusted, if necessary, for any settlements or other changes to the expected useful life of the patent.  Patent defense costs will be charged to expense in the event of an unsuccessful outcome of the on-going litigation.

Research and Development Expenses

Research and development expenditures are expensed as incurred. Research and development costs consist primarily of: employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with clinical research organizations (CROs); fees paid to clinical investigators who are participating in our clinical trials; fees paid to consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

22

Accrued Clinical Expenses

Clinical trials are inherently complex and often involve multiple service providers. Because billing for services often lags by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. This process involves reviewing open contracts and communicating with our subject matter expert personnel and the appropriate service provider personnel to identify services that have been performed on our behalf. We accrue for the estimated but unbilled services performed and the associated cost incurred.

Payments to service providers can either be based on hourly rates for service or based on performance driven milestones. When accruing clinical expenses, we estimate the time period over which services will be performed during the life of the entire clinical program, the total cost of the program, and the level of effort to be expended in each intervening period. To the maximum extent possible, we work with each service provider to provide an estimate for incurred but unbilled services as of the end of the calendar quarter, including estimates for payments to site investigators.

We work diligently to minimize, if not eliminate, estimates based solely on company generated calculations. If the service provider underestimates or overestimates the cost associated with a trial or service at any given point in time, adjustments to research and  development expenses may be necessary in future periods. Historically, our estimated accrued clinical expenses have closely approximated actual expense incurred.

Results of Operations

Comparison of the three months ended September 30, 2017 and 2016

	Three Months ended September 30,						Increase/
	2017			2016			(decrease)
	(unaudited, in thousands)
Revenues:
Net product sales	$	78,066		$	55,618		$	22,448
Royalty revenue	2,010			1,140			870
Licensing revenue	322			52			270
Total revenues	80,398			56,810
Costs and expenses
Cost of product sales	4,251			3,428			823
Research and development	12,980			7,868			5,112
Selling, general and administrative	40,825			25,675			15,150
Total costs and expenses	58,056			36,971
Operating income	22,342			19,839
Other income (expense)
Interest income	814			378			436
Interest expense	—			(202		)	(202		)
Interest expense-nonrecourse liability related to sale of future royalties	(155		)	(1,004		)	(849		)
Changes in fair value of derivative liabilities	—			125			(125		)
Loss on extinguishment of debt	(91		)	—			91
Total other expenses	568			(703		)
Earnings before income taxes	22,910			19,136
Income tax expense (benefit)	6,949			(42,690		)	49,639
Net income	$	15,961		$	61,826

23

Net Product Sales.  The increase in net product sales for the three months ended September 30, 2017 as compared to the same period in 2016 is primarily driven by increased prescription volume from the launch of the migraine indication for Trokendi XR in April 2017. Price increases in 2016 and 2017 also contributed to the increase in net product sales. Net product sales are based on gross revenue from shipments to distributors, less estimates for discounts, rebates, allowances, other sales deductions and returns.

The table below lists our net product sales by product, in thousands:

	Net Product Sales Three Months ended September 30,
					Change in Net Product
	2017		2016		Sales (%)
	(unaudited)
Trokendi XR	$	59,339	$	41,690	42.3	%
Oxtellar XR	18,727		13,928		34.5	%
Total	$	78,066	$	55,618	40.4	%

Royalty Revenue. Royalty revenue was $2.0 million during the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016. Royalty revenue includes non-cash royalty from the Healthcare Royalty Partners III, L.P. (HC Royalty) agreement and royalty from collaboration partners. The increase is primarily due to royalty earned from collaboration partners.

Licensing Revenue. Total licensing revenue for the three months ended September 30, 2017 and 2016 was $0.3 million and $52,000 respectively. The increase of $248,000 is primarily due to milestone revenue received during the quarter.

Cost of Product Sales. Cost of product sales during the three months ended September 30, 2017 was $4.3 million, an increase of $0.9 million, or 24.0%, as compared to $3.4 million for the three months ended September 30, 2016. The quarter over quarter increase is attributable primarily to an increase in the number of units sold.

Research and Development Expense.  Research and development (R&D) expenses during the three months ended September 30, 2017 were $13.0 million as compared to $7.9 million for the three months ended September 30, 2016, an increase of $5.1 million or 65.0%. This increase is primarily due to increased costs associated with ongoing patient recruitment for Phase III trials for SPN-810 and costs incurred in preparation for Phase III clinical trials for SPN-812, which were initiated in September 2017.

Selling and Marketing.  The increase in selling and marketing expenses of approximately $10.9 million for the three months ended September 30, 2017, as compared to the same period in 2016, is primarily the result of an increase in workforce headcount and headcount related support for our commercial products, coupled with development, production, and execution of promotional and marketing programs for the launch of the migraine indication for Trokendi XR in 2017. Of this total, approximately $2.9 million is due to increased compensation, benefits, travel, and other employee-related expenses associated with increased headcount in our field sales force; increased sample production costs of approximately $1.7 million; and approximately $5.5 million is due to increased expenses for marketing programs, speaker programs, and consulting services to support our commercial products, including the launch of the migraine indication for Trokendi XR in 2017.

General and Administrative.  General and administrative expenses increased by $4.2 million for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to approximately $3.7 million in increased patent amortization expense.

24

The table below shows the comparison of Selling and Marketing and General and Administrative expenses for the three months ended September 30, 2017 and 2016:

	Selling, General and Administrative
	Three Months ended September 30,
	2017		2016		Change (%)
	(unaudited)
Selling and Marketing	$	29,301	$	18,389	59.3	%
General and Administrative	11,524		7,286		58.2	%
Total	$	40,825	$	25,675	59.0	%

Interest Income. During the three months ended September 30, 2017 and 2016, we recognized $0.8 million and $0.4 million, respectively, of interest income earned on our cash, cash equivalents and marketable securities investments. The increase is primarily attributable to increased in cash, cash equivalents, and marketable securities holdings year over year.

Interest Expense.  Interest expense was zero during the three months ended September 30, 2017 as compared to $0.2 million for the three months ended September 30, 2016. The decrease was primarily due to the decrease in the principal amount of our outstanding 7.5% Convertible Senior Secured Notes (Notes). As of July 2017, all Notes were converted. During the three months ended September 30, 2017, a total of $1.6 million of Notes and related accrued interest were converted into 0.3 million shares of common stock.

Interest Expense—Non-recourse Liability Related to Sale of Future Royalties. Non-cash interest expense related to our royalty liability was $0.2 million during the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016. The decrease of $0.9 million for this non-cash expense item was primarily due to reduced projections of future royalties related to Orenitram.

Changes in Fair Value of Derivative Liability.  During the three months ended September 30, 2016, we recognized a non-cash gain of $0.1 million related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. There was no gain recognized for the three months ended September 30, 2017 as the “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired in May 2017. As of July 2017, all Notes were converted.

Loss on Extinguishment of Debt.  During the three months ended September 30, 2017, we recognized a non-cash loss on extinguishment of debt of $91,000 related to the conversion of $1.6 million of our Notes. There was no loss on extinguishment of debt for the same periods in 2016 as no Notes were converted during the three months ended September 30, 2016.

Income Tax.  During the three months ended September 30, 2017, we recorded $6.9 million of tax expense as compared to a $42.7 million tax benefit for the three months ended September 30, 2016, an increase of $49.6 million. The increase is primarily attributable to the release of the valuation allowance on the deferred tax assets in 2016, which resulted in an income tax benefit in the third quarter of 2016.

Net Income.  We realized net income of $16.0 million during the three months ended September 30, 2017, as compared to net income of $61.8 million during the three months ended September 30, 2016, a decrease of $45.8 million. This change was primarily due to the release of the valuation allowance against deferred tax assets in 2016, which resulted in an income tax benefit as described above.

25

Comparison of the nine months ended September 30, 2017 and September 30, 2016

	Nine Months ended September 30,						Increase/
	2017			2016			(decrease)
	(unaudited, in thousands)
Revenues:
Net product sales	$	207,763		$	148,978		$	58,785
Royalty revenue	4,338			3,464			874
Licensing revenue	1,702			187			1,515
Total revenues	213,803			152,629
Costs and expenses
Cost of product sales	11,060			8,214			2,846
Research and development	33,405			29,539			3,866
Selling, general and administrative	104,141			76,956			27,185
Total costs and expenses	148,606			114,709
Operating income	65,197			37,920
Other income (expense)
Interest income	2,002			1,071			931
Interest expense	(148		)	(577		)	(429		)
Interest expense-nonrecourse liability related to sale of future royalties	(1,274		)	(3,564		)	(2,290		)
Changes in fair value of derivative liabilities	76			349			273
Loss on extinguishment of debt	(295		)	(382		)	(87		)
Total other expenses	361			(3,103		)
Earnings before income taxes	65,558			34,817
Income tax expense (benefit)	21,932			(42,085		)	64,017
Net income	$	43,626		$	76,902

Net Product Sales.  The increase in net product sales for the nine months ended September 30, 2017 as compared to the same period 2016, was primarily driven by increased prescription volume from the launch of the migraine indication for Trokendi XR in April 2017. Price increases in 2016 and 2017 also contributed to the increase in net product sales. Net product sales are based on gross revenue from shipments to distributors, less estimates for discounts, rebates, allowances, other sales deductions and returns. The table below lists our net product sales by product, in thousands:

	Net Product Sales Nine Months ended September 30,				Change in Net Product
	2017		2016		Sales (%)
	(unaudited)
Trokendi XR	$	157,337	$	111,673	40.9	%
Oxtellar XR	50,426		37,305		35.2	%
Total	$	207,763	$	148,978	39.5	%

Royalty Revenue. Royalty revenue was $4.3 million during the nine months ended September 30, 2017 as compared to $3.5 million for the nine months ended September 30, 2016. Royalty revenue includes non-cash royalty from the HC Royalty agreement and royalty from collaboration partners. The increase in 2017 is primarily due to royalty earned from collaboration partners.

26

Licensing Revenue. Total licensing revenue for the nine months ended September 30, 2017 and 2016 was $1.7 million and $0.2 million respectively. The increase of $1.5 million is primarily due to milestone payments received during the period.

Cost of Product Sales. Cost of product sales during the nine months ended September 30, 2017 was $11.1 million, an increase of $3.0 million, or 34.6 %, as compared to $8.1 million for the nine months ended September 30, 2016. The quarter over quarter increase is attributable primarily to an increase in the number of units sold.

Research and Development Expense.  R&D expenses during the nine months ended September 30, 2017 were $33.4 million as compared to $29.5 million for the nine months ended September 30, 2016, an increase of $3.9 million or 13.1%. This increase is primarily due to increased costs associated with ongoing patient recruitment for Phase III trials for SPN-810 and costs incurred in 2017 in preparation for Phase III clinical trials for SPN-812.  These trials were initiated during the second half of 2017.

Selling and Marketing.  The increase in selling and marketing expenses of approximately $21.2 million for the nine months ended September 30, 2017, as compared to the same period in 2016, is primarily the result of an increase in workforce headcount and headcount related support for our commercial products, coupled with development, production, and execution of promotional and marketing programs for the launch of the migraine indication for Trokendi XR in 2017. Of this total, approximately $6.6 million is due to increased compensation, benefits, travel, and other employee-related expenses associated with increased headcount in our field sales force; approximately $2.4 million is due to increased sample production; and approximately $10.8 million is due to increased expenses for marketing programs, speaker programs, and consulting services to support our commercial products, including the launch the migraine indication for Trokendi XR in 2017.

General and Administrative.  General and administrative expenses increased by $5.9 million for the nine months ended September 30, 2017, as compared to the same period in 2016. Of this total, approximately $2.3 million is due to increased compensation, benefits and other employee-related expenses as a result of increased executive compensation, headcount and share-based compensation; approximately $5.2 million is due to increased patent amortization and depreciation expense; and are offset by approximately $1.9 million in decreased regulatory affairs expenses for Trokendi XR.

The table below shows the comparison of Selling and Marketing and General and Administrative expenses for the nine months ended September 30, 2017 and 2016:

	Selling, General and Administrative Nine Months ended September 30,
	2017		2016		Change (%)
	(unaudited)
Selling and Marketing	$	78,977	$	57,741	36.8	%
General and Administrative	25,164		19,215		31.0	%
Total	$	104,141	$	76,956	35.3	%

Interest Income. During the nine months ended September 30, 2017 and 2016, we recognized $2.0 million and $1.1 million, respectively, of interest income earned on our cash, cash equivalents and marketable securities investments. The increase is primarily attributable to increased cash, cash equivalents, and marketable securities holdings year over year.

Interest Expense.  Interest expense was $0.1 million during the nine months ended September 30, 2017 as compared to $0.6 million for the nine months ended September 30, 2016. The decrease of $0.5 million was primarily due to a decrease in the principal amount of our Notes. As of July 2017, all Notes were converted. During the nine months ended September 30, 2017, a total of $4.6 million of Notes and related accrued interest were converted into 0.9 million shares of common stock.

27

Interest Expense—Non-recourse Liability Related to Sale of Future Royalties. Non-cash interest expense related to our royalty liability was $1.3 million during the nine months ended September 30, 2017 as compared to $3.6 million for the nine months ended September 30, 2016. The decrease of $2.3 million for this non-cash expense item was primarily due to reduced projections of future royalties related to Orenitram.

Changes in Fair Value of Derivative Liability.  During the nine months ended September 30, 2017 and 2016, we recognized a non-cash gain of $76,000 and $0.4 million, respectively, related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. The “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired in May 2017. As of July 2017, all Notes were converted.

Loss on Extinguishment of Debt.  During the nine months ended September 30, 2017, we recognized a non-cash loss on extinguishment of debt of $0.3 million related to the conversion of $4.6 million of our Notes. During the nine months ended September 30, 2016, we recognized a non-cash loss on extinguishment of debt of $0.4 million related to the conversion of $2.0 million of our Notes.

Income Tax.  During the nine months ended September 30, 2017, we recorded $21.9 million of tax expense as compared to a $42.1 million tax benefit for the nine months ended September 30, 2016, an increase of $64.0 million. The increase is primarily attributable to the release of the valuation allowance in 2016 on the deferred tax assets, which resulted in an income tax benefit in the third quarter of 2016.

Net Income.  We realized net income of $43.6 million during the nine months ended September 30, 2017, as compared to net income of $76.9 million during the nine months ended September 30, 2016, a decrease of $33.3 million. This change was primarily due to the release of the valuation allowance against deferred tax assets in 2016, which resulted in an income tax benefit as described above.

Liquidity and Capital Resources

We believe our increasing levels of net product sales will be sufficient to finance our operations in 2017 and subsequent years, including the increased R&D expenses for our clinical trials and including expenses in anticipation of launching our product candidates. We expect to incur significantly increased R&D expenses for the remainder of 2017 and in subsequent years to support the development of SPN-810 and SPN-812, including their respective Phase III trials. We expect our selling, general and administrative expenses to continue to increase in the foreseeable future, as we continue to invest in the commercialization of Trokendi XR and Oxtellar XR, and in areas such as compliance, finance, management of our intellectual property portfolio, information technology systems and personnel, in each case, commensurate with the growth of our business.

Our working capital at September 30, 2017 was $86.4 million, an increase of $15.7 million compared to our working capital of $70.7 million at December 31, 2016. Our long term marketable securities at September 30, 2017 were $123.1 million, an increase of $47.7 million, as compared to $75.4 million at December 31, 2016.

Our stockholders’ equity increased by $59.9 million during the nine months ended September 30, 2017, primarily as a result of net income, the issuance of shares related to the conversion of our Notes, option exercises, and share-based compensation.

As of September 30, 2017, all $90.0 million of our Notes have converted. Cumulatively, we issued a total of approximately 17.0 million shares of common stock in the conversion of the principal amount of the Notes. We issued an additional 2.2 million shares of common stock and also paid approximately $1.7 million in cash in settlement of the interest make-whole provision related to the converted Notes. Our obligations under the Indenture governing the Notes were satisfied and discharged.

We achieved positive cash flow and profitability from operations in each quarter of 2016 and in all three quarters of 2017. While we expect to maintain profitability in 2017 as we continue to increase sales, we anticipate there may be significant variability from quarter to quarter in our level of profitability due to increasing spending to advance our clinical product candidates.

28

Cash Flows

The following table sets forth the major sources and uses of cash and equivalents for the periods set forth below, in thousands:

	Nine Months ended September 30,						Increase/
	2017			2016			(decrease)
	(unaudited)
Net cash provided by (used in):
Operating activities	$	78,305		$	41,874		$	36,431
Investing activities	(67,289		)	(22,322		)	(44,967		)
Financing activities	4,510			1,255			3,255
Net increase in cash and cash equivalents	$	15,526		$	20,807

Operating Activities

Net cash provided by operating activities is comprised of two components: cash provided by operating income and cash provided by changes in working capital.

Results for the nine months ended September 30, 2017 and 2016 are summarized below, in thousands:

	Nine Months ended September 30,				Increase/
	2017		2016		(decrease)
	(unaudited)
Cash provided by operating income	$	67,342	$	41,352	$	25,990
Cash provided by working capital	10,963		522		10,441
Net cash provided by operating activities	$	78,305	$	41,874

The increase in net cash provided by operating activities is primarily driven by increased revenue generated from product sales of Trokendi XR and Oxtellar XR. The increase in cash provided by changes in working capital is primarily driven by increased accrued sales deductions associated with our increased revenues.

29

The changes in certain operating assets and liabilities are, in thousands:

	Nine Months ended September 30,
	2017			2016			Explanation of Change
	(unaudited)
Increase in accounts receivable	$	(14,639	)	$	(10,312	)	Increased product sales.
Decrease (increase) in inventory	1,854			(4,866		)	Utilization of inventory build-up from migraine launch.
(Increase) decrease in prepaid expenses and other assets	(2,712		)	1,060			Progress of clinical trials and timing difference related to prepayments.
Increase in accounts payable, accrued sales deductions, accrued expenses, and income taxes payable	25,768			14,585			Timing of accruals, including compensation and increased sales deductions and clinical trials.
Other	692			55
	$	10,963		$	522

Investing Activities

We invest excess cash in accordance with our investment policy. Marketable securities consist of investments which mature in four years or less, including U.S. Treasury and various government agency debt securities, as well as investment grade securities in industrial and financial institutions. Fluctuations in investing activities between periods relate exclusively to the timing of marketable security purchases and the related maturities of these securities.

Net cash used in investing activities for the nine months ended September 30, 2017 of $67.3 million related to the net purchase of marketable securities of $55.9 million, patent defense costs of $10.1 million, and property and equipment purchases of $1.3 million. Net cash used in investing activities for the nine months ended September 30, 2016 of $22.3 million related to the patent defense costs of $12.2 million, the net purchase of marketable securities of $8.8 million, and property and equipment purchases of $1.3 million.

Financing Activities

Net cash provided by financing activities of $4.5 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively, is from proceeds received from issuance of common stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of September 30, 2017 (except as noted below), in thousands, unaudited:

	Less than		1 - 3		3 - 5		Greater than
Contractual Obligations	1 Year		Years		Years		5 Years		Total
Operating leases (1)	1,894		2,130		—		—		4,024
Purchase obligations (2)	148,073		22,040		2,920		—		173,033
Total (3)	$	149,967	$	24,170	$	2,920	$	—	$	177,057

(1)Our commitments for operating leases relate to our lease of office equipment, fleet vehicles and office and laboratory space as of September 30, 2017.

(2)           Relates primarily to agreements and purchase orders with contractors.

(3)This table does not include (a) any milestone payments which may become payable to third parties under license agreements or contractual agreements regarding our clinical trials as the timing and likelihood of such payments are not known, (b) any

30

royalty payments to third parties as the amounts, timing and likelihood of such payments are not known and (c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above.

In addition to the above table, we are contractually obligated to pay to HC Royalty all royalty payments earned, up to a certain threshold, under a licensing agreement with United Therapeutics Corporation. Although we have recorded a liability of $28.0 million at September 30, 2017 related to this obligation, it is a non-recourse liability as we have no obligation to make any payments to HC Royalty. Accordingly, this obligation will have no impact on our liquidity at any time, and has not been included in the table above.

We have obtained exclusive licenses from third parties for proprietary rights to support the product candidates in our psychiatry portfolio. We have two license agreements with Afecta Pharmaceuticals, Inc. (Afecta) pursuant to which we obtained exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. We may pay up to $300,000 upon the achievement of certain milestones. If a product candidate is successfully developed and commercialized, we will be obligated to pay royalties to Afecta at a low single digit percentage of worldwide net product sales.

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

Off-Balance Sheet Arrangements

We currently do not have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Recently Issued Accounting Pronouncements

For a discussion of new accounting pronouncements, see Note 2 in the notes to the consolidated financial statements in Part I, Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk to principal amount. Our exposure to market risk is confined to our cash, cash equivalents, marketable securities and long term marketable securities. As of September 30, 2017, we had unrestricted cash, cash equivalents, marketable securities and long term marketable securities of $237.7 million. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash, cash equivalents, marketable securities and long term marketable securities and because we hold these securities to maturity, we do not believe that an increase in market rates would have any significant impact on the realizable value of our investments.

We may contract with CROs and investigational sites globally. Currently, we do not have ongoing trials outside of the U.S. We do not hedge our foreign currency exchange rate risk. A hypothetical 10% appreciation in Euro exchange rates against the U.S. dollar from prevailing market rates would have decreased our net income by approximately $14,000 for the nine months ended September 30, 2017. Conversely, a hypothetical 10% depreciation in Euro exchange rates against the U.S. dollar from prevailing market rates would have increased our net income by approximately $14,000 for the nine months ended September 30, 2017. We do not believe that inflation and changing prices over the nine months ended September 30, 2017 and 2016 had a significant impact on our consolidated results of operations.

31

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, under the supervision and with the participation of our management, including our CEO and CFO, we concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2017 because of continued material weaknesses in our internal control over financial reporting as described in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed on March 16, 2017.

Specifically, Company personnel did not have a sufficient understanding of the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework) and its application to internal controls over financial reporting, and their responsibilities for effective internal control. Also, the Company did not have an effective risk assessment process that identified necessary changes in financial reporting and internal controls impacted by changes in information technology systems.

As a consequence, the Company did not have effective control activities over the completeness and accuracy of key assumptions and data analyzed by a third party consultant and which was ultimately used by management to determine the returns portion of accrued sales deductions. The Company did not have effective general information technology controls (GITCs) over the Microsoft Dynamics AX information technology system and the employee expense reimbursement system.

Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Management’s Remediation Plan

The Company continues to execute on the following steps in 2017 to remediate the aforementioned material weaknesses in its internal control over financial reporting as described in its 2016 Annual Report:

·The Company has implemented organization changes, including hiring an Accounting Associate Director to oversee the implementation of financial accounting and internal controls policies and procedures, and has replaced the Associate Controller and Finance Manager. These individuals have significant prior experience in designing and operating financial controls, and therefore have substantially enhanced our capabilities. We believe that these actions will significantly strengthen the accounting and other administrative functions of the Company and improve financial processes, controls, financial accounting, and internal control reporting, and will strengthen its controls related to financial reporting. In addition to these new hires, the Company continues to look for and recruit additional personnel that have the requisite experience working with the implementation of financial accounting and internal controls policies and procedures.

·The Company conducted comprehensive internal controls training and facilitated sessions to enhance the understanding of process flows and control documentation for all processes. The Company continues to sponsor ongoing training related to the COSO 2013 Framework best practices for personnel that are accountable for internal control over financial reporting.  The Company has thoroughly mapped each of its financial processes, and conducted a review of its financial controls with internal audit and senior financial management.

·The Company implemented IT user access controls designed to restrict privileges to IT applications and AX database commensurate with assigned authorities and responsibilities. The Company also implemented a program to monitor changes to the AX IT applications and AX databases to ensure that such changes are appropriate and that any deficiencies are investigated and remediated. The Company plans to take further action to strengthen its control procedures surrounding GITCs, IT user access review and program change controls including the logging of changes to the IT applications and the database.

32

·The Company has also implemented a quarterly SOX process owner certification program to capture personnel, process and system changes throughout the year.

While the audit committee of our board of directors and senior management are closely monitoring this remediation, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, tested and determined effective, we will not be able to conclude that the material weaknesses have been remediated. In addition, we may need to incur incremental costs associated with remediation, primarily due to the hiring and training of finance and accounting personnel, and the implementation of improved training procedures.

Changes in Internal Control over Financial Reporting

Our management, including our CEO and CFO, has evaluated any changes in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2017, and has concluded that there was no change, other than the remediation efforts discussed above, that occurred during the quarterly period ended September 30, 2017 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

From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. We may be required to file infringement claims against third parties for the infringement of our patents. We have filed such claims for infringement of the Orange Book patents listed for our products Oxtellar XR and Trokendi XR.

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. Nos. 13-4740; 14-1981 (RMB)(JS) (D.N.J.)
Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., Appeal No. 2016-1619 (Fed. Cir.)

We received a Paragraph IV Notice Letter against two of our Oxtellar XR Orange Book patents (United States Patent Nos. 7,722,898 and 7,910,131) from generic drug maker Watson Laboratories, Inc.—Florida (WLF) n/k/a Actavis Laboratories FL, Inc. (Actavis Labs FL) on June 26, 2013. On August 7, 2013, we filed a lawsuit against Actavis, Inc., Actavis Labs FL, Actavis Pharma, Inc., Watson Laboratories, Inc., and ANDA, Inc. (collectively Actavis) alleging infringement of United States Patent Nos. 7,722,898 and 7,910,131. We received a second Paragraph IV Notice Letter against a later-issued Oxtellar XR Orange Book Patent (United States Patent No. 8,617,600) on February 20, 2014. On March 28, 2014, we filed a second lawsuit against Actavis alleging infringement of United States Patent No. 8,617,600. We have since listed four additional Orange Book patents: United States Patent Nos. 8,821,930, 9,119,791, 9,351,975, and 9,370,525. Our United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525 generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. The FDA Orange Book lists all seven of our Oxtellar XR patents as expiring on April 13, 2027.

Both Complaints—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that Actavis infringed our Oxtellar XR patents by submitting to the FDA an Abbreviated New Drug Application (ANDA) seeking to market a generic version of Oxtellar XR prior to the expiration of our patents. The two cases were consolidated for all purposes on October 8, 2015.

A seven-day bench trial for the consolidated action involving United States Patent Nos. 7,722,898, 7,910,131, and 8,617,600 was held between November 18 and December 4, 2015. On February 5, 2016, the Court issued an opinion and order finding that: (i) Actavis’s ANDA products infringe United States Patent Nos. 7,722,898 and 7,910,131; (ii) Actavis’s ANDA products do not infringe U.S. Patent No. 8,617,600; and (iii) United States Patent Nos. 7,722,898, 7,910,131, and 8,617,600 are not invalid.  The Court entered a final judgment on February 18, 2016: (i) enjoining the FDA from approving Actavis’s ANDA before the expiration date of United States Patent Nos. 7,722,898 and 7,910,131; and (ii) enjoining Actavis from commercially manufacturing, using, offering to sell, or selling within the United States, or importing into the United States, Actavis’s ANDA products until the expiration of United States Patent Nos. 7,722,898 and 7,910,131.  On February 19, 2016, Actavis filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit.  The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of all appeals, cross-appeals, claims, and counterclaims concerning U.S. Patent Nos. 8,617,600, 8,821,930, and 9,119,791. The appeal with respect to United States Patent Nos. 7,722,898 and 7,910,131 (docketed on February 24, 2016) was argued on December 8, 2016.  On December 12, 2016, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s February 18, 2016 Final Judgment.

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. No. 15-2499 (RMB)(JS) (D.N.J.)

We received a Paragraph IV Notice Letter against United States Patent No. 8,821,930 from Actavis Labs FL on February 21, 2015. On April 7, 2015, we filed a third lawsuit against Actavis alleging infringement of United States Patent No. 8,821,930.

33

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that Actavis infringed United States Patent No. 8,821,930 by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of United States Patent No. 8,821,930.

The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of both parties’ claims and counterclaims concerning U.S. Patent No. 8,821,930.

Supernus Pharmaceuticals, Inc. v. TWi Pharmaceuticals, Inc., et al., C.A. No. 15-369 (RMB)(JS) (D.N.J.)

Supernus Pharmaceuticals, Inc. v. TWi Pharmaceuticals, Inc., et al., Appeal No. 2017-2513 (Fed. Cir.)

We received a Paragraph IV Notice Letter against United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930 from generic drug maker TWi Pharmaceuticals, Inc. on December 9, 2014. On January 16, 2015, we filed a lawsuit against TWi Pharmaceuticals, Inc. and TWi International LLC (d/b/a TWi Pharmaceuticals USA) (collectively TWi) alleging infringement of United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930.

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that TWi infringed our Oxtellar XR patents by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of our patents. Filing the Complaint within 45 days of receiving TWi’s Paragraph IV certification notice entitles Supernus to an automatic stay preventing the FDA from approving TWi’s ANDA for 30 months from the date of our receipt of the first Paragraph IV certification notice. On February 13, 2015, TWi answered the Complaint and denied the substantive allegations of the Complaint.  TWi also asserted Counterclaims seeking declaratory judgments of non-infringement and invalidity of United States Patent Nos. 7,722,898 and 7,910,131. On March 20, 2015, we filed our Reply, denying the substantive allegations of those Counterclaims.  A four-day bench trial was held between April 3 and April 6, 2017.  On August 15, 2017, the Court issued an opinion and order finding that: (i) TWi’s ANDA products infringe United States Patent Nos. 7,722,898, 7,910,131, and 8,821,930; and (ii) United States Patent Nos. 7,722,898, 7,910,131, and 8,821,930 are not invalid.  The Court entered a final judgment on August 28, 2017: (i) enjoining the FDA from approving TWi’s ANDA before the expiration date of United States Patent Nos. 7,722,898, 7,910,131, and 8,821,930; and (ii) enjoining TWi from commercially manufacturing, using, offering to sell, or selling within the United States, or importing into the United States, TWi’s ANDA products until the expiration of United States Patent Nos. 7,722,898, 7,910,131, and 8,821,930.  On August 31, 2017, TWi filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit.  TWi’s appeal is pending.

Supernus Pharmaceuticals, Inc. v. TWi Pharmaceuticals, Inc., et al., C.A. No. 17-2164 (RMB)(JS) (D.N.J.)

We received a second Paragraph IV Notice Letter against United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525 from generic drug maker TWi Pharmaceuticals, Inc. on February 16, 2017.  On March 31, 2017, we filed a lawsuit against TWi Pharmaceuticals, Inc. and TWi International LLC alleging infringement of United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525.  TWi filed a motion to dismiss Supernus’s March 31, 2017 Complaint on May 10, 2017.  On May 11, 2017, the Court administratively terminated TWi’s motion to dismiss for failure to comply with the Court’s Individual Rules and Procedures.  On May 19, 2017, the Court “administratively terminate[d] this matter pending this Court’s decision in the First TWi Action [concerning United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930].”  As of the date of this filing, Civil Action No. 17-2164 (RMB)(JS) (D.N.J.) remains administratively terminated.

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. No. 15-8342 (RMB)(JS) (D.N.J.)

We received a Paragraph IV Notice Letter against United States Patent No. 9,119,791 from Actavis Labs FL on October 15, 2015. On November 25, 2015, we filed a fourth lawsuit against Actavis alleging infringement of United States Patent No. 9,119,791.

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that Actavis infringed United States Patent No. 9,119,791 by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of United States Patent No. 9,119,791. On January 29, 2016, Actavis answered the Complaint, denying the substantive allegations of that Complaint. Actavis Labs FL also asserted Counterclaims seeking declaratory judgments of non-infringement and invalidity of United States Patent No. 9,119,791.  On March 4, 2016, we filed our Reply, denying the substantive allegations of those Counterclaims.

The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of both parties’ claims and counterclaims concerning U.S. Patent No. 9,119,791.

34

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., C.A. No. 14-6102 (SDW)(LDW) (D.N.J.)

We received Paragraph IV Notice Letters against Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Actavis Laboratories FL, Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On October 1, 2014, we initiated a lawsuit against Actavis; the lawsuit alleged infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 as expiring on November 16, 2027.

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleged that Actavis infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Actavis answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its October 1, 2014 Complaint within 45 days of receiving the first of three Actavis Laboratories FL, Inc. Paragraph IV Notice Letters entitled Supernus to an automatic stay preventing the FDA from approving Actavis’s ANDA for 30 months from the date of our receipt of such Notice Letter.

The Company announced on March 7, 2017 that it entered into a binding term sheet with Actavis regarding the settlement of this case. The binding term sheet permits Actavis to begin selling a generic version of Trokendi XR on January 1, 2023, or earlier under certain circumstances. On March 13, 2017, the Company entered into a settlement agreement with Actavis. A consent judgment and stipulation of dismissal with prejudice, and a stipulation and order of dismissal were entered by the U.S. District Court for the District of New Jersey. The agreement has been submitted to the applicable governmental agencies.

Supernus Pharmaceuticals, Inc. v. Zydus Pharmaceuticals (USA) Inc., C.A. No. 14-7272 (SDW)(LDW) (D.N.J.)

We received Paragraph IV Notice Letters against Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Zydus Pharmaceuticals (USA) Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On November 21, 2014, we initiated a lawsuit against Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Limited (collectively Zydus); the lawsuit alleged infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191 and 8,992,989 as expiring on November 16, 2027.

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleged that Zydus infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Zydus answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its November 21, 2014 Complaint within 45 days of receiving the first of three Paragraph IV Notice Letters from Zydus Pharmaceuticals (USA) Inc. entitled Supernus to an automatic stay preventing the FDA from approving Zydus’s ANDA for 30 months from the date of our receipt of such Notice Letter.

The Company announced on March 6, 2017 that it entered into a settlement agreement with Zydus regarding this case. The settlement permits Zydus to begin selling a generic version of Trokendi XR on January 1, 2023, or earlier under certain circumstances. A stipulation and order of dismissal without prejudice was entered by the U.S. District Court for the District of New Jersey. The agreement has been submitted to the applicable governmental agencies.

Supernus Pharmaceuticals, Inc. v. Par Pharmaceutical Companies, Inc., C.A. No. 15-326 (SDW)(LDW) (D.N.J.)

We received Paragraph IV Notice Letters against Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Par Pharmaceutical, Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On January 16, 2015, we initiated a lawsuit against Par; the lawsuit alleged infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 as expiring on November 16, 2027.

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleged that Par infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Par answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its January 16, 2015 Complaint within 45 days of receiving the first of three Paragraph IV Notice Letters from Par Pharmaceutical, Inc. entitled Supernus to an automatic stay preventing the FDA from approving Par’s ANDA for 30 months from the date of our receipt of such Notice Letter.

35

The Company announced on October 15, 2015 that it entered into a settlement agreement with Par regarding this case. The settlement permits Par to begin selling a generic version of Trokendi XR on April 1, 2025, or earlier under certain circumstances. The agreement is subject to a consent judgment that was entered by the U.S. District Court for the District of New Jersey. In the consent judgment, Par acknowledges that the Orange Book-listed patents for Trokendi XR owned by Supernus, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989, are valid and enforceable with respect to Par’s ANDA product, and would be infringed by Par’s ANDA product. The agreement has been submitted to the applicable governmental agencies.

Item 1A. Risk Factors

Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes, and the additional information in the other reports we file with the Securities and Exchange Commission along with the risks described in our Annual Report on Form 10-K for the year ended December 31, 2016 and Quarterly Report on Form 10-Q for quarterly period ended June 30, 2017. These risks may result in material harm to our business and our financial condition and results of operations. In such an eventuality, the market price of our common stock may decline and you could lose part or all of your investment.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)           Sales of Unregistered Securities.

During the nine months ended September 30, 2017, the Company granted options to employees to purchase an aggregate of 1,074,955 shares of common stock at an exercise price of $25.88 per share. The options are exercisable for a period of ten years from the grant date. These issuances were exempt from registration in reliance on Section 4(a)(2) of the Securities Act as transactions not involving any public offering.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q:

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

36

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

37

EXHIBIT INDEX

Number	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SUPERNUS PHARMACEUTICALS, INC.
DATED: November 8, 2017	By:	/s/ Jack A. Khattar
	Jack A. Khattar
	President, Secretary and Chief Executive Officer
DATED: November 8, 2017	By:	/s/ Gregory S. Patrick
	Gregory S. Patrick
	Vice President and Chief Financial Officer

39

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Jack A. Khattar, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q of Supernus Pharmaceuticals, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)     designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)     disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2017	By:	/s/ Jack A. Khattar
		Jack A. Khattar
		President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Gregory S. Patrick, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q of Supernus Pharmaceuticals, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)     designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)     disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2017	By:	/s/ Gregory S. Patrick
		Gregory S. Patrick
		Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

SUPERNUS PHARMACEUTICALS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. sec. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Supernus Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jack A. Khattar, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 8, 2017	By:	/s/ Jack A. Khattar
		Jack A. Khattar
		President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

SUPERNUS PHARMACEUTICALS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. sec. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Supernus Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory S. Patrick, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 8, 2017	By:	/s/ Gregory S. Patrick
		Gregory S. Patrick
		Vice President and Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Oct. 31, 2017
Document and Entity Information
Entity Registrant Name	SUPERNUS PHARMACEUTICALS INC
Entity Central Index Key	0001356576
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		51,262,132
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 81,924	$ 66,398
Marketable securities	32,626	23,723
Accounts receivable, net	56,166	41,527
Inventories, net	14,947	16,801
Prepaid expenses and other current assets	5,667	2,955
Total current assets	191,330	151,404
Long term marketable securities	123,123	75,410
Property and equipment, net	4,688	4,344
Intangible assets, net	37,162	36,350
Other non-current assets	368	331
Deferred income taxes	28,807	41,729
Total assets	385,478	309,568
Current liabilities:
Accounts payable	6,262	8,055
Accrued sales deductions	59,772	41,943
Accrued expenses	26,892	27,427
Income taxes payable	6,489	7
Non-recourse liability related to sale of future royalties, current portion	5,254	3,101
Deferred licensing revenue	287	209
Total current liabilities	104,956	80,742
Deferred licensing revenue, net of current portion	1,221	1,501
Convertible notes, net		4,165
Non-recourse liability related to sale of future royalties, long term	22,702	27,289
Other non-current liabilities	4,936	4,002
Derivative liabilities		114
Total liabilities	133,815	117,813
Stockholders' equity:
Common stock, $0.001 par value, 130,000,000 shares authorized at September 30, 2017 and December 31, 2016; 51,262,007 and 49,971,267 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	51	50
Additional paid-in capital	291,841	276,127
Accumulated other comprehensive income (loss), net of tax	252	(134)
Accumulated deficit	(40,481)	(84,288)
Total stockholders' equity	251,663	191,755
Total liabilities and stockholders' equity	$ 385,478	$ 309,568

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2017	Dec. 31, 2016
Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	130,000,000	130,000,000
Common stock, shares issued	51,262,007	49,971,267
Common stock, shares outstanding	51,262,007	49,971,267

XML

Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revenue
Net product sales	$ 78,066	$ 55,618	$ 207,763	$ 148,978
Royalty revenue	2,010	1,140	4,338	3,464
Licensing revenue	322	52	1,702	187
Total revenue	80,398	56,810	213,803	152,629
Costs and expenses
Cost of product sales	4,251	3,428	11,060	8,214
Research and development	12,980	7,868	33,405	29,539
Selling, general and administrative	40,825	25,675	104,141	76,956
Total costs and expenses	58,056	36,971	148,606	114,709
Operating income	22,342	19,839	65,197	37,920
Other income (expense)
Interest income	814	378	2,002	1,071
Interest expense		(202)	(148)	(577)
Interest expense-nonrecourse liability related to sale of future royalties	(155)	(1,004)	(1,274)	(3,564)
Changes in fair value of derivative liabilities		125	76	349
Loss on extinguishment of debt	(91)		(295)	(382)
Total other income (expense)	568	(703)	361	(3,103)
Earnings before income taxes	22,910	19,136	65,558	34,817
Income tax expense (benefit)	6,949	(42,690)	21,932	(42,085)
Net income	$ 15,961	$ 61,826	$ 43,626	$ 76,902
Earnings per share:
Basic (in dollars per share)	$ 0.31	$ 1.25	$ 0.86	$ 1.56
Diluted (in dollars per share)	$ 0.29	$ 1.18	$ 0.82	$ 1.48
Weighted-average number of common shares outstanding:
Basic (in shares)	51,046,375	49,516,595	50,583,726	49,395,284
Diluted (in shares)	53,628,389	51,974,435	53,227,433	51,615,334

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Consolidated Statements of Comprehensive Income
Net income	$ 15,961	$ 61,826	$ 43,626	$ 76,902
Other comprehensive income (loss):
Unrealized net gain (loss) on marketable securities, net of tax	36	(422)	386	615
Other comprehensive income (loss):	36	(422)	386	615
Comprehensive income	$ 15,997	$ 61,404	$ 44,012	$ 77,517

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities
Net income	$ 43,626	$ 76,902
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on extinguishment of debt	295	382
Change in fair value of derivative liability	(76)	(349)
Depreciation and amortization	6,462	1,728
Amortization of deferred financing costs and debt discount	50	226
Non-cash interest expense, net/ interest (income), net	(342)	286
Non-cash interest expense on non-recourse liability related to sale of future royalties	1,274	3,564
Non-cash royalty revenue	(3,708)	(3,464)
Share-based compensation expense	6,447	4,454
Deferred income tax provision	13,314	(42,377)
Changes in operating assets and liabilities:
Accounts receivable	(14,639)	(10,312)
Inventories	1,854	(4,866)
Prepaid expenses and other current assets	(2,712)	1,060
Accounts payable	(1,312)	(1,629)
Accrued sales deductions	17,829	12,900
Accrued expenses	2,769	2,503
Income taxes payable	6,482	811
Deferred licensing revenue	(202)	195
Other non-current liabilities	894	(140)
Net cash provided by operating activities	78,305	41,874
Cash flows from investing activities
Purchases of marketable securities	(78,938)	(31,194)
Sales and maturities of marketable securities	23,052	22,398
Purchases of property, plant and equipment	(1,273)	(1,302)
Deferred legal fees	(10,130)	(12,224)
Net cash used in investing activities	(67,289)	(22,322)
Cash flows from financing activities
Proceeds from issuance of common stock	4,510	1,255
Net cash provided by financing activities	4,510	1,255
Net increase in cash and cash equivalents	15,526	20,807
Cash and cash equivalents at beginning of period	66,398	33,498
Cash and cash equivalents at end of period	81,924	54,305
Supplemental cash flow information:
Cash paid for interest	134	247
Noncash financial activity:
Conversion of convertible notes and interest make-whole	4,546	2,138
Deferred legal fees included in accounts payable and accrued expenses	$ 1,337	$ 7,920

XML

Organization and Business

9 Months Ended

Sep. 30, 2017

Organization and Business

Organization and Business

1.  Organization and Business

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. The Company markets two products, Oxtellar XR for the treatment of epilepsy and Trokendi XR for the treatment of migraine and epilepsy, and has several proprietary product candidates in clinical development that address the psychiatry market.

The Company launched Oxtellar XR and Trokendi XR in 2013 for the treatment of epilepsy and launched Trokendi XR for the prophylaxis of migraine in adolescents and adults in April 2017.

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

2.  Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd., collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information.

As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

In the opinion of management, the consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position, results of operations, and cash flows for the periods presented. These adjustments are of a normal recurring nature.  The Company currently operates in one business segment.

The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the Company’s future financial results.

Marketable Securities

Marketable securities consist of investments in U.S. Treasury bills and notes, certificates of deposit, various U.S. governmental agency debt securities, corporate and municipal bonds and other fixed income securities. The Company places all investments with government, industrial, or financial institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

The Company’s investments are classified as available-for-sale and are carried at estimated fair value. Any unrealized holding gains or losses are reported, net of any tax effects reported, as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method.

The Company established the Supernus Supplemental Executive Retirement Plan (SERP) for the sole purpose of receiving funds for executives from a previous SERP and providing a continuing deferral program under the Supernus SERP. As of September 30, 2017 and December 31, 2016, the fair value of the SERP was $313,000 and $275,000, respectively. The fair value of these assets is included within other non-current assets on the consolidated balance sheets. A corresponding non-current liability is also included in the consolidated balance sheets to reflect the Company’s obligation for the SERP. The Company has not made, and has no plans to make, contributions to the SERP. The securities are restricted in nature and can only be used for purposes of paying benefits under the SERP.

Accounts Receivable, net

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts and discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience.

The Company recorded an allowance for expected sales discounts of approximately $8.1 million and $5.6 million as of September 30, 2017 and December 31, 2016, respectively.

Inventories

Inventories, which are recorded at the lower of cost or market, include materials, labor, and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when it becomes probable that the related product candidates will receive regulatory approval and that the related costs will be recoverable through the commercial sale of the product.

Property and Equipment

Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following useful lives:

Computer equipment	3 years
Software	3 years
Lab equipment and furniture	5 - 10 years
Leasehold improvements	Shorter of lease term or useful life

Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Patent defense costs will be charged to expense in the event of an unsuccessful outcome of the ongoing litigation. Patents are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the patents. Amortization commences in the quarter after the costs are incurred. This amortization period is based initially upon the remaining patent life and is adjusted, if necessary, for any settlements or other changes to the expected useful life of the patent. The carrying value of the patents are assessed for impairment annually during the fourth quarter of each year, or more frequently if impairment indicators exist. There were no indicators of impairment identified as of September 30, 2017.

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment and patent defense costs. The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. Evaluation of impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur. Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and could require the recognition of an impairment charge equal to the excess of the carrying value of the long-lived assets over its estimated fair value.

There were no indicators of impairment identified for the Company’s long-lived assets as of September 30, 2017.

Deferred Financing Costs

Deferred financing costs consist of financing costs incurred by the Company in connection with the issuance of the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes). The Company amortizes deferred financing costs over the term of the related debt using the effective interest method. When extinguishing debt, the related deferred financing costs are written off.

Preclinical Study and Clinical Trial Accruals

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical investigators, and clinical research organizations (CROs) that conduct these activities on our behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services. As appropriate, we accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the advance payment will be charged to expense in the period that such determination is made.

Revenue from Product Sales

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, allowances, discounts, patient co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).

Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors takes title and ownership to the product upon physical receipt of the product and then distributes our products to pharmacies.

Sales Deductions

Allowances for estimated sales deductions are provided for the following:

· Rebates:  Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, as well as negotiated discounts with commercial healthcare providers. Rebates are amounts owed after the final dispensing of product to a benefit plan participant has occurred and are based upon contractual agreements or legal requirements with the public sector (e.g., Medicaid) and with private sector benefit providers (e.g., commercial managed care providers). The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates based on a plan provider’s utilization.

Rebates are generally invoiced and paid quarterly 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 known or estimated prior quarters’ unpaid rebates. If actual rebates vary from estimates, we may need to adjust balances of such rebates to reflect the actual expenditures of the Company with respect to these programs, which would affect revenue in the period of adjustment.

· Co-pay assistance:  Patients who pay in cash or have commercial healthcare insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. The intent of this program is to reduce the patient’s out of pocket costs when filling a prescription. Liabilities for co-pay assistance are based on actual program participation as well as estimates of program activity using data provided by third-party administrators.

· Distributor/wholesaler deductions and discounts:  U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts as consideration for distributing our products. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a percentage of the price at which the Company sells product to distributors and wholesalers. Wholesale customers are offered a prompt pay discount for payment within a specified period.

· Returns:  Sales of our products are not subject to a general right of return; however, the Company will accept product that is damaged or defective when shipped directly from our warehouse. The Company will accept expired product six months prior to and up to 12 months subsequent to its expiry date. Product that has been used to fill patient prescriptions is no longer subject to any right of return.

· Chargebacks:  Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase our product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on sales to contracted customers.

Revenue Recognition of License Revenue

License and Collaboration Agreements

We have entered into collaboration agreements to commercialize both Oxtellar XR and Trokendi XR outside of the U.S. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. We believe that when milestones meet all of the necessary criteria to be considered substantive, these should be recognized as revenue when achieved. As regards to up-front license fees, we have estimated the service period of the contract and are recognizing revenue on a straight-line basis over the respective service period.

Milestone Payments

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. Management may recognize milestone revenue in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. Substantive milestone payments are recognized upon achievement only if all of the following conditions are met:

· the milestone payments are non-refundable;

· achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;

· substantive effort on the partner’s part is involved in achieving the milestone; and

· the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone.

Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone. Therefore, the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period.

The Company recorded $0.3 million and $1.5 million of milestone revenue during the three and nine month periods ended September 30, 2017, respectively. No milestone revenue was recorded during the three and nine months ended September 30, 2016.

Royalty Revenue

We recognize non-cash royalty revenue for royalty amounts earned pursuant to a royalty agreement with United Therapeutics. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 14). Accordingly, the Company records non-cash royalty revenue when payments are made from United Therapeutics to HC Royalty in connection with these agreements. Royalty revenue also includes royalty amounts received from collaboration partners, including from Shire Pharmaceuticals based on net product sales of Mydayis.

Cost of Product Sales

The cost of product sales consists primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other manufacturing overhead costs.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs consist primarily of: employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with CROs; fees paid to clinical investigators who are participating in our clinical trials; fees paid to consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for, and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

Advertising Expense

The costs of the Company’s advertising efforts are expensed as incurred. The Company incurred approximately $9.6 million and $26.1 million in advertising costs for the three and nine months ended September 30, 2017 and approximately $4.9 million and $16.2 million in advertising costs for the three and nine months ended September 30, 2016, respectively. These expenses are recorded in the selling, general and administrative expense line of the Statement of Operations.

Share-Based Compensation

Employee share-based compensation is measured based on the estimated fair value on the grant date. The grant date fair value is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The Company recognizes expense using the straight-line method.

The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is re-measured at each reporting period. As a result, stock compensation expense for non-employee awards with vesting is affected by subsequent changes in the fair value of the Company’s common stock.

Income Taxes

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

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and relevant facts. The Company’s policy is to recognize any interest and penalties related to income taxes as income tax expense.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted in 2017

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted ASU 2016-09 on January 1, 2017 using the modified retrospective approach. As a result, the Company recorded a cumulative effect adjustment of $211,000 to increase the 2017 beginning of period additional paid-in capital balance, with an offset to accumulated deficit for historical forfeiture assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase its deferred tax asset, with an offset to accumulated deficit, primarily to recognize excess tax benefits (i.e. windfalls) from stock option exercises in prior years combined with the impact of the $211,000 adjustment to historical forfeiture expense.

New Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. This standard will be effective for the first annual period beginning after December 15, 2018, including interim periods within those periods.  Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

In July 2017, the FASB issued ASU 2017-11, “Earnings per share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” The amendments in Part I change the classification analysis of certain equity-linked financial instruments (embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 with a scope exception and do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The amendments in Part II of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does not expect it to have a material impact.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.”The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, as the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard eliminates diversity in the practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We expect the ASU to have a material impact on our assets and liabilities due to the addition of previously classified operating leases, but we do not expect it to have a material impact on our cash flows or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 will eliminate transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, with early adoption being permitted for periods ending after December 15, 2016. The guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures). The Company has not selected an adoption methodology.

Since ASU No. 2014-09 supersedes substantially all existing revenue recognition guidance affecting us under the current standard, it could impact revenue and cost recognition across our business processes. The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently finalizing phase one, the assessment phase, of the project.  In the assessment phase, we held revenue recognition workshops with our commercial and finance groups and reviewed a sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard. Phase two will include (a) establishing and documenting key accounting positions, (b) assessing the new disclosure requirements, business processes, and control impacts, and (c) beginning to assess the initial quantitative impacts resulting from the initial standard.  Phase three will include (a) finalizing any changes to accounting policies, (b) preparing new disclosures and implementing new business processes and controls as needed, and (c) quantifying the effect of adoption on opening retained earnings.

The Company continues to evaluate the impact of the new standard on the consolidated financial statements and related disclosures and additional differences may be identified as contracts with customers that will impact future periods are executed. The majority of the Company’s revenue consists of sales of products that represent a single performance obligation where control transfers at the point in time title and risk of loss pass to the customer. The adoption of the new ASU will most likely impact our revenue recognition practices on our product sales with regards to the accounting for variable considerations such as incentives and sales deductions and the related financial statement presentation.

In addition, the Company also has licensing and collaboration arrangements, where it receives milestone and royalty payments. The provisions of the new standard may impact the timing of revenue associated with these arrangements; i.e., may result in acceleration of revenue recognition based on the transfer of control. We expect that disclosures in the notes to the consolidated financial statements related to revenue recognition will be expanded in line with the requirements of the new standard to further describe the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of assessing its accounting and forecasting considerations to ensure its ability to record, report, forecast, and analyze results under the new standard.

XML

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2017

Fair Value of Financial Instruments

Fair Value of Financial Instruments

3.  Fair Value of Financial Instruments

The fair value of an asset or liability should represent the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants. Such transactions are assumed to occur in the principal or most advantageous market for the asset or liability. Accordingly, fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant rather than from a reporting entity’s perspective.

The Company reports assets and liabilities that are measured at fair value using a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

· Level 1—Inputs are unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date.

· Level 2—Inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.); and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

· Level 3—Unobservable inputs that reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

	Fair Value Measurements at
	September 30, 2017
	(unaudited)
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	September 30,		Markets		Inputs		Inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	81,924	$	81,924	$	—	$	—
Marketable securities	32,626		1,871		30,755		—
Long term marketable securities	123,123		698		122,425		—
Marketable securities - restricted (SERP)	313		—		313		—
Total assets at fair value	$	237,986	$	84,493	$	153,493	$	—
Liabilities:
Derivative liabilities	$	—	$	—	$	—	$	—

	Fair Value Measurements at
	December 31, 2016
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	December 31,		Markets		Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	66,398	$	66,398	$	—	$	—
Marketable securities	23,723		656		23,067		—
Long term marketable securities	75,410		—		75,410		—
Marketable securities - restricted (SERP)	275		—		275		—
Total assets at fair value	$	165,806	$	67,054	$	98,752	$	—
Liabilities:
Derivative liabilities	$	114	$	—	$	—	$	114

The fair value of the restricted marketable securities is included within other non-current assets in the consolidated balance sheets.

The Company’s Level 1 assets include cash held with banks, certificates of deposit, and money market funds.

Level 2 assets include the SERP assets, commercial paper and investment grade corporate bonds and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data into their models to estimate fair value.

Level 3 liabilities include the estimated fair value of the interest make-whole liability associated with the Notes, which are recorded as derivative liabilities. The “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired on May 1, 2017.

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

Unrestricted marketable securities held by the Company were as follows, in thousands:

At September 30, 2017 (unaudited):

Available for Sale	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
Corporate debt securities	$	155,713	286	(250	)	$	155,749

At December 31, 2016:

Available for Sale	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
Corporate debt securities	$	99,487	86	(440	)	$	99,133

The contractual maturities of the unrestricted available for sale marketable securities held by the Company were as follows, in thousands:

	September 30,
	2017
	(unaudited)
Less Than 1 Year	$	32,626
1 year to 2 years	38,121
3 years to 4 years	85,002
Greater Than 4 Years	—
Total	$	155,749

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities. The cost of securities sold is calculated using the specific identification method.

XML

Inventories

9 Months Ended

Sep. 30, 2017

Inventories

Inventories

4. Inventories

Inventories consist of the following, in thousands:

	September 30,		December 31,
	2017		2016
	(unaudited)
Raw materials	$	2,178	$	2,091
Work in process	4,690		8,874
Finished goods	8,079		5,836
	$	14,947	$	16,801

XML

Property and Equipment

9 Months Ended

Sep. 30, 2017

Property and Equipment

Property and Equipment

5.  Property and Equipment

Property and equipment consist of the following, in thousands:

	September 30,			December 31,
	2017			2016
	(unaudited)
Computer equipment	$	1,214		$	1,206
Software	1,966			1,807
Lab equipment and furniture	7,805			6,758
Leasehold improvements	2,729			2,642
Construction in progress	—			28
	13,714			12,441
Less accumulated depreciation and amortization	(9,026		)	(8,097		)
	$	4,688		$	4,344

Depreciation and amortization expense on property and equipment was approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2017, and approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, respectively.

XML

Intangible Assets

9 Months Ended

Sep. 30, 2017

Intangible Assets

Intangible Assets

6.  Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR.

The following sets forth the gross carrying amount and related accumulated amortization of the intangible asset, in thousands:

	Weighted-	September 30,			December 31,
	Average Life	2017			2016
	(unaudited)
Capitalized patent defense costs	5.9 - 10 years	$	43,978		$	37,633
Less accumulated amortization		(6,816		)	(1,283		)
		$	37,162		$	36,350

In March 2017, the Company entered into two settlements with various companies related to Trokendi XR patent litigation. The remaining unamortized capitalized patent defense cost for Trokendi XR is amortized through the settlement date of January 1, 2023.

Amortization expense related to intangible assets was approximately $4.1 million and $5.5 million for the three and nine months ended September 30, 2017, and approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, respectively.

There were no indicators of impairment identified.

XML

Accrued Expenses

9 Months Ended

Sep. 30, 2017

Accrued Expenses

Accrued Expenses

7.  Accrued Expenses

Accrued expenses are comprised of the following, in thousands:

	September 30,		December 31,
	2017		2016
	(unaudited)
Accrued compensation	$	13,870	$	9,145
Accrued professional fees	2,212		6,447
Accrued clinical trial and clinical supply costs	4,251		4,350
Accrued product costs	807		1,794
Accrued interest expense	—		61
Other accrued expenses	5,752		5,630
	$	26,892	$	27,427

XML

Convertible Senior Secured Notes

9 Months Ended

Sep. 30, 2017

Convertible Senior Secured Notes

Convertible Senior Secured Notes

8.   Convertible Senior Secured Notes

The table below summarizes activity related to the Notes from their issuance on May 3, 2013 through September 30, 2017, in thousands:

Gross proceeds	$	90,000
Initial value of interest make-whole derivative reported as debt discount	(9,270		)
Conversion option reported as debt discount and APIC	(22,336		)
Conversion of debt to equity - principal	(85,425		)
Conversion of debt to equity - accretion of debt discount and deferred financing costs	25,767
Accretion of debt discount and deferred financing costs	5,429
December 31, 2016 carrying value	4,165
Conversion of debt to equity - principal	(4,575		)
Conversion of debt to equity - accretion of debt discount and deferred financing costs	360
Accretion of debt discount and deferred financing costs	50
September 30, 2017 carrying value, unaudited	$	—

During the nine months ended September 30, 2017, approximately $4.6 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 0.9 million shares of common stock in conversion of the principal amount of the Notes. As a result of the conversions, the Company incurred a loss of approximately $0.3 million on extinguishment of debt during the nine months ended September 30, 2017, which is included as a separate component of other income (expense) on the Consolidated Statement of Operations. During the nine months ended September 30, 2016, consequent to approximately $2.0 million in note conversions, the Company incurred a loss of approximately $0.4 million on extinguishment of debt.

XML

Summary Stockholders' Equity

9 Months Ended

Sep. 30, 2017

Summary Stockholders' Equity

Summary Stockholders' Equity

9. Summary Stockholders’ Equity

The following summary table provides details related to the activity in certain captions within Stockholders’ Equity for the nine months ended September 30, 2017, in thousands.

	Common Stock		Additional Paid-in Capital		Accumulated Deficit
	(unaudited)
Balance, December 31, 2016	$	50	$	276,127	$	(84,288	)
Cumulative-effect adjustment	—		211		181
Balance at January 1, 2017	50		276,338		(84,107		)
Share-based compensation	—		6,447		—
Issuance of ESPP shares	—		908
Exercise of stock options	—		3,602		—
Equity issued on note conversion	1		4,546		—
Net income	—		—		43,626
Balance, September 30, 2017	$	51	$	291,841	$	(40,481	)

XML

Share-Based Payments

9 Months Ended

Sep. 30, 2017

Share-Based Payments

Share-Based Payments

10. Share-Based Payments

The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Equity Incentive Plan (the 2012 Plan), which is stockholder approved, and provides for the grant of stock options and certain other awards, including stock appreciation rights (SAR), restricted and unrestricted stock, stock units, performance awards, cash awards and other awards that are convertible into or otherwise based on the Company’s common stock, to the Company’s key employees, directors, and consultants and advisors. The 2012 Plan is administered by the Company’s Board of Directors and provides for the issuance of up to 8,000,000 shares of the Company’s Common Stock. Option awards are granted with an exercise price equal to the estimated fair value of the Company’s Common Stock at the grant date. Option awards granted to employees, consultants and advisors generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten-year contractual terms. Option awards granted to the directors generally vest over a one year term.

Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

	Three Months ended				Nine Months ended September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
Research and development	$	356	$	253	$	1,071	$	882
Selling, general and administrative	2,004		1,230		5,376		3,572
Total	$	2,360	$	1,483	$	6,447	$	4,454

The following table summarizes stock option and SAR activity:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)
Outstanding, December 31, 2016	3,644,088		$	10.25	7.59
Granted	1,074,955		$	25.88
Exercised	(383,588	)	$	9.39
Forfeited or expired	(66,797	)	$	17.07
Outstanding, September 30, 2017	4,268,658		$	14.15	7.59
As of December 31, 2016:
Vested and expected to vest	3,591,528		$	10.22	7.57
Exercisable	1,503,004		$	8.62	6.49
As of September 30, 2017:
Vested and expected to vest	4,268,658		$	14.15	7.59
Exercisable	1,961,784		$	9.30	6.40

XML

Earnings per Share

9 Months Ended

Sep. 30, 2017

Earnings per Share

Earnings per Share

11.  Earnings per Share

Basic income per common share is determined by dividing income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted income per share is computed by dividing the income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, SAR, and potential ESPP awards, and the if-converted method is used to determine the dilutive effect of the Company’s Notes.

The following common stock equivalents were excluded in the calculation of diluted income per share because their effect would be anti-dilutive as applied to the income from continuing operations applicable to common stockholders for the three and nine months ended September 30, 2017 and 2016:

	Three Months ended September 30,		Nine Months ended September 30,
	2017	2016	2017	2016
	(unaudited)		(unaudited)
Stock options, stock appreciation rights, and ESPP awards	15,170	12,097	105,699	67,030

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 2017 and 2016, in thousands, except share and per share amounts:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Numerator, in thousands:
Net income used for calculation of basic EPS	$	15,961		$	61,826		$	43,626		$	76,902
Interest expense on convertible debt	(14		)	202			134			577
Changes in fair value of derivative liabilities	—			(124		)	(76		)	(349		)
Loss on extinguishment of debt	91			—			295			382
Loss on extinguishment of outstanding debt, as if converted	(273		)	(705		)	(321		)	(1,183		)
Total adjustments	(196		)	(627		)	32			(573		)
Net income used for calculation of diluted EPS	$	15,765		$	61,199		$	43,658		$	76,329
Denominator:
Weighted average shares outstanding, basic	51,046,375			49,516,595			50,583,726			49,395,284
Effect of dilutive potential common shares:
Shares underlying Convertible Senior Secured Notes	56,484			1,240,814			382,230			1,274,491
Shares issuable to settle interest make-whole derivatives	—			27,296			7,013			71,537
Stock options and stock appreciation rights	2,525,530			1,189,730			2,254,464			874,022
Total potential dilutive common shares	2,582,014			2,457,840			2,643,707			2,220,050
Weighted average shares outstanding, diluted	53,628,389			51,974,435			53,227,433			51,615,334
Net income per share, basic	$	0.31		$	1.25		$	0.86		$	1.56
Net income per share, diluted	$	0.29		$	1.18		$	0.82		$	1.48

XML

Income Taxes

9 Months Ended

Sep. 30, 2017

Income Taxes

Income Taxes

12. Income Taxes

The following table provides a comparative summary of our income tax expense and effective tax rate for the three and nine months ended September 2017 and 2016, in thousands:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Income tax expense	$	6,949		$	(42,690	)	$	21,932		$	(42,085	)
Effective tax rate	30.3		%	-223		%	33.5		%	-120.9		%

The income tax expense for the three and nine months ended September 30, 2017 is attributable to U.S. federal and state income tax. The increase in the income tax expense and the effective tax rate for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 is primarily attributable to the release of the valuation allowance on the deferred tax assets, which resulted in an income tax benefit in the third quarter of 2016.

During the third quarter, we recorded an income tax benefit of approximately $2.9 million as a result of the Company recognizing excess tax benefits related to the employee exercise of stock options. This benefit causes the effective tax rate to be significantly less than our historical annual effective tax rate.

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies

Commitments and Contingencies

13. Commitments and Contingencies

The Company has concurrent leases for office and lab space that extend through April 2020. The Company may elect to extend the term of the leases for an additional five-year term. The leases provide for a tenant improvement allowance of approximately $2.1 million in the aggregate. During the three months ended September 30, 2017, none of the allowance was utilized. During the nine months ended September 30, 2017, $79,000 of the allowance was utilized. During the three and nine months ended September 30, 2016, none of the allowance was utilized. As of September 30, 2017, $0.4 million remains available for tenant improvements.

Rent expense for the leased facilities and leased vehicles for the three and nine months ended September 30, 2017 was $0.8 million and $1.9 million, respectively. Rent expense for the leased facilities and leased vehicles for the three and nine months ended September 30, 2016 was approximately $0.7 million and $2.0 million, respectively.

Future minimum lease payments under non-cancelable operating leases as of September 30, 2017 are as follows, in thousands, unaudited:

Year ending December 31:

2017 (remaining)	739
2018	1,487
2019	1,344
Thereafter	454
	$	4,024

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (Afecta), the Company has exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. The Company does not owe any future milestone payments for SPN-810. The Company is obligated to pay royalties to Afecta as a low single digit percentage of worldwide net product sales.

The Company has also entered into a purchase and sale agreement with Rune HealthCare Limited (Rune), where the Company obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments due to Rune under this agreement. If the Company receives approval to market and sell any products based on the Rune product concept for SPN-809, the Company is obligated to pay royalties to Rune as a low single digit percentage of worldwide net product sales.

XML

Collaboration Agreement

9 Months Ended

Sep. 30, 2017

Collaboration Agreement

Collaboration Agreement

14. Collaboration Agreement

Royalty Revenue

In the third quarter of 2014, the Company received a $30.0 million payment pursuant to a Royalty Interest Acquisition Agreement related to the purchase by HC Royalty of certain of the Company’s rights under the agreement with United Therapeutics Corporation related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. We will retain full ownership of the royalty rights if and when a certain threshold is reached per the terms of the Agreement. We have recorded a non-recourse liability related to this transaction and have begun to amortize this amount to recognize non-cash royalty revenue as royalties are received by HC Royalty from United Therapeutics. We also recognized non-cash interest expense related to this liability that accrues at an effective interest rate, which is determined based on projections of HC Royalty’s rate of return.

We recognized non-cash royalty revenue of $1.4 million for the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016, respectively. We recognized non-cash royalty revenue of $3.7 million for the nine months ended September 30, 2017 as compared to $3.5 million for the nine months ended September 30, 2016, respectively. We recognized non-cash interest expense of $0.2 million for the three months ended September 30, 2017 as compared to $1.0 million for the three months ended September 30, 2016, respectively. We recognized non-cash interest expense of $1.3 million for the nine months ended September 30, 2017 as compared to $3.6 million for the nine months ended September 30, 2016, respectively. 

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The Company’s consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd., collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information.

As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

In the opinion of management, the consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position, results of operations, and cash flows for the periods presented. These adjustments are of a normal recurring nature.  The Company currently operates in one business segment.

The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the Company’s future financial results.

Marketable Securities

Marketable Securities

Marketable securities consist of investments in U.S. Treasury bills and notes, certificates of deposit, various U.S. governmental agency debt securities, corporate and municipal bonds and other fixed income securities. The Company places all investments with government, industrial, or financial institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

The Company’s investments are classified as available-for-sale and are carried at estimated fair value. Any unrealized holding gains or losses are reported, net of any tax effects reported, as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method.

The Company established the Supernus Supplemental Executive Retirement Plan (SERP) for the sole purpose of receiving funds for executives from a previous SERP and providing a continuing deferral program under the Supernus SERP. As of September 30, 2017 and December 31, 2016, the fair value of the SERP was $313,000 and $275,000, respectively. The fair value of these assets is included within other non-current assets on the consolidated balance sheets. A corresponding non-current liability is also included in the consolidated balance sheets to reflect the Company’s obligation for the SERP. The Company has not made, and has no plans to make, contributions to the SERP. The securities are restricted in nature and can only be used for purposes of paying benefits under the SERP.

Accounts Receivable, net

Accounts Receivable, net

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts and discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience.

The Company recorded an allowance for expected sales discounts of approximately $8.1 million and $5.6 million as of September 30, 2017 and December 31, 2016, respectively.

Inventories

Inventories

Inventories, which are recorded at the lower of cost or market, include materials, labor, and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when it becomes probable that the related product candidates will receive regulatory approval and that the related costs will be recoverable through the commercial sale of the product.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following useful lives:

Computer equipment	3 years
Software	3 years
Lab equipment and furniture	5 - 10 years
Leasehold improvements	Shorter of lease term or useful life

Intangible Assets

Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Patent defense costs will be charged to expense in the event of an unsuccessful outcome of the ongoing litigation. Patents are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the patents. Amortization commences in the quarter after the costs are incurred. This amortization period is based initially upon the remaining patent life and is adjusted, if necessary, for any settlements or other changes to the expected useful life of the patent. The carrying value of the patents are assessed for impairment annually during the fourth quarter of each year, or more frequently if impairment indicators exist. There were no indicators of impairment identified as of September 30, 2017.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment and patent defense costs. The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. Evaluation of impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur. Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and could require the recognition of an impairment charge equal to the excess of the carrying value of the long-lived assets over its estimated fair value.

There were no indicators of impairment identified for the Company’s long-lived assets as of September 30, 2017.

Deferred Financing Costs

Deferred Financing Costs

Deferred financing costs consist of financing costs incurred by the Company in connection with the issuance of the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes). The Company amortizes deferred financing costs over the term of the related debt using the effective interest method. When extinguishing debt, the related deferred financing costs are written off.

Preclinical Study and Clinical Trial Accruals

Preclinical Study and Clinical Trial Accruals

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical investigators, and clinical research organizations (CROs) that conduct these activities on our behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services. As appropriate, we accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the advance payment will be charged to expense in the period that such determination is made.

Revenue from Product Sales

Revenue from Product Sales

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, allowances, discounts, patient co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).

Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors takes title and ownership to the product upon physical receipt of the product and then distributes our products to pharmacies.

Sales Deductions

Sales Deductions

Allowances for estimated sales deductions are provided for the following:

· Rebates:  Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, as well as negotiated discounts with commercial healthcare providers. Rebates are amounts owed after the final dispensing of product to a benefit plan participant has occurred and are based upon contractual agreements or legal requirements with the public sector (e.g., Medicaid) and with private sector benefit providers (e.g., commercial managed care providers). The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates based on a plan provider’s utilization.

Rebates are generally invoiced and paid quarterly 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 known or estimated prior quarters’ unpaid rebates. If actual rebates vary from estimates, we may need to adjust balances of such rebates to reflect the actual expenditures of the Company with respect to these programs, which would affect revenue in the period of adjustment.

· Co-pay assistance:  Patients who pay in cash or have commercial healthcare insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. The intent of this program is to reduce the patient’s out of pocket costs when filling a prescription. Liabilities for co-pay assistance are based on actual program participation as well as estimates of program activity using data provided by third-party administrators.

· Distributor/wholesaler deductions and discounts:  U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts as consideration for distributing our products. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a percentage of the price at which the Company sells product to distributors and wholesalers. Wholesale customers are offered a prompt pay discount for payment within a specified period.

· Returns:  Sales of our products are not subject to a general right of return; however, the Company will accept product that is damaged or defective when shipped directly from our warehouse. The Company will accept expired product six months prior to and up to 12 months subsequent to its expiry date. Product that has been used to fill patient prescriptions is no longer subject to any right of return.

· Chargebacks:  Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase our product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on sales to contracted customers.

Revenue Recognition of License Revenue

Revenue Recognition of License Revenue

License and Collaboration Agreements

We have entered into collaboration agreements to commercialize both Oxtellar XR and Trokendi XR outside of the U.S. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. We believe that when milestones meet all of the necessary criteria to be considered substantive, these should be recognized as revenue when achieved. As regards to up-front license fees, we have estimated the service period of the contract and are recognizing revenue on a straight-line basis over the respective service period.

Milestone Payments

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. Management may recognize milestone revenue in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. Substantive milestone payments are recognized upon achievement only if all of the following conditions are met:

· the milestone payments are non-refundable;

· achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;

· substantive effort on the partner’s part is involved in achieving the milestone; and

· the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone.

Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone. Therefore, the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period.

The Company recorded $0.3 million and $1.5 million of milestone revenue during the three and nine month periods ended September 30, 2017, respectively. No milestone revenue was recorded during the three and nine months ended September 30, 2016.

Royalty Revenue

Royalty Revenue

We recognize non-cash royalty revenue for royalty amounts earned pursuant to a royalty agreement with United Therapeutics. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 14). Accordingly, the Company records non-cash royalty revenue when payments are made from United Therapeutics to HC Royalty in connection with these agreements. Royalty revenue also includes royalty amounts received from collaboration partners, including from Shire Pharmaceuticals based on net product sales of Mydayis.

Cost of Product Sales

Cost of Product Sales

The cost of product sales consists primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other manufacturing overhead costs.

Research and Development Costs

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs consist primarily of: employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with CROs; fees paid to clinical investigators who are participating in our clinical trials; fees paid to consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for, and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

Advertising Expense

Advertising Expense

The costs of the Company’s advertising efforts are expensed as incurred. The Company incurred approximately $9.6 million and $26.1 million in advertising costs for the three and nine months ended September 30, 2017 and approximately $4.9 million and $16.2 million in advertising costs for the three and nine months ended September 30, 2016, respectively. These expenses are recorded in the selling, general and administrative expense line of the Statement of Operations.

Share-Based Compensation

Share-Based Compensation

Employee share-based compensation is measured based on the estimated fair value on the grant date. The grant date fair value is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The Company recognizes expense using the straight-line method.

The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is re-measured at each reporting period. As a result, stock compensation expense for non-employee awards with vesting is affected by subsequent changes in the fair value of the Company’s common stock.

Income Taxes

Income Taxes

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

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and relevant facts. The Company’s policy is to recognize any interest and penalties related to income taxes as income tax expense.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted in 2017

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted ASU 2016-09 on January 1, 2017 using the modified retrospective approach. As a result, the Company recorded a cumulative effect adjustment of $211,000 to increase the 2017 beginning of period additional paid-in capital balance, with an offset to accumulated deficit for historical forfeiture assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase its deferred tax asset, with an offset to accumulated deficit, primarily to recognize excess tax benefits (i.e. windfalls) from stock option exercises in prior years combined with the impact of the $211,000 adjustment to historical forfeiture expense.

New Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. This standard will be effective for the first annual period beginning after December 15, 2018, including interim periods within those periods.  Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

In July 2017, the FASB issued ASU 2017-11, “Earnings per share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” The amendments in Part I change the classification analysis of certain equity-linked financial instruments (embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 with a scope exception and do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The amendments in Part II of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does not expect it to have a material impact.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.”The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, as the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard eliminates diversity in the practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We expect the ASU to have a material impact on our assets and liabilities due to the addition of previously classified operating leases, but we do not expect it to have a material impact on our cash flows or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 will eliminate transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, with early adoption being permitted for periods ending after December 15, 2016. The guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures). The Company has not selected an adoption methodology.

Since ASU No. 2014-09 supersedes substantially all existing revenue recognition guidance affecting us under the current standard, it could impact revenue and cost recognition across our business processes. The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently finalizing phase one, the assessment phase, of the project.  In the assessment phase, we held revenue recognition workshops with our commercial and finance groups and reviewed a sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard. Phase two will include (a) establishing and documenting key accounting positions, (b) assessing the new disclosure requirements, business processes, and control impacts, and (c) beginning to assess the initial quantitative impacts resulting from the initial standard.  Phase three will include (a) finalizing any changes to accounting policies, (b) preparing new disclosures and implementing new business processes and controls as needed, and (c) quantifying the effect of adoption on opening retained earnings.

The Company continues to evaluate the impact of the new standard on the consolidated financial statements and related disclosures and additional differences may be identified as contracts with customers that will impact future periods are executed. The majority of the Company’s revenue consists of sales of products that represent a single performance obligation where control transfers at the point in time title and risk of loss pass to the customer. The adoption of the new ASU will most likely impact our revenue recognition practices on our product sales with regards to the accounting for variable considerations such as incentives and sales deductions and the related financial statement presentation.

In addition, the Company also has licensing and collaboration arrangements, where it receives milestone and royalty payments. The provisions of the new standard may impact the timing of revenue associated with these arrangements; i.e., may result in acceleration of revenue recognition based on the transfer of control. We expect that disclosures in the notes to the consolidated financial statements related to revenue recognition will be expanded in line with the requirements of the new standard to further describe the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of assessing its accounting and forecasting considerations to ensure its ability to record, report, forecast, and analyze results under the new standard.

XML

Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies

Schedule of useful lives used to compute depreciation and amortization

Computer equipment	3 years
Software	3 years
Lab equipment and furniture	5 - 10 years
Leasehold improvements	Shorter of lease term or useful life

XML

Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2017

Fair Value of Financial Instruments

Schedule of fair value of the financial assets and liabilities

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

	Fair Value Measurements at
	September 30, 2017
	(unaudited)
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	September 30,		Markets		Inputs		Inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	81,924	$	81,924	$	—	$	—
Marketable securities	32,626		1,871		30,755		—
Long term marketable securities	123,123		698		122,425		—
Marketable securities - restricted (SERP)	313		—		313		—
Total assets at fair value	$	237,986	$	84,493	$	153,493	$	—
Liabilities:
Derivative liabilities	$	—	$	—	$	—	$	—

	Fair Value Measurements at
	December 31, 2016
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	December 31,		Markets		Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	66,398	$	66,398	$	—	$	—
Marketable securities	23,723		656		23,067		—
Long term marketable securities	75,410		—		75,410		—
Marketable securities - restricted (SERP)	275		—		275		—
Total assets at fair value	$	165,806	$	67,054	$	98,752	$	—
Liabilities:
Derivative liabilities	$	114	$	—	$	—	$	114

Schedule of unrestricted marketable securities

Unrestricted marketable securities held by the Company were as follows, in thousands:

At September 30, 2017 (unaudited):

Available for Sale	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
Corporate debt securities	$	155,713	286	(250	)	$	155,749

At December 31, 2016:

Available for Sale	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
Corporate debt securities	$	99,487	86	(440	)	$	99,133

Schedule of contractual maturities of the unrestricted available for sale marketable securities held

The contractual maturities of the unrestricted available for sale marketable securities held by the Company were as follows, in thousands:

	September 30,
	2017
	(unaudited)
Less Than 1 Year	$	32,626
1 year to 2 years	38,121
3 years to 4 years	85,002
Greater Than 4 Years	—
Total	$	155,749

XML

Inventories (Tables)

9 Months Ended

Sep. 30, 2017

Inventories

Schedule of inventories

Inventories consist of the following, in thousands:

	September 30,		December 31,
	2017		2016
	(unaudited)
Raw materials	$	2,178	$	2,091
Work in process	4,690		8,874
Finished goods	8,079		5,836
	$	14,947	$	16,801

XML

Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2017

Property and Equipment

Schedule of property and equipment

Property and equipment consist of the following, in thousands:

	September 30,			December 31,
	2017			2016
	(unaudited)
Computer equipment	$	1,214		$	1,206
Software	1,966			1,807
Lab equipment and furniture	7,805			6,758
Leasehold improvements	2,729			2,642
Construction in progress	—			28
	13,714			12,441
Less accumulated depreciation and amortization	(9,026		)	(8,097		)
	$	4,688		$	4,344

XML

Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2017

Intangible Assets

Schedule of gross carrying amount and related accumulated amortization of the intangible asset

The following sets forth the gross carrying amount and related accumulated amortization of the intangible asset, in thousands:

	Weighted-	September 30,			December 31,
	Average Life	2017			2016
	(unaudited)
Capitalized patent defense costs	5.9 - 10 years	$	43,978		$	37,633
Less accumulated amortization		(6,816		)	(1,283		)
		$	37,162		$	36,350

XML

Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2017

Accrued Expenses

Schedule of accrued expenses

Accrued expenses are comprised of the following, in thousands:

	September 30,		December 31,
	2017		2016
	(unaudited)
Accrued compensation	$	13,870	$	9,145
Accrued professional fees	2,212		6,447
Accrued clinical trial and clinical supply costs	4,251		4,350
Accrued product costs	807		1,794
Accrued interest expense	—		61
Other accrued expenses	5,752		5,630
	$	26,892	$	27,427

XML

Convertible Senior Secured Notes (Tables)

9 Months Ended

Sep. 30, 2017

Convertible Senior Secured Notes

Summary of issuance of Notes reflected in balance sheet

The table below summarizes activity related to the Notes from their issuance on May 3, 2013 through September 30, 2017, in thousands:

Gross proceeds	$	90,000
Initial value of interest make-whole derivative reported as debt discount	(9,270		)
Conversion option reported as debt discount and APIC	(22,336		)
Conversion of debt to equity - principal	(85,425		)
Conversion of debt to equity - accretion of debt discount and deferred financing costs	25,767
Accretion of debt discount and deferred financing costs	5,429
December 31, 2016 carrying value	4,165
Conversion of debt to equity - principal	(4,575		)
Conversion of debt to equity - accretion of debt discount and deferred financing costs	360
Accretion of debt discount and deferred financing costs	50
September 30, 2017 carrying value, unaudited	$	—

XML

Summary Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2017

Summary Stockholders' Equity

Schedule of activity in certain captions within Stockholders' Equity

The following summary table provides details related to the activity in certain captions within Stockholders’ Equity for the nine months ended September 30, 2017, in thousands.

	Common Stock		Additional Paid-in Capital		Accumulated Deficit
	(unaudited)
Balance, December 31, 2016	$	50	$	276,127	$	(84,288	)
Cumulative-effect adjustment	—		211		181
Balance at January 1, 2017	50		276,338		(84,107		)
Share-based compensation	—		6,447		—
Issuance of ESPP shares	—		908
Exercise of stock options	—		3,602		—
Equity issued on note conversion	1		4,546		—
Net income	—		—		43,626
Balance, September 30, 2017	$	51	$	291,841	$	(40,481	)

XML

Share-Based Payments (Tables)

9 Months Ended

Sep. 30, 2017

Share-Based Payments

Schedule of share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, Employee Stock Purchase Plan (ESPP) awards and non-vested stock

Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

	Three Months ended				Nine Months ended September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
Research and development	$	356	$	253	$	1,071	$	882
Selling, general and administrative	2,004		1,230		5,376		3,572
Total	$	2,360	$	1,483	$	6,447	$	4,454

Summary of stock option and SAR activity

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)
Outstanding, December 31, 2016	3,644,088		$	10.25	7.59
Granted	1,074,955		$	25.88
Exercised	(383,588	)	$	9.39
Forfeited or expired	(66,797	)	$	17.07
Outstanding, September 30, 2017	4,268,658		$	14.15	7.59
As of December 31, 2016:
Vested and expected to vest	3,591,528		$	10.22	7.57
Exercisable	1,503,004		$	8.62	6.49
As of September 30, 2017:
Vested and expected to vest	4,268,658		$	14.15	7.59
Exercisable	1,961,784		$	9.30	6.40

XML

Earnings per Share (Tables)

9 Months Ended

Sep. 30, 2017

Earnings per Share

Schedule of common stock equivalents excluded in the calculation of diluted income per share

	Three Months ended September 30,		Nine Months ended September 30,
	2017	2016	2017	2016
	(unaudited)		(unaudited)
Stock options, stock appreciation rights, and ESPP awards	15,170	12,097	105,699	67,030

Schedule of computation of basic and diluted net income per share

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 2017 and 2016, in thousands, except share and per share amounts:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Numerator, in thousands:
Net income used for calculation of basic EPS	$	15,961		$	61,826		$	43,626		$	76,902
Interest expense on convertible debt	(14		)	202			134			577
Changes in fair value of derivative liabilities	—			(124		)	(76		)	(349		)
Loss on extinguishment of debt	91			—			295			382
Loss on extinguishment of outstanding debt, as if converted	(273		)	(705		)	(321		)	(1,183		)
Total adjustments	(196		)	(627		)	32			(573		)
Net income used for calculation of diluted EPS	$	15,765		$	61,199		$	43,658		$	76,329
Denominator:
Weighted average shares outstanding, basic	51,046,375			49,516,595			50,583,726			49,395,284
Effect of dilutive potential common shares:
Shares underlying Convertible Senior Secured Notes	56,484			1,240,814			382,230			1,274,491
Shares issuable to settle interest make-whole derivatives	—			27,296			7,013			71,537
Stock options and stock appreciation rights	2,525,530			1,189,730			2,254,464			874,022
Total potential dilutive common shares	2,582,014			2,457,840			2,643,707			2,220,050
Weighted average shares outstanding, diluted	53,628,389			51,974,435			53,227,433			51,615,334
Net income per share, basic	$	0.31		$	1.25		$	0.86		$	1.56
Net income per share, diluted	$	0.29		$	1.18		$	0.82		$	1.48

XML

Income Taxes (Tables)

9 Months Ended

Sep. 30, 2017

Income Taxes

Summary of our income tax expense and effective tax rate

The following table provides a comparative summary of our income tax expense and effective tax rate for the three and nine months ended September 2017 and 2016, in thousands:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016
	(unaudited)						(unaudited)
Income tax expense	$	6,949		$	(42,690	)	$	21,932		$	(42,085	)
Effective tax rate	30.3		%	-223		%	33.5		%	-120.9		%

XML

Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies

Schedule of future minimum lease payments under non-cancelable operating leases

Future minimum lease payments under non-cancelable operating leases as of September 30, 2017 are as follows, in thousands, unaudited:

Year ending December 31:

2017 (remaining)	739
2018	1,487
2019	1,344
Thereafter	454
	$	4,024

XML

Organization and Business (Details)	9 Months Ended
	Sep. 30, 2017 product
Organization and Business
Number of proprietary products in clinical development	2

XML

Summary of Significant Accounting Policies - Segments (Details)	9 Months Ended
	Sep. 30, 2017 segment
Basis of Presentation
Number of operating segments	1

XML

Summary of Significant Accounting Policies - SERP (Details) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
SERP | Other Non-current Assets
Marketable Securities - Restricted
Marketable securities	$ 313,000	$ 275,000

XML

Summary of Significant Accounting Policies - Accounts Receivable, net (Details) - USD ($) $ in Millions	Sep. 30, 2017	Dec. 31, 2016
Accounts Receivable, net
Allowance for expected sales discounts	$ 8.1	$ 5.6
7.50% Convertible Senior Secured Notes due 2019
Deferred Financing Costs
Interest rate (as a percent)	7.50%

XML

Summary of Significant Accounting Policies - Property and Equipment (Details)	9 Months Ended
	Sep. 30, 2017
Computer equipment
Property and equipment
Useful lives	3 years
Software
Property and equipment
Useful lives	3 years
Lab equipment and furniture | Minimum
Property and equipment
Useful lives	5 years
Lab equipment and furniture | Maximum
Property and equipment
Useful lives	10 years

XML

Summary of Significant Accounting Policies - Revenue Recognition (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revenue Recognition
Sales return period prior to expiry date			6 months
Sales return period subsequent to expiry date			12 months
Milestone revenues recorded	$ 0.3	$ 0.0	$ 1.5	$ 0.0
Selling, general and administrative
Advertising Expense
Advertising costs	$ 9.6	$ 4.9	$ 26.1	$ 16.2

XML

Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements (Details) - USD ($)	Sep. 30, 2017	Jan. 01, 2017	Dec. 31, 2016
Recently Issued Accounting Pronouncements
Additional Paid in Capital	$ 291,841,000		$ 276,127,000
Retained Earnings (Accumulated Deficit)	(40,481,000)		(84,288,000)
Deferred Tax Assets, Net, Noncurrent	$ 28,807,000		$ 41,729,000
ASU 2016-09 | Cumulative Effect Adjustment
Recently Issued Accounting Pronouncements
Additional Paid in Capital		$ 211,000
Retained Earnings (Accumulated Deficit)		(211,000)
ASU 2016-09 | Deferred Tax Asset Adjustment
Recently Issued Accounting Pronouncements
Retained Earnings (Accumulated Deficit)		392,000
Deferred Tax Assets, Net, Noncurrent		$ 392,000

XML

Fair Value of Financial Instruments - Carrying Value (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Assets:
Marketable securities	$ 32,626	$ 23,723
Long term marketable securities	123,123	75,410
Liabilities:
Derivative liabilities		114
Total Carrying Value | Recurring
Assets:
Cash and cash equivalents	81,924	66,398
Marketable securities	32,626	23,723
Long term marketable securities	123,123	75,410
Marketable securities - restricted (SERP)	313	275
Total assets at fair value	237,986	165,806
Liabilities:
Derivative liabilities		114
Quoted Prices in Active Markets (Level 1) | Recurring
Assets:
Cash and cash equivalents	81,924	66,398
Marketable securities	1,871	656
Long term marketable securities	698
Total assets at fair value	84,493	67,054
Significant Other Observable Inputs (Level 2) | Recurring
Assets:
Marketable securities	30,755	23,067
Long term marketable securities	122,425	75,410
Marketable securities - restricted (SERP)	313	275
Total assets at fair value	$ 153,493	98,752
Significant Unobservable Inputs (Level 3) | Recurring
Liabilities:
Derivative liabilities		$ 114

XML

Fair Value of Financial Instruments - Unrestricted Marketable Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value of Financial Instruments
Corporate debt securities, Amortized Cost	$ 155,713	$ 99,487
Corporate debt securities, Gross Unrealized Gains	286	86
Corporate debt securities, Gross Unrealized Losses	(250)	(440)
Corporate debt securities, Fair Value	155,749	99,133
Contractual maturities of the unrestricted available for sale marketable securities held
Less Than 1 Year	32,626
1 year to 2 years	38,121
3 years to 4 years	85,002
Corporate debt securities, Fair Value	$ 155,749	$ 99,133

XML

Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Inventories
Raw materials	$ 2,178	$ 2,091
Work in process	4,690	8,874
Finished goods	8,079	5,836
Total inventories	$ 14,947	$ 16,801

XML

Property and Equipment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Property and equipment
Property and equipment, gross	$ 13,714		$ 13,714		$ 12,441
Less accumulated depreciation and amortization	(9,026)		(9,026)		(8,097)
Property and equipment, net	4,688		4,688		4,344
Depreciation and amortization expense	300	$ 300	900	$ 900
Computer equipment
Property and equipment
Property and equipment, gross	1,214		1,214		1,206
Software
Property and equipment
Property and equipment, gross	1,966		1,966		1,807
Lab equipment and furniture
Property and equipment
Property and equipment, gross	7,805		7,805		6,758
Leasehold improvements
Property and equipment
Property and equipment, gross	$ 2,729		$ 2,729		2,642
Construction in progress
Property and equipment
Property and equipment, gross					$ 28

XML

Intangible Assets (Details) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)	Mar. 31, 2017 item
Intangible Assets
Less accumulated Amortization	$ (6,816)		$ (6,816)		$ (1,283)
Net book value of intangible assets	37,162		37,162		36,350
Additional disclosures
Amortization expense	4,100	$ 300	5,500	$ 900
Trokendi XR patent litigation
Additional disclosures
Number of settlements | item						2
Capitalized patent defense costs
Intangible Assets
Gross Carrying Amount	$ 43,978		$ 43,978		$ 37,633
Capitalized patent defense costs | Minimum
Intangible Assets
Weighted-Average Life			5 years 10 months 24 days		5 years 10 months 24 days
Capitalized patent defense costs | Maximum
Intangible Assets
Weighted-Average Life			10 years		10 years

XML

Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Accrued Expenses
Accrued compensation	$ 13,870	$ 9,145
Accrued professional fees	2,212	6,447
Accrued clinical trial and clinical supply costs	4,251	4,350
Accrued product costs	807	1,794
Accrued interest expense		61
Other accrued expenses	5,752	5,630
Total	$ 26,892	$ 27,427

XML

Convertible Senior Secured Notes (Details) - USD ($) $ in Thousands, shares in Millions	3 Months Ended	9 Months Ended		44 Months Ended
	Sep. 30, 2017	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Details of Notes reflected in balance sheet
Accretion of debt discount and deferred financing costs		$ 50	$ 226
Remaining outstanding balance				$ 4,165
Loss on extinguishment of debt	$ 91	295	382
7.50% Convertible Senior Secured Notes due 2019
Details of Notes reflected in balance sheet
Gross proceeds				90,000
Initial value of interest make-whole derivative reported as debt discount				(9,270)
Conversion option reported as debt discount and APIC				(22,336)
Conversion of debt to equity - principal		(4,575)	(2,000)	(85,425)
Conversion of debt to equity - accretion of debt discount and deferred financing costs		360		25,767
Accretion of debt discount and deferred financing costs		$ 50		5,429
Remaining outstanding balance				$ 4,165
Shares of common stock issued in conversion of Notes		0.9
Loss on extinguishment of debt		$ 300	$ 400

XML

Summary Stockholders' Equity (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
	Jan. 01, 2017	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Beginning balance	$ 191,755			$ 191,755
Net income		$ 15,961	$ 61,826	43,626	$ 76,902
Ending balance		251,663		251,663
Common Stock
Beginning balance	50			50
Equity issued on note conversion				1
Ending balance	50	51		51
Additional Paid-in Capital
Beginning balance	276,127			276,127
Cumulative-effect adjustment	211
Share-based compensation				6,447
Issuance of ESPP shares				908
Exercise of stock options				3,602
Equity issued on note conversion				4,546
Ending balance	276,338	291,841		291,841
Accumulated Deficit
Beginning balance	(84,288)			(84,288)
Cumulative-effect adjustment	181
Net income				43,626
Ending balance	$ (84,107)	$ (40,481)		$ (40,481)

XML

Share-Based Payments - 2012 Plan (Details) - 2012 Plan	9 Months Ended
	Sep. 30, 2017 installment shares
Share-based payments
Maximum number of shares of common stock provided for issuance | shares	8,000,000
Stock Option
Share-based payments
Number of annual installments in which the awards would generally vest starting on the first anniversary of the date of grant | installment	4
Contractual term	10 years
Stock Option | Directors
Share-based payments
Vesting period	1 year

XML

Share-Based Payments - Share-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Share-based Payments
Share-based compensation recognized	$ 2,360	$ 1,483	$ 6,447	$ 4,454
Research and development
Share-based Payments
Share-based compensation recognized	356	253	1,071	882
Selling, general and administrative
Share-based Payments
Share-based compensation recognized	$ 2,004	$ 1,230	$ 5,376	$ 3,572

XML

Share-Based Payments - Activity (Details) - Stock option and Stock Appreciation Rights - $ / shares	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Number of Options and SAR
Outstanding at the beginning of the period (in shares)	3,644,088
Granted (in shares)	1,074,955
Exercised (in shares)	(383,588)
Forfeited or expired (in shares)	(66,797)
Outstanding at the end of the period (in shares)	4,268,658	3,644,088
Vested and expected to vest (in shares)	4,268,658	3,591,528
Exercisable (in shares)	1,961,784	1,503,004
Weighted-Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 10.25
Granted (in dollars per share)	25.88
Exercised (in dollars per share)	9.39
Forfeited or expired (in dollars per share)	17.07
Outstanding at the end of the period (in dollars per share)	14.15	$ 10.25
Vested and expected to vest (in dollars per share)	14.15	10.22
Exercisable (in dollars per share)	$ 9.30	$ 8.62
Weighted-Average Remaining Contractual Term (in years)
Outstanding at the end of the period	7 years 7 months 2 days	7 years 7 months 2 days
Vested and expected to vest	7 years 7 months 2 days	7 years 6 months 26 days
Exercisable	6 years 4 months 24 days	6 years 5 months 27 days

XML

Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Numerator, in thousands:
Net income used for calculation of basic EPS	$ 15,961	$ 61,826	$ 43,626	$ 76,902
Interest expense on convertible debt	(14)	202	134	577
Changes in fair value of derivative liabilities		(124)	(76)	(349)
Loss on extinguishment of debt	91		295	382
Loss on extinguishment of outstanding debt, as if converted	(273)	(705)	(321)	(1,183)
Total adjustments	(196)	(627)	32	(573)
Net income used for calculation of diluted EPS	$ 15,765	$ 61,199	$ 43,658	$ 76,329
Denominator:
Weighted average shares outstanding, basic	51,046,375	49,516,595	50,583,726	49,395,284
Effect of dilutive potential common shares:
Shares underlying Convertible Senior Secured Notes	56,484	1,240,814	382,230	1,274,491
Shares issuable to settle interest make-whole derivatives		27,296	7,013	71,537
Stock options and stock appreciation rights	2,525,530	1,189,730	2,254,464	874,022
Total potential dilutive common shares	2,582,014	2,457,840	2,643,707	2,220,050
Weighted average shares outstanding, diluted	53,628,389	51,974,435	53,227,433	51,615,334
Net income per share, basic	$ 0.31	$ 1.25	$ 0.86	$ 1.56
Net income per share, diluted	$ 0.29	$ 1.18	$ 0.82	$ 1.48
Stock options, stock appreciation rights, and ESPP awards
Income per share
Common stock equivalents excluded in the calculation of diluted income per share	15,170	12,097	105,699	67,030

XML

Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income Taxes
Income tax expense	$ 6,949	$ (42,690)	$ 21,932	$ (42,085)
Effective tax rate	30.30%	(223.00%)	33.50%	(120.90%)
Income Tax Expense (Benefit)	$ 6,949	$ (42,690)	$ 21,932	$ (42,085)
Excess tax benefits related to employee exercise of stock options			$ 2,900

XML

Commitments and Contingencies (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Additional period for which the entity may elect to extend the term of the lease			5 years
Additional tenant improvement allowance			$ 2,100,000
Tenant improvement allowance utilized	$ 0	$ 0	79,000	$ 0
Amount available for tenant improvements			400,000
Rent expense	800,000	$ 700,000	1,900,000	$ 2,000,000
Future minimum lease payments under non-cancelable operating leases
2017 (remaining)	739,000		739,000
2018	1,487,000		1,487,000
2019	1,344,000		1,344,000
Thereafter	454,000		454,000
Total	4,024,000		4,024,000
Rune HealthCare Limited
Future minimum lease payments under non-cancelable operating leases
Milestone payments due	$ 0		$ 0

XML

Collaboration Agreement (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2014	Sep. 30, 2017	Sep. 30, 2016
Collaboration agreement
Revenue From Royalty Agreement	$ 1,400	$ 1,100		$ 3,708	$ 3,464
Noncash interest expense	$ 155	$ 1,004		$ 1,274	$ 3,564
Collaborative Arrangement | United Therapeutics
Collaboration agreement
Revenue From Royalty Agreement			$ 30,000