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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 March 31, 2023
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 300E
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 Symbol(s)Name 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 April 27, 2023, there were 57,444,139 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 March 31, 2023
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 (Quarterly Report) 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 and assumptions that involve risks, changes in circumstances and uncertainties. If the risks, changes in circumstances or uncertainties materialize or the assumptions prove incorrect, the results of Vanda Pharmaceuticals Inc. (we, our, the Company or Vanda) may differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this Quarterly Report may include, but are not limited to, statements about:
our ability to continue to commercialize HETLIOZ® (tasimelteon) capsules for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) in the United States (U.S.), in light of existing and potential generic competition, and Europe and HETLIOZ® capsules and oral suspension (HETLIOZ LQ®) for the treatment of nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) in the U.S.;
our ability to increase market awareness of Non-24 and SMS and market acceptance of HETLIOZ®;
our ability to overcome the continued reimbursement and patient access challenges we face as a result of third-party payor coverage;
our ability to continue to generate U.S. sales of Fanapt® (iloperidone) oral tablets for the treatment of schizophrenia;
our ability to obtain approval from the FDA for Fanapt® beyond the currently approved indications;
our ability to obtain regulatory approval for tradipitant from the U.S. Food and Drug Administration (FDA);
the impact of public health crises, epidemics, pandemics or similar events on our business and operations, including our revenue, 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®, HETLIOZ LQ®, and Fanapt® in sufficient quantities and quality;
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 and maintain regulatory approval of our products, and the labeling for any approved products;
our ability to obtain approval from the FDA for HETLIOZ® beyond the currently approved indications;
our expectations regarding the timing and success of preclinical studies and clinical trials;
the safety and efficacy of our products;
regulatory developments in the U.S., Europe and other jurisdictions;
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;
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;
potential losses incurred from product liability claims made against us; and
the use of our existing cash, cash equivalents and marketable securities.
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All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements contained throughout this report. We caution you not to rely too heavily on such forward-looking statements. Each forward-looking statement speaks only as of the date of this Quarterly Report, and 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.
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. In addition to the risks described in Part I, Item 1A, Risk Factors, of our annual report on Form 10-K for the fiscal year ended December 31, 2022, 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)March 31,
2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$354,171 $135,029 
Marketable securities147,325 331,830 
Accounts receivable, net24,513 33,512 
Inventory1,105 1,194 
Prepaid expenses and other current assets6,593 17,727 
Total current assets533,707 519,292 
Property and equipment, net2,333 2,573 
Operating lease right-of-use assets8,097 8,400 
Intangible assets, net18,186 18,565 
Deferred tax assets71,747 74,039 
Non-current inventory and other10,462 11,378 
Total assets$644,532 $634,247 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities$35,092 $45,551 
Product revenue allowances58,702 45,885 
Total current liabilities93,794 91,436 
Operating lease non-current liabilities
8,387 8,813 
Other non-current liabilities
6,612 6,800 
Total liabilities108,793 107,049 
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 March 31, 2023 and December 31, 2022
  
Common stock, $0.001 par value; 150,000,000 shares authorized; 57,440,992 and 56,783,764 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
57 57 
Additional paid-in capital
690,586 686,235 
Accumulated other comprehensive loss(255)(1,193)
Accumulated deficit(154,649)(157,901)
Total stockholders’ equity535,739 527,198 
Total liabilities and stockholders’ equity$644,532 $634,247 
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 Ended
(in thousands, except for share and per share amounts)March 31,
2023
March 31,
2022
Revenues:
Net product sales$62,498 $60,192 
Total revenues62,498 60,192 
Operating expenses:
Cost of goods sold excluding amortization4,774 5,665 
Research and development19,237 20,969 
Selling, general and administrative36,104 40,848 
Intangible asset amortization379 379 
Total operating expenses60,494 67,861 
Income (loss) from operations2,004 (7,669)
Other income 3,524 105 
Income (loss) before income taxes5,528 (7,564)
Provision (benefit) for income taxes2,276 (1,134)
Net income (loss)$3,252 $(6,430)
Net income (loss) per share:
Basic$0.06 $(0.11)
Diluted$0.06 $(0.11)
Weighted average shares outstanding:
Basic57,011,396 56,105,239 
Diluted57,400,152 56,105,239 
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 (LOSS) (Unaudited)
 
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
Net income (loss)$3,252 $(6,430)
Other comprehensive income (loss):
Net foreign currency translation gain (loss)9 (16)
Change in net unrealized gain (loss) on marketable securities1,206 (1,475)
Tax benefit (provision) on other comprehensive income (loss)(277)338 
Other comprehensive income (loss), net of tax938 (1,153)
Comprehensive income (loss)$4,190 $(7,583)
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
Accumulated Other
Comprehensive
Loss
Accumulated
Deficit
Total
(in thousands, except for share amounts)SharesPar Value
Balances at December 31, 202256,783,764 $57 $686,235 $(1,193)$(157,901)$527,198 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
657,228 — — — — — 
Stock-based compensation expense— — 4,351 — — 4,351 
Net income— — — — 3,252 3,252 
Other comprehensive income, net of tax— — — 938 — 938 
Balances at March 31, 202357,440,992 $57 $690,586 $(255)$(154,649)$535,739 

 Common StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive Loss
Accumulated
Deficit
Total
(in thousands, except for share amounts)SharesPar Value
Balances at December 31, 202155,900,855 $56 $669,223 $(175)$(164,176)$504,928 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
585,857 — — — — — 
Stock-based compensation expense— — 4,778 — — 4,778 
Net loss— — — — (6,430)(6,430)
Other comprehensive loss, net of tax— — — (1,153)— (1,153)
Balances at March 31, 202256,486,712 $56 $674,001 $(1,328)$(170,606)$502,123 
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)
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
Cash flows from operating activities
Net income (loss)$3,252 $(6,430)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property and equipment291 323 
Stock-based compensation4,351 4,778 
Amortization of premiums and accretion of discounts on marketable securities(2,288)77 
Loss on sale of marketable securities655  
Intangible asset amortization379 379 
Deferred income taxes2,014 4,417 
Other non-cash adjustments, net1,109 552 
Changes in operating assets and liabilities:
Accounts receivable8,901 1,957 
Prepaid expenses and other assets11,345 (13,360)
Inventory74 (1,179)
Accounts payable and other liabilities(10,791)13,426 
Product revenue allowances12,511 (894)
Net cash provided by operating activities31,803 4,046 
Cash flows from investing activities
Purchases of property and equipment(51)(75)
Purchases of marketable securities(163,045)(79,134)
Sales and maturities of marketable securities350,390 90,075 
Net cash provided by investing activities187,294 10,866 
Effect of exchange rate changes on cash, cash equivalents and restricted cash45 (57)
Net change in cash, cash equivalents and restricted cash219,142 14,855 
Cash, cash equivalents and restricted cash
Beginning of period135,498 52,590 
End of period$354,640 $67,445 
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 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 nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the United States Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, the Company has a number of drugs in development, including:
HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, insomnia, delayed sleep phase disorder (DSPD), sleep disturbances in autism spectrum disorder (ASD) and pediatric Non-24;
Fanapt® (iloperidone) for the treatment of bipolar I disorder and Parkinson’s disease psychosis and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis, 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;
Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and VPO-227 for the treatment of secretory diarrhea disorders, including cholera;
VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, for the treatment of performance anxiety and psychiatric disorders;
VHX-896, the active metabolite of iloperidone; and
Antisense oligonucleotide (ASO) molecules.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements includes the accounts of Vanda Pharmaceuticals Inc. and its wholly-owned subsidiaries and have been prepared in accordance with United States 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, 2022. The financial information as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 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, 2022 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
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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 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 Statements of Cash Flows:
(in thousands)March 31,
2023
March 31,
2022
Cash and cash equivalents$354,171 $66,927 
Restricted cash included in non-current inventory and other469 518 
Total cash, cash equivalents and restricted cash$354,640 $67,445 
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 months ended March 31, 2023 and 2022 were as follows:
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
HETLIOZ® net product sales
$39,616 $37,031 
Fanapt® net product sales
22,882 23,161 
Total net product sales$62,498 $60,192 
The Company’s HETLIOZ® net product sales for the three months ended March 31, 2023 reflect higher unit sales as compared to recent prior periods. The higher unit sales during the three months ended March 31, 2023 resulted in a significant increase of inventory stocking at specialty pharmacy customers. HETLIOZ® net product sales will likely decline in future periods, potentially significantly, as a result of the reduction of the elevated inventory levels at specialty pharmacy customers at March 31, 2023 and as a result of continued generic competition absent removal of generic HETLIOZ® products from the United States (U.S.) market. Additionally, the Company constrained HETLIOZ® net product sales for the three months ended March 31, 2023 to an amount not probable of revenue reversal. HETLIOZ® net product sales could experience variability in future periods as uncertainties associated with variable consideration related to the significant increase of inventory stocking during the three months ended March 31, 2023 are resolved.
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 86% of total revenues for the three months ended March 31, 2023. There were four major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 88% of total accounts receivable at March 31, 2023. 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.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that are expected to have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

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3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of March 31, 2023, 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$138,015 $44 $(397)$137,662 
Corporate debt9,642 21  9,663 
Total marketable securities$147,657 $65 $(397)$147,325 
The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2022, 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$178,351 $ $(1,181)$177,170 
Corporate debt155,017 14 (371)154,660 
Total marketable securities$333,368 $14 $(1,552)$331,830 
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 March 31, 2023 and December 31, 2022 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 and corporate notes that use as their basis readily observable market parameters.
The Company held certain assets that are required to be measured at fair value on a recurring basis as of March 31, 2023, as follows:
  Fair Value Measurement as of March 31, 2023 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$137,662 $137,662 $ $ 
Corporate debt9,663  9,663  
Total assets measured at fair value$147,325 $137,662 $9,663 $ 
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The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2022, as follows:
Fair Value Measurement as of December 31, 2022 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$177,170 $177,170 $ $ 
Corporate debt154,660  154,660  
Total assets measured at fair value$331,830 $177,170 $154,660 $ 
Total assets measured at fair value as of March 31, 2023 and December 31, 2022 include no 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, and product revenue allowances, the carrying values of which materially approximate their fair values.
5. Inventory
Inventory consisted of the following as of March 31, 2023 and December 31, 2022:
(in thousands)March 31,
2023
December 31, 2022
Current assets
Work-in-process$23 $23 
Finished goods1,082 1,171 
Total inventory, current$1,105 $1,194 
Non-Current assets
Raw materials$1,043 $1,043 
Work-in-process7,504 8,212 
Finished goods1,036 1,041 
Total inventory, non-current9,583 10,296 
Total inventory$10,688 $11,490 
Inventory, which is recorded at the lower of cost or net realizable value, includes the cost of third-party manufacturing and other direct and indirect costs and is valued using the first-in, first-out method. 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, patient usage, and generic competition. The Company’s inventory balance consisted of $7.4 million and $8.0 million of HETLIOZ® product and $3.3 million and $3.4 million of Fanapt® product as of March 31, 2023 and December 31, 2022, respectively.
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. 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. These milestone payments were determined to be additional consideration for the acquisition of HETLIOZ® and capitalized as an intangible asset and are being amortized on a straight-line basis over the estimated economic useful life of the related product patents.
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The following is a summary of the Company’s intangible assets as of March 31, 2023:
  March 31, 2023
(in thousands)Estimated
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
HETLIOZ®
March 2035$33,000 $14,814 $18,186 
The following is a summary of the Company’s intangible assets as of December 31, 2022:
  December 31, 2022
(in thousands)Estimated
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
HETLIOZ®
March 2035$33,000 $14,435 $18,565 
As of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and 2022. The following is a summary of the future intangible asset amortization schedule as of March 31, 2023:
(in thousands)Total20232024202520262027Thereafter
HETLIOZ®
$18,186 $1,137 $1,516 $1,516 $1,516 $1,516 $10,985 
7. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of March 31, 2023 and December 31, 2022:
(in thousands)March 31,
2023
December 31, 2022
Research and development expenses$11,676 $9,474 
Consulting and other professional fees10,713 9,241 
Royalties payable3,421 4,979 
Compensation and employee benefits3,136 6,839 
Operating lease liabilities2,346 2,328 
Accounts payable and other accrued liabilities3,800 12,690 
Total accounts payable and accrued liabilities$35,092 $45,551 
As of December 31, 2022, the prepaid expenses and other current assets and accounts payable and accrued liabilities balances included $11.5 million related to the case, Gordon v. Vanda Pharmaceuticals Inc. In January 2023, the settlement related to the case was fully and finally approved. As a result, the Company removed the associated prepaid and liability balances. (See Note 16, Legal Matters, in Part II, Item 8 of the Annual Report for additional information.)
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 March 31, 2023, 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, Intangible Assets). The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ® net sales to BMS. The royalty period in each territory where the Company commercializes HETLIOZ® is 10 years following the first commercial sale in the territory. In territories outside the U.S., the royalty is 5% on net sales. In the U.S., the royalty on net sales in the U.S. decreased from 10% to 5% in December 2022. This U.S. royalty will end in April 2024. 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 Pharma AG (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 new chemical entity (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-1 receptor 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 March 31, 2023, the Company has paid Lilly $3.0 million in upfront fees and development milestones. As of March 31, 2023 remaining milestone obligations include a $2.0 million development milestone due upon the filing of the first application for 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 an application for 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.
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 March 31, 2023, the Company has paid UCSF $1.6 million in upfront fees and development milestones. As of March 31, 2023 remaining milestone obligations include $11.9 million for development milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $11.9 million of development milestones are $1.1 million of milestone obligations due upon the conclusion of clinical studies for each licensed product but not to exceed $3.2 million in total for the CFTR portfolio.
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.
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Other Agreements
In September 2022, the Company entered into an agreement with OliPass Corporation (OliPass) to jointly develop a set of ASO molecules based on OliPass’ proprietary modified peptide nucleic acids. As consideration for entering into the arrangement, the Company paid OliPass an upfront fee of $3.0 million, which was recorded as research and development expense during the year ended December 31, 2022. The Company is funding the research and development activities and has the option to license jointly developed intellectual property upon successful development.
Purchase Commitments
In the course of its business, the Company regularly enters into agreements with third-party vendors under fee service arrangements, which generally may be terminated on 90 days’ notice without incurring additional charges, other than charges for work completed or materials procured 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. The Company’s non-cancellable purchase commitments for agreements longer than one year are not material. Various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase commitments, are cancellable in nature or contain variable commitment terms within the agreement.
9. Accumulated Other Comprehensive Loss
The accumulated balances related to each component of other comprehensive loss, net of taxes, were as follows as of March 31, 2023 and December 31, 2022:
(in thousands)March 31,
2023
December 31, 2022
Foreign currency translation$2 $(7)
Unrealized loss on marketable securities (257)(1,186)
Accumulated other comprehensive loss$(255)$(1,193)
10. Stock-Based Compensation
As of March 31, 2023, there were 6,985,906 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 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 a number of times since to increase the number of shares reserved for issuance, among other administrative changes. Each of the amendments to the 2016 Plan was approved by the Company’s stockholders. There is a total of 11,890,000 shares of common stock authorized for issuance under the 2016 Plan, 2,756,373 shares of which remained available for future grant as of March 31, 2023.
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 the 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. Service option awards granted to executive officers and certain other employees provide for partial acceleration of vesting if the executive officer or employee is subject to an involuntary termination, and full acceleration of vesting if the executive officer or employee 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 March 31, 2023, $8.6 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 March 31, 2023.
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A summary of option activity under the Plans for the three months ended March 31, 2023 follows:
(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, 20224,232,210 $14.19 5.81$ 
Granted774,976 7.01 
Expired(5,417)14.38 
Outstanding at March 31, 20235,001,769 13.08 6.2421 
Exercisable at March 31, 20233,229,665 14.32 4.71 
Vested and expected to vest at March 31, 20234,670,167 13.39 6.0014 
The weighted average grant date fair value of options granted was $3.57 and $5.28 per share for the three months ended March 31, 2023 and 2022, respectively. There were no proceeds from the exercise of stock options for the three months ended March 31, 2023 and 2022.
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. Service RSUs granted to executive officers and certain other employees provide for accelerated vesting if the executive officer or employee 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 March 31, 2023, $20.8 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.8 years. No RSUs are classified as a liability as of March 31, 2023.
A summary of RSU activity for the Plans for the three months ended March 31, 2023 is as follows:
Number of
Shares
Weighted
Average
Grant Date Fair Value
Unvested at December 31, 20221,915,546 $14.41 
Granted765,708 7.03 
Forfeited(39,492)12.70 
Vested(657,625)15.53 
Unvested at March 31, 20231,984,137 11.23 
The grant date fair value for the 657,625 shares underlying RSUs that vested during the three months ended March 31, 2023 was $10.2 million.
Stock-Based Compensation Expense
Stock-based compensation expense recognized for the three months ended March 31, 2023 and 2022 was comprised of the following:
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
Research and development$1,066 $1,160 
Selling, general and administrative3,285 3,618 
Total stock-based compensation expense$4,351 $4,778 
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 expected terms are determined based on a combination of historical exercise data and hypothetical exercise data for unexercised stock options. The risk-free interest rates are based on the
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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 three months ended March 31, 2023 and 2022 were as follows:
 Three Months Ended
March 31, 2023March 31, 2022
Expected dividend yield0 %0 %
Weighted average expected volatility47 %47 %
Weighted average expected term (years)6.156.05
Weighted average risk-free rate3.92 %1.86 %
11. Income Taxes
For the three months ended March 31, 2023 and 2022, the Company recorded a provision for income taxes of $2.3 million and income tax benefit of $1.1 million, respectively. The income tax expense (benefit) for the three months ended March 31, 2023 and 2022 was primarily driven by the estimated effective tax rate for the year, as well as discrete income tax expense of $1.1 million for each period.
12. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income (loss) 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.
The following table presents the calculation of basic and diluted net income (loss) per share of common stock for the three months ended March 31, 2023 and 2022:
 Three Months Ended
(in thousands, except for share and per share amounts)March 31,
2023
March 31,
2022
Numerator:
Net income (loss)$3,252 $(6,430)
Denominator:
Weighted average shares outstanding, basic57,011,396 56,105,239 
Effect of dilutive securities388,756  
Weighted average shares outstanding, diluted57,400,152 56,105,239 
Net income (loss) per share, basic and diluted:
Basic$0.06 $(0.11)
Diluted$0.06 $(0.11)
Antidilutive securities excluded from calculations of diluted net income (loss) per share6,133,050 4,263,975 
The Company incurred a net loss for the three months ended March 31, 2022 causing inclusion of any potentially dilutive securities to have an anti-dilutive effect, resulting in dilutive loss per share and basic loss per share attributable to common stockholders being equivalent.
13. Legal Matters
HETLIOZ®. Between April 2018 and March 2021, the Company filed numerous Hatch-Waxman lawsuits in the U.S. District Court for the District of Delaware (Delaware District Court) against Teva Pharmaceuticals USA, Inc. (Teva), MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN) and Apotex Inc. and Apotex Corp. (Apotex, and collectively with Teva and MSN, the HETLIOZ® Defendants) asserting that U.S. Patent Nos. RE46,604 (‘604 Patent), 9,060,995, 9,539,234, 9,549,913, 9,730,910 (‘910 Patent), 9,844,241, 10,071,977, 10,149,829 (‘829 Patent), 10,376,487 (‘487 Patent), 10,449,176, 10,610,510, 10,610,511, 10,829,465, and 10,611,744 will be infringed by the HETLIOZ® Defendants’ generic versions of HETLIOZ® for which they were seeking FDA approval. As initially disclosed in the Company’s Form 8-K
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filed with the Securities and Exchange Commission (SEC) on January 14, 2022, in January 2022, the Company entered into a license agreement with MSN and Impax Laboratories LLC (Impax) resolving the lawsuits against MSN (the MSN/Impax License Agreement). The MSN/Impax License Agreement grants MSN and Impax a non-exclusive license to manufacture and commercialize MSN’s generic version of HETLIOZ® in the U.S. effective as of March 13, 2035, unless prior to that date the Company obtains pediatric exclusivity for HETLIOZ®, in which case the license will be effective as of July 27, 2035. The MSN/Impax License Agreement also provides that MSN and Impax may launch a generic version of HETLIOZ® earlier under certain limited circumstances. The consolidated lawsuits against the remaining HETLIOZ® Defendants were tried in March 2022.
On December 13, 2022, the Delaware District Court ruled that Teva and Apotex did not infringe the ‘604 Patent, and that the asserted claims of the ‘604, ‘910, ‘829 and ‘487 Patents were invalid. In December 2022, the Company appealed the Delaware District Court’s decision to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) and an oral argument for the appeal was held in March 2023.
On December 27, 2022, the Company filed patent infringement lawsuits, including Hatch-Waxman Act claims, against each of Teva and Apotex in the U.S. District Court for the District of New Jersey (NJ District Court) asserting that U.S. Patent No. 11,285,129, a method of administration patent that was not litigated in the Delaware District Court cases (‘129 Patent), will be infringed by Teva’s and Apotex’ generic versions of HETLIOZ®, each of which was approved by the FDA. The Company asked the NJ District Court to, among other things, order that the effective date of the FDA’s approval of Teva’s and Apotex’ generic versions of HETLIOZ® be a date that is no earlier than the expiration of the ‘129 Patent, or such later date that the NJ District Court may determine, and enjoin each of Teva and Apotex from the commercial manufacture, use, import, offer for sale and/or sale of their generic versions of HETLIOZ® until the expiration of the ‘129 Patent, or such later date that the NJ District Court may determine. In February 2023, the case was transferred to the Delaware District Court, where it is now pending.
In January 2023, the Company filed a lawsuit in the NJ District Court against Teva challenging Teva’s advertising and marketing practices related to its at-risk launch of its generic version of HETLIOZ® for the single indication of Non-24. The Company believes that Teva’s advertising and marketing practices related to its generic version of HETLIOZ® promote its product for uses beyond the limited labeling that Teva sought, and the FDA approved. The Company seeks to, among other things, enjoin Teva from engaging in false and misleading advertising and recover monetary damages. In March 2023, Teva filed a motion to dismiss or to transfer the case to the Delaware District Court.
In January 2023, the Company filed a lawsuit in the U.S. District Court for the District of Columbia (DC District Court) against the FDA challenging the FDA’s approval of Teva’s Abbreviated New Drug Application (ANDA) for its generic version of HETLIOZ® capsules under the Administrative Procedure Act, the Food, Drug, and Cosmetic Act (FDCA), and FDA regulations. Under the FDCA, every ANDA must contain information to show that the labeling proposed for the generic drug is the same as the labeling approved for the listed drug; additionally, the generic drug must have the same conditions of use as the listed drug. The labeling and packaging for HETLIOZ® includes Braille, but Teva’s generic tasimelteon does not. On this basis, the Company believes that Teva’s approved labeling does not comply with applicable requirements. The Company has asked the DC District Court to, among other things, vacate the FDA’s approval of Teva’s ANDA, declare that the approval of the ANDA was unlawful, arbitrary, and capricious and compel the FDA to order Teva to recall its shipments or sales of its generic HETLIOZ® product. In February 2023, Teva joined the lawsuit as a defendant.
Other Matters. From April to December 2022, the Company filed six lawsuits in the DC District Court against the FDA to compel the FDA to produce records under the Freedom of Information Act (FOIA). The first lawsuit, in April 2022, requested certain records relating to its denial of the Company’s supplemental NDA for HETLIOZ® in the treatment of jet lag disorder. The Company had repeatedly attempted to obtain these records from the FDA pursuant to a FOIA request submitted by the Company in December of 2019, but the FDA refused to provide them, claiming an exemption under FOIA. In March 2023, the DC District Court ruled in the Company’s favor, rejecting the FDA’s claim that the exemption applied to the records requested. The remaining lawsuits, which relate to requests for certain records regarding cases in which the FDA waived its putative requirement of a 9-month non-rodent toxicity study before drugs can be tested on human patients for extended durations; communications external to and within the FDA relating to tradipitant; and communications external to and within the FDA relating to HETLIOZ®, are ongoing. The FDA has failed to respond and disclose the requested documents within the statutory timeframe with respect to each of these requests. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates FOIA.
In April 2022, the Company filed a lawsuit in the U.S. District Court for the District of Maryland (the MD District Court) against the Centers for Medicare & Medicaid Services (CMS) and the Administrator of CMS challenging CMS’ rule broadly interpreting the defined terms “line extension” and “new formulation” under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (ACA), which went into effect in January 2022 (the
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Rule). The Company believes that the Rule is unlawful and contrary to the intent of Congress when it passed the ACA. Under the Rule, certain of the Company’s products would be treated as line extensions and new formulations subject to enhanced rebates, despite the statutory text and CMS’ own long-standing practice, under which such products would not constitute line extensions or new formulations. In March 2023, the MD District Court ruled that CMS’ interpretation of the terms was reasonable and consistent with Congress’ intent. The Company has appealed the ruling to the U.S. Court of Appeals for the Fourth Circuit.
In May 2022, the Company filed a lawsuit in the DC District Court against the FDA challenging the FDA’s denial of Fast Track designation for tradipitant. In October 2021, the Company submitted to the FDA a request for Fast Track designation for tradipitant under the Food and Drug Administration Modernization Act of 1997 (FDAMA). The FDAMA provides for expedited development and review of drugs that receive Fast Track designation from the FDA. Under the FDAMA, the FDA must designate a drug as a Fast Track product if it both (1) is intended to treat a serious or life-threatening disease or condition and (2) demonstrates the potential to address unmet medical needs for such disease or condition. Although Fast Track designation is non-discretionary when the criteria are satisfied, the FDA denied the Company’s request for Fast Track designation. The Company does not believe that the FDA based its decision on the relevant criteria. Therefore, among other reasons, the Company maintains that the FDA’s denial is unlawful. The Company has asked the DC District Court to, among other things, set aside and vacate the FDA’s denial. An oral argument was held in January 2023.
In September 2022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to comply with two separate nondiscretionary obligations under the FDCA and its implementing regulations: an obligation to publish a notice of an opportunity for a hearing on the Company’s supplemental New Drug Application (sNDA) in the Federal Register within 180 days of the filing of the sNDA, and a separate obligation to publish the same notice within 60 days of the request for a hearing. The FDA published the notice of an opportunity for a hearing on October 11, 2022. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates the FDCA and the FDA regulations.
In May 2023, the Company filed a lawsuit in the U.S. Court of Federal Claims (Federal Claims Court) against the federal government for the uncompensated taking and misuse of the Company’s trade secrets and confidential information. The Company believes that the FDA violated the Fifth Amendment’s due process clause by improperly providing confidential details from the Company’s drug master files for HETLIOZ® and Fanapt® to generic drug manufacturers during the FDA’s review of the manufacturers’ ANDAs. The Company has asked the Federal Claims Court to, among other things, declare that the FDA’s disclosure of the Company’s confidential commercial information constitutes a taking for purposes of the Fifth Amendment and award just compensation.
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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 nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the U.S. Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, we have a number of drugs in development, including:
HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, insomnia, delayed sleep phase disorder (DSPD), sleep disturbances in autism spectrum disorder (ASD) and pediatric Non-24;
Fanapt® (iloperidone) for the treatment of bipolar I disorder and Parkinson’s disease psychosis and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis, 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;
Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and VPO-227 for the treatment of secretory diarrhea disorders, including cholera;
VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, for the treatment of performance anxiety and psychiatric disorders;
VHX-896, the active metabolite of iloperidone; and
Antisense oligonucleotide (ASO) molecules.
Operational Highlights
Fanapt®
We previously announced positive results in the Phase III clinical study of Fanapt® in acute manic and mixed episodes associated with bipolar I disorder in adults. We expect to submit a supplemental New Drug Application (sNDA) in the second quarter of 2023.
HETLIOZ®
We are continuing to pursue regulatory approvals for HETLIOZ® in the indications of insomnia and jet lag disorder.
On March 14, 2023, the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit) held an oral argument in relation to our appeal of the HETLIOZ® Abbreviated New Drug Application litigation ruling in favor of defendants Teva Pharmaceuticals USA, Inc., Apotex Inc. and Apotex Corp. We await the Federal Circuit’s decision.
In March 2023, we announced that we had prevailed against the U.S. Food and Drug Administration (FDA) in a Freedom of Information Act lawsuit regarding certain records relating to the FDA’s denial of our sNDA for HETLIOZ® in jet lag disorder.
Tradipitant
We are preparing for the submission of a New Drug Application (NDA) for tradipitant for patients with gastroparesis. We expect to submit this NDA to the FDA in the second quarter of 2023.
The Phase III study of tradipitant in the treatment of motion sickness is fully enrolled. Results are expected by mid-2023.
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Since we began operations, we have devoted substantially all of our resources to the in-licensing, clinical development and commercialization of our products. Our ability to generate meaningful product sales and achieve profitability largely depends on our level of success in commercializing HETLIOZ® and Fanapt® in the U.S. and Europe, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks that are detailed in Part I, Item 1A, Risk Factors, of our annual report on Form 10-K (Annual Report) for the year ended December 31, 2022.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes in our critical accounting policies including estimates, assumptions and judgments from those described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Annual Report. A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements included in the Annual Report. However, we believe that the following accounting policies are important to understanding and evaluating our reported financial results as they involve the most significant judgments and estimates used in the preparation of our condensed consolidated financial statements, and we have accordingly included them in this discussion.
Revenue from net product sales. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue when control of the product is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer.
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. We invoice and record revenue when 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. Revenues and accounts receivable are concentrated with these customers. Outside the U.S., we sell HETLIOZ® in Germany and have a distribution agreement with Megapharm Ltd. for the commercialization of Fanapt® in Israel. 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.
The transaction price is determined based upon the consideration to which we will be entitled in exchange for transferring product to the customer. Our product sales are recorded net of applicable product revenue allowances for which reserves are established and include discounts, rebates, chargebacks, service fees, co-pay assistance and product returns that are applicable for various government and commercial payors. Where appropriate, our estimates of variable consideration included in the transaction price consider a range of possible outcomes. Allowances for rebates, chargebacks and co-pay assistance are based upon the insurance benefits of the end customer, which are estimated using historical activity and, where available, actual and pending prescriptions for which we have validated the insurance benefits. Variable consideration may be constrained and is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts. If actual results in the future vary from our estimates, we adjust our estimate in the period identified, which would affect net product sales in the period such variances become known. During the three months ended March 31, 2023, we constrained the variable consideration for HETLIOZ® net product sales.
Reserves for variable consideration are classified as product revenue allowances on the Condensed Consolidated Balance Sheets, with the exception of prompt-pay discounts, which are classified as reductions of accounts receivable. The reserve for product returns for which the product may not be returned for a period of greater than one year from the balance sheet date is included as a component of other non-current liabilities in the Condensed Consolidated Balance Sheets. Uncertainties related to variable consideration are generally resolved in the quarter subsequent to period end, with the exception of Medicaid rebates, which are dependent upon the timing of when states submit reimbursement claims, Medicare inflationary rebates, and product
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returns that are resolved during the product expiry period specified in the customer contract. Due to increased inventory stocking at specialty pharmacy customers of HETLIOZ® in the first quarter of 2023, the time for these uncertainties to be resolved could be longer than we have historically experienced. We currently record sales allowances for the following:
Prompt-pay: Specialty pharmacies and wholesalers are generally offered discounts for prompt payment. We expect that the specialty pharmacies and wholesalers will earn prompt payment discounts and, therefore, deduct the full amount of these discounts from total product sales when revenues are recognized.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors, including the new Medicare Part D inflationary rebate effective October 1, 2022. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid and Medicare. The allowances for rebates are based on statutory or contracted discount rates and estimated patient utilization.
Chargebacks: Chargebacks are discounts that occur when contracted indirect customers purchase directly from specialty pharmacies and wholesalers. Contracted indirect customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy or wholesaler, in turn, charges back the difference between the price initially paid by the specialty pharmacy or wholesaler and the discounted price paid to the specialty pharmacy or wholesaler by the contracted customer.
Medicare Part D coverage gap: The Medicare Part D prescription drug benefit requires manufacturers to fund approximately 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients for applicable drugs. We account for the Medicare Part D coverage gap using a point of sale model. Estimates for expected Medicare Part D coverage gap are based in part on historical activity and, where available, actual and pending prescriptions when we have validated the insurance benefits.
Service fees: We receive sales order management, data and distribution services from certain customers, for which we are assessed fees. These fees are based on contracted terms and are known amounts. We accrue service fees at the time of revenue recognition, resulting in a reduction of product sales and the recognition of an accrued liability, unless it is a payment for a distinct good or service from the customer in which case the fair value of those distinct goods or services are recorded as selling, general and administrative expense.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Co-pay assistance utilization is based on information provided by our third-party administrator.
Product returns: We generally offer direct customers a limited right to return as contractually defined with our customers. We consider several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, historical return activity, including activity for product sold for which the return period has past, prescription trends and other relevant factors. We do not expect returned goods to be resalable. There was no right of return asset as of March 31, 2023 or December 31, 2022.
The following table summarizes sales discounts and allowance activity as of and for the three months ended March 31, 2023:
(in thousands)Rebates & ChargebacksDiscounts,
Returns and Other
Total
Balances at December 31, 2022
$37,459 $10,024 $47,483 
Provision related to current period sales36,863 7,862 44,725 
Adjustments for prior period sales410 170 580 
Credits/payments made(25,467)(7,532)(32,999)
Balances at March 31, 2023
$49,265 $10,524 $59,789 
The provision of $36.9 million for rebates and chargebacks for the three months ended March 31, 2023 primarily represents Medicaid rebates applicable to sales of HETLIOZ® and Fanapt®. The provision of $7.9 million for discounts, returns and other for the three months ended March 31, 2023 primarily represents wholesaler distribution fees applicable to sales of Fanapt® and estimated product returns of Fanapt®, and co-pay assistance costs and prompt-pay discounts applicable to the sales of both HETLIOZ® and Fanapt®.
Stock-based compensation. Compensation costs for all stock-based awards to employees and directors are measured based on the grant date fair value of those awards and recognized over the period during which the employee or director is required to perform service in exchange for the award. We use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option pricing model is
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affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatility rates are based on the historical volatility of our 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. We have never paid cash dividends to our stockholders and do not plan to pay dividends in the foreseeable future. As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Research and development expenses. Research and development expenses consist primarily of fees for services provided by third parties in connection with the clinical trials, costs of contract manufacturing services for clinical trial use, milestone payments made under licensing agreements prior to regulatory approval, costs of materials used in clinical trials and research and development, costs for regulatory consultants and filings, depreciation of capital resources used to develop products, related facilities costs, and salaries, other employee-related costs and stock-based compensation for research and development personnel. We expense research and development costs as they are incurred for products in the development stage, including manufacturing costs and milestone payments made under license agreements prior to FDA approval. Upon and subsequent to FDA approval, manufacturing and milestone payments made under license agreements are capitalized. Milestone payments are accrued when it is deemed probable that the milestone event will be achieved. Costs related to the acquisition of intellectual property are expensed as incurred if the underlying technology is developed in connection with our research and development efforts and has no alternative future use.
Clinical trials are inherently complex, often involve multiple service providers, and can include payments made to investigator physicians at study sites. Because billing for services often lags delivery of service by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. Our assessments include, but are not limited to: (i) an evaluation by the project manager of the work that has been completed during the period, (ii) measurement of progress prepared internally and/or provided by the third-party service provider, (iii) analyses of data that justify the progress, and (iv) management’s judgment. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high.
Intangible assets and impairment of long-lived assets. Our intangible assets consist of capitalized license costs for products approved by the FDA. We amortize our intangible assets on a straight-line basis over the estimated useful economic life of the related product patents. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, a significant adverse change in legal or regulatory factors that could affect the value or patent life including our ability to defend and enforce patent claims and other intellectual property rights and significant negative industry or economic trends. When we determine that the carrying value of our intangible assets may not be recoverable based upon the existence of one or more of the indicators of impairment, we measure any impairment based on the amount that carrying value exceeds fair value.
We filed several Hatch-Waxman lawsuits in the U.S. District Court for the District of Delaware (Delaware District Court) against Teva Pharmaceuticals USA, Inc. (Teva), Apotex Inc. and Apotex Corp (Apotex), MSN Pharmaceuticals, Inc. and MSN Laboratories Private Limited (MSN) (collectively, the HETLIOZ® Defendants) asserting infringement of patents covering HETLIOZ® 20 mg capsules. As initially disclosed in our Form 8-K filed with the Securities and Exchange Commission (SEC) on January 14, 2022, in January 2022, we entered into a license agreement with MSN and Impax Laboratories LLC (Impax) resolving the lawsuits against MSN (the MSN/Impax License Agreement). The consolidated lawsuits against the remaining HETLIOZ® Defendants were tried in March 2022. In December 2022, the Delaware District Court ruled that Teva and Apotex did not infringe U.S. Patent No. RE46,604, and that the asserted claims of U.S. Patent Nos. RE46,604; 9,730,910; 10,149,829; and 10,376,487 were invalid. In December 2022, we appealed the Delaware District Court’s decision to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) and an oral argument for the appeal was held in March 2023. We have also filed patent infringement lawsuits, including Hatch-Waxman Act claims against each of Teva and Apotex asserting infringement of a method of administration patent that was not litigated in the Delaware District Court, which are currently pending before the Delaware District Court. This litigation does not affect the sale of HETLIOZ® in the E.U. and there is no generic litigation pending outside of the U.S. with respect to HETLIOZ®. Furthermore, the litigation does not relate to the HETLIOZ LQ® oral suspension formulation. The unfavorable ruling by the Delaware District Court and subsequent developments related to the HETLIOZ® patent litigation was determined to be a triggering event for potential impairment in the fourth quarter of 2022. As a result, we performed an impairment review for our HETLIOZ® asset group and determined, based upon our review of undiscounted cash flows, that the carrying value of our HETLIOZ® asset group, inclusive of the intangible
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asset, is recoverable. Accordingly, we did not record an intangible asset impairment charge for the periods ended March 31, 2023 and December 31, 2022. Additionally, our expected cash flows continue to support our estimated useful economic life of the intangible asset through March 2035.
Income taxes. We assess the need for a valuation allowance against our 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 is highly dependent upon historical and projected taxable income. Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities, which could be affected by the HETLIOZ® generic competition, amongst other factors. Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to the condensed consolidated financial statements included in Part I of this quarterly report on Form 10-Q (Quarterly Report) for information on recent accounting pronouncements.
Results of Operations
We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to continue to successfully commercialize our products, any possible payments made or received pursuant to license agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals and the status of existing and future potential litigation involving our products and intellectual property. In December 2022, the Delaware District Court ruled in favor of the remaining HETLIOZ® Defendants in our patent litigation relating to the Defendants’ filing of Abbreviated New Drug Applications (ANDAs) for generic versions of HETLIOZ® in the U.S. We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal. The FDA approved Teva’s ANDA in December 2022, and Teva has since launched its generic version of HETLIOZ® at risk in the U.S. The FDA has also approved the ANDAs for Apotex and MSN, and HETLIOZ® could face even more competition from generic companies in the U.S. in the near term in light of the patent litigation rulings against us. The MSN/Impax License Agreement grants MSN and Impax a non-exclusive license to manufacture and commercialize MSN’s generic version of HETLIOZ® in the U.S. effective as of March 13, 2035, unless prior to that date we obtain pediatric exclusivity for HETLIOZ®, in which case the license will be effective as of July 27, 2035. The MSN/Impax License Agreement also provides that MSN and Impax may launch a generic version of HETLIOZ® earlier under certain limited circumstances. MSN and its commercial partner, Amneal Pharmaceuticals, Inc. have informed us of their belief that such circumstances have occurred. We disagree with this position and intend to aggressively defend our legal rights to exclusivity for HETLIOZ®. Sales of generic versions of HETLIOZ® could result in a significant reduction in the demand for HETLIOZ® and/or the price at which we can sell it and/or create volatility in net product sales in future periods, which would have a material and adverse impact on our revenues and results of operations. Unless and until we are able to successfully enforce our legal rights to exclusivity, we may reduce the amount we spend with the intention of retaining the capability to ramp-up promptly.
Three months ended March 31, 2023 compared to three months ended March 31, 2022
Revenues. Total revenues increased by $2.3 million, or 4%, to $62.5 million for the three months ended March 31, 2023 compared to $60.2 million for the three months ended March 31, 2022. Revenues were as follows:
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
Net
Change
Percent
HETLIOZ® net product sales
$39,616 $37,031 $2,585 %
Fanapt® net product sales
22,882 23,161 (279)(1)%
Total net product sales$62,498 $60,192 $2,306 %
HETLIOZ® net product sales increased by $2.6 million, or 7%, to $39.6 million for the three months ended March 31, 2023 compared to $37.0 million for the three months ended March 31, 2022. The increase to net product sales was attributable to an increase in volume, partially offset by a decrease in price net of deductions. Our HETLIOZ® net product sales for the three months ended March 31, 2023 reflect higher unit sales as compared to recent prior periods. The higher unit sales during the three months ended March 31, 2023 resulted in a significant increase of inventory stocking at specialty pharmacy customers.
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HETLIOZ® net product sales will likely decline in future periods, potentially significantly, as a result of the reduction of the elevated inventory levels at specialty pharmacy customers at March 31, 2023 and as a result of continued generic competition absent removal of generic HETLIOZ® products from the U.S. market. Additionally, we constrained HETLIOZ® net product sales for the three months ended March 31, 2023 to an amount not probable of revenue reversal. HETLIOZ® net product sales could experience variability in future periods as uncertainties associated with variable consideration related to the significant increase of inventory stocking during the three months ended March 31, 2023 are resolved.
Fanapt® net product sales decreased by $0.3 million, or 1%, to $22.9 million for the three months ended March 31, 2023 compared to $23.2 million for the three months ended March 31, 2022. The decrease to net product sales was attributable to a decrease in volume, partially offset by an increase in price net of deductions.
Cost of goods sold. Cost of goods sold decreased by $0.9 million, or 16%, to $4.8 million for the three months ended March 31, 2023 compared to $5.7 million for the three months ended March 31, 2022. Cost of goods sold includes third-party manufacturing costs of product sold, third-party royalty costs and distribution and other costs. Third-party royalty costs were 5% of HETLIOZ® net product sales in Germany and 6% of Fanapt® net product sales. Third-party royalty costs on HETLIOZ® net product sales in the U.S. decreased from 10% to 5% in December 2022 and are expected to end in the second quarter of 2024. We evaluate expiry risk by evaluating current and future product demand relative to product shelf life and build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance, patient usage, and generic competition. Our inventory balance consisted of $7.4 million and $8.0 million of HETLIOZ® product and $3.3 million and $3.4 million of Fanapt® product as of March 31, 2023 and December 31, 2022, respectively.
Research and development expenses. Research and development expenses decreased by $1.7 million, or 8%, to $19.2 million for the three months ended March 31, 2023 compared to $21.0 million for the three months ended March 31, 2022. The decrease was primarily due to a decrease in clinical trial expenses associated with our Fanapt® development program, partially offset by an increase in clinical trial expenses associated with our tradipitant development program and our other development programs, which include expenses incurred on product discovery.
The following table summarizes the costs of our product development initiatives for the three months ended March 31, 2023 and 2022:
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
Direct project costs (1)
HETLIOZ®
$2,478 $3,084 
Fanapt®
2,030 8,600 
Tradipitant8,339 4,755 
VTR-297444 415 
CFTR378 332 
VQW-765362 933 
Other2,814 715 
Total direct project costs16,845 18,834 
Indirect project costs (1)
Stock-based compensation1,066 1,160 
Other indirect overhead1,326 975 
Total indirect project costs2,392 2,135 
Total research and development expense$19,237 $20,969 
(1)We record direct costs, including personnel costs and related benefits, on a project-by-project basis. Many of our research and development costs are not attributable to any individual project because we share resources across several development projects. We record indirect costs that support a number of our research and development activities in the aggregate, including stock-based compensation.
We expect to incur significant research and development expenses as we continue to develop our products. In addition, we expect to incur licensing costs in the future that could be substantial, as we continue our efforts to expand our product pipeline.
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Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $4.7 million, or 12%, to $36.1 million for the three months ended March 31, 2023 compared to $40.8 million for the three months ended March 31, 2022. The decrease in selling, general and administrative expenses was primarily the result of a decrease in spending on marketing activities and commercial support for our commercial products, as well as ongoing litigation.
Intangible asset amortization. Intangible asset amortization was $0.4 million for each of the three months ended March 31, 2023 and 2022.
Other income. Other income was $3.5 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended March 31, 2022. Other income primarily consists of investment income on our marketable securities, which increased in 2023 as a result of higher yields on our marketable securities.
Provision (benefit) for income taxes. A provision for income taxes of $2.3 million and income tax benefit of $1.1 million was recorded for the three months ended March 31, 2023 and 2022, respectively. The income tax expense (benefit) for each of the three months ended March 31, 2023 and 2022 was primarily driven by the estimated effective tax rate for the year as well as discrete income tax expense of $1.1 million for each period.
Liquidity and Capital Resources
As of March 31, 2023, our total cash and cash equivalents and marketable securities were $501.5 million compared to $466.9 million at December 31, 2022. Our cash and cash equivalents are deposits in operating accounts and highly liquid investments with an original maturity of 90 days or less at date of purchase and consist of investments in money market funds with commercial banks and financial institutions and commercial paper of high-quality corporate issuers. Our marketable securities consist of investments in government sponsored and corporate enterprises and commercial paper.
Our liquidity resources as of March 31, 2023 and December 31, 2022 are summarized as follows:
(in thousands)March 31,
2023
December 31, 2022
Cash and cash equivalents$354,171 $135,029 
Marketable securities:
U.S. Treasury and government agencies137,662 177,170 
Corporate debt9,663 154,660 
Total marketable securities147,325 331,830 
Total cash, cash equivalents and marketable securities$501,496 $466,859 
As of March 31, 2023, we maintained all of our cash, cash equivalents and marketable securities in two financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits, but we do not anticipate any losses with respect to such deposits.
In the normal course of our business, we regularly enter into agreements with third-party vendors under fee service arrangements which generally may be terminated on 90 days’ notice without incurring additional charges, other than charges for work completed or materials procured but not paid for through the effective date of termination and other costs incurred by our contractors in closing out work in progress as of the effective date of termination. Our non-cancellable purchase commitments for agreements longer than one year are not material. Various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase arrangements, are cancellable in nature or contain variable commitment terms within the agreement that are within our control.
We also have long-term contractual obligations related to our operating leases and license agreements. There have been no material changes to our long-term contractual obligations as disclosed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report. For further information regarding our license agreements, see Note 8, Commitments and Contingencies, to the condensed consolidated financial statements included in Part I of this Quarterly Report.
We do not have any off-balance sheet arrangements.
Based on our current operating plans, which include costs and expenses in connection with our continued clinical development of tradipitant and our other products, U.S. commercial activities for HETLIOZ® and Fanapt®, pursuit of regulatory approval of HETLIOZ® and Fanapt® in other regions and in other indications, and payments due upon achievement of milestones under our
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license agreements, we believe that our cash, cash equivalents and marketable securities and cash received from product sales will be sufficient for at least the next 12 months. Our future cash requirements and the adequacy of our available funds will depend on many factors, primarily including our ability to generate revenue, the scope and costs of our commercial, manufacturing and process development activities, the magnitude of our discovery, preclinical and clinical development programs, and potential costs to acquire or license the rights to additional products.
We may need or desire to obtain additional capital to finance our operations through debt, equity or alternative financing arrangements. We may also seek capital through collaborations or partnerships with other companies. The issuance of debt could require us to grant liens on certain of our assets that may limit our flexibility and debt securities may be convertible into common stock. If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may significantly dilute the ownership of our existing stockholders. If we are unable to obtain additional financing, we may be required to reduce the scope of our future activities which could harm our business, financial condition and operating results. There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all.
Cash Flow
The following table summarizes our net cash flows from operating, investing and financing activities for the three months ended March 31, 2023 and 2022:
 Three Months Ended
(in thousands)March 31,
2023
March 31,
2022
Net
Change
Net cash provided by:
Operating activities:
Net income (loss)$3,252 $(6,430)$9,682 
Non-cash charges6,511 10,526 (4,015)
Net change in operating assets and liabilities22,040 (50)22,090 
Operating activities31,803 4,046 27,757 
Investing activities:
Purchases of property and equipment(51)(75)24 
Net purchases, sales and maturities of marketable securities187,345 10,941 176,404 
Investing activities187,294 10,866 176,428 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
45 (57)102 
Net change in cash, cash equivalents and restricted cash$219,142 $14,855 $204,287 
Operating Activities: Cash flows provided by operating activities during the three months ended March 31, 2023 were $31.8 million, an increase of $27.8 million compared to $4.0 million during the three months ended March 31, 2022. The increase reflects an increase of $9.7 million in net income and an increase of $22.1 million from the net change in operating assets and liabilities primarily due to changes in our accounts receivable and product revenue allowances as a result of increased inventory stocking of HETLIOZ® at specialty pharmacy customers in the first quarter of 2023, partially offset by a decrease of $4.0 million in non-cash charges primarily due to a decrease in the change in deferred tax assets and additional amortization of discounts on our marketable securities.
Investing Activities: Cash flows provided by investing activities during the three months ended March 31, 2023 were $187.3 million, an increase of $176.4 million compared to $10.9 million during the three months ended March 31, 2022. The change in investing activities reflects the timing of net reinvestment of available cash and cash equivalents in our portfolio of marketable securities.
Financing Activities: Financing activities include proceeds from exercises of stock options. There were no exercises of stock options during the three months ended March 31, 2023 and March 31, 2022.
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ITEM 3Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is currently confined to our cash and cash equivalents, marketable securities and restricted cash. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes.
We deposit our cash with financial institutions that we consider to be of high credit quality and purchase marketable securities that are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S. dollars. Our marketable securities consist of commercial paper, corporate notes and U.S. government agency notes and have maturities of less than two years. We do not believe that an increase in market rates would have any significant impact on the realized value of our cash equivalents and marketable securities.
We are also exposed to risks related to changes in foreign currency exchange rates relating to our foreign operations. The functional currency of our international subsidiaries is the local currency. We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our subsidiaries’ respective functional currencies. We are also exposed to unfavorable fluctuations of the U.S. dollar, which is our reporting currency, against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. dollars for inclusion in our condensed consolidated financial statements. We do not currently hedge our foreign currency exchange rate risk. Foreign currency has not had, nor do we believe that a decrease or increase in any foreign currency exchange rates would have, a material impact on our results of operations.
ITEM 4Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of March 31, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of March 31, 2023, the end of the period covered by this quarterly report, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION
 
ITEM 1Legal Proceedings
Information with respect to this item may be found in Note 13, Legal Matters, to the condensed consolidated financial statements in Part I of this quarterly report on Form 10-Q, which is incorporated herein by reference.
ITEM 1ARisk Factors
We previously disclosed in Part I, Item 1A of our annual report on Form 10-K (Annual Report) for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 9, 2023, important factors which could affect our business, financial condition, results of operations and future operations under the heading Risk Factors. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results
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and the price of our common stock. Other than as set forth below, there have been no material changes in our risk factors subsequent to the filing of our Annual Report for the fiscal year ended December 31, 2022.
Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.
Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. Most recently, on March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although we assess our banking and customer relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect us, the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, result in breaches of our contractual obligations or result in violations of federal or state wage and hour laws. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our business, financial condition or results of operations.
ITEM 2Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3Defaults Upon Senior Securities
None
ITEM 4Mine Safety Disclosures
Not applicable
ITEM 5Other Information
Approval of Amendment to Amended and Restated 2016 Equity Incentive Plan
On March 16, 2023, our Board of Directors approved, subject to stockholder approval, an amendment to our Amended and Restated 2016 Equity Incentive Plan, as amended (the 2016 Plan). The amendment to the 2016 Plan, if approved by the stockholders, will increase the aggregate number of shares of common stock that may be issued by us pursuant to awards under the 2016 Plan by 1,900,000 shares.
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ITEM 6Exhibits
Exhibit
Number
  Description
3.1  
3.2  
10.1†*
10.2†*
31.1*  
31.2*