PTC Therapeutics
PTC THERAPEUTICS, INC. (Form: 10-Q, Received: 05/08/2017 08:28:54)
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 March 31, 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 May 5, 2017 , there were 41,244,004 shares of Common Stock, $0.001 par value per share, outstanding.
 


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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 Form10-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 a pending commercial launch of EMFLAZA for the treatment of Duchenne muscular dystrophy, or DMD, in the United States including with respect to matters of timing and our ability to resolve gating regulatory, distribution channel, 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;
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;
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;

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the timing and conduct of our ongoing, planned and potential future clinical trials and studies of Translarna for the treatment of nmDMD, mucopolysaccharidosis type I, or MPS I, 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, including whether patients in Germany will continue to be able to access Translarna via a reimbursed importation pathway provided under German law, while maintaining a sustainable price;
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, 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

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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)
 
 
 
March 31,
2017
 
December 31,
2016
Assets
 
 

 
 
Current assets:
 
 

 
 
Cash and cash equivalents
 
$
54,106

 
$
58,321

Marketable securities
 
148,471

 
173,345

Inventory
 
1,354

 

Prepaid expenses and other current assets
 
4,623

 
4,691

Trade receivables, net
 
32,173

 
24,929

Total current assets
 
240,727

 
261,286

Fixed assets, net
 
7,059

 
7,429

Deposits and other assets
 
859

 
630

Total assets
 
$
248,645

 
$
269,345

Liabilities and stockholders’ equity
 
 

 
 
Current liabilities:
 
 

 
 
Accounts payable and accrued expenses
 
$
45,153

 
$
48,759

 Other current liabilities
 
265

 
865

Total current liabilities
 
45,418

 
49,624

Deferred revenue - long-term
 
2,194

 
1,587

Long-term debt
 
99,895

 
98,216

Other long-term liabilities
 
311

 
335

Total liabilities
 
147,818

 
149,762

 
 
 
 
 
Stockholders’ equity:
 
 

 
 
Common stock, $0.001 par value. Authorized 125,000,000 shares; issued and outstanding 34,316,836 shares at March 31, 2017. Authorized 125,000,000 shares; issued and outstanding 34,169,410 shares at December 31, 2016
 
34

 
34

Additional paid-in capital
 
865,834

 
856,142

Accumulated other comprehensive loss
 
(876
)
 
(1,485
)
Accumulated deficit
 
(764,165
)
 
(735,108
)
Total stockholders’ equity
 
100,827

 
119,583

Total liabilities and stockholders’ equity
 
$
248,645

 
$
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 March 31,
 
 
2017
 
2016
Revenues:
 
 

 
 

Net product revenue
 
$
26,442

 
$
18,878

Collaboration and grant revenue
 
105

 
17

Total revenues
 
26,547

 
18,895

Operating expenses:
 
 

 
 

Cost of product sales
 
39

 

Research and development
 
27,363

 
31,399

Selling, general and administrative
 
25,500

 
25,938

Total operating expenses
 
52,902

 
57,337

Loss from operations
 
(26,355
)
 
(38,442
)
Interest expense, net
 
(2,219
)
 
(1,956
)
Other expense, net
 
(318
)
 
(721
)
Loss before income tax expense
 
(28,892
)
 
(41,119
)
Income tax expense
 
(165
)
 
(114
)
Net loss attributable to common stockholders
 
$
(29,057
)
 
$
(41,233
)
 
 
 
 
 
Weighted-average shares outstanding:
 
 

 
 

Basic and diluted (in shares)
 
34,305,948

 
33,919,169

Net loss per share—basic and diluted (in dollars per share)
 
$
(0.85
)
 
$
(1.22
)
 
See accompanying unaudited notes.


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PTC Therapeutics, Inc.
Consolidated Statements of Comprehensive Loss (unaudited)
In thousands
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net loss
 
$
(29,057
)
 
$
(41,233
)
Other comprehensive loss:
 
 

 
 

Unrealized (loss) gain on marketable securities, net of tax
 
(22
)
 
658

Foreign currency translation gain
 
631

 
1,626

Comprehensive loss
 
$
(28,448
)
 
$
(38,949
)
 
See accompanying unaudited notes.


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PTC Therapeutics, Inc.
Consolidated Statements of Cash Flows (unaudited)
In thousands
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(29,057
)
 
$
(41,233
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Depreciation
 
612

 
849

Change in valuation of warrant liability
 

 
(47
)
Non-cash interest expense
 
1,600

 
1,446

Amortization of premiums on investments
 
208

 
631

Amortization of debt issuance costs
 
80

 
72

Share-based compensation expense
 
9,029

 
8,915

Unrealized foreign currency transaction losses, net
 
820

 

Changes in operating assets and liabilities:
 
 

 
 

Inventory
 
(1,350
)
 

Prepaid expenses and other current assets
 
93

 
702

Trade receivables, net
 
(6,746
)
 
(10,678
)
Deposits and other assets
 
(226
)
 
(12
)
Accounts payable and accrued expenses
 
(3,923
)
 
(2,452
)
Other liabilities
 
(624
)
 
(23
)
Deferred revenue
 
582

 
243

Net cash used in operating activities
 
(28,902
)
 
(41,587
)
Cash flows from investing activities
 
 

 
 

Purchases of fixed assets
 
(225
)
 
(265
)
Purchases of marketable securities
 
(19,467
)
 
(19,413
)
Sale and redemption of marketable securities
 
44,110

 
41,795

Net cash provided by investing activities
 
24,418

 
22,117

Cash flows from financing activities
 
 

 
 

Proceeds from exercise of options
 
106

 
34

Proceeds from shares issued under employee stock purchase plan
 
557

 

Net cash provided by financing activities
 
663

 
34

Effect of exchange rate changes on cash
 
(394
)
 
1,579

Net decrease in cash and cash equivalents
 
(4,215
)
 
(17,857
)
Cash and cash equivalents, beginning of period
 
58,321

 
58,022

Cash and cash equivalents, end of period
 
$
54,106

 
$
40,165

Supplemental disclosure of cash information
 
 

 
 

Cash paid for interest
 
$
2,250

 
$
2,263

Cash paid for income taxes
 
$
28

 
$
225

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

 
 

Change in unrealized (loss) gain on marketable securities, net of tax
 
$
(22
)
 
$
658

 
See accompanying unaudited notes.


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PTC Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
March 31, 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’s product, Translarna (ataluren) 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. nmDMD is a rare, life threatening disorder.

The Company’s marketing authorization 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 January 2017 and is effective, unless extended, through August 5, 2017. 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. The Company submitted a marketing authorization renewal request to the EMA in February 2017. In April 2017, the EMA’s Committee for Human Medicinal Products, or CHMP, issued a positive recommendation to this renewal request, which is pending endorsement from the European Commission. If the European Commission endorses the recommendation, the Company expects the renewal would be effective for a period of twelve months.
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 March 31, 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, or 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. 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

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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.
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™ (deflazacort), or the Transaction. EMFLAZA is approved in the United States for the treatment of Duchenne muscular dystrophy, or DMD, 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, or the Asset Purchase Agreement, by and between the Company and Marathon Pharmaceuticals, LLC (now known as Complete Pharma Holdings, LLC), or Marathon. The assets acquired by the Company in the Transaction include intellectual property rights related to EMFLAZA, inventories of EMFLAZA, certain contractual rights related to EMFLAZA and certain other assets 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 of approximately $140 million . The total upfront consideration was comprised of $75 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 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 for such payments, and a single $50 million sales-based milestone, in each case subject to the terms and conditions of the Asset Purchase Agreement. The Company expects that the contingent payments will, on a blended average basis, range in percentages of net sales between the low to mid-twenties.

As of March 31, 2017 , the Company had an accumulated deficit of approximately $764.2 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, convertible debt financings, grant funding and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease area addressed by the Company’s product candidates. 

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 (SEC) on March 16, 2017 ( 2016 Form 10-K).
 
Basis of presentation
 
The accompanying financial information as of March 31, 2017 and for the three months ended March 31, 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 March 31, 2017 and for the three months ended March 31, 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 month periods ended March 31, 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 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. The product sales in the period ended
March 31, 2017 reflects de minimis cost of inventory as the majority was expensed to research and development costs in prior periods.

Inventory

Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis. 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 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.

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

 
 
March 31, 2017
 
December 31, 2016
Work in progress
 
$
320

 
$

Finished goods
 
1,034

 

Total inventory
 
$
1,354

 
$


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. 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 and storage costs.

Revenue recognition
 
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
 
The Company’s net product sales have consisted solely of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. The Company began recognizing revenue for payments received under the reimbursed EAPs for Translarna in nmDMD

10


patients in select countries in the third quarter of 2014. 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, in some cases, one of 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.

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 FASB 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

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 $0.8 million as of March 31, 2017 and $0.7 million as of December 31, 2016 .

Recently issued accounting standards
 
In May 2014, the FASB issued Accounting Standards Update (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 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

11


adopt this guidance when effective and 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 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 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 expects to adopt this guidance when effective and is assessing what effect the adoption of ASU 2017-01 will have on its consolidated financial statements and accompanying notes.

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 March 31, 2017 , adoption of this standard did not have a significant impact on the Company's financial statements.


12


 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 the development and application of its forfeiture rate.

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.
 
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 March 31, 2017 and December 31, 2016 :
 
 
 
March 31, 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
 
$
148,471

 
$

 
$
148,471

 
$

Warrant liability
 
$
1

 
$

 
$

 
$
1

Stock appreciation rights liability
 
$
265

 
$

 
$

 
$
265



13


 
 
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 March 31, 2017 and December 31, 2016 .
 
The following is a summary of marketable securities accounted for as available-for-sale securities at March 31, 2017 and December 31, 2016 :
 
 
March 31, 2017
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
 
Gains
 
Losses
 
Commercial paper
 
$
19,162

 
$
35

 
$

 
$
19,197

Corporate debt securities
 
126,134

 
23

 
(84
)
 
126,073

Government obligations
 
3,201

 

 

 
3,201

 
 
$
148,497

 
$
58

 
$
(84
)
 
$
148,471

 
 
 
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 March 31, 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 March 31, 2017 and December 31, 2016 , the Company did not have any realized gains/losses from the sale of marketable securities.
 
Marketable securities on the balance sheet at March 31, 2017 and December 31, 2016 mature as follows:
 
 
March 31, 2017
 
 
Less Than
12 Months
 
More Than
12 Months
Commercial paper
 
$
19,197

 
$

Corporate debt securities
 
122,077

 
3,995

Government obligations
 
3,202

 

Total Marketable securities
 
$
144,476

 
$
3,995

 
 
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.

14


 
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 long-term 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 March 31, 2017 :
 
 
Level 3 liabilities
 
 
Warrants
 
SARs
Beginning balance as of December 31, 2016
 
$
1

 
$
865

Change in fair value
 

 
464

Payments
 

 
(1,064
)
Ending balance as of March 31, 2017
 
$
1

 
$
265

 
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 March 31, 2017 include (i) volatility ( 55% 69% ), (ii) risk free interest rate ( 0.76% 1.39% ), (iii) strike price ( $128.00 - $2,520.00 ), (iv) fair value of common stock ( $9.84 ), and (v) expected life ( 0.21 2.48 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 March 31, 2017 include (i) volatility ( 67% 69% ), (ii) risk free interest rate ( 0.97% 1.50% ), (iii) strike price ( $6.76 - $30.86 ), (iv) fair value of common stock ( $9.84 ), and (v) expected life ( 0.8 2.8 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 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 months ended March 31, 2017 :


15


 
 
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
 
(22
)
 
631

 
609

Amounts reclassified from other comprehensive items
 

 

 

Other comprehensive (loss) income
 
(22
)
 
631

 
609

Balance at March 31, 2017
 
$
(225
)
 
$
(651
)
 
$
(876
)

5.
Accounts payable and accrued expenses
 
Accounts payable and accrued expenses at March 31, 2017 and December 31, 2016 consist of the following:
 
 
 
March 31,
2017
 
December 31,
2016
Employee compensation, benefits, and related accruals
 
$
7,605

 
$
13,649

Consulting and contracted research
 
8,827

 
11,505

Professional fees
 
2,298

 
1,237

Sales allowance and other costs
 
19,088

 
13,245

Accounts payable
 
3,579

 
6,298

Other
 
3,756

 
2,825

 
 
$
45,153

 
$
48,759

 
6.
Warrants
 
All of the Company’s outstanding warrants were classified as liabilities as of March 31, 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 March 31, 2017 and 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 income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (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 March 31,
 
 
2017
 
2016
 
Numerator
 

 
 

 
Net loss
$
(29,057
)
 
$
(41,233
)
 
Denominator
 

 
 

 
Denominator for basic and diluted net loss per share
34,305,948

 
33,919,169

 
Net loss per share:
 

 
 

 
Basic and diluted
$
(0.85
)
*
$
(1.22
)
*

16


 
 
*In the three months ended March 31, 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 March 31,
 
2017
 
2016
Stock Options
7,007,290

 
6,034,918

Unvested restricted stock awards and units
566,594

 
453,441

Total
7,573,884

 
6,488,359


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 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 March 31, 2017 , awards for 236,792 shares of common stock are available for issuance.
 
From January 1, 2017 through March 31, 2017 , the Company issued a total of 1,244,723 stock options to various employees.  Of those, 54,900 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:

17


 
 
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
 
1,244,723

 
$
11.32

 
 
 
 

Exercised
 
(9,766
)
 
$
10.85

 
 
 
 

Forfeited/Cancelled
 
(81,983
)
 
$
35.64

 
 
 
 

Outstanding at March 31, 2017
 
7,007,290

 
$
30.56

 
7.87 years
 
$
179

Vested or Expected to vest at March 31, 2017
 
3,296,281

 
$
28.16

 
8.68 years
 
$
144

Exercisable at March 31, 2017
 
3,478,720

 
$
33.28

 
7.03 years
 
$
25

 
The fair value of grants made in the three months ended March 31, 2017 was contemporaneously estimated on the date of grant using the following assumptions:
 
 
Three months ended
March 31, 2017
 
Risk-free interest rate
 
1.94% — 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 three -month period ended March 31, 2017 was $7.76 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.

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
 
328,194

 
$
11.23

Vested
 
(30,161
)
 
$
30.86

Forfeited
 
(3,090
)
 
$
13.98

Unvested at March 31, 2017
 
566,594

 
$
14.26

 
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.

18


 
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 March 31, 2017 , a total of 213,197 SARs vested and the Company recorded $0.2 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 March 31, 2017 , the Company issued 107,499 shares of common stock and recorded $0.2 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 March 31,
 
 
2017
 
2016
Research and development
 
$
4,467

 
$
4,328

Selling, general and administrative
 
4,562

 
4,587

Total
 
$
9,029

 
$
8,915

 
As of March 31, 2017 , there was approximately $63.2 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 2.26 years.
 
9.
Convertible Senior 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

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·                   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.
 
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:

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Liability component
 
March 31, 2017
 
December 31, 2016
Principal
 
$
150,000

 
$
150,000

Less: Debt issuance costs
 
(2,378
)
 
(2,457
)
Less: Debt discount, net(1)
 
(47,727
)
 
(49,327
)
Net carrying amount
 
$
99,895

 
$
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.
 
The fair value of the Convertible Notes was approximately $95.9 million as of March 31, 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 March 31, 2017 , the remaining contractual life of the Convertible Notes is approximately 5.4 years.
 
The following table sets forth total interest expense recognized related to the Convertible Notes:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Contractual interest expense
 
$
1,110

 
$
1,116

Amortization of debt issuance costs
 
80

 
72

Amortization of debt discount
 
1,600

 
1,446

Total
 
$
2,790

 
$
2,634

Effective interest rate of the liability component
 
11
%
 
11
%
 
10.
Restructuring
 
In March 2016, the Company commenced implementation of a reorganization of its operations intended to improve efficiency and better align the Company’s costs and employment structure with its strategic plans. The Company completed its reorganization in June 2016 and recorded a one-time charge of $2.5 million for the year ended December 31, 2016 . The total $2.5 million in one-time charges is related to work-force reduction, recorded in research and development and selling, general and administrative expenses in the accompanying statement of operations.

 
 
Balance as of
December 31,
2016
 
Expenses,
net
 
Cash payments
 
Balance as of
March 31, 2017
2016 workforce reduction
 
$
22

 
$

 
$
(22
)
 
$

 
11.
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 steam 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.
    

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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.
 
12.
Subsequent events
 
On April 20, 2017, the Company completed its previously announced acquisition of all rights to EMFLAZA™ (deflazacort) pursuant to an asset purchase agreement, dated March 15, 2017, and amended on April 20, 2017, by and between the Company and Marathon Pharmaceuticals, LLC (now known as Complete Pharma Holdings, LLC), or Marathon.

Upon the closing of the acquisition of EMFLAZA, the Company paid to Marathon total upfront consideration of approximately $140 million , comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of the Company's common stock. Marathon is also 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 for such payments, which the Company expects will range as a percentage of net sales between the low to mid-20s on a blended average basis. In addition, Marathon has the opportunity to receive a single $50 million sales-based milestone. Additional information concerning the EMFLAZA acquisition is discussed in Note 1. The Company is currently assessing the accounting related to the EMFLAZA acquisition.

On May 5, 2017, the Company entered into a credit and security agreement with MidCap Financial Trust a Delaware statutory trust, or MidCap Financial, as administrative agent and MidCap Financial and other certain institutions as lenders thereto, or the Credit Agreement, that provides for a $60 million term loan facility, of which $40 million was drawn by the Company at close. The remaining $20 million under the senior secured term loan facility would become available to the Company upon demonstration (prior to December 31, 2018) of net product revenue equaling or exceeding $120 million for the trailing twelve month period. The maturity date of the Credit Agreement is May 1, 2021, unless terminated earlier.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to LIBOR (with a floor rate of 1.00% ) plus 6.15% . The Company is obligated to make only interest 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 based on the straight-line amortization schedule in the Credit Agreement. The Credit Agreement requires the Company to not have less than $100 million of net revenue (raised to $120 million if the additional $20 million term loan is issued) for the prior twelve months to be measured on the last day of each fiscal quarter beginning on December 31, 2017. The Company is currently assessing the accounting related to the Credit Agreement.

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 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.

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During the quarter ended March 31, 2017 , we recognized $26.4 million in sales of Translarna TM (ataluren) for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD. 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.
Corporate Updates
Acquisition of EMFLAZA™ for the treatment of Duchenne muscular dystrophy in the United States
On April 20, 2017, we completed the previously announced acquisition of all rights to EMFLAZA™ (deflazacort) 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 Duchenne muscular dystrophy, or 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 of approximately $140 million, comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock. The number of shares of common stock issued at closing was determined by dividing $65 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 million sales-based milestone, in each case subject to the terms and conditions of the Asset Purchase Agreement. We expect that the contingent payments will, on a blended average basis, range as a percentage of net sales between the low to mid-twenties.
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 United States, or 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 plan to begin commercializing EMFLAZA in the U.S. in the next several weeks. We are working to finalize certain regulatory and distribution channel matters and our ability to launch is subject to conclusion of these matters. If we are unable to finalize these matters promptly, the Asset Purchase Agreement allows for an alternative mechanism to be utilized at the option of Marathon by which EMFLAZA may become commercially available for a limited interim period using the existing Marathon distribution channel. During the period, if any, that this alternative mechanism is utilized, we would be entitled to a majority, but not all, of the net proceeds of such sales of EMFLAZA.
We expect to utilize third parties for the commercial distribution of EMFLAZA, including a third-party logistics company to warehouse EMFLAZA as well as a specialty pharmacy to sell and distribute EMFLAZA to patients. A specialty pharmacy will also provide us with third-party call center services to provide patient support and financial services, prescription intake and distribution, reimbursement adjudication, and ongoing compliance support. All of our manufacturing needs for EMFLAZA will be 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 preparations for the commercial launch of EMFLAZA in the U.S., we are engaging 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 expected to be made on a plan-by-plan, and in some cases, on a patient-by-patient basis.

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To date, we have received over 900 physician prescriptions for EMFLAZA. Most of these prescriptions are for patients currently being treated with deflazacort. We anticipate that coverage and reimbursement decisions by third-party payors, including the processing and adjudication of these 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 Translarna 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. This 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 January 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. The renewal was based on the totality of the clinical data available from our trials and studies of Translarna for the treatment of nmDMD, including the safety and efficacy results of our Phase 2b and Phase 3 clinical trials, and our commitment to conduct and submit the results of Study 041 to the European Medicines Agency, or EMA, by the end of the third quarter of 2021. 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 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. We expect that as part of the annual EMA assessment, the EMA will consider the ongoing status of Study 041. We submitted a marketing authorization renewal request to the EMA in February 2017. In April 2017, the EMA’s Committee for Human Medicinal Products, or CHMP, issued a positive recommendation to this renewal request, which is pending endorsement from the European Commission. If the European Commission endorses the recommendation, we expect the renewal would be effective for a period of twelve months.
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 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

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marketing authorization in the EEA to include patients from two to four 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 "Item1A. 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 “ Our initial commercial launch of Translarna has begun 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: mucopolysaccharidosis type I caused by nonsense mutation, or nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5.
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. Part one of each study is expected to be followed by a pivotal part two with the primary objective of evaluating the efficacy 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

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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 of approximately $140 million, comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock. To date, we have not generated revenue from, or commenced commercial sale of, EMFLAZA in the United States. We plan to begin commercializing EMFLAZA in the United States in the second quarter of 2017.
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.
As of March 31, 2017 , we had an accumulated deficit of $764.2 million . We had a net loss of $29.1 million and $41.2 million for the three months ended March 31, 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 nmMPS I, 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. 
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. 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

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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 solely of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. 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
 
·    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 nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5, activities under our cancer stem cell program, and

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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 months ended March 31, 2017 and 2016 .
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Translarna (nmDMD, nmCF, nmMPS I, aniridia and Dravet)
 
$
19,400

 
$
22,182

Cancer stem cell
 
1,443

 
1,216

Next generation nonsense readthrough
 
1,434

 
1,852

Other research and preclinical
 
5,086

 
6,149

Total research and development
 
$
27,363

 
$
31,399

 
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;
 
·
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.

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Interest (expense) income, net
 
Interest (expense) income, net consists of interest income earned on investments and interest expense from the Convertible Notes outstanding.
 
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 solely of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. We began recognizing revenue for payments received under the reimbursed EAPs for Translarna in nmDMD patients in select countries in the third quarter of 2014. We have now established a pattern of collectability and, since January 2015, 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 (“FASB”) Accounting Standards Codification (“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, in some cases, one of 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 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.
 
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 Brazil, 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

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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 the Financial Accounting Standards Board, or 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, the cost of products sold and related gross margins for the period ended March 31, 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 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.

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

 
 
March 31, 2017
 
December 31, 2016
Work in progress
 
$
320

 
$

Finished goods
 
1,034

 

Total inventory
 
$
1,354

 
$


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


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Cost of product sales consists of the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs and storage costs.

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.
 
From January 1, 2017 through March 31, 2017 , we issued a total of 1,244,723 stock options to various employees. Of those, 54,900 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 three months ended March 31, 2017 was contemporaneously estimated on the date of grant using the following assumptions:
 
 
2017
Risk-free interest rate
1.94% — 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 three month period ended March 31, 2017 was $7.76 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

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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
 
328,194

 
$
11.23

Vested
 
(30,161
)
 
$
30.86

Forfeited
 
(3,090
)
 
$
13.98

March 31, 2017
 
566,594

 
$
14.26


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.
 
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 March 31, 2017 , a total of 213,197 SARs vested and we recorded $0.2 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 March 31, 2017 , we issued 107,499 shares of common stock and recorded $0.2 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 March 31,
 
 
2017
 
2016
 
 
 
 
 
Research and development
 
$
4,467

 
$
4,328

Selling, general and administrative
 
4,562

 
4,587

Total
 
$
9,029

 
$
8,915

 
As of March 31, 2017 , there was approximately $63.2 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

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expected to be recognized as share-based compensation expense over the weighted average remaining service period of approximately 2.26 years .

Results of operations
 
Three months ended March 31, 2017 compared to three months ended March 31, 2016
 
The following table summarizes revenues and selected expense and other income data for the three months ended March 31, 2017 and 2016 .
 
 
 
Three Months Ended
March 31,
 
Change
2017 vs.
2016
(in thousands)
 
2017
 
2016
 
Net product revenue
 
$
26,442

 
$
18,878

 
$
7,564

Collaboration and grant revenue
 
105

 
17

 
88

Cost of product sales
 
39

 

 
39

Research and development expense
 
27,363

 
31,399

 
(4,036
)
Selling, general and administrative expense
 
25,500

 
25,938

 
(438
)
Interest expense, net
 
(2,219
)
 
(1,956
)
 
(263
)
 
Net product revenues. Net product revenues were $26.4 million for the three months ended March 31, 2017 , an increase of $7.6 million , or 40% , from $18.9 million for the three months ended March 31, 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.
 
Collaboration and grant revenues. Collaboration and grant revenues were $0.1 million for the three months ended March 31, 2017 primarily from ongoing collaboration arrangements with Roche.

Cost of product sales . Cost of product sales were $0.04 million for the three months ended March 31, 2017 due to the initial capitalization of drug product manufactured for commercial use as inventory in the first quarter of 2017 and the sale of product in the period from the inventory stock. Prior to the decision to capitalize inventory effective January 1, 2017 as a result of the annual marketing authorization renewal granted by the European Commission for Translarna for the treatment of nmDMD, the manufacturing and material costs were expensed as research and development expenses. 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 $27.4 million for the three months ended March 31, 2017 , a decrease of $4.0 million , or 13% , from $31.4 million for the three months ended March 31, 2016 . The decrease resulted primarily from decreased costs associated with clinical trials of $2.7 million and lower product manufacturing costs of $1.1 million as a result of the completion of ACT CF at the end of 2016 and the ongoing reduction of clinical trial expenses.

Selling, general and administrative expense. Selling, general and administrative expense was $25.5 million for the three months ended March 31, 2017 , a decrease of $0.4 million , or 2% , from $25.9 million for the three months ended March 31, 2016 . The decrease resulted primarily from a decrease in personnel and related costs due to the prior year restructuring.
 
Interest expense, net.  Interest expense, net was $2.2 million for the three months ended March 31, 2017 , an increase of $0.3 million from $2.0 million for the three months ended March 31, 2016 .  The increase in interest expense was primarily due to current year interest expense recorded from the Convertible Notes partially offset by lower interest income from investments.
 
Income tax expense. Income tax expense was $0.2 million for the three months ended March 31, 2017 and $0.1 million for the three months ended March 31, 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 March 31, 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

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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, 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 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.
On April 20, 2017, we completed our acquisition of all rights to EMFLAZA for total upfront consideration of approximately $140 million, comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock. 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. To date, we have not generated revenue from, or commenced commercial sale of, EMFLAZA in the United States.
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. 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 a floating interest rate of 1-month LIBOR plus 6.15%, with a minimum LIBOR floor of 1.0%, 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, or the Convertible Notes, 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 March 31, 2017 , we had cash, cash equivalents and marketable securities of $ 202.6 million.
 
The following table provides information regarding our cash flows and our capital expenditures for the periods indicated.
 

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Three Months Ended
March 31,
(in thousands)
 
2017
 
2016
Cash provided by (used in):
 
 

 
 

Operating activities
 
(28,902
)
 
(41,587
)
Investing activities
 
24,418

 
22,117

Financing activities
 
663

 
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Net cash used in operating activities was $28.9 million for the three months ended March 31, 2017 and $41.6 million for the three months ended March 31, 2016 . The net cash used in operating activities primarily relates to supporting clinical development and commercial activities.
 
Net cash provided by investing activities was $24.4 million for the three months ended March 31, 2017 and $22.1 million for the three months ended March 31, 2016 .  Cash provided by investing activities was related to the sale and redemption of marketable securities to fund operations.
 
Net cash provided by financing activities for the three months ended March 31, 2017 and for the three months ended March 31, 2016 is primarily attributable to the exercise of options and issuance of stock under the ESPP.
 
Funding requirements
 
We anticipate that our expenses will increase in connection with our commercialization efforts in the United States, the EEA and other territories, including 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 nmMPS I, 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. 
In addition, our expenses will increase if and as we:
prepare and execute our strategy for EMFLAZA in the United States, including commercialization and integration efforts;
satisfy contractual and regulatory obligations that we assumed through the EMFLAZA acquisition;
are required to complete any additional clinical and non-clinical trials or analyses in order to advance Translarna for the treatment of nmDMD in the United States or elsewhere;
are required to take other steps, in addition to Study 041, to maintain our current marketing authorization in the EEA for Translarna for the treatment of nmDMD or to obtain further marketing authorizations for Translarna for the treatment of nmDMD or other indications;
initiate or continue the research and development of Translarna for additional indications and of our other product candidates;
seek to discover and develop additional product candidates;
seek to expand and diversify our product pipeline through strategic transactions;
maintain, expand and protect our intellectual property portfolio; and
add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.
We believe that our cash flows from product sales, together with existing cash and cash equivalents, including the net proceeds from our term loan facility with MidCap Financial Trust, our offering of the Convertible Notes, public offerings of common

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stock, marketable securities and research funding that we expect to receive under our collaborations, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
our ability to commercialize and market EMFLAZA for the treatment of DMD in the United States;
our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms, on a timely basis, with third-party payors for EMFLAZA for the treatment of DMD in the United States and for Translarna for the treatment of nmDMD in the EEA and other territories outside of the United States;
our ability to maintain orphan exclusivity for, and successfully complete all FDA post-marketing requirements with respect to, EMFLAZA;
our ability to satisfy our obligations under the terms of the Credit Agreement with MidCap Financial;
our ability to maintain the marketing authorization in the EEA for Translarna for the treatment of nmDMD, including whether the EMA determines on an annual basis that the benefit-risk balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label;
the costs, timing and outcome of Study 041;
the costs, timing and outcome of our efforts to advance Translarna for the treatment of nmDMD in the United States, whether pursuant to the file over protest process with the FDA, or otherwise, and including, whether we will be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost which, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the U.S.;
the progress and results of our pediatric study of Translarna for the treatment of nmDMD, our open label extension clinical trials of Translarna for the treatment of nmDMD as well as our studies for nmMPS I and nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5 and activities under our cancer stem cell program;
the scope, costs and timing of our commercialization activities, including product sales, marketing, legal, regulatory, distribution and manufacturing, for both EMFLAZA and Translarna for the treatment of nmDMD and any of our other product candidates that may receive marketing authorization or any additional indications or territories in which we receive authorization to market Translarna;
the costs, timing and outcome of regulatory review of our other product candidates and Translarna in other territories or for indications other than nmDMD;
the timing and scope of growth in our employee base;
the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for Translarna for additional indications and for our other product candidates;
revenue received from commercial sales of Translarna or, when and if commercially launched, EMFLAZA, or any of our other product candidates;
our ability to obtain additional and maintain existing reimbursed named patient and cohort EAP programs for Translarna for the treatment of nmDMD on adequate terms, or at all;
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, including in Germany;
the costs of preparing, filing and prosecuting patent applications, maintaining, and protecting our intellectual property rights and defending against intellectual property-related claims;
the extent to which we acquire or invest in other businesses, products, product candidates, and technologies, including the success of any acquisition, in-licensing or other strategic transaction we may pursue, and the costs of subsequent development requirements and commercialization efforts, including with respect to our acquisition of EMFLAZA; and

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our ability to establish and maintain collaborations, including our collaborations with Roche and the SMA Foundation, and our ability to obtain research funding and achieve milestones under these agreements.
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. 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.
 
We will need to generate significant revenues to achieve and sustain profitability, and we may never do so. We may need to obtain substantial additional funding in connection with our continuing operations. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs primarily through a combination of equity offerings, debt financings, collaborations, strategic alliances, grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product and product candidates and marketing, distribution or licensing arrangements. Adequate additional financing may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
 
If we are unable to raise additional funds through equity or debt financings when needed or on attractive terms, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
 
Off-Balance Sheet Arrangements
 
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.

Contractual obligations
 
During the period ended March 31, 2017 , there were no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2016 .

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
During the period ended March 31, 2017, there were no material changes in our market risk or how our market risk is managed, compared to those disclosed under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017 . The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required

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disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2017 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
 
Changes in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting occurred during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II—OTHER INFORMATION
 
Item 1. Legal Proceedings.
In March 2016, three purported securities class action lawsuits were commenced in the United States District Court for the District of New Jersey (one each on March 3, 10, and 11), naming as defendants the Company, our Chief Executive Officer, and our Chief Financial Officer. The lawsuits have been consolidated into one action captioned In re PTC Therapeutics, Inc. Securities Litigation , No. 16-1224 (KM). A consolidated amended complaint was filed on January 13, 2017. On February 14, 2017, the defendants filed a motion to dismiss the consolidated amended complaint. The action alleges violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the Company about its business, operations, and prospects as it relates to the NDA for Translarna for the treatment of nmDMD that the Company submitted to the FDA in December 2015. The plaintiffs seek, among other things, compensatory damages for purchasers of the Company’s common stock between November 6, 2014 and February 23, 2016, as well as attorneys’ fees and costs.
Item 1A.  Risk Factors
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 1 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.
Risks Related to Our Recent Acquisition of EMFLAZA TM (deflazacort)
We may fail to realize the anticipated benefits of our acquisition of all rights to EMFLAZA, those benefits may take longer to realize than expected, and we may encounter significant integration difficulties.
On April 20, 2017, we completed the previously announced 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.
Our ability to realize the anticipated benefits of our acquisition of EMFLAZA will depend, to a large extent, on our ability to integrate EMFLAZA into our business and realize anticipated growth opportunities and synergies. We have no history of commercializing pharmaceutical products in the United States and we expect the process will be complex, costly and time-consuming. As a result, we will be required to devote significant management attention and resources to integrating this product into our business. The process may be disruptive to our business and the expected benefits may not be achieved within the anticipated time frame, or at all. The failure to meet the challenges involved and to realize the anticipated benefits of the acquisition could cause an interruption of, or a loss of momentum in, our commercialization efforts and could adversely affect our business, financial condition and results of operations.
To date, we have not generated revenue from, or commenced commercial sale of, EMFLAZA in the United States. While we are preparing for commercial launch of EMFLAZA in the United States, such launch is subject to our ability to finalize certain regulatory and distribution channel matters. If we are unable to finalize these matters promptly, the Asset Purchase Agreement allows for an alternative mechanism to be utilized at the option of Marathon by which EMFLAZA may become commercially available for a limited interim period using the existing Marathon distribution channel. There can be no assurance that we will be successful in our efforts to launch EMFLAZA in the United States within our planned timeframe, including pursuant to this alternative mechanism and, if this alternative mechanism is utilized, we would realize a reduced amount of revenue from sales of EMFLAZA made pursuant to this alternative mechanism. If we are unable to finalize our preparations for commercial launch in a timely manner, the launch and revenue recognized for sales of EMFLAZA will be delayed or compromised. Delays in our ability to commercially launch EMFLAZA could result in negative reactions from our stockholders, patients, the medical community, vendors, payors, and employees, among others. Further, such delays could result in declines in the price of our common stock and the perception of the effectiveness of our management and our company may suffer in the marketplace.
In addition, to the factors above relating to the commercial launch of EMFLAZA in the United States, we expect our commercialization efforts to rely on non-patent market exclusivity periods under the Orphan Drug Act of 1983, or the Orphan Drug Act, and the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act. There are limited circumstances under each of the Orphan Drug Act and the Hatch-Waxman Act that could result in our loss of marketing exclusivity, which could allow a competitor to enter the market. Failure to maintain either market exclusivity period would have a material adverse effect on our ability to commercialize EMFLAZA.

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Even if we are able to launch EMFLAZA on a commercial basis in the United States in a timely manner, delays in the processing and adjudication of prescriptions can require a significant period of time, in some cases several months, and may be subject to additional third-party payor requirements, including prior authorization and requirements to try other therapies first, which would delay our ability to obtain payment for prescriptions for EMFLAZA. Further, while we estimate that there are approximately 9,000 DMD patients in the United States who are aged five years or older, these estimates may prove to be incorrect. If the market opportunity for EMFLAZA is smaller than we believe it is, our business and anticipated revenues will be negatively impacted. There are no guarantees that, even if timely launched, EMFLAZA will be commercially successful and we may never achieve significant revenue from sales of the drug.
Our ability to realize the anticipated benefits of the acquisition is expected to entail numerous additional material potential difficulties, including, among others:
challenges related to public and market perception of EMFLAZA and/or our acquisition of the product;
increased scrutiny from third parties, including regulators, legislative bodies and enforcement agencies, with respect to product pricing and commercialization matters;
changes in laws or regulations that adversely impact the anticipated benefits of the acquisition;
delays in our ability to commence commercial sales of EMFLAZA in the United States;
challenges related to the perception by patients, the medical community and third-party payors of EMFLAZA for the treatment of DMD;
challenges related to the ability of patients to obtain and maintain sufficient coverage and reimbursement from third-party payors, including Medicare and Medicaid and other government and private payers for EMFLAZA;
disruptions to our manufacturing arrangements with third-party manufacturers, including our exclusive providers of tablet and suspension EMFLAZA product;
disruptions to our third-party distribution channel;
difficulties in managing the expanded operations of a significantly larger and more complex company following the acquisition;
the diversion of management attention to integration matters;
difficulties in achieving anticipated business opportunities and growth prospects from the acquisition;
the size of the treatable patient population may be smaller than we believe it is;
difficulties in assimilating employees and in attracting and retaining key personnel; and
potential unknown liabilities, adverse consequences, unforeseen increased expenses or other unanticipated problems associated with the acquisition.
Many of these factors are outside of our control, and any one of them could result in increased costs, decreased expected revenues and further diversion of management time and energy, which could materially impact our business, financial condition and results of operations.
In addition, we now possess not only the rights to EMFLAZA, but also certain corresponding liabilities and obligations, including the contractual liabilities and regulatory obligations that were assumed by us upon closing of the transaction, including certain royalty payment obligations and FDA post-marketing requirements. The post-marketing requirements we are obligated to complete in connection with our marketing authorization granted by the FDA in the United States are expected to result in additional investment in EMFLAZA by us, and failure to satisfy any such requirements could delay our realization of, or prevent us from ever realizing, the anticipated benefits from the acquisition.
In addition, upfront consideration for the acquisition from Marathon was comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock. Marathon is also entitled to receive contingent payments from us based on annual net sales of EMFLAZA beginning in 2018 and has the opportunity to receive a single $50 million sales-based milestone. The issuance of our common stock was dilutive to our existing stockholders and because we have limited financial resources, by investing in this acquisition, we may forgo or delay pursuit of other opportunities that may have proven to have greater commercial potential.

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Further, it is possible that undisclosed, contingent, or other liabilities or problems may arise in the future of which we were previously unaware. These undisclosed liabilities could have an adverse effect on our business, financial condition and results of operations.
All of these factors could decrease or delay the expected accretive effect of the transaction and negatively impact our stock price. As a result, it cannot be assured that the acquisition will result in the full realization of the benefits anticipated from the transaction within the anticipated time frames or at all.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception and based on our current commercial, research and development plans, we expect to continue to incur significant operating expenses for the foreseeable future. We may never generate profits from operations or maintain profitability.  
Since inception, we have incurred significant operating losses. As of March 31, 2017 , we had an accumulated deficit of $764.2 million . 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 and 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. 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. We expect to continue to generate operating losses in 2017 and, while we anticipate that operating losses generated in future periods should decline versus prior periods, we may never generate profits from operations or maintain profitability. The net losses we incur may fluctuate significantly from quarter to quarter.
On April 20, 2017, we acquired all rights to EMFLAZA. Upfront consideration for the acquisition was comprised of $75 million in cash, funded through cash on hand, and 6,683,598 shares of our common stock. To date, we have not generated revenue from sales of EMFLAZA in the United States and we may never do so. In addition, we expect to incur significant costs in connection with liabilities we assumed as part of the acquisition, including the obligation to complete certain post-marketing requirements in connection with the EMFLAZA marketing authorization.
On March 2, 2017, we announced that the primary and secondary endpoints were not achieved in ACT CF, our Phase 3 clinical for Translarna in nonsense mutation cystic fibrosis, or nmCF, and that, as a result, we have discontinued our current clinical development of Translarna for nmCF and have withdrawn our type II variation submission with the European Medicines Agency, or EMA, which sought approval of Translarna for the treatment of nmCF in the European Economic Area, or EEA.
In October 2015, we announced that the primary efficacy endpoint in the intent to treat, or ITT, population did not achieve statistical significance in ACT DMD, our Phase 3 clinical trial for Translarna TM (ataluren) for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD.
Our current ability to generate revenue from sales of Translarna is dependent upon our ability to maintain our marketing authorization in the EEA of Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. The marketing authorization in the EEA is subject to annual review and renewal by the European Commission following reassessment by the EMA of the benefit-risk balance of the authorization and is further subject to a specific obligation to conduct and report the results of Study 041, 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. Enrolling, conducting and reporting a clinical trial is a time-consuming, expensive and uncertain process that takes years to complete, and we expect that we will incur material costs related to the implementation and conduct of Study 041. In addition, it is likely that we will enroll patients in Study 041 in countries where Translarna for the treatment of nmDMD is currently available on a reimbursed basis, which could negatively impact growth in our net product sales. We may experience unknown complications with Study 041 and may not achieve the pre-specified endpoint with statistical significance, which would have a material adverse effect on our ability to maintain our marketing authorization in the EEA.
If, in any annual renewal cycle, the EMA determines that the balance of benefits and risks of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with the specific obligation to complete Study 041 or any other requirement that has been or may be placed on the marketing authorization, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or impose other specific obligations or restrictions, which would have a materially adverse effect on our business. We expect to incur significant costs in connection with our efforts to maintain our marketing authorization in the EEA. If our marketing

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authorization in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from sales of Translarna, whether pursuant to a commercial or a reimbursed early access program, or EAP program, and throughout all territories. For additional information, see the risk factor under “Risks Related to Regulatory Approval of our Products and our Product Candidates” 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."
We also expect that our efforts to advance Translarna for the treatment of nmDMD in the United States, whether pursuant to the recently initiated file over protest process with the FDA, or otherwise, will be time-consuming and may be expensive. For additional information, see the risk factor under “Risks Related to Regulatory Approval of our Products and our Product Candidates” titled, “ There is substantial risk that the FDA will continue to disagree 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 and we will be unable to advance Translarna for the treatment of nmDMD in the United States in a timely manner, or at all, whether pursuant to the file over protest process or otherwise, and by determining to file our NDA over protest, we have postponed other available strategic pathways which may have proven to be more effective. If there are delays in obtaining regulatory approval in the United States, we will not be able to commercialize Translarna for nmDMD in that territory and our ability to generate revenue will be materially impaired. In the event that the FDA requires us to conduct a new clinical trial in nmDMD which, if successful, may enable FDA review of an NDA submission by us, we would expect to incur significant costs, which may have a material adverse effect on our business and results of operations.”
We anticipate that our expenses will further increase in connection with our commercialization efforts in the United States for EMFLAZA and in the EEA and other territories for Translarna for the treatment of nmDMD, 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, the clinical and regulatory developments noted in this risk factor may exacerbate the risks related to our commercialization efforts set forth under the heading “Risks Related to the Development and Commercialization of our Products and our Product Candidates,” which could increase the costs associated with our commercial activities or have a negative impact on our revenues. For additional information, see also, the risk factor under the heading “Risks Related to the Regulation of our Products and our Product Candidates” titled “ Our initial commercial launch of Translarna has begun in, and is expected to continue to take place in, countries that tend to impose strict price controls, which may adversely affect our revenues. Failure to obtain and maintain acceptable pricing and reimbursement terms for Translarna for the treatment of nmDMD in the EEA and other countries where Translarna is available would delay or prevent us from marketing our product in such regions, which would adversely affect our anticipated revenue, growth and business.
We may seek to further expand and diversify our product pipeline through opportunistically in-licensing or acquiring the rights to products, product candidates or technologies, similar to our recent acquisition of EMFLAZA, 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.
In addition to the foregoing, we expect to continue to incur significant costs in connection with our open label extension trials of Translarna for the treatment of nmDMD as well as our studies for nmMPS I, 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.
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. These efforts may significantly impact the timing and extent of our commercialization expenses. With respect to our outstanding 3.00% convertible senior notes due August 15, 2022, or the Convertible Notes, cash interest payments are payable on a semi-annual basis in arrears, which will require total funding of $4.5 million annually.
In addition, our expenses will increase if and as we:
prepare and execute our strategy for EMFLAZA in the United States, including commercialization and integration efforts;
satisfy contractual and regulatory obligations that we assumed through the EMFLAZA acquisition;

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are required to complete any additional clinical and non-clinical trials or analyses in order to advance Translarna for the treatment of nmDMD in the United States or elsewhere;
are required to take other steps, in addition to Study 041, to maintain our current marketing authorization in the EEA for Translarna for the treatment of nmDMD or to obtain further marketing authorizations for Translarna for the treatment of nmDMD or other indications;
initiate or continue the research and development of Translarna for additional indications and of our other product candidates;
seek to discover and develop additional product candidates;
seek to expand and diversify our product pipeline through strategic transactions;
maintain, expand and protect our intellectual property portfolio; and
add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.
We also 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.
Our ability to generate profits from operations and become and remain profitable depends on our ability to successfully develop and commercialize drugs that generate significant revenue. This will require us to be successful in a range of challenging activities, including:
launching commercial sales of EMFLAZA for the treatment of DMD in the United States in accordance with our estimated timeline;
negotiating, securing, and maintaining adequate pricing, coverage and reimbursement terms, on a timely basis, for EMFLAZA for the treatment of DMD in the United States;
maintaining orphan exclusivity for EMFLAZA and successfully completing all FDA post-marketing requirements with respect to EMFLAZA;
maintaining the marketing authorization of Translarna for the treatment of nmDMD in the EEA, including successfully obtaining annual renewals of the marketing authorization, fulfilling the specific obligation to conduct and report the results of Study 041 to the EMA, and meeting any ongoing requirements related to the marketing authorization;
advancing Translarna for the treatment of nmDMD in the United States in a timely manner, or at all, whether pursuant to the file over protest process with the FDA or otherwise, and including, if required, performing additional clinical and non-clinical trials or analyses at significant cost which, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the United States;
expanding the territories in which we are approved to market Translarna for the treatment of nmDMD;
minimizing the enrollment impact of Study 041 on commercialization efforts for Translarna for nmDMD;
developing Translarna for the treatment of additional indications, including nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5 and successfully advancing our other programs and collaborations, including our cancer stem cell and SMA programs;
establishing a global commercial infrastructure, including the sales, marketing and distribution capabilities to effectively market and sell Translarna for the treatment of nmDMD in the EEA and other parts of the world;
implementing marketing and distribution relationships with third parties in territories where we do not pursue direct commercialization;
negotiating, securing and maintaining adequate pricing and reimbursement terms for Translarna for the treatment of nmDMD on a timely basis, or at all, in the countries in which we have obtained, and may obtain, regulatory approval;
launching commercial sales of Translarna for the treatment of nmDMD in accordance with our estimated timeline;

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identifying patients eligible for treatment with EMFLAZA for DMD;
identifying patients eligible for treatment with Translarna for nmDMD;
obtaining approval to market Translarna for the treatment of other indications;
expanding the approved product label of Translarna for the treatment of nmDMD;
successfully developing or commercializing any product candidate or product that we may in-license or acquire;
protecting our rights to our intellectual property portfolio related to Translarna; and
contracting for the manufacture and distribution of commercial quantities of Translarna and EMFLAZA.
We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to generate profits from operations. Even if we do generate profits from operations, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to generate profits from operations and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or continue our operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment in our company.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
As noted in the prior risk factor, we expect to incur significant expenses related to our clinical, regulatory, commercial, legal, research and development, and other business efforts. We believe that our cash flows from product sales, together with existing cash and cash equivalents, including the net proceeds from our term loan facility with MidCap Financial, our Convertible Note offering, public offerings of common stock, marketable securities and research funding that we expect to receive under our collaborations, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
our ability to commercialize and market EMFLAZA for the treatment of DMD in the United States;
our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms, on a timely basis, for EMFLAZA for the treatment of DMD in the United States and Translarna for the treatment of nmDMD in the EEA and other territories outside of the United States;
our ability to maintain orphan exclusivity for, and successfully complete all FDA post-marketing requirements with respect to, EMFLAZA;
our ability to satisfy our obligations under the terms of the credit and security agreement with MidCap Financial;
our ability to maintain the marketing authorization in the EEA for Translarna for the treatment of nmDMD, including whether the EMA determines on an annual basis that the benefit-risk balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label;
the costs, timing and outcome of Study 041;
the costs, timing and outcome of our efforts to advance Translarna for the treatment of nmDMD in the United States, whether pursuant to the file over protest process with the FDA, or otherwise, and including, whether we will be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost which, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the U.S.;
the progress and results of our pediatric study of Translarna for the treatment of nmDMD, our open label extension clinical trials of Translarna for the treatment of nmDMD as well as our studies for nmMPS I and nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5 and activities under our cancer stem cell program;
the scope, costs and timing of our commercialization activities, including product sales, marketing, legal, regulatory, distribution and manufacturing, for both EMFLAZA for the treatment of DMD and Translarna for the treatment of nmDMD and any of our other product candidates that may receive marketing authorization or any additional indications or territories in which we receive authorization to market Translarna;

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the costs, timing and outcome of regulatory review of our other product candidates and Translarna in other territories or for indications other than nmDMD;
the timing and scope of growth in our employee base;
the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for Translarna for additional indications and for our other product candidates;
revenue received from commercial sales of Translarna or, when and if commercially launched, EMFLAZA or any of our other product candidates;
our ability to obtain additional and maintain existing reimbursed named patient and cohort EAP programs for Translarna for the treatment of nmDMD on adequate terms, or at all;
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, including in Germany;
the costs of preparing, filing and prosecuting patent applications, maintaining, and protecting our intellectual property rights and defending against intellectual property-related claims;
the extent to which we acquire or invest in other businesses, products, product candidates, and technologies, including the success of any acquisition, in-licensing or other strategic transaction we may pursue, and the costs of subsequent development requirements and commercialization efforts, including with respect to our acquisition of EMFLAZA; and
our ability to establish and maintain collaborations, including our collaborations with Roche and the SMA Foundation, and our ability to obtain research funding and achieve milestones under these agreements.
Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales for certain product candidates or indications. In addition, our products and product candidates, if approved, may not achieve commercial success, including Translarna for the treatment of nmDMD and EMFLAZA for the treatment of DMD.
To date all of our product revenue has been attributable to sales of Translarna for the treatment of nmDMD in territories outside of the United States. We are continuing to engage in significant commercialization efforts for this product. In order to continue sales and our commercial launch of Translarna, we must maintain our marketing authorization in the EEA and secure market access through commercial 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. Although we are preparing to commercialize and market EMFLAZA in the United States, to date, we have not generated revenue from, or commenced commercial sale of, 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.
Other commercial revenue, if any, would be derived from product acquisitions or, if none, from sales of products that we are not planning to have commercially available for several years, if at all. If our marketing authorization for Translarna in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from sales of Translarna for the treatment of nmDMD, whether pursuant to a commercial or an EAP program and throughout all territories. Likewise, if we fail to maintain our marketing authorization for EMFLAZA in the United States or lose the non-patent market exclusivity for EMFLAZA, we will be unable to commercialize and generate revenue from sales of that product.
Accordingly, we will need to continue to rely on additional financing in connection with our continuing operations and to achieve our business objectives. In addition, we may seek additional capital due to favorable market conditions or based on strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. 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.
Our indebtedness resulting from our credit and security agreement with MidCap Financial Trust could adversely affect our financial condition or restrict our future operations.
On May 5, 2017, we entered into a credit and security agreement with Midcap Financial Trust, a Delaware statutory trust, or MidCap Financial, as administrative agent and MidCap Financial and other certain institutions as lenders thereto, or the Credit

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Agreement, 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 twelve month period. The maturity date of the Credit Agreement is May 1, 2021, unless terminated earlier.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to 6.15% plus LIBOR (with a floor rate of 1.00%). The Credit Agreement requires us to not have less than $100 million of net revenue (raised to $120 million if the additional $20 million term loan is issued) for the prior twelve months to be measured on the last day of each fiscal quarter beginning on December 31, 2017.
Additionally, subject to customary exceptions and exclusions, all obligations under the Credit Agreement are secured pursuant to the terms of the Credit Agreement, a Pledge Agreement between us, certain of our subsidiaries, and Midcap Financial, or the Pledge Agreement, and an Intellectual Property and Security Agreement between us and Midcap Financial, or the IP Security Agreement, each dated May 5, 2017. Under the Credit Agreement, the Pledge Agreement, and the IP Security Agreement, we provide to Midcap Financial and the other lenders a perfected, first-priority security interest in all of our personal property, a perfected, first-priority security interest in all of our intellectual property (except that this security interest will not be perfected in intellectual property located outside the United States unless our cash position falls below a pre-specified threshold), and a perfected, first-priority pledge of 65% of the equity ownership interests directly held by us in our wholly owned subsidiary, PTC Therapeutics Holdings (Bermuda) Corp. Limited.
A failure to comply with the conditions of our Credit Agreement could result in an event of default. An event of default under the Credit Agreement includes, among other things, a failure to pay any amount due under the Credit Agreement as well as the occurrence of events that could reasonably be expected to result in a material adverse effect, including if we were to fail to maintain our marketing authorization for Translarna for the treatment of nmDMD in the EEA or if the FDA were to withdraw any of our products from the market, including EMFLAZA for the treatment of DMD in the United States.
In the event of an acceleration of amounts due under our Credit Agreement as a result of an event of default, we may not have sufficient funds or may be unable to arrange for additional financing to repay the term loans or to make any accelerated payments, and the lenders could seek to enforce security interests in the collateral securing the term loans, which would have a material adverse effect on our business, financial condition and results of operations.
In addition, our indebtedness under the Credit Agreement could have significant adverse consequences, including, among other things:
requiring us to dedicate a substantial portion of cash and cash equivalents and marketable securities to the payment of interest on, and principal of, the term loans, which will reduce the amounts available to fund working capital, capital expenditures, product development efforts and other general corporate purposes;
obligating us to negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions, encumbering our intellectual property, incurring indebtedness or liens, paying dividends, making investments and engaging in certain other business transactions;
limiting our flexibility in planning for, or reacting to, changes in our business and our industry;
placing us at a competitive disadvantage compared to our competitors who have less debt or competitors with comparable debt at more favorable interest rates; and
limiting our ability to borrow additional amounts for working capital, capital expenditures, research and development efforts, acquisitions, debt service requirements, execution of our business strategy and other purposes.
Any of these factors could materially and adversely affect our business, financial condition and results of operations.
We may engage in strategic transactions to acquire assets, businesses, or rights to products, product candidates or technologies or form collaborations or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt, or cause us to incur significant expense.
As part of our business strategy, we may engage in additional strategic transactions to expand and diversify our product pipeline, including through the acquisition of assets, businesses, or rights to products, product candidates or technologies or through strategic alliances or collaborations, similar to our recent acquisition of EMFLAZA. We may not identify suitable strategic transactions, or complete such transactions in a timely manner, on a cost-effective basis, or at all. Moreover, we may devote resources to potential opportunities that are never completed or we may incorrectly judge the value or worth of such opportunities. Even if we successfully execute a strategic transaction, we may not be able to realize the anticipated benefits of such transaction, may incur additional debt or assume unknown or contingent liabilities in connection therewith, and may experience losses related to our investments in such transactions. Integration of an acquired company or assets into our existing business may not be successful and may disrupt ongoing operations, require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, and require management resources that would otherwise focus

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on developing our existing business. Even if we are able to achieve the long-term benefits of a strategic transaction, our expenses and short-term costs may increase materially and adversely affect our liquidity. Any of the foregoing could have a detrimental effect on our business, results of operations and financial condition.
In addition, future strategic transactions may entail numerous operational, financial and legal risks, including:
incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;
exposure to known and unknown liabilities, including possible intellectual property infringement claims, violations of laws, tax liabilities and commercial disputes;
higher than expected acquisition and integration costs;
difficulty in integrating operations and personnel of any acquired business;
increased amortization expenses or, in the event that we write-down the value of acquired assets, impairment losses;
impairment of relationships with key suppliers or customers of any acquired business due to changes in management and ownership;
inability to retain personnel, customers, distributors, vendors and other business partners integral to an in-licensed or acquired product, product candidate or technology;
potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges;
entry into indications or markets in which we have no or limited direct prior development or commercial experience and where competitors in such markets have stronger market positions; and
other challenges associated with managing an increasingly diversified business.
If we are unable to successfully manage any strategic transaction in which we may engage, our ability to develop new products and continue to expand and diversify our product pipeline may be limited.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings; debt financings; collaborations; strategic alliances; grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates; and marketing, distribution or licensing arrangements.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, entering into agreements involving licenses to our intellectual property, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates; or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Our limited operating history may make it difficult for our stockholders to evaluate the success of our business to date and to assess our future viability.
Since mid-2014, we have been transitioning from a company with a research and development focus to a company capable of supporting global commercial activities. We may not be successful in completing this transition. Our ability to develop product candidates, manufacture a commercial scale product or arrange for a third party to do so on our behalf, and conduct sales and marketing activities necessary for a successful full scale product commercialization is largely limited to our activities with respect to the marketing authorization in the EEA for Translarna for the treatment of nmDMD, which is subject to annual review and renewal following reassessment of the benefit-risk balance of the authorization by the EMA and satisfaction of the specific obligation to conduct and report to the EMA Study 041. In addition, other than our marketing authorization in the EEA and the marketing authorizations granted in Israel and South Korea (which are largely contingent upon continued EMA approval), we have not proven our ability to successfully obtain marketing authorizations to sell our products or product candidates. Although we recently acquired EMFLAZA, we have no history of commercializing pharmaceutical products in the United States and, to date, we have not generated revenue from, or commenced commercial sale of, EMFLAZA in the United States. Further, we recently announced that we are discontinuing our current clinical development of Translarna for nmCF based on the results of ACT CF, and we may not successfully complete development of other product candidates. Consequently,

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any predictions our stockholders make about our future success or viability may not be as accurate as they could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors, including, and not limited to, those related to our commercialization of EMFLAZA and integration of EMFLAZA into our business.
Our ability to use our net operating losses and certain other tax attributes may be subject to annual limitations under federal and state tax law that could materially affect our ability to utilize such losses and attributes.
If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Internal Revenue Code, or Section 382, the corporation’s ability to utilize any net operating losses, or NOLs, and certain tax credits and other attributes generated before such an ownership change, is limited. We believe that we have in the past experienced ownership changes within the meaning of Section 382 that have resulted in limitations under Section 382 (and similar state provisions) on the use of our NOLs and other tax attributes.
Future changes in ownership could result in additional ownership changes within the meaning of Section 382 that could further limit our ability to utilize our NOLs and certain other tax attributes.
Changes in our effective income tax rates could adversely affect our results of operations.
We are subject to income taxes in the Unites States and various foreign jurisdictions. Taxes will be incurred as income is earned among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, the accounting for stock options and other share-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations by the U.S. Internal Revenue Service and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our income tax provision resulting from the above-mentioned factors and others may be significant and could adversely affect our results of operations.
In addition, there is growing pressure in many jurisdictions (including the United States) and from multinational organizations such as the Organization for Economic Co-operation and Development, or OECD, and the EU, to amend existing international tax rules in order to render them more responsive to current global business practices. For example, the OECD has released guidance relating to various international tax related topics in an initiative referred to as Base Erosion and Profit Shifting, or BEPS, that aims to standardize and modernize global tax policy. Depending on the final form of the BEPS guidance and the legislation ultimately enacted by the OECD members, BEPS could have material adverse consequences on our effective tax rate, the amount of tax we pay and on our financial position and results of operations.
In addition, some members of the U.S. Congress have recently begun publicly considering potential tax reform, including the possibility of replacing large parts of the existing federal income tax with a so-called “destination-based cash flow tax” in addition to other potential tax reforms that the recently elected President and members of his administration may be considering.
Although we monitor these developments, it is very difficult to assess to what extent these changes may be implemented in the United States and other jurisdictions in which we conduct our business or may impact the way in which we conduct our business or our effective tax rate due to the unpredictability and interdependency of these potential changes. Changes in tax laws and related regulations and practices could have a material adverse effect on our business operations, effective tax rate and financial position and results of operations.
Risks Related to the Development and Commercialization of our Products and our Product Candidates
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.
In October 2015, we announced that the primary efficacy endpoint in the ITT population did not achieve statistical significance in ACT DMD. On the basis of our position that the totality of clinical data from ACT DMD and our prior Phase 2b trial support the clinical benefit of Translarna for the treatment of nmDMD, we submitted our analyses of the ACT DMD data and meta-analysis of the combined ACT DMD and Phase 2b subgroup data to the FDA, as part of our NDA.
On February 22, 2016, we received a Refuse to File letter from the FDA stating that, in the view of the FDA, both our Phase 2b and Phase 3 ACT DMD trials were negative and do not provide substantial evidence of effectiveness. Additionally, the FDA stated that we had proposed a post-hoc adjustment of ACT DMD that eliminates data from a majority of enrolled patients. In addition, the FDA noted that our NDA does not contain adequate information regarding the abuse potential of Translarna. In

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October 2016, the FDA denied our first appeal of the Refuse to File letter. In the first quarter of 2017, we filed our Translarna NDA for nmDMD with the FDA via the “file over protest” process 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. When an application is filed over protest, the FDA is required to review the application as filed. Generally, the FDA does not favor the file over protest procedure and the agency’s policies explain that an application filed over protest does not receive a timeline for review and is designated as a standard review. The FDA 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. 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 our NDA by the PDUFA goal date.
There is substantial risk that, notwithstanding any dialogue we have had or any further dialogue we may be able to initiate with the agency, pursuant to the file over protest process or otherwise, the FDA will continue to disagree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials. Even if we are successful in resolving some or all of the matters raised by the FDA in the Refuse to File letter, there is significant risk that we will be unable to obtain FDA approval of Translarna for nmDMD, on a timely basis or at all, and we may be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost. Even if we are able to enroll and fund any such additional trials or complete such analyses, there is substantial risk that the results would not ultimately support the approval of the NDA filed over protest or a new NDA submission in the United States for Translarna for nmDMD. In addition, any such requirement for additional trials would most likely result in our inability to sell Translarna in the United States for a significant period of time, which would have a material adverse effect on our ability to generate revenue from the sales of Translarna for the treatment of nmDMD. Due to these uncertainties, we are unable to estimate the timing or potential for a launch of Translarna for the treatment of nmDMD in the United States.
We also submitted our analyses of the ACT DMD data and meta-analyses of the combined ACT DMD and Phase 2b subgroup data to the EMA to support continuation of our marketing authorization in the EEA, which is subject to annual review and renewal by the European Commission following reassessment by the EMA of the benefit-risk balance of the authorization. The EMA and European Commission did not approve our request for full marketing authorization of Translarna for the treatment of nmDMD and, instead, approved the annual renewal of our conditional marketing authorization with the specific obligation to confirm the efficacy and safety of Translarna for the treatment of nmDMD in ambulatory patients aged 5 years or older via Study 041.
Enrolling, conducting and reporting a clinical trial is a time-consuming, expensive and uncertain process that takes years to complete, and we expect that we will incur material costs related to the implementation and conduct of Study 041. We expect that conducting a placebo-controlled trial in nmDMD of this size will be challenging and it is probable that we will enroll patients in territories where Translarna has already become available on a reimbursed basis, which could negatively impact growth in our product sales. We may enroll patients in countries with a different standard of care for nmDMD patients or at clinical trial sites that are inexperienced with clinical trials in general, or specifically with nmDMD trials. In addition, we may experience unknown complications with Study 041 and may not achieve the pre-specified endpoint with statistical significance, which would have a material adverse effect on our ability to maintain our marketing authorization in the EEA.
The marketing authorization renewal approved in January 2017 is effective through August 5, 2017, unless extended. If the EMA determines in any annual renewal cycle that the balance of benefits and risks of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with any conditions that have been or may be placed on the marketing authorization, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require the imposition of other conditions or restrictions. As such, there is ongoing risk to our ability to maintain our marketing authorization in the EEA.
Our current ability to generate revenue from sales of Translarna is dependent upon our ability to maintain our marketing authorization in the EEA of Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. If we are unable to renew our EEA marketing authorization during any annual renewal cycle, or if our product label is materially restricted, 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, which would have a material adverse effect on our business, results of operations and financial condition.
There is substantial risk that other regulators in regions where we have not yet sought or are currently seeking marketing authorization 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 ability to generate revenue from the sales of Translarna for the treatment of nmDMD in those applicable territories. In addition, we may not be able to maintain or obtain marketing authorizations in areas where such authorizations are contingent upon decisions of the EMA with respect to our marketing authorization in the EEA.

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For additional information, see “Risks Related to Regulatory Approval of our Products and our Product Candidates” below.
We depend heavily on the success of Translarna, which we are developing for nmDMD and other indications, and EMFLAZA, for DMD. If we are unable to execute our commercial strategy for Translarna for the treatment of nmDMD in the EEA or for EMFLAZA for the treatment of DMD in the United States, fail to receive regulatory approval for Translarna for the treatment of nmDMD in the United States and other territories, fail to obtain renewal of, or satisfy the conditions of our marketing authorization for Translarna for the treatment of nmDMD in the EEA, or fail to maintain our marketing authorization or market exclusivity for EMFLAZA in the United States, or if we experience significant delays in accomplishing such goals, our business will be materially harmed.
We have invested a significant portion of our efforts and financial resources in the development of Translarna for nmDMD, and most recently, in the acquisition of EMFLAZA for DMD. Our ability to generate product revenues will depend heavily on the successful development and commercialization of Translarna and our successful integration of EMFLAZA into our business and commercialization of EMFLAZA for DMD in the United States.
We have no history of commercializing pharmaceutical products in the United States and, to date, we have not generated revenue from, or commenced commercial sale of, EMFLAZA in the United States. Although we are preparing for commercial launch of EMFLAZA in the United States, there can be no assurances that we will be successful in this endeavor. As we presently have no patent rights to protect the approved use of EMFLAZA, we expect to rely on the concurrently running market exclusivity periods currently available to us under the Hatch-Waxman Act and the Orphan Drug Act to commercialize EMFLAZA for DMD in the United States. Further, we are obligated to complete certain FDA post-marketing requirements in connection with our marketing authorization of EMFLAZA. Failure to maintain these market exclusivity periods, complete the FDA post-marketing requirements, maintain our marketing authorization for EMFLAZA in the United States, or timely execute our commercialization plans for EMFLAZA, would have a material adverse effect on our business, financial position and results of operations.
While we have obtained marketing authorization for Translarna for the treatment of nmDMD in the EEA, such authorization is subject to annual review and renewal by the European Commission following the annual EMA reassessment as well as the specific obligation to conduct and submit the results of Study 041. For a review of recent developments that have had, and may continue to have, a material adverse effect on our ability to commercialize Translarna for the treatment of nmDMD, please review 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.
We are currently pursuing further clinical development efforts for Translarna for the treatment of nmDMD, nonsense mutation aniridia, nonsense mutation MPS I, and nonsense mutation CDKL5/Dravet syndrome. Each genetic disorder has unique genetic and pathophysiological characteristics and we believe that regulators, including the FDA and the EMA, will evaluate the effectiveness of Translarna for any given indication based on the merits of the clinical efficacy evidence available for such indication. However, because we are developing Translarna for the treatment of multiple indications associated with genetic disorders that arise as a result of a nonsense mutation, there is a risk that negative results in a clinical trial evaluating the efficacy of Translarna for one indication, such as ACT CF, could adversely affect the perception of the efficacy of Translarna in a different indication. There can be no assurance that regulators, including the FDA and the EMA, will not consider such results when making determinations with respect to our ongoing or future regulatory submissions for marketing authorization of Translarna for any indication, including in connection with the FDA’s review of our NDA (which was filed over protest with the FDA in the first quarter of 2017) for Translarna for the treatment of nmDMD and the EMA’s annual reassessment of our marketing authorization for Translarna for the treatment of nmDMD, which could have an adverse effect on the outcome of the applicable regulatory review. We intend to submit the safety results of ACT CF to regulators with any applicable safety updates and submissions, including the EMA. While the safety profile of Translarna in the ACT CF study was consistent with previous studies and no new safety signals were identified, there can be no assurance that the EMA or other regulators will agree with our interpretation of the safety data from the trial.
If we do not successfully renew and maintain our marketing authorization and commercialize Translarna in the EEA, or receive regulatory approval in the United States for Translarna for the treatment of nmDMD and subsequently successfully commercialize Translarna in the United States, our ability to generate additional revenue will be jeopardized and, consequently, our business will be materially harmed. Likewise, if we do not successfully commercialize or maintain our marketing authorization for EMFLAZA for the treatment of DMD in the United States, our ability to generate additional revenue will be jeopardized and, consequently, our business will be materially harmed.
The success of EMFLAZA and Translarna will depend on a number of additional factors, including the following:

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our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms on a timely basis, or at all;
the timing and scope of commercial launches;
the maintenance and expansion of a commercial infrastructure capable of supporting product sales, marketing and distribution;
the implementation and maintenance of marketing and distribution relationships with third parties in territories where we do not pursue direct commercialization;
our ability to establish and maintain commercial manufacturing arrangements with third-party manufacturers;
the ability of our third-party manufacturers to successfully produce commercial and clinical supply of drug on a timely basis sufficient to meet the needs of our commercial and clinical activities;
successful identification of eligible patients;
acceptance of the drug as a treatment for the approved indication by patients, the medical community and third-party payors, including, with respect to Translarna any impact the results of ACT CF may have on the perception of the effectiveness of Translarna;
effectively competing with other therapies;
a continued acceptable safety profile of the drug;
the costs, timing and outcome of post-marketing studies and trials for EMFLAZA and Translarna, including, with respect to Translarna, Study 041;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity, including with respect to EMFLAZA, whether we are able to maintain market exclusivity periods under the Hatch-Waxman Act and Orphan Drug Act; and
whether, with respect to Translarna, we are able to continue to satisfy our obligations under, and maintain, the marketing authorization in the EEA for Translarna for the treatment of nmDMD, including whether the EMA determines on an annual basis that the benefit-risk balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label;
whether, and within what timeframe, we are able to advance Translarna for the treatment of nmDMD in the United States, pursuant to the file over protest process with the FDA or otherwise, and including, whether we will be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost which, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the United States;
the successful advancement of Translarna in additional indications, in particular, nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5;
our ability to obtain additional and maintain existing reimbursed named patient and cohort EAP programs for Translarna for the treatment of nmDMD on adequate terms;
our ability to successfully prepare and advance regulatory submissions for marketing authorizations for Translarna in additional territories and for additional or expanded indications and whether and in what timeframe we may obtain such authorizations;
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; and
protecting our rights in our intellectual property portfolio.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to continue to commercialize Translarna or to commence commercialization of EMFLAZA, either of which would have a material adverse effect on our business, results of operations and financial condition.
The marketing authorization granted by the European Commission for Translarna for the treatment of nmDMD is limited to ambulatory patients aged five years and older located in the EEA, which significantly limits an already small treatable

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patient population, which reduces our commercial opportunity and is also subject to annual reassessment of the benefit-risk balance by the EMA as well as the specific obligation to conduct Study 041, and may be varied, suspended or withdrawn by the European Commission if we fail to satisfy those requirements.
We have obtained orphan drug designations from the EMA and from the FDA for Translarna for the treatment of nmDMD because the number of patients who could benefit from treatment with Translarna is small. The marketing label approved by the European Commission further limits the currently treatable patient population to ambulatory nmDMD patients aged five years and older who have been identified through genetic testing as having a nonsense mutation. Prevalence estimates for rare diseases are uncertain due to the uncertainties associated with the methodologies used to derive estimates, such as epidemiology assumptions. It can take many years of experience in rare disease market places before prevalence becomes well characterized. We are launching the first therapy specifically aimed at nmDMD patients. Our experience to date suggests that there may be up to 7,000 nmDMD patients globally and that approximately 35 to 40% of such patients satisfy the conditions for treatment under our current product label in the EEA, however, we expect that country specific epidemiology will continue to be refined and characterized over the coming years. Our estimates of both the number of people who have DMD caused by a nonsense mutation, as well as the subset of people with nmDMD who are ambulatory and at least five years old (and, therefore, satisfy the conditions for treatment under our current product label in the EEA), are based on our beliefs and estimates derived from a variety of sources and may prove to be incorrect. Prevalence estimates vary given some degree of variation in the incidence of live male births, the incidence of DMD, the incidence of nonsense mutations and other factors. Information concerning the eligible patient population is generally limited to certain geographies and may not employ definitive measures capable of establishing with precision the actual number of nmDMD patients in such geography. If the market opportunities for Translarna for the treatment of nmDMD are smaller than we believe they are, our business and anticipated revenues will be negatively impacted. Although we intend to seek to expand the approved product label of Translarna for the treatment of nmDMD in the future, the timing of, and our ability to generate, the necessary data or results required to obtain expanded regulatory approval is currently uncertain. Given the small number of patients who have nmDMD, and the smaller number of patients who meet the criteria for treatment under our current marketing authorization, our commercial opportunity is limited. It is critical to the commercial success of Translarna for nmDMD that we successfully identify and treat these patients.
Translarna is not approved, and is an investigational new drug, in the United States. In order to continue to generate revenue from Translarna, we must maintain our marketing authorization in the EEA for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. The marketing authorization in the EEA is subject to annual review and renewal by the European Commission following reassessment by the EMA of the benefit-risk balance of the authorization, which we refer to as the annual EMA reassessment, as well as the specific obligation to complete and report the results of Study 041 to the EMA. We expect that as part of the annual EMA assessment, the EMA will consider the ongoing status of Study 041. The marketing authorization was last renewed in January 2017 and is effective, unless extended, through August 5, 2017. Enrolling Study 041 may further reduce the number of patients available for reimbursed treatment.
If the EMA determines in any annual renewal cycle that the balance of benefits and risks of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with any conditions that have been or may be placed on the marketing authorization, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require the imposition of other conditions or restrictions. As such, there is ongoing risk to our ability to maintain our marketing authorization in the EEA. If we are unable to renew our marketing authorization in the EEA during any annual renewal cycle, or if our product label is materially restricted, 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 in all territories, which would have a material adverse effect on our business, results of operations and financial condition. See “Risks Related to Regulatory Approval of our Products and our Product Candidates” below for further detail regarding conditional marketing authorizations in the EEA.
If clinical trials of Translarna or our product candidates fail to demonstrate safety and efficacy to the satisfaction of the EMA, the FDA or other regulators, or do not otherwise produce favorable results, we may experience delays in completing, or ultimately be unable to complete, the development and commercialization of Translarna or any other product candidate.
In connection with seeking marketing authorization from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing authorization of their products.

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On March 2, 2017, we announced that the primary and secondary endpoints were not achieved in ACT CF and that, as a result, we plan to discontinue our current clinical development of Translarna for 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, and do not currently expect to pursue other marketing authorizations for this indication.
In addition, the primary efficacy endpoint in the ITT population did not achieve statistical significance in the Phase 2b (completed in 2009) or Phase 3 ACT DMD (completed in 2015) clinical trials of Translarna for the treatment of nmDMD. For a review of recent developments that have had, and may continue to have, a material adverse effect on our ability to commercialize Translarna for the treatment of nmDMD, please review 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.
If the FDA, the EMA and other regulators do not agree with our interpretation of the results of the clinical data from our trials, including ACT DMD and, when and if completed, Study 041 and related analyses, or otherwise do not view the results of these trials as favorable; if we are required to conduct additional clinical trials or other testing of Translarna or any other product candidate that we develop beyond those that we contemplate; if we are unable to successfully complete our clinical trials or other testing; if the results of these trials or tests are not positive or are only modestly positive; or if there are safety concerns, we may, among other things:
be unable to successfully maintain our marketing authorization in the EEA for Translarna for the treatment of nmDMD, which is subject to annual review and renewal following reassessment of the benefit-risk balance of the authorization by the EMA;
be delayed in obtaining additional marketing authorizations, or not obtain additional marketing authorizations at all, for Translarna for the treatment of nmDMD;
be delayed in obtaining marketing authorizations, or not obtain marketing authorizations at all, for Translarna for other indications, or for our other product candidates;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;
be subject to additional post-marketing testing requirements or restrictions;
have the product removed from markets after obtaining applicable marketing authorizations; or
not be permitted to sell Translarna under some or any reimbursed EAP programs.
If we or our collaborators experience any of a number of possible unforeseen events in connection with clinical trials related to Translarna or our product candidates, including Study 041 and those under our collaboration with Roche and the SMA Foundation, maintenance of our existing marketing authorization for Translarna for the treatment of nmDMD in the EEA and any additional potential marketing authorization or commercialization of Translarna or our product candidates could be delayed or prevented.
We or our collaborators may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing authorization or commercialize Translarna or our product candidates, including:
clinical trials of Translarna or our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
the number of patients required for clinical trials of our product and product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;
we may be unable to enroll a sufficient number of patients in our clinical trials to ensure adequate statistical power to detect any statistically significant treatment effects;
we may enroll patients at clinical trial sites in countries that are inexperienced with clinical trials in general, or with the indication that is the subject of the trial;

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we may enroll patients at clinical trial sites in countries that have a different standard of care for patients in general, or with respect to the indication that is the subject of the trial;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
regulators, institutional review boards or independent ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site or may require us to submit additional data, conduct additional studies or amend our investigational new drug application, or IND, or comparable application prior to commencing a clinical trial;
we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospecti