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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

OR

o         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)

(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 x  No o

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 x  No o

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” and “smaller reporting company” in Rule 12b-2 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 o  No x

As of July 28, 2015 there were 34,271,494 shares of Common Stock, $0.001 par value per share, outstanding.

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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:

·                  the timing and conduct of our clinical trials and studies of Translarna™ (ataluren) for the treatment of Duchenne muscular dystrophy, cystic fibrosis, mucopolysaccharidosis type I, or MPS I, and aniridia, 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;

·                  our ability to commercialize Translarna in general, and specifically as a treatment for Duchenne muscular dystrophy caused by nonsense mutations, or nmDMD, including the timing of such commercialization and our ability to successfully negotiate adequate pricing and reimbursement processes on a timely basis, or at all, in the countries in which we may obtain regulatory approval, including the countries in the European Economic Area;

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·                  the timing of and our ability to obtain additional marketing authorizations for Translarna and our other product candidates, and the ability of Translarna and our other product candidates to meet existing or future regulatory standards;

·                  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;

·                  our estimates regarding the potential market opportunity for Translarna, including the size of eligible patient populations and our ability to identify such patients;

·                  our ability to expand the approved product label of Translarna for the treatment of nmDMD;

·                  the timing and scope of our commercial infrastructure expansion, including the growth of our international presence in Europe and in other territories;

·                  the potential receipt of revenues from future sales of Translarna and other product candidates, including our ability to earn a profit from sales or licenses of Translarna for the treatment of nmDMD;

·                  our sales, marketing and distribution capabilities and strategy, including the ability of our third party manufacturers to manufacture and deliver Translarna in commercially sufficient quantities and the ability of distributors to process orders in a timely manner and satisfy its other obligations to us;

·                  our ability to establish and maintain arrangements for the manufacture of Translarna and our other product candidates that are sufficient to meet clinical trial and commercial launch requirements;

·                  our plans to pursue development of Translarna for additional indications other than nmDMD and cystic fibrosis, MPS I, and aniridia, caused by nonsense mutations;

·                  our ability to maintain the marketing authorization of Translarna for the treatment of nmDMD in the European Economic Area, which is conditioned upon completion of our Phase 3 confirmatory trial in nmDMD, among other things, and subject to annual review and renewal by the EMA following its reassessment of the risk benefit balance of the authorization;

·                  our ability to advance our earlier stage programs, including our antibacterial program;

·                  our plans to pursue research and development of other product candidates;

·                  the potential advantages of Translarna;

·                  our estimates regarding expenses, future revenues, 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;

·                  our intellectual property position;

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·                  the impact of government laws and regulations;

·                  our competitive position; and

·                  our expectations with respect to the development and regulatory status of our product candidate 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 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, 2014 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,” “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.

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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)

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Consolidated Statements of Operations (unaudited)

In thousands (except per share data)

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Consolidated Statements of Comprehensive Loss (unaudited)

In thousands

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Consolidated Statements of Cash Flows (unaudited)

In thousands

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited)

June 30, 2015

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 orally administered, small molecule therapeutics targeting an area of RNA biology referred to as post-transcriptional control. The letters “PTC” in the corporate name are an acronym for post-transcriptional control processes, which are the regulatory events that occur in cells during and after a messenger RNA is copied from DNA through the transcription process. The Company has discovered all of its compounds currently under development using its proprietary technologies. The Company plans to continue to develop these compounds both on its own and through selective collaboration arrangements with leading pharmaceutical and biotechnology companies. The Company believes that systematically targeting post-transcriptional control processes represents an unexploited approach to drug discovery and development. The Company’s internally discovered pipeline addresses multiple therapeutic areas, including rare disorders, oncology and infectious diseases.

The Company’s lead product, Translarna™ (ataluren) received marketing authorization from the European Commission, or EC, in August 2014 for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, in ambulatory patients age 5 years and over in the 31 member states of the European Economic Area, or EEA. This marketing authorization is subject to annual review and renewal by the European Medicines Agency, or EMA following its reassessment of the risk-benefit balance of the authorization and is further conditioned on the Company’s ability to complete its global, confirmatory Phase 3 clinical trial in nmDMD, which it refers to as ACT DMD, and submit the final report, including additional efficacy and safety data from the trial, during 2015. See “Risk Factors—Risks Related to Regulatory Approval of our Product and our Product Candidates” for further detail regarding the annual EMA reassessment process, including a description of the risk-benefit balance.

The Company launched Translarna on a commercial basis in Germany in December 2014 and in Austria, Denmark, and Norway in 2015. The Company expects to expand its launch activities across the EEA throughout 2015 and future years, subject to successful completion of pricing and reimbursement negotiations. The market access process, including pricing and reimbursement negotiations, varies from country to country and can take over 18 months in certain circumstances. Concurrently, the Company has been making Translarna available under reimbursed early access programs in selected countries where those mechanisms exist, both within Europe and in those countries outside of Europe that will reference the marketing authorization described above.

During 2015, the Company expects that revenues will be primarily generated from sales of Translarna in counties in the EEA where pricing and reimbursement approval is obtained at acceptable levels and in other territories where permitted to distribute Translarna under EAPs. The Company is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals, the difficulties inherent in the development of commercially usable products, the potential need to obtain additional capital necessary to fund the development of its products, and competition from other companies. As of June 30, 2015, the Company had an accumulated deficit of approximately $498.8 million. The Company has financed its operations to date primarily through 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 are described in Note 2 of the notes to the Company’s audited financial statements as of December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 2, 2015 (2014 Form 10-K).

Basis of Presentation

The accompanying financial information as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 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, 2014 and notes thereto included in the 2014 Form 10-K.

In the opinion of management, the unaudited financial information as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2015 or for any other interim period or for any other future year.

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Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventories and cost of product revenue

On August 4, 2014, the Company was notified that the European Commission, or EC, granted marketing authorization for Translarna for the treatment of Duchenne muscular dystrophy caused by nonsense mutations, or nmDMD, in ambulatory patients aged five years and older. The marketing authorization allows the Company to market Translarna in the European Economic Area, or EEA, which is comprised of the 28 member states of the European Union plus Norway, Iceland and Liechtenstein. This marketing authorization is subject to annual review and renewal by the European Medicines Agency, or EMA following its reassessment of the risk-benefit balance of the authorization and is further conditioned on the Company’s ability to complete its global, confirmatory Phase 3 clinical trial in nm DMD, which it refers to as ACT DMD, and submit the final report, including additional efficacy and safety data from the trial during 2015.  The Company recently received EC approval of the annual renewal. The launch in these countries is on a country by country basis. If we fail to satisfy renewal requirements, or if it is determined that the balance of risks and benefits of using Translarna changes materially, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require additional clinical trials. The Company does not have sufficient history or experience from which to accurately forecast product sales or demand generation. As such, the Company has not capitalized inventory and will not capitalize inventory until the completion of ACT DMD and satisfaction of the EMA conditions or until the Company can reasonably predict future product sales. The costs incurred related to the manufacturing of Translarna have been recorded as research and development expense in the consolidated statements of operations and consist principally of royalties that are less than $0.1 million. The time period over which this inventory is consumed will depend on a number of factors, including the amount of future Translarna sales, and the ability to utilize inventory prior to its expiration date.

Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 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 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the Financial Accounting Standards Board voted to delay the effective date of this standard until the first quarter of 2018. Companies are permitted to early adopt the standard in the first quarter of 2017. Presently, the Company is assessing what effect the adoption of ASU 2014-09 will have on its financial statements and accompanying notes.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern—Disclosures of Uncertainties about an entity’s Ability to Continue as a Going Concern.” ASU 2014-15 provides new guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of ASU 2014-15 are not expected to have a significant impact on the Consolidated Financial Statements.

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

PTC’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 applies the revenue recognition guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-15, Revenue Recognition—Products. The Company recognizes revenue from product

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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.

The Company records revenue on sales where Translarna is available either on a commercial basis or through a reimbursed early access program and typically paid for by a government authority or institution. Prior to January 1, 2015, the Company recognized revenue for commercial and reimbursed early access program sales on a cash basis once the product was shipped on behalf of the government authority or institution and payment had been received, if all other revenue recognition criteria were met. Beginning in the first quarter of 2015, the Company is recognizing revenue for Translarna as product is shipped, as the Company has established a pattern of collectability.

The Company records revenue net of estimated discounts and rebates. Allowances are recorded as a reduction of revenue at the time revenues from product sales are recognized. Allowances for government rebates and discounts are established at the time of delivery. These allowances are adjusted to reflect known changes in factors that 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 the Financial Accounting Standards Board (FASB), guidance on the milestone method of revenue recognition. 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. 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.

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.

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Cash equivalents are reflected in the accompanying financial statements at fair value. The carrying amount of grant and collaboration 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 June 30, 2015 and December 31, 2014:

The following is a summary of marketable securities accounted for as available-for-sale securities at June 30, 2015 and December 31, 2014:

At June 30, 2015 and December 31, 2014, 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.

Marketable securities on the balance sheet at June 30, 2015 and December 31, 2014 mature as follows:

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The Company classifies all of its securities as current as they are all available for sale and are available for current operations.

Level 3 valuation

The warrant liability is classified in Other long-term liabilities on the Company’s consolidated balance sheets. The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other income (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 table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for warrant liability for the period ended June 30, 2015:

Fair value of the warrant liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of June 30, 2015 include (i) volatility (69%—72%), (ii) risk free interest rate (0.64%—1.32%), (iii) strike price ($128.00-$2,520.00), (iv) fair value of common stock ($48.13), and (v) expected life (1.96—4.23 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of December 31, 2014 include (i) volatility (68%-70%), (ii) risk free interest rate (0.89%—1.65%), (iii) strike price ($128.00—$2,520.00), (iv) fair value of common stock ($51.77), and (v) expected life (2.50—4.70 years). See Note 6 for a description of the warrants issued in connection with the convertible notes.

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4.             Other comprehensive income (loss) and accumulated other comprehensive items

Other comprehensive income (loss) includes changes in equity that are excluded from net income (loss), such as unrealized gains and losses on marketable securities.

The following tables summarize other comprehensive income (loss) and the changes in accumulated other comprehensive items for the three and six months ended June 30, 2015:

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5.             Accounts payable and accrued expenses

Accounts payable and accrued expenses at June 30, 2015 and December 31, 2014 consist of the following:

6.             Warrants

All of the Company’s outstanding warrants were classified as liabilities as of June 30, 2015 and December 31, 2014 because they contained non-standard antidilution provisions.

The following is a summary of the Company’s outstanding warrants as of June 30, 2015:

The following is a summary of the Company’s outstanding warrants as of December 31, 2014:

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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:

*              In the three and six months ended June 30, 2015 and 2014, 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.

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 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.

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) 238,742 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.

From January 1, 2015 through June 30, 2015, the Company issued a total of 1,916,100 stock options to various employees.  Of those, 524,900 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 our new hires’ employment compensation.

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A summary of stock option activity is as follows:

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The fair value of grants made in the six months ended June 30, 2015 was contemporaneously estimated on the date of grant using the following assumptions:

The Company assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the six month period ended June 30, 2015 was $33.23 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.

The following table summarizes information on the Company’s restricted stock:

The Company recorded share-based compensation expense in the statement of operations as follows:

As of June 30, 2015 there was approximately $78.4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2009 Equity and Long Term Incentive Plan, 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 3.0 years.

9.             Subsequent events

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

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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, 2014 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2015. 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.

Overview and Corporate Update

We are a global biopharmaceutical company focused on the discovery, development and commercialization of orally administered, proprietary small molecule drugs targeting an area of RNA biology we refer to as post-transcriptional control. Post-transcriptional control processes are the regulatory events that occur in cells during and after a messenger RNA molecule is copied from DNA through the transcription process. Our internally discovered pipeline addresses multiple therapeutic areas, including rare disorders, oncology and infectious diseases. 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 lead product candidate is ataluren, an investigational new drug in the United States, for the treatment of patients with genetic disorders that arise from a type of genetic mutation known as a nonsense mutation. We hold worldwide commercialization rights to ataluren for all indications in all territories. The brand name of ataluren is Translarna™.

Translarna™ for nonsense mutation Duchenne muscular dystrophy

Translarna™ (ataluren), received marketing authorization from the European Commission, or EC, in August 2014 for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, in ambulatory patients age 5 years and over, in the 31 member states of the European Economic Area, or EEA. Our authorization in the EEA is subject to annual review and renewal by the European Medicines Agency, or EMA, following its reassessment of the risk benefit balance of the authorization, which we refer to as the annual EMA reassessment. This marketing authorization is further conditioned on our ability to complete our global, confirmatory Phase 3 clinical trial in nmDMD, which we refer to as ACT DMD, and submit the final report, including additional efficacy and safety data from the trial, during 2015. We completed enrollment for ACT DMD in September 2014 and we expect to receive top-line data in the fourth quarter of 2015. See “Risk Factors—Risks Related to Regulatory Approval of our Product and our Product Candidates” on page 71 for further detail regarding the annual EMA reassessment process, including a description of the risk benefit balance.

We launched Translarna on a commercial basis in Germany in December 2014 and in Austria, Denmark and Norway in 2015. We expect to expand our launch activities across the EEA throughout 2015 and future years, subject to successful completion of pricing and reimbursement negotiations. The market access process, including pricing and reimbursement negotiations, varies from country to country and can take over 18 months in certain circumstances.

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Concurrently, we have been making available Translarna for the treatment of nmDMD through reimbursed early access programs, or EAP programs, in selected countries where funded named patient or cohort programs exist, both within the EEA and in those countries outside of the EEA that will reference the marketing authorization in the EEA. Translarna has been made available under EAP programs in Brazil, Colombia, France, Greece, Italy, Israel, Spain, and Turkey.

During the fourth quarter of 2014 we initiated a rolling new drug application, or NDA, with the U.S. Food and Drug Administration, or FDA, for Translarna for the treatment of nmDMD. We believe this process gives the FDA an opportunity to conduct a meaningful review of most of the segments of our NDA, ahead of reviewing our ACT DMD data. Assuming positive data from ACT DMD, we expect that the submission of the data will complete our rolling NDA and allow for FDA review. If granted priority review and approval by the FDA, among other factors, we believe we have the potential to begin commercialization in the United States in the first half of 2016. In preparation for a potential U.S. launch, subject to positive ACT DMD data and receipt of FDA approval, we have begun building out our commercial team and infrastructure in the United States.

We ultimately intend to market Translarna in all markets in the EEA where market access is possible. We currently expect Translarna to be priced at levels consistent with the pricing for other therapies for the treatment of rare disorders where high unmet medical need exists.

Translarna™ for nonsense mutation cystic fibrosis

We are currently enrolling a global, confirmatory Phase 3 clinical trial of Translarna for the treatment of cystic fibrosis caused by nonsense mutations, or nmCF. We refer to this trial as ACT CF. We anticipate completing enrollment in this trial by the end of 2015 with top-line data about a year later.

As ACT CF enrollment is expected to complete by the end of this year, we are preparing our request for a variation to our marketing authorization of Translarna in the EEA, described above, to include approval for the treatment of nmCF. We intend to submit this variation request prior to the end of 2015. While our variation submission will use the clinical results achieved in our prior Phase 3 clinical trial in nmCF, we believe that the EMA’s Committee for Medicinal Products for Human Use will consider the status of ACT CF enrollment important at the time of our submission. Approval of the marketing authorization variation will depend on the EMA’s assessment of the relative benefits and risks of approval. We may not be able to demonstrate the required relative risk-benefit profile and there is substantial risk that the EMA will not grant us a variation approving Translarna for the treatment of nmCF. If approved, we expect that the EMA will require us, as a post-approval measure, to provide comprehensive clinical data from ACT CF to the EMA. In addition, unless and until we satisfy the conditions of our primary marketing authorization in the EEA for Translarna, such authorization will continue to be subject to annual review and renewal by the EMA. See “Risk Factors—Risks Related to Regulatory Approval of our Product and our Product Candidates” on page 71 for further detail regarding the annual EMA reassessment process, including a description of the risk benefit balance.

In preparation for our variation submission to the EMA for Translarna for the treatment of nmCF, we have performed additional retrospective analyses of the data from our previous Phase 3 trial completed in 2011. Natural history data for cystic fibrosis suggests that patients under 18 years of age experience more rapid rates of decline in pulmonary function. In addition, as previously reported, post hoc analysis of data from our previous Phase 3 trial indicates that patients not using chronic inhaled tobramycin experienced a benefit in relative change from baseline in percent-predicted FEV1 favoring the Translarna-treated group versus placebo at week 48, with fewer pulmonary exacerbations in the Translarna-treated group. Given the natural history of the disease and the data from our previous Phase 3 trial, we undertook further analyses to compare pulmonary outcomes on the basis of age (under 18 years versus 18 years or older) in patients who did not use chronic inhaled tobramycin. In this new subgroup analysis, non-TOBI Translarna patients under 18 showed an increase in FEV1 over baseline, a mean relative change in predicted FEV1 of 8.4%  and an absolute change in predicted FEV1 of 5.4%. In addition, non-TOBI patients under 18 years receiving Translarna also showed a 60% reduction in exacerbation rate. We plan to include this analysis with our variation submission. For additional considerations see our risk factor with respect to retrospective analyses of clinical trial results on page 50.

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Translarna™ for additional indications

Over the last six years multiple independent investigators have conducted preclinical studies in which Translarna enabled readthrough of the premature stop codons from a large set of nonsense mutations across a diverse group of experimental models exhibiting various genetic disorders. The studies evaluated Translarna’s ability to read through premature stop codons in mRNA in cell-free systems, transfected cell lines, mouse models and patient cells. Based on these studies by independent investigators in addition to our own trials and studies, we expect to continue to pursue additional indications for Translarna, including nmMPS I and aniridia caused by nonsense mutation.

MPS I is an inherited genetic disorder caused by a deficiency in an essential enzyme that is responsible for the breakdown of byproducts of chemical reactions in the body’s cells. It is estimated that 60 percent to 80 percent of cases of MPS I are caused by a nonsense mutation. While enzyme replacement therapies are on the market, there remains significant unmet medical need for the development of new treatments that can target the underlying cause of the disorder.

Aniridia is a genetic disorder due to mutations in the PAX6 gene associated with loss of eyesight and other symptoms.  We estimate that approximately one-third of all aniridia cases are due to a nonsense mutation. In a prior study conducted by an independent investigator, Translarna-treated mice with nonsense mutation aniridia showed a significant increase in the PAX6 protein in a nonsense mutation PAX6 gene, but not in a PAX6 gene harboring a splice-site mutation. The investigators in this study found that Translarna not only inhibited disease progression, but also reversed corneal, lens and retinal malformation defects and restored electrical responses of the retina.

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Spinal muscular atrophy program

RG7800, an investigational oral therapy for spinal muscular atrophy, or SMA, is our product candidate under our joint development SMA program 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.

Results from the Phase 1 study of RG7800, which was completed in the first half of 2014, were presented at the emerging science session at the 2015 annual meeting of the American Academy of Neurology. The Phase 1 study was a single ascending dose, placebo-controlled clinical study in 48 healthy volunteers. Results from the Phase 1 study indicated that RG7800 showed a favorable safety profile and was well tolerated at all dose levels studied. In addition, proof of mechanism was demonstrated by a dose-dependent effect on Survival Motor Neuron 2 (SMN2) mRNA splicing towards the production of full length SMN2 mRNA.

MOONFISH, a Phase 2, multiple-dose clinical study investigating the safety and tolerability of RG7800 was initiated in November 2014. Secondary outcome measures include pharmacokinetics and pharmacodynamics as well as exploratory efficacy endpoints.

Dosing of the first cohort of the Phase 2 MOONFISH study was completed in the second quarter of 2015. RG7800 was well tolerated and preliminary review of the blinded data in the first cohort indicates substantial increases in full length SMN2 mRNA.

Data from a 39-week non-clinical safety and toxicology study of RG7800 in cynomolgus monkeys have recently shown an eye finding at exposures above those explored in SMA patients and healthy volunteers. As a precautionary measure, the collaboration partners decided in April 2015 to suspend dosing of patients to evaluate this finding and confirm next steps for MOONFISH. Additional pre-clinical data from ongoing investigations are expected in the fourth quarter.  Pending that data, dosing could potentially resume in patients in the first quarter of 2016.

Cancer stem cell program

In April 2015, we initiated a Phase 1 first-in-human, dose-escalation safety and pharmacokinetic open-label clinical study for our product candidate, PTC596, in advanced cancer patients with solid tumors. PTC596 is a first-in-class, orally bioavailable and potent small molecule that targets tumor stem cell populations by reducing the function, activity and amount of a protein called BMI1. Elevated levels of BMI1 are associated with more aggressive tumors and a poor prognosis in a wide variety of cancers, including glioblastoma.

Antibacterial program

Our compound PTC672 is an orally bioavailable, new chemical entity with a novel mechanism of action distinct from that of all approved antibiotics. During the first half of 2015, we commenced IND-enabling preclinical safety studies for PTC672 to support the submission of an investigational new drug, or IND, application for the initiation of clinical assessment. These studies are ongoing. PTC672 is derived from a novel chemical scaffold and has the potential to address the significant need for new treatment options to combat infections caused by multi-drug resistant Gram-negative Neisseria gonorrhoeae. Because PTC672 acts selectively, inhibiting only Neisseria, beneficial bacteria are spared, which we believe may be a significant advantage over broadly acting antibiotics in treating gonorrheal infections.

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Funding

During 2015, we expect that our revenues will be primarily generated from sales of Translarna in counties in the EEA where we are able to obtain pricing and reimbursement approval at acceptable levels and in other territories where we are permitted to distribute Translarna under our EAPs.

Historically, we have financed our operations primarily through 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.

As of June 30, 2015, we had an accumulated deficit of $498.8 million. We had a net loss of $76.3 million for the six months ended June 30, 2015 and a net loss of $39.2 million for the six months ended June 30, 2014.

We anticipate that our expenses will increase substantially in connection with the expansion of our commercial infrastructure as we continue to establish an international presence, particularly throughout Europe and in the U.S., and commercialize Translarna for the treatment of nmDMD, including significant sales and marketing, legal and regulatory, and distribution and manufacturing expenses. In addition, we expect to continue to incur significant costs in connection with our ongoing ACT DMD and ACT CF trials as well as our Phase 2 proof-of-concept studies for nmMPS I and nonsense mutation aniridia. We also expect to incur ongoing research and development expenses for our other product candidates, including the ongoing Phase 1 clinical study under our cancer stem cell program and IND-enabling studies under our antibacterial program. In addition, we may incur substantial costs in connection with our ongoing rolling NDA submission with the FDA for Translarna for the treatment of nmDMD and our currently anticipated submission of a marketing authorization variation with the EMA to seek to include Translarna for the treatment of nmCF in the second half of 2015. We have begun seeking and intend to continue to seek marketing approval for Translarna for the treatment of nmDMD in territories outside of the EEA and we may also seek marketing approval for Translarna for other indications, and these efforts may significantly impact the timing and extent of our commercialization expenses.

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.

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. We will need to generate significant revenues to achieve and sustain profitability, and we may never do so.

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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, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

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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 as we continue our confirmatory Phase 3 clinical trials of Translarna for the treatment of nmDMD and nmCF, our Phase 2 proof-of-concept study of Translarna in nmMPS I and nonsense mutation aniridia, and our IND-enabling studies under our antibacterial program, and as we prepare to commence our Phase 1 clinical study for PTC596 under our cancer stem cell program. 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 product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product candidate manufacturing costs.

The following table provides research and development expense for our most advanced principal product development programs, for the three and six months ended June 30, 2015 and June 30, 2014.

The successful development of our product and 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;

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·                  the potential benefits of our products and product candidate over other therapies;

·                  our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future;

·                  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 Translarna or any other product candidate could mean a significant change in the costs and timing associated with the development of that 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, and accounting services.

We expect that selling, general and administrative expenses will increase in future periods as a result of our continued efforts to establish an expanded international presence in Europe and other territories and our continued efforts to commercialize Translarna for the treatment of nmDMD, including increased payroll, expanded infrastructure, commercial operations, increased consulting, legal, accounting and investor relations expenses.

Interest income

Interest income consists of interest income earned on investments.

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.

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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 selected countries in the third quarter of 2014.  We have now established a pattern of collectability and, beginning in 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 and typically paid for by a government authority or institution. 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, the Company is recognizing revenue for Translarna as product is shipped, as the Company has 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 will fluctuate quarter-over-quarter. In some countries, including Brazil, orders for named patient sales are 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 the results of our Phase 3 ACT DMD trial in nmDMD. We expect to receive top-line data from ACT DMD in the fourth quarter of 2015.

Collaboration and Grant Revenue

The terms of collaboration agreements typically include payments of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding; and royalties on future product sales. In addition, if applicable, we generate service revenue through collaboration and grant agreements that provide for fees for research and development services or additional payments upon achievement of specified events.

We evaluate all contingent consideration earned, such as a milestone payment, using the criteria as provided by 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.

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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.

Inventories and Cost of Product Revenues

In 2014, we were notified that the European Commission, or EC, granted marketing authorization for Translarna for the treatment of nmDMD, in ambulatory patients aged five years and older. This marketing authorization is subject to annual review and renewal by the EMA following its reassessment of the risk-benefit balance of the authorization, which we refer to as the annual EMA reassessment, and is further conditioned on our ability to complete ACT DMD and submit the final report, including additional efficacy and safety data from the trial, in 2015 and implement measures, including pharmacovigilance plans, that are detailed in the risk management plan for Translarna that was submitted to EMA. We submitted a marketing authorization renewal request to the EMA in February 2015 and recently received EC approval of the annual renewal. We plan to seek to renew the approval on an annual basis until our obligations have been fulfilled and the approval is converted from a conditional approval into a full approval. If we fail to satisfy such requirements, or if it is determined that the balance of risks and benefits of using Translarna changes materially, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require additional clinical trials. The conditional marketing authorization allows us to market Translarna in the 31 member states of European Economic Area. Our launch in these countries is on a country by country basis.

We do not have sufficient history or experience from which to accurately forecast product sales or demand generation. As such, we have not capitalized inventory and will not capitalize inventory until full approval has been obtained or until we can reasonably predict future product sales and demand generation. The Company’s cost of product sales consists principally of royalties that are less than $0.1 million and included as a component of research and development costs in the current year presentation.

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;

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·                  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.

During the six months ended June 30, 2015, we issued a total of 1,916,100 stock options to various employees. Of those, 524,900 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 six months ended June 30, 2015 was contemporaneously estimated on the date of grant using the following assumptions:

We assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the six months ended June 30, 2015 was $33.23 per share.

We use the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to us with respect to industry, stage of life cycle, size, and financial leverage. The risk-free rate of the option is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.

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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.

The following table summarizes information on our restricted stock:

We recorded share-based compensation expense in the statement of operations as follows: