The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business Organization and Presentation
Business
Organization
Vanda Pharmaceuticals Inc. (the Company) is a specialty pharmaceutical company focused on the development and commercialization of
novel 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 Companys portfolio includes the following products:
|
|
|
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 and included post-marketing commitments related to a pediatric investigation plan. This authorization is valid in the 28 countries that are members of the European Union, as well as European Economic
Area members Iceland, Liechtenstein and Norway. 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 Pediatric Non-24, Jet Lag Disorder and Smith-Magenis Syndrome (SMS).
|
|
|
|
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 of 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt
®
franchise to the Company on December 31,
2014. Additionally, the Companys distribution partners launched Fanapt
®
in Israel and Mexico in 2014. Fanapt
®
has potential
utility in a number of other disorders. An assessment of new Fanapt
®
clinical opportunities is ongoing.
|
|
|
|
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 and gastroparesis.
|
|
|
|
Trichostatin A, a small molecule histone deacetylase (HDAC) inhibitor.
|
|
|
|
AQW051, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist.
|
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements
and should be read in conjunction with the Companys consolidated financial statements for the fiscal year ended December 31, 2015 included in the Companys annual report on Form 10-K. The financial information as of
September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 is unaudited, but in the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair statement
of the results for these interim periods have been included. The condensed consolidated balance sheet data as of December 31, 2015 was derived from audited financial statements but does not include all disclosures required by GAAP.
The results of the Companys operations for any interim period are not necessarily indicative of the results that may be expected for any other interim
period or for a full fiscal year. The financial information included herein should be read in conjunction with the consolidated financial statements and notes in the Companys annual report on Form 10-K for the fiscal year ended
December 31, 2015.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of
revenue and expenses during the reporting period. The Company has estimated its annual fees for Fanapt
®
under the Patient Protection and Affordable Care Act of 2010, as amended by the Health
Care and Education Reconciliation Act of 2010, however, the amount of the estimated liability could increase, but the range of this increase is not reasonably estimable at this time. Management continually re-evaluates its estimates, judgments and
assumptions, and managements evaluation could change. Actual results could differ from those estimates.
10
Inventory
Inventory, which is recorded at the lower of cost or market, includes the cost of third-party manufacturing and other direct and indirect costs and is valued
using the first-in, first-out method. The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on managements judgment, future commercialization is considered probable and the future economic
benefit is expected to be realized; otherwise, such costs are expensed as research and development. Inventory is evaluated for impairment by consideration of factors such as lower of cost or market, net realizable value, obsolescence or expiry.
Inventory not expected to be consumed within 12 months following the balance sheet date are classified as non-current.
Revenue from Net Product
Sales
The Companys 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, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HETLIOZ
®
product sales, net
|
|
$
|
18,715
|
|
|
$
|
11,682
|
|
|
$
|
52,376
|
|
|
$
|
29,159
|
|
Fanapt
®
product sales, net
|
|
|
19,767
|
|
|
|
16,662
|
|
|
|
55,397
|
|
|
|
48,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
38,482
|
|
|
$
|
28,344
|
|
|
$
|
107,773
|
|
|
$
|
78,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company applies the revenue recognition guidance in accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Subtopic 605-15,
Revenue RecognitionProducts
. The Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss
has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and the Company has no further performance obligations.
Major Customers
HETLIOZ
®
is only 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. There were five major customers that each accounted for more than 10% of total revenues and, as a group, represented 86% of total revenues for the nine
months ended September 30, 2016. There were four major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 80% of total accounts receivable at September 30, 2016.
Product Sales Discounts and Allowances
The
Companys product sales are recorded net of applicable discounts, rebates, chargebacks, service fees, co-pay assistance and product returns that are applicable for various government and commercial payors. Reserves established for discounts and
returns are classified as reductions of accounts receivable if the amount is payable to direct customers, with the exception of service fees. Service fees are classified as a liability. Reserves established for rebates, chargebacks or co-pay
assistance are classified as a liability if the amount is payable to a party other than customers. The Company currently records sales allowances for the following:
Prompt-pay:
Specialty pharmacies and wholesalers are offered discounts for prompt payment. The Company expects that the specialty
pharmacies and wholesalers will earn prompt payment discounts and, therefore, deducts the full amount of these discounts from total product sales when revenues are recognized.
Rebates:
Allowances for rebates include mandated and supplemental discounts under the Medicaid Drug Rebate Program as well as contracted
rebate programs with other payors. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The
allowance for rebates is based on statutory or contracted discount rates and expected utilization. Estimates for the expected utilization of rebates are based on historical activity and, where available, actual and pending prescriptions for which
the Company has validated the insurance benefits. Rebates are generally invoiced and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarters activity, plus an
accrual balance for known prior quarters unpaid rebates. If actual future invoicing varies from estimates, the Company may need to adjust accruals, which would affect net revenue in the period of adjustment.
11
Chargebacks:
Chargebacks are discounts that occur when contracted customers purchase
directly from specialty pharmacies and wholesalers. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule,
generally purchase the product at a discounted price. The specialty pharmacy or wholesaler, in turn, charges back the difference between the price initially paid by the specialty pharmacy or wholesaler and the discounted price paid to the specialty
pharmacy or wholesaler by the contracted customer. The allowance for chargebacks is based on historical activity and, where available, actual and pending prescriptions for which the Company has validated the insurance benefits.
Medicare Part D Coverage Gap:
Medicare Part D prescription drug benefit mandates manufacturers to fund approximately 50% of
the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Estimates for expected Medicare Part D coverage gap are based in part on historical activity and, where available, actual and pending
prescriptions for which the Company has validated the insurance benefits. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current
quarters activity, plus an accrual balance for known prior quarter activity. If actual future funding varies from estimates, the Company may need to adjust accruals, which would affect net revenue in the period of adjustment.
Service Fees:
The Company also incurs specialty pharmacy and wholesaler fees for services and their data. These fees are based on
contracted terms and are known amounts. The Company accrues service fees at the time of revenue recognition, resulting in a reduction of product sales and the recognition of an accrued liability, unless it receives an identifiable and separate
benefit for the consideration and it can reasonably estimate the fair value of the benefit received. In which case, service fees are recorded as selling, general and administrative expense.
Co-payment Assistance:
Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment
assistance. Co-pay assistance utilization is based on information provided by the Companys third-party administrator. The allowance for co-pay assistance is based on actual sales and an estimate for pending sales based on either historical
activity or pending sales for which the Company has validated the insurance benefits.
Product Returns:
Consistent with industry
practice, the Company generally offers direct customers a limited right to return as defined within the Companys returns policy. The Company considers several factors in the estimation process, including historical return activity, expiration
dates of product shipped to specialty pharmacies, inventory levels within the distribution channel, product shelf life, prescription trends and other relevant factors.
Stock-Based Compensation
Compensation costs for
all stock-based awards to employees and directors are measured based on the grant date fair value of those awards and recognized over the period during which the employee or director is required to perform service in exchange for the award. The
Company recognizes the expense over the awards vesting period. The fair value of stock options granted and restricted stock units (RSUs) awarded are amortized using the straight-line method. As stock-based compensation expense recognized in
the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates
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 Companys 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.
12
Assumptions used in the Black-Scholes-Merton option pricing model for employee and director stock options granted
during the nine months ended September 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
57
|
%
|
|
|
60
|
%
|
Weighted average expected term (years)
|
|
|
6.1
|
|
|
|
6.0
|
|
Weighted average risk-free rate
|
|
|
1.37
|
%
|
|
|
1.67
|
%
|
Weighted average fair value per share
|
|
$
|
4.51
|
|
|
$
|
6.45
|
|
Stock-based compensation expense recognized for the three and nine months ended September 30, 2016 and 2015 was comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
539
|
|
|
$
|
516
|
|
|
$
|
1,552
|
|
|
$
|
1,743
|
|
Selling, general and administrative
|
|
|
1,561
|
|
|
|
1,545
|
|
|
|
4,888
|
|
|
|
4,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,100
|
|
|
$
|
2,061
|
|
|
$
|
6,440
|
|
|
$
|
6,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Expense
The Company expenses the costs of advertising, including branded promotional expenses, as incurred. Branded advertising expenses, recorded in selling, general
and administrative expenses, were $0.1 million and $0.5 million for the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $2.4 million for the nine months ended September 30, 2016 and 2015,
respectively.
Non-Cash Investing and Financing Activities
For the nine months ended September 30, 2015, the Company recorded an intangible asset of $25.0 million relating to HETLIOZ
®
and recorded the related non-current liability relating to its obligation to make a milestone payment to Bristol-Myers Squibb (BMS) of $25.0 million in the event that cumulative worldwide sales
of HETLIOZ
®
reach $250.0 million. For each of the nine months ended September 30, 2016 and 2015, the Company recorded purchases of property, plant and equipment and the related
current liability in the amount of $0.3 million.
Recent accounting pronouncements
In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows Classification of Certain Cash Receipts and
Cash Payments
, to clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flow. The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this new standard is not expected to have a material impact on the Companys consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments Credit Losses,
related to the measurement of credit losses on financial
instruments. The standard will require the use of an expected loss model for instruments measured at amortized cost. 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 Companys consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
to simplify various aspects related to how
share-based payments are accounted for and presented in the financial statements. The ASU provides that all of the tax effects related to share-based payments are recorded as part of the provision for income taxes, allows entities to withhold an
amount up to the employees maximum individual tax rate in the relevant jurisdiction, allows entities to estimate the effect of forfeitures or recognized forfeitures when they occur, and other improvements to the accounting for share-based
awards. The new standard is effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating this standard
to determine if adoption will have a material impact on the Companys consolidated financial statements.
13
In February 2016, the FASB issued ASU 2016-02,
Leases
. The new standard requires that lessees will need to
recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be 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 current
operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The new standard is effective for annual periods ending after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating this standard to determine if adoption will have a material impact on the Companys consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory,
dealing with changes to the subsequent measurement of inventory.
Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that
inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less
reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for periods beginning after December 15, 2016. The Company adopted this new standard in the second quarter of 2016, and adoption did not
have a material impact on the Companys consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial
Statements Going Concern
. The new standard requires management of public and private companies to evaluate whether there is substantial doubt about the entitys ability to continue as a going concern and, if so, disclose that fact.
Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after
December 15, 2016. Adoption of this new standard is not expected to have a material impact on the Companys consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. This new standard requires companies to recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. Under the new standard, revenue is recognized when a customer obtains
control of a good or service. The standard allows for two transition methodsentities can either apply the new standard (i) retrospectively to each prior reporting period presented, or (ii) retrospectively with the cumulative effect
of initially applying the standard recognized at the date of initial adoption. In July 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers
, which defers the effective date by one year to December 15, 2017 for fiscal
years, and interim periods within those fiscal years, beginning after that date. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. In March 2016, the FASB issued ASU 2016-08
Revenue
from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue versus Net),
in April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers, identifying Performance Obligations and Licensing
, and
in May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients,
which provide additional clarification on certain topics addressed in ASU 2014-09. ASU 2016-08, ASU 2016-10,
and ASU 2016-12 follow the same implementation guidelines as ASU 2014-09 and ASU 2015-14. The Company is evaluating this standard to determine if adoption will have a material impact on the Companys consolidated financial statements.
3. Earnings per Share
Basic earnings per share (EPS) is
calculated by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net 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.
14
The following table presents the calculation of basic and diluted net loss per share of common stock for the
three and nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands, except for share and per share amounts)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(430
|
)
|
|
$
|
(9,461
|
)
|
|
$
|
(17,406
|
)
|
|
$
|
(25,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
43,515,404
|
|
|
|
42,435,405
|
|
|
|
43,275,074
|
|
|
|
42,059,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities excluded from calculations of diluted net loss per share
|
|
|
3,845,456
|
|
|
|
5,181,975
|
|
|
|
5,298,256
|
|
|
|
5,534,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company incurred net losses for the three and nine months ended September 30, 2016 and 2015 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.
4. Marketable Securities
The following is a summary of
the Companys available-for-sale marketable securities as of September 30, 2016, which all have contract maturities of less than one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
September 30, 2016
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
(in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. Treasury and government agencies
|
|
$
|
54,662
|
|
|
$
|
33
|
|
|
$
|
|
|
|
$
|
54,695
|
|
Corporate debt
|
|
|
55,010
|
|
|
|
117
|
|
|
|
(8
|
)
|
|
|
55,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,672
|
|
|
$
|
150
|
|
|
$
|
(8
|
)
|
|
$
|
109,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys available-for-sale marketable securities as of December 31, 2015, which
all have contract maturities of less than one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
December 31, 2015
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
(in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. Treasury and government agencies
|
|
$
|
44,059
|
|
|
$
|
6
|
|
|
$
|
(8
|
)
|
|
$
|
44,057
|
|
Corporate debt
|
|
|
48,239
|
|
|
|
46
|
|
|
|
(5
|
)
|
|
|
48,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,298
|
|
|
$
|
52
|
|
|
$
|
(13
|
)
|
|
$
|
92,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Fair Value Measurements
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
|
|
Level 1 defined as observable inputs such as quoted prices in active markets
|
|
|
|
Level 2 defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
|
|
|
|
Level 3 defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
|
15
Marketable securities classified in Level 1 and Level 2 as of September 30, 2016 and December 31, 2015
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 also is determined using a market approach based upon quoted prices for similar assets in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities
include certificates of deposit, commercial paper and corporate notes that use as their basis readily observable market parameters. The Company did not transfer any assets between Level 2 and Level 1 during the nine months ended September 30,
2016 and 2015.
As of September 30, 2016, the Company held certain assets that are required to be measured at fair value on a recurring basis, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of September 30, 2016 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
54,695
|
|
|
$
|
54,695
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt
|
|
|
55,119
|
|
|
|
|
|
|
|
55,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,814
|
|
|
$
|
54,695
|
|
|
$
|
55,119
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, 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, 2015 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
44,057
|
|
|
$
|
44,057
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt
|
|
|
48,280
|
|
|
|
|
|
|
|
48,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,337
|
|
|
$
|
44,057
|
|
|
$
|
48,280
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and milestone obligations under license agreements, the carrying value of which materially approximate their fair values.
16
6. 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, 2016 and
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Current assets
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
865
|
|
|
$
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
865
|
|
|
$
|
1,294
|
|
|
|
|
|
|
|
|
|
|
Non-Current assets
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
127
|
|
|
$
|
127
|
|
Work-in-process
|
|
|
2,241
|
|
|
|
2,369
|
|
Finished goods
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,591
|
|
|
$
|
2,496
|
|
|
|
|
|
|
|
|
|
|
7. Accounts Payable and Accrued Liabilities
The following is a summary of the Companys accounts payable and accrued liabilities as of September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Research and development expenses
|
|
$
|
2,575
|
|
|
$
|
3,199
|
|
Consulting and other professional fees
|
|
|
4,162
|
|
|
|
5,088
|
|
Compensation and employee benefits
|
|
|
3,071
|
|
|
|
468
|
|
Royalties payable
|
|
|
6,413
|
|
|
|
5,328
|
|
Other
|
|
|
1,351
|
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,572
|
|
|
$
|
15,767
|
|
|
|
|
|
|
|
|
|
|
8. Intangible Assets
The
following is a summary of the Companys intangible assets as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
(in thousands)
|
|
Estimated
Useful Life
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
HETLIOZ
®
|
|
|
January 2033
|
|
|
$
|
33,000
|
|
|
$
|
4,751
|
|
|
$
|
28,249
|
|
Fanapt
®
|
|
|
November 2016
|
|
|
|
27,941
|
|
|
|
26,266
|
|
|
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,941
|
|
|
$
|
31,017
|
|
|
$
|
29,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys intangible assets as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(in thousands)
|
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
HETLIOZ
®
|
|
January 2033
|
|
$
|
33,000
|
|
|
$
|
3,460
|
|
|
$
|
29,540
|
|
Fanapt
®
|
|
November 2016
|
|
|
27,941
|
|
|
|
18,729
|
|
|
|
9,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,941
|
|
|
$
|
22,189
|
|
|
$
|
38,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2014, the Company announced that the FDA had approved the NDA for HETLIOZ
®
. As a result of this approval, the Company met a milestone under its license agreement with BMS that required the Company to make a license payment of
17
$8.0 million to BMS. The $8.0 million is being amortized on a straight-line basis over the remaining life of the U.S. patent for
HETLIOZ
®
, which prior to June 2014, the Company expected to last until December 2022. In June 2014, the Company received a notice of allowance from the U.S. Patent and Trademark Office for a
patent covering the method of use of HETLIOZ
®
. The patent expires in January 2033, thereby potentially extending the exclusivity protection in the U.S. beyond the composition of matter patent.
As a result of the patent allowance, the Company extended the estimated useful life of the U.S. patent for HETLIOZ
®
from December 2022 to January 2033. The Company is obligated to make a
future milestone payment to BMS of $25.0 million in the event that cumulative worldwide sales of HETLIOZ
®
reach $250.0 million. The likelihood of achieving the milestone and the related
milestone obligation was determined to be probable during 2015. As a result, the future obligation of $25.0 million was recorded as a non-current liability along with a capitalized intangible assets relating to HETLIOZ
®
. The actual payment of the obligation will occur once the $250.0 million in cumulative worldwide sales of HETLIOZ
®
is realized. Intangible
assets relating HETLIOZ
®
are being amortized on a straight-line basis over the remaining life of the U.S. patent for HETLIOZ
®
, which is
expected to be January 2033.
In 2009, the Company announced that the FDA had approved the NDA for
Fanapt
®
. As a result of this approval, the Company met a milestone under its original sublicense agreement with Novartis that required the Company to make a license payment of
$12.0 million to Novartis. 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. As a result, the Company recognized an intangible asset of $15.9 million related to the reacquired rights to Fanapt
®
. Intangible assets relating to Fanapt
®
are being amortized on a straight-line basis over the remaining life of the U.S. composition of matter patent for Fanapt
®
through November
2016. The useful life estimation is based on the market participant methodology prescribed by ASC Subtopic 805,
Business Combinations
, and therefore does not reflect the impact of additional Fanapt
®
patents solely owned by the Company with varying expiration dates, the latest of which is December 2031.
The intangible assets are being amortized over their estimated useful economic life using the straight-line method. Amortization expense was $2.9 million and
$2.9 million for the three months ended September 30, 2016 and 2015, respectively, and $8.8 million and $10.0 million for the nine months ended September 30, 2016 and 2015, respectively. The following is a summary of the future intangible
asset amortization schedule as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
Remainder
of 2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
HETLIOZ
®
|
|
$
|
28,249
|
|
|
$
|
430
|
|
|
$
|
1,721
|
|
|
$
|
1,721
|
|
|
$
|
1,721
|
|
|
$
|
1,721
|
|
|
$
|
20,935
|
|
Fanapt
®
|
|
|
1,675
|
|
|
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,924
|
|
|
$
|
2,105
|
|
|
$
|
1,721
|
|
|
$
|
1,721
|
|
|
$
|
1,721
|
|
|
$
|
1,721
|
|
|
$
|
20,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Income Taxes
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The fact that the Company has historically generated net
operating losses (NOLs) serves as strong evidence that it is more likely than not that deferred tax assets will not be realized in the future. Therefore, the Company has a full valuation allowance against all deferred tax assets as of
September 30, 2016 and December 31, 2015. As a result of the tax valuation allowance against deferred tax assets, there was no provision for income taxes for the three and nine months ended September 30, 2016 and 2015.
Certain tax attributes of the Company, including NOLs and credits, are subject to limitation as a result of any ownership change as defined under Internal
Revenue Code of 1986, as amended (IRC), Section 382. A change in ownership could affect the Companys ability to use NOLs and credit carryforward (tax attributes). Ownership changes did occur as of December 31, 2014 and
December 31, 2008. However, the Company believes that it had sufficient Built-In-Gain to offset the IRC Section 382 limitation generated by the ownership changes. Any future ownership changes may cause the Companys existing tax
attributes to have additional limitations. Additionally, the Company maintains a valuation allowance on its tax attributes and therefore, any IRC Section 382 limitation would not have a material impact on the Companys provision for income
taxes as of September 30, 2016.
18
10. Commitments and Contingencies
Operating leases
Commitments relating to operating
leases represent the minimum annual future payments under operating leases for a total of 40,188 square feet of office space for the Companys headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. that expire in 2026 and the
operating lease for 2,880 square feet of office space for the Companys European headquarters in London that has a noncancellable lease term ending in 2021. The following is a summary of the minimum annual future payments under operating leases
for office space as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments due by year
|
|
(in thousands)
|
|
Total
|
|
|
Remainder
of 2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
Operating leases
|
|
$
|
22,063
|
|
|
$
|
445
|
|
|
$
|
1,933
|
|
|
$
|
2,230
|
|
|
$
|
2,284
|
|
|
$
|
2,341
|
|
|
$
|
12,830
|
|
In 2011, the Company entered into an operating lease for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington,
D.C. A lease amendment in 2014 increased the office space under lease to 30,260 square feet, and a lease amendment in June 2016 extended the lease term from April 2023 to September 2026. Subject to the prior rights of other tenants, the Company
has the right to renew the lease for five years following its expiration. 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 under which the Company will lease 9,928 square feet of office
space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. The sublease term begins 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.
Rent expense under operating leases was $0.7 million and
$0.5 million for the three months ended September 30, 2016 and 2015, respectively, and $1.7 million and $1.4 million for the nine months ended September 30, 2016 and 2015, respectively.
Guarantees and Indemnifications
The Company has
entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally the Companys business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect
to the Companys products. The term of these indemnification agreements is generally perpetual from the date of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events
or occurrences, subject to certain conditions.
License Agreements
The Companys rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other
pharmaceutical companies.
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
®
. In partial consideration for the license, the Company paid BMS an initial license fee of $0.5 million. The Company made a milestone payment to BMS of $1.0 million under the license agreement in
2006 relating to the initiation of its first Phase III clinical trial for HETLIOZ
®
. As a result of the FDA acceptance of the Companys NDA for HETLIOZ
®
for the treatment of Non-24 in July 2013, the Company incurred a $3.0 million milestone obligation under the license agreement with BMS. As a result of the FDAs approval of the HETLIOZ
®
NDA in January 2014, the Company incurred an $8.0 million milestone obligation in the first quarter of 2014 under the same license agreement that was capitalized as an intangible asset and is
being amortized over the expected HETLIOZ
®
patent life in the U.S. The Company is obligated to make a future milestone payment to BMS of $25.0 million in the event that cumulative worldwide
sales of HETLIOZ
®
reach $250.0 million. During the first quarter of 2015, the likelihood of achieving the milestone and the related milestone obligation was determined to be probable. As such,
the $25.0 million milestone obligation was capitalized as an intangible asset and is being amortized over the expected HETLIOZ
®
patent life in the U.S. The actual payment of the $25.0 million
will occur once the $250.0 million in cumulative worldwide sales of HETLIOZ
®
is realized. 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
19
chemical entity patent in that territory. During the period prior to the expiry of the new chemical entity 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 new chemical entity patent existed or for the remainder of the 10 years after the expiry of the new chemical entity 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
®
.
The license agreement was amended in April 2013 to add a process that would allow BMS to waive the
right to develop and commercialize HETLIOZ
®
in those countries not covered by a development and commercialization agreement. Subsequent to the execution of the April 2013 amendment, BMS
provided the Company with formal written notice that it irrevocably waived the option to exercise the right to reacquire any or all rights to any product (as defined in the license agreement) containing HETLIOZ
®
, or to develop or commercialize any such product, in the countries not covered by a development and commercialization agreement.
Either party may terminate the HETLIOZ
®
license agreement under certain circumstances, including a
material breach of the agreement by the other. In the event the Company terminates the license, or if BMS terminates the license due to the Companys breach, all rights licensed and developed by the Company under the license agreement will
revert or otherwise be licensed back to BMS on an exclusive basis.
Fanapt
®
.
A
predecessor company of Sanofi, Hoechst Marion Roussel, Inc. (HMRI) discovered Fanapt
®
and completed early clinical work on the product. In 1996, following a review of its product portfolio,
HMRI licensed its rights to the Fanapt
®
patents and patent applications to Titan Pharmaceuticals, Inc. (Titan) on an exclusive basis. In 1997, soon after it had acquired its rights, Titan
sublicensed its rights to Fanapt
®
on an exclusive basis to Novartis. In June 2004, the Company acquired exclusive worldwide rights to these patents and patent applications, as well as certain
Novartis patents and patent applications to develop and commercialize Fanapt
®
, through a sublicense agreement with Novartis. In October 2009, subsequent to the FDAs approval of the NDA
for Fanapt
®
, the Company entered into an amended and restated sublicense agreement with Novartis, which amended and restated the June 2004 sublicense agreement. Pursuant to the amended and
restated sublicense agreement, Novartis had exclusive commercialization rights to all formulations of Fanapt
®
in the U.S. and Canada. Novartis began selling Fanapt
®
in the U.S. during the first quarter of 2010. Novartis was responsible for the further clinical development activities in the U.S. and Canada. The Company also received royalties equal to 10% of
net sales of Fanapt
®
in the U.S. and Canada. The Company retained exclusive rights to Fanapt
®
outside the U.S. and Canada and was
obligated to make royalty payments to Sanofi S.A. (Sanofi) on Fanapt
®
sales outside the U.S. and Canada.
Pursuant to the terms of the 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 is obligated to make royalty payments to Sanofi and Titan, at a percentage rate equal to 23% on annual U.S. net sales of Fanapt
®
up to $200.0 million, and at a percentage rate in the mid-twenties on sales over $200.0 million through November 2016. In February 2016, the Company amended the agreement with Sanofi and Titan to
remove Titan as the entity through which royalty payments from the Company are directed to Sanofi following the expiration of the new chemical entity (NCE) patent for Fanapt
®
in the U.S. on
November 15, 2016. Under the amended agreement, the Company will pay directly to Sanofi a fixed royalty of 3% of net sales from November 16, 2016 through December 31, 2019 related to manufacturing know-how. The Company made a $2.0
million payment during the nine months ended September 30, 2016 that applied to this 3% manufacturing know-how royalty and will make additional royalty payments only to the extent that the Companys cumulative royalty obligations during
this period exceed the amount of the pre-payment. No further royalties on manufacturing know-how are payable by the Company after December 31, 2019. This amended agreement does not alter Titans obligation under the license agreement to
make royalty payments to Sanofi prior to November 16, 2016 or the Companys obligations under the sublicense agreement to pay Sanofi a fixed royalty on Fanapt
®
net sales equal up 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 has entered into distribution agreements with Probiomed S.A. de C.V. for the commercialization of Fanapt
®
in Mexico and Megapharm Ltd. for the commercialization of Fanapt
®
in Israel.
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 a
new chemical entity expires in April 2023, except in the U.S., where it expires in June 2024 absent any applicable patent term adjustments.
Pursuant to
the license agreement, the Company paid Lilly an initial license fee of $1.0 million and will be responsible for all development costs. The initial license fee was recognized as research and development expense in the consolidated statement of
operations for the year ended December 31, 2012. Lilly is also eligible to receive additional payments based upon achievement of
20
specified development and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. These milestones include $4.0 million for pre-NDA
approval milestones and up to $95.0 million for future regulatory approval and sales milestones. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.
Either party may terminate the license agreement under certain circumstances, including a material breach of the license agreement by the other. In the event
that the Company terminates the license agreement, or if Lilly terminates due to the Companys breach or for certain other reasons set forth in the license agreement, all rights licensed and developed by the Company under the license agreement
will revert or otherwise be licensed back to Lilly on an exclusive basis, subject to payment by Lilly to the Company of a royalty on net sales of products that contain tradipitant.
AQW051.
In connection with the 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 AQW051, 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 AQW051 and is
responsible for all development costs under the AQW051 license agreement. 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.
Research and Development and Marketing Agreements
In the course of its business, the Company regularly enters into agreements with clinical organizations to provide services relating to clinical development
and clinical manufacturing activities under fee service arrangements. The Companys current agreements for clinical services may be terminated on generally 60 days notice without incurring additional charges, other than charges for work
completed but not paid for through the effective date of termination and other costs incurred by the Companys contractors in closing out work in progress as of the effective date of termination.
11. Legal Matters
In June 2014, the Company filed suit
against Roxane Laboratories, Inc. (Roxane) in the U.S. District Court for the District of Delaware (the Delaware District Court). The suit seeks an adjudication that Roxane has infringed one or more claims of the Companys U.S. Patent
No. 8,586,610 (the 610 Patent) by submitting to the FDA an Abbreviated New Drug Application (ANDA) for a generic version of Fanapt
®
prior to the expiration of the 610 Patent
in November 2027. In addition, pursuant to the settlement agreement with Novartis, the Company assumed Novartis patent infringement action against Roxane in the Delaware District Court. That suit alleges that Roxane has infringed one or more
claims of U.S Patent RE39198 (the 198 Patent), which is licensed exclusively to the Company, by filing an ANDA for a generic version of Fanapt
®
prior to the expiration of the 198
Patent in November 2016. These two cases against Roxane were consolidated by agreement of the parties and were tried together in a five-day bench trial that concluded on March 4, 2016. On August 25, 2016, the Delaware District Court ruled
in favor of the Company, finding that Roxanes ANDA product infringed the asserted claims of the 610 Patent and the 198 Patent. The Delaware District Court ruled that the Company is entitled to a permanent injunction against Roxane
enjoining Roxane from infringing the 610 Patent, including the manufacture, use, sale, offer to sell, sale, distribution or importation of any generic iloperidone product described in the 610 Patent ANDA until the expiration of the
610 Patent in November 2027. If the Company obtains pediatric exclusivity, the injunction against Roxane would be extended until May 2028 under the Delaware District Courts order. On September 23, 2016, Roxane filed a notice of
appeal with the Federal Circuit Court of Appeals.
In 2015, the Company filed six separate patent infringement lawsuits in the Delaware District Court
against Roxane, Inventia Healthcare Pvt. Ltd., Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp., (collectively, the Defendants). The
lawsuits each seek an adjudication that the respective Defendants infringed one or more claims of the 610 Patent and/or the Companys U.S. Patent No. 9,138,432 (the 432 Patent) by submitting to the FDA an ANDA for a generic
version of Fanapt
®
prior to the expiration of the 610 Patent in November 2027 or the 432 Patent in September 2025. The Defendants have denied infringement and counterclaimed for
declaratory judgment of invalidity and noninfringement of the 610 Patent and the 432 Patent. The Delaware District Court has scheduled a five-day bench trial beginning on May 15, 2017 in which all of these lawsuits regarding
infringement of the 610 Patent and the 432 Patent are expected to be tried together.
Lupin filed counter claims for declaratory judgment of
invalidity and noninfringement of seven of the Companys method of treatment patents that are listed in the
Approved Drug Products with Therapeutic Equivalence Evaluations
(the Orange Book) related to Fanapt
®
(such seven patents, the Method of Treatment Patents). The Company has not sued Lupin for infringing the Method of Treatment Patents. On October 13, 2016, the Company and Lupin filed a
Stipulation of Dismissal in the Delaware District Court pursuant to which Lupins counterclaims relating to the Method of Treatment Patents were dismissed without prejudice in recognition of an agreement reached between the parties.
21
On October 24, 2016, the Company entered into a License Agreement with Taro to resolve the Companys
patent litigation against Taro regarding Taros ANDA seeking approval of its generic version of Fanapt
®
(the Taro License Agreement). Under the Taro License Agreement, the Company granted
Taro a non-exclusive license to manufacture and commercialize Taros version of Fanapt
®
in the U.S. effective November 2, 2027, unless prior to that date the Company obtains
pediatric exclusivity for Fanapt
®
, in which case, the license will be effective May 2, 2028. Taro may enter the market earlier under certain limited circumstances. The Taro License
Agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, provides for a full settlement and release by the Company and Taro of all claims that are the subject of the litigation.
On February 26, 2016, Roxane filed suit against the Company in the U.S. District Court for the Southern District of Ohio. The suit seeks a declaratory
judgment of invalidity and noninfringement of the Method of Treatment Patents. The Company has not sued Roxane for infringing the Method of Treatment Patents. The Company filed a motion to dismiss this lawsuit for lack of personal jurisdiction or to
transfer the lawsuit to the Delaware District Court.
On February 26, 2016, Roxane filed a Petition for
Inter Partes
Review (IPR) of the
432 Patent with the Patent Trials and Appeals Board (PTAB) of the United States Patent and Trademark Office. The Company filed a Preliminary Response on June 7, 2016, and on August 30, 2016 the PTAB denied the request by Roxane to
institute an IPR of the 432 Patent. On September 29, 2016, Roxane filed a Petition for Rehearing with the PTAB, and on October 13, 2016 the Company filed a Response to Roxanes Petition.
12. Stock-Based Compensation
As of September 30,
2016, there were 6,831,988 shares that were subject to outstanding options and RSUs under the 2006 Equity Incentive Plan (2006 Plan) and the 2016 Equity Incentive Plan (2016 Plan) (collectively, the Plans). The 2006 Plan expired by its terms on
April 12, 2016. 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. On June 16, 2016, the Companys
stockholders approved the 2016 Plan. There are 2,000,000 shares of common stock reserved for issuance under the 2016 Plan, of which 1,835,000 shares remained available for future grant as of September 30, 2016.
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 and all service option awards granted prior to December 31, 2006, service option awards granted to new employees, and certain service
option awards granted to existing employees vest and become exercisable on the first anniversary of the grant date with respect to the 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. Certain service option awards granted to existing employees after December 31, 2006 vest and become exercisable monthly in equal installments over
four years. The initial service option awards granted to directors upon their election vest and become exercisable in equal monthly installments over a period of four years, while the subsequent annual service option awards granted to directors vest
and become exercisable in equal monthly installments over a period of one year. 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 employees or executives service is terminated by the Company for any reason other than cause or permanent disability. As of September 30, 2016, $10.2
million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.3 years. No option awards are classified as a liability as of September 30, 2016.
22
A summary of option activity under the Plans for the nine months ended September 30, 2016 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
Stock Options
|
|
Number of
|
|
|
Exercise Price at
|
|
|
Remaining Term
|
|
|
Intrinsic
|
|
(in thousands, except for share and per share amounts)
|
|
Shares
|
|
|
Grant Date
|
|
|
(Years)
|
|
|
Value
|
|
Outstanding at December 31, 2015
|
|
|
6,252,448
|
|
|
$
|
11.87
|
|
|
|
6.16
|
|
|
$
|
7,498
|
|
Granted
|
|
|
861,511
|
|
|
|
8.39
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(377,448
|
)
|
|
|
11.16
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(205,266
|
)
|
|
|
14.47
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(827,572
|
)
|
|
|
8.46
|
|
|
|
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
5,703,673
|
|
|
|
11.79
|
|
|
|
5.78
|
|
|
|
36,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
3,908,977
|
|
|
|
12.41
|
|
|
|
4.47
|
|
|
|
25,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2016
|
|
|
5,569,895
|
|
|
|
11.84
|
|
|
|
5.70
|
|
|
|
35,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options amounted to $7.0 million for the nine months ended September 30, 2016 and
$4.4 million for the nine months ended September 30, 2015.
An RSU is a stock award that entitles the holder to receive shares of the Companys
common stock as the award vests. The fair value of each RSU is based on the closing price of the Companys 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. As of September 30, 2016, $8.9 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average
period of 1.8 years. No RSUs are classified as a liability as of September 30, 2016.
A summary of RSU activity under the Plans for the nine months
ended September 30, 2016 follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Grant Date
|
|
RSUs
|
|
RSUs
|
|
|
Fair Value
|
|
Unvested at December 31, 2015
|
|
|
1,022,681
|
|
|
$
|
10.90
|
|
Granted
|
|
|
632,242
|
|
|
|
8.39
|
|
Forfeited
|
|
|
(238,942
|
)
|
|
|
10.27
|
|
Vested
|
|
|
(287,666
|
)
|
|
|
9.65
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2016
|
|
|
1,128,315
|
|
|
|
9.95
|
|
|
|
|
|
|
|
|
|
|
The grant date fair value for the 287,666 shares underlying RSUs that vested during the nine months ended September 30,
2016 was $2.8 million.
23