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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     
Commission File Number: 001-34186

VANDA PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter)

Delaware03-0491827
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2200 Pennsylvania Avenue NW, Suite 300 E
Washington, DC 20037
(202) 734-3400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each ClassTrading SymbolName of Exchange on Which Registered
Common Stock, par value $0.001 per shareVNDAThe Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x  Accelerated filer 
Non-accelerated filer   Smaller reporting company 
   Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x

As of July 30, 2020, there were 54,651,399 shares of the registrant’s common stock issued and outstanding.


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Vanda Pharmaceuticals Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2020
Table of Contents
 
  Page
ITEM 1
ITEM 2
ITEM 3
ITEM 4
ITEM 1
ITEM 1A
ITEM 2
ITEM 3
ITEM 4
ITEM 5
ITEM 6
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “goal,” “likely,” “will,” “would,” and “could,” or the negative of these terms and similar expressions or words, identify forward-looking statements. Forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. The forward-looking statements in this quarterly report on Form 10-Q may include, among other things, statements about:
 
the ability of Vanda Pharmaceuticals Inc. (we, our, the Company or Vanda) to continue to commercialize HETLIOZ® (tasimelteon) for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) in the United States (U.S.) and Europe;
our ability to increase market awareness of Non-24 and the market acceptance of HETLIOZ®;
our ability to continue to generate U.S. sales of Fanapt® (iloperidone) for the treatment of schizophrenia;
the impact of the novel coronavirus (COVID-19) on our business and operations, including our revenues, our supply chain, our commercial activities, our ongoing and planned clinical trials and our regulatory activities;
our dependence on third-party manufacturers to manufacture HETLIOZ® and Fanapt® in sufficient quantities and quality;
our level of success in commercializing HETLIOZ® and Fanapt® in new markets;
our ability to reach agreement with the U.S. Food and Drug Administration (FDA) regarding our regulatory approval strategy, preclinical animal testing requirements or proposed path to approval for tradipitant;
our ability to prepare, file, prosecute, defend and enforce any patent claims and other intellectual property rights;
our ability to maintain rights to develop and commercialize our products under our license agreements;
our ability to obtain approval from the FDA for HETLIOZ® for the treatment of Smith-Magenis Syndrome (SMS) and jet lag disorder;
the ability to obtain and maintain regulatory approval of our products, and the labeling for any approved products;
our expectations regarding the timing and success of preclinical studies and clinical trials;
the ability of our products to be demonstrably safe and effective;
limitations on our ability to utilize some or all of our prior net operating losses and orphan drug and research and development credits;
the size and growth of the potential markets for our products and the ability to serve those markets;
our expectations regarding trends with respect to our revenues, costs, expenses, liabilities and cash, cash equivalents and marketable securities;
the scope, progress, expansion and costs of developing and commercializing our products;
our ability to identify or obtain rights to new products;
our ability to attract and retain key scientific or management personnel;
the cost and effects of litigation;
our ability to obtain the capital necessary to fund our research and development or commercial activities;
regulatory developments in the U.S., Europe and other jurisdictions;
potential losses incurred from product liability claims made against us; and
the use of our existing cash, cash equivalents and marketable securities.
All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report. We caution investors not to rely too heavily on the forward-looking statements we make or that are made on our behalf. We undertake no obligation, and specifically decline any obligation, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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We encourage you to read Management’s Discussion and Analysis of Financial Condition and Results of Operations and our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q. In addition to the risks described below and in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended December 31, 2019, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the Securities and Exchange Commission from time to time, including on Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
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Part I — FINANCIAL INFORMATION 
ITEM 1Financial Statements (Unaudited)
VANDA PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
(in thousands, except for share and per share amounts)June 30,
2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$95,305  $45,072  
Marketable securities244,544  267,057  
Accounts receivable, net24,587  26,367  
Inventory1,384  1,140  
Prepaid expenses and other current assets15,041  14,500  
Total current assets380,861  354,136  
Property and equipment, net3,744  3,864  
Operating lease right-of-use assets10,601  11,180  
Intangible assets, net22,298  23,037  
Deferred tax assets85,558  87,680  
Non-current inventory and other3,569  3,851  
Total assets$506,631  $483,748  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities$28,398  $27,590  
Product revenue allowances33,194  31,915  
Total current liabilities61,592  59,505  
Operating lease non-current liabilities
11,720  12,455  
Other non-current liabilities
1,735  843  
Total liabilities75,047  72,803  
Commitments and contingencies (Notes 8 and 13)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000,000 shares authorized, and no shares issued or outstanding at June 30, 2020 and December 31, 2019
    
Common stock, $0.001 par value; 150,000,000 shares authorized; 54,628,336 and 53,549,612 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
55  54  
Additional paid-in capital
642,398  631,307  
Accumulated other comprehensive income596  249  
Accumulated deficit(211,465) (220,665) 
Total stockholders’ equity431,584  410,945  
Total liabilities and stockholders’ equity$506,631  $483,748  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VANDA PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 Three Months EndedSix Months Ended
(in thousands, except for share and per share amounts)June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Revenues:
Net product sales$62,207  $59,060  $120,207  $106,773  
Total revenues62,207  59,060  120,207  106,773  
Operating expenses:
Cost of goods sold excluding amortization5,847  6,368  11,054  11,481  
Research and development12,903  10,950  28,430  24,228  
Selling, general and administrative33,917  31,468  70,938  62,497  
Intangible asset amortization369  379  739  759  
Total operating expenses53,036  49,165  111,161  98,965  
Income from operations9,171  9,895  9,046  7,808  
Other income1,918  1,649  3,284  3,134  
Income before income taxes11,089  11,544  12,330  10,942  
Provision for income taxes2,375  18  3,130  28  
Net income$8,714  $11,526  $9,200  $10,914  
Net income per share:
Basic$0.16  $0.22  $0.17  $0.21  
Diluted$0.16  $0.21  $0.17  $0.20  
Weighted average shares outstanding:
Basic54,501,308  53,101,499  54,153,812  52,928,101  
Diluted55,081,397  54,579,982  54,975,771  54,932,932  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VANDA PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 Three Months EndedSix Months Ended
(in thousands)June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Net income$8,714  $11,526  $9,200  $10,914  
Other comprehensive income (loss):
Net foreign currency translation gain (loss)10  6  (3) 2  
Change in net unrealized gain (loss) on marketable securities
(252) 245  453  383  
Tax provision on other comprehensive income (loss)
57    (103)   
Other comprehensive income (loss), net of tax(185) 251  347  385  
Comprehensive income$8,529  $11,777  $9,547  $11,299  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VANDA PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
 
 Common StockAdditional
Paid-in
Capital
Other
Comprehensive
Income
Accumulated
Deficit
Total
(in thousands, except for share amounts)SharesPar Value
Balances at December 31, 201953,549,612  $54  $631,307  $249  $(220,665) $410,945  
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
582,724    479  —  —  479  
Stock-based compensation expense—  —  3,944  —  —  3,944  
Net income—  —  —  —  486  486  
Other comprehensive income, net of tax
—  —  —  532  —  532  
Balances at March 31, 202054,132,336  54  635,730  781  (220,179) 416,386  
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
496,000  1  3,599  —  —  3,600  
Stock-based compensation expense—  —  3,069  —  —  3,069  
Net income—  —  —  —  8,714  8,714  
Other comprehensive loss, net of tax
—  —  —  (185) —  (185) 
Balances at June 30, 202054,628,336  $55  $642,398  $596  $(211,465) $431,584  
 Common StockAdditional
Paid-in
Capital
Other
Comprehensive Income
Accumulated
Deficit
Total
(in thousands, except for share amounts)SharesPar Value
Balances at December 31, 201852,477,593  $52  $611,587  $1  $(336,218) $275,422  
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
485,083  1  178  —  —  179  
Stock-based compensation expense—  —  3,282  —  —  3,282  
Net loss—  —  —  —  (612) (612) 
Other comprehensive income, net of tax
—  —  —  134  —  134  
Balances at March 31, 201952,962,676  53  615,047  135  (336,830) 278,405  
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
302,108    3,411  —  —  3,411  
Stock-based compensation expense—  —  3,101  —  —  3,101  
Net income—  —  —  —  11,526  11,526  
Other comprehensive income, net of tax
—  —  —  251  —  251  
Balances at June 30, 201953,264,784  $53  $621,559  $386  $(325,304) $296,694  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VANDA PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months Ended
(in thousands)June 30,
2020
June 30,
2019
Cash flows from operating activities
Net income$9,200  $10,914  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment694  672  
Stock-based compensation7,013  6,383  
Amortization of premiums and accretion of discounts on marketable securities(420) (1,848) 
Gain on sale of marketable securities(229)   
Intangible asset amortization739  759  
Deferred income taxes2,019    
Other non-cash adjustments, net695  740  
Changes in operating assets and liabilities:
Accounts receivable1,672  4,851  
Prepaid expenses and other assets(591) 681  
Inventory10  (191) 
Accounts payable and other liabilities883  5,159  
Product revenue allowances1,414  2,038  
Net cash provided by operating activities23,099  30,158  
Cash flows from investing activities
Purchases of property and equipment(583) (657) 
Purchases of marketable securities(151,124) (191,293) 
Sales and maturities of marketable securities174,739  143,745  
Net cash provided by (used in) investing activities23,032  (48,205) 
Cash flows from financing activities
Proceeds from the exercise of stock options4,079  3,590  
Net cash provided by financing activities4,079  3,590  
Effect of exchange rate changes on cash, cash equivalents and restricted cash23  (5) 
Net change in cash, cash equivalents and restricted cash50,233  (14,462) 
Cash, cash equivalents and restricted cash
Beginning of period45,650  61,749  
End of period$95,883  $47,287  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VANDA PHARMACEUTICALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business Organization and Presentation
Business organization
Vanda Pharmaceuticals Inc. (the Company) is a leading global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. The Company commenced its operations in 2003 and operates in one reporting segment.
The Company’s commercial portfolio is currently comprised of two products, HETLIOZ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first treatment for Non-24 approved by the U.S. Food and Drug Administration (FDA). In addition, the Company has a number of drugs in development, including:
 
HETLIOZ® (tasimelteon) for the treatment of Smith-Magenis Syndrome (SMS), jet lag disorder (JLD), pediatric Non-24 and delayed sleep phase disorder (DSPD);
Fanapt® (iloperidone) for the treatment of bipolar disorder and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
Tradipitant (VLY-686), a small molecule neurokinin-1 receptor (NK-1R) antagonist, for the treatment of atopic dermatitis, gastroparesis, motion sickness and COVID-19 Acute Respiratory Distress Syndrome (ARDS);
VTR-297, a small molecule histone deacetylase (HDAC) inhibitor for the treatment of hematologic malignancies and with potential use as a treatment for several oncology indications;
VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, with potential use for the treatment of psychiatric disorders; and
Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors for the treatment of dry eye and ocular inflammation and for the treatment of secretory diarrhea disorders, including cholera.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in the Company's annual report on Form 10-K (Annual Report) for the fiscal year ended December 31, 2019. The financial information as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or any future year or period.
2. Summary of Significant Accounting Policies
There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
For purposes of the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows, cash equivalents represent highly-liquid investments with a maturity date of three months or less at the date of purchase. Cash and
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cash equivalents include investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Restricted cash relates primarily to amounts held as collateral for letters of credit for leases for office space at the Company’s Washington, D.C. headquarters. 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total end of period cash, cash equivalents and restricted cash reported within the Condensed Consolidated Statement of Cash Flows:
(in thousands)June 30,
2020
June 30,
2019
Cash and cash equivalents$95,305  $46,543  
Restricted cash included in:
Prepaid expenses and other current assets  157  
Non-current inventory and other578  587  
Total cash, cash equivalents and restricted cash
$95,883  $47,287  
Revenue from Net Product Sales
The Company’s net product sales consist of sales of HETLIOZ® and Fanapt®. Net sales by product for the three and six months ended June 30, 2020 and 2019 were as follows:
 
 Three Months EndedSix Months Ended
(in thousands)June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
HETLIOZ® net product sales
$41,561  $37,835  $76,897  $66,792  
Fanapt® net product sales
20,646  21,225  43,310  39,981  
Total net product sales$62,207  $59,060  $120,207  $106,773  
Major Customers
HETLIOZ® is available in the U.S. for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. The Company invoices and records revenue when its customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse which is the point at which control is transferred to the customer. There were five major customers that each accounted for more than 10% of total revenues and, as a group, represented 96% of total revenues for the six months ended June 30, 2020. There were five major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 93% of total accounts receivable at June 30, 2020. Receivables are carried at transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and incorporating current conditions and forward-looking estimates.
Certain Risks and Uncertainties
In December 2019, a novel strain of coronavirus (COVID-19) surfaced in Wuhan, China. Since then, COVID-19 has spread to nearly every country in the world, including the U.S. The COVID-19 pandemic continues to rapidly evolve. The extent to which the outbreak may impact the Company's business, financial condition and results of operations will depend on future developments, which are highly uncertain and the effects of which cannot be reasonably estimated at this time.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the impairment model for most financial assets and certain other financial instruments. The standard requires the use of a forward-looking “expected loss” model for instruments measured at amortized cost that generally will result in the earlier recognition of allowances for losses. The standard is effective for years beginning after December 15, 2019, and interim periods within annual periods beginning
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after December 15, 2019. The adoption of this standard on January 1, 2020 did not have a material impact on the Company's condensed consolidated financial results.
3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of June 30, 2020, which all have contractual maturities of less than two years:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
(in thousands)
U.S. Treasury and government agencies$149,821  $309  $(10) $150,120  
Corporate debt93,963  461    94,424  
Total marketable securities$243,784  $770  $(10) $244,544  
The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2019, which all have contractual maturities of less than two years:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
(in thousands)
U.S. Treasury and government agencies$88,535  $68  $(2) $88,601  
Corporate debt129,860  196  (1) 130,055  
Asset-backed securities48,355  49  (3) 48,401  
Total marketable securities$266,750  $313  $(6) $267,057  
4. Fair Value Measurements
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
 
Level 1 — defined as observable inputs such as quoted prices in active markets
Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
Marketable securities classified in Level 1 and Level 2 as of June 30, 2020 and December 31, 2019 consist of cash equivalents and available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of investments classified in Level 2 is also determined using a market approach based upon quoted prices for similar assets in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities include certificates of deposit, commercial paper, corporate notes and asset-backed securities that use as their basis readily observable market parameters.
As of June 30, 2020, the Company held certain assets that are required to be measured at fair value on a recurring basis, as follows:
  Fair Value Measurement as of June 30, 2020 Using
Total Fair ValueQuoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
(in thousands)(Level 1)(Level 2)(Level 3)
U.S. Treasury and government agencies$150,120  $150,120  $  $  
Corporate debt136,942    136,942    
Total assets measured at fair value$287,062  $150,120  $136,942  $  
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As of December 31, 2019, the Company held certain assets that are required to be measured at fair value on a recurring basis, as follows:
Fair Value Measurement as of December 31, 2019 Using
Total Fair ValueQuoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
(in thousands)(Level 1)(Level 2)(Level 3)
U.S. Treasury and government agencies$88,601  $88,601  $  $  
Corporate debt137,025    137,025    
Asset-backed securities48,401    48,401    
Total assets measured at fair value$274,027  $88,601  $185,426  $  
Total assets measured at fair value as of June 30, 2020 and December 31, 2019 include $42.5 million and $7.0 million of cash equivalents, respectively.
The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, accounts receivable, restricted cash, accounts payable and accrued liabilities, product revenue allowances and milestone obligations under license agreements, the carrying values of which materially approximate their fair values.
5. Inventory
The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Inventory levels are evaluated for the amount of inventory that would be sold within one year. At certain times, the level of inventory can exceed the forecasted level of cost of goods sold for the next twelve months. The Company classifies the estimate of such inventory as non-current.
Inventory consisted of the following as of June 30, 2020 and December 31, 2019:
(in thousands)June 30,
2020
December 31, 2019
Current assets
Finished goods$1,384  $1,140  
Total inventory, current$1,384  $1,140  
Non-Current assets
Raw materials$745  $659  
Work-in-process1,247  1,109  
Finished goods552  1,056  
Total inventory, non-current2,544  2,824  
Total inventory$3,928  $3,964  
6. Intangible Assets
HETLIOZ®. In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ®. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $8.0 million to BMS. The $8.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in July 2035.
In April 2018, the Company met its final milestone under its license agreement with BMS when cumulative worldwide sales of HETLIOZ® reached $250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in 2018. The $25.0 million, which was capitalized as an intangible asset in the first quarter of 2015, was determined to be additional consideration for the acquisition of the HETLIOZ® intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in July 2035.
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The estimated economic useful life of both the $8.0 million and the $25.0 million intangible assets were changed from February 2035 to July 2035 based on the July 2035 expiration date of U.S. patent number 10,376,487 ('487 Patent) issued by the U.S. Patent and Trademark Office in August 2019.
The following is a summary of the Company’s intangible assets as of June 30, 2020:
 
  June 30, 2020
(in thousands)Estimated
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
HETLIOZ®
July 2035$33,000  $10,702  $22,298  
The following is a summary of the Company’s intangible assets as of December 31, 2019:
 
  December 31, 2019
(in thousands)Estimated
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
HETLIOZ®
July 2035$33,000  $9,963  $23,037  
As of June 30, 2020 and December 31, 2019, the Company also had $27.9 million of fully amortized intangible assets related to Fanapt®.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense was $0.4 million for each of the three months ended June 30, 2020 and 2019. Amortization expense was $0.7 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively. The following is a summary of the future intangible asset amortization schedule as of June 30, 2020:
(in thousands)Total20202021202220232024Thereafter
HETLIOZ®
$22,298  $739  $1,478  $1,478  $1,478  $1,478  $15,647  
7. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of June 30, 2020 and December 31, 2019:
(in thousands)June 30,
2020
December 31, 2019
Research and development expenses$6,459  $5,893  
Consulting and other professional fees6,286  5,376  
Compensation and employee benefits5,536  6,597  
Royalties payable5,418  5,904  
Operating lease liabilities2,181  2,147  
Other2,518  1,673  
Total accounts payable and accrued liabilities$28,398  $27,590  
8. Commitments and Contingencies
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 Company’s 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 Company’s 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 conditions.
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License Agreements
The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies.
HETLIOZ®. In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ®. As of June 30, 2020, the Company has paid BMS $37.5 million in upfront fees and milestone obligations, including $33.0 million of regulatory approval and commercial milestones capitalized as intangible assets (see Note 6). The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ® net sales to BMS in any territory where the Company commercializes HETLIOZ® for a period equal to the greater of 10 years following the first commercial sale in the territory or the expiry of the new chemical entity (NCE) patent in that territory. During the period prior to the expiry of the NCE patent in a territory, the Company is obligated to pay a 10% royalty on net sales in that territory. The royalty rate is decreased by half for countries in which no NCE patent existed or for the remainder of the 10 years after the expiry of the NCE patent. The Company is also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments and milestone and other payments (excluding royalties) that it receives from a third party in connection with any sublicensing arrangement, at a rate which is in the mid-twenties. The Company is obligated to use its commercially reasonable efforts to develop and commercialize HETLIOZ®.
Fanapt®. Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to the Company on December 31, 2014. The Company paid directly to Sanofi S.A (Sanofi) a fixed royalty of 3% of net sales through December 2019 related to manufacturing know-how. The Company is also obligated to pay Sanofi a fixed royalty on Fanapt® net sales equal to 6% on Sanofi know-how not related to manufacturing under certain conditions for a period of up to 10 years in markets where the NCE patent has expired or was not issued. The Company is obligated to pay this 6% royalty on net sales in the U.S. through November 2026.
Tradipitant. In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1R antagonist, tradipitant, for all human indications. Lilly is eligible to receive future payments based upon achievement of specified development, regulatory approval and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. As of June 30, 2020, the Company has paid Lilly $3.0 million in upfront fees and development milestones, including a $2.0 million milestone payment in July 2018 as a result of enrolling the first subject into a Phase III study for tradipitant. As of June 30, 2020, remaining milestone obligations include a $2.0 million development milestone due upon the filing of the first marketing authorization for tradipitant in either the U.S. or European Union (E.U.), $10.0 million and $5.0 million for the first approval of a marketing authorization for tradipitant in the U.S. and E.U., respectively, and up to $80.0 million for sales milestones. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.
VQW-765. In connection with a settlement agreement with Novartis relating to Fanapt®, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens.
Portfolio of CFTR activators and inhibitors. In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which the Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including current pre-investigational new drug development work. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as single-digit royalties on net sales. As of June 30, 2020, the Company has paid UCSF $1.2 million in upfront fees and development milestones, including an upfront license fee payment of $1.0 million in 2017 and a $0.2 million development milestone payment in March 2019. As of June 30, 2020, remaining milestone obligations include $12.2 million for development milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $12.2 million  in development milestones is a $350,000 milestone due upon the conclusion of a Phase I study for each licensed product but not to exceed $1.1 million in total for the CFTR portfolio.
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Purchase Commitments
In the course of its business, the Company regularly enters into agreements with clinical organizations to provide services relating to clinical development and clinical manufacturing activities under fee service arrangements. The Company’s current agreements for clinical, marketing, and other services may be terminated on generally 90 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 Company’s contractors in closing out work in progress as of the effective date of termination. Noncancellable long-term contractual cash obligations include noncancellable purchase commitments longer than one year and primarily relate to commitments for data services, of which $0.5 million, $1.0 million and $0.5 million are expected to be paid in 2020, 2021 and 2022, respectively.
9. Accumulated Other Comprehensive Income
The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows as of June 30, 2020 and December 31, 2019:
(in thousands)June 30,
2020
December 31, 2019
Foreign currency translation$10  $13  
Unrealized gain on marketable securities 586  236  
Accumulated other comprehensive income$596  $249  
10. Stock-Based Compensation
As of June 30, 2020, there were 5,445,343 shares that were subject to outstanding options and restricted stock units (RSUs) under the 2006 Equity Incentive Plan (2006 Plan) and the Amended and Restated 2016 Equity Incentive Plan (2016 Plan, and together with the 2006 Plan, Plans). The 2006 Plan expired by its terms in April 2016, and the Company adopted the 2016 Plan. Outstanding options and RSUs under the 2006 Plan remain in effect and the terms of the 2006 Plan continue to apply, but no additional awards can be granted under the 2006 Plan. In June 2016, the Company’s stockholders approved the 2016 Plan. The 2016 Plan has been amended and restated three times to increase the number of shares reserved for issuance, among other administrative changes. Each of the amendments and restatements of the 2016 Plan was approved by the Company's stockholders. There are a total of 8,790,000 shares of common stock reserved for issuance under the 2016 Plan, 4,041,406 shares of which remained available for future grant as of June 30, 2020.
Stock Options
The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have 10 year contractual terms. Service option awards granted to employees and new directors upon their election vest and become exercisable over four years with the first 25% of the shares subject to service option awards vesting on the first anniversary of the grant date and remaining 75% of the shares subject to the service option awards in 36 equal monthly installments thereafter. Subsequent annual service option awards granted to directors vest and become exercisable in full on the first anniversary of the grant date. Certain service option awards to executives and directors provide for accelerated vesting if there is a change in control of the Company. Certain service option awards to employees and executives provide for accelerated vesting if the respective employee’s or executive’s service is terminated by the Company for any reason other than cause or permanent disability.
As of June 30, 2020, $8.4 million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.4 years. No option awards are classified as a liability as of June 30, 2020.
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A summary of option activity under the Plans for the six months ended June 30, 2020 follows:
 
2006 and 2016 Plans
(in thousands, except for share and per share amounts)
Number of
Shares
Weighted Average
Exercise Price at
Grant Date
Weighted Average
Remaining Term
(Years)
Aggregate
Intrinsic
Value
Outstanding at December 31, 20194,495,145  $12.21