NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business Organization and Presentation
Business organization
Vanda Pharmaceuticals Inc. (the Company) is a leading global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. The Company commenced its operations in 2003 and operates in one reporting segment.
The Company’s commercial portfolio is currently comprised of two products, HETLIOZ® for the treatment of Non-24 Hour Sleep-Wake Disorder (Non-24) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first treatment for Non-24 approved by the U.S. Food and Drug Administration (FDA). In addition, the Company has a number of drugs in development, including:
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•
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HETLIOZ® (tasimelteon) for the treatment of jet lag disorder (JLD), Smith-Magenis Syndrome (SMS), pediatric Non-24 and delayed sleep phase disorder (DSPD);
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•
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Fanapt® (iloperidone) for the treatment of bipolar disorder and a long acting injectable (LAI) formulation program for the treatment of schizophrenia;
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•
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Tradipitant (VLY-686), a small molecule neurokinin-1 receptor (NK-1R) antagonist, for the treatment of atopic dermatitis, gastroparesis, motion sickness and COVID-19 Acute Respiratory Distress Syndrome (ARDS);
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•
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VTR-297, a small molecule histone deacetylase (HDAC) inhibitor for the treatment of hematologic malignancies and with potential use as a treatment for several oncology indications;
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•
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VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, with potential use for the treatment of psychiatric disorders; and
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•
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Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors for the treatment of dry eye and ocular inflammation and for the treatment of secretory diarrhea disorders, including cholera.
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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 (Annual Report) for the fiscal year ended December 31, 2019. The financial information as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or any future year or period.
2. Summary of Significant Accounting Policies
There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
For purposes of the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows, cash equivalents represent highly-liquid investments with a maturity date of three months or less at the date of purchase. Cash and
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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(in thousands)
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March 31,
2020
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March 31,
2019
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Cash and cash equivalents
|
$
|
64,950
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$
|
34,379
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Restricted cash included in:
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Prepaid expenses and other current assets
|
—
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|
157
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Non-current inventory and other
|
577
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|
|
586
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|
Total cash, cash equivalents and restricted cash
|
$
|
65,527
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|
|
$
|
35,122
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Revenue from Net Product Sales
The Company’s net product sales consist of sales of HETLIOZ® and Fanapt®. Net sales by product for the three months ended March 31, 2020 and 2019 were as follows:
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Three Months Ended
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(in thousands)
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March 31,
2020
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March 31,
2019
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HETLIOZ® product sales, net
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$
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35,336
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$
|
28,957
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Fanapt® product sales, net
|
22,664
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|
|
18,756
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Total net product sales
|
$
|
58,000
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|
|
$
|
47,713
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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 three months ended March 31, 2020. There were five major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 94% of total accounts receivable at March 31, 2020. Receivables are carried at transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and incorporating current conditions and forward-looking estimates.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the impairment model for most financial assets and certain other financial instruments. The standard requires the use of a forward-looking “expected loss” model for instruments measured at amortized cost that generally will result in the earlier recognition of allowances for losses. The standard is effective for years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2019. The adoption of this standard on January 1, 2020 did not have a material impact on the Company's condensed consolidated financial results.
3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of March 31, 2020, which all have contractual maturities of less than two years:
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Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
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Fair
Market
Value
|
(in thousands)
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|
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U.S. Treasury and government agencies
|
$
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87,014
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|
$
|
558
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|
|
$
|
—
|
|
|
$
|
87,572
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Corporate debt
|
122,964
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|
|
572
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(110
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)
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123,426
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Asset-backed securities
|
36,386
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|
|
56
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|
(64
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)
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|
36,378
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Total marketable securities
|
$
|
246,364
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|
|
$
|
1,186
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|
|
$
|
(174
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)
|
|
$
|
247,376
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|
The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2019, which all have contractual maturities of less than two years:
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Amortized
Cost
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|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
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Fair
Market
Value
|
(in thousands)
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|
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U.S. Treasury and government agencies
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$
|
88,535
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$
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68
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|
$
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(2
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)
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|
$
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88,601
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Corporate debt
|
129,860
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|
196
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(1
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)
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130,055
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Asset-backed securities
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48,355
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49
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(3
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)
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48,401
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Total marketable securities
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$
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266,750
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|
$
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313
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$
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(6
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)
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$
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267,057
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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
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•
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Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
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•
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Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
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Marketable securities classified in Level 1 and Level 2 as of March 31, 2020 and December 31, 2019 consist of cash equivalents and available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of investments classified in Level 2 is also determined using a market approach based upon quoted prices for similar assets in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities include certificates of deposit, commercial paper, corporate notes and asset-backed securities that use as their basis readily observable market parameters.
As of March 31, 2020, 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 March 31, 2020 Using
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Total Fair Value
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Quoted Prices in
Active Markets for
Identical Assets
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Significant Other
Observable Inputs
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Significant
Unobservable
Inputs
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(in thousands)
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(Level 1)
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(Level 2)
|
|
(Level 3)
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U.S. Treasury and government agencies
|
$
|
87,572
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|
|
$
|
87,572
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|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
123,426
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|
|
—
|
|
|
123,426
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|
|
—
|
|
Asset-backed securities
|
36,378
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|
|
—
|
|
|
36,378
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
247,376
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|
|
$
|
87,572
|
|
|
$
|
159,804
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|
|
$
|
—
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|
As of December 31, 2019, the Company held certain assets that are required to be measured at fair value on a recurring basis, as follows:
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Fair Value Measurement as of December 31, 2019 Using
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Total Fair Value
|
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Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
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|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
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|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
88,601
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|
|
$
|
88,601
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
137,025
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|
|
—
|
|
|
137,025
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|
|
—
|
|
Asset-backed securities
|
48,401
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|
|
—
|
|
|
48,401
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|
|
—
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|
Total assets measured at fair value
|
$
|
274,027
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|
|
$
|
88,601
|
|
|
$
|
185,426
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|
|
$
|
—
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|
Total assets measured at fair value as of December 31, 2019 include $7.0 million of cash equivalents.
The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, accounts receivable, restricted cash, accounts payable and accrued liabilities, product revenue allowances and milestone obligations under license agreements, the carrying values of which materially approximate their fair values.
5. Inventory
The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Inventory levels are evaluated for the amount of inventory that would be sold within one year. At certain times, the level of inventory can exceed the forecasted level of cost of goods sold for the next twelve months. The Company classifies the estimate of such inventory as non-current.
Inventory consisted of the following as of March 31, 2020 and December 31, 2019:
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(in thousands)
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March 31,
2020
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|
December 31,
2019
|
Current assets
|
|
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Finished goods
|
$
|
1,320
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|
|
$
|
1,140
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Total inventory, current
|
$
|
1,320
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|
|
$
|
1,140
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Non-Current assets
|
|
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Raw materials
|
$
|
659
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|
|
$
|
659
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|
Work-in-process
|
949
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|
|
1,109
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Finished goods
|
934
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|
|
1,056
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Total inventory, non-current
|
2,542
|
|
|
2,824
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Total inventory
|
$
|
3,862
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|
|
$
|
3,964
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6. Intangible Assets
HETLIOZ®. In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ®. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $8.0 million to BMS. The $8.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in July 2035.
In April 2018, the Company met its final milestone under its license agreement when cumulative worldwide sales of HETLIOZ® reached $250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in 2018. The $25.0 million, which was capitalized as an intangible asset in the first quarter of 2015, was determined to be additional consideration for the acquisition of the HETLIOZ® intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in July 2035.
The estimated economic useful life of both the $8.0 million and the $25.0 million intangible assets were changed from February 2035 to July 2035 based on the July 2035 expiration date of U.S. patent number 10,376,487 ('487 Patent) issued by the U.S. Patent and Trademark Office in August 2019.
The following is a summary of the Company’s intangible assets as of March 31, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(in thousands)
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ®
|
July 2035
|
|
$
|
33,000
|
|
|
$
|
10,333
|
|
|
$
|
22,667
|
|
The following is a summary of the Company’s intangible assets as of December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ®
|
July 2035
|
|
$
|
33,000
|
|
|
$
|
9,963
|
|
|
$
|
23,037
|
|
As of March 31, 2020 and December 31, 2019, the Company also had $27.9 million of fully amortized intangible assets related to Fanapt®.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense was $0.4 million for each of the three months ended March 31, 2020 and 2019. The following is a summary of the future intangible asset amortization schedule as of March 31, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
HETLIOZ®
|
$
|
22,667
|
|
|
$
|
1,108
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
15,647
|
|
7. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of March 31, 2020 and December 31, 2019:
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|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2020
|
|
December 31,
2019
|
Consulting and other professional fees
|
$
|
7,636
|
|
|
$
|
5,376
|
|
Research and development expenses
|
5,839
|
|
|
5,893
|
|
Royalties payable
|
4,912
|
|
|
5,904
|
|
Compensation and employee benefits
|
3,762
|
|
|
6,597
|
|
Operating lease liabilities
|
2,101
|
|
|
2,147
|
|
Other
|
1,795
|
|
|
1,673
|
|
Total accounts payable and accrued liabilities
|
$
|
26,045
|
|
|
$
|
27,590
|
|
8. Commitments and Contingencies
Guarantees and Indemnifications
The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual from the date of
execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain conditions.
License Agreements
The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies.
HETLIOZ®. In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ®. As of March 31, 2020, the Company has paid BMS $37.5 million in upfront fees and milestone obligations, including $33.0 million of regulatory approval and commercial milestones capitalized as intangible assets (see Note 6). The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ® net sales to BMS in any territory where the Company commercializes HETLIOZ® for a period equal to the greater of 10 years following the first commercial sale in the territory or the expiry of the new chemical entity (NCE) patent in that territory. During the period prior to the expiry of the NCE patent in a territory, the Company is obligated to pay a 10% royalty on net sales in that territory. The royalty rate is decreased by half for countries in which no NCE patent existed or for the remainder of the 10 years after the expiry of the NCE patent. The Company is also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments and milestone and other payments (excluding royalties) that it receives from a third party in connection with any sublicensing arrangement, at a rate which is in the mid-twenties. The Company 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 paid directly to Sanofi S.A (Sanofi) a fixed royalty of 3% of net sales through December 2019 related to manufacturing know-how. The Company is also obligated to pay Sanofi a fixed royalty on Fanapt® net sales equal to 6% on Sanofi know-how not related to manufacturing under certain conditions for a period of up to 10 years in markets where the NCE patent has expired or was not issued. The Company is obligated to pay this 6% royalty on net sales in the U.S. through November 2026.
Tradipitant. In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1R antagonist, tradipitant, for all human indications. Lilly is eligible to receive future payments based upon achievement of specified development, regulatory approval and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. As of March 31, 2020, the Company has paid Lilly $3.0 million in upfront fees and development milestones, including a $2.0 million milestone payment in July 2018 as a result of enrolling the first subject into a Phase III study for tradipitant. As of March 31, 2020, remaining milestone obligations include a $2.0 million development milestone due upon the filing of the first marketing authorization for tradipitant in either the U.S. or European Union (E.U.), $10.0 million and $5.0 million for the first approval of a marketing authorization for tradipitant in the U.S. and E.U., respectively, and up to $80.0 million for sales milestones. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.
VQW-765. In connection with a settlement agreement with Novartis relating to Fanapt®, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens.
Portfolio of CFTR activators and inhibitors. In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which the Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including current pre-investigational new drug development work. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as single-digit royalties on net sales. As of March 31, 2020, the Company has paid UCSF $1.2 million in upfront fees and development milestones, including an upfront license fee payment of $1.0 million in 2017 and a $0.2 million development milestone payment in March 2019. As of
March 31, 2020, remaining milestone obligations include $12.2 million for development milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $12.2 million in development milestones is a $350,000 milestone due upon the conclusion of a Phase I study for each licensed product but not to exceed $1.1 million in total for the CFTR portfolio.
Purchase Commitments
In the course of its business, the Company regularly enters into agreements with clinical organizations to provide services relating to clinical development and clinical manufacturing activities under fee service arrangements. The Company’s current agreements for clinical, marketing, and other services may be terminated on generally 90 days’ notice without incurring additional charges, other than charges for work completed but not paid for through the effective date of termination and other costs incurred by the Company’s contractors in closing out work in progress as of the effective date of termination. Noncancellable long-term contractual cash obligations include noncancellable purchase commitments longer than one year and primarily relate to commitments for media and data services, of which $3.2 million, $1.0 million, and $0.5 million are expected to be paid in 2020, 2021 and 2022, respectively.
9. Accumulated Other Comprehensive Income
The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2020
|
|
December 31,
2019
|
Foreign currency translation
|
$
|
—
|
|
|
$
|
13
|
|
Unrealized gain on marketable securities
|
781
|
|
|
236
|
|
Accumulated other comprehensive income
|
$
|
781
|
|
|
$
|
249
|
|
There were no reclassifications out of accumulated other comprehensive income for either of the three months ended March 31, 2020 or 2019.
10. Stock-Based Compensation
As of March 31, 2020, there were 6,335,548 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, 2,153,920 shares of which remained available for future grant as of March 31, 2020.
Stock Options
The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have 10 year contractual terms. Service option awards granted to employees and new directors upon their election vest and become exercisable over four years with the first 25% of the shares subject to service option awards vesting on the first anniversary of the grant date and remaining 75% of the shares subject to the service option awards in 36 equal monthly installments thereafter. Subsequent annual service option awards granted to directors vest and become exercisable in full on the first anniversary of the grant date. Certain service option awards to executives and directors provide for accelerated vesting if there is a change in control of the Company. Certain service option awards to employees and executives provide for accelerated vesting if the respective employee’s or executive’s service is terminated by the Company for any reason other than cause or permanent disability.
As of March 31, 2020, $9.1 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 March 31, 2020.
A summary of option activity under the Plans for the three months ended March 31, 2020 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 and 2016 Plans
(in thousands, except for share and per share amounts)
|
Number of
Shares
|
|
Weighted Average
Exercise Price at
Grant Date
|
|
Weighted Average
Remaining Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2019
|
4,495,145
|
|
|
$
|
12.21
|
|
|
5.58
|
|
$
|
21,148
|
|
Granted
|
487,500
|
|
|
11.42
|
|
|
|
|
|
Forfeited
|
(225,000
|
)
|
|
18.83
|
|
|
|
|
|
Expired
|
(10,104
|
)
|
|
11.78
|
|
|
|
|
|
Exercised
|
(172,500
|
)
|
|
4.96
|
|
|
|
|
890
|
|
Outstanding at March 31, 2020
|
4,575,041
|
|
|
12.07
|
|
|
5.81
|
|
4,818
|
|
Exercisable at March 31, 2020
|
3,379,139
|
|
|
11.02
|
|
|
4.63
|
|
4,818
|
|
Vested and expected to vest at March 31, 2020
|
4,340,916
|
|
|
11.99
|
|
|
5.60
|
|
4,818
|
|
The weighted average grant-date fair value of options granted was $5.73 and $11.50 per share for the three months ended March 31, 2020 and 2019, respectively. Proceeds from the exercise of stock options amounted to $0.5 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
Restricted Stock Units
An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that vest in four 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 March 31, 2020, $25.9 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 2.0 years. No RSUs are classified as a liability as of March 31, 2020.
A summary of RSU activity under the Plans for the three months ended March 31, 2020 follows:
|
|
|
|
|
|
|
|
2006 and 2016 Plans
|
Number of
Shares
Underlying RSUs
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at December 31, 2019
|
1,649,285
|
|
|
$
|
18.04
|
|
Granted
|
745,818
|
|
|
11.32
|
|
Forfeited
|
(136,091
|
)
|
|
18.65
|
|
Vested
|
(498,505
|
)
|
|
16.73
|
|
Unvested at March 31, 2020
|
1,760,507
|
|
|
15.52
|
|
The grant date fair value for the 498,505 shares underlying RSUs that vested during the three months ended March 31, 2020 was $8.3 million.
Stock-Based Compensation Expense
Stock-based compensation expense recognized for the three months ended March 31, 2020 and 2019 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 31,
2020
|
|
March 31,
2019
|
Research and development
|
$
|
1,111
|
|
|
$
|
728
|
|
Selling, general and administrative
|
2,833
|
|
|
2,554
|
|
Total stock-based compensation expense
|
$
|
3,944
|
|
|
$
|
3,282
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. Expected volatility rates are based on the historical volatility of the Company’s publicly traded common stock and other factors. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has never paid cash dividends to its stockholders and does not plan to pay dividends in the foreseeable future. Assumptions used in the Black-Scholes-Merton option pricing model for employee and director stock options granted during the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Weighted average expected volatility
|
52
|
%
|
|
58
|
%
|
Weighted average expected term (years)
|
6.09
|
|
|
5.92
|
|
Weighted average risk-free rate
|
1.37
|
%
|
|
2.51
|
%
|
11. Income Taxes
For the three months ended March 31, 2020 and 2019, the Company recorded income tax expense of $0.8 million and less than $0.1 million, respectively. The income tax expense for the three months ended March 31, 2020 was primarily driven by the estimated effective tax rate for the year and the discrete impact of $0.4 million of net shortfall tax expense related to stock-based compensation activity during the quarter. As a result of the tax valuation allowance against deferred tax assets in the U.S., there was no benefit for federal income taxes associated with the loss before taxes for the three months ended March 31, 2019. Income taxes were recorded related to certain U.S. state and foreign jurisdictions for the three months ended March 31, 2019.
The Company assesses the need for a valuation allowance against its deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. The analysis depends on historical and projected taxable income. Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities. During the third quarter of 2019, after considering all available positive and negative evidence, including but not limited to cumulative income in recent periods, historical, current and future projected results and significant risks and uncertainties related to forecasts, the Company concluded that it was more likely than not that substantially all of its deferred tax assets in the U.S. are realizable in future periods. A valuation allowance was retained against certain U.S. federal tax attributes with short carryforward periods and District of Columbia state deferred tax assets as of March 31, 2020 and December 31, 2019.
12. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.
The following table presents the calculation of basic and diluted net income (loss) per share of common stock for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except for share and per share amounts)
|
March 31,
2020
|
|
March 31,
2019
|
Numerator:
|
|
|
|
Net income (loss)
|
$
|
486
|
|
|
$
|
(612
|
)
|
Denominator:
|
|
|
|
Weighted average shares outstanding, basic
|
53,806,317
|
|
|
52,752,774
|
|
Effect of dilutive securities
|
1,063,829
|
|
|
—
|
|
Weighted average shares outstanding, diluted
|
54,870,146
|
|
|
52,752,774
|
|
Net income (loss) per share, basic and diluted:
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
Diluted
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
Antidilutive securities excluded from calculations of diluted net income (loss) per share
|
3,095,224
|
|
|
3,068,806
|
|
The Company incurred a net loss for the three months ended March 31, 2019 causing inclusion of any potentially dilutive securities to have an anti-dilutive effect, resulting in dilutive loss per share and basic loss per share attributable to common stockholders being equivalent.
13. Legal Matters
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 January 2020, the U.S. Supreme Court denied West-Ward's petition for writ of certiorari.
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 parties are scheduled to provide the court with a status report on May 28, 2020 with respect to the remaining lawsuits against the other Fanapt® Defendants.
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 July 2021.
In March 2019, April 2019, and May 2019, the Company filed three additional patent infringement lawsuits in the Delaware District Court against the HETLIOZ® Defendants following the receipt of additional Paragraph IV Letters from each concerning its Orange Book listed U.S. Patent No. 10,149,829, which expires in 2033. These lawsuits have been consolidated with the other lawsuits against the HETLIOZ® Defendants and are also scheduled for trial in July 2021.
In November and December 2019, the Company filed additional patent infringement lawsuits in the Delaware District Court against Apotex and Teva, respectively, for infringement of its Orange Book listed U.S. Patent No. 10,376,487 (‘487 Patent) following the receipt of additional Paragraph IV Letters from Apotex and Teva regarding the '487 Patent, which expires in July 2035. Teva asserted a counterclaim for a declaratory judgment that the ‘487 Patent is invalid. The Company answered Teva’s counterclaim by denying their allegation that the ‘487 Patent is invalid. In January 2020, the Company filed two additional patent infringement lawsuits in the Delaware District Court against Teva and Apotex for infringement of its Orange Book-listed U.S. Patent No. 10,449,176 (‘176 Patent) following the receipt of additional Paragraph IV Letters from Teva and Apotex regarding the ‘176 Patent, which expires in January 2033. These lawsuits have been consolidated with the other lawsuits against the HETLIOZ® Defendants and are also scheduled for trial in July 2021.
In January 2020 and February 2020, the Company received additional Paragraph IV Letters from MSN concerning the '487 patent and the '176 Patent, respectively, in which MSN alleges that the ‘487 and the '176 Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use, sale, offer for sale, or importation of MSN's generic version of HETLIOZ® as described in MSN's ANDA. In February and March 2020 the Company filed two additional lawsuits in the Delaware District Court against MSN for infringement of its ‘487 Patent and ‘176 Patent. These lawsuits have been consolidated with the other lawsuits against the HETLIOZ® Defendants and are also scheduled for trial in July 2021.
Other Matters. In 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. At that time, the FDA informed the Company that the original PCH was not based on any safety or efficacy data related to tradipitant, but, rather that these additional toxicity studies were required by a guidance document. Subsequently, the FDA has taken the position that an additional study was required in order for the FDA to have adequate toxicology data to undertake a risk analysis of tradipitant.
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 PCH continues to be appropriate until the Company has adequate safety data from a nine-month non-rodent toxicity study. In May 2019, the Company filed an amended complaint, and in July 2019, the Company filed a Motion for Summary Judgment based on its continuing belief after review of the FDA’s remand response 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. The FDA filed a reply and cross-motion for summary judgment in October 2019 and an oral hearing was held in December 2019. In January 2020, the Court granted the FDA's cross-motion for summary judgment and granted judgment in favor of the FDA on the Company's claims. The Company has elected not to appeal the Court's ruling.
In February 2019, a qui tam action filed against the Company was unsealed by order of the DC District Court. The qui tam action, which was filed under seal in March 2017, was brought by a former Company employee on behalf of the U.S., 28 states and the District of Columbia (collectively, the Plaintiff States) and the policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the Federal False Claims Act and related state laws. The complaint
alleged that the Company violated these laws through the promotion and marketing of its products Fanapt® and HETLIOZ® and sought, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs. By virtue of the DC District Court having unsealed the original complaint, the Company learned that in January 2019, the U.S. Department of Justice (the DOJ), as well as the Plaintiff States, elected not to intervene in the qui tam action at that time. In May 2019, the plaintiff filed an amended complaint under seal repeating the same allegations and seeking the same relief. According to a filing unsealed in June 2019, the DOJ reaffirmed its decision not to intervene and incorporated its prior filing, indicating that neither the DOJ nor the Plaintiff States were intervening regarding the original complaint. Although the DOJ and the Plaintiff States have elected not to intervene, the plaintiff may litigate this action and the DOJ and the Plaintiff States may later seek to intervene in the action. In August 2019, the Company filed a motion to dismiss, and in October 2019 the plaintiff filed a reply. In March 2020, the DC District Court vacated the scheduled hearing on the Company's motion to dismiss and will notify the parties of a new hearing date if one is deemed necessary by the DC District Court. 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. On March 23, 2020, the Company filed a motion to dismiss the complaint. The plaintiff is expected to file its reply by May 7, 2020. 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. In March 2020, the Delaware District Court transferred the Bavaro case to the Eastern District of New York, consolidating the Williams and Bavaro cases, and the plaintiffs filed a consolidated complaint on April 24, 2020. These complaints, filed on behalf of purported stockholders, derivatively on behalf of the Company, assert claims for alleged breach of fiduciary duties by certain of the Company’s current and former directors and officers. The Company believes that it has meritorious defenses and intends to vigorously defend 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.
In July 2017, the CHMP issued a negative opinion recommending against approval of Fanaptum® (oral iloperidone tablets) for the treatment of schizophrenia in adult patients in the E.U. The CHMP was of the opinion that the benefits of Fanaptum® did not outweigh its risks and recommended against marketing authorization. In March 2018, the Company filed an application seeking annulment of the EMA’s negative opinion and the subsequent European Commission decision refusing marketing authorization of Fanaptum in the European General Court. In December 2019, the General Court issued its judgment dismissing the action, leaving the EMA opinion and Commission decision intact. In February 2020, the Company filed an appeal of this judgment with the Court of Justice of the E.U.