Sucampo Pharmaceuticals, Inc. reported consolidated financial results for the second quarter ended June 30, 2016

“Our strong second quarter results demonstrate the continued growth of AMITIZA and the sustained significant benefit derived from our acquisition of R-Tech Ueno,” said Peter Greenleaf, Chairman and Chief Executive Officer of Sucampo.  “As we look to the second half of the year, we will continue our focus on AMITIZA growth and focus our pipeline efforts on our life cycle management programs for lubiprostone, our partnership with Cancer Prevention Pharmaceuticals regarding its Phase 3 familial adenomatous polyposis program, and continuing to evolve our company through business development.”

For the three months ended June 30, 2016, Sucampo reported year-over-year total revenue growth of 49% to $52.0 million.  Product sales revenue increased to $28.4 million, representing 96% year-over-year growth, and product royalty revenue grew 16% year-over-year to $18.7 million.Revenue for the quarter included an additional $13.8 million as a result of the R-Tech Ueno acquisition. Excluding this additional revenue from the acquisition, base revenue grew by 9%.

Sucampo reported a GAAP net loss of $0.8 million, or ($0.02) per diluted share during the second quarter of 2016 compared to net income of $9.6 million, or $0.21 per diluted share, during the second quarter of 2015, a decrease of 109% and 109% respectively.  On an adjusted basis, Sucampo reported net income of $10.0 million, or $0.23 per diluted share, during the second quarter of 2016, compared to net income of $9.8 million, or $0.21 per diluted shares, during the second quarter of 2015, an increase year-over-year of 2% and 10% respectively.

Second Quarter 2016 Operational Review

AMITIZA

United States

• AMITIZA total prescriptions were 366,524 in the second quarter of 2016, as reported by IMS, an increase of 1% compared to the second quarter of 2015. For the first six months of 2016, AMITIZA total prescriptions were 726,695, an increase of 3% compared to the first six months of 2015.   Net sales of AMITIZA, reported by Takeda Pharmaceuticals U.S.A., Inc. (Takeda) for royalty calculation purposes, increased 15% to $101.7 million for the second quarter of 2016, compared to $88.2 million in the same period of 2015.  Royalty revenue was $18.7 million compared to $16.1 million, an increase of 16%. Also included in second quarter revenue are Takeda AMITIZA sales from R-Tech Ueno of $12.4 million.

Global Markets

• In Japan, Sucampo's revenue from sales of AMITIZA to Mylan N.V. was $14.6 million for the second quarter of 2016, compared to $14.5 million in the same period of 2015.

Corporate

• In July, Paul Edick was appointed to Sucampo’s Board of Directors.

Research and Development

• An ongoing phase 3 trial of AMITIZA in pediatric functional constipation in children six to seventeen years of age completed enrollment during April.  Top-line data from this trial and a new drug application (NDA) filing are expected in the second half of this year, with the potential for approval in the second half of 2017.
• Sucampo discontinued the development of cobiprostone after top-line data from a Phase 2a study of cobiprostone in patients with proton pump inhibitor (PPI)-refractory non-erosive reflux disease (NERD) or symptomatic gastroesophageal reflux disease (sGERD) did not meet its primary endpoints and also based on the results of a futility analysis of a Phase 2a study in the prevention of oral mucositis in patients undergoing radio chemotherapy for head and neck cancer. There were no safety concerns identified and cobiprostone demonstrated a well-tolerated safety profile consistent with earlier Phase 1 studies.

Second Quarter 2016 Financial Review

• On a GAAP basis, Sucampo reported a net loss of $0.8 million and a diluted loss per share of $.02 during the second quarter of 2016, compared to net income of $9.6 million and diluted EPS of $0.21 in the same period in 2015. Adjusted net income was $10.0 million, or $0.23 per diluted share, during the second quarter of 2016, compared to net income of $9.8 million, or $0.21 per diluted share, in the same period of 2015, an increase year-over-year of 2% and 10% respectively.
• EBITDA was $20.5 million for the second quarter of 2016 compared to EBITDA of $11.7 million for the same period in 2015. Adjusted EBITDA, defined as net income before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring and intangible impairment, was $24.9 million for the second quarter of 2016 compared to $14.8 million in the same period in 2015, an increase of 68%.
• Total revenues were $52.0 million for the second quarter of 2016 compared to $34.9 million in the same period in 2015, an increase of $17.1 million or 49%.  The increase was primarily due to the inclusion of R-Tech Ueno results and increase in royalty revenues from Takeda.
• Cost of goods sold were $20.4 million for the second quarter of 2016 compared to $7.3 million for the same period in 2015, an increase of $13.1 million or 180%.  The increase was primarily due to the amortization of the R-Tech Ueno inventory step-up and acquired intangible asset amortization.  Excluding the step-up of inventory and intangible asset amortization of $12.7 million, cost of goods sold was $7.7 million. The amortization of inventory step-up costs continued through May 2016.
• Gross margin calculated as product sales revenue less cost of goods sold as a percentage of product sales revenue, was 28% for the second quarter of 2016, compared to 50% for the same period in 2015, a decrease of 22%.  The decrease was primarily due to the amortization of the R-Tech Ueno inventory step-up and acquired intangible asset amortization. Excluding the step-up of inventory and intangible asset amortization, gross margin was 73%, an increase of 23%.
   
• Research and development expenses were $11.3 million for the second quarter of 2016 compared to $6.7 million for the same period of 2015, an increase of $4.6 million or 68%. The increase was primarily due to increased spending on lubiprostone pediatric studies and costs associated with cobiprostone clinical development.
   
• General and administrative expenses were $12.0 million for the second quarter of 2016 compared to $8.7 million for the same period of 2015, an increase of $3.3 million or 38%. The increase was primarily due to the inclusion of R-Tech Ueno in 2016 and restructuring costs related to the integration of R-Tech.
• Selling and marketing expenses were $0.6 million for the second quarter of 2016 compared to $0.6 million for the same period of 2015.
• The effective tax rate for the second quarter of 2016 was 5.8%, compared to 29% in the same period of 2015. The decrease in the tax rate is primarily due to the treatment of non-U.S. income.

Certain prior year non-GAAP amounts have been reclassified for consistency with the current period- adjusted presentation. These reclassifications had no effect on the reported results of operations. A reconciliation of adjusted Net Income to GAAP Net Income and adjusted EBITDA to income from operations, the most directly comparable GAAP financial measure, is included in the tables below.

Cash, Cash Equivalents, Restricted Cash and Marketable Securities

At June 30, 2016, cash, cash equivalents, restricted cash and investments were $154.9 million compared to $163.5 million at December 31, 2015. This change is primarily due to the investment in CPP of $5.0 million and the associated option payment of $3.0 million made in January 2016.  At June 30, 2016 and December 31, 2015, notes payable were $224.1 million and $252.4 million, respectively, including current portions of $21.7 million and $39.1 million, respectively. The change in the overall note payable balance is due to debt repayments made during 2016. Sucampo’s net debt position at June 30, 2016 is $69.2 million, compared to $88.9 million at December 31, 2015.

Geographic Sales

Company revenues by product type and geographic location for the three months ended June 30, 2016 and 2015 were as follows

Guidance

Sucampo today reiterated its earnings guidance for the full year ending December 31, 2016. Sucampo expects total revenue of $195.0 million to $205.0 million, adjusted net income of $45.0 million to $50.0 million, adjusted EPS of $0.97 to $1.07, and adjusted EBITDA of $100.0 million to $105.0 million. Adjusted net income guidance excludes amortization of acquired intangibles of approximately $17.6 million and amortization of the remaining inventory step-up costs of approximately $8.9 million.

Non-GAAP Financial Measures

This press release contains non-GAAP earnings as listed in the first table above, which is GAAP net income before interest, tax, depreciation, amortization, stock option expense and intangible impairment. Sucampo believes that this non-GAAP measure of financial results provides useful information to management and investors relating to its results of operations. Sucampo's management uses this non-GAAP measure to compare Sucampo's performance to that of prior periods for trend analyses, and for budgeting and planning purposes, as management believes this provides a more comparable measure of our continuing business, as it adjusts for special items that are not reflective of the normal earnings of our business. Sucampo believes that the use of non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Sucampo's financial measures with other companies in its industry, many of which present similar non-GAAP financial measures to investors, and that it allows for greater transparency with respect to key metrics used by management in its financial and operational decision-making.

Adjusted EBITDA provides us with an understanding of one aspect of earnings before the impact of investing and financing charges, income taxes and special items.  Adjusted EBITDA may be useful to an investor in evaluating our operating performance and liquidity because this measure is widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company.  In addition, this is a financial measure that is used by rating agencies, lenders and other parties to evaluate credit worthiness.  Finally, this measure is used by management for various purposes, including as a measure of performance of our operating entities and as a basis for strategic planning and forecasting.

Management of the company does not consider non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded in the Sucampo's financial statements. In order to compensate for these limitations, management presents non-GAAP financial measures together with GAAP results. Non-GAAP measures should be considered in addition to results and guidance prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. Reconciliation tables of the most comparable GAAP financial measure to the non-GAAP financial measure used in this press release are included with the financial tables at the end of this release. Sucampo urges investors to review the reconciliation and not to rely on any single financial measure to evaluate the Sucampo's business. In addition, other companies, including companies in our industry, may calculate similarly named non-GAAP measures differently than we do, which limits their usefulness in comparing our financial results with theirs.

About AMITIZA^® (lubiprostone)

AMITIZA (lubiprostone) is a chloride channel activator that acts locally in the small intestine. By increasing intestinal fluid secretion, lubiprostone increases motility in the intestine, thereby facilitating the passage of stool and alleviating symptoms associated with CIC. Lubiprostone, via activation of apical CIC-2 channels in intestinal epithelial cells, bypasses the antisecretory action of opiates that results from suppression of secretomotor neuron excitability. Activation of CIC-2 by lubiprostone has also been shown to stimulate recovery of mucosal barrier function and reduce intestinal permeability via the restoration of tight junction protein complexes in ex vivo studies of ischemic porcine intestine.

AMITIZA (24 mcg twice daily) is indicated in the U.S. for the treatment of adults with CIC and opioid-induced constipation (OIC) with chronic, non-cancer pain. AMITIZA (8 mcg twice daily) is also approved in the U.S. for irritable bowel syndrome with constipation (IBS-C) in women 18 years of age and older. In Japan, AMITIZA (24 mcg twice daily) is indicated for the treatment of chronic constipation (excluding constipation caused by organic diseases). In Canada, AMITIZA (24 mcg twice daily) is indicated for the treatment of CIC in adults. In the U.K., AMITIZA (24 mcg twice daily) is indicated for the treatment of CIC and associated symptoms in adults, when response to diet and other non-pharmacological measures (e.g. educational measures, physical activity) are inappropriate. In Switzerland, AMITIZA (24 mcg twice daily) is indicated for the treatment of CIC in adults and for the treatment of OIC and associated signs and symptoms such as stool consistency, straining, constipation severity, abdominal discomfort, and abdominal bloating in adults with chronic, non-cancer pain. The efficacy of AMITIZA for the treatment of OIC in patients taking opioids of the diphenylheptane class, such as methadone, has not been established.

About RESCULA®

Unoprostone isopropyl 0.12% (trade named RESCULA) first received marketing authorization in 1994 in Japan for the treatment of glaucoma and ocular hypertension.  RESCULA is marketed in Japan by Santen Pharmaceutical Co., Ltd. (Santen).  We acquired RESCULA as part of the acquisition of R-Tech Ueno in 2015.

About Sucampo Pharmaceuticals, Inc.

Sucampo Pharmaceuticals, Inc. is focused on the development and commercialization of medicines that meet major unmet medical needs of patients worldwide. Sucampo has two marketed products – AMITIZA, its lead product, and RESCULA – and a pipeline of product candidates in clinical development. A global company, Sucampo is headquartered in Rockville, Maryland, and has operations in Japan, Switzerland and the U.K.