e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
000-51863
VANDA PHARMACEUTICALS
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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03-0491827
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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9605 Medical Center Drive, Suite 300
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20850
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Rockville, Maryland
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(Zip Code)
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(Address of Principal Executive
Offices)
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(240) 599-4500
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. Please see definition of accelerated and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
o Accelerated
Filer
o Non-Accelerated
Filer
þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of November 5, 2007, there were 26,650,634 shares
of the Registrants Common Stock issued and outstanding.
Vanda
Pharmaceuticals Inc.
(A Development Stage Enterprise)
Form 10-Q
Index
For the
Three and Nine Months Ended September 30, 2007
2
Part I
FINANCIAL INFORMATION ITEM
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1.
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FINANCIAL
STATEMENTS (UNAUDITED)
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VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
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September 30,
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December 31,
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2007
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2006
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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59,954,473
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$
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30,928,895
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Marketable securities
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45,474,370
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941,981
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Prepaid expenses, deposits and other current assets
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3,439,284
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1,949,466
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Total current assets
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108,868,127
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33,820,342
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Marketable securities, long-term
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3,992,347
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Property and equipment, net
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1,444,925
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1,859,704
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Deposits
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150,000
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150,000
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Restricted cash
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430,230
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430,230
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Total assets
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$
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114,885,629
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$
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36,260,276
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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3,446,423
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$
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2,783,249
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Accrued expenses
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11,868,130
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6,322,808
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Total current liabilities
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15,314,553
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9,106,057
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Deferred rent
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280,655
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238,413
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Deferred grant revenue
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129,950
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Other long-term liabilities
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28,984
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Total liabilities
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15,595,208
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9,503,404
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Commitments and contingencies
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Stockholders equity
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Common stock, $0.001 par value, 150,000,000 shares
authorized as of September 30, 2007 and December 31,
2006; and 26,643,487 and 22,128,534 shares issued and
outstanding as of September 30, 2007 and December 31,
2006, respectively
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26,643
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22,129
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Additional paid-in capital
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252,412,208
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126,578,588
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Accumulated other comprehensive gain (loss)
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13,430
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|
|
|
(3,269
|
)
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Deficit accumulated during the development stage
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|
(153,161,860
|
)
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|
|
(99,840,576
|
)
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|
|
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|
|
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Total stockholders equity
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|
99,290,421
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26,756,872
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Total liabilities and stockholders equity
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$
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114,885,629
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$
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36,260,276
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|
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Period from
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March 13,
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|
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2003
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Three Months Ended
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Nine Months Ended
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(Inception) to
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September 30,
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September 30,
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September 30,
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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2007
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Revenues from services
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$
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$
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$
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$
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$
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81,545
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Operating expenses:
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Research and development
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|
13,874,248
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|
|
|
9,542,385
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|
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|
34,660,132
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|
|
|
44,130,788
|
|
|
|
113,075,038
|
|
General and administrative
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|
|
9,647,646
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|
|
|
3,264,849
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|
|
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23,330,570
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|
|
|
9,170,439
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|
|
|
47,536,325
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,521,894
|
|
|
|
12,807,234
|
|
|
|
57,990,702
|
|
|
|
53,301,227
|
|
|
|
160,611,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss from operations
|
|
|
(23,521,894
|
)
|
|
|
(12,807,234
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)
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|
|
(57,990,702
|
)
|
|
|
(53,301,227
|
)
|
|
|
(160,529,818
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,514,708
|
|
|
|
683,469
|
|
|
|
4,608,143
|
|
|
|
1,686,363
|
|
|
|
7,399,713
|
|
Interest expense
|
|
|
|
|
|
|
(396
|
)
|
|
|
|
|
|
|
(4,829
|
)
|
|
|
(80,485
|
)
|
Other income
|
|
|
71,345
|
|
|
|
|
|
|
|
71,345
|
|
|
|
|
|
|
|
71,947
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total other income, net
|
|
|
1,586,053
|
|
|
|
683,073
|
|
|
|
4,679,488
|
|
|
|
1,681,534
|
|
|
|
7,391,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(21,935,841
|
)
|
|
|
(12,124,161
|
)
|
|
|
(53,311,214
|
)
|
|
|
(51,619,693
|
)
|
|
|
(153,138,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
7,660
|
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
23,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,943,501
|
)
|
|
|
(12,124,161
|
)
|
|
|
(53,321,284
|
)
|
|
|
(51,619,693
|
)
|
|
|
(153,161,860
|
)
|
Beneficial conversion feature deemed dividend to
preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(21,943,501
|
)
|
|
$
|
(12,124,161
|
)
|
|
$
|
(53,321,284
|
)
|
|
$
|
(51,619,693
|
)
|
|
$
|
(186,648,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$
|
(0.82
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(2.03
|
)
|
|
$
|
(3.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of basic and diluted net loss per
share applicable to common stockholders
|
|
|
26,612,853
|
|
|
|
21,871,542
|
|
|
|
26,223,151
|
|
|
|
13,862,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
During the
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Gain (Loss)
|
|
|
Stage
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at December 31, 2006
|
|
|
22,128,534
|
|
|
$
|
22,129
|
|
|
$
|
126,578,588
|
|
|
$
|
(3,269
|
)
|
|
$
|
(99,840,576
|
)
|
|
|
|
|
|
$
|
26,756,872
|
|
Follow-on offering of common stock, net of issuance costs
|
|
|
4,370,000
|
|
|
|
4,370
|
|
|
|
111,250,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,254,850
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
14,301,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,301,976
|
|
Exercise of stock options
|
|
|
144,953
|
|
|
|
144
|
|
|
|
103,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,176
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
178,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,132
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,321,284
|
)
|
|
$
|
(53,321,284
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,792
|
)
|
|
|
|
|
|
|
(26,792
|
)
|
|
|
|
|
Net unrealized gains on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,491
|
|
|
|
|
|
|
|
43,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(53,304,585
|
)
|
|
|
(53,304,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2007
|
|
|
26,643,487
|
|
|
$
|
26,643
|
|
|
$
|
252,412,208
|
|
|
$
|
13,430
|
|
|
$
|
(153,161,860
|
)
|
|
|
|
|
|
$
|
99,290,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
Nine Months Ended
|
|
|
(Inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(53,321,284
|
)
|
|
$
|
(51,619,693
|
)
|
|
$
|
(153,161,860
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
446,806
|
|
|
|
415,197
|
|
|
|
1,865,659
|
|
Employee and non-employee stock-based compensation
|
|
|
14,480,108
|
|
|
|
4,525,202
|
|
|
|
25,792,817
|
|
Loss on disposal of assets
|
|
|
27,017
|
|
|
|
29,528
|
|
|
|
56,545
|
|
Accretion of discount on investments
|
|
|
(1,315,609
|
)
|
|
|
(301,293
|
)
|
|
|
(1,736,683
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses, deposits and other current assets
|
|
|
(1,414,371
|
)
|
|
|
391,559
|
|
|
|
(3,360,162
|
)
|
Deposits
|
|
|
|
|
|
|
660,000
|
|
|
|
(150,000
|
)
|
Accounts payable
|
|
|
660,697
|
|
|
|
(143,303
|
)
|
|
|
3,435,841
|
|
Accrued expenses
|
|
|
5,544,227
|
|
|
|
5,329,690
|
|
|
|
11,863,292
|
|
Deferred grant revenue
|
|
|
(140,599
|
)
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
13,258
|
|
|
|
209,851
|
|
|
|
280,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(35,019,750
|
)
|
|
|
(40,503,262
|
)
|
|
|
(115,113,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(249,728
|
)
|
|
|
(1,187,295
|
)
|
|
|
(3,441,225
|
)
|
Proceeds from sales of property and equipment
|
|
|
119,054
|
|
|
|
|
|
|
|
119,054
|
|
Purchases of marketable securities
|
|
|
(107,570,370
|
)
|
|
|
(101,313,078
|
)
|
|
|
(221,649,154
|
)
|
Proceeds from sales of marketable securities
|
|
|
|
|
|
|
82,137,888
|
|
|
|
82,137,888
|
|
Maturities of marketable securities
|
|
|
60,395,000
|
|
|
|
18,520,000
|
|
|
|
91,815,000
|
|
Investment in restricted cash
|
|
|
|
|
|
|
|
|
|
|
(430,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(47,306,044
|
)
|
|
|
(1,842,485
|
)
|
|
|
(51,448,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on note payable
|
|
|
|
|
|
|
|
|
|
|
515,147
|
|
Principal payments on obligations under capital lease
|
|
|
|
|
|
|
(1,071
|
)
|
|
|
(91,691
|
)
|
Principal payments on note payable
|
|
|
|
|
|
|
(141,074
|
)
|
|
|
(515,147
|
)
|
Proceeds from issuance of preferred stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
61,795,187
|
|
Proceeds from exercise of stock options and warrants
|
|
|
103,176
|
|
|
|
48,886
|
|
|
|
262,046
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
111,254,850
|
|
|
|
53,329,951
|
|
|
|
164,588,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
111,358,026
|
|
|
|
53,236,692
|
|
|
|
226,554,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
(6,654
|
)
|
|
|
(3,781
|
)
|
|
|
(37,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
29,025,578
|
|
|
|
10,887,164
|
|
|
|
59,954,473
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
30,928,895
|
|
|
|
21,012,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
59,954,473
|
|
|
$
|
31,899,979
|
|
|
$
|
59,954,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
1.
|
Business
Organization and Presentation
|
Business
organization
Vanda Pharmaceuticals Inc. (Vanda or the Company) is a
biopharmaceutical company focused on the development and
commercialization of small molecule therapeutics, with exclusive
worldwide commercial rights to three product candidates in
clinical development for various central nervous system
disorders. Vanda commenced its operations on March 13,
2003. The Companys lead product candidate, iloperidone, is
a compound for the treatment of schizophrenia and bipolar
disorder. The Company submitted a New Drug Application (NDA) for
iloperidone in schizophrenia to the United States Food and Drug
Administration (FDA) on September 27, 2007. The
Companys second product candidate, VEC-162, is a compound
for the treatment of sleep and mood disorders, which previously
demonstrated positive results from a Phase III clinical
trial in transient insomnia. VEC-162 is also ready for
Phase II trials for the treatment of depression. The
Company recently initiated a Phase III trial of VEC-162 in
chronic primary insomnia. The Companys third product
candidate, VSF-173, is a compound for the treatment of excessive
sleepiness. On October 30, 2007 the Company reported the
top-line results of its first Phase II trial of VSF-173 for
the treatment of excessive sleepiness.
Initial
public and follow-on offerings
The Company completed its initial public offering in April 2006.
The offering totaled 5,964,188 shares of common stock at a
public offering price of $10.00 per share, resulting in net
proceeds to the Company of approximately $53.3 million
after deducting payments of underwriters discounts and
commissions and offering expenses.
In January 2007 the Company completed its follow-on offering.
The offering totaled 4,370,000 shares of common stock at a
public offering price of $27.29 per share, resulting in net
proceeds to the Company of approximately $111.3 million
after deducting underwriting discounts and commissions and
offering expenses.
Capital
resources
Since its inception, the Company has devoted substantially all
of its efforts to business planning, research and development,
recruiting management and technical staff, acquiring operating
assets, raising capital and market research. Accordingly, the
Company is considered to be in the development stage as defined
in Statement of Financial Accounting Standards (SFAS)
No. 7, Accounting and Reporting by Development Stage
Enterprises.
The Companys activities will necessitate significant uses
of working capital throughout 2007 and beyond. Additionally, the
Companys capital requirements will depend on many factors,
including the success of the Companys research and
development efforts, payments received under contractual
agreements with other parties, if any, and the status of
competitive products. The Company plans to continue financing
its operations with cash received from financing activities and
believes that its current capital resources will be sufficient
to meet its anticipated operating needs into mid-2008 and, after
that time, the Company will require additional capital. In
budgeting for its activities, the Company has relied on a number
of assumptions, including assumptions that the Company will
continue to expend funds in preparation of a commercial launch
of iloperidone, that it will conduct the Phase III trial of
VEC-162 in chronic primary insomnia in accordance with its
expectations, that it will not engage in further in-licensing
activities, that it will not receive any proceeds from potential
partnerships, that it will not expend funds on the bipolar
indication for iloperidone, that it will continue to evaluate
pre-clinical compounds for potential development, that it will
be able to continue the manufacturing of our product candidates
at commercially reasonable prices, that it will be able to
retain its key personnel, and that it will not incur any
significant contingent liabilities.
7
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Company may need to raise additional funds more quickly if
one or more of the above assumptions proves to be incorrect, if
the Company chooses to expand its product development efforts
more rapidly than presently anticipated or if the Company seeks
to acquire additional product candidates. The Company may decide
to raise additional funds even before they are needed if the
conditions for raising capital are favorable. However, the
Company may not be able to raise additional funds on acceptable
terms, or at all. If the Company is unable to secure sufficient
capital to fund its research and development activities, the
Company may not be able to continue operations, or the Company
may have to enter into collaboration agreements that could
require the Company to share commercial rights to its products
to a greater extent or at earlier stages in the drug development
process than is currently intended.
Basis of
presentation
The accompanying unaudited condensed consolidated financial
statements of Vanda Pharmaceuticals Inc. have been prepared in
accordance with accounting principles generally accepted in the
United States and the rules and regulations of the Securities
and Exchange Commission (SEC) for interim financial information.
Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles
for complete financial statements and should be read in
conjunction with the Companys consolidated financial
statements for the year ended December 31, 2006 included in
the Companys annual report on the
Form 10-K.
The financial information as of September 30, 2007 and for
the periods of the three and nine months ended
September 30, 2007 and 2006 and for the period from
March 13, 2003 (inception) to September 30, 2007, is
unaudited, but in the opinion of management all adjustments,
consisting only of normal recurring accruals, considered
necessary for a fair statement of the results of these interim
periods have been included. The condensed consolidated balance
sheet data as of December 31, 2006 was derived from audited
financial statements but does not include all disclosures
required by accounting principles generally accepted in the
United States.
The results of the Companys operations for any interim
period are not necessarily indicative of the results that may be
expected for any other interim period or for a full fiscal year.
The financial information included herein should be read in
conjunction with the consolidated financial statements and notes
in the Companys annual report incorporated by reference in
the
Form 10-K
for the year ended December 31, 2006. The condensed
consolidated financial statements include the accounts of the
Company and its wholly-owned Singapore subsidiary. All
inter-company balances and transactions have been eliminated.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
Cash
and cash equivalents
For purposes of the condensed consolidated balance sheets and
condensed consolidated statements of cash flows, cash
equivalents represent highly-liquid investments with a maturity
of three months or less at the date of purchase.
8
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Marketable
securities
The Company classifies all of its marketable securities as
available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses reported as a
component of stockholders equity in accumulated other
comprehensive loss. Interest income, amortization of premiums
and accretion of discounts on marketable securities, and
realized gains and losses on securities are included in interest
income in the condensed consolidated statements of operations.
Marketable securities with a maturity of more than one year at
the end of the period are classified as long-term securities.
Restricted
cash
During 2005, in conjunction with the lease of the office and
laboratory space in Rockville, MD, the Company provided the
landlord with a letter of credit, which was collateralized with
a deposit in the amount of $430,230. The deposit is recorded as
non-current restricted cash at September 30, 2007 since the
letter of credit is required until the lease expires in 2016.
Concentrations
of credit risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash and cash equivalents and marketable securities. The Company
places its cash and cash equivalents and marketable securities
with highly-rated financial institutions. At September 30,
2007, the Company maintained all of its cash, cash equivalents
and marketable securities in three financial institutions.
Deposits held with these institutions may exceed the amount of
insurance provided on such deposits. Generally, these deposits
may be redeemed upon demand, and the Company believes there is
minimal risk of losses on such balances.
Stock-based
compensation
The Company accounts for the stock-based compensation expenses
in accordance with the Financial Accounting Standards Board
(FASB) revised SFAS No. 123, Share-Based Payment
(SFAS 123(R)). Accordingly, compensation costs for all
stock-based awards to employees and directors are measured based
on the grant date fair value of those awards and recognized over
the period during which the employee or director is required to
perform service in exchange for the award. The Company generally
recognizes the expense over the awards vesting period.
For stock awards granted in 2006 and 2007, expenses are
amortized under the accelerated attribution method. For stock
awards granted prior to January 1, 2006, expenses are
amortized under the accelerated attribution method for options
that were modified after the original grant date and under the
straight-line attribution method for all other options. As
stock-based compensation expense recognized in the condensed
consolidated statements of operations for the three and nine
months ended September 30, 2006 and 2007 is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Pre-vesting forfeitures on the options granted during
2006 and 2007 were estimated to be approximately 2% based on the
Companys historical experience.
9
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Total stock-based compensation expense recognized during the
three and nine months ended September 30, 2007 and 2006
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(Inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Research and development
|
|
$
|
1,097,577
|
|
|
$
|
184,789
|
|
|
$
|
3,292,944
|
|
|
$
|
475,563
|
|
|
$
|
4,825,955
|
|
General and administrative
|
|
|
4,059,822
|
|
|
|
1,321,008
|
|
|
|
11,009,038
|
|
|
|
4,013,347
|
|
|
|
20,749,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
5,157,399
|
|
|
$
|
1,505,797
|
|
|
$
|
14,301,982
|
|
|
$
|
4,488,910
|
|
|
$
|
25,575,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per basic and diluted share of
common stock
|
|
$
|
0.19
|
|
|
$
|
0.07
|
|
|
$
|
0.55
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of stock-based compensation expense
per share
|
|
|
26,612,853
|
|
|
|
21,871,542
|
|
|
|
26,223,151
|
|
|
|
13,862,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, approximately $29.8 million
of total unrecognized compensation costs related to non-vested
awards are expected to be recognized over a weighted average
period of 2.8 years.
As of September 30, 2007, the Company had two equity
incentive plans, the Second Amended and Restated Management
Equity Plan (the 2004 Plan) and the 2006 Equity Incentive Plan
(the 2006 Plan) that were adopted in December 2004 and April
2006, respectively. An aggregate of 1,195,577 shares were
subject to outstanding options granted under the 2004 Plan as of
September 30, 2007, and no additional options will be
granted under this plan. As of September 30, 2007 there are
2,385,141 shares of the Companys common stock
reserved under the 2006 Plan of which 1,651,608 shares were
subject to outstanding options to employees and non-employees.
Options are subject to terms and conditions established by the
compensation committee of the board of directors. None of the
stock-based awards are classified as a liability as of
September 30, 2007. Option awards have
10-year
contractual terms and all options granted prior to
December 31, 2006 and options granted to new employees vest
and become exercisable on the first anniversary of the grant
date with respect to the 25% of the option awards. The remaining
75% of the option awards vest and become exercisable monthly in
equal installments thereafter over three years. Option awards
granted to existing employees after December 31, 2006 vest
and become exercisable monthly in equal installments over four
years. The initial stock options granted to directors upon their
election vest and become exercisable in equal monthly
installments over a period of four years, while the subsequent
annual stock option grants to directors vest and become
exercisable in equal monthly installments over a period of one
year. Certain option awards to executives provide for
accelerated vesting if there is a change in control of the
Company.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes-Merton option pricing model that
uses the assumptions noted in the following table. Expected
volatility rates are based on historical volatility of the
common stock of comparable entities and other factors due to the
lack of historic information of the Companys publicly
traded common stock. The expected term of options granted is
based on the transition approach provided by Staff Accounting
Bulletin (SAB) No. 107 as the options meet the
plain vanilla criteria required by this method. The
risk-free interest rates are based on the U.S. Treasury
yield for a period consistent with the expected term of the
option in effect at the time of the grant. The
10
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Company has not paid dividends to its stockholders since its
inception and does not plan to pay dividends in the foreseeable
future.
Assumptions used in the Black-Scholes-Merton option pricing
model for employee and director stock options granted during the
nine months ended September 30, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
71
|
%
|
|
|
71
|
%
|
Weighted average expected term (years)
|
|
|
6.25
|
|
|
|
5.56
|
|
Weighted average risk-free rate
|
|
|
4.66
|
%
|
|
|
4.84
|
%
|
A summary of option activity for the 2004 Plan is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Remaining Term
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
at Grant Date
|
|
|
(Years)
|
|
|
Intrinsic Value
|
|
|
Outstanding at December 31, 2006
|
|
|
1,347,205
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(6,580
|
)
|
|
|
2.77
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(145,048
|
)
|
|
|
0.71
|
|
|
|
|
|
|
$
|
3,168,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
|
1,195,577
|
|
|
|
1.80
|
|
|
|
8.00
|
|
|
|
14,476,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
|
523,075
|
|
|
|
1.72
|
|
|
|
7.81
|
|
|
|
6,521,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of option activity for the 2006 Plan is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Remaining Term
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
at Grant Date
|
|
|
(Years)
|
|
|
Intrinsic Value
|
|
|
Outstanding at December 31, 2006
|
|
|
359,527
|
|
|
$
|
20.21
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,317,301
|
|
|
|
29.01
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(72
|
)
|
|
|
30.65
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(25,148
|
)
|
|
|
27.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
|
1,651,608
|
|
|
|
27.11
|
|
|
|
9.33
|
|
|
$
|
536,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
|
250,463
|
|
|
|
26.66
|
|
|
|
9.31
|
|
|
|
150,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted
during the nine months ended September 30, 2007 was $20.03
per share. For the nine months ended September 30, 2007 and
2006 the Company received a total of $103,176 and $294,
respectively, in cash from options exercised under the
stock-based arrangements.
Equity
instruments issued to non-employees
The equity instruments issued to non-employees in exchange for
services are recorded at the fair value of the equity
instruments on the measurement date. The measurement of expense
is subject to periodic adjustment as the underlying equity
instruments vest and the performance by the third party is
complete. The Company recognizes the fair value of non-employee
equity instruments in the same periods and in the same manner as
if the Company had paid cash for the services.
11
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
As of September 30, 2007, an aggregate of
35,625 shares were subject to outstanding options granted
to non-employees under the 2004 Plan and 2006 Plan of which
28,187 options are subject to vesting. Total non-employee
equity-based compensation expense, recognized during the three
and nine months ended September 30, 2007 and 2006 was
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(Inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Research and development
|
|
$
|
465
|
|
|
$
|
1,528
|
|
|
$
|
90,262
|
|
|
$
|
36,292
|
|
|
$
|
129,755
|
|
General and administrative
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
87,864
|
|
|
|
|
|
|
|
87,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(953
|
)
|
|
$
|
1,528
|
|
|
$
|
178,126
|
|
|
$
|
36,292
|
|
|
$
|
217,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
Management is required to estimate accrued expenses as part of
the process of preparing financial statements. The estimation of
accrued expenses involves identifying services that have been
performed on the Companys behalf, and then estimating the
level of service performed and the associated cost incurred for
such services as of each balance sheet date in the financial
statements. Accrued expenses include professional service fees,
such as lawyers and accountants, contract service fees, such as
those under contracts with clinical monitors, data management
organizations and investigators in conjunction with clinical
trials, fees to contract manufacturers in conjunction with the
production of clinical materials, and fees for marketing and
other commercialization activities. Pursuant to
managements assessment of the services that have been
performed on clinical trials and other contracts, the Company
recognizes these expenses as the services are provided. Such
management assessments include, but are not limited to:
(1) an evaluation by the project manager of the work that
has been completed during the period, (2) measurement of
progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment.
Research
and development expenses
The Companys research and development expenses consist
primarily of fees for services provided by third parties in
connection with the clinical trials, costs of contract
manufacturing services, license fees, costs of materials used in
clinical trials and research and development, depreciation of
capital resources used to develop products, all related
facilities costs, and salaries, other employee related costs and
stock-based compensation related to the research and development
personnel. The Company expenses research and development costs
as they are incurred, including payments made to date under the
license agreements. Manufacturing-related costs are also
included in research and development expenses as the Company
does not yet have FDA approval for any of its product
candidates. Costs related to the acquisitions of intellectual
property have been expensed as incurred since the underlying
technology associated with these acquisitions were made in
connection with the Companys research and development
efforts and have no alternative future use. Milestone payments
are accrued when it is deemed probable that the milestone event
will be achieved.
General
and administrative expenses
General and administrative costs consist primarily of salaries,
other employee related costs and stock-based compensation for
personnel serving executive, business development, marketing,
finance, accounting, information technology and human resource
functions, facility costs not otherwise included in research and
development expenses, insurance costs and professional fees for
legal, accounting and other professional
12
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
services. General and administrative costs also include third
party expenses incurred to support business development,
marketing and other business activities related to our product
candidate iloperidone, in anticipation of its commercial launch.
Income
taxes
The Company accounts for income taxes under the liability method
in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109), which
requires companies to account for deferred income taxes using
the asset and liability method. Under the asset and liability
method, current income tax expense or benefit is the amount of
income taxes expected to be payable or refundable for the
current year. A deferred income tax asset or liability is
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Tax rate
changes are reflected in income during the period such changes
are enacted. Changes in ownership may limit the amount of net
operating loss carryforwards that can be utilized in the future
to offset taxable income.
On January 1, 2007, the Company adopted the provisions of
Financial Standards Accounting Board Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes. The adoption of FIN No. 48 did not
have a material effect on the Companys financial position
or results of operations.
Segment
information
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
Recent
accounting pronouncements
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (SFAS 157), which addresses
how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure
purposes under generally accepted accounting principles.
SFAS 157 outlines a common definition of fair value and the
new standard intends to make the measurement of fair value more
consistent and comparable and improve disclosures about those
measures. The Company will need to adopt SFAS 157 for
financial statements issued for fiscal years beginning after
November 15, 2007. While the Company continues to evaluate
the impact of SFAS 157, this pronouncement is not expected
to have significant impact on its results of operations and
financial condition.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this standard the
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis (the fair value option). SFAS 159 is effective for
fiscal years beginning after November 15, 2007. While the
Company continues to evaluate the impact of SFAS 159, this
pronouncement is not expected to have significant impact on its
results of operations and financial condition.
In June 2007, the Emerging Issues Task Force issued EITF
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3),
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. The
Company will be required to adopt
EITF 07-3
for the year beginning after December 15, 2007. The Company
is
13
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
currently assessing
EITF 07-3
and does not expect the pronouncement to have a significant
impact on its future condensed consolidated financial statements
upon its adoption.
Net loss attributable to common stockholders per share is
calculated in accordance with SFAS No. 128,
Earnings per Share and SAB No. 98. Basic
earnings per share (EPS) is calculated by dividing the net
income or loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding,
reduced by the weighted average unvested shares of common stock
subject to repurchase.
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of other potential common stock outstanding for the
period. Other potential common stock includes the Companys
Series A Preferred Stock and Series B Preferred Stock
outstanding prior to the consummation of the Companys
initial public offering, stock options and warrants to purchase
common stock, but only to the extent that their inclusion is
dilutive. The Company incurred a net loss in all periods
presented, causing inclusion of any potentially dilutive
securities to have an anti-dilutive effect, resulting in
dilutive loss per share attributable to common stockholders and
basic loss per share attributable to common stockholders being
equivalent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,943,501
|
)
|
|
$
|
(12,124,161
|
)
|
|
$
|
(53,321,284
|
)
|
|
$
|
(51,619,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
26,629,637
|
|
|
|
21,907,188
|
|
|
|
26,243,793
|
|
|
|
13,904,719
|
|
Weighted average unvested shares of common stock subject to
repurchase
|
|
|
(16,784
|
)
|
|
|
(35,646
|
)
|
|
|
(20,642
|
)
|
|
|
(42,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
$
|
26,612,853
|
|
|
$
|
21,871,542
|
|
|
$
|
26,223,151
|
|
|
$
|
13,862,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$
|
(0.82
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(2.03
|
)
|
|
$
|
(3.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities not included in diluted net loss per
share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
2,847,185
|
|
|
|
1,673,361
|
|
|
|
2,847,185
|
|
|
|
1,673,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon consummation of the initial public offering on
April 12, 2006, all shares of the Companys
Series A Preferred Stock and Series B Preferred Stock
were converted into an aggregate of 15,794,632 shares of
common stock. Additionally, the holders of the warrants to
purchase 50,335 shares of common stock exercised their
warrants upon the Companys initial public offering.
14
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following is a summary of the Companys
available-for-sale marketable securities as of
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
6,477,825
|
|
|
$
|
5,332
|
|
|
$
|
|
|
|
$
|
6,483,157
|
|
U.S. corporate debt
|
|
|
36,160,430
|
|
|
|
37,805
|
|
|
|
(12,902
|
)
|
|
|
36,185,333
|
|
U.S. asset-based securities
|
|
|
2,803,806
|
|
|
|
2,074
|
|
|
|
|
|
|
|
2,805,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,442,061
|
|
|
$
|
45,211
|
|
|
$
|
(12,902
|
)
|
|
$
|
45,474,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate debt
|
|
$
|
1,986,513
|
|
|
$
|
1,049
|
|
|
|
|
|
|
$
|
1,987,562
|
|
U.S. asset-based securities
|
|
|
2,004,375
|
|
|
|
410
|
|
|
|
|
|
|
|
2,004,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,990,888
|
|
|
$
|
1,459
|
|
|
|
|
|
|
$
|
3,992,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys
available-for-sale marketable securities as of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate debt
|
|
$
|
941,970
|
|
|
$
|
36
|
|
|
$
|
(25
|
)
|
|
$
|
941,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
941,970
|
|
|
$
|
36
|
|
|
$
|
(25
|
)
|
|
$
|
941,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Prepaid
Expenses, Deposits and Other Current Assets
The following is a summary of the Companys prepaid
expenses, deposits and other current assets:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deposits with vendors
|
|
$
|
790,000
|
|
|
$
|
820,000
|
|
Prepaid insurance
|
|
|
455,202
|
|
|
|
337,332
|
|
Prepaid research and development expenses
|
|
|
737,742
|
|
|
|
185,229
|
|
Accrued interest income
|
|
|
417,338
|
|
|
|
97,575
|
|
Other prepaid expenses
|
|
|
1,035,225
|
|
|
|
332,400
|
|
Prepaid follow-on offering costs
|
|
|
|
|
|
|
69,064
|
|
Other receivables
|
|
|
3,777
|
|
|
|
107,866
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,439,284
|
|
|
$
|
1,949,466
|
|
|
|
|
|
|
|
|
|
|
15
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
6.
|
Property
and Equipment
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory equipment
|
|
|
5
|
|
|
$
|
1,285,107
|
|
|
$
|
1,675,375
|
|
Computer equipment
|
|
|
3
|
|
|
|
762,755
|
|
|
|
741,404
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
187,317
|
|
|
|
169,549
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
485,506
|
|
|
|
736,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,720,685
|
|
|
|
3,322,846
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(1,275,760
|
)
|
|
|
(1,463,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,444,925
|
|
|
$
|
1,859,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the nine months ended
September 30, 2007 was $446,806, for the nine months ended
September 30, 2006 was $415,197 and for the period from
March 13, 2003 (inception) to September 30, 2007 was
$1,865,659.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued research and development expenses
|
|
$
|
3,923,252
|
|
|
$
|
4,552,050
|
|
Accrued license fee
|
|
|
5,000,000
|
|
|
|
|
|
Bonus accrual
|
|
|
695,650
|
|
|
|
1,084,512
|
|
Accrued professional fees
|
|
|
1,825,693
|
|
|
|
329,177
|
|
Employee benefits
|
|
|
248,763
|
|
|
|
78,656
|
|
Lease abandonment
|
|
|
124,267
|
|
|
|
232,388
|
|
Other accrued expenses
|
|
|
50,505
|
|
|
|
46,025
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,868,130
|
|
|
$
|
6,322,808
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Commitments
and Contingencies
|
Singapore
research facility
In May 2007, the Company initiated a plan to move all of its
operations out of Singapore and to consolidate all of its
discovery research activities in its Rockville, Maryland
facility. The consolidation was completed as of
September 30, 2007, and all expenses of the consolidation,
including employee severance, loss on the sale of fixed assets
and other related costs were recorded in the condensed
consolidated financial statements as of September 30, 2007.
Total expenses relating to the consolidation of the discovery
research activities were not significant to the Companys
condensed consolidated financial statements.
In 2004 the Companys subsidiary in Singapore entered into
an agreement with the Economic Development Board of Singapore
(EDB) to provide a grant for a development project. During 2005,
the Company received a payment from the EDB that was recorded as
deferred grant revenue since under certain conditions the EDB
could have reclaimed these funds. On September 19, 2007 the
Company agreed with the EDB to pay
16
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
back 50% of the grant and the remaining 50%, or $71,345, was
recognized as other income during the three months ended
September 30, 2007.
Operating
leases
The Company has commitments totaling approximately
$6.5 million under operating real estate leases for its
current and former headquarters located in Rockville, Maryland,
expiring in 2016 and 2008. In September 2007, the Company
entered into an agreement to sublease its former headquarters
for the remainder of the lease for approximately $67,000.
Guarantees
and indemnifications
The Company has entered into a number of standard intellectual
property indemnification agreements in the ordinary course of
its business. Pursuant to these agreements, the Company
indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the
indemnified party, generally the Companys business
partners or customers, in connection with any U.S. patent
or any copyright or other intellectual property infringement
claim by any third party with respect to the Companys
products. The term of these indemnification agreements is
generally perpetual from the date of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited. Since inception, the Company has not incurred
costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company also indemnifies its
officers and directors for certain events or occurrences,
subject to certain limits. The Company believes that the fair
value of the indemnification agreements is minimal, and
accordingly the Company has not recognized any liabilities
relating to these agreements as of September 30, 2007.
Licensing
agreements
The Companys rights to develop and commercialize the
clinical-stage product candidates are subject to the terms and
conditions of licenses granted to the Company by other
pharmaceutical companies.
Iloperidone. The Company acquired exclusive
worldwide rights to patents for iloperidone through a sublicense
agreement with Novartis. A predecessor company of
sanofi-aventis, Hoechst Marion Roussel, Inc. (HMRI), discovered
iloperidone and completed early clinical work on the compound.
In 1996, following a review of its product portfolio, HMRI
licensed its rights to the iloperidone patents to Titan
Pharmaceuticals, Inc. on an exclusive basis. In 1997, soon after
it had acquired its rights, Titan sublicensed its rights to
iloperidone on an exclusive basis to Novartis. In June 2004, the
Company acquired exclusive worldwide rights to these patents to
develop and commercialize iloperidone through a sublicense
agreement with Novartis. In partial consideration for this
sublicense, the Company paid Novartis an initial license fee of
$500,000 and is obligated to make future milestone payments to
Novartis of less than $100 million in the aggregate (the
majority of which are tied to sales milestones), as well as
royalty payments to Novartis at a rate which, as a percentage of
net sales, is in the mid-twenties. The Company expects to meet a
milestone in 2007 under this license agreement relating to the
filing of the NDA for iloperidone in schizophrenia, for which
the Company is obligated to make a license payment of
$5.0 million. The Company recorded an expense of
$5.0 million in September 2007 resulting from this
milestone obligation.
The rights with respect to the patents to develop and
commercialize iloperidone may terminate, in whole or in part, if
the Company fails to meet certain development or
commercialization milestones relating to the time it takes for
the Company to launch iloperidone commercially following
regulatory approval, and the time it takes for the Company to
receive regulatory approval following the submission of an NDA
or equivalent foreign filing. Additionally, the Companys
rights may terminate in whole or in part if the Company does not
meet certain other obligations under the sublicense agreement to
make royalty and milestone payments, if the
17
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Company fails to comply with requirements in the sublicense
agreement regarding its financial condition, or if the Company
does not abide by certain restrictions in the sublicense
agreement regarding other development activities.
VEC-162. In February 2004, the Company entered
into a license agreement with Bristol-Myers Squibb (BMS) under
which the Company received an exclusive worldwide license under
certain patents and patent applications, and other licenses to
intellectual property, to develop and commercialize VEC-162. In
partial consideration for the license, the Company paid BMS an
initial license fee of $500,000 and is obligated to make future
milestone payments to BMS of less than $40 million in the
aggregate (the majority of which are tied to sales milestones)
as well as royalty payments based on the net sales of VEC-162 at
a rate which, as a percentage of net sales, is in the low teens.
The Company is also obligated under this agreement to pay BMS a
percentage of any sublicense fees, upfront payments and
milestone and other payments (excluding royalties) that the
Company receives from a third party in connection with any
sublicensing arrangement, at a rate which is in the
mid-twenties. The Company has agreed with BMS in the license
agreement for VEC-162 to use commercially reasonable efforts to
develop and commercialize VEC-162 and to meet certain milestones
in initiating and completing certain clinical work. During March
2006, the Company met its first milestone relating to the
initiation of the Phase III clinical trial for VEC-162 and
recorded a license fee expense of $1,000,000.
BMS holds certain rights with respect to VEC-162 in the license
agreement. If the Company has not agreed to one or more
partnering arrangements to develop and commercialize VEC-162 in
certain significant markets with one or more third parties after
the completion of the Phase III program, BMS has the option
to exclusively develop and commercialize VEC-162 on its own on
pre-determined financial terms, including milestone and royalty
payments. If the Company seeks a co-promotion agreement for
VEC-162, BMS has a right of first negotiation to enter into such
an agreement with the Company.
Either party may terminate the VEC-162 license agreement under
certain circumstances, including a material breach of the
agreement by the other. In the event that BMS has not exercised
its option to reacquire the rights to VEC-162 and the Company
terminates the license, or if BMS terminates the license due to
the Companys breach, all rights licensed and developed by
the Company under this agreement will revert or otherwise be
licensed back to BMS on an exclusive basis.
VSF-173. In June 2004, the Company entered
into a license agreement with Novartis under which the Company
received an exclusive worldwide license to develop and
commercialize VSF-173. In consideration for the license, the
Company paid Novartis an initial license fee of $500,000. The
Company is also obligated to make future milestone payments to
Novartis of less than $50 million in the aggregate (the
majority of which are tied to sales milestones) and royalty
payments at rates which, as a percentage of net sales, range
from the low-to-mid teens. In March 2007, the Company met its
first milestone under this license agreement relating to the
initiation of the Phase II clinical trial for VSF-173, and
recorded a license fee expense of $1,000,000.
Novartis has the right to co-develop and exclusively
commercialize VSF-173 on its own after the completion of
Phase II and Phase III programs in exchange for
certain milestones and royalty payments. In the event that
Novartis chooses not to exercise either of these options and the
Company decides to enter into a partnering arrangement to
commercialize VSF-173, Novartis has a right of first refusal to
negotiate such an agreement with the Company, as well as a right
to submit a last matching counteroffer regarding such an
agreement. In addition, the rights with respect to VSF-173 may
terminate, in whole or in part, if the Company fails to meet
certain development and commercialization milestones described
in the license agreement relating to the time it takes the
Company to complete the development work on VSF-173. These
rights may also terminate in whole or in part if the Company
fails to make royalty or milestone payments or if the Company
does not comply with requirements in the license agreement
regarding its financial condition. In the event of
18
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
an early termination of the license agreement, all rights
licensed and developed by the Company under this agreement may
revert back to Novartis.
Future license payments. Except for the
accrued expense of $5,000,000 in connection with the license fee
payable upon the expected filing of the NDA by the FDA for
iloperidone in schizophrenia, no other amounts were recorded as
liabilities nor were any other contractual obligations relating
to the license agreements included in the condensed consolidated
financial statements as of September 30, 2007, since the
amounts, timing and likelihood of these future payments are
unknown and will depend on the successful outcome of future
clinical trials, regulatory filings, favorable FDA regulatory
approvals, growth in product sales and other factors.
Research
and development and marketing agreements
The Company entered into agreements with several organizations
to provide services relating to clinical development, clinical
manufacturing activities and marketing services under fee
service arrangements. The Companys current agreements for
these services may be terminated on no more than 60 days
notice without incurring additional charges, other than charges
for work completed but not paid for through the effective date
of termination and other costs incurred by the Companys
contractors in closing out work in progress as of the effective
date of termination.
On January 1, 2007, the Company adopted the provisions of
Financial Standards Accounting Board Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes. The adoption of FIN No. 48 did not
have a material effect on the Companys financial position
or results of operations. In addition, there are no uncertain
tax positions whose resolution in the next twelve months is
expected to materially affect operating results. The Company
accounts for income taxes using the asset and liability method.
Deferred income taxes are recognized by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits for
which future realization is uncertain.
The Company has not recorded any tax provision or benefit for
the nine months ended September 30, 2007 or 2006, except
for an estimated tax expense resulting from the research and
development agreement with the Companys subsidiary in
Singapore. The Company has provided a valuation allowance for
the full amount of its net deferred tax assets since realization
of any future benefit from deductible temporary differences and
net operating loss cannot be sufficiently assured at
September 30, 2007 and December 31, 2006. Under the
Tax Reform Act of 1986, the amounts of and benefits from the
operating loss carryforwards may be impaired in certain
circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
19
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward
Looking Statements
Various statements in this report are forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as, but not limited
to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, and similar expressions or words, identify
forward-looking statements. Such forward-looking statements are
based upon current expectations that involve risks, changes in
circumstances, assumptions and uncertainties. Vanda is at an
early stage of development and may not ever have any products
that generate significant revenue. Important factors that could
cause actual results to differ materially from those reflected
in Vandas forward-looking statements include, among others:
|
|
|
|
|
delays in the completion of our clinical trials;
|
|
|
|
a failure of our product candidates to be demonstrably safe and
effective;
|
|
|
|
a failure to obtain regulatory approval for our products or to
comply with ongoing regulatory requirements;
|
|
|
|
a lack of acceptance of our product candidates in the
marketplace, or a failure to become or remain profitable;
|
|
|
|
our inability to obtain the capital necessary to fund our
research and development activities;
|
|
|
|
our failure to identify or obtain rights to new product
candidates;
|
|
|
|
a failure to develop or obtain sales, marketing and distribution
resources and expertise or to otherwise manage our growth;
|
|
|
|
a loss of any of our key scientists or management personnel;
|
|
|
|
losses incurred from product liability claims made against us;
|
|
|
|
a loss of rights to develop and commercialize our products under
our license and sublicense agreements; and
|
|
|
|
the increased expenses and administrative workload associated
with being a public company.
|
The information in this report is provided only as of the date
of this report, and Vanda undertakes no obligation to update any
forward-looking statements contained in this report on account
of new information, future events, or otherwise, except as
required by law.
Forward-looking statements, therefore, should be considered in
light of all of the information included or referred to in this
report, including the Risk Factors section set forth
as Item 1A of Part II of this report. You should also
read the following discussion and analysis of financial
condition and results of operations together with our condensed
consolidated financial statements and related notes included
elsewhere in this report.
Our
Business
We are a biopharmaceutical company focused on the development
and commercialization of clinical-stage product candidates for
central nervous system disorders, with exclusive worldwide
commercial rights to three product candidates in clinical
development. Our lead product candidate, iloperidone, is a
compound for the treatment of schizophrenia and bipolar disorder
and on September 27, 2007 we submitted a New Drug
Application (NDA) for iloperidone in schizophrenia with the
United States Food and Drug Administration (FDA). Our second
product candidate, VEC-162, is a compound for the treatment of
sleep and mood disorders, which previously demonstrated positive
results in a Phase III clinical trial for transient
insomnia. We will have to conduct additional trials prior to our
filing of an NDA for VEC-162, and we recently initiated a
Phase III trial of VEC-162 in chronic primary insomnia.
VEC-162 is also ready for Phase II trials for the treatment
of depression. Our third product candidate, VSF-173, is a
compound for the treatment of excessive sleepiness. On
20
October 30, 2007 we reported the top-line results of our
first Phase II clinical trial of VSF-173 for the treatment
of excessive sleepiness. We plan to conduct additional
Phase II trials.
Assuming successful outcomes of our clinical trials and approval
by the FDA, we plan to commercialize iloperidone and VSF-173
with our own sales force in the U.S., and we expect to
commercialize VEC-162 through a partnership with a global
pharmaceutical company, although we have not yet identified such
a global partner.
We are a development stage enterprise and have accumulated net
losses of approximately $153.2 million since the inception
of our operations through September 30, 2007. We have no
product revenues to date and have no approved products for sale.
Since inception we have devoted substantially all of our efforts
to business planning, research and development, recruiting
management and technical staff, acquiring operating assets,
raising capital and conducting market research. Our future
operating results will depend largely on our ability to
successfully develop and commercialize our lead product
candidates, iloperidone and VEC-162, and on the progress of
other product candidates currently in our research and
development pipeline. The results of our operations will vary
significantly from year-to-year and quarter-to-quarter and
depend on a number of factors, including risks related to our
business, risks related to our industry, and other risks which
are detailed in the Risk Factors section of this
quarterly report on
Form 10-Q.
We completed our initial public offering in April 2006. The
offering totaled 5,964,188 shares of common stock at a
public offering price of $10.00 per share, resulting in net
proceeds to the Company of approximately $53.3 million,
after deducting underwriters discounts and commissions as
well as offering expenses.
In January 2007 we completed our follow-on offering. The
offering totaled 4,370,000 shares of common stock at the
public offering price of $27.29 per share, resulting in net
proceeds to the Company of approximately $111.3 million
after deducting underwriting discounts and commissions and
offering expenses.
Based on our current operating plans, we believe that our
existing cash, cash equivalents and marketable securities, will
be sufficient to meet our anticipated operating needs into
mid-2008, and after that time we will require additional
capital. In budgeting for our activities, we have relied on a
number of assumptions, including assumptions that we will
continue to expend funds in preparation of a commercial launch
of iloperidone, that we will conduct our VEC-162 Phase III
trial in chronic primary insomnia in accordance with our
expectations, that we will not engage in further in-licensing
activities, that we will not receive any proceeds from potential
partnerships, that we will not expend funds on the bipolar
indication for iloperidone, that we will continue to evaluate
clinical and pre-clinical compounds for potential development,
that we will be able to continue the manufacturing of our
product candidates at commercially reasonable prices, that we
will be able to retain our key personnel, and that we will not
incur any significant contingent liabilities. We may need to
raise additional funds more quickly if one or more of our
assumptions proves to be incorrect or if we choose to expand our
product development efforts more rapidly than presently
anticipated or seek to acquire additional product candidates,
and we may also decide to raise additional funds even before
they are needed if the conditions for raising capital are
favorable.
We may seek to sell additional equity or debt securities or
obtain a bank credit facility. The sale of additional equity or
debt securities, if convertible, could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants
that would restrict our operations.
We cannot assure you that additional funds will be available
when we need them on terms that are acceptable to us, or at all.
The unavailability of financing may require us to delay, scale
back or eliminate expenditures for our research, development and
marketing activities necessary to commercialize our potential
biopharmaceutical products. If we are unable to secure
sufficient capital to fund our research and development
activities, we may not be able to continue operations or we may
have to enter into collaboration agreements that could require
us to share commercial rights to our products to a greater
extent or at earlier stages in the drug development process than
we currently intend. Collaborations that are consummated by us
prior to proof-of-efficacy and safety of a product candidate
could impair our ability to realize value from that product
candidate.
21
Iloperidone
Iloperidone is our product candidate under development to treat
schizophrenia and bipolar disorder. We submitted an NDA for
iloperidone in schizophrenia to the FDA on September 27,
2007. We are also developing a 4-week injectable formulation of
iloperidone, for which we already have early Phase II data
from a study previously conducted by Novartis. From inception to
September 30, 2007, we incurred approximately
$63.7 million in research and development costs directly
attributable to our development of iloperidone, including a
$5.0 million milestone license fee payable to Novartis
related to the filing of our NDA.
We expect to increase our pre-launch commercial activities
relating to iloperidone, and we expect to start marketing
iloperidone commercially in early 2009. However, the time it
takes to receive cash inflows from the sale of iloperidone is
highly dependent on facts and circumstances that we may not be
able to control and are subject to a number of risks. For
example, delays in the approval process and subsequent
commercial launch of iloperidone following our filing may occur
if the FDA fails to attend to our filing in a timely manner or
requires further data to approve iloperidone. Please see the
Risk Factors section of this quarterly report on
Form 10-Q
for a more detailed discussion of these and other risks.
We also continue to progress with the development of our 4-week
injectable formulation of iloperidone, for which we already have
early Phase II data from a study previously conducted by
Novartis. We are planning to conduct additional clinical work in
2008.
VEC-162
VEC-162 is our product candidate under development to treat
sleep and mood disorders. VEC-162 is a melatonin receptor
agonist that works by adjusting the human body clock
of circadian rhythm. VEC-162 has successfully completed a
Phase III trial in transient insomnia in November 2006. We
initiated a Phase III trial of VEC-162 in chronic primary
insomnia in October 2007.
From inception to September 30, 2007, we incurred
approximately $30.9 million in direct research and
development costs directly attributable to our development of
VEC-162. We believe that we will have to conduct additional
trials to receive FDA approval of VEC-162. We have recently
initiated a Phase III clinical trial to evaluate the safety
and efficacy of VEC-162 in chronic primary insomnia. The trial
is a randomized, double-blind, and placebo-controlled study, and
will enroll approximately 400 patients. The trial will
measure time to fall asleep and sleep maintenance, as well as
next-day
performance and mood. We expect to announce the results of this
Phase III trial in the fourth quarter of 2008.
VSF-173
VSF-173 is an oral compound that has demonstrated effects on
animal sleep/wake patterns and gene expression suggestive of a
stimulant effect. In a recently completed Phase II trial of
VSF-173 in excessive sleepiness, the compound demonstrated
improvement compared to placebo on the Maintenance of
Wakefulness Test (MWT), though not statistically significant,
and dose-dependent, statistically significant improvements
versus placebo on a number of secondary endpoints taken in the
recovery sleep period after dosing, including number of
awakenings, and sleep efficiency and wake after sleep onset in
the first third of the recovery sleep period. VSF-173 was also
demonstrated to be safe and well-tolerated. We expect to conduct
additional Phase II trials.
Excessive sleepiness is a common symptom that can significantly
impair a persons ability to function. The effects of
excessive sleepiness range from mild sleepiness to unrecognized
episodes of microsleeps and uncontrollable sleep
attacks. Excessive sleepiness is a symptom of many disorders,
including obstructive sleep apnea, narcolepsy, shift worker
sleep disorder, Parkinsons disease and Alzheimers
disease.
From inception to September 30, 2007, we incurred
approximately $5.6 million in direct research and
development costs directly attributable to our development of
VSF-173, including a milestone license fee of $1.0 million
paid upon the initiation of our first Phase II clinical
trial.
22
Research
and development expenses
The Companys research and development expenses consist
primarily of fees for services provided by third parties in
connection with the clinical trials, costs of contract
manufacturing services, license fees, costs of materials used in
clinical trials and research and development, depreciation of
capital resources used to develop products, all related
facilities costs, and salaries, other employee related costs and
stock-based compensation related to the research and development
personnel. The Company expenses research and development costs
as they are incurred, including payments made to date under the
license agreements. Manufacturing-related costs are also
included in research and development expenses as the Company
does not yet have FDA approval for any of its product
candidates. Costs related to the acquisitions of intellectual
property have been expensed as incurred since the underlying
technology associated with these acquisitions were made in
connection with the Companys research and development
efforts and have no alternative future use. Milestone payments
are accrued when it is deemed probable that the milestone event
will be achieved.
We believe that significant investment in product development is
a competitive necessity and plan to continue these investments
in order to realize the potential of our product candidates and
pharmacogenetics and pharmacogenomics expertise. From inception
through September 30, 2007, we incurred research and
development expenses in the aggregate of approximately
$113.1 million, including employee stock-based compensation
expenses of approximately $4.8 million. We expect to
continue to incur significant research and development expenses
as we continue to develop our product candidates. We also expect
to incur substantial licensing costs in the future, as we
continue our efforts to develop our product candidates and to
evaluate potential in-license product candidates.
The following table summarizes our product development
initiatives for the three and nine months ended
September 30, 2007 and 2006 and the period from
March 13, 2003 (inception) to September 30, 2007.
Included in this table are the research and development expenses
recognized in connection with our product candidates in clinical
development. Included in Other product candidates
are the costs directly related to research initiatives for all
other product candidates.
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Period from
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March 13,
|
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2003
|
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Three Months Ended
|
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|
Nine Months Ended
|
|
|
(Inception) to
|
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|
September 30,
|
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|
September 30,
|
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|
September 30,
|
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September 30,
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September 30,
|
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2007
|
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2006
|
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2007
|
|
|
2006
|
|
|
2007
|
|
|
Direct project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iloperidone
|
|
$
|
7,972,000
|
|
|
$
|
5,195,000
|
|
|
$
|
18,366,000
|
|
|
$
|
31,478,000
|
|
|
$
|
63,742,000
|
|
VEC-162
|
|
|
3,894,000
|
|
|
|
3,512,000
|
|
|
|
9,922,000
|
|
|
|
9,559,000
|
|
|
|
30,941,000
|
|
VSF-173
|
|
|
782,000
|
|
|
|
214,000
|
|
|
|
3,077,000
|
|
|
|
849,000
|
|
|
|
5,646,000
|
|
Other product candidates
|
|
|
653,000
|
|
|
|
228,000
|
|
|
|
1,559,000
|
|
|
|
873,000
|
|
|
|
4,593,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct product costs
|
|
|
13,301,000
|
|
|
|
9,149,000
|
|
|
|
32,924,000
|
|
|
|
42,759,000
|
|
|
|
104,922,000
|
|
Indirect project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
59,000
|
|
|
|
129,000
|
|
|
|
341,000
|
|
|
|
447,000
|
|
|
|
1,425,000
|
|
Depreciation
|
|
|
108,000
|
|
|
|
125,000
|
|
|
|
333,000
|
|
|
|
350,000
|
|
|
|
1,596,000
|
|
Other indirect overhead
|
|
|
406,000
|
|
|
|
139,000
|
|
|
|
1,062,000
|
|
|
|
575,000
|
|
|
|
5,132,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect expenses
|
|
|
573,000
|
|
|
|
393,000
|
|
|
|
1,736,000
|
|
|
|
1,372,000
|
|
|
|
8,153,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
13,874,000
|
|
|
$
|
9,542,000
|
|
|
$
|
34,660,000
|
|
|
$
|
44,131,000
|
|
|
$
|
113,075,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Many of our research and development costs are not attributable
to any individual project because we share resources across
several development projects. We record direct costs, including
personnel costs and related benefits and stock-based
compensation, on a
project-by-project
basis. We record indirect costs that support a number of our
research and development activities in the aggregate. |
23
General
and administrative expenses
General and administrative expenses consist primarily of
salaries, other employee related costs and stock-based
compensation expenses for personnel serving executive, finance,
accounting, information technology and human resource functions,
facility costs not otherwise included in research and
development expenses, insurance costs and professional fees for
legal, accounting and other professional services. General and
administrative costs also include third party expenses incurred
to support business development, marketing and other business
activities related to our product candidate iloperidone in
anticipation of its commercial launch. We expect that our
general and administrative expenses will increase as we continue
to prepare for the commercial launch of our lead product
candidate, add sales personnel and continue to build our
commercial infrastructure. From inception through
September 30, 2007, we incurred general and administrative
expenses in the aggregate of approximately $47.5 million,
including employee stock-based compensation expenses of
approximately $20.7 million.
Critical
Accounting Policies
The preparation of our condensed consolidated 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
our financial statements as well as the reported income and
expenses during the reported periods. We base our estimates on
historical experience and on various other factors that we
believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
value of assets and liabilities that are not apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are described in the notes
to our audited consolidated financial statements for the year
ended December 31, 2006 included in our annual report on
the
Form 10-K.
However, we believe that the following critical accounting
policies relating to accrued expenses and stock-based
compensation expense are important to understanding and
evaluating our reported financial results, and we have
accordingly included them in this report.
Accrued
expenses
As part of the process of preparing financial statements we are
required to estimate accrued expenses. The estimation of accrued
expenses involves identifying services that have been performed
on our behalf, and then estimating the level of service
performed and the associated cost incurred for such services as
of each balance sheet date in the financial statements. Accrued
expenses include professional service fees, such as lawyers and
accountants, contract service fees, such as those under
contracts with clinical monitors, data management organizations
and investigators in conjunction with clinical trials, fees to
contract manufacturers in conjunction with the production of
clinical materials, and fees for marketing and other
commercialization activities. Pursuant to our assessment of the
services that have been performed on clinical trials and other
contracts, we recognize these expenses as the services are
provided. Our assessments include, but are not limited to:
(1) an evaluation by the project manager of the work that
has been completed during the period, (2) measurement of
progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment. In the event that we do not
identify certain costs that have begun to be incurred or we
under- or over-estimate the level of services performed or the
costs of such services, our reported expenses for such period
would be too low or too high.
Stock-based
compensation
We adopted SFAS 123(R) Share Based Payment,
on January 1, 2006 using the modified prospective
transition method of implementation. Accordingly, compensation
costs for all stock-based awards to employees and directors are
measured based on the grant date fair value of those awards and
recognized over the service period. The Company generally
recognizes the expense over the awards vesting period. For
stock awards granted in 2006 and 2007, expenses are amortized
under the accelerated attribution method. For stock awards
granted prior to January 1, 2006, expenses are amortized
under the accelerated attribution method for options
24
that were modified after the original grant date and under the
straight-line attribution method for all other options.
Factors which affect charges or credits to operations related to
stock-based compensation expense are the fair value of the
common stock underlying stock options for which stock-based
compensation is recorded, the volatility of such fair value,
risk-free rate and expected dividend yield used in the
calculation of the fair value of the stock option. If our
estimates of the fair value of these equity instruments are too
high or too low, it would have the effect of overstating or
understating expenses. The stock-based compensation expense for
a period is based on awards ultimately expected to vest and it
is reduced for estimated forfeitures. If our estimated
forfeiture rate is too high or too low, it would have the effect
of overstating or understating expenses for the period.
Total employee stock-based compensation expense recognized
during the three and nine months ending September 30, 2007
and 2006 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Research and development
|
|
$
|
1,097,000
|
|
|
$
|
185,000
|
|
|
$
|
3,293,000
|
|
|
$
|
476,000
|
|
General and administrative
|
|
|
4,060,000
|
|
|
|
1,321,000
|
|
|
|
11,009,000
|
|
|
|
4,013,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
5,157,000
|
|
|
$
|
1,506,000
|
|
|
$
|
14,302,000
|
|
|
$
|
4,489,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
accounting pronouncements
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (SFAS 157), which addresses
how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure
purposes under generally accepted accounting principles.
SFAS 157 outlines a common definition of fair value and the
new standard intends to make the measurement of fair value more
consistent and comparable and improve disclosures about those
measures. We will need to adopt SFAS 157 for financial
statements issued for fiscal years beginning after
November 15, 2007. While we continue to evaluate the impact
of SFAS 157, this pronouncement is not expected to have
significant impact on our results of operations and financial
condition.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this standard the
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis (the fair value option). SFAS 159 is effective for
fiscal years beginning after November 15, 2007. While we
continue to evaluate the impact of SFAS 159, this
pronouncement is not expected to have significant impact on our
results of operations and financial condition.
In June 2007, the Emerging Issues Task Force issued EITF
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3),
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. We will be
required to adopt
EITF 07-3
for the year beginning after December 15, 2007. We are
currently assessing
EITF 07-3
and do not expect the pronouncement to have a significant impact
on its future condensed consolidated financial statements upon
its adoption.
Results
of Operations
We have a limited history of operations. We anticipate that our
quarterly results of operations will fluctuate for the
foreseeable future due to several factors, including any
possible payments made or received pursuant to licensing or
collaboration agreements, progress of our research and
development efforts, and the timing and outcome of clinical
trials and related possible regulatory approvals. Our limited
operating history makes predictions of future operations
difficult or impossible. Since our inception, we have incurred
significant losses. As of September 30, 2007, we had a
deficit accumulated during the development stage of
25
approximately $153.2 million. We anticipate incurring
additional losses, which may increase, for the foreseeable
future.
Three
months ended September 30, 2007 compared to three months
ended September 30, 2006
Research and development expenses. Research
and development expenses increased by approximately
$4.3 million, or 45%, to approximately $13.9 million
for the three months ended September 30, 2007 compared to
approximately $9.5 million for the three months ended
September 30, 2006.
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
2,444,000
|
|
|
$
|
5,774,000
|
|
Contract research and development, consultants, materials and
other costs
|
|
|
3,731,000
|
|
|
|
2,265,000
|
|
License fees
|
|
|
5,000,000
|
|
|
|
|
|
Salaries, benefits and related costs
|
|
|
1,029,000
|
|
|
|
925,000
|
|
Stock-based compensation
|
|
|
1,097,000
|
|
|
|
185,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
13,301,000
|
|
|
|
9,149,000
|
|
Indirect project costs
|
|
|
573,000
|
|
|
|
393,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,874,000
|
|
|
$
|
9,542,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs increased approximately $4.2 million for the
three months ended September 30, 2007 compared to the three
months ended September 30, 2006 as a result of the
milestone fee and other expenses relating to our NDA for
iloperidone, increase in clinical manufacturing activities for
both iloperidone and VEC-162, offset by lower clinical trial
expenses for the Companys iloperidone and VEC-162
Phase III trials that were primarily completed in 2006.
Clinical trials expense decreased approximately
$3.3 million for the three months ended September 30,
2007 compared to the three months ended September 30, 2006
primarily due to the cost incurred during the three months ended
September 30, 2006 in our Phase III iloperidone and
VEC-162 clinical trials that were completed primarily in 2006.
Contract research and development, consulting, materials and
other direct costs increased approximately $1.5 million for
the three months ended September 30, 2007 relative to the
three months ended September 30, 2006, primarily as a
result of increased iloperidone NDA related expenses and
manufacturing-related development costs incurred in connection
with the manufacturing of clinical supply materials for the
iloperidone and the VEC-162 programs. Prior to FDA approval of
our products, manufacturing-related costs are included in
research and development expense. Salaries, benefits and related
costs increased approximately $103,000 for the three months
ended September 30, 2007 relative to the three months ended
September 30, 2006 due to an increase in personnel to
support the development and clinical trial activities for
iloperidone, VEC-162 and VSF-173. Stock-based compensation
expense increased by approximately $913,000 compared to the
three months ended September 30, 2006 as a result of
options granted in 2007 and the higher fair value of options
granted during 2007 compared to options granted in prior periods.
We expect to continue to incur substantial research and
development expenses due to our ongoing research and development
efforts as our existing and future product candidates advance
through clinical trials.
General and administrative expenses. General
and administrative expenses increased approximately
$6.4 million, or 196%, to approximately $9.6 million
for the three months ended September 30, 2007 from
approximately $3.3 million for the three months ended
September 30, 2006.
26
The following table discloses the components of our general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Salaries, benefits and related costs
|
|
$
|
760,000
|
|
|
$
|
610,000
|
|
Stock-based compensation
|
|
|
4,060,000
|
|
|
|
1,321,000
|
|
Marketing and related consulting services
|
|
|
3,369,000
|
|
|
|
235,000
|
|
Legal, accounting and other professional expenses
|
|
|
686,000
|
|
|
|
406,000
|
|
Other expenses
|
|
|
773,000
|
|
|
|
693,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,648,000
|
|
|
$
|
3,265,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased approximately
$150,000 for the three months ended September 30, 2007
compared to the three months ended September 30, 2006 due
to an increase in personnel as we continued to develop the
administrative structure to support the development and clinical
trial activities of our lead product candidates and to build our
marketing capabilities in anticipation of the commercial launch
of iloperidone. Stock-based compensation expense increased by
approximately $2.7 million as a result of options granted
in 2007 and the higher fair value of options granted during 2007
compared to options granted in prior periods. Marketing and
related consulting services expenses increased by approximately
$3.1 million due to the increase in marketing activity
related to our anticipated commercial launch of iloperidone.
These increased expenses included market research, branding,
medical community cultivation and publication planning costs.
Legal, accounting and other professional costs increased by
approximately $280,000 for the three months ended
September 30, 2007 compared to the three months ended
September 30, 2006 due primarily to a higher level of
business development consulting activity and higher costs
associated with our reporting and other regulatory obligations
applicable to public companies.
We expect our general and administrative expenses to increase
substantially, primarily to support our commercial development
activities.
Interest and other income. Interest and other
income in the three months ended September 30, 2007 was
approximately $1.6 million compared to approximately
$683,000 in the three months ended September 30, 2006.
Interest income was higher in 2007 due to higher average cash
balances for the quarter, primarily resulting from the proceeds
from our public offerings and higher short-term interest rates
which generated substantially higher interest income than in
2006. Other income for the three months ended September 30,
2007 includes approximately $71,000 in revenue recognized from a
grant from the Economic Development Board in Singapore. We do
not expect to receive similar grants in the future.
Our interest and other income for the three months ended
September 30, 2007 and 2006 are disclosed on the following
table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Interest income
|
|
$
|
1,515,000
|
|
|
$
|
683,000
|
|
Other income
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,586,000
|
|
|
$
|
683,000
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2007 compared to nine months
ended September 30, 2006
Research and development expenses. Research
and development expenses decreased by approximately
$9.5 million, or 21%, to approximately $34.7 million
for the nine months ended September 30, 2007 compared to
approximately $44.1 million for the nine months ended
September 30, 2006.
27
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
7,323,000
|
|
|
$
|
33,055,000
|
|
Contract research and development, consultants, materials and
other costs
|
|
|
13,261,000
|
|
|
|
5,855,000
|
|
License fees
|
|
|
6,000,000
|
|
|
|
1,000,000
|
|
Salaries, benefits and related costs
|
|
|
3,047,000
|
|
|
|
2,373,000
|
|
Stock-based compensation
|
|
|
3,293,000
|
|
|
|
476,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
32,924,000
|
|
|
|
42,759,000
|
|
Indirect project costs
|
|
|
1,736,000
|
|
|
|
1,372,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,660,000
|
|
|
$
|
44,131,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased approximately $9.8 million for the
nine months ended September 30, 2007 compared to the nine
months ended September 30, 2006 as a result of lower
clinical trial expenses for the Companys iloperidone and
VEC-162 Phase III trials that were primarily completed in
2006. These decreases were offset by the milestone fee that we
expect to pay and other expenses relating to our NDA for
iloperidone and clinical manufacturing activities for both
iloperidone and VEC-162. Clinical trials expense decreased
approximately $25.7 million for the nine months ended
September 30, 2007 compared to the nine months ended
September 30, 2006 primarily due to the cost incurred
during the nine months ended September 30, 2006 in our
Phase III iloperidone and VEC-162 clinical trials. Contract
research and development, consulting, materials and other direct
costs increased approximately $7.4 million for the nine
months ended September 30, 2007 relative to the nine months
ended September 30, 2006 primarily as a result of increased
expenses related to the preparation of our NDA for iloperidone
and the increased manufacturing of clinical supply materials for
the iloperidone and the VEC-162 programs. Prior to FDA approval
of our products, manufacturing-related costs are included in
research and development expenses. During the nine months ended
September 30, 2007 we met the requirements for a
$5.0 million milestone payment to Novartis under our
license agreement for iloperidone and a $1.0 million
milestone payment to Novartis under our license agreement for
VSF-173, and during the nine months ended September 30,
2006 we met the requirements for a $1.0 million milestone
payment to BMS under our license agreement for VEC-162.
Salaries, benefits and related costs increased approximately
$674,000 for the nine months ended September 30, 2007
relative to the nine months ended September 30, 2006 due to
an increase in personnel to support the development and clinical
trial activities for iloperidone, VEC-162 and VSF-173.
Stock-based compensation expense increased by approximately
$2.8 million compared to the nine months ended
September 30, 2006 as a result of options granted in 2007
and the higher fair value of options granted during 2007
compared to options granted in prior periods.
We expect to continue to incur substantial research and
development expenses due to our ongoing research and development
efforts and as our existing and future product candidates
advance through clinical trials.
General and administrative expenses. General
and administrative expenses increased approximately
$14.2 million, or 154%, to approximately $23.3 million
for the nine months ended September 30, 2007 from
approximately $9.2 million for the nine months ended
September 30, 2006.
28
The following table discloses the components of our general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Salaries, benefits and related costs
|
|
$
|
2,319,000
|
|
|
$
|
1,746,000
|
|
Stock-based compensation
|
|
|
11,009,000
|
|
|
|
4,013,000
|
|
Marketing and related consulting services
|
|
|
5,373,000
|
|
|
|
385,000
|
|
Legal, accounting and other professional expenses
|
|
|
2,333,000
|
|
|
|
978,000
|
|
Other expenses
|
|
|
2,297,000
|
|
|
|
2,048,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,331,000
|
|
|
$
|
9,170,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased approximately
$573,000 for the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006 due to
an increase in personnel as we continued to develop the
administrative structure to support the development and clinical
trial activities of our lead product candidates and to build our
marketing capabilities in anticipation of the commercial launch
of iloperidone. Stock-based compensation expense increased by
approximately $7.0 million as a result of options granted
in 2007 and the higher fair value of options granted during 2007
compared to options granted in prior periods. Marketing and
related consulting services expenses increased by approximately
$5.0 million due to the increase in marketing activities
related to our anticipated commercial launch of iloperidone.
These increased expenses included market research, branding,
medical community cultivation and publication planning costs.
Legal, accounting and other professional costs increased
approximately $1.4 million for the nine months ended
September 30, 2007 compared to the nine months ended
September 30, 2006 due primarily to a higher level of
business developments consulting activity and higher costs
associated with our reporting and other regulatory obligations
applicable to public companies.
We expect our general and administrative expenses to increase
substantially, primarily to support our commercial development
activities.
Interest and other income, net. Net interest
income in the nine months ended September 30, 2007 was
approximately $4.7 million compared to net interest income
of approximately $1.7 million in the nine months ended
September 30, 2006. Interest income was higher in 2007 due
to higher average cash balances for the period, primarily
resulting from the proceeds from our public offerings and higher
short-term interest rates which generated substantially higher
interest income than in 2006. Other income for the nine months
ended September 30, 2007 includes approximately $71,000 in
revenue recognized from a grant from the Economic Development
Board in Singapore. We do not expect to receive similar grants
in the future.
Our interest and other income for the nine months ended
September 30, 2007 and the nine months ended
September 30, 2006 are disclosed on the following table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Interest income
|
|
$
|
4,608,000
|
|
|
$
|
1,686,000
|
|
Other income
|
|
|
71,000
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,679,000
|
|
|
$
|
1,681,000
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
We have funded our operations through September 30, 2007
principally with the net proceeds from private preferred stock
offerings of approximately $62.0 million, with net proceeds
from our April 2006 initial public offering of approximately
$53.3 million and with net proceeds from our January 2007
follow-on offering of approximately $111.3 million.
29
As of September 30, 2007, cash and cash equivalents and
marketable securities were approximately $109.4 million
compared to approximately $31.9 million at
December 31, 2006. Our cash and cash equivalents are highly
liquid investments with a maturity of 90 days or less at
date of purchase and consist of time deposits, investments in
money market funds with commercial banks and financial
institutions, and commercial paper of high-quality corporate
issuers. As of September 30, 2007 the Company also held a
non-current deposit of $430,000 that is used to collateralize a
letter of credit issued for its current office lease expiring in
2016.
As of September 30, 2007 and December 31, 2006, our
liquidity resources are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash and cash equivalents
|
|
$
|
59,954,000
|
|
|
$
|
30,929,000
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
|
6,483,000
|
|
|
|
|
|
U.S. corporate debt securities
|
|
|
36,185,000
|
|
|
|
942,000
|
|
U.S. asset-backed securities
|
|
|
2,806,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, short-term
|
|
|
45,474,000
|
|
|
|
942,000
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate debt securities
|
|
|
1,988,000
|
|
|
|
|
|
U.S. asset-backed securities
|
|
|
2,004,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, long-term
|
|
|
3,992,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,420,000
|
|
|
$
|
31,871,000
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
430,000
|
|
|
$
|
430,000
|
|
|
|
|
|
|
|
|
|
|
We maintain cash balances with financial institutions in excess
of insured limits, but do not anticipate any losses with respect
to such cash balances.
Cash
Flow
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(35,020,000
|
)
|
|
$
|
(40,503,000
|
)
|
Investing activities
|
|
|
(47,306,000
|
)
|
|
|
(1,843,000
|
)
|
Financing activities
|
|
|
111,358,000
|
|
|
|
53,237,000
|
|
Exchange rate effect on cash and equivalents
|
|
|
(6,000
|
)
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
29,026,000
|
|
|
$
|
10,887,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations was approximately $35.0 million
and approximately $40.5 million for the nine months ended
September 30, 2007 and 2006, respectively. The net loss for
the nine months ended September 30, 2007 of approximately
$53.3 million was offset primarily by non-cash charges for
stock-based compensation of approximately $14.5 million, by
depreciation and amortization of approximately $447,000, by a
decrease in prepaid expenses of approximately $1.4 million,
by an increase in accrued expenses and accounts payable of
approximately $6.2 million, and other net changes in
working capital. Net cash used in investing activities for the
nine months ended September 30, 2007 was approximately
$47.3 million and consisted primarily of net purchases of
marketable securities of approximately $47.2 million. Net
cash provided by financing activities for the nine months ended
September 30, 2007 was approximately $111.4 million,
consisting primarily of net proceeds from our follow-on offering.
30
Contractual
Obligations and Commitments
The following table summarizes our long-term contractual cash
obligations as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
October to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
Operating leases
|
|
$
|
6,497,000
|
|
|
$
|
162,000
|
|
|
$
|
662,000
|
|
|
$
|
685,000
|
|
|
$
|
706,000
|
|
|
$
|
727,000
|
|
|
$
|
3,555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
Our commitments under operating leases shown above consist of
payments relating to our real estate leases for our current and
former headquarters located in Rockville, Maryland, expiring in
2016 and 2008, respectively. We vacated our previous
headquarters in January 2006. According to SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities, a liability for costs that will continue to be
incurred under a lease for its remaining term without economic
benefit to the company shall be recognized and measured when the
company ceases using the right conveyed by the lease, reduced by
the sublease rentals. As of September 30, 2007, the balance
of the lease abandonment accrual was approximately $124,000.
During the second quarter of 2007, we exercised an option to
lease additional space in our current headquarters in Rockville,
Maryland and the additional commitment is reflected in the
summary of operating lease commitments. In connection with the
consolidation of our research activities, we terminated our
Singapore lease, vacated the premises at the end of September
2007 and we have no other obligations in respect to the
Singapore lease.
Clinical
research organization contracts and other
contracts
We entered into agreements with clinical research organizations
responsible for conducting and monitoring our clinical trials
for iloperidone, VEC-162 and VSF-173. These contractual
obligations are not reflected in the table above because we may
terminate them on no more than 60 days notice without
incurring additional charges (other than charges for work
completed but not paid for through the effective date of
termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination). We also entered into agreements with clinical
manufacturing organizations and other outside contractors who
are responsible for additional services supporting our on-going
clinical development and commercialization processes. These
contractual obligations are not reflected in the table above
because we may terminate them on no more than 60 days
notice without incurring additional charges (other than charges
for work completed but not paid for through the effective date
of termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination).
License
agreements
In February 2004 and June 2004, we entered into separate
licensing agreements with Bristol-Myers Squibb and Novartis,
respectively, for the exclusive rights to develop and
commercialize our three compounds in clinical development. We
are obligated to make payments under the conditions in the
agreements upon the achievement of specified clinical,
regulatory and commercial milestones. If the products are
successfully commercialized we will be required to pay certain
royalties based on net sales for each of the licensed products.
Please see the notes to the condensed consolidated financial
statements included with this report for a more detailed
description of these license agreements.
As a result of the successful commencement of the Phase III
clinical study of VEC-162 in March 2006, we met the first
milestone specified in our licensing agreement with
Bristol-Myers Squibb and recorded a related license expense of
$1,000,000 during the three months ended March 31, 2006.
During March 2007, we met our first milestone under the license
agreement with Novartis for VSF-173 relating to the initiation
of the Phase II clinical trial and recorded a license fee
expense of $1,000,000 during the three months ended
March 31, 2007. As a result of the submission of our NDA
for iloperidone in October 2007, we expect to meet another
milestone under our license agreement with Novartis. During the
three months ended September 30, 2007 we have recorded a
$5,000,000 milestone related charge, and expect to make
this licensing payment to Novartis upon the successful filing of
the NDA by the FDA. No other amounts were recorded as
liabilities nor were any other contractual obligations relating
to the license agreements included in
31
the condensed consolidated financial statements as of
September 30, 2007, since the amounts, timing and
likelihood of these payments are unknown and will depend on the
successful outcome of future clinical trials, regulatory
filings, favorable FDA regulatory approvals, growth in product
sales and other factors. For a more detailed description of the
risks associated with the outcome of such clinical trials,
regulatory filings, FDA approvals and product sales, please see
the section Risk Factors of this quarterly report on
Form 10-Q.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements, as defined in
Item 303(a)(4) of the Securities and Exchange
Commissions Regulations S-K.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Foreign
Exchange
We currently incur a portion of our operating expenses outside
of the United States. The reporting currency for our financial
statements is U.S. Dollars. To date, we have determined
that operating expenses incurred in currencies other than
U.S. Dollar have not been significant. As a result, we have
not been impacted materially by changes in exchange rates and do
not expect to be impacted materially for the foreseeable future.
However, if operating expenses incurred outside of the United
States increase, our results of operations could be adversely
impacted by changes in exchange rates. We do not currently hedge
foreign currency positions and do not intend to do so for the
foreseeable future.
Interest
Rates
Our exposure to market risk is currently confined to our cash,
cash equivalents and marketable securities that have maturities
of less than 12 months. We currently do not hedge interest
rate exposure. We have not used derivative financial instruments
for speculation or trading purposes. Because of the short-term
maturities of our cash, cash equivalents and marketable
securities, we do not believe that a change in market rates
would have any significant impact on the realized value of our
investments.
Effects
of Inflation
Our most liquid assets are cash, cash equivalents and marketable
securities. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheet. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract
services, which could increase our level of expenses and the
rate at which we use our resources.
|
|
Item 4T.
|
Controls
and Procedures
|
a) Evaluation
of Disclosure Controls and Procedures
The Companys management, under the supervision and with
the participation of the Companys Chief Executive Officer
and Chief Financial Officer, performed an evaluation of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934) as of
September 30, 2007. Based upon this evaluation, management
has concluded that, as of September 30, 2007, our
disclosure controls and procedures were effective to provide
reasonable assurance that the information required to be
disclosed is recorded, processed, summarized and reported within
the time periods specified under applicable rules of the
Securities and Exchange Commission.
b) Changes
in Internal Controls
There have been no changes in our internal controls over
financial reporting, identified in connection with the
evaluation of such internal controls that have occurred during
the quarter ended September 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
32
Part II
OTHER INFORMATION
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this report, including the condensed consolidated financial
statements and the related notes contained in this quarterly
report on
Form 10-Q,
before deciding to invest in shares of our common stock. If any
of the following risks is actually realized, our business,
financial condition, results of operations and future prospects
would likely be materially and adversely affected. In that
event, the market price of our common stock could decline and
you could lose all or part of your investment.
Risks
related to our business and industry
Our
success is dependent on the success of our three product
candidates: iloperidone, VEC-162 and VSF-173. If any of these
product candidates are determined to be unsafe or ineffective in
humans, whether in clinical trials or commercially, our business
will be materially harmed.
Despite the positive results of our completed trials, we are
uncertain whether any of our current product candidates will
ultimately prove to be effective and safe in humans. Frequently,
product candidates that have shown promising results in clinical
trials have suffered significant setbacks in later clinical
trials or even after they are approved for commercial sale.
Future uses of any of our product candidates, whether in
clinical trials or commercially, may reveal that the product
candidate is ineffective, unacceptably toxic, has other
undesirable side effects or is otherwise not fit for further
use. If we are unable to discover and develop products that are
safe and effective, our business will be materially harmed.
Any
failure or delay in completing clinical trials for our product
candidates could severely harm our business.
Pre-clinical studies and clinical trials required to demonstrate
the safety and efficacy of our product candidates are
time-consuming and expensive and together take several years to
complete. The completion of clinical trials for our product
candidates may be delayed by many factors, including:
|
|
|
|
|
our inability to manufacture or obtain from third parties
materials sufficient for use in pre-clinical studies and
clinical trials
|
|
|
|
delays in patient enrollment and variability in the number and
types of patients available for clinical trials
|
|
|
|
difficulty in maintaining contact with patients after treatment,
resulting in incomplete data
|
|
|
|
poor effectiveness of product candidates during clinical trials
|
|
|
|
unforeseen safety issues or side effects
|
|
|
|
governmental or regulatory delays and changes in regulatory
requirements and guidelines
|
If we fail to successfully complete one or more clinical trials
for any of our product candidates, we may not receive the
regulatory approvals needed to market that product candidate.
Any failure or delay in commencing or completing these clinical
trials would harm our business materially.
We
face heavy government regulation, and FDA regulatory approval of
our products is uncertain.
The research, testing, manufacturing and marketing of drug
products such as those that we are developing are subject to
extensive regulation by federal, state and local government
authorities, including the FDA. To obtain regulatory approval of
a product, we must demonstrate to the satisfaction of the
applicable regulatory agency that, among other things, the
product is safe and effective for its intended use. In addition,
we must show that the manufacturing facilities used to produce
the products are in compliance with current Good Manufacturing
Practices regulations (cGMP).
The process of obtaining FDA and other required regulatory
approvals and clearances will require us to expend substantial
time and capital. Despite the time and expense expended,
regulatory approval is never guaranteed. The number of
pre-clinical and clinical tests that will be required for FDA
approval varies
33
depending on the drug candidate, the disease or condition that
the drug candidate is in development for, and the regulations
applicable to that particular drug candidate. The FDA can delay,
limit or deny approval of a drug candidate for many reasons,
including that:
|
|
|
|
|
a drug candidate may not be safe or effective
|
|
|
|
they may interpret data from pre-clinical and clinical testing
in different ways than we do
|
|
|
|
they may not approve our manufacturing process
|
|
|
|
they may change their approval policies or adopt new regulations
|
For example, if certain of our methods for analyzing our trial
data are not approved by the FDA, we may fail to obtain
regulatory approval for our product candidates.
Moreover, if and when our products do obtain such approval or
clearances, the marketing, distribution and manufacture of such
products would remain subject to extensive ongoing regulatory
requirements. Failure to comply with applicable regulatory
requirements could result in:
|
|
|
|
|
warning letters
|
|
|
|
fines
|
|
|
|
civil penalties
|
|
|
|
injunctions
|
|
|
|
recall or seizure of products
|
|
|
|
total or partial suspension of production
|
|
|
|
refusal of the government to grant approvals
|
|
|
|
withdrawal of approvals
|
|
|
|
criminal prosecution
|
Any delay or failure by us to obtain regulatory approvals for
our product candidates could diminish competitive advantages
that we may attain and would adversely affect the marketing of
our products. We have not received regulatory approval to market
any of our product candidates in any jurisdiction.
Even if we do receive regulatory approval for our drug
candidates, the FDA may impose limitations on the indicated uses
for which our products may be marketed, subsequently withdraw
approval or take other actions against us or our products that
are adverse to our business. The FDA generally approves products
for particular indications. An approval for a more limited
indication reduces the size of the potential market for the
product. Product approvals, once granted, may be withdrawn if
problems occur after initial marketing.
We also are subject to numerous federal, state and local laws,
regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the
environment and the use and disposal of hazardous substances
used in connection with our discovery, research and development
work. In addition, we cannot predict the extent of governmental
regulations or the impact of new governmental regulations that
might significantly harm the discovery, development, production
and marketing of our products. We may be required to incur
significant costs to comply with current or future laws or
regulations, and we may be adversely affected by the cost of
such compliance.
We
intend to seek regulatory approvals for our products in foreign
jurisdictions, but we may not obtain any such
approvals.
We intend to market our products outside the United States, with
one or more commercial partners. In order to market our products
in foreign jurisdictions, we may be required to obtain separate
regulatory approvals and comply with numerous and varying
regulatory requirements. The approval procedure varies among
countries and jurisdictions and can involve additional testing,
and the time required to obtain approval may differ from that
required to obtain FDA approval. We have no experience with
obtaining any such foreign approvals. Additionally, the foreign
regulatory approval process may include all of the risks
associated with obtaining FDA approval. For all of these
reasons, we may not obtain foreign regulatory approvals on a
timely basis, if at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries or
34
jurisdictions, and approval by one foreign regulatory authority
does not ensure approval by regulatory authorities in other
foreign countries or jurisdictions or by the FDA. We may not be
able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
The failure to obtain these approvals could harm our business
materially.
Our
product candidates may cause undesirable side effects or have
other properties that could delay or prevent their regulatory
approval or limit their marketability.
Undesirable side effects caused by our product candidates could
interrupt, delay or halt clinical trials and could result in the
denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications, and in turn
prevent us from commercializing our product candidates and
generating revenues from their sale. For example, like many
other drugs in its class, iloperidone is associated with a
prolongation of the hearts QTc interval, which is a
measurement of specific electrical activity in the heart as
captured on an electrocardiogram, corrected for heart rate. A
QTc interval that is significantly prolonged may result in an
abnormal heart rhythm with adverse consequences including
fainting, dizziness, loss of consciousness and death. No patient
in the controlled portion of any of iloperidones clinical
trials was observed to have an interval that exceeded a
500-millisecond threshold of particular concern to the FDA. Two
patients experienced a prolongation of 500 milliseconds or more
during the open-label extension of one trial. We will continue
to assess the side effect profile of iloperidone and our other
product candidates in our ongoing clinical development program.
In addition, if any of our product candidates receive marketing
approval and we or others later identify undesirable side
effects caused by the product, we could face one or more of the
following:
|
|
|
|
|
regulatory authorities may require the addition of labeling
statements, such as a black box warning or a
contraindication
|
|
|
|
regulatory authorities may withdraw their approval of the product
|
|
|
|
we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product
|
|
|
|
our reputation may suffer
|
Any of these events could prevent us from achieving or
maintaining market acceptance of the affected product or could
substantially increase the costs and expenses of commercializing
the product candidate, which in turn could delay or prevent us
from generating significant revenues from its sale.
Our
product candidates may never achieve market acceptance even if
we obtain regulatory approvals.
Even if we receive regulatory approvals for the sale of our
product candidates, the commercial success of these products
will depend, among other things, on their acceptance by
physicians, patients, third-party payors and other members of
the medical community as a therapeutic and cost-effective
alternative to competing products and treatments. The degree of
market acceptance of any of our product candidates will depend
on a number of factors, including the demonstration of its
safety and efficacy, its cost-effectiveness, its potential
advantages over other therapies, the reimbursement policies of
government and third-party payors with respect to the product
candidates, and the effectiveness of our marketing and
distribution capabilities. If our product candidates fail to
gain market acceptance, we may be unable to earn sufficient
revenue to continue our business. If our product candidates do
not become widely accepted by physicians, patients, third-party
payors and other members of the medical community, it is
unlikely that we will ever become profitable.
If we
fail to obtain the capital necessary to fund our research and
development activities, we may be unable to continue operations
or we may be forced to share our rights to commercialize our
product candidates with third parties on terms that may not be
attractive to us.
Based on our current operating plans, we believe that our
existing cash, cash equivalents and marketable securities, will
be sufficient to meet our anticipated operating needs into
mid-2008 and after that time we will require additional capital.
In budgeting for our activities, we have relied on a number of
assumptions, including assumptions that we will continue to
expend funds in preparation of a commercial launch of
iloperidone, that we will conduct our VEC-162 Phase III
trial in chronic primary insomnia in accordance with
35
our expectations, that we will not engage in further
in-licensing activities, that we will not receive any proceeds
from potential partnerships, that we will not expend funds on
the bipolar indication for iloperidone, that we will continue to
evaluate pre-clinical compounds for potential development, that
we will be able to continue the manufacturing of our product
candidates at commercially reasonable prices, that we will be
able to retain our key personnel, and that we will not incur any
significant contingent liabilities. We may need to raise
additional funds more quickly if one or more of our assumptions
proves to be incorrect or if we choose to expand our product
development efforts more rapidly than presently anticipated or
seek to acquire additional product candidates, and we may also
decide to raise additional funds even before they are needed if
the conditions for raising capital are favorable.
We may seek to sell additional equity or debt securities or
obtain a bank credit facility. The sale of additional equity or
debt securities, if convertible, could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants
that would restrict our operations.
We cannot assure you that additional funds will be available
when we need them on terms that are acceptable to us, or at all.
The unavailability of financing may require us to delay, scale
back or eliminate expenditures for our research, development and
marketing activities necessary to commercialize our potential
biopharmaceutical products. If we are unable to secure
sufficient capital to fund our research and development
activities, we may not be able to continue operations or we may
have to enter into collaboration agreements that could require
us to share commercial rights to our products to a greater
extent or at earlier stages in the drug development process than
we currently intend. Collaborations that are consummated by us
prior to proof-of-efficacy and safety of a product candidate
could impair our ability to realize value from that product
candidate.
We have engaged an investment bank to provide strategic and
financial advisory services to the Company, which may lead to
one or more possible transactions, including the acquisition,
licensing or sale by the Company of one or more product
candidates, or the acquisition of the Company. However, we can
not assure you that we will complete any acquisitions, sales or
licenses or that, if completed, any acquisition, sale or license
will be successful or on attractive terms.
We
have incurred operating losses in each year since our inception
and expect to continue to incur substantial and increasing
losses for the foreseeable future.
We have a limited operating history. We have not generated any
revenue from product sales to date and we cannot estimate with
precision the extent of our future losses. We do not currently
have any products that have been approved for commercial sale
and we may never generate revenue from selling products or
achieve profitability. We expect to continue to incur
substantial and increasing losses for the foreseeable future,
particularly as we increase our research, clinical development,
marketing and administrative activities. As a result, we are
uncertain when or if we will achieve profitability and, if so,
whether we will be able to sustain it. We have been engaged in
identifying and developing compounds and product candidates
since March 2003. As of September 30, 2007, we have
accumulated net losses of approximately $153.2 million. Our
ability to achieve revenue and profitability is dependent on our
ability to complete the development of our product candidates,
obtain necessary regulatory approvals, and have our products
manufactured and marketed. We cannot assure you that we will be
profitable even if we successfully commercialize our products.
Failure to become and remain profitable may adversely affect the
market price of our common stock and our ability to raise
capital and continue operations.
36
If our
contract research organizations do not successfully carry out
their duties or if we lose our relationships with contract
research organizations, our drug development efforts could be
delayed.
We are dependent on contract research organizations, third-party
vendors and investigators for pre-clinical testing and clinical
trials related to our drug discovery and development efforts and
we will likely continue to depend on them to assist in our
future discovery and development efforts. These parties are not
our employees and we cannot control the amount or timing of
resources that they devote to our programs. If they fail to
devote sufficient time and resources to our drug development
programs or if their performance is substandard, it will delay
the development and commercialization of our product candidates.
The parties with which we contract for execution of our clinical
trials play a significant role in the conduct of the trials and
the subsequent collection and analysis of data. Their failure to
meet their obligations could adversely affect clinical
development of our product candidates. Moreover, these parties
may also have relationships with other commercial entities, some
of which may compete with us.
If we lose our relationship with any one or more of these
parties, we could experience a significant delay in both
identifying another comparable provider and then contracting for
its services. We may be unable to retain an alternative provider
on reasonable terms, if at all. Even if we locate an alternative
provider, it is likely that this provider may need additional
time to respond to our needs and may not provide the same type
or level of service as the original provider. In addition, any
provider that we retain will be subject to current Good
Laboratory Practices (cGLP), and similar foreign standards and
we do not have control over compliance with these regulations by
these providers. Consequently, if these practices and standards
are not adhered to by these providers, the development and
commercialization of our product candidates could be delayed.
The
FDA may refuse to file our NDA for iloperidone, which may delay
or prevent the approval of iloperidone for commercial
use.
We submitted our New Drug Application (NDA) for iloperidone to
the FDA on September 27, 2007. The FDA must inform us
within 75 days of submission if it has accepted our NDA
submission and filed it for regulatory review. If the FDA
determines that our NDA submission is incomplete or insufficient
for filing, the FDA may refuse to file the NDA. Any such refusal
by the FDA could require us to expend additional time and
resources to revise and resubmit our NDA, harm our business and
reputation and cause the market price of our stock to decline.
Furthermore, there is no guarantee that any revised or
resubmitted NDA filing we make will be accepted by the FDA.
We
rely on a limited number of manufacturers for our product
candidates and our business will be seriously harmed if these
manufacturers are not able to satisfy our demand and alternative
sources are not available.
We do not have an in-house manufacturing capability and depend
completely on a small number of third-party manufacturers and
active pharmaceutical ingredient formulators for the manufacture
of our product candidates. We do not have long-term agreements
with any of these third parties, and if they are unable or
unwilling to perform for any reason, we may not be able to
locate alternative acceptable manufacturers or formulators or
enter into favorable agreements with them. Any inability to
acquire sufficient quantities of our product candidates in a
timely manner from these third parties could delay clinical
trials and prevent us from developing our product candidates in
a cost-effective manner or on a timely basis. In addition,
manufacturers of our product candidates are subject to cGMP and
similar foreign standards and we do not have control over
compliance with these regulations by our manufacturers. If one
of our contract manufacturers fails to maintain compliance, the
production of our product candidates could be interrupted,
resulting in delays and additional costs. In addition, if the
facilities of such manufacturers do not pass a pre-approval
plant inspection, the FDA will not grant pre-market approval of
our products.
Our manufacturing strategy presents the following additional
risks:
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the manufacturing process for VSF-173 has not been tested in
quantities needed for continued clinical trials or commercial
sales, and delays in
scale-up to
commercial quantities of VEC-162 and VSF-173 could delay
clinical trials, regulatory submissions and commercialization of
these product candidates
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because most of our third-party manufacturers and formulators
are located outside of the United States, there may be
difficulties in importing our compounds or their components into
the United States as a
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result of, among other things, FDA import inspections,
incomplete or inaccurate import documentation or defective
packaging
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because of the complex nature of our compounds, our
manufacturers may not be able to successfully manufacture our
compounds in a cost-effective
and/or
timely manner
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Materials
necessary to manufacture our product candidates may not be
available on commercially reasonable terms, or at all, which may
delay the development, regulatory approval and commercialization
of our product candidates.
We rely on our manufacturers to purchase from third-party
suppliers the materials necessary to produce our product
candidates for our clinical trials. Suppliers may not sell these
materials to our manufacturers at the times we need them or on
commercially reasonable terms. We do not have any control over
the process or timing of the acquisition of these materials by
our manufacturers. Moreover, we currently do not have any
agreements for the commercial production of these materials. If
our manufacturers are unable to obtain these materials for our
clinical trials, product testing and potential regulatory
approval of our product candidates could be delayed,
significantly affecting our ability to develop our product
candidates. If we or our manufacturers are unable to purchase
these materials after regulatory approval has been obtained for
our product candidates, the commercial launch of our product
candidates would be delayed or there would be a shortage in
supply, which would materially affect our ability to generate
revenues from the sale of our product candidates.
We
face substantial competition which may result in others
developing or commercializing products before or more
successfully than we do.
Our future success will depend on our ability to demonstrate and
maintain a competitive advantage with respect to our product
candidates and our ability to identify and develop additional
product candidates through the application of our
pharmacogenetics and pharmacogenomics expertise. Large, fully
integrated pharmaceutical companies, either alone or together
with collaborative partners, have substantially greater
financial resources and have significantly greater experience
than we do in:
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developing products
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undertaking pre-clinical testing and clinical trials
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obtaining FDA and other regulatory approvals of products
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manufacturing and marketing products
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These companies may invest heavily and quickly to discover and
develop novel products that could make our product candidates
obsolete. Accordingly, our competitors may succeed in obtaining
patent protection, receiving FDA approval or commercializing
superior products or other competing products before we do.
We believe the primary competitors for each of our product
candidates are as follows:
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For iloperidone in the treatment of schizophrenia, the atypical
antipsychotics
Risperdal®
(risperidone) (including the depot formulation
Risperdal®
Consta®)
and
Invega®
(paliperidone) by Johnson & Johnson,
Zyprexa®
(olanzapine) by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
Abilify®
(aripiprazole) by Bristol-Myers Squibb Company/Otsuka
Pharmaceutical Co., Ltd.,
Geodon®
(ziprasidone) by Pfizer Inc. and generic clozapine, as well as
the typical antipsychotics haloperidol, chlorpromazine,
thioridazine, and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials (or for which an NDA has been recently filed) for the
treatment of schizophrenia include bifeprunox (Wyeth/Solvay
S.A./Lundbeck A/S), and asenapine (Schering-Plough Corporation)
and pimavanserin (Acadaia Pharmaceuticals).
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For VEC-162 in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as trazodone and doxepin, and over-the-counter remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials (or for which an
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NDA has been recently filed) for insomnia include indiplon
(Neurocrine Biosciences, Inc.) and low-dose doxepin
(Silenortm,
Somaxon Pharmaceuticals, Inc.).
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For VEC-162 in the treatment of depression, antidepressants such
as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK and
Cymbalta®
(duloxetine) by Eli Lilly. In addition to the approved products,
compounds in Phase III trials for depression include
agomelatine (Novartis and Les Laboratoires Servier).
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For VSF-173 in the treatment of excessive sleepiness,
Provigil®
(modafinil) and
Nuvigil®
(armodafinil) by Cephalon Inc., and
Xyrem®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
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We
have no experience selling, marketing or distributing products
and no internal capability to do so.
At present, we have limited marketing and no sales personnel. In
order for us to commercialize any of our product candidates, we
must either acquire or internally develop sales, marketing and
distribution capabilities, or enter into collaborations with
partners to perform these services for us. We may not be able to
establish sales and distribution partnerships on acceptable
terms or at all, and if we do enter into a distribution
arrangement, our success will be dependent upon the performance
of our partner. In the event that we attempt to acquire or
develop our own in-house sales, marketing and distribution
capabilities, factors that may inhibit our efforts to
commercialize our products without partners or licensees include:
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our inability to recruit and retain adequate numbers of
effective sales and marketing personnel
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the inability of sales personnel to obtain access to or persuade
adequate numbers of physicians to prescribe our product
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the lack of complementary products to be offered by our sales
personnel, which may put us at a competitive disadvantage
against companies with broader product lines
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unforeseen costs associated with creating our own sales and
marketing team or with entering into a partnering agreement with
an independent sales and marketing organization
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We
will need to increase the size of our organization, and we may
experience difficulties in managing our growth.
As of September 30, 2007, we had 47 full-time
employees. We will need to expand our managerial, operational,
financial and other resources in order for us to manage and fund
our operations, continue our development activities and
commercialize our product candidates. Our current personnel,
systems and facilities are not adequate to support this future
growth. To manage our growth, we must:
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manage our clinical trials effectively
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manage our internal development efforts effectively
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improve our operational, financial, accounting and management
controls, reporting systems and procedures
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attract and retain sufficient numbers of talented employees
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We may be unable to successfully implement these tasks on a
larger scale and, accordingly, may not achieve our development
and commercialization goals.
If we
cannot identify, or enter into licensing arrangements for, new
product candidates, our ability to develop a diverse product
portfolio may be limited.
A component of our business strategy is acquiring rights to
develop and commercialize compounds discovered or developed by
other pharmaceutical and biotechnology companies for which we
may find effective uses and markets by using our unique
pharmacogenetics and pharmacogenomics expertise. Competition for
the acquisition of these compounds is intense. If we are not
able to identify opportunities to acquire rights to
commercialize additional products, we may not be able to develop
a diverse portfolio of products and our business may be harmed.
Additionally, it may take substantial human and financial
resources to secure
39
commercial rights to promising product candidates. Moreover, if
other firms develop pharmacogenetics and pharmacogenomics
capabilities, we may face increased competition in identifying
and acquiring additional product candidates.
If we
lose key scientists or management personnel, or if we fail to
recruit additional highly skilled personnel, it will impair our
ability to identify, develop and commercialize product
candidates.
We are highly dependent on principal members of our management
team and scientific staff, including our Chief Executive
Officer, Mihael H. Polymeropoulos, M.D. These executives
each have significant pharmaceutical industry experience. The
loss of any such executives, including Dr. Polymeropoulos,
or any other principal member of our management team or
scientific staff, would impair our ability to identify, develop
and market new products.
Product
liability lawsuits could divert our resources, result in
substantial liabilities and reduce the commercial potential of
our products.
The risk that we may be sued on product liability claims is
inherent in the development of pharmaceutical products. For
example, we face a risk of product liability exposure related to
the testing of our product candidates in clinical trials and
will face even greater risks upon any commercialization by us of
our product candidates. We believe that we may be at a greater
risk of product liability claims relative to other
pharmaceutical companies because our compounds are intended to
treat behavioral disorders, and it is possible that we may be
held liable for the behavior and actions of patients who use our
compounds. These lawsuits may divert our management from
pursuing our business strategy and may be costly to defend. In
addition, if we are held liable in any of these lawsuits, we may
incur substantial liabilities and may be forced to limit or
forego further commercialization of one or more of our products.
Although we maintain general liability and product liability
insurance, our aggregate coverage limit under this insurance is
$10,000,000, and while we believe this amount of insurance is
sufficient to cover our product liability exposure, these limits
may not be high enough to fully cover potential liabilities. In
addition, product liability insurance is becoming increasingly
expensive, and we may not be able to obtain or maintain
sufficient insurance coverage at an acceptable cost or otherwise
to protect against potential product liability claims, which
could prevent or inhibit the commercial production and sale of
our products.
Legislative
or regulatory reform of the healthcare system in the U.S. and
foreign jurisdictions may affect our ability to sell our
products profitably.
The continuing efforts of the U.S. and foreign governments,
insurance companies, managed care organizations and other payors
of health care services to contain or reduce health care costs
may adversely affect our ability to set prices for our products
which we believe are fair, and our ability to generate revenues
and achieve and maintain profitability.
Specifically, in both the United States and some foreign
jurisdictions there have been a number of legislative and
regulatory proposals to change the healthcare system in ways
that could affect our ability to sell our products profitably.
In the United States, the Medicare Prescription Drug Improvement
and Modernization Act of 2003 reforms the way Medicare will
cover and reimburse for pharmaceutical products. This
legislation could decrease the coverage and price that we may
receive for our products. Other third-party payors are
increasingly challenging the prices charged for medical products
and services. It will be time-consuming and expensive for us to
go through the process of seeking reimbursement from Medicare
and private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. Further federal and state proposals and
healthcare reforms are likely which could limit the prices that
can be charged for the drugs we develop and may further limit
our commercial opportunity. Our results of operations could be
materially adversely affected by the Medicare prescription drug
coverage legislation, by the possible effect of this legislation
on amounts that private insurers will pay and by other
healthcare reforms that may be enacted or adopted in the future.
In some foreign countries, including major markets in the
European Union and Japan, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with
40
governmental authorities can take nine to twelve months or
longer after the receipt of regulatory marketing approval for a
product. To obtain reimbursement or pricing approval in some
countries, we may be required to conduct a clinical trial that
compares the cost-effectiveness of our product candidate to
other available therapies. Our business could be materially
harmed if reimbursement of our products is unavailable or
limited in scope or amount or if pricing is set at
unsatisfactory levels.
Recently
enacted legislation may make it more difficult and costly for us
to obtain regulatory approval of our product candidates and to
produce, to market and to distribute our existing
products.
On September 27, 2007, President Bush signed into law the
Food and Drug Administration Amendments Act of 2007 or the
FDAAA. The FDAAA grants a variety of new powers to the FDA, many
of which are aimed at assuring drug safety and monitoring the
safety of drug products after approval. Under the FDAAA,
companies that violate the new law are subject to substantial
civil monetary penalties. While we expect the FDAAA to have a
substantial effect on the pharmaceutical industry, the extent of
that effect is not yet known. As the FDA issues regulations,
guidance and interpretations relating to the new legislation,
the impact on the industry as well as our business will become
clearer. The new requirements and other changes that the FDAAA
imposes may make it more difficult, and likely more costly, to
obtain approval of new pharmaceutical products and to produce,
market and distribute existing products.
Our
quarterly operating results may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. The revenues we generate, if any, and our
operating results will be affected by numerous factors,
including:
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our addition or termination of development programs
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variations in the level of expenses related to our existing
three product candidates or future development programs
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our execution of collaborative, licensing or other arrangements,
and the timing of payments we may make or receive under these
arrangements
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any intellectual property infringement lawsuit in which we may
become involved
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regulatory developments affecting our product candidates or
those of our competitors
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If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
Risks
related to intellectual property and other legal
matters
Our
rights to develop and commercialize our product candidates are
subject in part to the terms and conditions of licenses or
sublicenses granted to us by other pharmaceutical companies.
With respect to VEC-162 and VSF-173, these terms and conditions
include options in favor of these pharmaceutical companies to
reacquire rights to commercialize and develop these product
candidates in certain circumstances.
Iloperidone is based in part on patents and other intellectual
property owned by sanofi-aventis and Novartis. Titan
Pharmaceuticals, Inc. (Titan) holds an exclusive license from
sanofi-aventis to the intellectual property owned by
sanofi-aventis, and Titan has sublicensed its rights under such
license on an exclusive basis to Novartis. We have acquired
exclusive rights to this and other intellectual property through
a further sublicense from Novartis. Our rights with respect to
the intellectual property to develop and commercialize
iloperidone may terminate, in whole or in part, if we fail to
meet certain milestones contained in our sublicense agreement
with Novartis relating to the time it takes for us to launch
iloperidone commercially following regulatory approval, and the
time it takes for us to receive regulatory approval following
our submission of an NDA or equivalent foreign filing. We may
also lose our rights to develop and commercialize iloperidone if
we fail to pay royalties to Novartis, if we fail to comply with
certain requirements in the sublicense regarding our financial
condition, or if we fail to comply with certain restrictions
regarding our other development activities. Finally, our rights
to develop and commercialize iloperidone may be impaired if
41
we do not cure breaches by Novartis and Titan of similar
obligations contained in these sublicense and license
agreements, although we are not aware of any such breach by
Titan or Novartis. In the event of an early termination of our
sublicense agreement, all rights licensed and developed by us
under this agreement may be extinguished, which would have a
material adverse effect on our business.
VEC-162 is based in part on patents that we have licensed on an
exclusive basis and other intellectual property licensed from
Bristol-Myers Squibb Company (BMS). Following the completion of
the entire Phase III program for VEC-162, which may consist
of several Phase III trials, and in the event that we have
not entered into one or more development and commercialization
agreements with one or more third parties covering certain
significant markets, BMS has retained an option to reacquire the
rights it has licensed to us to exclusively develop and
commercialize VEC-162 on pre-determined financial terms,
including the payment of royalties and milestone payments to us.
BMS may terminate our license if we fail to meet certain
milestones or if we otherwise breach our royalty or other
obligations in the agreement. In the event that we terminate our
license, or if BMS terminates our license due to our breach, all
of our rights to VEC-162 (including any intellectual property we
develop with respect to VEC-162) will revert back to BMS or
otherwise be licensed back to BMS on an exclusive basis. Any
termination or reversion of our rights to develop or
commercialize VEC-162, including any reacquisition by BMS of our
rights, may have a material adverse effect on our business.
VSF-173 is based in part on patents and other intellectual
property that we have licensed on an exclusive basis from
Novartis. Novartis has the option to reacquire rights to
co-develop and exclusively commercialize VSF-173 following the
completion of the Phase II trials, and an additional option
to reacquire co-development rights and exclusive
commercialization rights following the completion of the
Phase III clinical trials, subject in each case to
Novartis payment of pre-determined royalties and other
payments to us. In the event that Novartis chooses not to
exercise either of these options and we decide to enter into a
partnering arrangement to help us commercialize VSF-173,
Novartis has a right of first refusal to negotiate such an
agreement with us, as well as a right to submit a last matching
counteroffer regarding such an agreement. In addition, our
rights with respect to VSF-173 may terminate, in whole or in
part, if we fail to meet certain development and
commercialization milestones described in our license agreement
relating to the time it takes us to complete our development
work on VSF-173. These rights may also terminate in whole or in
part if we fail to make royalty or milestone payments or if we
do not comply with requirements in our license agreement
regarding our financial condition. In the event of an early
termination of our license agreement, all rights licensed and
developed by us under this agreement may revert back to
Novartis. Any termination or reversion of our rights to develop
or commercialize VSF-173, including any reacquisition by
Novartis of our rights, may have a material adverse effect on
our business.
If our
efforts to protect the proprietary nature of the intellectual
property related to our products are not adequate, we may not be
able to compete effectively in our markets.
In addition to the rights we have licensed from Novartis and BMS
relating to our product candidates, we rely upon intellectual
property we own relating to our products, including patents,
patent applications and trade secrets. As of September 30,
2007, we owned twenty nine provisional patent applications in
the United States, two U.S. national stage
applications under U.S. C. 371 and eight pending Patent
Cooperation Treaty applications, which permit the pursuit of
patents outside of the United States, relating to our product
candidates in clinical development. Our patent applications may
be challenged or fail to result in issued patents and our
existing or future patents may be too narrow to prevent third
parties from developing or designing around these patents. In
addition, we rely on trade secret protection and confidentiality
agreements to protect certain proprietary know-how that is not
patentable, for processes for which patents are difficult to
enforce and for any other elements of our drug development
processes that involve proprietary know-how, information and
technology that is not covered by patent applications. While we
require all of our employees, consultants, advisors and any
third parties who have access to our proprietary know-how,
information and technology to enter into confidentiality
agreements, we cannot be certain that this know-how, information
and technology will not be disclosed or that competitors will
not otherwise gain access to our trade secrets or independently
develop substantially equivalent information and techniques.
Further, the laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United
States. As a result, we may encounter significant problems in
protecting and defending our intellectual property both in the
United
42
States and abroad. If we are unable to protect or defend the
intellectual property related to our technologies, we will not
be able to establish or maintain a competitive advantage in our
market.
If we
do not obtain protection under the Hatch-Waxman Act and similar
foreign legislation to extend our patents and to obtain market
exclusivity for our product candidates, our business will be
materially harmed.
The United States Drug Price Competition and Patent Term
Restoration Act of 1984, more commonly known as the
Hatch-Waxman Act, provides for an extension of
patent protection for drug compounds for a period of up to five
years to compensate for time spent in development. Assuming we
gain a five-year extension for each of our current product
candidates in clinical development, and that we continue to have
rights under our sublicense and license agreements with respect
to these product candidates, we would have exclusive rights to
iloperidones United States new chemical entity
patent (the primary patent covering the compound as a new
composition of matter) until 2016, to VEC-162s
United States new chemical entity patent until 2022 and to
VSF-173s United States new chemical entity patent until
2019. In Europe, similar legislative enactments allow patent
protection in the European Union to be extended for up to five
years through the grant of a Supplementary Protection
Certificate. Assuming we gain such a five-year extension for
each of our current product candidates in clinical development,
and that we continue to have rights under our sublicense and
license agreements with respect to these product candidates, we
would have exclusive rights to iloperidones European new
chemical entity patents until 2015, to VEC-162s European
new chemical entity patents until 2022 and to VSF-173s
European new chemical entity patents until 2017. Additionally, a
recent directive in the European Union provides that companies
who receive regulatory approval for a new compound will have a
10-year
period of market exclusivity for that compound (with the
possibility of a further one-year extension) in most EU
countries, beginning on the date of such European regulatory
approval, regardless of when the European new chemical entity
patent covering such compound expires. A generic version of the
approved drug may not be marketed or sold during such market
exclusivity period. This directive may be of particular
importance with respect to iloperidone, since the European new
chemical entity patent for iloperidone will likely expire prior
to the end of this
10-year
period of market exclusivity. However, there is no assurance
that we will receive the extensions of our patents or other
exclusive rights available under the Hatch-Waxman Act or similar
foreign legislation. If we fail to receive such extensions and
exclusive rights, our ability to prevent competitors from
manufacturing, marketing and selling generic versions of our
products will be materially harmed.
Litigation
or third-party claims of intellectual property infringement
could require us to divert resources and may prevent or delay
our drug discovery and development efforts.
Our commercial success depends in part on our not infringing the
patents and proprietary rights of third parties. Third parties
may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain
patents in the future and claim that use of our technologies
infringes upon these patents. Furthermore, parties making claims
against us may obtain injunctive or other equitable relief,
which could effectively block our ability to develop and
commercialize one or more of our product candidates. Defense of
these claims, regardless of their merit, would divert
substantial financial and employee resources from our business.
In the event of a successful claim of infringement against us,
we may have to pay substantial damages, obtain one or more
licenses from third parties or pay royalties. In addition, even
in the absence of litigation, we may need to obtain additional
licenses from third parties to advance our research or allow
commercialization of our product candidates. We may fail to
obtain any of these licenses at a reasonable cost or on
reasonable terms, if at all. In that event, we would be unable
to develop and commercialize further one or more of our product
candidates.
In addition, in the future we could be required to initiate
litigation to enforce our proprietary rights against
infringement by third parties. Prosecution of these claims to
enforce our rights against others could divert substantial
financial and employee resources from our business. If we fail
to enforce our proprietary rights against others, our business
will be harmed.
43
If we
use hazardous and biological materials in a manner that causes
injury or violates applicable law, we may be liable for
damages.
Our research and development activities involve the controlled
use of potentially hazardous substances, including toxic
chemical and biological materials. We could be held liable for
any contamination, injury or other damages resulting from these
hazardous substances. In addition, our operations produce
hazardous waste products. While third parties are responsible
for disposal of our hazardous waste, we could be liable under
environmental laws for any required cleanup of sites at which
our waste is disposed. Federal, state, foreign and local laws
and regulations govern the use, manufacture, storage, handling
and disposal of these hazardous materials. If we fail to comply
with these laws and regulations at any time, or if they change,
we may be subject to criminal sanctions and substantial civil
liabilities, which may adversely affect our business.
Even if we continue to comply with all applicable laws and
regulations regarding hazardous materials, we cannot eliminate
the risk of accidental contamination or discharge and our
resultant liability for any injuries or other damages caused by
these accidents. Although we maintain pollution liability
insurance, our coverage limit under this insurance is
$2,000,000, and while we believe this amount and type of
insurance is sufficient to cover risks typically associated with
our handling of materials, the insurance may not cover all
environmental liabilities, and these limits may not be high
enough to cover potential liabilities for these damages fully.
The amount of uninsured liabilities may exceed our financial
resources and materially harm our business.
Risks
related to our common stock
Our
stock price has been volatile and may be volatile in the future,
and purchasers of our common stock could incur substantial
losses.
The stock market has from time to time experienced significant
price and volume fluctuations, and the market prices of the
securities of life sciences companies without product revenues,
such as ours, have historically been highly volatile. The
following factors, in addition to the other risk factors
described in this section, may also have a significant impact on
the market price of our common stock:
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publicity regarding actual or potential testing or trial results
or the outcome of regulatory review relating to products under
development by us or our competitors
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regulatory developments in the United States and foreign
countries
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developments concerning any collaboration or other strategic
transaction we may undertake
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announcements of patent issuances or denials, technological
innovations or new commercial products by us or our competitors
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actual or anticipated variations in our quarterly operating
results
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changes in estimates of our financial results or recommendations
by securities analysts
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additions or departures of key personnel or members of our board
of directors
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economic and other external factors beyond our control
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As a result of these factors, holders of our common stock might
be unable to sell their shares at or above the price they paid
for such shares.
If
there are substantial sales of our common stock, our stock price
could decline.
A small number of early investors in our company who held our
stock prior to the sale of shares in our initial public offering
continue to hold a substantial number of shares of our common
stock. Additionally, a small number of institutional investors
and private equity funds continue to hold a significant number
of shares of our common stock. Sales by these stockholders of a
substantial number of shares, or the expectation of such sales,
could cause a significant reduction in the market price of our
common stock. Additionally, the holders of a substantial number
of shares of our common stock have rights, subject to certain
conditions, to require us to file registration statements to
permit the resale of these shares in the public market or to
include their shares in registration statements that we may file
for ourselves or other stockholders.
In addition to our outstanding common stock, as of
September 30, 2007 there were a total of
2,847,185 shares of common stock that we have registered
and that we are obligated to issue upon the exercise
44
of currently outstanding options granted under our Second
Amended and Restated Management Equity Plan and 2006 Equity
Incentive Plan. Upon the exercise of these options in accordance
with their respective terms, these shares may be resold freely,
subject to restrictions imposed on our affiliates under
Rule 144. If significant sales of these shares occur in
short periods of time, these sales could reduce the market price
of our common stock. Any reduction in the trading price of our
common stock could impede our ability to raise capital on
attractive terms. Additionally, the sale of additional equity
securities at prices below the current market price of our
common stock could result in dilution to our stockholders
interest.
If
securities or industry analysts do not publish research or
reports or publish unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts
who covers the Company downgrades our stock, our stock price
would likely decline. If one or more of these analysts ceases to
cover us or fails to publish regular reports on us, interest in
the purchase of our stock could decrease, which could cause our
stock price or trading volume to decline.
Anti-takeover
provisions in our charter and bylaws, and in Delaware law, could
prevent or delay a change in control of our
company.
We are a Delaware corporation and the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting
us from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes
an interested stockholder, even if a change of control would be
beneficial to our existing stockholders. In addition, our
amended and restated certificate of incorporation and bylaws may
discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
amended and restated certificate of incorporation and bylaws:
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt
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do not provide for cumulative voting in the election of
directors, which would allow holders of less than a majority of
the stock to elect some directors
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establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election
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require that directors only be removed from office for cause
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provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office
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limit who may call special meetings of stockholders
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prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders
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establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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We registered shares of our common stock in connection with our
initial public offering under the Securities Act. Our
Registration Statement on
Form S-1
(Reg.
No. 333-130759)
in connection with our initial public offering was declared
effective by the SEC on April 12, 2006. The offering was
consummated on April 18, 2006 with respect to
5,750,000 shares of our common stock, and on April 25,
2006 with respect to 214,188 shares pursuant to the
exercise by the underwriters of their over-allotment option. The
managing underwriters of the offering were J.P. Morgan
Securities Inc., Banc of America Securities LLC and Thomas
Weisel Partners LLC.
45
All 5,964,188 shares of our common stock sold in the
offering were sold to the public at the initial public offering
price of $10.00 per share. The aggregate price of the offering
was approximately $59.6 million. The net offering proceeds
to us after deducting underwriting discounts and commissions, as
well as offering expenses, were approximately
$53.3 million. We incurred total expenses in connection
with the offering of approximately $6.3 million, which
consisted of approximate direct payments of:
(i) $1,861,000 in legal, accounting and printing fees
(ii) $4,175,000 in underwriters discounts, fees and
commissions and
(iii) $276,000 in miscellaneous expenses
We also registered shares of our common stock in connection with
our follow-on offering under the Securities Act. Our
Registration Statement on
Form S-1
(Reg.
No. 333-139485
and
No. 333-140081)
in connection with our follow-on offering was declared effective
by the SEC on January 18, 2007. The offering was
consummated on January 24, 2007 with respect to all
4,370,000 shares of our common stock that were offered,
including 570,000 of such shares that were offered pursuant to
the exercise by the underwriters of their over-allotment option.
The managing underwriters of the offering were J.P. Morgan
Securities Inc., Morgan Stanley & Co., Incorporated,
Banc of America Securities LLC and Natexis Bleichroeder Inc.
All 4,370,000 shares of our common stock sold in the
follow-on offering were sold to the public at the offering price
of $27.29 per share. The aggregate price of the offering was
approximately $119.3 million. The net offering proceeds to
us after deducting underwriting discounts and commissions, as
well as estimated offering expenses, were approximately
$111.3 million. We incurred total expenses in connection
with the offering of approximately $8.0 million which
consisted of approximate direct payments of:
(i) $772,000 in legal, accounting and printing fees
(ii) $7,155,000 in underwriters discounts, fees and
commissions and
(iii) $75,000 in miscellaneous expenses
We have used a portion of, and intend to continue to use, the
proceeds of our initial public offering and our follow-on
offering for general corporate and research and development
expenses, including for our clinical trials for iloperidone,
VEC-162 and VSF-173, the generation and submission of an NDA for
iloperidone, the initiation and implementation of our
commercialization strategy of iloperidone, and clinical
manufacturing and other expenses relating to the development of
our lead product candidates. The unused net proceeds from the
initial public and follow-on offerings are invested in
investment grade securities. This use of proceeds is not
materially different from the use of proceeds described in the
final prospectuses for our initial public offering and follow-on
offering.
The amount and timing of our actual expenditures may vary
significantly depending on numerous factors, such as the
progress of our product development and commercialization
efforts and the amount of cash used by our operations.
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Item 5.
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Other
Information
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On November 7, 2007, based upon the determination of the
Compensation Committee of the Companys Board of Directors,
the Company entered into a tax indemnity agreement with Al
Gianchetti, the Companys Chief Commercial Officer. Under
the tax indemnity agreement, the Company or its successor will
reimburse Mr. Gianchetti for any excise tax that he is
required to pay under Section 4999 of the Internal Revenue
Code of 1986, as amended, as well as the income and excise taxes
imposed on the reimbursement. Section 4999 imposes a 20%
excise tax on payments and distributions that are made or
accelerated (or the vesting of which is accelerated) as a result
of a change in control of the Company. The excise tax applies
only if the aggregate value of the payments and distributions
equals or exceeds 300% of Mr. Gianchettis average
annual compensation from the Company for the last five completed
calendar years or, if less, all years of his employment with the
Company. If the tax applies, it attaches to the excess of the
aggregate value of the payments and distributions over 100% of
Mr. Gianchettis average annual compensation. In the
Companys case, the payments and distributions consist of
the continuation of salary, incentive bonus and health insurance
coverage for varying periods of time and accelerated vesting of
stock options to varying degrees.
46
The form of tax indemnity agreement is attached as
Exhibit 10.21 to this report. An agreement in this form has
also been entered into between the Company and each of Mihael H.
Polymeropoulos, M.D., its President and Chief Executive
Officer, Paolo Baroldi, M.D., Ph.D., its Senior Vice
President and Chief Medical Officer, Chip Clark, its Senior Vice
President, Chief Business Officer and Secretary, and Steven A.
Shallcross, its Senior Vice President, Chief Financial Officer
and Treasurer.
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Exhibit
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Number
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Description
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10
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.20
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Employment Agreement for Al Gianchetti dated October 25,
2007.
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10
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.21
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Form of Tax Indemnity Agreement.
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31
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.1
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Certification of the Principal Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
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31
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.2
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Certification of the Principal Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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.1
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Certification of the Chief Executive Officer and Chief Financial
Officer, as required by Section 906 of the Sarbanes-Oxley
Act of 2002.
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The certification attached as Exhibit 32 that accompanies
this Quarterly Report on
Form 10-Q
is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of
Vanda Pharmaceuticals Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Quarterly Report
on
Form 10-Q,
irrespective of any general incorporation language contained in
such filing.
47
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Vanda Pharmaceuticals Inc.
/s/ Mihael
H. Polymeropoulos, M.D.
Mihael H. Polymeropoulos, M.D.
President and Chief Executive Officer
(Principal executive officer)
November 8, 2007
Steven A. Shallcross
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal financial and accounting officer)
November 8, 2007
48
VANDA
PHARMACEUTICALS INC.
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Exhibit
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Number
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Description
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10
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.20
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Employment Agreement for Al Gianchetti dated October 25,
2007.
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10
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.21
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Form of Tax Indemnity Agreement.
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31
|
.1
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Certification of the Principal Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
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31
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.2
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Certification of the Principal Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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.1
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Certification of the Chief Executive Officer and Chief Financial
Officer, as required by Section 906 of the Sarbanes-Oxley
Act of 2002.
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The certification attached as Exhibit 32 that accompanies
this Quarterly Report on
Form 10-Q
is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of
Vanda Pharmaceuticals Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Quarterly Report
on
Form 10-Q,
irrespective of any general incorporation language contained in
such filing.
49
exv10w20
Exhibit 10.20
VANDA PHARMACEUTICALS INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (this Agreement) is entered into as of October
25, 2007, by and between Al Gianchetti (the Employee) and Vanda
Pharmaceuticals Inc., a Delaware corporation (the Company).
1. Duties and Scope of Employment.
(a) Position. For the term of his employment under this Agreement
(Employment), the Company agrees to employ the Employee in the position of
Chief Commercial Officer. The Employee shall be subject to the supervision of,
and shall have such authority as is delegated to him by, the Chief Executive
Officer of the Company, consistent with his position as Chief Commercial
Officer. The Employee hereby accepts such employment and agrees to undertake
the duties and responsibilities normally inherent in such position and such
other duties and responsibilities as the Chief Executive Officer shall from
time to time reasonably assign to him consistent with his position as Chief
Commercial Officer.
(b) Obligations to the Company. During the term of his Employment, the
Employee shall devote his full business efforts and time to the Company.
During the term of his Employment, without the prior written approval of the
Board of Directors of the Company (the Board), the Employee shall not render
services in any capacity to any other person or entity and shall not act as a
sole proprietor or partner of any other person or entity or as a shareholder
owning more than five percent of the stock of any other corporation. The
Employee shall comply with the Companys policies and rules, as they may be in
effect from time to time during the term of his Employment.
(c) No Conflicting Obligations. The Employee represents and warrants to
the Company that he is under no obligations or commitments, whether contractual
or otherwise, that are inconsistent with his obligations under this Agreement.
The Employee represents and warrants that he will not use or disclose, in
connection with his employment by the Company, any trade secrets or other
proprietary information or intellectual property in which the Employee or any
other person has any right, title or interest and that his employment by the
Company as contemplated by this Agreement will not infringe or violate the
rights of any other person or entity. The Employee represents and warrants to
the Company that he has returned all property and confidential information
belonging to any prior employers.
2. Cash and Incentive Compensation.
(a) Salary and Signing Bonus. The Company shall pay the Employee as
compensation for his services a base salary at a gross annual rate of not less
than $295,000. Such salary shall be payable in accordance with the Companys
standard payroll procedures. (The annual compensation specified in this
Subsection (a), together with any increases in such compensation that the
Company may grant from time to time, is referred to in this Agreement as Base
Compensation.). The Employee will also receive a $100,000 signing bonus that
will be become due and payable upon hire. The payment of such signing bonus
will be subject to standard federal and state taxes and will be payable in
accordance with the Companys standard payroll procedures. The Employee will
also receive a $35,000 bonus that will become due and payable once the Employee
has completed one year of continuous service to the Company. This bonus will be
subject to standard federal and state taxes and will be payable in accordance
with the Companys standard payroll procedures.
(b) Incentive Bonuses. The Employee shall be eligible to be considered
for an annual incentive bonus with a target amount equal to 25% of his Base
Compensation (the Annual Target Bonus). Such annual incentive bonus (if any)
shall be awarded based on objective or subjective criteria established in
advance by the Board or its Compensation Committee. The determinations of the
Board or its Compensation Committee with respect to such bonus shall be final
and binding. For the avoidance of doubt, (i) to be eligible for an annual
incentive bonus for any given fiscal year of the Company, the Employee must
have been employed continuously by the Company throughout such fiscal year, and
(ii) provided the Employee has been employed continuously by the Company from
the date of this Agreement through December 31, 2007, then, notwithstanding
clause (i), the Employees annual incentive bonus with respect to the Companys
2007 fiscal year will not be prorated, but will instead be based on the full
amount of Base Compensation the Employee would have been entitled to receive
had the Employee commenced his employment with the Company on January 1, 2007.
(c) Stock Option. Subject to the approval of the Board or its
Compensation Committee, the Company shall grant the Employee a nonstatutory stock
option under the Companys 2006 Equity Incentive Plan, covering 90,000 shares
of the Companys Common Stock. Such option shall be granted as soon as
reasonably practicable after the date of this Agreement. The per-share
exercise price of such option shall be equal to the fair market value of one
share of the Companys Common Stock on the date of grant. The term of such
option shall be 10 years, subject to earlier expiration in the event of the
termination of the Employees Employment. The Employee shall vest in 25% of
the option shares after the first 12 months of continuous service and shall
vest in the remaining option shares in equal monthly installments over the next
three years of continuous service. The vested and exercisable portion of the
option shall be determined by adding 24 months to the Employees actual period
of service if, after a Change in Control, (i) the Employees Employment is
terminated by the Company for reasons other than Cause or (ii) the Employees
Employment is terminated by the Employee for Good Reason. The grant of such
option shall be subject to the other terms and conditions set forth in the
Companys 2006 Equity Incentive Plan, and the Companys standard form of stock
option agreement under such Plan.
(d) Restricted Stock Grant. Subject to the approval of the Board or its
Compensation Committee, the Company shall also award the Employee as
compensation 3,000 shares of the Companys Common Stock under the Companys
2006 Equity Incentive Plan, which shall be Restricted Shares as defined in
such Plan. The Employee shall vest in 25% of such Restricted Shares on each of
the first, second, third and fourth anniversaries of this agreement. The vested
portion of the Restricted Shares shall be determined by adding 24 months to the
Employees actual period of service if, after a Change in Control, (i) the
Employees Employment is terminated by the Company for reasons other than Cause
or (ii) the Employees Employment is terminated by the Employee for Good
Reason. The Restricted Shares shall be subject to the terms of the Companys
2006 Equity Incentive Plan and such other terms as shall be determined by the
Board or its Compensation Committee, and shall be evidenced by a restricted
stock agreement to be executed by the Employee and the Company as soon as
reasonably practicable following approval thereof.
2
For purposes of the foregoing paragraphs (c) and (d):
Change in Control shall mean (i) the consummation of a merger or
consolidation of the Company with or into another entity, if persons who were
not stockholders of the Company immediately prior to such merger or
consolidation own immediately after such merger or consolidation 50% or more of
the voting power of the outstanding securities of each of (A) the continuing or
surviving entity and (B) any direct or indirect parent corporation of such
continuing or surviving entity; or (ii) the sale, transfer or other disposition
of all or substantially all of the Companys assets. A transaction shall not
constitute a Change in Control if its sole purpose is to change the state of
the Companys incorporation or to create a holding company that will be owned
in substantially the same proportions by the persons who held the Companys
securities immediately before such transaction.
Cause shall mean (i) an unauthorized use or disclosure of the Companys
confidential information or trade secrets, which use or disclosure causes
material harm to the Company; (ii) a material breach of any agreement between
Employee and the Company; (iii) a material failure to comply with the Companys
written policies or rules; (iv) conviction of, or plea of guilty or no
contest to, a felony under the laws of the United States or any state thereof;
(v) gross negligence or willful misconduct which causes material harm to the
Company; or (vi) a continued failure to perform assigned duties after receiving
written notification of such failure from the Board; or (vii) a failure by the
Employee to cooperate in good faith with a governmental or internal
investigation of the Company or its directors, officers or employees, if the
Company has requested the Employees cooperation.
Good Reason shall mean any of the following events, if such event occurs
without the Employees consent: (i) the Employees receipt of notice that his
principal workplace will be relocated more than 30 miles; (ii) a reduction in
the Employees base salary by more than 10%, unless pursuant to a Company-wide
reduction affecting all employees proportionately; or (iii) a change in
Employees position with the Company that materially reduces his level of
authority or responsibility.
3. Vacation and Employee Benefits. During the term of his Employment, the
Employee shall be eligible for 20 paid vacation days each year in accordance
with the Companys standard policy for similarly situated employees, as it may
be amended from time to time. During the term of his Employment (and beginning
on the first day of such Employment), the Employee shall be eligible to
participate in any employee benefit plans maintained by the Company for
similarly situated employees, subject in each case to the generally applicable
terms and conditions of the plan in question, the completion of any required
enrollment forms and the determinations of any person or committee
administering such plan.
4. Business Expenses. During the term of his Employment, the Employee
shall be authorized to incur necessary and reasonable travel, entertainment and
other business expenses in connection with his duties hereunder. The Company
shall reimburse the Employee for such expenses upon presentation of an itemized
account and appropriate supporting documentation, all in accordance with the
Companys generally applicable policies.
3
5. Term of Employment.
(a) Basic Rule. The Company agrees to continue the Employees Employment,
and the Employee agrees to remain in Employment with the Company, from the date
of this Agreement until the date when the Employees Employment terminates
pursuant to Subsection (b) or (c) below. The Employees Employment with the
Company shall be at will, meaning that either the Employee or the Company may
terminate the Employees Employment at any time, with or without cause. Any
contrary representations which may have been made to the Employee shall be
superseded by this Agreement. This Agreement shall constitute the full and
complete agreement between the Employee and the Company on the at will nature
of the Employees Employment, which may only be changed in an express written
agreement signed by the Employee and a duly authorized officer of the Company.
(b) Termination. The Company may terminate the Employees Employment at
any time and for any reason (or no reason), and with or without cause, by
giving the Employee notice in writing. The Employee may terminate his
Employment by giving the Company 14 days advance notice in writing. The
Employees Employment shall terminate automatically in the event of his death.
(c) Permanent Disability. The Company may terminate the Employees
Employment due to Permanent Disability by giving the Employee 30 days advance
notice in writing. For all purposes under this Agreement, Permanent
Disability shall mean that the Employee, at the time notice is given, has
failed to perform his duties under this Agreement for a period of not less than
90 consecutive days as the result of his incapacity due to physical or mental
injury, disability or illness. In the event that the Employee satisfactorily
resumes the performance of substantially all of his duties hereunder before the
termination of his Employment under this Subsection (c) becomes effective, the
notice of termination shall automatically be deemed to have been revoked.
(d) Rights Upon Termination. Except as expressly provided in Section 6,
upon the termination of the Employees Employment pursuant to this Section 5,
the Employee shall only be entitled to the compensation, benefits and
reimbursements described in Sections 2, 3 and 4 for the period preceding the
effective date of the termination. The payments under this Agreement shall
fully discharge all responsibilities of the Company to the Employee.
(e) Termination of Agreement. This Agreement shall terminate when all
obligations of the parties hereunder have been satisfied. The termination of
this Agreement shall not limit or otherwise affect any of the Employees
obligations under Section 7.
6. Termination Benefits.
(a) General Release. Any other provision of this Agreement
notwithstanding, Subsections (b) and (d) below shall not apply unless the
Employee (i) has executed a general release (in a form prescribed by the
Company) of all known and unknown claims that he may then have against the
Company or persons affiliated with the Company and (ii) has agreed not to
prosecute any legal action or other proceeding based upon any of such claims.
The release shall be in a form prescribed by the Company, without alterations.
The Company shall deliver the form to the Employee within 30 days after his
Employment termination date. The Employee shall execute the release within the
period set forth in the form.
4
(b) Severance Pay. If, during the term of this Agreement, the Company
terminates the Employees Employment for any reason other than Cause or
Permanent Disability, then the Company shall pay the Employee:
(i) Base Compensation. His Base Compensation for a period of 12 months
following the termination of his Employment (the Continuation Period). Such
Base Compensation shall be paid at the rate in effect at the time of the
termination of Employment and in accordance with the Companys standard payroll
procedures.
(ii) Bonus Compensation. A bonus (the Severance Bonus) in an amount
determined as follows:
(A) If the Employees Employment is terminated prior to the first
anniversary of the date of this Agreement, the Severance Bonus shall be equal
to a pro-rata portion of the anticipated first-year Annual Target Bonus as
determined by the Board in good faith.
(B) If the Employees Employment is terminated on or following the first
anniversary of the date of this Agreement and prior to the third anniversary of
the date of this Agreement, the Severance Bonus shall be equal to the greater
of (I) the most recent Annual Target Bonus and (II) the average of Annual
Target Bonuses awarded for the prior years.
(C) If the Employees Employment is terminated on or following the third
anniversary of the date of this Agreement, the Severance Bonus shall be equal
to the greater of (I) the most recent Annual Target Bonus) and (II) the average
of Annual Target Bonuses awarded for the prior three years.
Such Severance Bonus shall be payable in accordance with the Companys standard
payroll procedures.
(c) Section 409A. If the Company determines that the Employee is a
specified employee under Section 409A(a)(2)(B)(i) of the Internal Revenue
Code of 1986, as amended (the Code), and the regulations thereunder when his
Employment terminates, then (i) the salary continuation payments under
Subsection (b)(i), to the extent not exempt from Section 409A of the Code,
shall commence on the earliest practicable date that occurs more than six
months after the Employment termination date, (ii) the installments that
otherwise would have been paid under Subsection (b)(i) during the first six
months following the Employment termination date shall be paid in a lump sum on
the earliest practicable date in the seventh month after the Employment
termination date and (iii) the Severance Bonus, to the extent not exempt from
Section 409A of the Code, shall be paid on the earliest practicable date in the
seventh month after the Employment termination date.
(d) Health Insurance. If Subsection (b) above applies, and if the
Employee elects to continue his health insurance coverage under the
Consolidated Omnibus Budget Reconciliation Act (COBRA) following the
termination of his Employment, then the Company shall pay the Employees
monthly premium under COBRA until the earliest of (i) the close of the
Continuation Period, (ii) the expiration of the Employees continuation
coverage under COBRA and (iii) the date when the Employee is offered
substantially equivalent health insurance coverage in connection with new
employment or self-employment.
5
7. Non-Solicitation, Non-Disclosure and Non-Competition. The Employee has
entered into a Proprietary Information and Inventions Agreement with the
Company, which agreement is incorporated herein by reference.
8. Successors.
(a) Companys Successors. This Agreement shall be binding upon any
successor (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Companys business and/or assets. For all purposes under this Agreement, the
term Company shall include any successor to the Companys business and/or
assets which becomes bound by this Agreement.
(b) Employees Successors. This Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employees
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees.
9. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by overnight courier, U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
(b) Modifications and Waivers. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No other agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement and the
Proprietary Information and Inventions Agreement contain the entire
understanding of the parties with respect to the subject matter hereof.
(d) Withholding Taxes. All payments made under this Agreement shall be
subject to reduction to reflect taxes or other charges required to be withheld
by law.
6
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Maryland (except their provisions governing the choice of law).
(f) Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(g) Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof, or the Employees Employment or the
termination thereof, shall be settled in the State of Maryland, by arbitration
in accordance with the National Rules for the Resolution of Employment Disputes
of the American Arbitration Association. The decision of the arbitrator shall
be final and binding on the parties, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
parties hereby agree that the arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and the Employee shall share equally all fees and expenses of the
arbitrator. The Employee hereby consents to personal jurisdiction of the state
and federal courts located in the State of Maryland for any action or
proceeding arising from or relating to this Agreement or relating to any
arbitration in which the parties are participants.
(h) No Assignment. This Agreement and all rights and obligations of the
Employee hereunder are personal to the Employee and may not be transferred or
assigned by the Employee at any time. The Company may assign its rights under
this Agreement to any entity that assumes the Companys obligations hereunder
in connection with any sale or transfer of all or a substantial portion of the
Companys assets to such entity.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
7
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the date first
written above.
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/s/ Al Gianchetti
Al Gianchetti |
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VANDA PHARMACEUTICALS INC. |
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By: /s/ Mihael H. Polymeropoulos
Title: CEO |
8
exv10w21
Exhibit 10.21
TAX INDEMNITY AGREEMENT
This Tax Indemnity Agreement (this Agreement) is made as of this 7 day
of November, 2007 by and between Vanda Pharmaceuticals Inc. (the Company) and
Al Gianchetti (the Executive).
WHEREAS, the Compensation Committee of the Companys Board of Directors
has determined that the Company should enter into tax indemnity agreements with
certain of its executives to reimburse certain excise taxes, interest and
penalties they may be obligated to pay in connection with a change of control
of the Company, so that the Company may preserve the financial incentives the
Company created by granting stock options to those executives, and so that the
Company may also continue to provide motivation for those executives to stay
with the Company and act in its best interests.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged and agreed to, the parties hereto agree as follows:
1. Gross-Up Payment. If it is determined that any payment or distribution
of any type to the Executive or for his benefit by the Company, any of its
affiliates, any person who acquires ownership or effective control of the
Company or ownership of a substantial portion of the Companys assets (within
the meaning of section 280G of the Internal Revenue Code of 1986, as amended
(the Code), and the regulations thereunder) or any affiliate of such person,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (the Total Payments), would be subject to the
excise tax imposed by section 4999 of the Code or any interest or penalties
with respect to such excise tax (such excise tax and any such interest or
penalties are collectively referred to as the Excise Tax), then the Executive
shall be entitled to receive an additional payment (a Gross-Up Payment) in an
amount calculated to ensure that after the Executive pays all taxes (and any
interest or penalties imposed with respect to such taxes), including any Excise
Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.
2. Determination by Accountant. All determinations and calculations
required to be made under this Agreement shall be made by an independent
accounting firm selected by the Executive from among the largest five
accounting firms in the United States (the Accounting Firm). The Accounting
Firm shall provide its determination (the Determination), together with
detailed supporting calculations regarding the amount of any Gross-Up Payment
and any other relevant matter, to the Executive and the Company within five
days after the Executive or the Company made a request (if the Executive
reasonably believes that any of the Total Payments may be subject to the Excise
Tax). If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive with a written statement that it has
concluded that no Excise Tax is payable (including the reasons therefor) and
that the Executive has substantial authority not to report any Excise Tax on
his federal income tax return. If a Gross-Up Payment is determined to be
payable, it shall be paid to the Executive within five days after the
Determination has been delivered to him or the Company. Any determination by
the Accounting Firm shall be binding upon the Company and the Executive, absent
manifest error.
3. Over- and Underpayments. As a result of uncertainty in the application
of section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments not made by
the Company should have been made (Underpayment) or that Gross-Up Payments
will have been made by the Company that should not have been made
(Overpayment). In either event, the Accounting Firm shall determine the
amount of the Underpayment or Overpayment that has occurred. In the case of an
Underpayment, the Company shall promptly pay the amount of such Underpayment to
the Executive or for his benefit. In the case of an Overpayment, the Executive
shall, at the direction and expense of the Company, take such steps as are
reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the
Company, and otherwise reasonably cooperate with the Company to correct such
Overpayment, provided, however, that (i) the Executive shall in no event be
obligated to return to the Company an amount greater than the net after-tax
portion of the Overpayment that the Executive has retained or has recovered as
a refund from the applicable taxing authorities and (ii) this provision shall
be interpreted in a manner consistent with the intent of paragraph 1 above,
which is to make the Executive whole, on an after-tax basis, from the
application of the Excise Tax, it being understood that the correction of an
Overpayment may result in the Executives repaying to the Company an amount
that is less than the Overpayment.
4. Limitation on Parachute Payments. Any other provision of this
Agreement notwithstanding, if the Excise Tax could be avoided by reducing the
Total Payments by $25,000 or less, then the Total Payments shall be reduced to
the extent necessary to avoid the Excise Tax and no Gross-Up Payment shall be
made. If the Accounting Firm determines that the Total Payments are to be
reduced under the preceding sentence, then the Company shall promptly give the
Executive notice to that effect and a copy of the detailed calculation thereof.
The Executive may then elect, in his sole discretion, which and how much of
the Total Payments are to be eliminated or reduced (as long as after such
election no Excise Tax shall be payable), and the Executive shall advise the
Company in writing of his election within 10 days of receipt of notice. If the
Executive make no such election within such 10-day period, then the Company may
elect which and how much of the Total Payments are to be eliminated or reduced
(as long as after such election no Excise Tax shall be payable), and it shall
notify the Executive promptly of such election.
[The rest of this page has been intentionally left blank.]
IN WITNESS WHEREOF, the Company and the Executive have duly executed this
Agreement as of the date first written above.
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VANDA PHARMACEUTICALS INC. |
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By: /s/ Mihael H. Polymeropoulos |
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Title: CEO |
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By: /s/ Al Gianchetti
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Title: SVP, Chief Commercial Officer |
exv31w1
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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I, Mihael H. Polymeropoulos, certify that: |
1. |
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I have reviewed this quarterly report on Form 10-Q of Vanda Pharmaceuticals Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have: |
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a. |
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designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; |
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b. |
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[Paragraph omitted in accordance with SEC Release 34-47986] |
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c. |
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evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
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d. |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
5. |
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The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions): |
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a. |
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all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
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b. |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting. |
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Date: November 8, 2007
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/s/ Mihael H. Polymeropoulos
Mihael H. Polymeropoulos
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Chairman and Chief Executive Officer
(Principal Executive Officer) |
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exv31w2
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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I, Steven A. Shallcross, certify that: |
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1. |
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I have reviewed this quarterly report on Form 10-Q of Vanda Pharmaceuticals Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have: |
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a. |
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designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; |
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b. |
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[Paragraph omitted in accordance with SEC Release 34-47986] |
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c. |
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evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
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d. |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
5. |
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The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions): |
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a. |
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all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
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b. |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting. |
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Date: November 8, 2007
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/s/ Steven A. Shallcross |
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Steven A. Shallcross
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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exv32w1
EXHIBIT 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section
1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Vanda
Pharmaceuticals Inc., (the Company), does hereby certify, to the best of such officers knowledge,
that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the Form 10-Q) of
the Company fully complies with the requirements of Section 13(a) and 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the Company.
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Date: November 8, 2007
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/ S / Mihael H. Polymeropoulos
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Mihael H. Polymeropoulos
Chairman and Chief Executive Officer
(Principal Executive Officer) |
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Date: November 8, 2007
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/ S / Steven A. Shallcross |
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Steven A. Shallcross
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission
(SEC) or its staff upon request. This certification accompanies the Form 10-Q to which it
relates, is not deemed filed with the SEC and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any
general incorporation language contained in such filing.