e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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|
|
For the transition period
from to
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Commission File Number:
001-34186
VANDA PHARMACEUTICALS INC.
(Exact name of
registrant as specified in its charter)
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|
Delaware
(State or other jurisdiction
of
incorporation or organization)
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03-0491827
(I.R.S. Employer
Identification No.)
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9605 Medical Center Drive, Suite 300
Rockville, Maryland
(Address of principal
executive offices)
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20850
(Zip
Code)
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(240) 599-4500
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of November 5, 2010, there were 28,041,379 shares
of the registrants common stock issued and outstanding.
Vanda
Pharmaceuticals Inc.
Quarterly
Report on
Form 10-Q
For the Quarter Ended September 30, 2010
INDEX
2
Part I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements (Unaudited).
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VANDA
PHARMACEUTICALS INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
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September 30,
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December 31,
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2010
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2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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102,467,982
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$
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205,295,488
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Marketable securities
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99,592,086
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Accounts receivable
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494,028
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3,163,898
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Inventory
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2,398,517
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Prepaid expenses, deposits and other current assets
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1,901,682
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2,092,581
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Deferred tax asset, current portion
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1,554,099
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Total current assets
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206,009,877
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212,950,484
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Property and equipment, net
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1,015,363
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1,316,302
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Intangible asset, net
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9,898,976
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11,017,065
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Restricted cash
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430,230
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430,230
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Total assets
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$
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217,354,446
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$
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225,714,081
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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295,478
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$
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2,423,877
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Accrued liabilities
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1,776,046
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2,321,301
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Accrued income taxes
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3,234,732
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Deferred revenues, current portion
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26,788,991
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26,788,991
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Total current liabilities
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32,095,247
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31,534,169
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Deferred rent
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494,370
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506,852
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Deferred revenues, noncurrent portion
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150,605,505
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170,642,202
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Total liabilities
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183,195,122
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202,683,223
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Commitments
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Stockholders equity
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Preferred stock, $0.001 par value; 20,000,000 shares
authorized and none issued and outstanding at September 30,
2010 and December 31, 2009
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Common stock, $0.001 par value; 150,000,000 shares
authorized as of September 30, 2010 and December 31,
2009; and 28,011,844 and 27,568,595 shares issued and
outstanding as of September 30, 2010 and December 31,
2009, respectively
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28,012
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27,569
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Additional paid-in capital
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289,919,532
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283,836,642
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Accumulated other comprehensive income
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51,945
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Accumulated deficit
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(255,840,165
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)
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(260,833,353
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)
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Total stockholders equity
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34,159,324
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23,030,858
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Total liabilities and stockholders equity
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$
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217,354,446
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$
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225,714,081
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
VANDA
PHARMACEUTICALS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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Revenues:
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Licensing agreement
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$
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6,752,293
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$
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$
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20,036,697
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$
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Royalty revenue
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494,028
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2,630,107
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Product sales
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5,290,150
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Total revenues
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7,246,321
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27,956,954
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Operating expenses:
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Cost of sales, licensing agreement
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376,792
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376,792
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1,118,089
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606,143
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Cost of sales, product sales
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2,890,746
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Research and development
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4,072,189
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2,091,984
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8,516,382
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11,620,918
|
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General and administrative
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2,053,584
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5,266,434
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7,384,502
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14,478,786
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Total operating expenses
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|
6,502,565
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7,735,210
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19,909,719
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26,705,847
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Income (loss) from operations
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743,756
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(7,735,210
|
)
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|
8,047,235
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|
|
|
(26,705,847
|
)
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Interest income
|
|
|
155,739
|
|
|
|
9,842
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|
|
|
288,574
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|
|
84,391
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|
|
|
|
|
|
|
|
|
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|
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|
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Income (loss) before tax provision
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|
|
899,495
|
|
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(7,725,368
|
)
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8,335,809
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|
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|
(26,621,456
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)
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Tax provision (benefit)
|
|
|
(2,284,987
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)
|
|
|
|
|
|
|
3,342,621
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
|
|
$
|
3,184,482
|
|
|
$
|
(7,725,368
|
)
|
|
$
|
4,993,188
|
|
|
$
|
(26,621,456
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted
|
|
$
|
0.11
|
|
|
$
|
(0.28
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Shares used in calculation of net income (loss) per share:
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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Basic
|
|
|
28,003,453
|
|
|
|
27,196,694
|
|
|
|
27,872,542
|
|
|
|
26,920,742
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
|
28,466,532
|
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27,196,694
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|
|
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28,429,223
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26,920,742
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
VANDA
PHARMACEUTICALS INC.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY (Unaudited)
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Accumulated
|
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|
|
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|
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Additional
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Other
|
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Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
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Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
Balances at December 31, 2009
|
|
|
27,568,595
|
|
|
$
|
27,569
|
|
|
$
|
283,836,642
|
|
|
$
|
|
|
|
$
|
(260,833,353
|
)
|
|
|
|
|
|
$
|
23,030,858
|
|
Issuance of common stock from exercised stock options/restricted
stock units
|
|
|
443,249
|
|
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|
443
|
|
|
|
774,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,816
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,529,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,529,864
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
116,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,665
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,661,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,661,988
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,993,188
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|
$
|
4,993,188
|
|
|
|
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,945
|
|
|
|
|
|
|
|
51,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,045,133
|
|
|
|
5,045,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2010
|
|
|
28,011,844
|
|
|
$
|
28,012
|
|
|
$
|
289,919,532
|
|
|
$
|
51,945
|
|
|
$
|
(255,840,165
|
)
|
|
|
|
|
|
$
|
34,159,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
VANDA
PHARMACEUTICALS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,993,188
|
|
|
$
|
(26,621,456
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
257,903
|
|
|
|
346,785
|
|
Employee and non-employee stock-based compensation
|
|
|
3,646,529
|
|
|
|
8,708,726
|
|
Loss on disposal of assets
|
|
|
(23,185
|
)
|
|
|
|
|
Amortization of premiums and discounts on marketable securities
|
|
|
(11,731
|
)
|
|
|
122,963
|
|
Amortization of intangible assets
|
|
|
1,118,089
|
|
|
|
606,143
|
|
Deferred tax asset
|
|
|
(1,554,099
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,669,870
|
|
|
|
|
|
Inventory
|
|
|
2,398,517
|
|
|
|
(1,758,427
|
)
|
Prepaid expenses, deposits and other current assets
|
|
|
190,899
|
|
|
|
(1,345,383
|
)
|
Accounts payable
|
|
|
(2,128,399
|
)
|
|
|
833,854
|
|
Accrued liabilities
|
|
|
(545,255
|
)
|
|
|
(852,389
|
)
|
Accrued income taxes
|
|
|
3,234,732
|
|
|
|
|
|
Other liabilities
|
|
|
(12,482
|
)
|
|
|
3,061
|
|
Deferred revenues
|
|
|
(20,036,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,802,121
|
)
|
|
|
(19,956,123
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of intangible asset
|
|
|
|
|
|
|
(7,000,000
|
)
|
Proceeds from sales of property and equipment
|
|
|
66,221
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(124,028,410
|
)
|
|
|
(11,365,815
|
)
|
Proceeds from sales of marketable securities
|
|
|
|
|
|
|
126,547
|
|
Maturities of marketable securities
|
|
|
24,500,000
|
|
|
|
15,250,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(99,462,189
|
)
|
|
|
(2,989,268
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
1,661,988
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
774,816
|
|
|
|
1,283,734
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,436,804
|
|
|
|
1,283,734
|
|
Net change in cash and cash equivalents
|
|
|
(102,827,506
|
)
|
|
|
(21,661,657
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
205,295,488
|
|
|
|
39,079,304
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
102,467,982
|
|
|
$
|
17,417,647
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities
|
|
|
|
|
|
|
|
|
Intangible asset acquisition included in accounts payable
|
|
$
|
|
|
|
$
|
5,000,000
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
1.
|
Business
Organization and Presentation
|
Business
organization
Vanda Pharmaceuticals Inc. (Vanda or the Company) is a
biopharmaceutical company focused on the development and
commercialization of products for central nervous system
disorders. Vanda commenced its operations in 2003. The
Companys lead product,
Fanapt®
(iloperidone), which Novartis Pharma AG (Novartis) began
marketing in the U.S. in the first quarter of 2010, is a
compound for the treatment of schizophrenia. On May 6,
2009, the United States Food and Drug Administration (FDA)
granted U.S. marketing approval of
Fanapt®
for the acute treatment of schizophrenia in adults. On
October 12, 2009, Vanda entered into an amended and
restated sublicense agreement with Novartis. Vanda had
originally entered into a sublicense agreement with Novartis on
June 4, 2004 pursuant to which Vanda obtained certain
worldwide exclusive licenses from Novartis relating to
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot) formulation of
Fanapt®.
Pursuant to the amended and restated sublicense agreement, Vanda
received an upfront payment of $200.0 million at the end of
2009 and is eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. Vanda also receives royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapt®
in the U.S. and Canada. In addition, Vanda is no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. Vanda retains exclusive rights to
Fanapt®
outside the U.S. and Canada and Vanda will have exclusive
rights to use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option,
Vanda will enter into good faith discussions with Novartis
relating to the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada. On February 23, 2010,
the U.S. Patent and Trademark Office (PTO) issued a notice
of allowance for Vandas patent application for the
microsphere long acting injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed Vanda that the patent
has been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 27, 2023.
Subsequently, on October 28, 2010, the PTO informed Vanda
that it has granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 25, 2023. Vanda
continues to explore the regulatory path and commercial
opportunity for
Fanapt®
oral formulation outside of the U.S. and Canada. On
November 1, 2010, the Therapeutic Goods Administration of
Australias Department of Health and Ageing, accepted for
evaluation Vandas application for marketing approval.
Tasimelteon is an oral compound in development for the treatment
of sleep and mood disorders including Circadian Rhythm Sleep
Disorders (CRSD). On January 19, 2010, the FDA granted
orphan drug designation status for tasimelteon in a specific
CRSD, Non-24 Hour Sleep/Wake Disorder (N24HSWD) in blind
individuals with no light perception. The FDA grants orphan drug
designation to drugs that may provide significant therapeutic
advantage over existing treatments and target conditions
affecting 200,000 or fewer U.S. patients per year. Orphan
drug designation provides potential financial and regulatory
incentives including study design assistance, waiver of FDA user
fees, tax credits and up to seven years of market exclusivity
upon marketing approval. Vanda initiated two clinical trials to
pursue FDA approval of tasimelteon for the treatment of N24HSWD
in blind individuals with no light perception in the third
quarter of 2010. The first trial is a randomized, double-blind,
placebo-controlled study with a planned enrollment of
approximately 160 patients with N24HSWD. The trial has a
six month treatment period and includes measures of both
nighttime and daytime sleep, as well as laboratory measures of
the synchronization between the internal body clock and the
24-hour
environmental light/dark cycle. Vanda also initiated a one-year
safety study of tasimelteon for the treatment of N24HSWD. This
trial is an open-label safety study with a planned enrollment of
approximately 140 patients with N24HSWD. Vanda plans to
conduct additional clinical trials over the next one to two
years to support the use of tasimelteon as a circadian regulator
and the submission of a new drug application (NDA) to the FDA
and a marketing authorization application to the European
7
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
Medicines Agency (EMA). The application for orphan designation
from the EMA is pending. Tasimelteon is also ready for
Phase II trials for the treatment of depression. Given the
range of potential indications for tasimelteon, Vanda may pursue
one or more partnerships for the development and
commercialization of tasimelteon worldwide.
Throughout this quarterly report on
Form 10-Q,
we refer to
Fanapt®
within the U.S. and Canada as our partnered product and we
refer to
Fanapt®
outside the U.S. and Canada and tasimelteon as our
products. All other compounds are referred to as our product
candidates. In addition, we refer to our partnered products,
products and product candidates collectively as our compounds.
Moreover, we refer to drug products generally as drugs or
products.
Basis
of presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles (GAAP) for
interim financial information and the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all the information and
footnotes required by GAAP for complete financial statements and
should be read in conjunction with the Companys
consolidated financial statements for the year ended
December 31, 2009 included in the Companys annual
report on
Form 10-K.
The financial information as of September 30, 2010 and for
the period of the three and nine months ended September 30,
2010 and 2009, is unaudited, but in the opinion of management
all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair statement of the results of
these interim periods have been included. The condensed
consolidated balance sheet data as of December 31, 2009 was
derived from audited financial statements but does not include
all disclosures required by GAAP.
The results of the Companys operations for any interim
period are not necessarily indicative of the results that may be
expected for any other interim period or for a full fiscal year.
The financial information included herein should be read in
conjunction with the consolidated financial statements and notes
in the Companys annual report incorporated by reference in
the
Form 10-K
for the year ended December 31, 2009.
|
|
2.
|
Summary
of Significant Accounting Policies
|
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. Actual results could differ from those
estimates.
Cash
and cash equivalents
For purposes of the condensed consolidated balance sheets and
condensed consolidated statements of cash flows, cash
equivalents represent highly-liquid investments with a maturity
date of three months or less at the date of purchase.
Marketable
securities
The Company classifies all of its marketable securities as
available-for-sale
securities. The Companys investment policy requires the
selection of high-quality issuers, with bond ratings of AAA to
A1+/P1.
Available-for-sale
securities are carried at fair market value, with unrealized
gains and losses reported as a component of stockholders
equity in accumulated other comprehensive income/loss. Interest
and dividend income is recorded when earned and included in
interest income. Premiums and discounts on marketable securities
are amortized and accreted, respectively, to maturity and
included in interest income. The Company uses the specific
identification method in computing realized gains and losses on
the sale of investments, which would be included in the
8
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
condensed consolidated statements of operations when generated.
Marketable securities with a maturity of more than one year as
of the balance sheet date are classified as long-term securities.
Inventory
The Company values inventories at the lower of cost or net
realizable value. The Company analyzes its inventory levels
quarterly and writes down inventory that has become obsolete, or
has a cost basis in excess of its expected net realizable value
and inventory quantities in excess of expected requirements.
Expired inventory is disposed of and the related costs are
written off to cost of sales. Prior to FDA approval, all
Fanapt®
manufacturing-related costs were included in research and
development expenses. Subsequent to FDA approval of
Fanapt®,
manufacturing costs related to this product are capitalized.
Pursuant to the amended and restated sublicense agreement with
Novartis, the Company sold its entire stock of finished product
and the remainder of its raw materials to Novartis in the first
six months of 2010.
Intangible
asset, net
Costs incurred for products or product candidates not yet
approved by the FDA and for which no alternative future use
exists are recorded as expense. In the event a product or
product candidate has been approved by the FDA or an alternative
future use exists for a product or product candidate, patent and
license costs are capitalized and amortized over the expected
patent life of the related product or product candidate.
Milestone payments to the Companys partners are recognized
when it is deemed probable that the milestone event will occur.
As a result of the FDAs approval of the NDA for
Fanapt®,
the Company met a milestone under its original sublicense
agreement with Novartis which required the Company to make a
milestone payment of $12.0 million to Novartis. The
$12.0 million is being amortized on a straight line basis
over the remaining life of the U.S. patent for
Fanapt®,
which the Company expects to last until May 15, 2017. This
includes the Hatch-Waxman extension that extends patent
protection for drug compounds for a period of up to five years
to compensate for time spent in development and a six-month
pediatric term extension. This term is the Companys best
estimate of the life of the patent; if, however, the
Hatch-Waxman or pediatric extensions are not granted, the
intangible asset will be amortized over a shorter period.
Amortization of the intangible asset is recorded as a component
of cost of sales, licensing agreement.
The carrying values of intangible assets are periodically
reviewed to determine if the facts and circumstances suggest
that a potential impairment may have occurred. The Company had
no impairments of its intangible assets for the nine months
ended September 30, 2010.
Revenue
Recognition
The Companys revenues are derived primarily from the
amended and restated sublicense agreement with Novartis and
include an up-front payment, product sales and future milestone
and royalty payments. Revenue is considered both realizable and
earned when each one of the following four conditions is met:
(1) persuasive evidence of an arrangement exists,
(2) the arrangement fee is fixed or determinable,
(3) delivery or performance has occurred and
(4) collectability is reasonably assured. Pursuant to the
amended and restated sublicense agreement, Novartis has the
right to commercialize and develop
Fanapt®
in the U.S. and Canada. Under the amended and restated
sublicense agreement, the Company received an upfront payment of
$200.0 million in December of 2009. Pursuant to the amended
and restated sublicense agreement, the Company and Novartis
established a Joint Steering Committee (JSC) following the
effective date of the amended and restated sublicense agreement.
The Company expects to have an active role on the JSC and
concluded that the JSC constitutes a deliverable under the
amended and restated sublicense agreement and that revenue
related to the upfront payment will be recognized ratably over
the term of the JSC; however, the delivery or performance has no
term as the exact length of the JSC is undefined. As a result,
the Company deems the performance period of the JSC to be the
life of the U.S. patent of
Fanapt®,
which the Company expects to last until May 15, 2017. This
includes the Hatch-Waxman extension that provides patent
9
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
protection for drug compounds for a period of up to five years
to compensate for time spent in development and a six-month
pediatric term extension. This term is the Companys best
estimate of the life of the patent. Revenue will be recognized
ratably from the date the amended and restated sublicense
agreement became effective (November 27, 2009) through
the expected life of the U.S. patent for
Fanapt®
(May 15, 2017). Revenue related to product sales is
recognized upon delivery to Novartis. The Company recognizes
revenue from
Fanapt®
royalties and commercial and development milestones from
Novartis when realizable and earned.
Concentrations
of credit risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash, cash equivalents and marketable securities. The Company
places its cash, cash equivalents and marketable securities with
what the Company believes to be highly-rated financial
institutions. At September 30, 2010, the Company maintained
all of its cash, cash equivalents and marketable securities in
three financial institutions. Deposits held with these
institutions may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand,
and the Company believes there is minimal risk of losses on such
balances.
Employee
stock-based compensation
The Company accounts for its stock-based compensation expenses
in accordance with the FASB guidance on share-based payments
which were adopted on January 1, 2006. Accordingly,
compensation costs for all stock-based awards to employees and
directors are measured based on the grant date fair value of
those awards and recognized over the period during which the
employee or director is required to perform service in exchange
for the award. The Company generally recognizes the expense over
the awards vesting period.
For stock awards granted subsequent to 2006, the fair value of
these awards are amortized using the accelerated attribution
method. For stock awards granted prior to January 1, 2006,
expenses are amortized under the accelerated attribution method
for options that were modified after the original grant date and
under the straight-line attribution method for all other
options. As stock-based compensation expense recognized in the
consolidated statements of operations is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are required to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Pre-vesting
forfeitures on the options granted during 2008, 2007 and 2006,
were estimated to be approximately 2% and was increased to 4% in
2009 and 2010 based on the Companys historical experience.
10
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
Total employee stock-based compensation expense recognized
during the three and nine months ended September 30, 2010
and 2009 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Research and development
|
|
$
|
428,853
|
|
|
$
|
707,646
|
|
|
$
|
1,982,788
|
|
|
$
|
1,517,324
|
|
General and administrative
|
|
|
368,174
|
|
|
|
2,555,576
|
|
|
|
1,547,076
|
|
|
|
6,803,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
797,027
|
|
|
$
|
3,263,222
|
|
|
$
|
3,529,864
|
|
|
$
|
8,230,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of stock-based compensation expense
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,003,453
|
|
|
|
27,196,694
|
|
|
|
27,872,542
|
|
|
|
26,920,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,466,532
|
|
|
|
27,196,694
|
|
|
|
28,429,223
|
|
|
|
26,920,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, approximately $6.3 million
of total unrecognized compensation costs related to non-vested
awards are expected to be recognized over a weighted average
period of 1.31 years. The total income tax benefit
recognized in the unaudited consolidated statement of changes in
stockholders equity for the stock-based compensation
arrangements was $1.7 million and $0 for the nine months
ended September 30, 2010 and 2009, respectively.
As of September 30, 2010, the Company had two equity
incentive plans, the Second Amended and Restated Management
Equity Plan (the 2004 Plan) and the 2006 Equity Incentive Plan
(the 2006 Plan) that were adopted in December 2004 and April
2006, respectively. An aggregate of 690,952 shares were
subject to outstanding options granted under the 2004 Plan as of
September 30, 2010, and no additional options will be
granted under this plan. As of September 30, 2010, there
are 5,619,924 shares of the Companys common stock
reserved under the 2006 Plan of which 3,095,422 shares were
subject to outstanding options and restricted stock units (RSUs)
issued to employees and non-employees.
Options are subject to terms and conditions established by the
compensation committee of the board of directors. None of the
stock-based awards are classified as a liability as of
September 30, 2010. Option awards have
10-year
contractual terms and all options granted prior to
December 31, 2006, options granted to new employees, and
certain options granted to existing employees vest and become
exercisable on the first anniversary of the grant date with
respect to 25% of the shares subject to the option awards. The
remaining 75% of the shares subject to the option awards vest
and become exercisable monthly in equal installments thereafter
over three years. Certain option awards granted to existing
employees after December 31, 2006 vest and become
exercisable monthly in equal installments over four years. The
initial stock options granted to directors upon their election
vest and become exercisable in equal monthly installments over a
period of four years, while the subsequent annual stock option
grants to directors vest and become exercisable in equal monthly
installments over a period of one year. Certain option awards to
executives and directors provide for accelerated vesting if
there is a change in control of the Company. Certain option
awards to employees and executives provide for accelerated
vesting if the respective employees or executives
service is terminated by the Company for any reason other than
cause or permanent disability.
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
11
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
historical volatility of the common stock of comparable entities
and other factors due to the lack of historic information of the
Companys publicly traded common stock. The expected term
of options granted is based on the transition approach provided
by FASB guidance as the options meet the plain
vanilla criteria required by this guidance. The risk-free
interest rates are based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect
at the time of the grant. The Company has not paid dividends to
its stockholders since its inception and does not plan to pay
dividends in the foreseeable future.
Assumptions used in the Black-Scholes-Merton option pricing
model for employee and director stock options granted during the
nine months ended September 30, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
68
|
%
|
|
|
68
|
%
|
Weighted average expected term (years)
|
|
|
6.03
|
|
|
|
6.03
|
|
Weighted average risk-free rate
|
|
|
2.38
|
%
|
|
|
2.95
|
%
|
A summary of option activity for the 2004 Plan as of
September 30, 2010, and changes during the nine months then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
Aggregate
|
|
|
Number of
|
|
Exercise Price at
|
|
Remaining Term
|
|
Intrinsic
|
|
|
Shares
|
|
Grant Date
|
|
(Years)
|
|
Value
|
|
Outstanding at December 31, 2009
|
|
|
732,894
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(41,938
|
)
|
|
$
|
4.65
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4
|
)
|
|
$
|
4.73
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
|
|
690,952
|
|
|
$
|
1.81
|
|
|
|
5.03
|
|
|
$
|
3,363,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010
|
|
|
690,952
|
|
|
$
|
1.81
|
|
|
|
5.03
|
|
|
$
|
3,363,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of option activity for the 2006 Plan as of
September 30, 2010, and changes during the nine months then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
Aggregate
|
|
|
Number of
|
|
Exercise Price at
|
|
Remaining Term
|
|
Intrinsic
|
|
|
Shares
|
|
Grant Date
|
|
(Years)
|
|
Value
|
|
Outstanding at December 31, 2009
|
|
|
3,484,845
|
|
|
$
|
15.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
225,000
|
|
|
$
|
8.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(112,311
|
)
|
|
$
|
5.16
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(269,595
|
)
|
|
$
|
26.83
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(465,767
|
)
|
|
$
|
13.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
|
|
2,862,172
|
|
|
$
|
15.18
|
|
|
|
7.87
|
|
|
$
|
1,144,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010
|
|
|
1,617,709
|
|
|
$
|
18.49
|
|
|
|
7.25
|
|
|
$
|
649,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted
during the nine months ended September 30, 2010 was $5.21
per share. For the nine months ended September 30, 2010 and
2009, the Company received a total of $774,816 and $1,283,734,
respectively, in cash from options exercised under the
stock-based arrangements.
12
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
A RSU is a stock award that entitles the holder to receive
shares of the Companys common stock as the award vests.
The fair value of each RSU was based on the closing price of the
Companys stock on the date of grant which equals the RSUs
intrinsic value. On December 17, 2009, the Compensation
Committee approved RSUs for each of the Companys employees
to be awarded on January 1, 2010. These awards vest in
equal annual installments over four years beginning
January 1, 2011, provided that the employee remains
employed with us. As of September 30, 2010, there was
approximately $2,059,444 of total unrecognized compensation cost
related to unvested RSU awards granted under the Companys
stock incentive plans.
A summary of RSU activity for the 2006 Plan as of
September 30, 2010, and changes during the nine months then
ended are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted Average
|
|
Aggregate
|
|
|
Shares
|
|
Price/Share
|
|
Intrinsic Value
|
|
Unvested at December 31, 2009
|
|
|
12,500
|
|
|
$
|
0.80
|
|
|
$
|
140,625
|
|
Granted
|
|
|
292,250
|
|
|
$
|
11.35
|
|
|
|
|
|
Vested
|
|
|
(2,500
|
)
|
|
$
|
0.80
|
|
|
|
|
|
Cancelled
|
|
|
(69,000
|
)
|
|
$
|
11.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2010
|
|
|
233,250
|
|
|
$
|
10.80
|
|
|
$
|
1,541,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
The Company accounts for income taxes under the liability method
in accordance with the FASB provisions on accounting for income
taxes, which requires companies to account for deferred income
taxes using the asset and liability method. Under the asset and
liability method, current income tax expense or benefit is the
amount of income taxes expected to be payable or refundable for
the current year. A deferred income tax asset or liability is
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Tax rate
changes are reflected in income during the period such changes
are enacted. Changes in ownership may limit the amount of net
operating loss carryforwards that can be utilized in the future
to offset taxable income.
Segment
information
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
Net income (loss) is calculated in accordance with FASB guidance
on earnings per share. Basic earnings per share (EPS) is
calculated by dividing the net income or loss by the weighted
average number of shares of common stock outstanding, reduced by
the weighted average unvested shares of common stock subject to
repurchase. Diluted EPS is computed by dividing the net income
or loss by the weighted average number of other potential common
stock outstanding for the period. Other potential common stock
includes stock options, warrants and RSUs, but only to the
extent that their inclusion is dilutive.
13
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
The following schedule presents the calculation of basic and
diluted net income (loss) per share of common stock for the
three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,184,482
|
|
|
$
|
(7,725,368
|
)
|
|
$
|
4,993,188
|
|
|
$
|
(26,621,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding, basic
|
|
|
28,003,453
|
|
|
|
27,196,694
|
|
|
|
27,872,542
|
|
|
|
26,920,742
|
|
Stock options and restricted stock units related to the issuance
of common stock
|
|
|
463,079
|
|
|
|
|
|
|
|
556,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding, diluted
|
|
|
28,466,532
|
|
|
|
27,196,694
|
|
|
|
28,429,223
|
|
|
|
26,920,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share applicable to
common stockholders
|
|
$
|
0.11
|
|
|
$
|
(0.28
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities not included in diluted net income
(loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock and restricted stock units
|
|
|
3,786,374
|
|
|
|
4,320,992
|
|
|
|
3,786,374
|
|
|
|
4,320,992
|
|
The Company incurred a net loss for the three and nine months
ended September 30, 2009, causing inclusion of any
potentially dilutive securities to have an anti-dilutive affect,
resulting in diluted loss per share and basic loss per share
attributable to common stockholders being equivalent.
The following is a summary of the Companys
available-for-sale
marketable securities as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
10,813,685
|
|
|
$
|
368
|
|
|
$
|
(1,103
|
)
|
|
$
|
10,812,950
|
|
U.S. corporate debt
|
|
|
88,726,456
|
|
|
|
59,779
|
|
|
|
(7,099
|
)
|
|
|
88,779,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,540,141
|
|
|
$
|
60,147
|
|
|
$
|
(8,202
|
)
|
|
$
|
99,592,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company did not hold any
available-for-sale
marketable securities.
14
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
The carrying amounts of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
|
|
|
$
|
1,094,388
|
|
Finished goods
|
|
|
|
|
|
|
1,304,129
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
|
|
|
$
|
2,398,517
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the amended and restated sublicense agreement with
Novartis, Novartis was obligated to purchase all
Fanapt®
inventory following the effective date of the agreement, subject
to such inventory meeting certain requirements. The Company sold
its entire stock of finished product and the remainder of its
raw materials to Novartis in the first six months of 2010.
|
|
6.
|
Prepaid
Expenses, Deposits and Other Current Assets
|
The following is a summary of the Companys prepaid
expenses, deposits and other current assets, as of
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deposits with vendors
|
|
$
|
50,000
|
|
|
$
|
150,000
|
|
Prepaid insurance
|
|
|
388,990
|
|
|
|
283,839
|
|
Other prepaid expenses and advances
|
|
|
1,341,119
|
|
|
|
1,657,521
|
|
Accrued interest income
|
|
|
121,573
|
|
|
|
1,221
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses, deposits and other current assets
|
|
$
|
1,901,682
|
|
|
$
|
2,092,581
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and Equipment, Net
|
The following is a summary of the Companys property and
equipment-at cost, as of September 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2010
|
|
|
2009
|
|
|
Laboratory equipment
|
|
|
5
|
|
|
$
|
1,281,877
|
|
|
$
|
1,348,098
|
|
Computer equipment
|
|
|
3
|
|
|
|
763,894
|
|
|
|
763,894
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
705,784
|
|
|
|
705,784
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
844,158
|
|
|
|
844,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,595,713
|
|
|
|
3,661,934
|
|
Lessaccumulated depreciation and amortization
|
|
|
|
|
|
|
(2,580,350
|
)
|
|
|
(2,345,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,015,363
|
|
|
$
|
1,316,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the nine months ended
September 30, 2010 and 2009 were $257,903 and $346,785,
respectively.
15
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
The intangible asset consists of the following as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Fanapt®
|
|
|
8 years
|
|
|
$
|
12,000,000
|
|
|
$
|
2,101,024
|
|
|
$
|
9,898,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000,000
|
|
|
$
|
2,101,024
|
|
|
$
|
9,898,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible asset consisted of the following as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Fanapt®
|
|
|
8 years
|
|
|
$
|
12,000,000
|
|
|
$
|
982,935
|
|
|
$
|
11,017,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000,000
|
|
|
$
|
982,935
|
|
|
$
|
11,017,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 6, 2009, the Company announced that the FDA had
approved the NDA for
Fanapt®.
As a result of the FDAs approval of the NDA for
Fanapt®,
the Company met a milestone under its original sublicense
agreement with Novartis which required the Company to make a
milestone payment of $12.0 million to Novartis. The
$12.0 million is being amortized on a straight line basis
over the remaining life of the U.S. patent for
Fanapt®,
which the Company expects to last until May 15, 2017. This
includes the Hatch-Waxman extension that provides patent
protection for drug compounds for a period of up to five years
to compensate for time spent in development and a six-month
pediatric term extension. This term is the Companys best
estimate of the life of the patent; if, however, the
Hatch-Waxman or pediatric extensions are not granted, the
intangible asset will be amortized over a shorter period.
Intangible assets are amortized over their estimated useful
economic life using the straight line method. Amortization
expense was $1,118,089 and $606,143 for the nine months ended
September 30, 2010 and 2009, respectively. The Company
capitalized and began amortizing the asset immediately following
the FDA approval of the NDA for
Fanapt®.
The following is a summary of accrued liabilities as of
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued research and development expenses
|
|
$
|
851,135
|
|
|
$
|
1,033,339
|
|
Accrued consulting and other professional fees
|
|
|
264,064
|
|
|
|
1,076,111
|
|
Employee benefits
|
|
|
633,847
|
|
|
|
106,126
|
|
Other accrued expenses
|
|
|
27,000
|
|
|
|
105,725
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
1,776,046
|
|
|
$
|
2,321,301
|
|
|
|
|
|
|
|
|
|
|
16
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
The Companys revenue consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Revenue
|
|
|
September 30, 2010
|
|
|
|
Deferred Revenue
|
|
|
Recognized
|
|
|
Deferred Revenue
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreement
|
|
$
|
197,431,193
|
|
|
$
|
20,036,697
|
|
|
$
|
177,394,496
|
|
Royalty revenue
|
|
|
|
|
|
|
2,630,107
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
5,290,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
197,431,193
|
|
|
$
|
27,956,954
|
|
|
$
|
177,394,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanda entered into an amended and restated sublicense agreement
with Novartis on October 12, 2009, pursuant to which
Novartis has the right to commercialize and develop
Fanapt®
in the U.S. and Canada. Under the amended and restated
sublicense agreement, Vanda received an upfront payment of
$200.0 million in December of 2009. Revenue will be
recognized ratably from the date the amended and restated
sublicense agreement became effective (November 27,
2009) through the expected life of the U.S. patent for
Fanapt®
(May 15, 2017). This includes the Hatch-Waxman extension
that provides patent protection for drug compounds for a period
of up to five years to compensate for time spent in development
and a six-month pediatric term extension. This term is the
Companys best estimate of the life of the patent. For the
nine months ended September 30, 2010, the Company
recognized $20.0 million of revenue for the licensing
agreement. Vanda recognized $5.3 million for product sold
to Novartis for the nine months ended September 30, 2010.
Vanda recognizes product revenue upon delivery of our products
to Novartis. Vanda recognized royalty revenue of
$2.6 million for the nine months ended September 30,
2010. Royalty revenue is based on a percentage of the quarterly
net sales of
Fanapt®
sold in the U.S. and Canada by Novartis and is recorded
when reliably measurable and earned.
|
|
11.
|
Commitments
and Contingencies
|
Operating
leases
The Company has commitments totaling approximately
$4.5 million under operating real estate leases for its
headquarters located in Rockville, Maryland, expiring in 2016.
Income
taxes
The Company has submitted a private letter ruling request and a
supplemental information letter to the Internal Revenue Service
(IRS) to clarify the application of certain section 382
rules in the Internal Revenue Code of 1986, as amended (Code).
Section 382 of the Code imposes an annual limitation on the
ability of a corporation that undergoes an ownership
change to utilize its tax attributes, including net
operating loss carryforwards and research and development
credits, to reduce its tax liability. The Company has determined
that due to a potential December 31, 2008 ownership change,
the ability to utilize its tax attributes to offset future tax
liabilities may be materially limited. An adverse ruling by the
IRS could have a material adverse impact on tax expense in the
current year as the Company could lose the ability to utilize up
to approximately $108.7 million in net operating losses and
$5.5 million in research and development credits, and a
material negative effect on the Companys results of
operations and cash flows.
Guarantees
and indemnifications
The Company has entered into a number of standard intellectual
property indemnification agreements in the ordinary course of
its business. Pursuant to these agreements, the Company
indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the
indemnified party, generally the Companys business
partners or customers, in connection with any U.S. patent
or any copyright or other intellectual
17
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
property infringement claim by any third party with respect to
the Companys products. The term of these indemnification
agreements is generally perpetual from the date of execution of
the agreement. The maximum potential amount of future payments
the Company could be required to make under these
indemnification agreements is unlimited. Since inception, the
Company has not incurred costs to defend lawsuits or settle
claims related to these indemnification agreements. The Company
also indemnifies its officers and directors for certain events
or occurrences, subject to certain limits. The Company believes
that the fair value of the indemnification agreements is
minimal, and accordingly the Company has not recognized any
liabilities relating to these agreements as of
September 30, 2010.
License
agreements
The Companys rights to develop and commercialize its
products are subject to the terms and conditions of licenses
granted to the Company by other pharmaceutical companies.
Fanapt®. The
Company acquired exclusive worldwide rights to patents and
patent applications for
Fanapt®,
previously known as iloperidone, in 2004 through a sublicense
agreement with Novartis. A predecessor company of
sanofi-aventis, Hoechst Marion Roussel, Inc. (HMRI), discovered
Fanapt®
and completed early clinical work on the compound. In 1996,
following a review of its product portfolio, HMRI licensed its
rights to the
Fanapt®
patents and patent applications to Titan Pharmaceuticals, Inc.
(Titan) on an exclusive basis. In 1997, soon after it had
acquired its rights, Titan sublicensed its rights to
Fanapt®
on an exclusive basis to Novartis. In June 2004, the Company
acquired exclusive worldwide rights to these patents and patent
applications as well as certain Novartis patents and patent
applications to develop and commercialize
Fanapt®
through a sublicense agreement with Novartis. In partial
consideration for this sublicense, the Company paid Novartis an
initial license fee of $0.5 million and was obligated to
make future milestone payments to Novartis of less than
$100.0 million in the aggregate (the majority of which were
tied to sales milestones), as well as royalty payments to
Novartis at a rate which, as a percentage of net sales, was in
the mid-twenties. In November 2007, the Company met a milestone
under this sublicense agreement relating to the acceptance of
its filing of the NDA for
Fanapt®
for the treatment of schizophrenia and made a corresponding
payment of $5.0 million to Novartis. As a result of the
FDAs approval of the NDA for
Fanapt®
in May 2009, the Company met an additional milestone under this
sublicense agreement which required the Company to make a
milestone payment of $12.0 million to Novartis.
On October 12, 2009, Vanda entered into an amended and
restated sublicense agreement with Novartis which amended and
restated the June 2004 sublicense agreement with Novartis.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. Novartis began selling
Fanapt®
in the U.S. during the first quarter of 2010. Novartis is
responsible for the further clinical development activities in
the U.S. and Canada, including the development of a
long-acting injectable (or depot) formulation of
Fanapt®.
Pursuant to the amended and restated sublicense agreement, Vanda
received an upfront payment of $200.0 million and Vanda is
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. Vanda also receives royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapt®
in the U.S. and Canada. In addition, Vanda is no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. Vanda retains exclusive rights to
Fanapt®
outside the U.S. and Canada and Vanda has exclusive rights
to use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option,
Vanda will enter into good faith discussions with Novartis
relating to the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada.
Vanda may lose its rights to develop and commercialize
Fanapt®
outside the U.S. and Canada if it fails to comply with
certain requirements in the amended and restated sublicense
agreement regarding its financial condition, or if Vanda fails
to comply with certain diligence obligations regarding its
development or
18
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
commercialization activities or if Vanda otherwise breaches the
amended and restated sublicense agreement and fails to cure such
breach. Vandas rights to develop and commercialize
Fanapt®
outside the U.S. and Canada may be impaired if it does not
cure breaches by Novartis of similar obligations contained its
sublicense agreement with Titan for
Fanapt®.
Vanda is not aware of any such breach by Novartis. In addition,
if Novartis breaches the amended and restated sublicense
agreement with respect to its commercialization activities in
the U.S. or Canada, Vanda may terminate Novartis
commercialization rights in the applicable country and Vanda
would no longer receive royalty payments from Novartis in
connection with such country in the event of such termination.
Tasimelteon. In February 2004, the Company
entered into a license agreement with Bristol-Myers Squibb (BMS)
under which the Company received an exclusive worldwide license
under certain patents and patent applications, and other
licenses to intellectual property, to develop and commercialize
tasimelteon. In partial consideration for the license, the
Company paid BMS an initial license fee of $0.5 million.
The Company is also obligated to make future milestone payments
to BMS of less than $40.0 million in the aggregate (the
majority of which are tied to sales milestones) as well as
royalty payments based on the net sales of tasimelteon at a rate
which, as a percentage of net sales, is in the low teens. The
Company made a milestone payment to BMS of $1.0 million
under this license agreement in 2006 relating to the initiation
of the Phase III clinical trial for tasimelteon. The
Company is also obligated under this agreement to pay BMS a
percentage of any sublicense fees, upfront payments and
milestone and other payments (excluding royalties) that the
Company receives from a third party in connection with any
sublicensing arrangement, at a rate which is in the
mid-twenties. The Company has agreed with BMS in the license
agreement for tasimelteon to use commercially reasonable efforts
to develop and commercialize tasimelteon and to meet certain
milestones in initiating and completing certain clinical work.
The license agreement with BMS was amended on April 15,
2010 to, among other things, extend the deadline by which the
Company must enter into a development and commercialization
agreement with a third party for tasimelteon until the earliest
of: (i) the date mutually agreed upon by the Company and
BMS following the provision by the Company to BMS of a full
written report of the Phase III clinical studies on which
the Company intends to rely for filing for marketing
authorization for tasimelteon in its first major market country
(Phase III report); (ii) the date of the acceptance by
a regulatory authority of the filing by the Company for
marketing authorization for tasimelteon in a major market
country following the provision by the Company to BMS of the
Phase III report; or (iii) May 31, 2013.
If the Company has not entered into such a development and
commercialization agreement with respect to certain major market
countries by the foregoing deadline, then BMS will have the
option to exclusively develop and commercialize tasimelteon on
its own in those countries not covered by such an agreement on
pre-determined financial terms, including milestone and royalty
payments. In addition to the foregoing, pursuant to the
April 15, 2010 amendment, Vandas deadline for filing
a NDA for tasimelteon was extended until June 1, 2013.
Either party may terminate the tasimelteon license agreement
under certain circumstances, including a material breach of the
agreement by the other. In the event that BMS has not exercised
its option to reacquire the rights to tasimelteon and the
Company terminates the license, or if BMS terminates the license
due to the Companys breach, all rights licensed and
developed by the Company under this agreement will revert or
otherwise be licensed back to BMS on an exclusive basis.
Future license payments. No amounts were
recorded as liabilities nor were any contractual obligations
relating to the license agreements included in the condensed
consolidated financial statements as of September 30, 2010,
since the amounts, timing and likelihood of these future
payments are unknown and will depend on the successful outcome
of future clinical trials, regulatory filings, favorable FDA
regulatory approvals, growth in product sales and other factors.
Research
and development and marketing agreements
In the course of its business the Company regularly enters into
agreements with clinical organizations to provide services
relating to clinical development and clinical manufacturing
activities under fee service arrangements. The Companys
current agreements for clinical services may be terminated on no
more than 60 days notice
19
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
without incurring additional charges, other than charges for
work completed but not paid for through the effective date of
termination and other costs incurred by the Companys
contractors in closing out work in progress as of the effective
date of termination. The Company has transitioned all
outstanding manufacturing purchase orders for the raw material
supply of
Fanapt®
to Novartis.
On January 1, 2007, the Company adopted the FASB guidance
relating to accounting for uncertainty in income taxes. The
adoption of this guidance did not have a material effect on the
Companys financial position or results of operations. In
addition, the Company has not recorded any liabilities due to
uncertain tax positions. The Company accounts for income taxes
using the asset and liability method. Deferred income taxes are
recognized by applying enacted statutory tax rates applicable to
future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits for which future realization is uncertain.
The Company recorded a tax provision of $3.3 million and $0
for the nine months ended September 30, 2010 and 2009,
respectively. At December 31, 2009, the Company provided a
valuation allowance for the full amount of its net deferred tax
assets since realization of any future benefit from deductible
temporary differences and net operating losses could not be
sufficiently assured. As a result of the Companys ability
in future years to carryback reversing temporary differences
which generate tax deductions to offset current year taxes
payable, during the nine months ended September 30, 2010
the Company recorded approximately $1.6 million of deferred
tax assets. The Company provided a valuation allowance for the
remaining net deferred tax assets since realization of any
future benefit from deductible temporary differences is not more
likely than not at September 30, 2010. In the third quarter
of 2010, the Company determined that there was an error in the
calculation of reversing temporary differences which generate
tax deductions. This error resulted in an understatement of the
first quarter 2010 tax expense of approximately $430,000 and an
understatement of the second quarter of 2010 tax benefit of
approximately ($190,000). The Company corrected these errors in
the third quarter of 2010 by recording a cumulative adjustment
of approximately $240,000. The Company evaluated these errors in
relation to the current period, which is when they were
corrected, as well as the prior two periods in which they
originated. The Company believes these errors are immaterial to
the consolidated quarterly financial statements.
The federal net operating loss carryforwards and research and
development credits may be used to reduce the Companys
U.S. federal income taxes otherwise payable.
Section 382 of the Internal Revenue Code of 1986, as
amended (Code), imposes an annual limitation on the ability of a
corporation that undergoes an ownership change to
utilize its tax attributes, including net operating loss
carryforwards and research and development credits, to reduce
its tax liability. The Company has determined that it has had
potential ownership changes and, as a result, the ability to
utilize its tax attributes to offset future tax liabilities in
any particular year may be limited. The extent of the limitation
on utilization of the Companys tax attributes cannot be
determined at this time due to issues in the application of
certain section 382 provisions. The Company has submitted a
private letter ruling request and a supplemental information
letter to the IRS to clarify the application of these
provisions. Upon resolution of this process, the Company will
provide additional information on the limitations that will be
applied to its tax attributes. However, an adverse ruling by the
IRS could have a material adverse impact on tax expense in the
current year, as the Company could lose the ability to utilize
up to approximately $108.7 million in net operating losses
and $5.5 million in research and development credits, and a
material negative effect on the Companys results of
operations and cash flows.
20
VANDA
PHARMACEUTICALS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
13.
|
Fair
Value Measurements
|
FASB 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
|
As of September 30, 2010, the Company held certain assets
that are required to be measured at fair value on a recurring
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
September 30, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Description:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
99,592,086
|
|
|
$
|
10,812,950
|
|
|
$
|
88,779,136
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,592,086
|
|
|
$
|
10,812,950
|
|
|
$
|
88,779,136
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company did not hold any
assets or liabilities that are required to be measured at fair
value on a recurring basis.
21
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Various statements in this report are forward-looking
statements under the securities laws. Words such as, but
not limited to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, and similar expressions or words, identify
forward-looking statements. Forward-looking statements are based
upon current expectations that involve risks, changes in
circumstances, assumptions and uncertainties. Important factors
that could cause actual results to differ materially from those
reflected in our forward-looking statements include, among
others:
|
|
|
|
|
the extent and effectiveness of the development, sales and
marketing and distribution support
Fanapt®
receives;
|
|
|
|
our inability to utilize a substantial portion of our prior net
operating losses and research and development credits;
|
|
|
|
our ability to successfully commercialize
Fanapt®
outside of the U.S. and Canada;
|
|
|
|
delays in the completion of our clinical trials;
|
|
|
|
a failure of our products, product candidates or partnered
products to be demonstrably safe and effective;
|
|
|
|
our failure to obtain regulatory approval for our products or
product candidates or to comply with ongoing regulatory
requirements;
|
|
|
|
a lack of acceptance of our products, product candidates or
partnered products in the marketplace, or a failure to become or
remain profitable;
|
|
|
|
our expectations regarding trends with respect to our costs and
expenses;
|
|
|
|
our inability to obtain the capital necessary to fund additional
research and development activities;
|
|
|
|
our failure to identify or obtain rights to new products or
product candidates;
|
|
|
|
our failure to develop or obtain sales, marketing and
distribution resources and expertise or to otherwise manage our
growth;
|
|
|
|
a loss of any of our key scientists or management personnel;
|
|
|
|
losses incurred from product liability claims made against us;
and
|
|
|
|
a loss of rights to develop and commercialize our products or
product candidates under our license and sublicense agreements.
|
All written and verbal forward-looking statements attributable
to us or any person acting on our behalf are expressly qualified
in their entirety by the cautionary statements contained or
referred to in this section. We caution investors not to rely
too heavily on the forward-looking statements we make or that
are made on our behalf. We undertake no obligation, and
specifically decline any obligation, to update or revise
publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
We encourage you to read the discussion and analysis of our
financial condition and our condensed consolidated financial
statements contained in this quarterly report on
Form 10-Q.
We also encourage you to read Item 1A of Part II of
this quarterly report on
Form 10-Q
entitled Risk Factors and Item 1A of
Part I of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009 which contain a
more complete discussion of the risks and uncertainties
associated with our business. In addition to the risks described
above and in Item 1A of Part II of this report and
Item 1A of Part I of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, 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
Forms 10-Q,
8-K and
10-K, which
may supplement, modify, supersede or update those risk factors.
There can be no assurance that the actual results or
developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected
consequences to, or effects
22
on, us. Therefore, no assurance can be given that the outcomes
stated in such forward-looking statements and estimates will be
achieved.
Overview
We are a biopharmaceutical company focused on the development
and commercialization of products for central nervous system
disorders. We believe that each of our products and partnered
products will address a large market with significant unmet
medical needs by offering advantages over currently available
therapies. Our product portfolio includes:
|
|
|
|
|
Fanapt®
(iloperidone). We have developed
Fanapt®,
and will continue to develop it outside the U.S. and
Canada, to treat schizophrenia. On May 6, 2009, the United
States Food and Drug Administration (FDA) granted
U.S. marketing approval of
Fanapt®
for the acute treatment of schizophrenia in adults. On
October 12, 2009, we entered into an amended and restated
sublicense agreement with Novartis. We had originally entered
into a sublicense agreement with Novartis on June 4, 2004
pursuant to which we obtained certain worldwide exclusive
licenses from Novartis relating to
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapt®
in the U.S. Novartis is responsible for the further
clinical development activities in the U.S. and Canada,
including the development of a long-acting injectable (or depot)
formulation of
Fanapt®.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and are
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada. On February 23, 2010,
the U.S. Patent and Trademark Office (PTO) issued a notice
of allowance for our patent application for the microsphere long
acting injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed us that the patent has
been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 27, 2023.
Subsequently, on October 28, 2010, the PTO informed us that
it has granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 25, 2023. We
continue to explore the regulatory path and commercial
opportunity for
Fanapt®
oral formulation outside of the U.S. and Canada. On
November 1, 2010, the Therapeutic Goods Administration of
Australias Department of Health and Ageing, accepted for
evaluation our application for marketing approval.
|
As a result of the FDAs approval of the new drug
application (NDA) for
Fanapt®,
we met a milestone under the original sublicense agreement which
required us to make a milestone payment of $12.0 million to
Novartis. The $12.0 million was capitalized and will be
amortized over the remaining life of the U.S. patent for
Fanapt®.
|
|
|
|
|
Tasimelteon. Tasimelteon is an oral compound
in development for sleep and mood disorders, including Circadian
Rhythm Sleep Disorders (CRSD). The compound binds selectively to
the brains melatonin receptors, which are thought to
govern the bodys natural sleep/wake cycle. Compounds that
bind selectively to these receptors are thought to be able to
help treat sleep disorders, and additionally are believed to
offer potential benefits in mood disorders. We announced
positive top-line results from our Phase III trial of
tasimelteon in transient insomnia in November 2006. In June
2008, we announced positive top-line results from the
Phase III trial of tasimelteon in chronic primary insomnia.
The trial was a randomized, double-blind, and placebo-controlled
study with 324 patients. The trial measured time to fall
asleep and sleep maintenance, as well as
next-day
performance. On January 19, 2010, the FDA granted orphan
drug designation status for tasimelteon in a specific CRSD,
Non-24-Hour Sleep/Wake Disorder (N24HSWD) in blind individuals
with no light perception. The FDA grants orphan drug designation
to drugs that may
|
23
|
|
|
|
|
provide significant therapeutic advantage over existing
treatments and target conditions affecting 200,000 or fewer
U.S. patients per year. Orphan drug designation provides
potential financial and regulatory incentives, including study
design assistance, tax credits, waiver of FDA user fees, and up
to seven years of market exclusivity upon marketing approval. We
initiated two clinical trials to pursue FDA approval of
tasimelteon for the treatment of N24HSWD in blind individuals
with no light perception in the third quarter of 2010. The first
trial is a randomized, double-blind, placebo-controlled study
with a planned enrollment of approximately 160 patients
with N24HSWD. The trial has a six month treatment period and
includes measures of both nighttime and daytime sleep, as well
as laboratory measures of the synchronization between the
internal body clock and the
24-hour
environmental light/dark cycle. We also initiated a one-year
safety study of tasimelteon for the treatment of N24HSWD. This
trial is an open-label safety study with a planned enrollment of
approximately 140 patients with N24HSWD. We plan to conduct
additional clinical trials over the next one to two years to
support the use of tasimelteon as a circadian regulator and the
submission of a NDA to the FDA and a marketing authorization
application to the European Medicines Agency (EMA). The
application for orphan designation from the EMA is pending.
Tasimelteon is also ready for Phase II trials for the
treatment of depression. Given the range of potential
indications for tasimelteon, we may pursue one or more
partnerships for the development and commercialization of
tasimelteon worldwide.
|
Since we began our operations in March 2003, we have devoted
substantially all of our resources to the in-licensing and
clinical development of our compounds. Our ability to generate
revenue and achieve profitability largely depends on
Novartis ability to successfully commercialize
Fanapt®
in the U.S. and to successfully develop and commercialize
Fanapt®
in Canada and upon our ability, alone or with others, to
complete the development of our products or product candidates,
and to obtain the regulatory approvals for and manufacture,
market and sell our products and product candidates. The results
of our operations will vary significantly from
year-to-year
and
quarter-to-quarter
and depend on a number of factors, including risks related to
our business, risks related to our industry, and other risks
which are detailed in Item 1A of Part II of this
quarterly report on
Form 10-Q,
entitled Risk Factors and in Item 1A of
Part I of our Annual Report on
Form 10-K
for the year ended December 31, 2009.
Revenues. Our revenues are derived primarily
from our amended and restated sublicense agreement with Novartis
and include an up-front payment, product sales and future
milestone and royalty payments. Revenue is considered both
realizable and earned when each one of the following four
conditions is met: (1) persuasive evidence of an
arrangement exists, (2) the arrangement fee is fixed or
determinable, (3) delivery or performance has occurred and
(4) collectability is reasonably assured. Revenue from the
$200.0 million upfront payment will be recognized ratably
on a straight-line basis from the date the amended and restated
sublicense agreement became effective (November 27,
2009) through the expected life of the U.S. patent for
Fanapt®
(May 15, 2017). Revenue related to product sales is
recognized upon delivery to Novartis. We recognize revenue from
Fanapt®
royalties and commercial and development milestones from
Novartis when realizable and earned.
Research
and development expenses
Our research and development expenses consist primarily of fees
paid to third-party professional service providers in connection
with the services they provide for our clinical trials, costs of
contract manufacturing services, costs of materials used in
clinical trials and research and development, costs for
regulatory consultants and filings, depreciation of capital
resources used to develop our products, all related facilities
costs, and salaries, benefits and stock-based compensation
expenses related to our research and development personnel. We
expense research and development costs as incurred for compounds
in development stage, including certain payments made under our
license agreements prior to obtaining FDA approval. We believe
that significant investment in product development is a
competitive necessity and plan to continue these investments in
order to realize the potential of our products and
pharmacogenetics and pharmacogenomics expertise. We expect to
incur licensing costs in the future that could be substantial,
as we continue our efforts to develop our products, product
candidates and partnered products and to evaluate potential
in-license products or compounds.
The following table summarizes our product development
initiatives for the three and nine months ended
September 30, 2010 and 2009. Included in this table are the
research and development expenses recognized in
24
connection with our products in clinical development. Included
in Other product candidates are the costs directly
related to research initiatives for all other product candidates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Direct project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fanapt®
|
|
$
|
992,000
|
|
|
$
|
977,000
|
|
|
$
|
2,158,000
|
|
|
$
|
8,444,000
|
|
|
|
|
|
Tasimelteon
|
|
|
2,723,000
|
|
|
|
685,000
|
|
|
|
5,349,000
|
|
|
|
1,797,000
|
|
|
|
|
|
Other product candidates
|
|
|
|
|
|
|
24,000
|
|
|
|
|
|
|
|
101,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct project costs
|
|
|
3,715,000
|
|
|
|
1,686,000
|
|
|
|
7,507,000
|
|
|
|
10,342,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
150,000
|
|
|
|
153,000
|
|
|
|
459,000
|
|
|
|
465,000
|
|
|
|
|
|
Depreciation
|
|
|
42,000
|
|
|
|
57,000
|
|
|
|
144,000
|
|
|
|
179,000
|
|
|
|
|
|
Other indirect overhead
|
|
|
165,000
|
|
|
|
196,000
|
|
|
|
406,000
|
|
|
|
635,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect project costs
|
|
|
357,000
|
|
|
|
406,000
|
|
|
|
1,009,000
|
|
|
|
1,279,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
4,072,000
|
|
|
$
|
2,092,000
|
|
|
$
|
8,516,000
|
|
|
$
|
11,621,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Many of our research and development costs are not attributable
to any individual project because we share resources across
several development projects. We record direct costs, including
personnel costs and related benefits and stock-based
compensation, on a
project-by-project
basis. We record indirect costs that support a number of our
research and development activities in the aggregate. |
General
and administrative expenses
General and administrative expenses consist primarily of
salaries and other related costs for personnel, including
stock-based compensation, serving executive, finance,
accounting, information technology, marketing and human resource
functions. Other costs include facility costs not otherwise
included in research and development expenses and fees for
legal, accounting and other professional services. For the
quarter ended September 30, 2010, we incurred general and
administrative expenses in the aggregate of approximately
$2.1 million, including stock-based compensation expenses
of approximately $0.4 million.
Interest income. Interest income consists of
interest earned on our cash and cash equivalents, marketable
securities and restricted cash.
Critical
Accounting Policies
The preparation of our condensed consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
our financial statements, as well as the reported 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.
Our significant accounting policies are described in the notes
to our audited consolidated financial statements for the year
ended December 31, 2009 included in our annual report on
Form 10-K.
However, we believe that the following critical accounting
policies are important to understanding and evaluating our
reported financial results, and we have accordingly included
them in this quarterly report on
Form 10-Q.
25
Accrued
expenses
As part of the process of preparing financial statements we are
required to estimate accrued expenses. The estimation of accrued
expenses involves identifying services that have been performed
on our behalf, and then estimating the level of service
performed and the associated cost incurred for such services as
of each balance sheet date in the financial statements. Accrued
expenses include professional service fees, such as lawyers and
accountants, contract service fees, such as those under
contracts with clinical monitors, data management organizations
and investigators in conjunction with clinical trials, fees to
contract manufacturers in conjunction with the production of
clinical materials, and fees for marketing and other
commercialization activities. Pursuant to our assessment of the
services that have been performed on clinical trials and other
contracts, we recognize these expenses as the services are
provided. Our assessments include, but are not limited to:
(1) an evaluation by the project manager of the work that
has been completed during the period, (2) measurement of
progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress and (4) managements
judgment. In the event that we do not identify certain costs
that have begun to be incurred or we under- or over-estimate the
level of services performed or the costs of such services, our
reported expenses for such period would be too low or too high.
Revenue
Recognition
Our revenues are derived primarily from our amended and restated
sublicense agreement with Novartis and include an up-front
payment, product revenue and future milestone and royalty
revenues. Revenue is considered both realizable and earned when
each one of the following four conditions is met:
(1) persuasive evidence of an arrangement exists,
(2) the arrangement fee is fixed or determinable,
(3) delivery or performance has occurred and
(4) collectability is reasonably assured. Pursuant to the
amended and restated sublicense agreement, Novartis has the
right to commercialize and develop
Fanapt®
in the U.S. and Canada. Under the amended and restated
sublicense agreement, we received an upfront payment of
$200.0 million in December of 2009. Pursuant to the amended
and restated sublicense agreement, we established a Joint
Steering Committee (JSC) with Novartis following the effective
date of the amended and restated sublicense agreement. We expect
to have an active role on the JSC and concluded that the JSC
constitutes a deliverable under the amended and restated
sublicense agreement and that revenue related to the upfront
payment will be recognized ratably over the term of the JSC;
however, the delivery or performance has no term as the exact
length of the JSC is undefined. As a result, we deem the
performance period of the JSC to be the life of the
U.S. patent of
Fanapt®,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that provides patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is our best estimate of the life of the
patent. Revenue will be recognized ratably from the date the
amended and restated sublicense agreement became effective
(November 27, 2009) through the expected life of the
U.S. patent for
Fanapt®
(May 15, 2017). We recognize revenue related to
Fanapt®
royalties and commercial and development milestones as they are
realizable and earned, and product revenue upon delivery of our
products to Novartis.
Stock-based
compensation
We adopted the FASB guidance on share based payments
January 1, 2006 using the modified prospective transition
method of implementation and adopted the accelerated attribution
method.
We currently 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 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 historical volatility of the common stock of
comparable entities and other factors due to the lack of
historic information of our publicly traded common stock. The
expected term of options granted is based on the transition
approach provided by FASB guidance as the options meet the
plain vanilla criteria required by this method. The
risk-free interest rates are based on the U.S. Treasury
yield for a period consistent with the expected term of the
option in effect at the time of the grant. We have not paid
dividends to our stockholders since our inception and do not
plan to pay dividends in the foreseeable future. The stock-based
compensation expense for a period is also
26
affected by expected forfeiture rate for the respective option
grants. If our estimates of the fair value of these equity
instruments or expected forfeitures are too high or too low, it
would have the effect of overstating or understating expenses.
Total employee stock-based compensation expense, related to all
of the Companys stock-based awards, during the three and
nine months ended September 30, 2010 and 2009 was comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Research and development
|
|
$
|
429,000
|
|
|
$
|
708,000
|
|
|
$
|
1,983,000
|
|
|
$
|
1,517,000
|
|
General and administrative
|
|
|
368,000
|
|
|
|
2,555,000
|
|
|
|
1,547,000
|
|
|
|
6,803,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
797,000
|
|
|
$
|
3,263,000
|
|
|
$
|
3,530,000
|
|
|
$
|
8,320,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
Our annual effective tax rate is based on expected pre-tax
earnings, existing statutory tax rates, limitations on the use
of tax credits and net operating loss carryforwards, evaluation
of qualified expenses related to the orphan drug credit and tax
planning opportunities available in the jurisdictions in which
we operate. Significant judgment is required in determining our
annual effective tax rate.
On a periodic basis, we evaluate the realizability of our
deferred tax assets and liabilities and will adjust such amounts
in light of changing facts and circumstances, including but not
limited to future projections of taxable income, the reversal of
deferred tax liabilities, tax legislation, rulings by relevant
tax authorities and tax planning strategies. We recognize the
benefit of tax positions that we have taken or expect to take on
the income tax returns we file if such tax position is more
likely than not of being sustained. Settlement of filing
positions that may be challenged by tax authorities could impact
our income taxes in the year of resolution.
In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the period in
which those temporary differences becomes deductible or the NOLs
and credit carryforwards can be utilized. When considering the
reversal of the valuation allowance, we consider the level of
past and future taxable income, the reversal of deferred tax
liabilities, the utilization of the carryforwards and other
factors. Revisions to the estimated net realizable value of the
deferred tax asset could cause our provision for income taxes to
vary significantly from period to period.
Results
of Operations
We have a limited history of operations. We anticipate that our
results of operations will fluctuate for the foreseeable future
due to several factors, including any possible payments made or
received pursuant to licensing or collaboration agreements,
progress of our research and development efforts, the timing and
outcome of clinical trials and related possible regulatory
approvals and our and our partners ability to successfully
commercialize our products, product candidates and partnered
products. Our limited operating history makes predictions of
future operations difficult or impossible. Since our inception,
we have incurred significant losses. As of September 30,
2010, we had a deficit accumulated of approximately
$256.0 million.
Three
months ended September 30, 2010 compared to three months
ended September 30, 2009
Revenues. Revenues were $7.2 million for
the three months ended September 30, 2010 compared to
revenues of $0 for the three months ended September 30,
2009. Revenues for the three months ended September 30,
2010 included $6.7 million recognized from Novartis related
to straight-line recognition of up-front license fees and
$0.5 million in royalty revenue based on third quarter 2010
sales of
Fanapt®.
Novartis launched
Fanapt®
in January 2010.
Cost of sales. Cost of sales were
$0.4 million for the three months ended September 30,
2010 compared to cost of sales of $0.4 million for the
three months ended September 30, 2009. Cost of sales for
the three months ended
27
September 30, 2010 and 2009 consisted of $0.4 million
resulting from the amortization of the capitalized intangible
asset related to the milestone payment to Novartis in May 2009.
Research and development expenses. Research
and development expenses increased by approximately
$2.0 million, or 95.2%, to approximately $4.1 million
for the three months ended September 30, 2010 compared to
approximately $2.1 million for the three months ended
September 30, 2009.
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the three months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
1,210,000
|
|
|
$
|
2,000
|
|
Contract research and development, consulting, materials and
other direct costs
|
|
|
1,343,000
|
|
|
|
512,000
|
|
Salaries, benefits and related costs
|
|
|
733,000
|
|
|
|
464,000
|
|
Stock-based compensation
|
|
|
429,000
|
|
|
|
708,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
3,715,000
|
|
|
|
1,686,000
|
|
Indirect project costs
|
|
|
357,000
|
|
|
|
406,000
|
|
Total
|
|
$
|
4,072,000
|
|
|
$
|
2,092,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs increased approximately $2.0 million for the
three months ended September 30, 2010 compared to the three
months ended September 30, 2009 as a result of increases in
clinical trial costs, contract research and development,
consulting and other direct costs and salaries, benefits and
related costs partially offset by lower stock based
compensation. Clinical trials costs increased by
$1.2 million for the three months ended September 30,
2010 relative to the three months ended September 30, 2009,
primarily due to costs related to the tasimelteon trials for the
treatment of N24HSWD in blind individuals which began in the
third quarter of 2010. Contract research and development,
consulting, materials and other direct costs increased
approximately $0.8 million for the three months ended
September 30, 2010 relative to the three months ended
September 30, 2009, primarily due to costs related to the
tasimelteon trials for the treatment of N24HSWD in blind
individuals which began in the third quarter of 2010.
General and administrative expenses. General
and administrative expenses decreased by approximately
$3.2 million, or 60.4%, to approximately $2.1 million
for the three months ended September 30, 2010 from
approximately $5.3 million for the three months ended
September 30, 2009.
The following table discloses the components of our general and
administrative expenses for the three months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Salaries, benefits and related costs
|
|
$
|
334,000
|
|
|
$
|
408,000
|
|
Stock-based compensation
|
|
|
368,000
|
|
|
|
2,555,000
|
|
Marketing, legal, accounting and other professional expenses
|
|
|
732,000
|
|
|
|
1,755,000
|
|
Other expenses
|
|
|
620,000
|
|
|
|
548,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,054,000
|
|
|
$
|
5,266,000
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense decreased by approximately
$2.2 million for the three months ended September 30,
2010, compared to the three months ended September 30,
2009, as a result of the cancellation of unvested options during
the three months ending September 30, 2010. Marketing,
legal, accounting and other professional costs decreased by
approximately $1.0 million for the three months ended
September 30, 2010 compared to the three months ended
September 30, 2009 due to a decrease in marketing expenses
relating to
Fanapt®
for the three months ending September 30, 2010.
28
Interest income. Interest income in the three
months ended September 30, 2010 was approximately
$0.2 million compared to approximately $10,000 in the three
months ended September 30, 2009. Interest income was higher
for the three months ended September 30, 2010, compared to
the three months ended September 30, 2009, due to a higher
cash balance from the receipt of the $200.0 million upfront
payment from Novartis received at the end of 2009.
Nine
months ended September 30, 2010 compared to nine months
ended September 30, 2009
Revenues. Revenues were $28.0 million for
the nine months ended September 30, 2010 compared to
revenues of $0 for the nine months ended September 30,
2009. Revenues for the nine months ended September 30, 2010
included $20.0 million recognized from Novartis related to
straight-line recognition of up-front license fees,
$5.3 million for
Fanapt®
product sales to Novartis and $2.7 million in royalty
revenue based on first, second and third quarter 2010 sales of
Fanapt®.
Novartis launched
Fanapt®
in January 2010.
Cost of sales. Cost of sales were
$4.0 million for the nine months ended September 30,
2010 compared to cost of sales of $0.6 million for the nine
months ended September 30, 2009. Cost of sales for the nine
months ended September 30, 2010 consisted of
$1.1 million resulting from the amortization of the
capitalized intangible asset related to the $12.0 million
milestone payment to Novartis and $2.9 million for the
inventory sold to Novartis. Prior to approval of
Fanapt®
by the FDA in May 2009 all inventory costs were expensed as
research and development. Cost of sales of $0.6 million for
the nine months ended September 30, 2009 resulted from the
amortization of the capitalized intangible asset related to the
$12.0 million milestone payment to Novartis in May 2009.
Research and development expenses. Research
and development expenses decreased by approximately
$3.1 million, or 26.7%, to approximately $8.5 million
for the nine months ended September 30, 2010 compared to
approximately $11.6 million for the nine months ended
September 30, 2009.
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
1,496,000
|
|
|
$
|
37,000
|
|
Contract research and development, consulting, materials and
other direct costs
|
|
|
1,916,000
|
|
|
|
7,295,000
|
|
Salaries, benefits and related costs
|
|
|
2,112,000
|
|
|
|
1,493,000
|
|
Stock-based compensation
|
|
|
1,983,000
|
|
|
|
1,517,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
7,507,000
|
|
|
|
10,342,000
|
|
Indirect project costs
|
|
|
1,009,000
|
|
|
|
1,279,000
|
|
Total
|
|
$
|
8,516,000
|
|
|
$
|
11,621,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased approximately $2.8 million for the
nine months ended September 30, 2010 compared to the nine
months ended September 30, 2009 as a result of lower
contract research and development, consulting and other direct
costs combined with increases in clinical trials, salaries,
benefits and related costs and stock based compensation.
Clinical trials increased approximately $1.5 million for
the nine months ended September 30, 2010 relative to the
nine months ended September 30, 2009, primarily due to
costs related to the tasimelteon trials for the treatment of
N24HSWD in blind individuals which began in the third quarter of
2010. Contract research and development, consulting, materials
and other direct costs decreased approximately $5.4 million
for the nine months ended September 30, 2010 relative to
the nine months ended September 30, 2009, primarily due to
reduced expenses of $5.3 million for the regulatory
consultants who assisted us during the nine months ended
September 30, 2009 in our efforts to obtain FDA approval of
Fanapt®.
29
General and administrative expenses. General
and administrative expenses decreased by approximately
$7.1 million, or 49.0%, to approximately $7.4 million
for the nine months ended September 30, 2010 from
approximately $14.5 million for the nine months ended
September 30, 2009.
The following table discloses the components of our general and
administrative expenses for the nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Salaries, benefits and related costs
|
|
$
|
1,346,000
|
|
|
$
|
1,376,000
|
|
Stock-based compensation
|
|
|
1,547,000
|
|
|
|
6,802,000
|
|
Marketing, legal, accounting and other professional expenses
|
|
|
2,616,000
|
|
|
|
4,586,000
|
|
Other expenses
|
|
|
1,876,000
|
|
|
|
1,715,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,385,000
|
|
|
$
|
14,479,000
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense decreased by approximately
$5.3 million for the nine months ended September 30,
2010, compared to the nine months ended September 30, 2009,
as a result of the cancellation of unvested options during the
nine months ending September 30, 2010 combined with
historic higher priced options becoming nearly fully vested in
the nine months ended September 30, 2009. Marketing, legal,
accounting and other professional costs decreased by
approximately $2.0 million for the nine months ended
September 30, 2010 compared to the nine months ended
September 30, 2009 due to a decrease in commercial costs
related to
Fanapt®
expensed and a decrease in legal fees for the nine months ending
September 30, 2010. The higher legal fees in the nine
months ended September 30, 2009 were due to additional
legal fees incurred in connection with a potential proxy contest.
Other income, net. Interest and other income
in the nine months ended September 30, 2010 was
approximately $0.3 million compared to approximately
$84,000 in the nine months ended September 30, 2009.
Interest income was higher for the nine months ended
September 30, 2010, compared to the nine months ended
September 30, 2009, due to a higher cash balance from the
receipt of the $200.0 million upfront payment from Novartis
at the end of 2009.
Liquidity
and Capital Resources
As of September 30, 2010, our total cash and cash
equivalents and marketable securities were approximately
$202.1 million compared to approximately
$205.3 million at December 31, 2009. 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 time deposits, 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 enterprises and commercial paper. As of
September 30, 2010, we also held a non-current deposit of
$430,000 that is used to collateralize a letter of credit issued
for our current office lease in Rockville, Maryland which
expires in 2016.
As of September 30, 2010, we maintained all of our cash and
cash equivalents in three 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.
FASB 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
|
30
As of September 30, 2010, we held certain assets that are
required to be measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
September 30, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Description :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
99,592,000
|
|
|
$
|
10,813,000
|
|
|
$
|
88,779,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,592,000
|
|
|
$
|
10,813,000
|
|
|
$
|
88,779,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, we did not hold any assets or
liabilities that are required to be measured at fair value on a
recurring basis.
We believe that our current existing cash and cash equivalents
is sufficient to meet our working capital and capital
expenditure needs to execute our current business plan. However,
the amounts of expenditures that will be needed to carry out our
business plan are subject to numerous uncertainties, which may
adversely affect our liquidity and capital resources. We have
submitted a private letter ruling request and a supplemental
information letter to the IRS to clarify the application of
certain section 382 change of ownership rules.
Section 382 of the Code imposes an annual limitation on the
ability of a corporation that undergoes an ownership
change to utilize its tax attributes, including net
operating loss carryforwards and research and development
credits, to reduce its tax liability. We have determined that
due to a potential December 31, 2008 ownership change our
ability to utilize our tax attributes to offset future tax
liabilities may be materially limited. An adverse ruling by the
IRS could have a material adverse impact on tax expense in the
current year, as we could lose the ability to utilize up to
approximately $108.7 million in net operating losses and
$5.5 million in research and development credits, and a
material negative effect on the Companys results of
operations and cash flows.
We entered into an amended and restated sublicense agreement in
2009 with Novartis to commercialize
Fanapt®
in the U.S. and Canada. Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot) formulation of
Fanapt®.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million, and are
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. We will recognize the
$200.0 million upfront payment ratably from the date the
amended and restated sublicense agreement became effective
(November 27, 2009) through the expected life of the
U.S. patent for
Fanapt®
(May 15, 2017). We also receive royalties, which, as a
percentage of net sales, are in the low double digits, on net
sales of
Fanapt®
in the U.S. and Canada. During the nine months ended
September 30, 2010, we recorded approximately
$20.0 million in licensing revenue. To date, we have
recognized product revenue of approximately $5.3 million
from product sold to Novartis and $2.6 million in royalty
revenue. We recognize product revenue on the sale of the
existing
Fanapt®
product to Novartis upon delivery to Novartis and royalty
revenue when realizable and earned. Other than participation in
the JSC, we have no control over the progress of Novartis
commercial plans. We cannot forecast with any degree of
certainty the achievement of milestones and royalties under this
agreement.
We expect to continue to incur substantial expenses relating to
our research and development efforts, as we focus on clinical
trials and manufacturing required for the development of our
active product candidates. We initiated two clinical trials to
pursue FDA approval of tasimelteon for the treatment of N24HSWD
in blind individuals with no light perception beginning in the
third quarter of 2010. The first trial is a randomized,
double-blind, placebo-controlled study with a planned enrollment
of approximately 160 patients with N24HSWD. The trial has a
six month treatment period and includes measures of both
nighttime and daytime sleep, as well as laboratory measures of
the synchronization between the internal body clock and the
24-hour
environmental light/dark cycle. The duration and cost of
clinical trials are a function of numerous factors such as the
number of patients to be enrolled in the trial, the amount of
time it takes to enroll them, the length of time they must be
treated and observed, and the number of clinical sites and
countries for the trial. In addition, orphan clinical trials
create an additional challenge due to the limited number of
available patients afflicted with the disease.
31
We must receive regulatory approval to launch any of our
products commercially. In order to receive such approval, the
appropriate regulatory agency must conclude that our clinical
data establish safety and efficacy and that our products and the
manufacturing facilities meet all applicable regulatory
requirements. We cannot be certain that we will establish
sufficient safety and efficacy data to receive regulatory
approval for any of our drugs or that our drugs and the
manufacturing facilities will meet all applicable regulatory
requirements.
Because of the uncertainties discussed above, the costs to
advance our research and development projects are difficult to
estimate and may vary significantly. We expect that our existing
funds, primarily consisting of the upfront payment received
under the Novartis contract and investment income will be
sufficient to fund our operations. Our future capital
requirements and the adequacy of our available funds will depend
on many factors, primarily including the scope and costs of our
clinical development programs, the scope and costs of our
manufacturing and process development activities, the magnitude
of our discovery and preclinical development programs and the
level of our pre-commercial launch activities. 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 cash flows for the nine
months ended September 30, 2010, and 2009:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,802,000
|
)
|
|
$
|
(19,956,000
|
)
|
Investing activities
|
|
|
(99,462,000
|
)
|
|
|
(2,989,000
|
)
|
Financing activities
|
|
|
2,437,000
|
|
|
|
1,284,000
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
(102,827,000
|
)
|
|
$
|
(21,661,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operations was approximately $5.8 million
and approximately $20.0 million for the nine months ended
September 30, 2010 and 2009, respectively. Net cash used in
operations for the nine months ended September 30, 2010
consisted primarily of net income for the nine months ended
September 30, 2010 of approximately $5.0 million, an
increase in non-cash items of $3.4 million, the receipt of
$2.5 million in amounts due from Novartis for the remaining
finished product and royalty revenue, a decrease in inventory of
$2.4 million for the final inventory sold to Novartis and
an increase of $3.2 million in accrued taxes offset by a
decrease of $20.0 million in the deferred revenue related
to the upfront payment received from Novartis in December 2009,
a decrease of $0.2 million in prepaid expenses and other
current assets, a decrease of $2.7 million in accounts
payable and accrued expenses. Net cash used in investing
activities for the nine months ended September 30, 2010 was
approximately $99.5 million and consisted primarily of net
purchases of marketable securities. The $2.4 million
provided by financing activities for the nine months ended
September 30, 2010 relates to the $1.7 million in
excess tax benefits from the exercise of stock options and
$0.7 million received from the exercise of stock options.
Contractual
Obligations and Commitments
Operating
leases
Our commitments under operating leases shown above consist of
payments relating to our real estate leases for our current
headquarters located in Rockville, Maryland, expiring in 2016.
32
The following table summarizes our long-term contractual cash
obligations as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
October
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2014
|
|
|
Operating leases
|
|
$
|
4,458,000
|
|
|
$
|
176,000
|
|
|
$
|
727,000
|
|
|
$
|
749,000
|
|
|
$
|
771,000
|
|
|
$
|
795,000
|
|
|
$
|
1,240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,458,000
|
|
|
$
|
176,000
|
|
|
$
|
727,000
|
|
|
$
|
749,000
|
|
|
$
|
771,000
|
|
|
$
|
795,000
|
|
|
$
|
1,240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical
research organization contracts and other
contracts
We have entered into agreements for tasimelteon with clinical
supply manufacturing organizations and other outside contractors
who will be responsible for additional services supporting our
ongoing clinical development processes. These contractual
obligations are not reflected in the table above because we may
terminate them on no more than 60 days notice without
incurring additional charges (other than charges for work
completed but not paid for through the effective date of
termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination).
License agreements. In February 2004 and June
2004, we entered into separate licensing agreements with BMS and
Novartis, respectively, for the exclusive rights to develop and
commercialize tasimelteon and
Fanapt®.
On October 12, 2009, we entered into an amended and
restated sublicense agreement with Novartis. We are obligated to
make (in the case of tasimelteon and, in the case of
Fanapt®
in the U.S. and Canada, are entitled to receive) payments
under the conditions in the agreements upon the achievement of
specified clinical, regulatory and commercial milestones. If the
products are successfully commercialized we will be required to
pay certain royalties (and in the case of
Fanapt®
in the U.S. and Canada, will be entitled to receive) based
on net sales for each of the licensed products. Please see the
notes to the consolidated financial statements included with
this report for a more detailed description of these license
agreements.
As a result of the successful commencement of the Phase III
clinical study of tasimelteon in March 2006, we met the first
milestone specified in our licensing agreement with BMS and
subsequently paid a license fee of $1.0 million.
As a result of the acceptance by FDA of the NDA for
Fanapt®
in October 2007, we met a milestone under our original
sublicense agreement with Novartis and subsequently paid a
$5.0 million milestone fee. As a result of the FDAs
approval of the NDA for
Fanapt®,
we met an additional milestone under the original sublicense
agreement with Novartis which required us to make a milestone
payment of $12.0 million to Novartis. The
$12.0 million was capitalized and will be amortized over
the remaining life of the U.S. patent for
Fanapt®,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that provides patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is the Companys best estimate of the
life of the patent; if, however, the Hatch-Waxman or pediatric
extensions are not granted, the intangible asset will be
amortized over a shorter period. No amounts were recorded as
liabilities relating to the license agreements included in the
consolidated financial statements as of September 30, 2010,
since the amounts, timing and likelihood of these payments are
unknown and will depend on the successful outcome of future
clinical trials, regulatory filings, favorable regulatory
approvals, growth in product sales and other factors.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot) formulation of
Fanapt®.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and are
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
33
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Interest
Rates
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. Because of the short-term maturities of our cash and
cash equivalents and marketable securities, we do not believe
that an increase in market rates would have any significant
impact on the realized value of our investments.
Effects
of Inflation
Our most liquid assets are cash and cash equivalents and
marketable securities. Because of their liquidity, these assets
are not directly affected by inflation. We also believe that we
have intangible assets in the value of our intellectual
property. In accordance with generally accepted accounting
principles, we have not capitalized the value of this
intellectual property on our balance sheet. Because we intend to
retain and continue to use our equipment, furniture and fixtures
and leasehold improvements, we believe that the incremental
inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation
affects our expenses, such as those for employee compensation
and contract services, which could increase our level of
expenses and the rate at which we use our resources.
Marketable
securities
We deposit our cash with financial institutions that we consider
to be of high credit quality and purchase marketable securities
which are generally investment grade, liquid, short-term fixed
income securities and money-market instruments denominated in
U.S. dollars.
Off-balance
sheet arrangements
We have no off-balance sheet arrangements, as defined in
Item 303(a)(4) of the Securities and Exchange
Commissions
Regulation S-K.
|
|
Item 4.
|
Controls
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, who currently
serves as our principal executive officer, principal financial
officer and principal accounting 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 Exchange Act) as of September 30, 2010. Based
upon that evaluation, our Chief Executive Officer, who currently
serves as our principal executive officer, principal financial
officer and principal accounting, officer has concluded that our
disclosure controls and procedures are effective as of
September 30, 2010, 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 SECs rules and
forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer, who
currently serves as our principal executive officer, principal
financial officer and principal accounting officer, as
appropriate to allow timely decisions regarding required
disclosures.
34
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) of
the Exchange Act) during the third quarter of 2010 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Effective
August 6, 2010, our then Acting Chief Financial Officer,
Secretary, Treasurer, principal financial officer and principal
accounting officer resigned to pursue other opportunities. Our
Board of Directors is currently identifying a replacement for
the position left vacant by her resignation. We are executing
changes to our key controls to mitigate segregation of duties
issues related to her resignation. However, her departure and
the changes did not materially affect internal control over
financial reporting as of September 30, 2010. Our President
and Chief Executive Officer is currently serving as our
principal financial and accounting officer until a permanent
replacement is identified.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
None.
Item 1A of Part I of our Annual Report on
Form 10-K
for the year ended December 31, 2009 sets forth information
relating to the material risks and uncertainties with respect to
our business and our common stock. In addition to those risk
factors, we believe the following risk factors are relevant to
the understanding of our business, financial condition and
operating results. These risks are not the only risks facing our
Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition
and/or
operating results. If any of these risks actually occurs, our
business, financial condition, results of operations and future
prospects would likely be materially and adversely affected. In
that event, the market price of our common stock could decline
and you could lose all or part of your investment.
Our
ability to use net operating loss carryforwards and tax credit
carryforwards to offset future taxable income may be limited as
a result of transactions involving our common
stock.
In general, under Section 382 of the Internal Revenue Code
of 1986, as amended (Code), a corporation that undergoes an
ownership change is subject to limitations on its
ability to utilize its pre-change net operating losses, or NOLs,
and certain other tax assets to offset future taxable income. In
general, an ownership change occurs if the aggregate stock
ownership of certain stockholders increases by more than
50 percentage points over such stockholders lowest
percentage ownership during the testing period (generally three
years). Transactions involving our common stock, even those
outside our control, such as purchases or sales by investors,
within the testing period could result in an ownership change.
We have determined that due to a potential December 31,
2008 ownership change, our ability to utilize our tax attributes
to offset future tax liabilities may be materially limited. The
Company has submitted a private letter ruling request and a
supplemental information letter to the Internal Revenue Service
(IRS) to clarify the application of certain section 382
rules in the Code. An adverse ruling by the IRS could have a
material adverse impact on tax expense in the current year, as
we could lose the ability to utilize up to approximately
$108.7 million in net operating losses and
$5.5 million in research and development credits.
An unfavorable ruling related to our request or a future
ownership change could have a material negative
effect on our results of operations and cash flows. Limitations
imposed on the ability to use NOLs and tax credits to offset
future taxable income could require us to pay U.S. federal
income taxes earlier than would otherwise be required if such
limitations were not in effect and could cause such NOLs and tax
credits to expire unused, in each case reducing or eliminating
the benefit of such NOLs and tax credits. Similar rules and
limitations may apply for state income tax purposes.
35
Healthcare
reform could adversely affect our revenue and financial
results.
Our industry is highly regulated and changes in law may
adversely impact our business, operations or financial results.
The Patient Protection and Affordable Care Act of 2010, as
amended by the Health Care and Education Reconciliation Act of
2010, or PPACA, is a sweeping measure intended to expand
healthcare coverage within the U.S., primarily through the
imposition of health insurance mandates on employers and
individuals and expansion of the Medicaid program. Several
provisions of the new law, which have varying effective dates,
may affect us and will likely increase certain of our costs. For
example, an increase in the Medicaid rebate rate from 15.1% to
23.1% is effective as of January 1, 2010, and the volume of
rebated drugs has been expanded to include beneficiaries in
Medicaid managed care organizations, effective as of
March 23, 2010. The PPACA also imposes an annual fee on
pharmaceutical manufacturers beginning in 2011, based on the
manufacturers sale of branded pharmaceuticals and
biologics (excluding orphan drugs); expands the 340B drug
discount program (excluding orphan drugs) including the creation
of new penalties for non-compliance; and includes a 50% discount
on brand name drugs for Medicare Part D participants in the
coverage gap, or doughnut hole. The law also revises
the definition of average manufacturer price for
reporting purposes (effective October 1, 2010), which could
increase the amount of the Companys Medicaid drug rebates
to states, once the provision is effective. Substantial new
provisions affecting compliance also have been added, which may
require us to modify our business practices with health care
practitioners.
The reforms imposed by the new law will significantly impact the
pharmaceutical industry; however, the full effects of the PPACA
cannot be known until these provisions are implemented and the
Centers for Medicare & Medicaid Services and other
federal and state agencies issue applicable regulations or
guidance. Moreover, in the coming years, additional changes
could be made to governmental healthcare programs that could
significantly impact the success of our products or product
candidates. We will continue to evaluate the PPACA, as amended,
the implementation of regulations or guidance related to various
provisions of the PPACA by federal agencies, as well as trends
and changes that may be encouraged by the legislation and that
may potentially impact on our business over time.
In addition, Federal, state, and foreign governmental
authorities are likely to continue efforts to control the price
of drugs and reduce overall healthcare costs. These efforts
could impact our ability to market products and generate
revenues in the U.S. and foreign countries.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
|
|
Item 5.
|
Other
Information.
|
None.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer, as required
by Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer (Principal
Executive Officer, Principal Financial Officer and Principal
Accounting Officer), as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
The certification attached as Exhibit 32.1 that accompanies
this Quarterly Report on
Form 10-Q
is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of
Vanda Pharmaceuticals Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Quarterly Report
on
Form 10-Q,
irrespective of any general incorporation language contained in
such filing.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Vanda
Pharmaceuticals Inc.
/s/ Mihael
H. Polymeropoulos, M.D.
Mihael H. Polymeropoulos, M.D.
President and Chief Executive Officer
(Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)
November 8, 2010
37
VANDA
PHARMACEUTICALS INC.
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer, as required
by Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer (Principal
Executive Officer, Principal Financial Officer and Principal
Accounting Officer), as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
The certification attached as Exhibit 32.1 that accompanies
this Quarterly Report on
Form 10-Q
is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of
Vanda Pharmaceuticals Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Quarterly Report
on
Form 10-Q,
irrespective of any general incorporation language contained in
such filing.
38
exv31w1
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mihael H. Polymeropoulos, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Vanda Pharmaceuticals Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b. |
|
designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; |
|
|
c. |
|
evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
|
|
d. |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
5. |
|
The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions): |
|
a. |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
|
|
b. |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting. |
|
|
|
|
|
|
|
|
Date: November 8, 2010 |
/s/ Mihael H. Polymeropoulos
|
|
|
Mihael H. Polymeropoulos |
|
|
Chief Executive Officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
|
exv32w1
EXHIBIT 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section
1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Vanda
Pharmaceuticals Inc., (the Company), does hereby certify, to the best of such officers
knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (the Form 10-Q) of
the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all
material respects, the consolidated financial condition and results of operations of the Company.
|
|
|
|
|
|
|
|
Date: November 8, 2010 |
/s/ Mihael H. Polymeropoulos
|
|
|
Mihael H. Polymeropoulos |
|
|
Chief Executive Officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
|
|
A signed original of this written statement required by Section 906 has been provided to
the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission (SEC) or its staff upon request. This certification accompanies the Form 10-Q to which
it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any
general incorporation language contained in such filing.