NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business Organization and Presentation
Business organization
Vanda Pharmaceuticals Inc. (the Company) is a leading global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. The Company commenced its operations in 2003 and operates in one reporting segment. The Company’s portfolio includes the following products:
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•
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HETLIOZ® (tasimelteon), a product for the treatment of non-24-hour sleep-wake disorder (Non-24), was approved by the U.S. Food and Drug Administration (FDA) in January 2014 and launched commercially in the U.S. in April 2014. In July 2015, the European Commission (EC) granted centralized marketing authorization with unified labeling for HETLIOZ® for the treatment of Non-24 in totally blind adults. HETLIOZ® was commercially launched in Germany in August 2016. HETLIOZ® has potential utility in a number of other circadian rhythm disorders and is presently in clinical development for the treatment of Jet Lag Disorder, Smith-Magenis Syndrome (SMS) and pediatric Non-24. An assessment of new HETLIOZ® clinical opportunities, including the treatment of delayed sleep phase disorder and for sleep disorders in patients with neurodevelopmental disorders, is ongoing.
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•
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Fanapt® (iloperidone), a product for the treatment of schizophrenia, the oral formulation of which was approved by the FDA in May 2009 and launched commercially in the U.S. by Novartis Pharma AG (Novartis) in January 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt® franchise to the Company on December 31, 2014. Additionally, the Company's distribution partners launched Fanapt® in Israel in 2014. Fanapt® has potential utility in a number of other disorders. Initial clinical work studying a long acting injectable (LAI) formulation of Fanapt® began in 2018. An assessment of new Fanapt® clinical opportunities, including the treatment of bipolar disorder, is ongoing.
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•
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Tradipitant (VLY-686), a small molecule neurokinin-1 receptor (NK-1R) antagonist, which is presently in clinical development for the treatment of chronic pruritus in atopic dermatitis, gastroparesis and motion sickness.
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•
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VTR-297, a small molecule histone deacetylase (HDAC) inhibitor presently in clinical development for the treatment of hematologic malignancies.
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•
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Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors. An early stage CFTR activator program is planned for the treatment of dry eye and ocular inflammation. In addition, an early stage CFTR inhibitor program is planned for the treatment of secretory diarrhea disorders, including cholera.
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•
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VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist.
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2018. The financial information as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet data as of December 31, 2018 was derived from audited financial statements but does not include all disclosures required by GAAP. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or any future year or period.
2. Summary of Significant Accounting Policies
With the exception of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases and all related amendments (collectively, Accounting Standards Codification (ASC) 842) on January 1, 2019, discussed below, there have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates.
Leases
In accordance with ASC 842, Leases, effective January 1, 2019, the Company determines if an arrangement contains a lease at inception. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from that lease. For leases with a term greater than 12 months, ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes the option to extend the lease when it is reasonably certain the Company will exercise that option. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. In the case the implicit rate is not available, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including publicly available data for instruments with similar characteristics, to determine the present value of lease payments. The Company does not combine lease and non-lease elements for office leases. For existing leases as of January 1, 2019, executory costs are excluded from lease expense, which is consistent with the Company's accounting under ASC 840, Leases. For all leases entered into after January 1, 2019, executory costs are allocated between lease and non-lease elements based upon their relative stand-alone prices.
Revenue from Net Product Sales
The Company’s revenues consist of net product sales of HETLIOZ® and net product sales of Fanapt®. Net sales by product for the three and nine months ended September 30, 2019 and 2018 were as follows:
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|
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|
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|
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Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
September 30,
2019
|
|
September 30,
2018
|
|
September 30,
2019
|
|
September 30,
2018
|
HETLIOZ® product sales, net
|
$
|
37,589
|
|
|
$
|
29,923
|
|
|
$
|
104,381
|
|
|
$
|
83,391
|
|
Fanapt® product sales, net
|
21,896
|
|
|
19,212
|
|
|
61,877
|
|
|
56,686
|
|
Total net product sales
|
$
|
59,485
|
|
|
$
|
49,135
|
|
|
$
|
166,258
|
|
|
$
|
140,077
|
|
Major Customers
HETLIOZ® is available in the U.S. for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. The Company invoices and records revenue when its customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse which is the point at which control is transferred to the customer. There were five major customers that each accounted for more than 10% of total revenues and, as a group, represented 96% of total revenues for the nine months ended September 30, 2019. There were five major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 93% of total accounts receivable at September 30, 2019. The Company evaluates outstanding receivables to assess collectability. In performing this evaluation, the Company analyzes economic conditions, the aging of receivables and customer specific risks. Using this information, the Company reserves an amount that it estimates may not be collected.
Supplemental Cash Flows Information
Cash, Cash Equivalents and Restricted Cash
For purposes of the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows, cash equivalents represent highly-liquid investments with a maturity date of three months or less at the date of purchase. Cash and cash equivalents include investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Restricted cash relates primarily to amounts held as collateral for letters of credit for leases for office space at the Company’s Washington, D.C. headquarters.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total end of period cash, cash equivalents and restricted cash reported within the Condensed Consolidated Statement of Cash Flows:
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|
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|
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|
|
(in thousands)
|
September 30,
2019
|
|
September 30,
2018
|
Cash and cash equivalents
|
$
|
39,208
|
|
|
$
|
60,778
|
|
Restricted cash included in:
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|
|
Prepaid expenses and other current assets
|
157
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|
|
157
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|
Non-current inventory and other
|
585
|
|
|
587
|
|
Total cash, cash equivalents and restricted cash
|
$
|
39,950
|
|
|
$
|
61,522
|
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Recent Accounting Pronouncements
In August 2018, the U.S. Securities and Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification. This final rule amends certain disclosure requirements that are redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective for the Company for all filings made on or after November 5, 2018. The SEC staff clarified that the first presentation of the changes in shareholders' equity may be included in the first Form 10-Q for the quarter that begins after the effective date of the amendments. The adoption of the final rule did not have a material impact on the Company’s condensed consolidated financial statements. The Company updated the disclosure of its Condensed Consolidated Statements of Changes in Stockholders' Equity in 2019 to include a reconciliation for the quarter-to-date and year-to-date comparative periods.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the impairment model for most financial assets and certain other financial instruments. The standard will require the use of a forward-looking “expected loss” model for instruments measured at amortized cost that generally will result in the earlier recognition of allowances for losses. The standard is effective for years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2019. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s accounts receivable and marketable securities balances and related financial statement disclosures.
In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842), which was further clarified by ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases - Targeted Improvements, issued in July 2018. ASC 842 supersedes existing lease guidance, including ASC 840 Leases. The new leasing standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new leasing standard requires that lessees will need to recognize an ROU asset and a lease liability for virtually all of their leases, and allows companies to make a policy election as to whether short term leases will be recognized under the requirements of the new standard. The Company elected to exclude short-term leases in the application of the new standard. The lease liability is equal to the present value of lease payments. The ROU asset is based on the liability subject to certain adjustments. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense, similar to accounting for operating leases under ASC 840, while finance leases will result in a front-loaded expense pattern, similar to accounting for capital leases under ASC 840.
The Company adopted the new leasing standard in the first quarter of 2019, using a modified retrospective transition. There was no impact to the opening balance of retained earnings as of the effective date of January 1, 2019 as a result of adoption. Prior period financial statements were not recast. The Company elected the package of transition provisions available for expired or existing contracts, which allowed it to carryforward its historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of the new leasing standard on January 1, 2019 resulted in the recognition of $15.8 million of operating lease liabilities, $2.2 million of which were classified as current liabilities, with corresponding ROU assets of $12.2 million, net of lease prepayments and the balance of deferred lease incentives. The Company does not have any financing leases.
3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of September 30, 2019:
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September 30, 2019
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Market
Value
|
(in thousands)
|
|
|
|
Current:
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
$
|
72,767
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|
|
$
|
83
|
|
|
$
|
(4
|
)
|
|
$
|
72,846
|
|
Corporate debt
|
110,119
|
|
|
176
|
|
|
—
|
|
|
110,295
|
|
Asset-backed securities
|
15,410
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|
|
28
|
|
|
(2
|
)
|
|
15,436
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|
Total marketable securities, current
|
$
|
198,296
|
|
|
$
|
287
|
|
|
$
|
(6
|
)
|
|
$
|
198,577
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|
Non-current:
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|
|
|
|
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|
|
U.S. Treasury and government agencies
|
$
|
14,499
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|
|
$
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—
|
|
|
$
|
(20
|
)
|
|
$
|
14,479
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|
Corporate debt
|
15,852
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|
|
28
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|
|
(2
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)
|
|
15,878
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|
Asset-backed securities
|
31,469
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|
|
15
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|
|
(14
|
)
|
|
31,470
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|
Total marketable securities, non-current
|
61,820
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|
|
43
|
|
|
(36
|
)
|
|
61,827
|
|
Total marketable securities
|
$
|
260,116
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|
|
$
|
330
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|
|
$
|
(42
|
)
|
|
$
|
260,404
|
|
Current marketable securities have a remaining maturity of less than one year. Non-current marketable securities have a remaining maturity of between one and two years.
The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2018, which all have contract maturities of less than one year:
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|
|
|
|
|
|
|
December 31, 2018
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Market
Value
|
(in thousands)
|
|
|
|
Current:
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
$
|
69,275
|
|
|
$
|
12
|
|
|
$
|
(17
|
)
|
|
$
|
69,270
|
|
Corporate debt
|
105,897
|
|
|
38
|
|
|
(25
|
)
|
|
105,910
|
|
Asset-backed securities
|
21,189
|
|
|
—
|
|
|
(14
|
)
|
|
21,175
|
|
Total marketable securities, current
|
$
|
196,361
|
|
|
$
|
50
|
|
|
$
|
(56
|
)
|
|
$
|
196,355
|
|
4. Fair Value Measurements
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
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|
•
|
Level 1 — defined as observable inputs such as quoted prices in active markets
|
|
|
•
|
Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
|
|
|
•
|
Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
|
Marketable securities classified in Level 1 and Level 2 as of September 30, 2019 and December 31, 2018 consist of available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of investments classified in Level 2 is also determined using a market approach based upon quoted prices for similar assets in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities include certificates of deposit, commercial paper, corporate notes and asset-backed securities that use as their basis readily observable market parameters. The Company did not transfer any assets between Level 2 and Level 1 during the nine months ended September 30, 2019 and 2018.
As of September 30, 2019, the Company held certain assets that are required to be measured at fair value on a recurring basis, as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of September 30, 2019 Using
|
|
Total Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
87,325
|
|
|
$
|
87,325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
126,173
|
|
|
—
|
|
|
126,173
|
|
|
—
|
|
Asset-backed securities
|
46,906
|
|
|
—
|
|
|
46,906
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
260,404
|
|
|
$
|
87,325
|
|
|
$
|
173,079
|
|
|
$
|
—
|
|
As of December 31, 2018, the Company held certain assets that are required to be measured at fair value on a recurring basis, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2018 Using
|
|
Total Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
69,270
|
|
|
$
|
69,270
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
105,910
|
|
|
—
|
|
|
105,910
|
|
|
—
|
|
Asset-backed securities
|
21,175
|
|
|
—
|
|
|
21,175
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
196,355
|
|
|
$
|
69,270
|
|
|
$
|
127,085
|
|
|
$
|
—
|
|
The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, accounts receivable, restricted cash, accounts payable and accrued liabilities, product revenue allowances and milestone obligations under license agreements, the carrying values of which materially approximate their fair values.
5. Inventory
The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Inventory levels are evaluated for the amount of inventory that would be sold within one year. At certain times, the level of inventory can exceed the forecasted level of cost of goods sold for the next twelve months. The Company classifies the estimate of such inventory as non-current.
Inventory consisted of the following as of September 30, 2019 and December 31, 2018:
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|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Current:
|
|
|
|
Work-in-process
|
$
|
—
|
|
|
$
|
48
|
|
Finished goods
|
1,019
|
|
|
946
|
|
Total inventory, current
|
$
|
1,019
|
|
|
$
|
994
|
|
Non-Current:
|
|
|
|
Raw materials
|
$
|
662
|
|
|
$
|
86
|
|
Work-in-process
|
1,131
|
|
|
2,290
|
|
Finished goods
|
1,286
|
|
|
516
|
|
Total inventory, non-current
|
3,079
|
|
|
2,892
|
|
Total inventory
|
$
|
4,098
|
|
|
$
|
3,886
|
|
6. Leases
The Company's long-term leases primarily include operating leases and subleases for office space in Washington, D.C. and London, England. The Company recognized ROU assets and lease liabilities related to fixed payments for these long-term operating leases in its Condensed Consolidated Balance Sheet as of September 30, 2019. The Company also has short-term leases, including office space in Berlin, Germany.
In June 2011, the Company entered into an operating lease agreement under which it leases 33,534 square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. Subject to the prior rights of other tenants, the Company has the right to renew the lease for five years following its expiration in July 2028. As of September 30, 2019, the renewal period has not been included in the lease term. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions. The lease may be terminated early by the Company or the landlord under certain circumstances.
In June 2016, the Company entered into a sublease agreement under which it subleases an additional 9,928 square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. The sublease term began in January 2017 and ends in July 2026, but may be terminated earlier by either party under certain circumstances. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions.
In May 2016, the Company entered into an operating lease agreement under which it leases 2,880 square feet of office space for its European headquarters in London, England. The Company has the right to renew the lease for five years following its expiration in 2021. As of September 30, 2019, the renewal period has not been included in the lease term.
The following is a summary of the Company’s ROU assets and operating lease liabilities as of September 30, 2019:
|
|
|
|
|
|
|
|
(in thousands)
|
|
Classification on the Balance Sheet
|
|
September 30, 2019
|
Assets
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
11,436
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease current liabilities
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,123
|
|
Operating lease non-current liabilities
|
|
Operating lease non-current liabilities
|
|
12,793
|
|
Total lease liabilities
|
|
|
|
$
|
14,916
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
8.3 Years
|
|
Weighted average discount rate(1)
|
|
|
|
8.1
|
%
|
|
|
(1)
|
Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
|
For the three and nine months ended September 30, 2019, the Company recognized operating lease cost of $0.6 million and $1.7 million, respectively, and short-term operating lease cost of $0.1 million and $0.3 million, respectively. The Company also recognized $0.4 million and $1.0 million, respectively, of expense related to non-lease elements, such as building maintenance services and utilities, and executory costs associated with the operating leases. For existing leases as of January 1, 2019, executory costs are excluded from operating lease expense, which is consistent with the Company's accounting under ASC 840. For all leases entered into after January 1, 2019, executory costs are allocated between lease and non-lease elements based upon their relative stand-alone prices. For the three and nine months ended September 30, 2018, the Company recognized $0.9 million and $2.7 million of rent expense, respectively, inclusive of lease expense, non-lease elements, and executory costs for short and long-term operating leases.
Cash paid for amounts included in the measurement of operating lease liabilities is included in operating cash flows was $1.8 million for the nine months ended September 30, 2019.
The table below reconciles the Company's future cash obligations to operating lease liabilities recorded on the balance sheet as of September 30, 2019:
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
2019
|
|
$
|
633
|
|
2020
|
|
2,309
|
|
2021
|
|
2,329
|
|
2022
|
|
2,355
|
|
2023
|
|
2,420
|
|
Thereafter
|
|
10,669
|
|
Total minimum lease payments
|
|
20,715
|
|
Less: amount of lease payments representing interest
|
|
(5,799
|
)
|
Present value of future minimum lease payments
|
|
14,916
|
|
Less: current obligations under leases
|
|
(2,123
|
)
|
Operating lease non-current liabilities
|
|
$
|
12,793
|
|
At December 31, 2018, future minimum payments under noncancellable operating leases under ASC 840 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Year
|
(in thousands)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Operating leases
|
22,757
|
|
|
2,483
|
|
|
2,495
|
|
|
2,335
|
|
|
2,355
|
|
|
2,420
|
|
|
10,669
|
|
7. Intangible Assets
HETLIOZ®. In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ®. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $8.0 million to BMS. The $8.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in July 2035.
In April 2018, the Company met its final milestone under its license agreement when cumulative worldwide sales of HETLIOZ® reached $250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in the second quarter of 2018. The $25.0 million was determined to be additional consideration for the acquisition of the HETLIOZ® intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in July 2035.
The estimated economic useful life of both the $8.0 million and the $25.0 million intangible assets were changed from February 2035 to July 2035 based on the July 2035 expiration date of U.S. patent number 10,376,487 ('487 Patent) issued by the U.S. Patent and Trademark Office in August 2019. The estimated economic useful life of these intangible assets were previously changed from May 2034 to February 2035 based on the February 2035 expiration date of U.S. patent number 10,071,977 ('977 Patent) issued by the U.S. Patent and Trademark Office in September 2018.
The following is a summary of the Company’s intangible assets as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
(in thousands)
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ®
|
July 2035
|
|
$
|
33,000
|
|
|
$
|
9,593
|
|
|
$
|
23,407
|
|
The following is a summary of the Company’s intangible assets as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in thousands)
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ®
|
February 2035
|
|
$
|
33,000
|
|
|
$
|
8,458
|
|
|
$
|
24,542
|
|
As of September 30, 2019 and December 31, 2018, the Company also had $27.9 million of fully amortized intangible assets related to Fanapt®.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense was $0.4 million for each of the three months ended September 30, 2019 and 2018. Amortization expense was $1.1 million for each of the nine months ended September 30, 2019 and 2018. The following is a summary of the future intangible asset amortization schedule as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
HETLIOZ®
|
$
|
23,407
|
|
|
$
|
370
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
17,125
|
|
8. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Consulting and other professional fees
|
$
|
4,579
|
|
|
$
|
2,924
|
|
Research and development expenses
|
6,709
|
|
|
5,593
|
|
Royalties payable
|
5,783
|
|
|
5,172
|
|
Compensation and employee benefits
|
5,490
|
|
|
6,363
|
|
Operating lease liabilities
|
2,123
|
|
|
—
|
|
Other
|
2,308
|
|
|
1,532
|
|
Total accounts payable and accrued liabilities
|
$
|
26,992
|
|
|
$
|
21,584
|
|
9. Commitments and Contingencies
The following is a summary of the Company's noncancellable long-term contractual cash obligations as of September 30, 2019. See footnote 6, Leases, for the maturities of the Company's operating lease liabilities as of September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Year
|
(in thousands)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Purchase commitments
|
12,872
|
|
|
225
|
|
|
11,200
|
|
|
966
|
|
|
481
|
|
|
—
|
|
|
—
|
|
Guarantees and Indemnifications
The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual from the date of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain conditions.
License Agreements
The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies.
HETLIOZ®. In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ®. As a result of the FDA’s approval of the HETLIOZ® NDA in January 2014, the Company made an $8.0 million milestone payment to BMS in the first quarter of 2014 under the license agreement that was capitalized as an intangible asset and is being amortized over the estimated economic useful life of the related product patents for HETLIOZ® in the U.S. In April 2018, the Company met another milestone under its license agreement when cumulative worldwide sales of HETLIOZ® reached $250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in the second quarter of 2018. The $25.0 million milestone obligation was capitalized as an intangible asset in the first quarter of 2015 and is being amortized over the estimated economic useful life of the related product patents for HETLIOZ® in the U.S. The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ® net sales to BMS in any territory where the Company commercializes HETLIOZ® for a period equal to the greater of 10 years following the first commercial sale in the territory or the expiry of the new chemical entity (NCE) patent in that territory. During the period prior to the expiry of the NCE patent in a territory, the Company is obligated to pay a 10% royalty on net sales in that territory. The royalty rate is decreased by half for countries in which no NCE patent existed or for the remainder of the 10 years after the expiry of the NCE patent. The Company is also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments and milestone and other payments (excluding royalties) that it receives from a third party in connection with any sublicensing arrangement, at a rate which is in the mid-twenties. The Company has agreed with BMS in the license agreement for HETLIOZ® to use its commercially reasonable efforts to develop and commercialize HETLIOZ®.
Fanapt®. Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to the Company on December 31, 2014. The Company pays directly to Sanofi S.A (Sanofi) a fixed royalty of 3% of net sales through December 2019 related to manufacturing know-how. No further royalties on manufacturing know-how will be payable by the Company after December 2019. The Company is also obligated to pay Sanofi a fixed royalty on Fanapt® net sales equal to 6% on Sanofi know-how not related to manufacturing under certain conditions for a period of up to 10 years in markets where the NCE patent has expired or was not issued. The Company is obligated to pay this 6% royalty on net sales in the U.S. through November 2026. No further royalties on know-how not related to manufacturing will be payable by the Company for net sales in the U.S. after November 2026.
Tradipitant. In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1R antagonist, tradipitant, for all human indications. The patent describing tradipitant as an NCE expires in April 2023, except in the U.S., where it expires in June 2024 absent any applicable patent term adjustments. Lilly is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. As of September 30, 2019, remaining milestone obligations include a $2.0 million pre-NDA approval milestone due upon the filing of the first marketing authorization for tradipitant in either the U.S. or European Union, $10.0 million and $5.0 million for the first approval of a marketing authorization for tradipitant in the U.S. and European Union, respectively, and up to $80.0 million for sales milestones. In the third quarter of 2018, the Company also made a $2.0 million milestone payment to Lilly as a result of enrolling the first subject into a Phase III study for tradipitant in July 2018. The likelihood of achieving this milestone was determined to be probable during 2017 and the obligation of $2.0 million tied to such milestone was recorded as research and development expense in the consolidated statement of operations during the year ended December 31, 2017. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.
VQW-765. In connection with a settlement agreement with Novartis relating to Fanapt®, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens.
Portfolio of CFTR activators and inhibitors. In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which the Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and
commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including current pre-investigational new drug development work. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as single-digit royalties on net sales. As of September 30, 2019, remaining milestone obligations include annual maintenance fees, $12.2 million for pre-NDA approval milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $12.2 million pre-NDA approval milestones is a $350,000 milestone due upon the conclusion of a Phase I study for each licensed product but not to exceed $1.1 million in total for the CFTR portfolio. In the first quarter of 2019, the Company also made a $0.2 million pre-NDA approval milestone payment to UCSF, which was determined to be probable and accrued as a current liability in the fourth quarter of 2018. Additionally, the Company paid an initial license fee of $1.0 million in 2017.
Purchase Commitments
In the course of its business, the Company regularly enters into agreements with clinical organizations to provide services relating to clinical development and clinical manufacturing activities under fee-for-service arrangements. The Company’s current agreements for clinical, marketing, and other services generally may be terminated on 90 days’ notice without incurring additional charges, other than charges for work completed but not paid for through the effective date of termination and other costs incurred by the Company’s contractors in closing out work in progress as of the effective date of termination. Purchase commitments included in the noncancellable long-term contractual cash obligations table above include noncancellable purchase commitments longer than one year and primarily relate to commitments for advertising and data services.
10. Public Offering of Common Stock
In March 2018, the Company completed a public offering of 6,325,000 shares of its common stock, including the exercise of the underwriters’ option to purchase an additional 825,000 shares of common stock, at a price to the public of $17.00 per share. Net cash proceeds from the public offering were $100.9 million after deducting the underwriting discounts and commissions and offering expenses.
11. Accumulated Other Comprehensive Income
The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Foreign currency translation
|
$
|
(10
|
)
|
|
$
|
7
|
|
Unrealized gain (loss) on marketable securities
|
221
|
|
|
(6
|
)
|
Accumulated other comprehensive income
|
$
|
211
|
|
|
$
|
1
|
|
There were no reclassifications out of accumulated other comprehensive income for either of the nine months ended September 30, 2019 or 2018.
12. Stock-Based Compensation
As of September 30, 2019, there were 6,324,304 shares that were subject to outstanding options and restricted stock units (RSUs) under the 2006 Equity Incentive Plan (2006 Plan) and the Amended and Restated 2016 Equity Incentive Plan (2016 Plan, and together with the 2006 Plan, Plans). The 2006 Plan expired by its terms in April 2016, and the Company adopted the 2016 Plan. Outstanding options and RSUs under the 2006 Plan remain in effect and the terms of the 2006 Plan continue to apply, but no additional awards can be granted under the 2006 Plan. In June 2016, the Company’s stockholders approved the 2016 Plan. The 2016 Plan has been amended and restated twice to increase the number of shares reserved for issuance, among other administrative changes. Both amendments and restatements of the 2016 Plan were approved by the Company's stockholders. There are a total of 7,100,000 shares of common stock reserved for issuance under the 2016 Plan, 3,063,197 shares of which remained available for future grant as of September 30, 2019.
Stock Options
The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the Company's board of directors. Service option awards have 10 year contractual terms. Service option awards granted to employees and new directors upon their election vest and
become exercisable on the first anniversary of the grant date with respect to 25% of the shares subject to service option awards. The remaining 75% of the shares subject to the service option awards vest and become exercisable monthly in equal installments thereafter over three years. Subsequent annual service option awards granted to directors vest and become exercisable in either equal monthly installments over a period of one year or on the first anniversary of the grant date. Certain service option awards to executives and directors provide for accelerated vesting if there is a change in control of the Company. Certain service option awards to employees and executives provide for accelerated vesting if the respective employee’s or executive’s service is terminated by the Company for any reason other than cause or permanent disability.
As of September 30, 2019, $10.7 million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.5 years. No option awards are classified as a liability as of September 30, 2019.
A summary of option activity under the Plans for the nine months ended September 30, 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 and 2016 Plans
(in thousands, except for share and per share amounts)
|
Number of
Shares
|
|
Weighted Average
Exercise Price at
Grant Date
|
|
Weighted Average
Remaining Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2018
|
4,369,042
|
|
|
$
|
11.15
|
|
|
5.28
|
|
$
|
65,438
|
|
Granted
|
652,500
|
|
|
18.60
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
(15,000
|
)
|
|
14.78
|
|
|
|
|
|
Exercised
|
(338,317
|
)
|
|
12.26
|
|
|
|
|
1,083
|
|
Outstanding at September 30, 2019
|
4,668,225
|
|
|
12.10
|
|
|
5.56
|
|
12,673
|
|
Exercisable at September 30, 2019
|
3,489,627
|
|
|
10.21
|
|
|
4.46
|
|
12,343
|
|
Vested and expected to vest at September 30, 2019
|
4,459,638
|
|
|
11.81
|
|
|
5.38
|
|
12,652
|
|
The weighted average grant-date fair value of options granted was $10.34 and $10.66 per share for the nine months ended September 30, 2019 and 2018, respectively. Proceeds from the exercise of stock options amounted to $4.1 million and $5.5 million for the nine months ended September 30, 2019 and 2018, respectively.
Restricted Stock Units
An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that generally vest over 4 years in equal annual installments provided that the employee remains employed with the Company. Annual service RSUs granted to directors vest on the first anniversary of the grant date.
As of September 30, 2019, $25.3 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.9 years. No RSUs are classified as a liability as of September 30, 2019.
A summary of RSU activity under the Plans for the nine months ended September 30, 2019 follows:
|
|
|
|
|
|
|
|
2006 and 2016 Plans
|
Number of
Shares
Underlying RSUs
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at December 31, 2018
|
1,313,576
|
|
|
$
|
15.68
|
|
Granted
|
915,328
|
|
|
19.58
|
|
Forfeited
|
(55,024
|
)
|
|
18.93
|
|
Vested
|
(517,801
|
)
|
|
14.49
|
|
Unvested at September 30, 2019
|
1,656,079
|
|
|
18.09
|
|
The grant date fair value for the 517,801 shares underlying RSUs that vested during the nine months ended September 30, 2019 was $7.5 million.
Stock-Based Compensation
Stock-based compensation expense recognized for the three and nine months ended September 30, 2019 and 2018 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
September 30,
2019
|
|
September 30,
2018
|
|
September 30,
2019
|
|
September 30,
2018
|
Research and development
|
$
|
827
|
|
|
$
|
326
|
|
|
$
|
2,311
|
|
|
$
|
963
|
|
Selling, general and administrative
|
2,580
|
|
|
2,546
|
|
|
7,479
|
|
|
7,781
|
|
Total stock-based compensation expense
|
$
|
3,407
|
|
|
$
|
2,872
|
|
|
$
|
9,790
|
|
|
$
|
8,744
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. Expected volatility rates are based on the historical volatility of the Company’s publicly traded common stock and other factors. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has not paid dividends to its stockholders since its inception (other than a dividend of preferred share purchase rights, which was declared in September 2008) and does not plan to pay dividends in the foreseeable future. Assumptions used in the Black-Scholes-Merton option pricing model for stock options granted during the nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
2019
|
|
September 30,
2018
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Weighted average expected volatility
|
58
|
%
|
|
58
|
%
|
Weighted average expected term (years)
|
5.94
|
|
|
5.90
|
|
Weighted average risk-free rate
|
2.29
|
%
|
|
2.68
|
%
|
13. Income Taxes
For the three months ended September 30, 2019 and 2018, the Company recorded income tax benefit of $88.1 million and income tax expense of $0.1 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded income tax benefit of $88.1 million and income tax expense of $0.2 million, respectively. The income tax benefit for the three and nine months ended September 30, 2019 was primarily due to the reduction of the Company's tax valuation allowance against substantially all of its deferred tax assets in the U.S. recognized during the three months ended September 30, 2019. Net income tax benefit of $1.6 million was also recorded related to the generation of 2019 research and development and orphan drug credits, current taxes payable to certain U.S. state and foreign jurisdictions and uncertain tax positions for the three and nine months ended September 30, 2019. As a result of the tax valuation allowance against deferred tax assets in the U.S., there was no expense for federal income taxes associated with the income before taxes for the three and nine months ended September 30, 2018. Income taxes were recorded related to certain U.S. state and foreign jurisdictions for the three and nine months ended September 30, 2018.
The Company assesses the need for a valuation allowance against its deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2018, there was a full tax valuation allowance against all deferred tax assets in the U.S. During the three months ended September 30, 2019, after considering all available positive and negative evidence, including but not limited to cumulative income in recent periods, historical and current projected results, and significant risks and uncertainties related to forecasts, the Company concluded that it was more likely than not that substantially all of its deferred taxes are realizable in future periods.
Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. As of September 30, 2019, the total amount of unrecognized tax benefits (UTB) was $9.7 million. As of December 31, 2018, the Company had no UTB. The UTB recognized in 2019 is primarily related to prior year tax positions and has no impact on tax expense as, prior to 2019, a tax valuation allowance was recorded against deferred tax assets in the U.S.
The Company does not expect its unrecognized tax benefits as of September 30, 2019 to change significantly over the next twelve months.
Certain tax attributes of the Company, including net operating losses (NOLs) and credits, would be subject to a limitation should an ownership change as defined under the Internal Revenue Code of 1986, as amended, Section 382, occur. The limitations resulting from a change in ownership could affect the Company’s ability to utilize its NOLs and credit carryforward (tax attributes). Ownership changes occurred in the years ended December 31, 2014 and December 31, 2008. The Company believes that the ownership changes in 2014 and 2008 will not impact its ability to utilize NOL and credit carryforwards; however, future ownership changes may cause the Company’s existing tax attributes to have additional limitations.
The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. During the fourth quarter of 2018, the Company completed its accounting for the tax effects of the TCJA. No material measurement period adjustments were recorded in 2018 to adjust estimated effects of the TCJA that were recorded in 2017. Immaterial measurement period adjustments that were recorded resulted in no tax expense as they were fully offset by a change in the Company's valuation allowance.
14. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.
The following table presents the calculation of basic and diluted net income per share of common stock for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands, except for share and per share amounts)
|
September 30,
2019
|
|
September 30,
2018
|
|
September 30,
2019
|
|
September 30,
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
100,423
|
|
|
$
|
7,171
|
|
|
$
|
111,337
|
|
|
$
|
14,848
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
53,297,298
|
|
|
52,389,012
|
|
|
53,052,521
|
|
|
50,321,640
|
|
Effect of dilutive securities
|
1,244,327
|
|
|
2,320,737
|
|
|
1,751,330
|
|
|
1,994,002
|
|
Weighted average shares outstanding, diluted
|
54,541,625
|
|
|
54,709,749
|
|
|
54,803,851
|
|
|
52,315,642
|
|
Net income per share, basic and diluted:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.88
|
|
|
$
|
0.14
|
|
|
$
|
2.10
|
|
|
$
|
0.30
|
|
Diluted
|
$
|
1.84
|
|
|
$
|
0.13
|
|
|
$
|
2.03
|
|
|
$
|
0.28
|
|
Antidilutive securities excluded from calculations of diluted net income per share
|
2,646,933
|
|
|
752,194
|
|
|
1,826,279
|
|
|
1,058,058
|
|
15. Legal Matters
Fanapt®. The Company has been involved in litigation with Roxane Laboratories, Inc. (Roxane) and its affiliates, West-Ward Pharmaceuticals International Limited and West-Ward Pharmaceuticals Corp (West-Ward), since the Company filed a lawsuit against Roxane in the U.S. District Court for the District of Delaware (Delaware District Court) for patent infringement in June 2014. The lawsuit was filed in response to Roxane’s submission to the U.S. Food and Drug Administration (FDA) of an Abbreviated New Drug Application (ANDA) for a generic version of Fanapt® prior to the expiration of certain of the Company’s patents covering Fanapt®, including U.S. Patent No. 8,586,610 (‘610 Patent). In August 2016, the Delaware District Court ruled in the Company’s favor, permanently enjoining Roxane from manufacturing, using, selling, offering to sell, distributing or importing any generic iloperidone product described in Roxane’s ANDA until the expiration of the ‘610 Patent in November 2027, or May 2028 if the Company obtains pediatric exclusivity. In April 2018, following an appeal by Roxane of the Delaware District Court’s decision to the Federal Circuit Court of Appeals (Federal Circuit), the Federal Circuit affirmed the Delaware District Court’s ruling. In June 2018, West-Ward, having replaced Roxane as defendants following the acquisition of Roxane by West-Ward’s parent company, Hikma Pharmaceuticals PLC, petitioned the Federal Circuit for a rehearing en banc. In August 2018, the Federal Circuit denied West-Ward's petition. In January 2019, West-Ward filed a petition in the U.S.
Supreme Court for a writ of certiorari seeking reversal of the Federal Circuit’s decision. In March 2019, the U.S. Supreme Court invited the Solicitor General of the U.S. to file a brief in the matter expressing the views of the U.S.
In 2015, the Company filed six separate patent infringement lawsuits in the Delaware District Court against Roxane, Inventia Healthcare Pvt. Ltd. (Inventia), Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp. (Apotex, and collectively with Roxane, Inventia, Lupin and Taro, the Fanapt® Defendants). These lawsuits were filed in response to the submission to the FDA by each of the Fanapt® Defendants of ANDAs for generic versions of Fanapt® prior to the expiration of the ‘610 Patent in November 2027 or the U.S. Patent No. 9,138,432 in September 2025. The Company entered into separate confidential stipulations with each of Inventia and Lupin regarding any potential launch of their generic versions of Fanapt®. The remaining lawsuits against the other Fanapt® Defendants have been stayed until 14 days after final disposition by the U.S. Supreme Court of the petition for a writ of certiorari filed by West-Ward.
HETLIOZ®. In April and May 2018, the Company filed three separate patent infringement lawsuits in the Delaware District Court against Teva Pharmaceuticals USA, Inc. (Teva), MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN) and Apotex (collectively with Teva and MSN, the HETLIOZ® Defendants) after having received Paragraph IV certification notice letters (Paragraph IV Letters) from each of the HETLIOZ® Defendants alleging that certain of the Company's patents covering HETLIOZ® (collectively, the HETLIOZ® Patents) were invalid, unenforceable and/or would not be infringed by the manufacture, use or sale of their generic versions of HETLIOZ®, as described in the ANDAs submitted to the FDA by each of the HETLIOZ® Defendants, prior to the expiration of the latest to expire of the HETLIOZ® Patents in 2034. Each of the HETLIOZ® Patents are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book). In December 2018, the Company filed amended complaints against each of the HETLIOZ® Defendants following the receipt of additional Paragraph IV Letters from Teva and Apotex concerning its Orange Book listed '977 Patent, which expires in 2035. These lawsuits are scheduled for trial in October 2020.
In March 2019, April 2019, and May 2019, the Company filed three additional patent infringement lawsuits in the Delaware District Court against the HETLIOZ® Defendants following the receipt of additional Paragraph IV Letters from each concerning its Orange Book listed U.S. Patent No. 10,149,829, which expires in 2033. A trial date has not yet been scheduled for these lawsuits.
In October 2019, the Company received an additional Paragraph IV certification notice letter from Teva concerning its Orange Book listed ‘487 Patent, which expires in July 2035. In its notice letter, Teva alleges that the ‘487 Patent, which covers a method of treatment using HETLIOZ®, is invalid, unenforceable and/or will not be infringed by Teva’s manufacture, use or sale of its generic version of HETLIOZ® as described in its ANDA. The Company intends to vigorously pursue a patent infringement lawsuit permanently enjoining Teva from infringing the claims of the ‘487 Patent.
Other Matters. In April 2018, the Company submitted a protocol amendment to the FDA, proposing a 52-week open-label extension (OLE) period for patients who had completed the tradipitant Phase II clinical study (2301) in gastroparesis. In May 2018, based on feedback from the FDA, the Company amended the protocol limiting the duration of treatment in the 2301 study to a total of three months, while continuing to seek further dialogue with the FDA on extending the study duration to 52-weeks. As a part of this negotiation process, in September 2018, the Company submitted a new follow-on 52-week OLE protocol to the FDA (2302) for patients who had completed the 2301 study. While waiting for further feedback, the Company did not enroll any patients in any study beyond 12 weeks. In December 2018, the FDA imposed a partial clinical hold (PCH) on the two proposed studies, stating that the Company is required first to conduct additional chronic toxicity studies in canines, monkeys or minipigs before allowing patients access in any clinical protocol beyond 12 weeks. The original PCH was not based on any safety or efficacy data related to tradipitant. Rather, the FDA informed the Company that these additional toxicity studies are required by a guidance document.
On February 5, 2019, the Company filed a lawsuit against the FDA in the U.S. District Court for the District of Columbia (DC District Court), challenging the FDA’s legal authority to issue the PCH, and seeking an order to set it aside. In February 2019, the FDA filed a Motion for Voluntary Remand to the Agency and for a Stay of the Case. In March 2019, the DC District Court granted the FDA’s request for voluntary remand and returned the matter to the FDA for further consideration. In April 2019, the FDA provided its remand response, in which it indicated that, upon review of scientific literature and tradipitant data, it believes that a partial clinical hold continues to be appropriate until the Company has adequate safety data from a 9-month non-rodent toxicity study. After reviewing the FDA’s remand response, the Company continues to believe that additional chronic toxicity studies are unjustified, and that it has provided the FDA with sufficient information regarding the safety of tradipitant to justify the continued study of tradipitant in patients beyond 12 weeks, in accordance with applicable law and FDA regulations. In May 2019, the Company filed an amended complaint, and in July 2019, the Company filed a Motion for
Summary Judgment. The FDA filed a reply and cross-motion for summary judgment in October 2019. A hearing has been set for December 13, 2019. The Company intends to continue vigorously pursuing its interests in the matter.
In February 2019, a qui tam action filed against the Company was unsealed by order of the DC District Court. The qui tam action, which was filed under seal in March 2017, was brought by a former Company employee on behalf of the U.S., 28 states and the District of Columbia (collectively, the Plaintiff States) and the policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the Federal False Claims Act and related state laws. The complaint alleged that the Company violated these laws through the promotion and marketing of its products Fanapt® and HETLIOZ® and sought, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs. By virtue of the DC District Court having unsealed the original complaint, the Company learned that in January 2019, the U.S. Department of Justice (the DOJ), as well as the Plaintiff States, elected not to intervene in the qui tam action at that time. In May 2019, the plaintiff filed an amended complaint under seal repeating the same allegations and seeking the same relief. In August 2019, the Company filed a motion to dismiss, and in October 2019 the plaintiff filed a reply. According to a filing unsealed in June 2019, the DOJ reaffirmed its decision not to intervene and incorporated its prior filing, indicating that neither the DOJ nor the Plaintiff States were intervening regarding the original complaint. Although the DOJ and the Plaintiff States have elected not to intervene, the plaintiff may litigate this action and the DOJ and the Plaintiff States may later seek to intervene in the action. The Company intends to vigorously defend itself in the case.
In February 2019, a securities class action, Gordon v. Vanda Pharmaceuticals Inc., was filed in the U.S. District Court for the Eastern District of New York naming the Company and certain of its officers as defendants. An amended complaint was filed in July 2019. The amended complaint, filed on behalf of a purported stockholder, asserts claims on behalf of a putative class of all persons who purchased the Company’s publicly traded securities between November 4, 2015 and February 11, 2019, for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that the defendants made false and misleading statements and/or omissions regarding Fanapt®, HETLIOZ® and the Company’s interactions with the FDA regarding tradipitant between November 3, 2015 and February 11, 2019. The Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, this lawsuit is subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.
In July 2019, a shareholder derivative complaint, Samuel Williams vs. Mihael Polymeropoulos, et al., was filed in the U.S. District Court for the Eastern District of New York naming certain current and former Company directors and officers as defendants. In September 2019, a shareholder derivative complaint, Michael Bavaro v. Mihael Polymeropoulos, et al., was filed in the Delaware District Court naming certain current and former Company directors and officers as defendants. In October 2019, the Company filed a motion to transfer the Bavaro case to the Eastern District of New York, where the Gordon and Williams cases are pending. These complaints, filed on behalf of purported stockholders, derivatively on behalf of the Company, assert claims for alleged breach of fiduciary duties by certain of the Company’s current and former directors and officers. The Company believes that it has meritorious defenses and intends to vigorously defend these lawsuits. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, these lawsuits are subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.