Catalyst Pharmaceuticals (CPRX) 10-K2020 FY Annual report

This Annual Report on Formcontains “forward-looking statements”, as that term is defined in the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, plans or objectives for future operations and anticipated results of operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, “believes”, “anticipates”, “proposes”, “plans”, “expects”, “intends”, “may”, and other similar expressions are intended to identify forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or other achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Item 1A – Risk Factors” and those discussed in the section entitled “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Caution Concerning Forward-Looking Statements.”

We are a biopharmaceutical company focused on developing and commercializing innovative therapies for people with rare, debilitating, chronic diseases. We are currently focusing our efforts on products that treat diseases in the neuromuscular and neurological space, but we recently decided to expand our strategic focus to include acquiring orinnovative technology platforms and earlier stage programs in other rare disease therapeutic categories outside of these spaces. We are dedicated to making a meaningful impact on the lives of those suffering from rare diseases, and we believe in putting patients first in everything we do.

Thepandemic has resulted, and is expected to continue to result, in significant economic disruption, and has adversely affected and will likely continue to adversely affect our business. We are actively monitoring the situation and are taking those actions that may be required by federal, state or local authorities or that we determine are in the best interests of our patients, investigators, employees and stockholders.

Our Board of Directors recently approved an expansion in our company’s strategic focus to include acquiring orinnovative technology platforms and earlier stage programs in other therapeutic categories outside of neuromuscular diseases. To accomplish these new priorities, we are prepared to invest more heavily in research and development, including acquiring earlier stage opportunities and innovative technology. We believe that this strategic expansion will better position our company to build out a broader more diversified portfolio of drug candidates that we believe will add greater value to our company over the near and long-term. However, there can be no assurance that whatever product candidates or technology platforms we acquire, if any, will be successfully developed.

In October 2012, we licensed the North American rights to Firdapse, a proprietary form of amifampridine phosphate, or chemically known asphosphate. When we acquired the rights to the product, it had already been granted orphan drug designation by the Food and Drug Administration (FDA) for the treatment of patients with LEMS, a rare and sometimes fatal autoimmune disease characterized by muscle weakness. Additionally, in August 2013, we were granted “breakthrough therapy designation” by the FDA for Firdapsefor the treatment of LEMS. Further, the FDA has granted Orphan Drug Designation for Firdapsefor the treatment of Myasthenia Gravis (MG).

In December 2018, we entered into a definitive agreement with Endo International plc’s subsidiary, Endo Ventures Limited (“Endo”), for the further development and commercialization of generic Sabriltablets through Endo’s United States Generic Pharmaceuticals segment, Par Pharmaceutical. Pursuant to the agreement, in December 2018, we received anpayment of $500,000. We will be entitled to receive a milestone payment of $2.0 million on the commercial launch of the product. Further, we will receive a sharing of defined net profits upon commercialization and we are obligated to share the costs of certain development expenses.

Firdapseis Catalyst’s registered trade name in the United States for amifampridine phosphate tablets. Amifampridine is the WHO (World Health Organization) registered INN (International Nonproprietary Name) and United States Adopted Name (USAN) for the chemical entity,often abbreviated asor DAP. Firdapsecontains the phosphate salt of amifampridine, hence the name “amifampridine phosphate.” We will refer to our drug by its trade name in the United States (Firdapse), by the INN/USAN (amifampridine), or by the specific salt in our product (amifampridine phosphate), throughout this

Myasthenia Gravis, or MG, is a chronic autoimmune neuromuscular disorder that is characterized by fluctuating weakness of the voluntary muscle groups. The prevalence of MG in the United States is estimated to be about 20/100,000 population (equating to an estimate of approximately 64,000 patients in the United States). However, according to the Myasthenia Gravis Foundation of America, MG is probably under diagnosed and the prevalence may be higher. For example, patients withmay have focal or regional weakness and muscle atrophy that are more suggestive of motor neuron or muscle membrane (myopathy) disease. MG occurs in all races, both genders, and at any age. MG is not thought to be directly inherited (although it occasionally occurs in more than one member of the same family), nor is it contagious.

We conducted two successful Phase 3 double-blind, placebo controlled clinical trials evaluating Firdapsefor the treatment of LEMS. The results of the first trial published in 2016 in(). The results of the second trial were published in March 2019 in the Journal of Clinical Neuromuscular Disease ().

In order to help patients afford their medication, we, like other pharmaceutical companies who are marketing drugs for ultra-orphan conditions, have developed an array of financial assistance programs that are available to reduce patientand deductibles to a nominal affordable amount. For eligible patients with commercial coverage, aassistance program designed to keepcosts to $10 or less per month is available for all LEMS patients prescribed Firdapse. We are also donating, and committing to continue to donate, money to qualified, independent charitable foundations dedicated to providing assistance to LEMS patients in financial need. Our goal is to ensure that no LEMS patient is ever denied access to their medication for financial reasons.

In May 2019, the FDA approved an NDA for Ruzurgi, Jacobus Pharmaceuticals’ version of amifampridinefor the treatment of pediatric LEMS patients (ages 6 to under 17). We believe that the vast majority of Ruzurgisales are to adult LEMS patients who are being prescribed the drug off label. If Jacobus is able to successfully sell Ruzurgito additional adult LEMS patients, it could have a material adverse effect on our business, financial condition and results of operations.

Sales of pharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement by third party payors, such as state and federal governments, including Medicare and Medicaid, managed care providers, private commercial insurance plans and pharmacy benefit management (PBM) plans. Decisions regarding the extent of coverage and the amount of reimbursement to be provided for Firdapseare expected to be made on aand in some cases, on abasis. Particularly given the rarity of LEMS, our experience has been that securing coverage and appropriate reimbursement from third-party payors requires targeted education and highly skilled insurance navigation experts that have experience with rare disease launches and medical exception processes at insurance companies to provide patient coverage for important rare disease therapies. To that end, we have engaged a dedicated team of field-based market access account managers and reimbursement experts as well as a patient service center staffed with experienced personnel focused on ensuring that clinically-qualified patients have access to our product.

In February 2016, we initiated an investigator-sponsored, randomized, double-blind, placebo-controlled, crossoverclinical trial evaluating the safety, tolerability and potential efficacy of Firdapseas a symptomatic treatment for patients withSeven patients participated in thistrial. On March 15, 2017, we reportedresults from this trial. Both of theefficacy endpoints of change from baseline (CFB) in total Quantitative Myasthenia Gravis (QMG) score (p=0.0003) and CFB in total Myasthenia Gravis Activities of Daily Livingscore (p=0.0006) were statistically and clinically significant in this trial. Several secondary efficacy measures also achieved statistical significance. Amifampridine phosphate was well tolerated in this population of patients.

Our exploratory study,(A Randomized Placebo Controlled Crossover Study to Evaluate the Safety and Efficacy of Amifampridine Phosphate in Ambulatory Patients with Spinal Muscular Atrophy (SMA) Type 3, met the primary endpoint of a statistically significant difference for the Hammersmith Functional Motor Scale Expanded (HFMSE). Clinically, however, the effect was modest. The secondary endpoints were not statistically significant, although several individual quality of life measures demonstrated a positive nominally statistically significant change. Key opinion leaders with whom we have spoken believed that Firdapse needed to show a large clinically significant change if there was the possibility to affect disease progression through retrograde signaling from enhanced neuromuscular junction function. After considering all of these factors, we have concluded that the modest results exhibited in this study are unlikely to result in a sufficient modification of disease progression, and, particularly in light of the fact that there are now three approved disease modifying medications for SMA Type 3, we have decided not to pursue the SMA Type 3 indication further.

We intend to conduct astudy evaluating Firdapseas a treatment for Hereditary Neuropathy with Liability to Pressure Palsies (HNPP). The scientific basis for considering this indication is that leakage of neuron potassium channels is observed in HNPP. Firdapse is a potassium channel blocker and may mitigate the pathological effects of the potassium channel leakage in HNPP patients.

We had previously reported that we planned to evaluate Firdapseas a treatment of Kennedy’s disease (spinal bulbar muscular atrophy). Previously, key opinion leaders had suggested to us that Firdapsemight be an effective treatment for the symptoms of Kennedy’s disease. However, given the results of the SMA Type 3study and the lack of a targeted mechanism of action for Firdapsein Kennedy’s disease, we have determined not to pursue this indication further.

In September 2015, we announced the launch of a program to develop our version of vigabatrinas a generic version of Sabril, which is marketed in the United States by Lundbeck. Lundbeck’s exclusivity for Sabrilexpired on April 26, 2018. Vigabatrin comes in two dosage forms – a powder sachet and a tablet. Par Pharmaceutical brought the first generic version of the powder sachet to market, and since then several additional generic versions of this product have been approved. However, there is only one approved generic version of the tablets at this time.

We are licensed in Florida as a virtual drug manufacturer, which means that we have nomanufacturing capacity and we are obligated to rely on contract manufacturers and packagers. We have no plans to build or acquire the manufacturing capability needed to manufacture any of our research materials or commercial products, and we expect that our drug products and drug substances will be prepared by contractors with suitable capabilities for these tasks and that we will enter into appropriate supply agreements with these contractors at appropriate times in the development and commercialization of our products. Because we will use contractors to manufacture and supply our products, we will be reliant on such contractors. Further, the contractors selected would have to be inspected by the FDA and found to be in substantial compliance with federal regulations in order for a drug application for one of our drug candidates to be approved, and there can be no assurance that the contractors we select would pass such an inspection.

Once a pharmaceutical candidate is identified for development it enters thetesting stage.tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Prior to beginning human clinical trials, an IND sponsor must submit an IND to the FDA. The IND sponsor must submit the results of thetests, together with manufacturing information and analytical data, to the FDA as part of the IND. Someortesting may continue even after the IND is submitted. In addition to including the results of thestudies, the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated, if the trial lends itself to an efficacy evaluation. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30–day time period, raises concerns or questions about the conduct of the trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA.

FDA approval of an NDA is required before marketing of the product may begin in the United States. The NDA must include the results of product development,studies and clinical studies, together with other detailed information, including information on the chemistry, manufacture and composition of the product. The FDA has 60 days from its receipt of the NDA to review the application to ensure that it is sufficiently complete for substantive review before filing it. The FDA may request additional information rather than file an NDA. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA files it. Once the submission is filed, the FDA begins ansubstantive review. The submission of an NDA is also subject to the payment of a substantial application fee (for FDA fiscal year 2021 this fee is $2,875,842), although a waiver of such fee may be obtained under certain limited circumstances, including when the drug that is subject of the application has received Orphan Drug Designation for the indication sought. Further, the sponsor of an approved NDA is subject to an annual program fee, which for FDA fiscal year 2021 is $336,432 per prescription drug product. User fees typically increase annually. The approval process is lengthy and difficult, and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA may also refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured to determine whether its manufacturing is cGMP–compliant to assure and preserve the product’s identity, strength, quality, purity and stability.

A SPA is a process in which sponsors may request to meet with the FDA to reach agreement on the design and size of certain clinical trials, clinical studies, or animal trials to determine if they adequately address scientific and regulatory requirements. As part of this process, sponsors submit specific questions about protocol design and scientific and regulatory requirements. After the FDA completes the review of a SPA request, the FDA may issue a SPA Letter, including an assessment of the protocol, agreement orwith the proposed protocol, and answers to the sponsor’s relevant questions.

Once an NDA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations foradvertising,promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. As a condition of NDA approval, the FDA may also require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for the healthcare professionals, and other Elements To Assure Safe Use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug.

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims covering the applicant’s product or approved methods of using the product. Upon approval of a drug, each of the patents listed in the application for the drug are then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of,or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug and can often be substituted by pharmacists under prescriptions written for the original listed drug.

Generic drugs may enter the market after the approval of an ANDA. The ANDA development process typically does not require newor clinical studies, but it does typically require one or more bioequivalence studies to show that the ANDA drug is bioequivalent to the previously approved brand name reference listed drug. Bioequivalence studies compare the bioavailability of the proposed drug product with that of the approved listed product containing the same active ingredient. Bioavailability is a measure of the rate and extent to which the active ingredient or active moiety is absorbed from a drug product and becomes available at the site of action. A demonstration of bioequivalence means that the rate and extent of absorption of the ANDA drug is not significantly different from the rate and extent of absorption of the brand name reference listed drug when administered at the same molar dose under similar experimental conditions.

Sponsors of clinical trials ofproducts, including drugs, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of results of these trials can be delayed in certain circumstances for up to two years after the date of completion of the clinical trial. Competitors may use this publicly-available information to gain knowledge regarding the progress of development programs.

We make available free of charge on or through our Internet website our Annual Report on FormQuarterly Reports on FormCurrent Reports on Formand all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). Our Internet address is. The content on our website is not, nor should it be deemed to be, incorporated by reference into this Form

Until we launched Firdapsefor the treatment of LEMS in January 2019, we focused all of our efforts on obtaining regulatory approval for Firdapsefor the treatment of LEMS, on evaluating Firdapsefor the treatment of other neuromuscular diseases including CMS,and SMA Type 3, on raising capital, and on recruiting personnel. On November 28, 2018, the FDA approved our first product, Firdapsefor the treatment of adults with LEMS, which became commercially available in January 2019. While we reported net income of $75.0 million for fiscal 2020 and $31.9 million for fiscal 2019, we have a prior history of operating losses in all prior fiscal years of our existence. There can be no assurance that we will remain profitable.

On January 6, 2021, we announced an expansion in our strategic focus to include acquiring orinnovative technology platforms and earlier stage programs in other therapeutic categories outside of neuromuscular diseases. We are evaluating opportunities toor acquire products, product candidates and technologies on a selective and targeted basis. Our business development efforts may fail to result in our acquiring rights to additional products, product candidates or technologies, or may result in our consummating transactions with which you do not agree.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including periodic reports, disclosures and more complex accounting rules. As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules requiring public companies to include a report of management on a company’s internal control over financial reporting in their Annual Report on FormBased on current rules, we are required to annually report under Section 404(a) of Sarbanes-Oxley regarding our management’s assessment as to the effectiveness of our internal control over financial reporting. Further, under Section 404(b) of Sarbanes-Oxley, our auditors are required to report on their assessment as to the effectiveness of our internal control over financial reporting. If we or our auditors are unable to conclude that we have effective internal control over our financial reporting, investors could lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our common stock.

We are highly dependent on our officers and key employees and on our Board of Directors. The loss of the services of any of these individuals could significantly impede the achievement of our scientific and business objectives. Other than an employment agreement with Patrick J. McEnany, our Chairman, President and Chief Executive Officer with respect to his services, we have no employment or retention agreements with any of our other officers or key employees. If we lose the services of any of our existing officers or key employees, or if we were unable to recruit qualified replacements on a timely basis for persons who leave our employ, our efforts to develop our drug candidates might be significantly delayed. We do not carryinsurance on any of our personnel.

The ongoing global outbreak of the coronavirusand the various attempts throughout the world to contain it, have created significant volatility, uncertainty and disruption. Thepandemic has had, and may continue to have, significant effects on our operations. There can be no assurance as to whether and how long these effects will last and whether following the pandemic whatever trends have occurred will not remain in place and continue to affect our business.

Broad-based business or economic disruptions could adversely affect our ongoing or planned research and development activities. Global health concerns, such as thepandemic, could also result in social, economic, and labor instability in the countries in which we or the third parties with whom we engage operate. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including the suppliers, clinical trial sites, regulators and other third parties with whom we conduct business, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively impacted. It is also possible that global health concerns such as thepandemic could disproportionately impact the hospitals and clinical sites in which we conduct any of our clinical trials, which could have a material adverse effect on our business and our results of operation and financial condition.

We will only obtain regulatory approval to commercialize Firdapsefor additional indications if we can demonstrate to the satisfaction of the FDA (or the equivalent foreign regulatory authorities) in adequate and well-controlled clinical studies and trials that the drug is safe and effective for its intended use, that the clinical and other benefits outweigh the safety risks and that it otherwise meets approval requirements. As we have experienced in the past, a failure of one or moreor clinical trials or studies can occur at any stage of drug development. We may experience numerous unforeseen events during, or as a result of, testing that could delay or prevent us from obtaining regulatory approval for, or commercializing our drug candidates, including but not limited to:

We do not currently have the ability to independently conductstudies or clinical studies and trials, and we typically rely on third parties, such as third-party contract research and governmental organizations, medical institutions and clinical investigators (including academic clinical investigators), to conduct studies and trials for us. Our reliance on third parties for development activities reduces our control over these activities. These third parties may not complete activities on schedule or may not conduct ourstudies and our clinical studies and trials in accordance with regulatory requirements or our study design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be adversely affected, and our efforts to obtain regulatory approvals for and commercialize Firdapsefor additional indications may be delayed.

We are licensed in Florida as a virtual drug manufacturer, which means we have nomanufacturing capacity and we will be obligated to rely on contract manufacturers and packagers. We cannot be sure that we will successfully manufacture any product, either independently or under manufacturing arrangements, if any, with third party manufacturers. Moreover, if any manufacturer should cease doing business with us or experience delays, shortages of supply or excessive demands on their capacity, we may not be able to obtain adequate quantities of product in a timely manner, or at all. Manufacturers, and in certain situations their suppliers, are required to comply with current NDA commitments and current good manufacturing practices (cGMP) requirements enforced by the FDA, and similar requirements of other countries. The failure by a manufacturer to comply with these requirements could affect its ability to provide us with product. Although we intend to rely on third-party contract manufacturers, we are ultimately responsible for ensuring that our products are manufactured in accordance with cGMP. In addition, if, during a preapproval inspection or other inspection of our third-party manufacturers’ facility or facilities, the FDA determines that the facility is not in compliance with cGMP, any of our marketing applications that lists such facility as a manufacturer may not be approved or approval may be delayed until the facility comes into compliance with cGMP and completes a successfulby the FDA.

In February 2019, we received a letter from Senator Bernie Sanders asking us to justify our pricing decision for Firdapse. In the letter, Senator Sanders accuses us of “fleecing” Americans and “immoral exploitation” because of our decision regarding the pricing of Firdapse. We responded to Senator Sanders, who issued a public statement in response askingCommissioner Scott Gottlieb to allow pharmacies and manufacturers who were previously making this drug to be permitted to resume providing it.

Firdapsetargets diseases with small patient populations. A key component of the successful commercialization of a drug product for these indications includes identification of patients and a targeted prescriber base for the drug product. Due to small patient populations, we believe that we would need to have significant market penetration to achieve meaningful revenues and identifying patients and targeting the prescriber base are key to achieving significant market penetration. Typically, drugs for conditions with small prevalence have higher prices in order to generate a return on investment, and as a result, theprices at which we anticipate we may sell Firdapsewill need to be relatively high in order for us to generate an appropriate return for the investment in these product development programs and achieve meaningful gross margins, and high per patient prices could drive physicians to seek out compounding pharmacies to provide compounded amifampridine to fill their prescriptions rather than Firdapse, thereby lowering the Firdapsemarket share or penetration in the market. There can be no assurance that we will be successful in achieving a sufficient degree of market penetration and/or obtaining or maintaining highprices for Firdapsefor diseases with small patient populations. Further, even if we obtain significant market share for Firdapse, because the potential target populations are very small, we may not be able to maintain profitability despite obtaining such significant market share. Additionally, patients who discontinue therapy or do not fill prescriptions are not easily replaced by new patients, given the limited patient population.

Before we can obtain future regulatory approval for the sale of our drug candidates for an indication, we may have to conduct, at our own expense,tests in animals in order to support the safety of our drug candidates.testing is expensive, difficult to design and implement, can take several years to complete, and is uncertain as to outcome. Ourtests may produce negative or inconclusive results, and on the basis of such results, we may decide, or regulators may require us, to halt ongoing clinical trials or conduct additionaltesting.

In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, andwaivers. The company that first obtains FDA approval for a designated orphan drug for a given rare disease receives marketing exclusivity for use of that drug for the stated disease or condition for a period of seven years, with an additional six months of exclusivity if the product also qualifies for pediatric exclusivity. Orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective, a subsequent product is deemed clinically superior, or if the manufacturer is unable to deliver sufficient quantity of the drug.

Certain provisions of our certificate of incorporation andand applicable provisions of Delaware corporate law, may make it more difficult for or prevent a third party from acquiring control of us or changing our Board of Directors and management. These provisions include:

In October 2012, we licensed the North American rights to Firdapse, a proprietary form of amifampridine phosphate, or chemically known asphosphate. When we acquired the rights to the product, it had already been granted orphan drug designation by the Food and Drug Administration (FDA) for the treatment of patients with LEMS, a rare and sometimes fatal autoimmune disease characterized by muscle weakness. Additionally, in August 2013, we were granted “breakthrough therapy designation” by the FDA for Firdapsefor the treatment of LEMS. Further, the FDA has granted Orphan Drug Designation for Firdapsefor the treatment of Myasthenia Gravis (MG).

In December 2018, we entered into a definitive agreement with Endo International plc’s subsidiary, Endo Ventures Limited (“Endo”), for the further development and commercialization of generic Sabriltablets through Endo’s United States Generic Pharmaceuticals segment, Par Pharmaceutical. Pursuant to the agreement, in December 2018, we received anpayment of $500,000. We will be entitled to receive a milestone payment of $2.0 million on the commercial launch of the product. Further, we will receive a sharing of defined net profits upon commercialization and we are obligated to share the costs of certain development expenses.

Cost of sales consists of third-party manufacturing costs, freight, royalties, and indirect overhead costs associated with sales of Firdapse. Cost of sales may also include period costs related to certain inventory manufacturing services, inventory adjustments charges, unabsorbed manufacturing and overhead costs, and manufacturing variances. Prior to FDA approval in November 2018, the cost of manufacturing Firdapsewas expensed, including ourof anticipated launch product. This will cause the cost of sales to appear artificially low as we consumed product manufactured and in process prior to approval, and will continue to do so until we deplete such product.

Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. The major components of research and development costs include preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, consulting, and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs related to our product development efforts. To date, all of our research and development resources have been devoted to the development of Firdapse,(our version of vigabatrin), and formerlyand we currently expect that our future development costs will be attributable principally to the continued development of Firdapse.

We prepare our consolidated financial statements and notes thereto which accompany this report in accordance with U.S. GAAP. To supplement our financial results presented on a U.S. GAAP basis, we may usefinancial measures in our reports filed with the Commission and/or our communications with investors.measures are provided as additional information and not as an alternative to our consolidated financial statements presented in accordance with GAAP. Ourfinancial measures are intended to enhance an overall understanding of our current financial performance. We believe that thefinancial measures we present provide investors and prospective investors with an alternative method for assessing our operating results in a manner that we believe is focused on the performance of ongoing operations and provide a more consistent basis for comparison between periods.

We recognize stock-based compensation for the fair value of all share-based payments, including grants of stock options and restricted stock units. For stock options, we use the Black-Scholes option valuation model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. Expected volatility is based on reviews of historical volatility of our common stock. The estimated expected option life is based upon the simplified method. Under this method, the expected option life is presumed to be thebetween the vesting date and the end of the contractual term. We will continue to use the simplified method until we have sufficient historical exercise data to estimate the expected life of the options. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the expected life of our stock options awards. For the years ended December 31, 2020 and 2019, the assumptions used were an estimated annual volatility of 81.4% and 75.5%, expected holding periods of four and a half years, and risk-free interest rates of 0.24% to 1.64% and 1.51% to 2.53%, respectively.

Total stock-based compensation for the years ended December 31, 2020 and 2019 was $6.3 million and $3.8 million, respectively. In 2020, grants were principally of stock options relating to 2020bonus awards and grants to new employees. In 2019, option grants were principally forbonus awards and to new employees hired in connection with the launch of Firdapse.

Ournet income for 2020, which excludes an approximately $6.3 million expense associated withstock-based compensation, was approximately $81.2 million ($0.78 per basic and $0.76 per diluted share). Ourincome for 2019, which excludes an approximately $3.8 million expense associated withstock-based compensation, was approximately $35.7 million ($0.35 per basic and $0.34 per diluted share).

For the year ended December 31, 2019, we recognized $102.3 million in net revenue from product sales of Firdapse. We had no revenues from product sales for the year ended December 31, 2018. We had no revenues from our collaborative arrangement in 2019. We had revenues in 2018 in the amount of $500,000 relating to thepayment from Endo in connection with the collaboration for vigabatrin tablets.

We reported other income, net in all periods primarily relating to our investment of funds received from offerings of our securities and product sales. The increase in other income, net for the year ended December 31, 2019 when compared to the same period in 2018 is primarily due to higher invested balances and higher yields on investments. Other income, net, consists of interest income, dividend income, and realized gain (loss) on trading securities. For the year ended December 31, 2019, other income, net also includes $100,000 received as part of a settlement agreement between us and Northwestern University relating toThese proceeds were used fund our drug development activities and our operations.

Ournet income, which excludes for 2019 a $3,824,815 expense associated with stock-based compensation was $35,700,152 ($0.35 and $0.34, respectively, per basic and diluted share). Ournet loss for the year ended December 31, 2018 was $30,452,870 ($0.30 per basic and diluted share), which excludesstock compensation of $3,550,664.

Net cash provided by operating activities was $45,034,864 and $34,611,473, respectively, for the years ended December 31, 2020 and 2019. During the year ended December 31, 2020, net cash provided by operating activities was primarily attributable to our net income of $74,983,000, a decrease of $4,549,571 in accounts receivable, net, an increase of $138,573 in accounts payable, and $7,134,049 net ofexpenses. This was partially offset by increases of $3,976,697 in prepaid expenses and other current andassets and $2,693,808 in inventory and decreases of $1,209,280 in accrued expenses and other liabilities, $919,280 in operating lease liability and $32,971,264 indeferred taxes. During the year ended December 31, 2019, net cash provided by operating activities was primarily attributable to our net income of $31,875,337, increases of $1,780,080 in accounts payable, $12,540,197 in accrued expenses and other liabilities, and of $3,831,736 ofexpenses. This was partially offset by increases of $10,536,997 in accounts receivable, net, $1,900,780 in inventory, and $2,701,293 in prepaid expenses and other current andassets and a decrease of $276,807 in operating lease liability.