PTC Therapeutics
PTC THERAPEUTICS, INC. (Form: 10-Q, Received: 08/09/2017 08:36:04)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
(Mark One)
 
þ      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
OR
 
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to            
 
Commission file number: 001-35969
 
PTC Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
04-3416587
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
100 Corporate Court
South Plainfield, NJ
 
07080
(Address of principal executive offices)
 
(Zip Code)
 
(908) 222-7000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ   No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
 
Accelerated filer  þ
 
 
 
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
 
Smaller reporting company ☐
 
 
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No  þ
 
As of August 4, 2017 , there were 41,389,046 shares of Common Stock, $0.001 par value per share, outstanding.
 


Table of Contents

TABLE OF CONTENTS
PTC Therapeutics, Inc.
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
 
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
our expectations with respect to our acquisition of all rights to EMFLAZA™ (deflazacort) from Marathon Pharmaceuticals, LLC (now known as Complete Pharma Holdings, LLC), or Marathon, including with respect to our ability to realize the anticipated benefits of the acquisition (including with respect to future revenue generation and contingent payments to Marathon based on annual net sales);
our expectations with respect to our commercial launch of EMFLAZA for the treatment of Duchenne muscular dystrophy, or DMD, in the United States, which is still in its initial phases, including with respect to our ability to optimize distribution channels and commercial matters in a timely manner;
our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms and processes on a timely basis, or at all, with third-party payors for EMFLAZA for the treatment of DMD in the United States and for Translarna™ (ataluren) for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, in the European Economic Area, or EEA, and other countries in which we have or may obtain regulatory approval, or there exist significant reimbursed early access programs;
the anticipated period of market exclusivity for EMFLAZA for the treatment of DMD in the United States under the Orphan Drug Act of 1983, or Orphan Drug Act, and the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act;
our ability to complete the United States Food and Drug Administration, or FDA, post-marketing requirements to the marketing authorization of EMFLAZA;
our ability to satisfy our obligations under the terms of the credit and security agreement with MidCap Financial Trust, or MidCap Financial, as administrative agent and MidCap Financial and certain other financial institutions as lenders thereunder;
our ability to resolve the matters set forth in the Refuse to File letter we received from the FDA in connection with our New Drug Application, or NDA, for Translarna for the treatment of nmDMD, including whether filing our NDA over protest with the FDA will result in a timely or successful review of our NDA, and whether we will be required to perform additional clinical and non-clinical trials or analyses at significant cost;
our ability to enroll, fund, and complete Study 041, a multicenter, randomized, double-blind, 18-month, placebo-controlled clinical trial of Translarna for the treatment of nmDMD followed by an 18-month open label extension, according to the protocol agreed with the European Medicines Agency, or EMA, and by the trial’s deadline;
our ability to maintain our marketing authorization of Translarna for the treatment of nmDMD in the EEA (which is subject to the specific obligation to conduct and submit the results of Study 041 to the EMA and is also subject to annual review and renewal by the European Commission following reassessment of the benefit-risk balance of the authorization by the EMA);
the timing and scope of our continued commercialization of Translarna as a treatment for nmDMD in the EEA or other territories outside of the United States;
our ability to obtain additional and maintain existing reimbursed named patient and cohort early access programs for Translarna for the treatment of nmDMD on adequate terms, or at all;
our estimates regarding the potential market opportunity for Translarna and EMFLAZA, including the size of eligible patient populations and our ability to identify such patients;

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our estimates regarding expenses, future revenues, third-party discounts and rebates, capital requirements and needs for additional financing, including our ability to maintain the level of our expenses consistent with our internal budgets and forecasts and to secure additional funds on favorable terms or at all;
the timing and conduct of our ongoing, planned and potential future clinical trials and studies of Translarna for the treatment of nmDMD, aniridia, and Dravet syndrome/CDKL5, each caused by nonsense mutations, as well as our studies in spinal muscular atrophy and our cancer stem cell program, including statements regarding the timing of initiation, enrollment and completion of the trials and the period during which the results of the trials will become available;
the rate and degree of market acceptance and clinical utility of Translarna and EMFLAZA;
the ability and willingness of patients and healthcare professionals to access Translarna through alternative means if pricing and reimbursement negotiations in the applicable territory do not have a positive outcome;
the timing of, and our ability to obtain additional marketing authorizations for, Translarna and our other product candidates;
the ability of Translarna, EMFLAZA and our other product candidates to meet existing or future regulatory standards;
our ability to maintain the current label under the marketing authorization in the EEA or expand the approved product label of Translarna for the treatment of nmDMD, whether pursuant to our Phase 2 study of Translarna for nmDMD in pediatric patients, or otherwise;
the timing of our planned closures of extension trials for Translarna for the treatment of nmCF;
the potential receipt of revenues from future sales of Translarna, EMFLAZA and other product candidates, including our ability to earn a profit from sales or licenses of Translarna for the treatment of nmDMD in the countries in which we have or may obtain regulatory approval and EMFLAZA for the treatment of DMD in the United States;
the potential impact that enrollment, funding and completion of Study 041 may have on our revenue growth;
our sales, marketing and distribution capabilities and strategy, including the ability of our third-party manufacturers to manufacture and deliver Translarna and EMFLAZA in clinically and commercially sufficient quantities and the ability of distributors to process orders in a timely manner and satisfy their other obligations to us;
our ability to establish and maintain arrangements for the manufacture of Translarna, EMFLAZA and our other product candidates that are sufficient to meet clinical trial and commercial launch requirements;
our other regulatory submissions, including with respect to timing and outcome of regulatory review;
our plans to pursue development of Translarna for additional indications;
our ability to advance our earlier stage programs, including our cancer stem cell program;
our plans to pursue research and development of other product candidates;
whether we may pursue business development opportunities, including potential collaborations, alliances, and acquisition or licensing of assets;
the potential advantages of Translarna and EMFLAZA;
our intellectual property position;
the impact of government laws and regulations;
our competitive position; and
our expectations with respect to the development and regulatory status of our product candidates and program directed against spinal muscular atrophy in collaboration with F. Hoffmann La Roche Ltd and Hoffmann La Roche Inc., which we refer to collectively as Roche, and the Spinal Muscular Atrophy Foundation, or the SMA Foundation, and our estimates regarding future revenues from achievement of milestones in that program.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans,

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intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
 
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016 completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
 
In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires, references to “PTC,” “PTC Therapeutics,” “the Company,” “we,” “us,” “our,” and similar references refer to PTC Therapeutics, Inc. and, where appropriate, its subsidiaries. The trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.
 
All website addresses given in this Quarterly Report on Form 10-Q are for information only and are not intended to be an active link or to incorporate any website information into this document.


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PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements.

PTC Therapeutics, Inc.
Consolidated Balance Sheets (unaudited)
In thousands (except per share data)
 
 
 
June 30,
2017
 
December 31,
2016
Assets
 
 

 
 
Current assets:
 
 

 
 
Cash and cash equivalents
 
$
133,011

 
$
58,321

Marketable securities
 
48,058

 
173,345

Trade receivables, net
 
33,767

 
24,929

Inventory
 
6,912

 

Prepaid expenses and other current assets
 
5,224

 
4,691

Total current assets
 
226,972

 
261,286

Fixed assets, net
 
6,839

 
7,429

Intangible assets, net
 
148,138

 

Deposits and other assets
 
1,129

 
630

Total assets
 
$
383,078

 
$
269,345

Liabilities and stockholders’ equity
 
 

 
 
Current liabilities:
 
 

 
 
Accounts payable and accrued expenses
 
$
63,996

 
$
48,759

 Deferred revenue
 
2,602

 

 Other current liabilities
 
1,387

 
865

Total current liabilities
 
67,985

 
49,624

Deferred revenue - long-term
 
3,828

 
1,587

Long-term debt
 
141,242

 
98,216

Other long-term liabilities
 
292

 
335

Total liabilities
 
213,347

 
149,762

 
 
 
 
 
Stockholders’ equity:
 
 

 
 
Common stock, $0.001 par value. Authorized 125,000,000 shares; issued and outstanding 41,304,008 shares at June 30, 2017. Authorized 125,000,000 shares; issued and outstanding 34,169,410 shares at December 31, 2016
 
41

 
34

Additional paid-in capital
 
949,331

 
856,142

Accumulated other comprehensive income (loss)
 
1,999

 
(1,485
)
Accumulated deficit
 
(781,640
)
 
(735,108
)
Total stockholders’ equity
 
169,731

 
119,583

Total liabilities and stockholders’ equity
 
$
383,078

 
$
269,345

 
See accompanying unaudited notes.


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PTC Therapeutics, Inc.
Consolidated Statements of Operations (unaudited)
In thousands (except per share data)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 

 
 

 
 

 
 

Net product revenue
 
$
47,891

 
$
15,437

 
$
74,334

 
$
34,314

Collaboration and grant revenue
 
71

 
196

 
176

 
214

Total revenues
 
47,962

 
15,633

 
74,510

 
34,528

Operating expenses:
 
 

 
 

 
 

 
 

Cost of product sales
 
758

 

 
797

 

Research and development
 
30,835

 
28,827

 
58,198

 
60,226

Selling, general and administrative
 
28,866

 
23,366

 
54,365

 
49,304

Total operating expenses
 
60,459

 
52,193

 
113,360

 
109,530

Loss from operations
 
(12,497
)
 
(36,560
)
 
(38,850
)
 
(75,002
)
Interest expense, net
 
(3,008
)
 
(2,060
)
 
(5,227
)
 
(4,016
)
Other expense, net
 
(1,820
)
 
(387
)
 
(2,139
)
 
(1,107
)
Loss before income tax expense
 
(17,325
)
 
(39,007
)
 
(46,216
)
 
(80,125
)
Income tax (expense) benefit
 
(150
)
 
93

 
(316
)
 
(22
)
Net loss attributable to common stockholders
 
$
(17,475
)
 
$
(38,914
)
 
$
(46,532
)
 
$
(80,147
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 

 
 

 
 

 
 

Basic and diluted (in shares)
 
39,621,738

 
34,000,333

 
36,978,528

 
33,959,751

Net loss per share—basic and diluted (in dollars per share)
 
$
(0.44
)
 
$
(1.14
)
 
$
(1.26
)
 
$
(2.36
)
 
See accompanying unaudited notes.


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PTC Therapeutics, Inc.
Consolidated Statements of Comprehensive Loss (unaudited)
In thousands
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(17,475
)
 
$
(38,914
)
 
$
(46,532
)
 
$
(80,147
)
Other comprehensive loss:
 
 

 
 

 
 

 
 

Unrealized (loss) gain on marketable securities, net of tax
 
(9
)
 
(40
)
 
(31
)
 
618

Foreign currency translation gain (loss)
 
2,884

 
(159
)
 
3,515

 
1,467

Comprehensive loss
 
$
(14,600
)
 
$
(39,113
)
 
$
(43,048
)
 
$
(78,062
)
 
See accompanying unaudited notes.


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PTC Therapeutics, Inc.
Consolidated Statements of Cash Flows (unaudited)
In thousands
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(46,532
)
 
$
(80,147
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Depreciation and amortization
 
1,448

 
1,664

Change in valuation of warrant liability
 
3

 
47

Non-cash interest expense
 
3,274

 
2,941

Loss on disposal of asset
 
47

 

Amortization of premiums on investments
 
365

 
1,140

Amortization of debt issuance costs
 
185

 
147

Share-based compensation expense
 
16,914

 
17,651

Benefit for deferred income taxes
 

 
(244
)
Unrealized foreign currency transaction losses, net
 
1,648

 
963

Changes in operating assets and liabilities:
 
 

 
 

Inventory, net
 
(2,806
)
 

Prepaid expenses and other current assets
 
(416
)
 
1,163

Trade receivables, net
 
(6,762
)
 
(8,480
)
Deposits and other assets
 
(463
)
 
(170
)
Accounts payable and accrued expenses
 
12,452

 
(3,435
)
Other liabilities
 
457

 
1

Deferred revenue
 
4,604

 
587

Net cash used in operating activities
 
(15,582
)
 
(66,172
)
Cash flows from investing activities
 
 

 
 

Purchases of fixed assets
 
(579
)
 
(275
)
Purchases of marketable securities
 
(19,467
)
 
(46,256
)
Sale and redemption of marketable securities
 
144,357

 
89,645

Acquisition, including transaction costs
 
(76,424
)
 

Net cash provided by investing activities
 
47,887

 
43,114

Cash flows from financing activities
 
 

 
 

Proceeds from exercise of options
 
535

 
34

Proceeds from shares issued under employee stock purchase plan
 
557

 

Debt issuance costs related to secured term loan
 
(432
)
 

Proceeds from issuance of secured term loan
 
40,000

 

Net cash provided by financing activities
 
40,660

 
34

Effect of exchange rate changes on cash
 
1,725

 
660

Net increase in cash and cash equivalents
 
74,690

 
(22,364
)
Cash and cash equivalents, beginning of period
 
58,321

 
58,022

Cash and cash equivalents, end of period
 
$
133,011

 
$
35,658

Supplemental disclosure of cash information
 
 

 
 

Cash paid for interest
 
$
2,474

 
$
2,263

Cash paid for income taxes
 
$
334

 
$
264

Supplemental disclosures of non-cash information related to investing and financing activities
 
 

 
 

Change in unrealized (loss) gain on marketable securities, net of tax
 
$
(31
)
 
$
618

 
See accompanying unaudited notes.

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PTC Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
June 30, 2017
In thousands (except per share data unless otherwise noted)

1.
The Company
 
PTC Therapeutics, Inc. (the “Company” or “PTC”) was incorporated as a Delaware corporation on March 31, 1998. PTC is a global biopharmaceutical company focused on the discovery, development, and commercialization of novel medicines using its expertise in RNA biology. PTC has discovered all of its compounds currently under development using its proprietary technologies. PTC plans to continue to develop these compounds both on its own and through selective collaboration arrangements with leading pharmaceutical and biotechnology companies. PTC’s internally discovered pipeline addresses multiple therapeutic areas, including rare disorders and oncology.
 
The Company has two products, Translarna (ataluren) and EMFLAZA™ (deflazacort). Translarna received marketing authorization from the European Commission in August 2014 for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, in ambulatory patients age five years and older in the 31 member states of the European Economic Area, or EEA. EMFLAZA is approved in the United States for the treatment of Duchenne muscular dystrophy, or DMD, in patients five years and older. nmDMD (including DMD) is a rare, life threatening disorder.

The Company’s marketing authorization for Translarna in the EEA is subject to annual review and renewal by the European Commission following reassessment by the European Medicines Agency, or EMA, of the benefit-risk balance of the authorization, which the Company refers to as the annual EMA reassessment. This marketing authorization is further subject to the specific obligation to conduct and submit the results of a multi-center, randomized, double-blind, 18-month, placebo-controlled trial, followed by an 18-month open-label extension, according to an agreed protocol, in order to confirm the efficacy and safety of Translarna in the approved patient population. The final report on the trial and open-label extension is to be submitted by the Company to the EMA by the end of the third quarter of 2021. The Company refers to the trial and open-label extension together as Study 041.
The marketing authorization in the EEA was last renewed in June 2017 and is effective, unless extended, through August 5, 2018. The renewal was based on the Company’s commitment to conduct Study 041 and the totality of the clinical data available from its trials and studies of Translarna for the treatment of nmDMD, including the safety and efficacy results of the Phase 2b and Phase 3 clinical trials. The primary efficacy endpoint was not achieved in either trial within the pre-specified level of statistical significance.
In June 2014, the Company initiated reimbursed early access programs, or EAP programs, for Translarna for nmDMD patients in selected territories in the EEA and recorded its first sales of Translarna in the third quarter of 2014 pursuant to an EAP program. In December 2014, the Company recorded its first commercial sales in Germany. As of June 30, 2017 , Translarna was available in over 25 countries on a commercial basis or pursuant to an EAP program. The Company expects to expand its launch activities across the EEA pursuant to the marketing authorization granted by the EMA throughout 2017 and future years, subject to continued renewal of its marketing authorization following annual EMA reassessments and successful completion of pricing and reimbursement negotiations. Concurrently, the Company plans to continue to pursue EAP programs in select countries where those mechanisms exist, both within the EEA and in other countries that will reference the marketing authorization in the EEA.
Translarna is an investigational new drug in the United States. During the first quarter of 2017, the Company filed a New Drug Application, or NDA, over protest with the United States Food and Drug Administration, (the "FDA"). The FDA has granted a standard review for the NDA and has set a target review date under the Prescription Drug User Fee Act, or PDUFA, of October 24, 2017, and has tentatively scheduled an advisory committee meeting on September 28, 2017 to facilitate its review. The PDUFA date is the goal date for the FDA to complete its review of the NDA, however, such date is not binding on the agency and there can be no assurance that the FDA will complete its review of the Company's NDA by the PDUFA goal date. Filing over protest is a procedural path permitted by FDA regulations that allows a company to have its NDA filed and reviewed when there is a disagreement with regulators over the acceptability of the NDA submission. The NDA, which seeks approval of Translarna for the treatment of nmDMD in the United States, was initially submitted by the Company in December 2015. In February 2016, following the initial submission, the Company received a Refuse to File letter from the FDA regarding the NDA. The FDA stated in the Refuse to File letter that the NDA was not sufficiently complete to permit a substantive review. Specifically, the Company was notified in the letter that, in the view of the FDA, both the Phase 2b and Phase 3 ACT DMD trials were negative and do not provide substantial evidence of effectiveness and that the NDA did not contain adequate information regarding the abuse potential of Translarna. Additionally, the FDA stated that the Company had proposed a post-hoc adjustment of ACT DMD that eliminates data from a majority of enrolled patients. During July 2016, the Company appealed the Refuse to File decision via the formal dispute resolution process within FDA’s Center for Drug Evaluation and Research; however, this appeal was denied by the FDA’s Office of Drug Evaluation I in October 2016.

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On March 2, 2017, the Company announced that the primary and secondary endpoints were not achieved in ACT CF, the Company’s Phase 3 double-blind, placebo-controlled, 48-week clinical trial comparing Translarna to placebo in nonsense mutation cystic fibrosis, or nmCF, patients six years of age or older not receiving chronic inhaled aminoglycosides. The safety profile of Translarna in the ACT CF study was consistent with previous studies and no new safety signals were identified. Based on the results of ACT CF, the Company has discontinued its current clinical development of Translarna for nmCF and has begun to close ongoing extension studies of Translarna for the treatment of nmCF. The Company has withdrawn its type II variation submission with the EMA, which sought approval of Translarna for the treatment of nmCF in the EEA.

On April 20, 2017, the Company completed its acquisition of all rights to EMFLAZA, or the Transaction. EMFLAZA is approved in the United States for the treatment of DMD in patients five years and older. The Transaction was completed pursuant to an asset purchase agreement, dated March 15, 2017, as amended on April 20, 2017, (the "Asset Purchase Agreement"), by and between the Company and Marathon Pharmaceuticals, LLC (now known as Complete Pharma Holdings, LLC), or Marathon. The transaction was accounted for as an asset acquisition. The assets acquired by the Company in the Transaction include intellectual property rights related to EMFLAZA, inventories of EMFLAZA, and certain contractual rights related to EMFLAZA. The Company assumed certain liabilities and obligations in the Transaction arising out of, or relating to, the assets acquired in the Transaction.

Upon the closing of the Transaction, the Company paid to Marathon total upfront consideration comprised of $75.0 million in cash, funded through cash on hand, and 6,683,598 shares of the Company’s common stock. The number of shares of common stock issued at closing was determined by dividing $65.0 million by the volume weighted average price per share of the Company’s common stock on the Nasdaq Stock Market for the 15 trading-day period ending on the third trading day immediately preceding the closing. Marathon will be entitled to receive contingent payments from the Company based on annual net sales of EMFLAZA beginning in 2018, up to a specified aggregate maximum amount over the expected commercial life of the asset, and a single $50.0 million sales-based milestone, in each case subject to the terms and conditions of the Asset Purchase Agreement.

As of June 30, 2017 , the Company had an accumulated deficit of approximately $781.6 million . The Company has financed its operations to date primarily through the private offering in August 2015 of 3.00% convertible senior notes due 2022 (see Note 9), public offerings of common stock in February 2014 and October 2014, its initial public offering of common stock in June 2013, private placements of its convertible preferred stock, collaborations, bank debt and convertible debt financings and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease area addressed by the Company’s product candidates. Since 2014, the Company has also relied on revenue generated from net sales of Translarna for the treatment of nmDMD in territories outside of the United States, and in May 2017, the Company began to recognize revenue generated from net sales of EMFLAZA for the treatment of DMD in the United States.

2.
Summary of significant accounting policies

The Company’s complete listing of significant accounting policies is set forth in Note 2 of the notes to the Company’s audited financial statements as of December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 16, 2017 (the " 2016 Form 10-K"). Additional significant accounting policies adopted during the six month period ended June 30, 2017 are discussed in further detail below.
 
Basis of presentation
 
The accompanying financial information as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 has been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the Company’s audited financial statements as of December 31, 2016 and notes thereto included in the 2016 Form 10-K.
 
In the opinion of management, the unaudited financial information as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 or for any other interim period or for any other future year.
 



Use of estimates

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in these consolidated financial statements have been made in connection with the calculation of net product sales, certain accruals related to the Company’s research and development expenses, stock-based compensation, valuation procedures for the convertible notes, allowance for doubtful accounts, inventory, acquired intangible assets, and the provision for or benefit from income taxes. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
 
Inventory and cost of product sales
 
In January 2017, the European Commission granted an annual renewal of the Company’s marketing authorization for Translarna for the treatment of nmDMD.  Until this renewal, the Company had considered the authorization to be subject to risk and did not capitalize productions costs in inventory as it was not probable that such costs would be recovered.  With the renewal, the Company now considers recovery of the costs to be probable and began capitalizing production costs in inventory, effective January 1, 2017.  Production costs will be expensed as cost of product sales when the related products are sold.  The costs for a portion of the inventory available for sale was expensed as research and development costs prior to the January 2017 annual renewal of the Translarna marketing authorization and as such the cost of products sold and related gross margins are not necessarily indicative of future cost of products sold and gross margin.

In April 2017, the Company completed the Transaction (refer to Note 11). EMFLAZA, both in tablet and suspension form, received approval from the FDA on February 9, 2017 as a treatment for DMD in patients five years of age and older. The Company began the commercialization of EMFLAZA in the United States shortly after the acquisition was completed. The Company utilizes third parties for the commercial distribution of EMFLAZA, including a third-party logistics company to warehouse EMFLAZA as well as specialty pharmacies to sell and distribute EMFLAZA to patients. All of the Company's manufacturing needs for EMFLAZA are fulfilled pursuant to exclusive supply agreements assumed by the Company upon close of the acquisition of EMFLAZA. Production costs will be expensed as cost of product sales when the related products are sold.

Inventory

Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis by product. The Company capitalizes inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. Translarna and EMFLAZA product which may be used in clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes. Inventory used for marketing efforts are charged to selling, general and administrative expense.

The following table summarizes the components of the Company’s inventory for the periods indicated:

 
 
June 30, 2017
 
December 31, 2016
Work in progress
 
$
941

 
$

Finished goods
 
5,971

 

Total inventory
 
$
6,912

 
$


The Company periodically reviews its inventories for excess amounts or obsolescence and writes down obsolete or otherwise unmarketable inventory to its estimated net realizable value. The Company has not recorded any inventory write downs as of the current period. Additionally, though the Company’s product is subject to strict quality control and monitoring which it performs throughout the manufacturing processes, certain batches or units of product may not meet quality specifications resulting in a charge to cost of product sales.

Cost of product sales

Cost of product sales consists of the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs, storage costs, amortization of the acquired intangible asset and royalty payments associated with net product sales.

Revenue recognition
 

10


The Company recognizes revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collection of the amounts due are reasonably assured.
 
Net product sales
 
Prior to the second quarter of 2017, the Company’s net product sales consisted of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. The Company has now established a pattern of collectability and, since January 2015, the Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and the Company has no further performance obligations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-15, Revenue Recognition—Products.
 
The Company has recorded revenue on sales where Translarna is available either on a commercial basis or through a reimbursed EAP program. Orders for Translarna are generally received from hospital and retail pharmacies and the Company’s third-party partner distributors. Revenue is recognized when risk of ownership has transferred. The Company’s third-party partner distributors act as intermediaries between the Company and end users and do not typically stock significant quantities of Translarna. The ultimate payor for Translarna is typically a government authority or institution or a third-party health insurer.

In May 2017, the Company began the commercialization of EMFLAZA in the U.S. The Company recorded product revenue related to the sales of EMFLAZA in the U.S. in accordance with ASC 605-15, when persuasive evidence of an arrangement exists, delivery has occurred and title of the product and associated risk of loss has passed to the customer, the price is fixed or determinable and collection from the customer has been reasonably assured. Due to the early stage of the product launch, the Company determined that it was not able to reliably make certain estimates, including returns, necessary to recognize product revenue upon shipment to distributors. As a result, the Company recorded net product revenue for EMFLAZA using a deferred revenue recognition model (sell-through). Under the deferred revenue model, the Company does not recognize revenue until EMFLAZA is shipped to an end-user. The Company will continue to evaluate when, if ever, it has sufficient volume of historical activity and visibility into the distribution channel, in order to reasonably make all estimates required under ASC 605 to recognize revenue upon shipment to its distributors.

The Company records revenue net of estimated third-party discounts and rebates. Allowances are recorded as a reduction of revenue at the time revenues from product sales are recognized. These allowances are adjusted to reflect known changes in factors and may impact such allowances in the quarter those changes are known.
 
Collaboration and grant revenue
 
The terms of these agreements typically include payments to the Company of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding and royalties on future product sales. In addition, the Company generates service revenue through agreements that generally provide for fees for research and development services and may include additional payments upon achievement of specified events.
 
The Company evaluates all contingent consideration earned, such as a milestone payment, using the criteria as provided by ASC 605-28, Revenue Recognition—Milestone Method. At the inception of a collaboration arrangement, the Company evaluates if a milestone payment is substantive. The criteria requires that (1) the Company determines if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from our activities to achieve the milestone; (2) the milestone be related to past performance; and (3) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered a substantive milestone and will be recognized as revenue in the period that the milestone is achieved. The Company recognizes royalties as earned in accordance with the terms of various research and collaboration agreements. If not substantive, the contingent consideration is allocated to the existing units of accounting based on relative selling price and recognized following the same basis previously established for the associated unit of accounting.
 
The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses as the Company has the risks and rewards as the principal in the research and development activities.

Allowance for doubtful accounts


11


The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company estimates uncollectible amounts based upon current customer receivable balances, the age of customer receivable balances, the customer’s financial condition and current economic trends. The allowance for doubtful accounts was $0.7 million as of June 30, 2017 and $0.7 million as of December 31, 2016 .

Business combinations and asset acquisitions

The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen (as adopted in the current period under Accounting Standards Update (ASU) No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business"; see "Impact of recently adopted accounting standards" and Note 11 for further details) to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in ASC Topic 805, “Business Combinations”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, and non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
 
The consideration for the Company’s business acquisitions includes future payments that are contingent upon the occurrence of a particular event or events. The obligations for such contingent consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration obligations, other than changes due to payments, are recognized as a (gain) loss on fair value remeasurement of contingent consideration in the condensed consolidated statements of operations.

If determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50, which requires the acquiring entity in an asset acquisition to recognize assets (net assets) based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to consideration given. No gain or loss is recognized as of the date of acquisition unless the fair value of noncash assets given as consideration differs from the assets' carrying amounts on the acquiring entity's books. Consideration transferred that is noncash will be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of the assets (net assets) acquired, whichever is more reliably measurable. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values.

Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the measuring of the cost of the acquired asset or group of assets.

Finite-lived intangible assets

The Company records the fair value of purchased intangible assets with finite useful lives as of the transaction date of a business combination or asset acquisition. Purchased intangible assets with finite useful lives are amortized to their estimated residual values over their estimated useful lives.  The Company evaluates the finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the reduction in the fair value below their respective carrying amounts. If the Company determines that an impairment has occurred, a write-down of the carrying value and an impairment charge to operating expenses in the period the determination is made is recorded. In addition, the remaining estimated useful life of the finite-lived intangible asset would be reassessed.

Recently issued accounting standards
 
In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers (Topic 606)”. ASU No. 2014-9 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU No. 2014-9 includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects

12


the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU will also 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. With the issuance of ASU No. 2015-14 in August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date, which was for reporting periods beginning after December 15, 2016. With the issuance of ASU No. 2016-8 in March 2016 and ASU No. 2016-10 in April 2016, the FASB further amended guidance on recording revenue on a gross versus a net basis and on identifying performance obligations and licensing, respectively.  The Company expects to use the modified retrospective approach to adopt this guidance when effective. The Company continues to evaluate the effect that the updated standard, as well as additional amendments, may have on its consolidated financial statements and accompanying notes. The Company’s implementation approach includes performing a detailed review of key contracts representative of the product being sold and services provided and assessing the conformance of historical accounting policies and practices with the standard. Because the standard may impact the Company’s business processes, systems and controls, the Company has initiated the development of a comprehensive change management project plan to guide the implementation.
 
In January 2016, the FASB issued ASU No. 2016-1, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The new guidance affects all reporting organizations (whether public or private) that hold financial assets or owe financial liabilities. ASU 2016-1 is effective for years beginning after December 15, 2017, including interim periods within those fiscal years. The Company expects to adopt this guidance when effective and is currently assessing what effect the adoption of ASU No. 2016-1 will have on its consolidated financial statements and accompanying notes.
 
In February 2016, the FASB issued ASU No. 2016-2, “Leases (Topic 842)”. This standard will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently assessing what effect the adoption of ASU No. 2016-2 will have on its consolidated financial statements and accompanying notes.
 
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This standard requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for public companies who are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company expects to adopt this guidance when effective and is assessing what effect the adoption of ASU 2016-13 will have on its consolidated financial statements and accompanying notes.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This standard clarifies the presentation of certain specific cash flow issues in the Statement of cash flows. The standard is effective for public companies who are SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. This standard requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows and no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. This standard is effective for public companies who are SEC filers for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Stock Compensation (Topic 718): Scope of Modification Accounting". This standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification, with entities applying the modification accounting guidance if the value, vesting conditions or classification of the award changes. In addition to all disclosures about modifications that are required under the current guidance, entities will be also required to disclose that compensation expense has not changed if applicable. This standard is effective for public companies who are SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted, including any interim period for which financial statements have not yet been issued or made available for issuance.

13


The guidance will be applied prospectively to awards modified on or after the adoption date. The Company expects to adopt this guidance when effective.

Impact of recently adopted accounting pronouncements

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. This standard requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. This standard is effective for public companies for annual periods beginning after December 15, 2016. The Company adopted the guidance on January 1, 2017 on a prospective basis. As the Company’s deferred tax assets is provided with full valuation allowance as of June 30, 2017 , adoption of this standard did not have a significant impact on the Company's financial statements.

In March 2016, the FASB issued ASU No. 2016-9, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This standard requires the recognition of all income tax effects of awards in the income statement when the awards vest or are settled, with Additional Paid in Capital (APIC) pools to be eliminated. In addition, the standard  will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation as well as allowing companies to elect whether to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. This standard is effective for public companies for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company adopted the guidance on January 1, 2017 and on a prospective basis, the Company will record all excess tax benefits and deficiencies as income tax expense or benefit. Due to the Company's history of operating losses, the adoption did not result in changes to the Company's Net loss or Retained earnings. In connection with the adoption of ASU 2016-9, the Company made a policy election to continue its methodology for estimating its forfeiture rate.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". This standard changed the definition of a business to help entities determine whether a set of transferred assets and activities is a business. This standard is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company has elected to early adopt ASU No. 2017-01 and apply the guidance to the Transaction, which is being accounted for as an asset acquisition under the revised guidance.

3.
Fair value of financial instruments and marketable securities
 
The Company follows the fair value measurement rules, which provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).
 
·
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.
 
·
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include 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 (i.e., 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—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
 
Cash equivalents and investments are reflected in the accompanying financial statements at fair value. The carrying amount of receivables, accounts payable and accrued expenses, and debt approximates fair value due to the short-term nature of those instruments.

Fair value of certain marketable securities is based upon market prices using quoted prices in active markets for identical assets quoted on the last day of the period. In establishing the estimated fair value of the remaining investments, the Company used the fair value as determined by its investment advisors using observable inputs other than quoted prices.

14


 
The Company reviews its investments on a periodic basis for other-than-temporary impairments. This review is subjective, as it requires management to evaluate whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investment.
 
The following represents the fair value using the hierarchy described above for the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 :
 
 
 
June 30, 2017
 
 
Total
 
Quoted prices
in active
markets for
identical assets
(level 1)
 
Significant
other
observable
inputs
(level 2)
 
Significant
unobservable
inputs
(level 3)
Marketable securities
 
$
48,058

 
$

 
$
48,058

 
$

Warrant liability
 
$
4

 
$

 
$

 
$
4

Stock appreciation rights liability
 
$
1,102

 
$

 
$

 
$
1,102


 
 
December 31, 2016
 
 
Total
 
Quoted prices
in active
markets for
identical assets
(level 1)
 
Significant
other
observable
inputs
(level 2)
 
Significant
unobservable
inputs
(level 3)
Marketable securities
 
$
173,345

 
$

 
$
173,345

 
$

Warrant Liability
 
$
1

 
$

 
$

 
$
1

Stock appreciation rights liability
 
$
865

 
$

 
$

 
$
865

 
No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the periods ended June 30, 2017 and December 31, 2016 .
 
The following is a summary of marketable securities accounted for as available-for-sale securities at June 30, 2017 and December 31, 2016 :
 
 
June 30, 2017
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
 
Gains
 
Losses
 
Commercial paper
 
$

 


 


 
$

Corporate debt securities
 
48,093

 

 
(35
)
 
48,058

Government obligations
 

 

 

 

 
 
$
48,093

 
$

 
$
(35
)
 
$
48,058

 
 
 
December 31, 2016
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
 
Gains
 
Losses
 
Commercial paper
 
$
12,919

 
$
47

 
$

 
$
12,966

Corporate debt securities
 
153,240

 
52

 
(103
)
 
153,189

Government obligations
 
7,188

 
2

 

 
7,190

 
 
$
173,347

 
$
101

 
$
(103
)
 
$
173,345

 
At June 30, 2017 and December 31, 2016 , the Company held securities with an unrealized loss position that were not considered to be other-than-temporarily impaired as the Company has the ability to hold such investments until recovery of their fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive (loss) income in stockholders’ equity. As of June 30, 2017 , the Company had $0.03 million in realized gains resulting from the sale of investments. As of December 31, 2016 , the Company did not have any realized gains/losses from the sale of marketable securities.
 

15


Marketable securities on the balance sheet at June 30, 2017 and December 31, 2016 mature as follows:
 
 
June 30, 2017
 
 
Less Than
12 Months
 
More Than
12 Months
Commercial paper
 
$

 
$

Corporate debt securities
 
48,058

 

Government obligations
 

 

Total Marketable securities
 
$
48,058

 
$

 
 
December 31, 2016
 
 
Less Than
12 Months
 
More Than
12 Months
Commercial paper
 
$
12,966

 
$

Corporate debt securities
 
137,196

 
15,993

Government obligations
 
7,190

 

Total Marketable securities
 
$
157,352

 
$
15,993

 
The Company classifies all of its securities as current as they are all available for sale and are available for current operations.
 
Level 3 valuation
 
The warrant liability is classified in Other long-term liabilities on the Company’s consolidated balance sheets. The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other expense, net, on the Company’s consolidated statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined at each reporting period by utilizing the Black-Scholes option pricing model.
 
The stock appreciation rights (SARs) liability is classified in Other liabilities on the Company’s consolidated balance sheets. The SARs liability is marked-to-market each reporting period with the change in fair value recorded as compensation expense on the Company’s consolidated statements of operations until the SARS vest. The fair value of the SARs liability is determined at each reporting period by utilizing the Black-Scholes option pricing model.
 
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuations for the warrant liability and SARs liability for the period ended June 30, 2017 :
 
 
Level 3 liabilities
 
 
Warrants
 
SARs
Beginning balance as of December 31, 2016
 
$
1

 
$
865

Change in fair value
 
3

 
1,301

Payments
 

 
(1,064
)
Ending balance as of June 30, 2017
 
$
4

 
$
1,102

 
Fair value of the warrant liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of June 30, 2017 include (i) volatility ( 69% 70% ), (ii) risk free interest rate ( 1.38% ), (iii) strike price ( $128.00 - $2,520.00 ), (iv) fair value of common stock ( $18.33 ), and (v) expected life ( 2.10 2.23 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of December 31, 2016 include (i) volatility ( 62% - 67% ), (ii) risk free interest rate ( 0.62% 1.34% ), (iii) strike price ( $128.00 $2,520.00 ), (iv) fair value of common stock ( $10.91 ), and (v) expected life ( 0.4 2.7 years).
 
Fair value of the SARs liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s SARs as of June 30, 2017 include (i) volatility ( 67% 70% ), (ii) risk free interest rate ( 1.14% 1.47% ), (iii) strike price ( $6.76 - $30.86 ), (iv) fair value of common stock ( $18.33 ), and (v) expected life ( 0.5 2.5 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s SARs as of December 31, 2016 include (i) volatility ( 48% - 71% ), (ii) risk free interest

16


rate ( 0.44% 1.47% ), (iii) strike price ( $6.76 $30.86 ), (iv) fair value of common stock ( $10.91 ), and (v) expected life ( 0.0 3.0 years).
 
4.
Other comprehensive income (loss) and accumulated other comprehensive items
 
Other comprehensive income (loss) includes changes in equity that are excluded from net income (loss), such as unrealized gains and losses on marketable securities.
 
The following tables summarize other comprehensive income (loss) and the changes in accumulated other comprehensive items for the three and six months ended June 30, 2017 :

 
 
Unrealized
Gains/(Losses)
On
Marketable
Securities, net
of tax
 
Foreign
Currency
Translation
 
Total
Accumulated
Other
Comprehensive
Items
Balance at March 31, 2017
 
$
(225
)
 
$
(651
)
 
$
(876
)
Other comprehensive (loss) income before reclassifications
 
(9
)
 
2,884

 
2,875

Amounts reclassified from other comprehensive items
 

 

 

Other comprehensive (loss) income
 
(9
)
 
2,884

 
2,875

Balance at June 30, 2017
 
$
(234
)
 
$
2,233

 
$
1,999


 
 
Unrealized
Gains/(Losses)
On
Marketable
Securities, net
of tax
 
Foreign
Currency
Translation
 
Total
Accumulated
Other
Comprehensive
Items
Balance at December 31, 2016
 
$
(203
)
 
$
(1,282
)
 
$
(1,485
)
Other comprehensive (loss) income before reclassifications
 
(31
)
 
3,515

 
3,484

Amounts reclassified from other comprehensive items
 

 

 

Other comprehensive (loss) income
 
(31
)
 
3,515

 
3,484

Balance at June 30, 2017
 
$
(234
)
 
$
2,233

 
$
1,999


5.
Accounts payable and accrued expenses
 
Accounts payable and accrued expenses at June 30, 2017 and December 31, 2016 consist of the following:
 
 
 
June 30,
2017
 
December 31,
2016
Employee compensation, benefits, and related accruals
 
$
11,064

 
$
13,649

Consulting and contracted research
 
11,006

 
11,505

Professional fees
 
2,252

 
1,237

Sales allowance and other costs
 
23,836

 
13,245

Accounts payable
 
6,062

 
6,298

Other
 
9,776

 
2,825

 
 
$
63,996

 
$
48,759

 
6.
Warrants
 
All of the Company’s outstanding warrants were classified as liabilities as of June 30, 2017 and December 31, 2016 because they contained non-standard antidilution provisions.
 
The following is a summary of the Company’s outstanding warrants as of June 30, 2017 and December 31, 2016 :
 

17


 
 
June 30, 2017
 
 
Warrant
shares
 
Exercise
price
 
Expiration
Common stock
 
7,030

 
$
128.00

 
2019
Common stock
 
130

 
$
2,520.00

 
2019

 
 
December 31, 2016
 
 
Warrant
shares
 
Exercise
price
 
Expiration
Common stock
 
6,250

 
$
128.00

 
2017
Common stock
 
7,030

 
$
128.00

 
2019
Common stock
 
130

 
$
2,520.00

 
2019

 
7.
Net loss per share
 
Basic earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net loss by the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding during the period.
 
The following tables set forth the computation of basic and diluted net loss per share:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
Numerator
 

 
 

 
 

 
 

 
Net loss
$
(17,475
)
 
$
(38,914
)
 
$
(46,532
)
 
$
(80,147
)
 
Denominator
 

 
 

 
 

 
 

 
Denominator for basic and diluted net loss per share
39,621,738

 
34,000,333

 
36,978,528

 
33,959,751

 
Net loss per share:
 

 
 

 
 

 
 

 
Basic and diluted
$
(0.44
)
*
$
(1.14
)
*
$
(1.26
)
*
$
(2.36
)
*
 
 
*In the three and six months ended June 30, 2017 and 2016 , the Company experienced a net loss and therefore did not report any dilutive share impact.
 
The following table shows historical dilutive common share equivalents outstanding, which are not included in the above historical calculation, as the effect of their inclusion is anti-dilutive during each period.
 
 
As of June 30,
 
2017
 
2016
Stock Options
7,124,052

 
5,969,382

Unvested restricted stock awards and units
423,986

 
274,490

Total
7,548,038

 
6,243,872


8.
Stock award plan
 
On March 5, 2013, the Company’s Board of Directors approved the 2013 Stock Incentive Plan, which provides for the granting of stock option awards, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards in the aggregate of 739,937 shares of common stock. On March 5, 2013, the Board approved a grant of 735,324 shares of restricted stock and 4,613 stock options. There are no additional shares available for issuance under this plan.
 
In 2009, the Company’s shareholders approved the 2009 Equity and Long-Term Incentive Plan, which provides for the granting of stock option awards, restricted stock awards, and other stock-based and cash-based awards, subject to certain adjustments and annual increases. In May 2013, the Company’s Board of Directors and stockholders increased by 2,500,000 the number of

18


shares authorized under the 2009 Equity and Long Term Incentive Plan, which provides for the granting of stock option awards, restricted stock awards, and other stock-based and cash-based awards. There are no additional shares available for issuance under this plan.

In May 2013, the Company’s Board of Directors and stockholders approved the 2013 Long Term Incentive Plan, which became effective upon the closing of the Company’s IPO.  The 2013 Long Term Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards. The number of shares of common stock reserved for issuance under the 2013 Long Term Incentive Plan is the sum of (1)  122,296 shares of common stock available for issuance under the Company’s 2009 Equity and Long Term Incentive Plan and 2013 Stock Incentive Plan, (2) the number of shares (up to 3,040,444 shares) equal to the sum of the number of shares of common stock subject to outstanding awards under the Company’s 1998 Employee, Director and Consultant Stock Option Plan, 2009 Equity and Long Term Incentive Plan and 2013 Stock Incentive Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right plus (3) an annual increase, to be added on the first day of each fiscal year until the expiration of the 2013 Long Term Incentive Plan, equal to the lowest of 2,500,000 shares of common stock, 4% of the number of shares of common stock outstanding on the first day of the fiscal year and an amount determined by the Company’s Board of Directors. As of June 30, 2017 , awards for 425,683 shares of common stock are available for issuance.
 
From January 1, 2017 through June 30, 2017 , the Company issued a total of 1,738,873 stock options to various employees.  Of those, 480,550 were inducement grants for non-statutory stock options. The inducement grant awards were made pursuant to the NASDAQ inducement grant exception as a material component of the Company's new hires’ employment compensation and not under the 2013 Long Term Incentive Plan.
 
A summary of stock option activity is as follows:
 
 
Number of
options
 
Weighted-
average
exercise
price
 
Weighted-
average
remaining
contractual
term
 
Aggregate
intrinsic
value
 
 
 
 
 
 
 
 
(in
thousands)
Outstanding at December 31, 2016
 
5,854,316

 
$
34.71

 
 
 
 

Granted
 
1,738,873

 
$
11.80

 
 
 
 

Exercised
 
(49,770
)
 
$
10.74

 
 
 
 

Forfeited/Cancelled
 
(419,367
)
 
$
33.83

 
 
 
 

Outstanding at June 30, 2017
 
7,124,052

 
$
29.33

 
7.51 years
 
$
19,807

Vested or Expected to vest at June 30, 2017
 
3,159,956

 
$
25.63

 
8.66 years
 
$
10,427

Exercisable at June 30, 2017
 
3,738,673

 
$
32.94

 
6.44 years
 
$
8,449

 
The fair value of grants made in the six months ended June 30, 2017 was contemporaneously estimated on the date of grant using the following assumptions:
 
 
Six months ended
June 30, 2017
 
Risk-free interest rate
 
1.84% — 2.45%
 
Expected volatility
 
76%—81%
 
Expected term
 
5.04– 10.00 years
 
 
The Company assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the six -month period ended June 30, 2017 was $8.07 per share.
 
The Company uses the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to the Company with respect to industry, stage of life cycle, size, and financial leverage. The risk-free rate of the option is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.


19


Restricted Stock Awards —Restricted stock awards are granted subject to certain restrictions, including in some cases service or time conditions (restricted stock). The grant-date fair value of restricted stock awards, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.
 
Restricted Stock Units —Restricted stock units are granted subject to certain restrictions, including in some cases service or time conditions (restricted stock). The grant-date fair value of restricted stock units, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.
 
The following table summarizes information on the Company’s restricted stock awards and units:
 
 
Restricted Stock Awards and Units
 
 
Number of
Shares
 
Weighted
Average
Grant
Date Fair
Value
January 1, 2017
 
271,651

 
$
19.76

Granted
 
358,194

 
$
11.34

Vested
 
(180,861
)
 
$
14.19

Forfeited
 
(24,998
)
 
$
13.47

Unvested at June 30, 2017
 
423,986

 
$
15.39

 
Stock Appreciation Rights —Stock appreciation rights (SARs) entitle the holder to receive, upon exercise, an amount of the Company's common stock or cash (or a combination thereof) determined by reference to appreciation, from and after the date of grant, in the fair market value of a share of the Company's common stock over the measurement price based on the exercise date.
 
In May 2016, a total of 897,290 SARs were granted to non-executive employees (the 2016 SARs). The 2016 SARs will vest annually in equal installments over four years and will be settled in cash on each vest date, requiring the Company to remeasure the SARs at each reporting period until vesting occurs. For the period ending June 30, 2017 , a total of 213,197 SARs vested and the Company recorded $1.3 million in compensation expense related to the 2016 SARs.

Employee Stock Purchase Plan —In June 2016, the Company established an Employee Stock Purchase Plan (“ESPP” or “the Plan”) for certain eligible employees. The Plan is administered by the Company’s Board of Directors or a committee appointed by the Board. The total number of shares available for purchase under the Plan is one million shares of the Company’s common stock. Employees may participate over a six -month period through payroll withholdings and may purchase, at the end of the six -month period, the Company’s common stock at a purchase price of at least 85% of the closing price of a share of the Company’s common stock on the first business day of the offering period or the closing price of a share of the Company’s common stock on the last business day of the offering period, whichever is lower. No participant will be granted a right to purchase the Company’s common stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company or any subsidiary of the Company after such purchase. For the period ending June 30, 2017 , the Company issued 107,499 shares of common stock and recorded $0.3 million in compensation expense related to the ESPP.

The Company recorded share-based compensation expense in the statement of operations related to incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units and the ESPP as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Research and development
 
$
3,895

 
$
4,087

 
$
8,362

 
$
8,415

Selling, general and administrative
 
3,990

 
4,649

 
8,552

 
9,236

Total
 
$
7,885

 
$
8,736

 
$
16,914

 
$
17,651

 
As of June 30, 2017 , there was approximately $56.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2009 Equity and Long Term Incentive Plan, the 2013 Long Term Incentive Plan and equity awards made pursuant to the NASDAQ inducement grant exception for new hires. This cost is expected to be recognized as share-based compensation expense over the weighted average remaining service period of approximately 2.19 years.
 

20


9.
Debt
 
2017 Credit Facility

In May 2017, the Company entered into a credit and security agreement (the "Credit Facility") with MidCap Financial Trust, a Delaware statutory trust (“MidCap”), as administrative agent and MidCap and certain other financial institutions as lenders thereunder (the “Credit Agreement”) that provides for a senior secured term loan facility of $60.0 million , of which $40.0 million was drawn by the Company on May 5, 2017. The remaining $20.0 million under the senior secured term loan facility will become available to the Company upon its demonstration (on or prior to December 31, 2018) of net product revenue equaling or exceeding $120.0 million for the trailing 12 month period. The Company capitalized approximately $0.4 million of debt issuance costs, which were netted against the carrying value of the     Credit Facility and will be amortized over the term of the Credit Facility.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to LIBOR (with a LIBOR floor rate of 1.00% ) plus 6.15% . The Company is obligated to make interest only payments (payable monthly in arrears) through April 30, 2019. Commencing on May 1, 2019 and continuing for the remaining twenty-four months of the facility, the Company will be required to make monthly interest payments and monthly principal payments. The principal payments are to be made based on straight-line amortization of the principal over the twenty-four month period. The maturity date of the Credit Agreement is May 1, 2021, unless terminated earlier.

The Credit Facility is subject to certain financial covenants. As of June 30, 2017, the Company was in compliance with all required covenants.

Convertible Notes

In August 2015, the Company issued, at par value,  $150.0 million  aggregate principal amount of  3.0%  convertible senior notes due 2022 (the "Convertible Notes"). The Convertible Notes bear cash interest at a rate of  3.0%  per year, payable semi-annually on February 15 and August 15 of each year, beginning on February 15, 2016. The Convertible Notes will mature on August 15, 2022, unless earlier repurchased or converted. The net proceeds to the Company from the offering were  $145.4 million  after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by the Company.
 
The Convertible Notes are governed by an indenture (the Convertible Notes Indenture) with U.S Bank National Association as trustee (the Convertible Notes Trustee).
 
Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 15, 2022 only under the following circumstances:

·                   during any calendar quarter commencing on or after September 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least  20  trading days (whether or not consecutive) during a period of  30  consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to  130%  of the conversion price on each applicable trading day;
 
·                   during the  five  business day period after any  five  consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Convertible Notes Indenture) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than  98%  of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
 
·                   during any period after the Company has issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or
 
·                   upon the occurrence of specified corporate events.
 
On or after February 15, 2022, until the close of business on the business day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and deliver shares of its common stock in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of Convertible Notes being converted.
 

21


The conversion rate for the Convertible Notes was initially, and remains, 17.7487 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately  $56.34  per share of the Company’s common stock.
 
The Company may not redeem the Convertible Notes prior to August 20, 2018. The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after August 20, 2018 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during, any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically.
 
If the Company undergoes a “fundamental change” (as defined in the Indenture governing the Convertible Notes Indenture), subject to certain conditions, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
 
The Convertible Notes Indenture contains customary events of default with respect to the Convertible Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the Convertible Notes when due and payable) occurring and continuing, the Convertible Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by notice to the Company and the Convertible Notes Trustee, may, and the Convertible Notes Trustee at the request of such holders (subject to the provisions of the Convertible Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the Convertible Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.
 
The Company accounts for the Convertible Notes as a liability and equity component where the carrying value of the liability component will be valued based on a similar instrument. In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the seven -year term of the Convertible Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component recorded at issuance related to the Convertible Notes is  $57.5 million  and was recorded in additional paid-in capital.
 
In accounting for the transaction costs related to the issuance of the Convertible Notes, the Company allocated the total costs incurred to the liability and equity components of the Convertible Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven -year term of the Convertible Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a net deferred tax liability of $22.3 million in connection with the Notes.
 
The Convertible Notes consist of the following:
 
Liability component
 
June 30, 2017
 
December 31, 2016
Principal
 
$
150,000

 
$
150,000

Less: Debt issuance costs
 
(2,294
)
 
(2,457
)
Less: Debt discount, net(1)
 
(46,054
)
 
(49,327
)
Net carrying amount
 
$
101,652

 
$
98,216

 
(1) Included in the consolidated balance sheets within convertible senior notes (due 2022) and amortized to interest expense over the remaining life of the Convertible Notes using the effective interest rate method.
 

22


The fair value of the Convertible Notes was approximately $115.8 million as of June 30, 2017 . The Company estimates the fair value of its Convertible Notes utilizing market quotations for debt that have quoted prices in active markets. As of June 30, 2017 , the remaining contractual life of the Convertible Notes is approximately 5.1 years.
 
The following table sets forth total interest expense recognized related to the Convertible Notes:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Contractual interest expense
 
$
1,131

 
$
1,125

 
$
2,241

 
$
2,241

Amortization of debt issuance costs
 
83

 
75

 
163

 
147

Amortization of debt discount
 
1,674

 
1,495

 
3,274

 
2,941

Total
 
$
2,888

 
$
2,695

 
$
5,678

 
$
5,329

Effective interest rate of the liability component
 
11
%
 
11
%
 
11
%
 
11
%
 
10.
Commitments and contingencies
 
Under various agreements, the Company will be required to pay royalties and milestone payments upon the successful development and commercialization of products. The Company has entered into funding agreements with The Wellcome Trust Limited ("Wellcome Trust") for the research and development of small molecule compounds in connection with the Company's cancer stem cell and antibacterial programs. As the Company has discontinued development under its antibacterial program, it no longer expects that milestone and royalty payments from the Company to Wellcome Trust will apply under that agreement, resulting in a change to the total amount of development and regulatory milestone payments the Company may become obligated to pay for this program. Under the cancer stem cell program funding agreement, to the extent that the Company develops and commercializes program intellectual property on a for-profit basis itself or in collaboration with a partner (provided the Company retains overall control of worldwide commercialization), the Company may become obligated to pay to Wellcome Trust development and regulatory milestone payments and single-digit royalties on sales of any research program product. The Company’s obligation to pay such royalties would continue on a country-by-country basis until the longer of the expiration of the last patent in the program intellectual property in such country covering the research program product and the expiration of market exclusivity of such product in such country. The Company’s first such milestone payment of $0.8 million payable to Wellcome Trust occurred in the second quarter of 2016. Additional milestone payments of up to an aggregate of $22.4 million may become payable by the Company to Wellcome Trust under this agreement.
    
The Company has also entered into a collaboration agreement with the SMA Foundation. The Company may become obligated to pay the SMA Foundation single- digit royalties on worldwide net product sales of any collaboration product that is successfully developed and subsequently commercialized or, if the Company outlicenses rights to a collaboration product, a specified percentage of certain payments the Company receives from its licensee. The Company is not obligated to make such payments unless and until annual sales of a collaboration product exceed a designated threshold. The Company’s obligation to make such payments would end upon our payment to the SMA Foundation of a specified amount.
 
The Company has employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control or termination without cause, occur. Additionally, the Company has royalty payments associated with Translarna and EMFLAZA product net sales, payable quarterly or annually in accordance with the terms of the related agreements.
 
11.
Emflaza asset acquisition

On April 20, 2017, the Company completed its previously announced acquisition of all rights to EMFLAZA pursuant to an Asset Purchase Agreement, dated March 15, 2017, and amended on April 20, 2017, by and between the Company and Marathon. The assets acquired by the Company in the Transaction include intellectual property rights related to EMFLAZA, inventories of EMFLAZA, and certain contractual rights related to EMFLAZA. The Company assumed certain liabilities and obligations in the Transaction arising out of, or relating to, the assets acquired in the Transaction.

The Company concluded that the EMFLAZA Agreement included inputs and processes that did not constitute a business under the revised guidance of ASU No. 2017-01, which allows for a screen to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. The Company determined that substantially all of the fair value is concentrated in the EMFLAZA rights intangible asset and accounted for the transaction as an asset acquisition under ASC 805-50.


23


The purchase price consisted of total upfront consideration comprised of $75.0 million in cash and 6,683,598 shares of the Company's common stock with a fair value of $75.2 million . In addition, the Company incurred approximately $2.2 million of acquisition costs, which are capitalized in an asset acquisition and included in the total consideration transferred.

Marathon is entitled to receive contingent payments from the Company based on annual net sales of EMFLAZA beginning in 2018, up to a specified aggregate maximum amount over the expected commercial life of the asset. In addition, Marathon has the opportunity to receive a single $50.0 million sales-based milestone. In accordance with the guidance for an asset acquisition, the Company will record the milestone payment when it becomes payable to Marathon and increase the cost basis for the EMFLAZA rights intangible asset.

The following tables present the total purchase consideration and the preliminary allocation of the purchase consideration for the Transaction as of April 20, 2017 (the “Acquisition Date”):

Cash consideration
 
$
75,000

Fair value of PTC common stock issued to Marathon (6,683,598 shares)
 
75,190

Acquisition costs
 
2,163

Total preliminary consideration transferred
 
$
152,353


Purchase price
 
$
152,353

 
 
 
Total fair value of tangible assets acquired and liabilities assumed:
 
 
Inventory
 
3,980

EMFLAZA rights
 
$
148,373


The EMFLAZA rights intangible asset is being amortized to cost of product sales using the economic use method over its expected useful life of approximately seven years. The method of amortization represents the pattern in which the economic benefits of the asset are expected to be consumed based on future projected cash flows of the intangible asset. Although the Company believes such available information and assumptions are reasonable, given the inherent risks and uncertainties underlying its expectations regarding such future revenues, there is the potential for the Company’s actual results to vary significantly from such expectations. As such, if the pattern as to which the asset will be consumed changes significantly, the related amortization of the intangible assets will change in proportion to the change in revenues. As of June 30, 2017 , the Company recognized accumulated amortization of $0.2 million with respect to the EMFLAZA rights intangible asset. The estimated future amortization of the EMFLAZA rights intangible asset is expected to be as follows:
 
 
As of June 30, 2017
2017 (1)
 
$
1,707

2018
 
11,695

2019
 
18,896

2020
 
25,918

2021 and thereafter
 
89,922

Total
 
$
148,138

 
(1) For the six months ended December 31, 2017.

12.
Subsequent events
 
The Company has evaluated all subsequent events and transactions through the filing date. There were no material events that impacted the unaudited consolidated financial statements or disclosures.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the

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Table of Contents

audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2017. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1A. (Risk Factors) of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Our Company
We are a global biopharmaceutical company focused on the discovery, development and commercialization of novel medicines using our expertise in RNA biology. We have discovered all of our compounds currently under development using our proprietary technologies. We plan to continue to develop these compounds both on our own and through selective collaboration arrangements with leading pharmaceutical and biotechnology companies. Our internally discovered pipeline addresses multiple therapeutic areas, including rare disorders and oncology.
During the quarter ended June 30, 2017 , we recognized $45.8 million in sales of Translarna TM (ataluren) for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, and $2.1 million in sales of EMFLAZA TM (deflazacort) for the treatment of Duchenne muscular dystrophy, or DMD. Translarna is currently available in over 25 countries on a commercial basis or through a reimbursed early access program, or EAP program. Translarna is an investigational new drug in the United States, or U.S. We hold worldwide commercialization rights to Translarna for all indications in all territories. EMFLAZA is indicated for the treatment of DMD in patients five years of age and older in the U.S.
Corporate Updates
Acquisition of EMFLAZA™ for the treatment of Duchenne muscular dystrophy in the United States
On April 20, 2017, we completed the acquisition of all rights to EMFLAZA pursuant to an asset purchase agreement, dated March 15, 2017 and amended on April 20, 2017, or the Asset Purchase Agreement, by and between us and Marathon Pharmaceuticals, LLC (now known as Complete Pharma Holdings, LLC), or Marathon.
Since the founding of the Company nearly twenty years ago, PTC has been committed to fundamentally changing the lives of patients living with DMD. In addition to our historical and continued investment in research and development, this commitment has included raising disease awareness, promoting diagnosis and early intervention, and supporting improved standards of care all with the goal of changing the course of the disease. It is our continuing commitment to the Duchenne community that underpinned the acquisition of EMFLAZA. PTC is committed to make this important therapy available to all eligible patients in the United States and to study its long-term benefits.
Upon the closing of our acquisition of EMFLAZA, we paid to Marathon total upfront consideration comprised of $75.0 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock, which was determined by dividing $65.0 million by the volume weighted average price per share of our common stock on the Nasdaq Stock Market for the 15 trading-day period ending on the third trading day immediately preceding the closing. Marathon will be entitled to receive contingent payments from us based on annual net sales of EMFLAZA beginning in 2018, up to a specified aggregate maximum amount over the expected commercial life of the asset, and a single $50.0 million sales-based milestone, in each case subject to the terms and conditions of the Asset Purchase Agreement.
EMFLAZA, both in tablet and suspension form, received approval from the U.S. Food and Drug Administration, or FDA, on February 9, 2017 as a treatment for DMD in patients five years of age and older. We estimate that there are approximately 9,000 DMD patients in the U.S. aged five years or older. We are obligated to complete certain post-marketing requirements in connection with the FDA's approval, including pre-clinical and clinical safety studies.
We expect that EMFLAZA will have a seven-year exclusive marketing period in the U.S. for the approved indication, commencing on the date of FDA approval, under the provisions of the Orphan Drug Act of 1983, or the Orphan Drug Act, as well as a concurrent five-year exclusive marketing period in the U.S. for the active ingredient in EMFLAZA under the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act. As we presently have no patent rights to protect the approved use of EMFLAZA, we expect to rely on both the five-year Hatch-Waxman Act and seven-year Orphan Drug Act exclusivity periods to commercialize EMFLAZA for the approved indication in the U.S. As the holder of orphan exclusivity, we are required to ensure the availability of sufficient quantities of EMFLAZA to meet the needs of patients. Failure to do so could result in loss of orphan exclusivity in the U.S.
We began the commercialization of EMFLAZA in the U.S. shortly after the acquisition was completed. We utilize third parties for the commercial distribution of EMFLAZA, including a third-party logistics company to warehouse EMFLAZA as well as specialty pharmacies to sell and distribute EMFLAZA to patients. A specialty pharmacy provides us with third-party call center services to provide patient support and financial services, prescription intake and distribution, reimbursement adjudication, and

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ongoing compliance support. All of our manufacturing needs for EMFLAZA are fulfilled pursuant to exclusive supply agreements assumed by us upon close of our acquisition of EMFLAZA.
Sales of pharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement by third-party payors. As part of our commercial launch of EMFLAZA in the U.S., we are engaged in pricing, coverage and reimbursement discussions with third-party payors, such as state and federal governments, including Medicare and Medicaid, managed care providers, private commercial insurance plans and pharmacy benefit management plans. Decisions regarding the extent of coverage and the amount of reimbursement to be provided for EMFLAZA are made on a plan-by-plan, and in some cases, on a patient-by-patient basis.
To date, over 1,200 patients are receiving EMFLAZA from our commercial and bridge programs. We anticipate that coverage and reimbursement decisions by third-party payors, including the processing and adjudication of prescriptions, may vary from weeks to several months. Certain third-party payors may impose additional requirements before approving reimbursement of a prescription, including prior authorization and the requirement to try another therapy first, which would delay our ability to obtain payment for prescriptions for EMFLAZA.
We have been engaging with key stakeholders in the DMD community to understand their needs and to address recent negative publicity and increasing legislative and public scrutiny around pharmaceutical drug pricing in the U.S., in particular with respect to orphan drugs and specifically with respect to EMFLAZA. U.S. government authorities and third-party payors are increasingly attempting to limit or regulate drug prices and reimbursement (including through mandatory discounts under certain government sponsored programs), which may limit our ability to generate revenue from commercial sales of EMFLAZA.
Regulatory, clinical and marketing authorization matters for Translarna in nonsense mutation Duchenne muscular dystrophy
United States . Translarna is an investigational new drug in the U.S. In October 2016, the Office of Drug Evaluation I of the FDA denied our first appeal of the Refuse to File letter issued by the FDA’s Division of Neurological Products on February 22, 2016 regarding our New Drug Application, or NDA, for Translarna for the treatment of nmDMD. In the first quarter of 2017, we filed our Translarna NDA via the FDA’s file over protest regulations. Filing over protest is a procedural path permitted by FDA regulations that allows a company to have its NDA filed and reviewed when there is a disagreement with regulators over the acceptability of the NDA submission.
The FDA has notified us that it has granted a standard review for the Translarna NDA and has set a target review date under the Prescription Drug User Fee Act, or PDUFA, of October 24, 2017, and has tentatively scheduled an advisory committee meeting on September 28, 2017 to facilitate its review. The target review date is not binding on the agency and there can be no assurance that the FDA will complete its review of the Translarna NDA by the target PDUFA date.
There is significant risk that, notwithstanding any dialogue we have had or any further dialogue we may be able to initiate with the FDA, pursuant to the file over protest process or otherwise, the agency will continue to disagree with our interpretation of the results of our Phase 3 clinical trial in nmDMD, or ACT DMD, and the totality of clinical data from our trials, and will not grant marketing authorization for Translarna for the treatment of nmDMD.
For additional information regarding risks to our ability to obtain marketing authorization for Translarna for the treatment of nmDMD in the U.S., see “Item 1A. Risk Factors,” including the risk factor titled, " ACT DMD did not meet its primary efficacy endpoint, and there is substantial risk that regulators will not agree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our business, financial performance and results of operations ."
European Economic Area . In June 2017, the European Commission renewed our marketing authorization for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older in the 31 member states of the European Economic Area, or EEA, and it is effective, unless extended, through August 5, 2018. We received initial marketing authorization from the European Commission in August 2014. The marketing authorization is subject to annual review and renewal by the European Commission following reassessment by the EMA of the benefit-risk balance of continued authorization, which we refer to as the annual EMA reassessment, as well as our satisfaction of any specific obligation or other requirement placed upon the marketing authorization, including Study 041. Study 041 is a three-year clinical trial to confirm the efficacy and safety of Translarna in the approved patient population. The trial is comprised of two stages: an 18-month randomized, double-blind, placebo controlled clinical trial followed by an 18-month open label extension period. We expect to submit the results of Study 041 to the European Medicines Agency, or EMA, by the end of the third quarter of 2021. We expect that as part of the annual EMA assessment, the EMA will consider the ongoing status of Study 041.
As part of our pediatric development commitments under our marketing authorization in the EEA and to support the potential expansion of Translarna’s labeling to younger patients with nmDMD, we initiated a Phase 2 pediatric clinical study to evaluate the safety and pharmacokinetics of Translarna in patients two to five years of age. The study, initiated in June 2016, includes a

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four-week screening period, a four-week study period, and a 48-week extension period for patients who complete the four-week study period (52 weeks total treatment). By the end of 2017, we intend to submit with the EMA a label-extension request to our marketing authorization in the EEA to include patients from two to up to five years of age, which will include data from this study. However, there can be no assurances that we will successfully obtain such label extension.  
For additional information regarding the risks related to the renewal of our marketing authorization in the EEA, see "Item 1A. Risk Factors," including the risk factor titled " Our marketing authorization in the EEA for Translarna for the treatment of nmDMD is a “conditional marketing authorization” that requires annual review and renewal by the European Commission following reassessment by the EMA of the benefit-risk balance of the authorization and is further conditioned upon our ability to satisfy the specific obligation to conduct and report the results of Study 041 by September 2021, and, as such, there is ongoing risk that we may be unable to maintain such authorization. If we are unable to obtain renewal of such marketing authorization in any future renewal cycle, we would lose all, or a significant portion of, our ability to generate revenue from sales of Translarna, whether pursuant to a commercial or an EAP program and throughout all territories, which would have a material adverse effect on our business, financial performance and results of operations. "
Each country, including each member state of the EEA, has its own pricing and reimbursement regulations and system. In order to commence commercial sale of product pursuant to our Translarna marketing authorization in any particular country in the EEA, we must finalize pricing and reimbursement negotiations with the applicable government body in such country. As a result, our commercial launch will continue to be on a country-by-country basis. We also have made, and expect to continue to make, product available under early access programs, or EAP programs, both in countries in the EEA and other territories. Our ability to negotiate, secure and maintain reimbursement for product under commercial and EAP programs can be subject to challenge in any particular country and can also be affected by political, economic and regulatory developments in such country.
For additional information regarding risks to our business arising as a result of matters relating to pharmaceutical pricing and reimbursement of Translarna see “Item 1A. Risk Factors,” including the risk factor titled “ Commercialization of Translarna has been in, and is expected to continue to take place in, countries that tend to impose strict price controls, which may adversely affect our revenues, if any. Failure to obtain and maintain acceptable pricing and reimbursement terms for Translarna in the European Economic Area and other jurisdictions would prevent us from marketing our products in such regions ."
Translarna™ for nonsense mutation cystic fibrosis
On March 2, 2017, we announced that the primary and secondary endpoints were not achieved in ACT CF, our Phase 3 double-blind, placebo-controlled, 48-week clinical trial comparing Translarna to placebo in nmCF patients six years of age or older not receiving chronic inhaled aminoglycosides. The safety profile of Translarna in the ACT CF trial was consistent with previous studies and no new safety signals were identified. Based on the results of ACT CF, we have discontinued our current clinical development of Translarna for nmCF and have begun to close ongoing extension studies of Translarna for the treatment of nmCF. We have withdrawn our type II variation submission with the EMA, which sought approval of Translarna for the treatment of nmCF in the EEA.
Translarna™ for additional indications
Based on its understood mechanism of action, we believe that Translarna may have benefit in the treatment of patients with genetic disorders that arise as a result of a nonsense mutation. We are pursuing studies for Translarna in additional indications: nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5. We recently decided that in the third quarter of 2017 we will stop our study for Translarna in mucopolysaccharidosis type I caused by nonsense mutation, or nmMPS I, as we have encountered difficulties identifying qualified patients for this study, and we determined it was best to move our resources to other areas.
Spinal muscular atrophy program
Our spinal muscular atrophy, or SMA, collaboration is with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc., which we refer to collectively as Roche, and the Spinal Muscular Atrophy Foundation, or SMA Foundation. Sunfish, a two-part clinical study in pediatric and adult type 2 and type 3 SMA patients initiated in the fourth quarter of 2016, followed by the initiation of Firefish in the fourth quarter of 2016, a two-part clinical study in infants with type 1 SMA. Both Sunfish and Firefish are investigating the safety, tolerability and efficacy of the compound RG7916 in the applicable patient populations. Part one of each study is a dose-finding study with the primary objectives of evaluating the safety, pharmacokinetics, or PK, and pharmacodynamics of RG7916 in patients and to select the dose for part two of the applicable study. Preliminary interim results from Part 1 of the Sunfish study was presented at the 2017 CureSMA Researcher Meeting at the end of the second quarter of 2017, with the results showing that type 2/3 SMA patients receiving RG7916 demonstrated a dose-dependent increase in SMN2 full length/Δ7 mRNA ratio of ~ 400% versus baseline, as measured in whole blood. We believe that these results provide proof of mechanism for the oral, small molecule SMN2 splicing modifier RG7916. No drug-related adverse events leading to withdrawal have been observed to date for RG7916. Part one of each study is expected to be followed by a pivotal part two

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with the primary objective of evaluating the efficacy and safety of RG7916. Commencement of the pivotal part two portion of either Sunfish or Firefish will trigger a single $20 million milestone payment to us from Roche. We anticipate that both Sunfish and Firefish will move into the pivotal second part of the respective study during the second half of 2017. Jewelfish, an open-label study investigating the safety, tolerability, PK, and PK/pharmacodynamic relationship of RG7916 in type 2 and type 3 SMA patients who have been previously treated with a survival of motor neuron 2 (SMN2)-targeting therapy, initiated in the first quarter of 2017.
Cancer stem cell program
A Phase 1 first-in-human, dose-escalation safety and pharmacokinetic open-label clinical study in advanced cancer patients with solid tumors initiated in April 2015 and completed in the first quarter of 2017 for PTC596, our product candidate in the cancer stem cell program. PTC596 was generally well tolerated as a monotherapy, producing systemic concentrations in patients similar to or exceeding those associated with preclinical activity. Though a protocol-defined maximum tolerated dose was not reached, the dose of 10 mg/kg was deemed intolerable due to pill burden and certain excipients that may have contributed to Grade 2 nausea, vomiting, and diarrhea in two of three patients. Data from this study and continued clinical development of PTC596, including reformulation efforts, are expected during 2017.
Funding
The success of Translarna, EMFLAZA, or other product candidates we may develop and/or commercialize, depends largely on obtaining and maintaining reimbursement from governments and third-party insurers.
Since 2015, our revenues have been primarily generated from sales of Translarna for the treatment of nmDMD in territories where we are permitted to distribute Translarna under EAP programs and in countries in the EEA where we were able to obtain acceptable pricing and reimbursement terms.
On April 20, 2017, we completed our acquisition of all rights to EMFLAZA for total upfront consideration comprised of $75.0 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock, which was determined by dividing $65.0 million by the volume weighted average price per share of our common stock on the Nasdaq Stock Market for the 15 trading-day period ending on the third trading day immediately preceding the closing.
On May 5, 2017, we entered into a credit and security agreement, or the Credit Agreement, with MidCap Financial Trust, or MidCap Financial, as administrative agent and MidCap Financial and other certain institutions as lenders thereto, that provides for a senior secured term loan facility of $60 million, of which $40 million was drawn by us on May 5, 2017. The remaining $20 million under the senior secured term loan facility would become available to us upon our demonstration (prior to December 31, 2018) of net product revenue equaling or exceeding $120 million for the trailing 12 month period. The maturity date of the Credit Agreement is May 1, 2021, unless terminated earlier.
To date, we have financed our operations primarily through our offering of 3.00% convertible senior notes due August 15, 2022, or the Convertible Notes offering, our public offerings of common stock in February 2014 and in October 2014, our initial public offering of common stock in June 2013, private placements of our preferred stock, collaborations, bank debt and convertible debt financings and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates. Since 2014, we have also relied on revenue generated from net sales of Translarna for the treatment of nmDMD in territories outside of the United States, and in May 2017, we began to recognize revenue generated from net sales of EMFLAZA for the treatment of DMD in the United States.
As of June 30, 2017 , we had an accumulated deficit of $781.6 million . We had a net loss of $46.5 million and $80.1 million for the six months ended June 30, 2017 and 2016 , respectively.
We anticipate that our expenses will increase in connection with our commercialization efforts in the United States, the EEA and other territories, including the expansion of our infrastructure and corresponding sales and marketing, legal and regulatory, distribution and manufacturing and administrative and employee-based expenses. In addition to the foregoing, we expect to continue to incur significant costs in connection with Study 041 and our open label extension trials of Translarna for the treatment of nmDMD as well as our studies for nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5 and our FDA post-marketing requirements with respect to EMFLAZA in the United States. We also expect to incur ongoing research and development expenses for our other product candidates, including our cancer stem cell program.
In addition, we may incur substantial costs in connection with our efforts to advance our regulatory submissions. We have begun seeking and intend to continue to seek marketing authorization for Translarna for the treatment of nmDMD in territories outside of the EEA and we may also seek marketing authorization for Translarna for other indications. These efforts may significantly impact the timing and extent of our commercialization expenses. 

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We may seek to expand and diversify our product pipeline through opportunistically in-licensing or acquiring the rights to products, product candidates or technologies and we may incur expenses, including with respect to transaction costs, subsequent development costs or any upfront, milestone or other payments or other financial obligations associated with any such transaction, which would increase our future capital requirements.
With respect to our outstanding Convertible Notes, cash interest payments are payable on a semi-annual basis in arrears, which will require total funding of $4.5 million annually. Additionally, under the terms of our Credit Agreement cash interest payments are payable monthly in arrears. Furthermore, as a result of our initial public offering in June 2013, we have incurred and expect to continue to incur additional costs associated with operating as a public company. These costs include significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Additionally, we could be forced to expend significant resources in the defense of the pending securities class action lawsuits brought against us and certain of our executives, as described under Part II, Item 1. Legal Proceedings in this Quarterly Report on Form 10-Q. See also, “ The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock and lawsuits against us and our officers and directors ” under Part II, Item 1A. Risk Factors - Risks Related to Our Common Stock.
We will need to generate significant revenues to achieve and sustain profitability, and we may never do so. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or our commercialization efforts.
Financial operations overview
 
To date, our net product sales have consisted primarily of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. We also began the commercialization of EMFLAZA in the U.S. shortly after the completion of the acquisition of all rights to EMFLAZA. Our process for recognizing revenue is described below under “Critical accounting policies and significant judgments and estimates—Revenue recognition”.
 
Roche and the SMA Foundation Collaboration.   In November 2011, we entered into a license and collaboration agreement, or licensing agreement, with Roche and the SMA Foundation pursuant to which we are collaborating with Roche and the SMA Foundation to further develop and commercialize compounds identified under our spinal muscular atrophy program with the SMA Foundation. The research component of this agreement terminated effective December 31, 2014. The licensing agreement included a $30 million upfront payment made in 2011 which was recognized on a deferred basis over the research term, and the potential for up to $460 million in milestone payments and royalties on net sales.
 
In August 2013, we announced the selection of a development candidate. The achievement of this milestone triggered a $10.0 million payment to us from Roche, which we recorded as collaboration revenue for the year ended December 31, 2013.
 
In January 2014, we initiated a Phase 1 clinical program, which triggered a $7.5 million milestone payment to us from Roche which we recorded as collaboration revenue for the year ended December 31, 2014.
 
In November 2014, we announced that our joint development program in Spinal Muscular Atrophy (SMA) with Roche and the SMA Foundation (SMAF) has started a Phase 2 study in adult and pediatric patients. The achievement of this milestone triggered a $10.0 million payment to us from Roche which we recorded as collaboration revenue for the year ended December 31, 2014.

Grant revenue.   From time to time, we receive grant funding from various institutions and governmental bodies. The grants are typically for early discovery research, and generally such grant programs last from two to five years.
 
Research and development expense
 
Research and development expenses consist of the costs associated with our research activities, as well as the costs associated with our drug discovery efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:
 
·    external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;
 
·    employee-related expenses, which include salaries and benefits, including share-based compensation, for the personnel involved in our drug discovery and development activities; and

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·    facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, IT, human resources and other support functions, depreciation of leasehold improvements and equipment, and laboratory and other supplies.
 
We use our employee and infrastructure resources across multiple research projects, including our drug development programs. We track expenses related to our clinical programs and certain preclinical programs on a per project basis.
 
We expect our research and development expenses to increase in connection with our ongoing activities, particularly in connection with Study 041 for Translarna for the treatment of nmDMD, our studies of Translarna in nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5, activities under our cancer stem cell program, and performance of our FDA post-marketing requirements with respect to EMFLAZA in the United States. The timing and amount of these expenses will depend upon the outcome of our ongoing clinical trials and the costs associated with our planned clinical trials. The timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our products or product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs, and product and product candidate manufacturing costs.
 
The following tables provide research and development expense for our most advanced principal product development programs, for the three and six months ended June 30, 2017 and 2016 .
 
 
 
Three Months Ended June 30,
 
 
2017
 
2016
 
 
(in thousands)
Translarna (nmDMD, nmCF, nmMPS I, aniridia and Dravet)
 
$
21,008

 
$
21,383

Cancer stem cell
 
682

 
1,691

Next generation nonsense readthrough
 
1,334

 
1,680

EMFLAZA
 
2,518

 

Other research and preclinical
 
5,293

 
4,073

Total research and development
 
$
30,835

 
$
28,827


 
 
Six Months Ended June 30, 2017
 
 
2017
 
2016
 
 
(in thousands)
Translarna (nmDMD, nmCF, nmMPS I, aniridia and Dravet)
 
$
40,429

 
$
43,975

Cancer stem cell
 
2,126

 
3,731

Next generation nonsense readthrough
 
2,762

 
3,577

EMFLAZA
 
2,598

 

Other research and preclinical
 
10,283

 
8,943

Total research and development
 
$
58,198

 
$
60,226

 
The successful development of Translarna and our other product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
 
·
the scope, rate of progress and expense of our clinical trials and other research and development activities;
 
·
the potential benefits of our products and product candidates over other therapies;
 
·
our ability to market, commercialize and achieve market acceptance for any of our products or product candidates that we are developing or may develop in the future, including our ability to negotiate pricing and reimbursement terms acceptable to us and to obtain or maintain marketing authorizations we have or may receive from our products and product candidates;
 
·
clinical trial results;
 

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·
the terms and timing of regulatory approvals; and
 
·
the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of our products or product candidates could mean a significant change in the costs and timing associated with the development of that product or product candidate. For example, if the EMA or FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of Translarna or any other product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
 
Selling, general and administrative expense
 
Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel, including share-based compensation expenses, in our executive, legal, business development, finance, accounting, information technology and human resource functions. Other selling, general and administrative expenses include facility-related costs not otherwise included in research and development expense; advertising and promotional expenses; costs associated with industry and trade shows; and professional fees for legal services, including patent-related expenses, accounting services, miscellaneous selling costs, and finishing costs incurred to direct product to commercial use.
 
We expect that selling, general and administrative expenses will increase in future periods in connection with our efforts to commercialize EMFLAZA in the United States, and our continued efforts to commercialize Translarna for the treatment of nmDMD, including increased payroll, expanded infrastructure, commercial operations, increased consulting, legal, accounting and investor relations expenses.
 
Interest (expense) income, net
 
Interest (expense) income, net consists of interest income earned on investments and interest expense from the Convertible Notes outstanding and interest expense from the Credit Facility.
 
Critical accounting policies and significant judgments and estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. Actual results may differ from these estimates under different assumptions or conditions.
 
Revenue recognition
 
We recognize revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collection of the amounts due are reasonably assured.
 
Net Product Sales
 
To date, our net product sales have consisted primarily of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and we have no further performance obligations in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Subtopic 605-15, Revenue Recognition—Products.
 
We have recorded revenue on sales where Translarna is available either on a commercial basis or through a reimbursed EAP program. Orders for Translarna are generally received from hospital and retail pharmacies and our third-party partner distributors. Our third-party distributors act as intermediaries between us and end users and do not typically stock significant quantities of Translarna. The ultimate payor for Translarna is typically a government authority or institution or a third-party health insurer. Prior to January 1, 2015, we generally recognized revenue for these reimbursed EAP programs once the product was shipped on behalf of the government authority or institution on a cash basis if all other revenue recognition criteria had

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been met. Beginning in the first quarter of 2015, we are recognizing revenue for Translarna as product is shipped, as we have established a pattern of collectability.

In May 2017, EMFLAZA became commercially available in the U.S. We record product revenue related to the sales of EMFLAZA in the U.S. in accordance with ASC 605 when persuasive evidence of an arrangement exists, delivery has occurred and title of the product and associated risk of loss has passed to the customer, the price is fixed or determinable and collection from the customer has been reasonably assured. As a result, we record net product revenue for EMFLAZA using a deferred revenue recognition model (sell-through). Under the deferred revenue model, we do not recognize revenue until EMFLAZA is shipped to an end-user. We will continue to evaluate when, if ever, we have sufficient volume of historical activity and visibility into the distribution channel, in order to reasonably make all estimates required under ASC 605 to recognize revenue upon shipment to its distributors.
 
We record revenue net of estimated third-party discounts and rebates. Allowances are recorded as a reduction of revenue at the time revenues from product sales are recognized. Allowances for government and other third-party rebates and discounts are established or estimated at the time of delivery. These allowances are adjusted to reflect known changes in factors and may impact such allowances in the quarter those changes are known.

We expect that net product sales of Translarna for the treatment of nmDMD will fluctuate quarter-over-quarter. In some countries, including those in Latin America, orders for named patient sales may be for multiple months of therapy which can lead to an unevenness in orders. In addition, net product sales may fluctuate quarter-over-quarter as a result of government actions, economic pressures and political unrest. Net product sales may be significantly impacted by multiple factors, including, among other things, decisions by regulatory authorities, in particular the FDA and the EMA with respect to our submissions for Translarna for the treatment of nmDMD and our ability to successfully negotiate favorable pricing and reimbursement processes on a timely basis in the countries in which we have or may obtain regulatory approval, including the United States, EEA and other territories. 
 
Collaboration and Grant Revenue
 
The terms of collaboration agreements typically include payments of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding; and royalties on future product sales. In addition, if applicable, we generate service revenue through collaboration and grant agreements that provide for fees for research and development services or additional payments upon achievement of specified events.
 
We evaluate all contingent consideration earned, such as a milestone payment, using the criteria as provided by FASB guidance on the milestone method of revenue recognition. At the inception of a collaboration arrangement, we evaluate if milestone payments are substantive. The criteria requires that (1) we determine if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from our activities to achieve the milestone; (2) the milestone be related to past performance; and (3) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved. We recognize royalties as earned in accordance with the terms of various research and collaboration agreements. If not substantive, the contingent consideration is allocated to the existing units of accounting based on relative selling price and recognized following the same basis previously established for the associated unit of accounting.
 
We recognize reimbursements for research and development costs under collaboration agreements as revenue as the services are performed. We record these reimbursements as revenue and not as a reduction of research and development expenses as we have the risks and rewards as the principal in the research and development activities.
 
Our principal obligation under our grant agreements is to conduct the internal or external research in the specific field funded by the grant. We determine, through the grant’s normal research process, which research and development projects to pursue. We recognize grant revenues as the research activities are performed. If the grant includes an upfront payment, we defer the amount and recognize it as revenue as the expenditures are incurred.
 
Inventory and cost of product sales
 
In January 2017, the European Commission renewed our marketing authorization for Translarna for the treatment of nmDMD, subject to the specific obligation to conduct Study 041. We plan to seek to renew the marketing authorization on an annual basis until a marketing authorization that is not subject to any specific obligation is granted, if ever. A portion of the inventory available for sale was expensed as research and development costs prior to the renewal of our marketing authorization. As such,

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the cost of products sold and related gross margins for the period ended June 30, 2017 are not necessarily indicative of future cost of product sales and gross margins. We expect the gross margin for Translarna to be greater than 90%, which we believe is consistent with the cost of producing small molecule therapeutics for orphan drug diseases in the pharmaceutical industry.

Inventory

Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis. We capitalize inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. Translarna and EMFLAZA product which may be used in clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes. Inventory used for marketing efforts are charged to selling, general and administrative expense.

The following table summarizes the components of our inventory for the periods indicated:

 
 
June 30, 2017
 
December 31, 2016
Work in progress
 
$
941

 
$

Finished goods
 
5,971

 

Total inventory
 
$
6,912

 
$


We periodically review our inventories for excess amounts or obsolescence and write down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Additionally, though our product is subject to strict quality control and monitoring which we perform throughout the manufacturing processes, certain batches or units of product may not meet quality specifications resulting in a charge to cost of product sales.

Cost of product sales

Cost of product sales consists of the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs, storage costs, amortization of the acquired intangible asset and royalty payments associated with net product sales.

Accrued expenses
 
As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. Examples of estimated accrued expenses include:
 
·
fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

·
fees paid to investigative sites in connection with clinical trials;
 
·
fees paid to contract manufacturers in connection with the production of clinical trial materials; and
 
·
professional service fees.
 
Share-based compensation
 
We expect to grant additional stock options that will result in additional share-based compensation expense. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. For service type awards, share-based compensation expense is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the entire award. For awards that vest or begin vesting upon achievement of a performance condition, we estimate the likelihood of satisfaction of the performance condition and recognize compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model.

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From January 1, 2017 through June 30, 2017 , we issued a total of 1,738,873 stock options to various employees. Of those, 480,550 were non-statutory stock option inducement grants made pursuant to the NASDAQ inducement grant exception as a material component of our new hires’ employment compensation. All other stock option grants were made under our 2013 Long Term Incentive Plan.
 
The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant based on key assumptions, such as expected volatility and expected term. As a new public company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of the options. We calculate expected volatility based on reported data for similar publicly traded companies for which historical information is available and will continue to do so until the historical volatility of our common stock is sufficient to measure expected volatility for future option grants.
 
The fair value of grants made in the six months ended June 30, 2017 was contemporaneously estimated on the date of grant using the following assumptions:
 
 
2017
Risk-free interest rate
1.84% — 2.45%
Expected volatility
76%—81%
Expected term
5.04– 10.00 years
 
We assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the six month period ended June 30, 2017 was $8.07 per share.
 
We use the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to us with respect to industry, stage of life cycle, size, and financial leverage. The risk-free rate of the option is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.
 
Restricted Stock Awards —Restricted stock awards are granted subject to certain restrictions, including service conditions. The grant-date fair value of restricted stock awards, which has been determined based upon the market value of our common stock on the grant date, is expensed over the vesting period.
 
Restricted Stock Units —Restricted stock units are granted subject to certain restrictions, including in some cases service or time conditions (restricted stock). The grant-date fair value of restricted stock units, which has been determined based upon the market value of our common stock on the grant date, is expensed over the vesting period.
 
The following table summarizes information on our restricted stock awards and units:
 
 
 
Restricted Stock Awards and Units
 
 
Number of
Shares
 
Weighted
Average
Grant
Date Fair
Value
January 1, 2017
 
271,651

 
$
19.76

Granted
 
358,194

 
$
11.34

Vested
 
(180,861
)
 
$
14.19

Forfeited
 
(24,998
)
 
$
13.47

June 30, 2017
 
423,986

 
$
15.39


Stock Appreciation Rights —Stock appreciation rights (SARs) entitle the holder to receive, upon exercise, an amount of our common stock or cash (or a combination thereof) determined by reference to appreciation, from and after the date of grant, in the fair market value of a share of our common stock over the measurement price based on the exercise date.
 

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In May 2016, a total of 897,290 SARs were granted to non-executive employees (the 2016 SARs). The 2016 SARs will vest annually in equal installments over four years and will be settled in cash on each vest date, requiring us to remeasure the SARs at each reporting period until vesting occurs. For the period ending June 30, 2017 , a total of 213,197 SARs vested and we recorded $1.3 million in compensation expense related to the 2016 SARs.

Employee Stock Purchase Plan —In June 2016, we established an Employee Stock Purchase Plan (“ESPP” or “the Plan”) for certain eligible employees. The Plan is administered by our Board of Directors or a committee appointed by the Board. The total number of shares available for purchase under the Plan is one million shares of our common stock. Employees may participate over a six-month period through payroll withholdings and may purchase, at the end of the six-month period, our common stock at a purchase price of at least 85% of the closing price of a share of our common stock on the first business day of the offering period or the closing price of a share of our common stock on the last business day of the offering period, whichever is lower. No participant will be granted a right to purchase our common stock under the Plan if such participant would own more than 5% of the total combined voting power of us or one of our subsidiaries. For the period ending June 30, 2017 , we issued 107,499 shares of common stock and recorded $0.3 million in compensation expense related to the ESPP.

We recorded share-based compensation expense in the statement of operations related to incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units and the ESPP as follows:
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2016
 
2015
Research and development
 
$
3,895

 
$
4,087

 
$
8,362

 
$
8,415

Selling, general and administrative
 
3,990

 
4,649

 
8,552

 
9,236

Total
 
$
7,885

 
$
8,736

 
$
16,914

 
$
17,651

 
As of June 30, 2017 , there was approximately $56.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2009 Equity and Long Term Incentive Plan, the 2013 Long Term Incentive Plan and equity awards made pursuant to the NASDAQ inducement grant exception for new hires. This cost is expected to be recognized as share-based compensation expense over the weighted average remaining service period of approximately 2.19 years .

Results of operations
 
Three months ended June 30, 2017 compared to three months ended June 30, 2016
 
The following table summarizes revenues and selected expense and other income data for the three months ended June 30, 2017 and 2016 .
 
 
 
Three Months Ended
June 30,
 
Change
2017 vs.
2016
(in thousands)
 
2017
 
2016
 
Net product revenue
 
$
47,891

 
$
15,437

 
$
32,454

Collaboration and grant revenue
 
71

 
196

 
(125
)
Cost of product sales
 
758

 

 
758

Research and development expense
 
30,835

 
28,827

 
2,008

Selling, general and administrative expense
 
28,866

 
23,366

 
5,500

Interest expense, net
 
(3,008
)
 
(2,060
)
 
(948
)
Other expense, net
 
(1,820
)
 
(387
)
 
(1,433
)
Income tax (expense) benefit
 
(150
)
 
93

 
(243
)
 
Net product revenues. Net product revenues were $47.9 million for the three months ended June 30, 2017 , an increase of $32.5 million , or 210% , from $15.4 million for the three months ended June 30, 2016 . The increase in net product revenue was primarily due to the increase in net product sales in existing markets where Translarna is available as well as continued geographic expansion into new territories, in addition to net product sales from the domestic commercial launch of EMFLAZA in May 2017.
 

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Collaboration and grant revenues. Collaboration and grant revenues were $0.1 million for the three months ended June 30, 2017 and $0.2 million for the three months ended June 30, 2016 . Revenues are primarily from ongoing collaboration arrangements with Roche.

Cost of product sales . Cost of product sales were $0.8 million for the three months ended June 30, 2017 . Cost of product sales consist primarily of amortization of the acquired intangible asset, royalty payments associated with EMFLAZA and Translarna net product sales and costs associated with EMFLAZA and Translarna product sold during the period. For Translarna sold in 2017, the majority of related manufacturing costs incurred had previously been expensed prior to January 1, 2017 as research and development expenses.
 
Research and development expense. Research and development expense was $30.8 million for the three months ended June 30, 2017 , an increase of $2.0 million , or 7% , from $28.8 million for the three months ended June 30, 2016 . The increase resulted primarily due to start-up clinical activities and regulatory spend, partially offset by the decreased costs due to the completion of our CF program at the end of 2016.

Selling, general and administrative expense. Selling, general and administrative expense was $28.9 million for the three months ended June 30, 2017 , an increase of $5.5 million , or 24% , from $23.4 million for the three months ended June 30, 2016 . The increase resulted primarily from the expansion of the U.S. commercial sales team in support of the domestic product launch of EMFLAZA.
 
Interest expense, net.  Interest expense, net was $3.0 million for the three months ended June 30, 2017 , an increase of $0.9 million , or 46% , from $2.1 million for the three months ended June 30, 2016 .  The increase in interest expense was primarily due to current year interest expense recorded from the Convertible Notes and the Credit Facility in addition to lower interest income from investments.

Other expense, net . Other expense, net was $1.8 million for the three months ended June 30, 2017 , an increase in expense of $1.4 million , or 370% , from $0.4 million for the three months ended June 30, 2016 . The increase resulted primarily from foreign currency losses due to changes in exchange rates in the current period.
 
Income tax expense. Income tax expense was $0.2 million for the three months ended June 30, 2017 and income tax benefit was $0.1 million for the three months ended June 30, 2016 . We are subject to income taxes in the United States, although currently not a tax payer, and various foreign jurisdictions, and our foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions.
 
The income tax expense for the three months ended June 30, 2017 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before tax expense as a result of the favorable amount of profit mix in foreign jurisdictions which have lower tax rates, as well as by having a full valuation allowance in jurisdictions where we have net operating losses. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and permanent book-to-tax differences, and changes resulting from the impact of tax law changes.

Six months ended June 30, 2017 compared to six months ended June 30, 2016
 
The following table summarizes revenues and selected expense and other income data for the six months ended June 30, 2017 and 2016 .
 
 
 
Six Months Ended
June 30,
 
Change
2017 vs.
2016
(in thousands)
 
2017
 
2016
 
Net product revenue
 
$
74,334

 
$
34,314

 
$
40,020

Collaboration and grant revenue
 
176

 
214

 
(38
)
Cost of product sales
 
797

 

 
797

Research and development expense
 
58,198

 
60,226

 
(2,028
)
Selling, general and administrative expense
 
54,365

 
49,304

 
5,061

Interest expense, net
 
(5,227
)
 
(4,016
)
 
(1,211
)
Other expense, net
 
(2,139
)
 
(1,107
)
 
(1,032
)
Income tax expense
 
(316
)
 
(22
)
 
(294
)

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Net product revenues. Net product revenues were $74.3 million for the six months ended June 30, 2017 , an increase of $ 40.0 million , or 117% , from $34.3 million for the six months ended June 30, 2016 . The increase in net product revenue was primarily due to the increase in net product sales in existing markets where Translarna is available as well as continued geographic expansion into new territories, in addition to net product sales from the domestic commercial launch of EMFLAZA in May 2017.
 
Collaboration and grant revenues. Collaboration and grant revenues were $0.2 million for the six months ended June 30, 2017 , a decrease of $ 0.04 million , or 18% , from $0.2 million for the six months ended June 30, 2016 . These revenues are primarily from ongoing collaboration arrangements with Roche.

Cost of product sales . Cost of product sales were $0.8 million for the six months ended June 30, 2017 . Cost of product sales consist primarily of amortization of the acquired intangible asset, royalty payments associated with EMFLAZA and Translarna net product sales and costs associated with EMFLAZA and Translarna product sold during the period. For Translarna sold in 2017, the majority of related manufacturing costs incurred had previously been expensed prior to January 1, 2017 as research and development expenses.
 
Research and development expense. Research and development expense was $58.2 million for the six months ended June 30, 2017 , a decrease of $ 2.0 million , or 3% , from $60.2 million for the six months ended June 30, 2016 . The decrease resulted primarily from the completion of our ACT CF study at the end of 2016.
 
Selling, general and administrative expense. Selling, general and administrative expense was $54.4 million for the six months ended June 30, 2017 , an increase of $ 5.1 million , or 10% , from $49.3 million for the six months ended June 30, 2016 . The increase resulted primarily from the expansion of the U.S. commercial sales team in support of the domestic product launch of EMFLAZA.
 
Interest expense, net.  Interest expense, net was $5.2 million for the six months ended June 30, 2017 , an increase in expense of $ 1.2 million , or 30% , from interest expense of $4.0 million for the six months ended June 30, 2016 .  The increase in interest expense was primarily due to current year interest expense recorded from the Convertible Notes and the Credit Facility partially offset by interest income from investments.

Other expense, net . Other expense, net was $2.1 million for the six months ended June 30, 2017 , an increase in expense of $1.0 million , or 93% , from other expense, net of $1.1 million for six months ended June 30, 2016 . The increase resulted primarily from foreign currency losses due to changes in exchange rates in the current period.
 
Income tax expense. Income tax expense was $0.3 million for the six months ended June 30, 2017 and $0.0 million for the six months ended June 30, 2016 . We are subject to income taxes in the United States, although currently not a tax payer, and various foreign jurisdictions, and our foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions.
 
The income tax expense for the six months ended June 30, 2017 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before tax expense as a result of the favorable amount of profit mix in foreign jurisdictions which have lower tax rates, as well as by having a full valuation allowance in jurisdictions where we have net operating losses. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and permanent book-to-tax differences, and changes resulting from the impact of tax law changes.
Liquidity and capital resources
Sources of liquidity
Since inception, we have incurred significant operating losses.
As a growing commercial-stage biopharmaceutical company, we are engaging in significant commercialization efforts for Translarna for nmDMD and EMFLAZA for the treatment of DMD while also devoting a substantial portion of our efforts on research and development programs related to Translarna and our other product candidates.
To date, almost all of our product revenue has been attributable to sales of Translarna for the treatment of nmDMD in territories outside of the United States. Our ongoing ability to generate revenue from sales of Translarna for the treatment of nmDMD is dependent upon our ability to maintain our marketing authorization in the EEA and secure market access through commercial

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programs following the conclusion of pricing and reimbursement terms at sustainable levels in the member states of the EEA or through EAP programs in the EEA and other territories. The marketing authorization requires annual review and renewal by the European Commission following reassessment by the EMA of the benefit-risk balance of the authorization and is subject to the specific obligation to conduct Study 041. Although we have recently begun to commercialize and market EMFLAZA in the United States, to date, we have not generated significant revenue from EMFLAZA. Our ability to generate product revenue from EMFLAZA will largely depend on the coverage and reimbursement levels set by governmental authorities, private health insurers and other third-party payors.
On April 20, 2017, we completed our acquisition of all rights to EMFLAZA for total consideration comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock, which was determined by dividing $65.0 million by the volume weighted average price per share of our common stock on the Nasdaq Stock Market for the 15 trading-day period ending on the third trading day immediately preceding the closing. As a result of this acquisition, we expect to continue to incur additional significant costs including costs related to our efforts to commercialize EMFLAZA and satisfy related FDA post-marketing requirements.
We have historically financed our operations primarily through the issuance and sale of our common stock in public offerings, the private placements of our preferred stock, collaborations, bank debt, convertible debt financings and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates. Since 2014, we have also relied on revenues generated from net sales of Translarna for the treatment of nmDMD in territories outside of the United States, and in May 2017, we began to recognize revenue generated from net sales of EMFLAZA for the treatment of DMD in the United States. Based on our current commercial, research and development plans, we expect to continue to incur significant operating expenses for the foreseeable future, which we anticipate will be partially offset by revenues generated from the sale of both Translarna and EMFLAZA. As a result, while we expect to continue to generate operating losses in 2017, we anticipate that operating losses generated in future periods should decline versus prior periods. The net losses we incur may fluctuate significantly from quarter to quarter.
On May 5, 2017, we entered into the Credit Agreement with MidCap Financial, which provides for a senior secured term loan facility of $60 million, of which $40 million was drawn by us on May 5, 2017. The remaining $20 million under the senior secured term loan facility would become available to us upon our demonstration (prior to December 31, 2018) of net product revenue equaling or exceeding $120 million for the trailing 12 month period. The maturity date of the Credit Agreement is May 1, 2021, unless terminated earlier. The facility is structured to require only monthly interest payments for the initial two years with principal amortization beginning in years three and four. The facility bears interest at a rate per annum equal to LIBOR (with a LIBOR floor rate of 1.00%) plus 6.15%, as well as additional upfront and administrative fees and expenses.
In August 2015, we closed a private offering of $150 million in aggregate principal amount of 3.00% convertible senior notes due 2022 including the exercise by the initial purchasers of an option to purchase an additional $25 million in aggregate principal amount of the Convertible Notes. The Convertible Notes bear cash interest payable on February 15 and August 15 of each year, beginning on February 15, 2016. The Convertible Notes are senior unsecured obligations of ours and will mature on August 15, 2022, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. We received net proceeds from the offering of approximately $145.4 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by us.
Cash flows
 
As of June 30, 2017 , we had cash, cash equivalents and marketable securities of $ 181.1 million.
 
The following table provides information regarding our cash flows and our capital expenditures for the periods indicated.
 
 
 
Six Months Ended
June 30,
(in thousands)
 
2017
 
2016
Cash provided by (used in):
 
 

 
 

Operating activities
 
(15,582
)
 
(66,172
)
Investing activities
 
47,887

 
43,114

Financing activities
 
40,660

 
34

 
Net cash used in operating activities was $15.6 million