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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 September 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 October 22, 2020, there were 54,691,654 shares of the registrant’s common stock issued and outstanding.


Table of Contents
Vanda Pharmaceuticals Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2020
Table of Contents
 
Page
ITEM 1
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
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 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;
our 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 our 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)September 30,
2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$56,973 $45,072 
Marketable securities291,575 267,057 
Accounts receivable, net28,033 26,367 
Inventory1,322 1,140 
Prepaid expenses and other current assets11,631 14,500 
Total current assets389,534 354,136 
Property and equipment, net3,921 3,864 
Operating lease right-of-use assets10,306 11,180 
Intangible assets, net21,929 23,037 
Deferred tax assets83,858 87,680 
Non-current inventory and other6,357 3,851 
Total assets$515,905 $483,748 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities$29,086 $27,590 
Product revenue allowances32,273 31,915 
Total current liabilities61,359 59,505 
Operating lease non-current liabilities
11,559 12,455 
Other non-current liabilities
2,415 843 
Total liabilities75,333 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 September 30, 2020 and December 31, 2019
  
Common stock, $0.001 par value; 150,000,000 shares authorized; 54,689,654 and 53,549,612 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
55 54 
Additional paid-in capital
645,656 631,307 
Accumulated other comprehensive income379 249 
Accumulated deficit(205,518)(220,665)
Total stockholders’ equity440,572 410,945 
Total liabilities and stockholders’ equity$515,905 $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 EndedNine Months Ended
(in thousands, except for share and per share amounts)September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Revenues:
Net product sales$60,308 $59,485 $180,515 $166,258 
Total revenues60,308 59,485 180,515 166,258 
Operating expenses:
Cost of goods sold excluding amortization5,898 6,782 16,952 18,263 
Research and development12,298 11,347 40,728 35,575 
Selling, general and administrative34,001 30,221 104,939 92,718 
Intangible asset amortization369 376 1,108 1,135 
Total operating expenses52,566 48,726 163,727 147,691 
Income from operations7,742 10,759 16,788 18,567 
Other income659 1,517 3,943 4,651 
Income before income taxes8,401 12,276 20,731 23,218 
Provision (benefit) for income taxes2,454 (88,147)5,584 (88,119)
Net income$5,947 $100,423 $15,147 $111,337 
Net income per share:
Basic$0.11 $1.88 $0.28 $2.10 
Diluted$0.11 $1.84 $0.28 $2.03 
Weighted average shares outstanding:
Basic54,666,128 53,297,298 54,325,832 53,052,521 
Diluted55,209,032 54,541,625 55,054,772 54,803,851 
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 EndedNine Months Ended
(in thousands)September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Net income$5,947 $100,423 $15,147 $111,337 
Other comprehensive income (loss):
Net foreign currency translation gain (loss)32 (19)29 (17)
Change in net unrealized gain (loss) on marketable securities
(323)(89)130 294 
Tax benefit (provision) on other comprehensive income (loss)74 (67)(29)(67)
Other comprehensive income (loss), net of tax(217)(175)130 210 
Comprehensive income$5,730 $100,248 $15,277 $111,547 
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 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
61,318  123 — — 123 
Stock-based compensation expense— — 3,135 — — 3,135 
Net income— — — — 5,947 5,947 
Other comprehensive loss, net of tax
— — — (217)— (217)
Balances at September 30, 202054,689,654 $55 $645,656 $379 $(205,518)$440,572 
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) (Continued)

 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 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
68,427  558 — — 558 
Stock-based compensation expense— — 3,407 — — 3,407 
Net income— — — — 100,423 100,423 
Other comprehensive loss, net of tax
— — — (175)— (175)
Balances at September 30, 201953,333,211 $53 $625,524 $211 $(224,881)$400,907 
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)
 Nine Months Ended
(in thousands)September 30,
2020
September 30,
2019
Cash flows from operating activities
Net income$15,147 $111,337 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment1,043 1,022 
Stock-based compensation10,148 9,790 
Amortization of premiums and accretion of discounts on marketable securities(175)(2,627)
Gain on sale of marketable securities(229) 
Intangible asset amortization1,108 1,135 
Deferred income taxes3,793 (89,155)
Other non-cash adjustments, net1,361 1,517 
Changes in operating assets and liabilities:
Accounts receivable(1,774)1,914 
Prepaid expenses and other assets2,897 (2,956)
Inventory(3,128)(896)
Accounts payable and other liabilities1,408 3,191 
Product revenue allowances874 1,884 
Net cash provided by operating activities32,473 36,156 
Cash flows from investing activities
Purchases of property and equipment(829)(951)
Purchases of marketable securities(264,112)(291,333)
Sales and maturities of marketable securities240,128 230,205 
Net cash used in investing activities(24,813)(62,079)
Cash flows from financing activities
Proceeds from the exercise of stock options4,202 4,148 
Net cash provided by financing activities4,202 4,148 
Effect of exchange rate changes on cash, cash equivalents and restricted cash41 (24)
Net change in cash, cash equivalents and restricted cash11,903 (21,799)
Cash, cash equivalents and restricted cash
Beginning of period45,650 61,749 
End of period$57,553 $39,950 
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 pneumonia;
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 September 30, 2020 and for the three and nine months ended September 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.
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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 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)September 30,
2020
September 30,
2019
Cash and cash equivalents$56,973 $39,208 
Restricted cash included in:
Prepaid expenses and other current assets57 157 
Non-current inventory and other523 585 
Total cash, cash equivalents and restricted cash
$57,553 $39,950 
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 nine months ended September 30, 2020 and 2019 were as follows:
 
 Three Months EndedNine Months Ended
(in thousands)September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
HETLIOZ® net product sales
$39,618 $37,589 $116,515 $104,381 
Fanapt® net product sales
20,690 21,896 64,000 61,877 
Total net product sales$60,308 $59,485 $180,515 $166,258 
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 nine months ended September 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 September 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., and has rapidly evolved into a global pandemic. 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 the impact that this standard will have on the Company’s condensed consolidated financial statements.
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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 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 September 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$151,307 $197 $(3)$151,501 
Corporate debt139,831 249 (6)140,074 
Total marketable securities$291,138 $446 $(9)$291,575 
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
The Company's assets classified in Level 1 and Level 2 as of September 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 Level 2 instruments 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 September 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 September 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$151,501 $151,501 $ $ 
Corporate debt140,074  140,074  
Total assets measured at fair value$291,575 $151,501 $140,074 $ 
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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 September 30, 2020 include no cash equivalents. Total assets measured at fair value as of December 31, 2019 include $7.0 million of cash equivalents.
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 September 30, 2020 and December 31, 2019:
(in thousands)September 30,
2020
December 31, 2019
Current assets
Finished goods$1,322 $1,140 
Total inventory, current$1,322 $1,140 
Non-Current assets
Raw materials$745 $659 
Work-in-process4,109 1,109 
Finished goods527 1,056 
Total inventory, non-current5,381 2,824 
Total inventory$6,703 $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 September 30, 2020:
 
  September 30, 2020
(in thousands)Estimated
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
HETLIOZ®
July 2035$33,000 $11,071 $21,929 
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 September 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 September 30, 2020 and 2019. Amortization expense was $1.1 million for each of the nine months ended September 30, 2020 and 2019. The following is a summary of the future intangible asset amortization schedule as of September 30, 2020:
(in thousands)Total20202021202220232024Thereafter
HETLIOZ®
$21,929 $370 $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 September 30, 2020 and December 31, 2019:
(in thousands)September 30,
2020
December 31, 2019
Compensation and employee benefits$8,129 $6,597 
Research and development expenses6,089 5,893 
Consulting and other professional fees5,847 5,376 
Royalties payable5,211 5,904 
Operating lease liabilities1,978 2,147 
Other1,832 1,673 
Total accounts payable and accrued liabilities$29,086 $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 September 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 September 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 September 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 September 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 September 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 of 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 $0.2 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 September 30, 2020 and December 31, 2019:
(in thousands)September 30,
2020
December 31, 2019
Foreign currency translation$42 $13 
Unrealized gain on marketable securities 337 236 
Accumulated other comprehensive income$379 $249 
10. Stock-Based Compensation
As of September 30, 2020, there were 5,429,647 shares 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 authorized for issuance under the 2016 Plan, 3,983,284 shares of which remained available for future grant as of September 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 granted to employees and executive officers provide for partial acceleration of vesting if the employee or executive officer is subject to an involuntary termination, and full acceleration of vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control of the Company. Service option awards granted to directors provide for accelerated vesting if there is a change in control of the Company or if the director's service terminates as a result of the director's death or total and permanent disability.
As of September 30, 2020, $7.9 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 September 30, 2020.
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A summary of option activity under the Plans for the nine months ended September 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 5.58$22,148 
Granted627,500 11.27 
Forfeited(225,000)18.83 
Expired(557,604)14.21 
Exercised(568,973)7.39 2,155 
Outstanding at September 30, 20203,771,068 12.09 5.773,331 
Exercisable at September 30, 20202,639,153 11.17 4.423,331 
Vested and expected to vest at September 30, 20203,604,062 12.05 5.613,331 
The weighted average grant-date fair value of options granted was $5.53 and $10.34 per share for the nine months ended September 30, 2020 and 2019, respectively. Proceeds from the exercise of stock options amounted to $4.2 million and $4.1 million for the nine months ended September 30, 2020 and 2019, respectively.
Restricted Stock Units
An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that are subject to terms and conditions established by the compensation committee of the board of directors. Service RSUs granted to employees vest in four equal annual installments provided that the employee remains employed with the Company. Certain service RSUs granted to employees and executive officers provide for accelerated vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control. Annual service RSUs granted to directors vest on the first anniversary of the grant date and provide for accelerated vesting if there is a change in control of the Company.
As of September 30, 2020, $20.7 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.7 years. No RSUs are classified as a liability as of September 30, 2020.
A summary of RSU activity under the Plans for the nine months ended September 30, 2020 follows:
2006 and 2016 Plans
Number of
Shares
Underlying RSUs
Weighted
Average
Grant Date Fair Value
Unvested at December 31, 20191,649,285 $18.04 
Granted828,162 11.28 
Forfeited(247,799)17.35 
Vested(571,069)16.53 
Unvested at September 30, 20201,658,579 15.29 
The grant date fair value for the 571,069 shares underlying RSUs that vested during the nine months ended September 30, 2020 was $9.4 million.
Stock-Based Compensation Expense
Stock-based compensation expense recognized for the three and nine months ended September 30, 2020 and 2019 was comprised of the following:
 
 Three Months EndedNine Months Ended
(in thousands)September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Research and development$853 $827 $2,864 $2,311 
Selling, general and administrative2,282 2,580 7,284 7,479 
Total stock-based compensation expense$3,135 $3,407 $10,148 $9,790 
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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 the historical volatility of the Company’s publicly traded common stock and other factors. 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 Company has never paid cash dividends to its stockholders 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, 2020 and 2019 were as follows:
 
 Nine Months Ended
September 30, 2020September 30, 2019
Expected dividend yield0 %0 %
Weighted average expected volatility51 %58 %
Weighted average expected term (years)6.075.94
Weighted average risk-free rate1.14 %2.29 %
11. Income Taxes
For the three months ended September 30, 2020 and 2019, the Company recorded income tax expense of $2.5 million and income tax benefit of $88.1 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded income tax expense of $5.6 million and income tax benefit of $88.1 million, respectively. The income tax expense for the three and nine months ended September 30, 2020 was primarily driven by the estimated effective tax rate for the year and the discrete impact of net shortfall tax expense related to stock-based compensation activity. The income tax benefit for the three and nine months ended September 30, 2019 was primarily due to the reduction of the Company's tax valuation allowance against substantially all of its deferred tax assets in the U.S. recognized during the three months ended September 30, 2019. Net income tax benefit of $1.6 million was also recorded during the three and nine months ended September 30, 2019 related to the generation of 2019 research and development and orphan drug credits, partially offset by current taxes payable to certain U.S. state and foreign jurisdictions and uncertain tax positions.
The Company assesses the need for a valuation allowance against its deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. The analysis depends on historical and projected taxable income. Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities. During the third quarter of 2019, after considering all available positive and negative evidence, including but not limited to cumulative income in recent periods, historical, current and future projected results and significant risks and uncertainties related to forecasts, the Company concluded that it was more likely than not that substantially all of its deferred tax assets in the U.S. are realizable in future periods. A valuation allowance was retained against certain District of Columbia state deferred tax assets as of September 30, 2020 and December 31, 2019.
12. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.
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The following table presents the calculation of basic and diluted net income per share of common stock for the three and nine months ended September 30, 2020 and 2019:
 
 Three Months EndedNine Months Ended
(in thousands, except for share and per share amounts)September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Numerator:
Net income$5,947 $100,423 $15,147 $111,337 
Denominator:
Weighted average shares outstanding, basic54,666,128 53,297,298 54,325,832 53,052,521 
Effect of dilutive securities542,904 1,244,327 728,940 1,751,330 
Weighted average shares outstanding, diluted55,209,032 54,541,625 55,054,772 54,803,851 
Net income per share, basic and diluted:
Basic$0.11 $1.88 $0.28 $2.10 
Diluted$0.11 $1.84 $0.28 $2.03 
Antidilutive securities excluded from calculations of diluted net income per share
3,898,896 2,646,933 3,602,648 1,826,279 
13. Legal Matters
Fanapt®. In 2014 and 2015 Roxane Laboratories, Inc. (Roxane) and its affiliates, West-Ward Pharmaceuticals International Limited and West-Ward Pharmaceuticals Corp (West-Ward), Inventia Healthcare Pvt. Ltd. (Inventia), Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp. (Apotex) (collectively, the Fanapt® Defendants) each submitted an Abbreviated New Drug Applications (ANDA) to the U.S. Food and Drug Administration (FDA) seeking approval to market generic versions of Fanapt® prior to the expiration of certain of the Company’s patents covering Fanapt®, including U.S. Patent No. 8,586,610 (‘610 Patent) and U.S. Patent No. 9,138,432 (‘432 Patent). In response, the Company filed separate lawsuits in 2014 and 2015 against each of the Fanapt® Defendants in the U.S. District Court for the District of Delaware (Delaware District Court) for patent infringement.
In August 2016, the Delaware District Court ruled in the Company’s favor, permanently enjoining Roxane from manufacturing, using, selling, offering to sell, distributing or importing any generic iloperidone product described in Roxane’s ANDA until the expiration of the ‘610 Patent in November 2027, or May 2028 if the Company obtains pediatric exclusivity. This ruling was affirmed on appeal by the Federal Circuit Court of Appeals in April 2018. West-Ward, having replaced Roxane as defendant following the acquisition of Roxane by West-Ward’s parent company, Hikma Pharmaceuticals PLC (Hikma), petitioned the U.S. Supreme Court for a writ of certiorari, which was denied in January 2020. The Company’s lawsuit against Hikma regarding the ‘432 Patent remains pending.
The Company entered into separate license agreements with each of Taro, Apotex and Lupin resolving these lawsuits in October 2016, December 2016 and July 2020, respectively. The license agreements grant Taro, Apotex and Lupin non-exclusive licenses to manufacture and commercialize a version of Fanapt® in the U.S. effective as of the expiration of the ‘610 Patent or earlier under certain limited circumstances. The Company entered into a confidential stipulation with Inventia regarding any potential launch of its generic versions of Fanapt®, but the Company’s lawsuit against Inventia regarding the ‘610 and ‘432 Patents remains pending.
HETLIOZ®. In April and May 2018, the Company filed three separate patent infringement lawsuits in the Delaware District Court against Teva Pharmaceuticals USA, Inc. (Teva), MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN) and Apotex (collectively with Teva and MSN, the HETLIOZ® Defendants) after having received Paragraph IV certification notice letters (Paragraph IV Letters) from each of the HETLIOZ® Defendants alleging that certain of the Company’s patents covering HETLIOZ® (collectively, the HETLIOZ® Patents) were invalid, unenforceable and/or would not be infringed by the manufacture, use or sale of their generic versions of HETLIOZ®, as described in the ANDAs submitted to the FDA by each of the HETLIOZ® Defendants, prior to the expiration of the latest to expire of the HETLIOZ® Patents in 2034. Each of the HETLIOZ® Patents are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book). In December 2018, the Company filed amended complaints against each of the HETLIOZ® Defendants following the receipt of additional Paragraph IV Letters from Teva and Apotex concerning its Orange Book listed 10,071,977 Patent, which expires in 2035. These lawsuits are scheduled for trial in July 2021.
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In March 2019, April 2019, and May 2019, the Company filed three additional patent infringement lawsuits in the Delaware District Court against the HETLIOZ® Defendants following the receipt of additional Paragraph IV Letters from each concerning its Orange Book listed U.S. Patent No. 10,149,829, which expires in 2033. These lawsuits have been consolidated with the other lawsuits against the HETLIOZ® Defendants and are also scheduled for trial in July 2021.
In November and December 2019, the Company filed additional patent infringement lawsuits in the Delaware District Court against Apotex and Teva, respectively, for infringement of its Orange Book listed U.S. Patent No. 10,376,487 (‘487 Patent) following the receipt of additional Paragraph IV Letters from Apotex and Teva regarding the ‘487 Patent, which expires in July 2035. Teva asserted a counterclaim for a declaratory judgment that the ‘487 Patent is invalid. The Company answered Teva’s counterclaim by denying their allegation that the ‘487 Patent is invalid. In January 2020, the Company filed two additional patent infringement lawsuits in the Delaware District Court against Teva and Apotex for infringement of its Orange Book-listed U.S. Patent No. 10,449,176 (‘176 Patent) following the receipt of additional Paragraph IV Letters from Teva and Apotex regarding the ‘176 Patent, which expires in January 2033. These lawsuits have been consolidated with the other lawsuits against the HETLIOZ® Defendants and are also scheduled for trial in July 2021.
In January 2020 and February 2020, the Company received additional Paragraph IV Letters from MSN concerning the ‘487 Patent and the ‘176 Patent, respectively, in which MSN alleges that the ‘487 and the ‘176 Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use, sale, offer for sale, or importation of MSN's generic version of HETLIOZ® as described in MSN’s ANDA. In February and March 2020, the Company filed two additional lawsuits in the Delaware District Court against MSN for infringement of its ‘487 Patent and ‘176 Patent. These lawsuits have been consolidated with the other lawsuits against the HETLIOZ® Defendants and are also scheduled for trial in July 2021.
Other Matters. In February 2019, a qui tam action filed against the Company was unsealed by order of the DC District Court. The qui tam action, which was filed under seal in March 2017, was brought by a former Company employee on behalf of the U.S., 28 states and the District of Columbia (collectively, the Plaintiff States) and the policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the Federal False Claims Act and related state laws. The complaint alleged that the Company violated these laws through the promotion and marketing of its products Fanapt® and HETLIOZ® and sought, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs. By virtue of the DC District Court having unsealed the original complaint, the Company learned that in January 2019, the U.S. Department of Justice (the DOJ), as well as the Plaintiff States, elected not to intervene in the qui tam action at that time. In May 2019, the plaintiff filed an amended complaint under seal repeating the same allegations and seeking the same relief. According to a filing unsealed in June 2019, the DOJ reaffirmed its decision not to intervene and incorporated its prior filing, indicating that neither the DOJ nor the Plaintiff States were intervening regarding the original complaint. Although the DOJ and the Plaintiff States have elected not to intervene, the plaintiff may litigate this action and the DOJ and the Plaintiff States may later seek to intervene in the action. In August 2019, the Company filed a motion to dismiss, and in October 2019 the plaintiff filed a reply. In May 2020, the DC District Court dismissed the plaintiff’s complaint in its entirety, without prejudice. In June 2020, the plaintiff filed a second amended complaint with similar allegations and seeking the same relief. In July 2020, the Company filed another motion to dismiss and in October 2020 the plaintiff filed a reply. The Company intends to continue to vigorously defend itself in the case.
In February 2019, a securities class action, Gordon v. Vanda Pharmaceuticals Inc., was filed in the U.S. District Court for the Eastern District of New York naming the Company and certain of its officers as defendants. An amended complaint was filed in July 2019. The amended complaint, filed on behalf of a purported stockholder, asserts claims on behalf of a putative class of all persons who purchased the Company’s publicly traded securities between November 4, 2015 and February 11, 2019, for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that the defendants made false and misleading statements and/or omissions regarding Fanapt®, HETLIOZ® and the Company’s interactions with the FDA regarding tradipitant between November 3, 2015 and February 11, 2019. In March 2020, the Company filed a motion to dismiss the complaint. The Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, this lawsuit is subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.
In July 2019, a shareholder derivative complaint, Samuel Williams v. Mihael Polymeropoulos, et al., was filed in the U.S. District Court for the Eastern District of New York naming certain current and former Company directors and officers as defendants. In September 2019, a shareholder derivative complaint, Michael Bavaro v. Mihael Polymeropoulos, et al., was filed in the Delaware District Court naming certain current and former Company directors and officers as defendants. In October 2019, the Company filed a motion to transfer the Bavaro case to the Eastern District of New York, where the Gordon and
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Williams cases are pending. In March 2020, the Delaware District Court transferred the Bavaro case to the Eastern District of New York, consolidating the Williams and Bavaro cases, and the plaintiffs filed a consolidated complaint in April 2020. These complaints, filed on behalf of purported stockholders, derivatively on behalf of the Company, assert claims for alleged breach of fiduciary duties by certain of the Company’s current and former directors and officers. The Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, this lawsuit is subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.
In July 2017, the CHMP issued a negative opinion recommending against approval of Fanaptum® (oral iloperidone tablets) for the treatment of schizophrenia in adult patients in the E.U. The CHMP was of the opinion that the benefits of Fanaptum® did not outweigh its risks and recommended against marketing authorization. In March 2018, the Company filed an application seeking annulment of the EMA’s negative opinion and the subsequent European Commission decision refusing marketing authorization of Fanaptum in the E.U. General Court. In December 2019, the General Court issued its judgment dismissing the action, leaving the EMA opinion and Commission decision intact. In February 2020, the Company filed an appeal of this judgment with the Court of Justice of the E.U.
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ITEM 2Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vanda Pharmaceuticals Inc. (we, our or Vanda) 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.
We strive to advance novel approaches to bring important, new medicines to market through responsible innovation. We are committed to the use of technologies that support sound science, including genetics and genomics, in drug discovery, clinical trials and the commercial positioning of our products.
Our 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, we have 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 pneumonia;
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.
Operational Highlights