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 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 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 (the FDA)
in January 2014 and launched commercially in the U.S. in April 2014. In July 2015, the European Commission (the EC) granted centralized marketing authorization with unified labeling for
HETLIOZ
®
for the treatment of Non-24 in totally blind adults. HETLIOZ
®
was commercially launched in Germany in August 2016. HETLIOZ
®
has potential utility in a number of other circadian rhythm disorders and is presently in clinical development for the treatment of 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.
|
|
|
|
Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors.
|
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, 2016 included in the Companys annual report on Form 10-K. The financial information as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 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, 2016 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, 2016.
2. Summary of Significant
Accounting Policies
Use of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
9
Inventory
Inventory, which is recorded at the lower of cost or net realizable value, includes the cost of third-party manufacturing and other direct and indirect costs
and is valued using the first-in, first-out method. The Company 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 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 months ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
HETLIOZ
®
product sales, net
|
|
$
|
20,182
|
|
|
$
|
16,201
|
|
Fanapt
®
product sales, net
|
|
|
17,233
|
|
|
|
17,061
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,415
|
|
|
$
|
33,262
|
|
|
|
|
|
|
|
|
|
|
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 four major customers that each accounted for more than 10% of total revenues and, as a group, represented 79% of total revenues for the three
months ended March 31, 2017. There were five major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 86% of total accounts receivable at March 31, 2017.
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.
10
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
Non-Cash Investing and Financing Activities
For the three months ended March 31, 2017 and 2016, the Company recorded purchases of property, plant and equipment and the related current liability in
the amount of $0.4 million and zero, respectively.
Recent accounting pronouncements
In November 2016, the FASB issued Accounting Standards Update (ASU) 2016-18,
Restricted Cash
. The new standard requires that a statement of cash flows
explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for annually reporting periods beginning after
December 15, 2017, and interim periods within annual periods beginning after December 15, 2017. 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.
11
In August 2016, the FASB issued 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. The Company adopted this new standard in the first quarter of 2017. As
a result of adoption of the new guidance, the Company recognized deferred tax assets related to the previously unrecognized tax benefits, fully reduced by a valuation allowance as it is more likely than not that such benefits will not be realized.
The Company will recognize excess tax benefits arising from share-based payments in the Companys provision for income taxes as opposed to additional paid-in capital on a prospective basis. Additionally, the Company elected to continue to
estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each period rather than to account for them as they occur. The remaining updates required by this standard did not have a material impact to the
Companys consolidated financial statements.
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 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 initial analysis identifying areas that will be impacted by the new guidance is substantially complete, and the Company is currently analyzing the
potential impacts to the consolidated financial statements and related disclosures. Revenue from the Companys product sales is expected to remain substantially unchanged. Management expects to adopt the new standard on January 1, 2018.
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.
12
The following table presents the calculation of basic and diluted net loss per share of common stock for the
three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in thousands, except for share and per share amounts)
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,645
|
)
|
|
$
|
(12,358
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
44,398,359
|
|
|
|
43,104,462
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted:
|
|
$
|
(0.17
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
Antidilutive securities excluded from calculations of diluted net loss per share
|
|
|
3,160,500
|
|
|
|
6,245,280
|
|
|
|
|
|
|
|
|
|
|
The Company incurred net losses for the three months ended March 31, 2017 and 2016 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 March 31, 2017, which all have contract maturities of less than one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Market
Value
|
|
U.S. Treasury and government agencies
|
|
$
|
60,106
|
|
|
$
|
|
|
|
$
|
(47
|
)
|
|
$
|
60,059
|
|
Corporate debt
|
|
|
57,492
|
|
|
|
102
|
|
|
|
(8
|
)
|
|
|
57,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,598
|
|
|
$
|
102
|
|
|
$
|
(55
|
)
|
|
$
|
117,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys available-for-sale marketable securities as of December 31, 2016, which
all have contract maturities of less than one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Market
Value
|
|
U.S. Treasury and government agencies
|
|
$
|
50,661
|
|
|
$
|
3
|
|
|
$
|
(17
|
)
|
|
$
|
50,647
|
|
Corporate debt
|
|
|
50,194
|
|
|
|
89
|
|
|
|
(16
|
)
|
|
|
50,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,855
|
|
|
$
|
92
|
|
|
$
|
(33
|
)
|
|
$
|
100,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
13
Marketable securities classified in Level 1 and Level 2 as of March 31, 2017 and December 31, 2016
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 three months ended March 31, 2017
and 2016.
As of March 31, 2017, 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 March 31, 2017 Using
|
|
(in thousands)
|
|
March 31,
2017
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
60,059
|
|
|
$
|
60,059
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt
|
|
|
57,586
|
|
|
|
|
|
|
|
57,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,645
|
|
|
$
|
60,059
|
|
|
$
|
57,586
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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 December 31, 2016 Using
|
|
(in thousands)
|
|
December 31,
2016
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
50,647
|
|
|
$
|
50,647
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt
|
|
|
50,267
|
|
|
|
|
|
|
|
50,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,914
|
|
|
$
|
50,647
|
|
|
$
|
50,267
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Current assets
|
|
|
|
|
|
|
|
|
Work-in-process
|
|
$
|
50
|
|
|
$
|
17
|
|
Finished goods
|
|
|
766
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
816
|
|
|
$
|
779
|
|
|
|
|
|
|
|
|
|
|
Non-Current assets
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
127
|
|
|
$
|
127
|
|
Work-in-process
|
|
|
2,191
|
|
|
|
2,225
|
|
Finished goods
|
|
|
125
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,443
|
|
|
$
|
2,435
|
|
|
|
|
|
|
|
|
|
|
14
7. Prepaid Expenses and Other Current Assets
The following is a summary of the Companys prepaid expenses and other current assets as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Research and development expenses
|
|
$
|
2,879
|
|
|
$
|
2,397
|
|
Consulting and other professional fees
|
|
|
6,888
|
|
|
|
6,051
|
|
Prepaid royalties
|
|
|
1,207
|
|
|
|
1,761
|
|
Other
|
|
|
1,265
|
|
|
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,239
|
|
|
$
|
11,788
|
|
|
|
|
|
|
|
|
|
|
8. Accounts Payable and Accrued Liabilities
The following is a summary of the Companys accounts payable and accrued liabilities as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Research and development expenses
|
|
$
|
4,313
|
|
|
$
|
3,024
|
|
Consulting and other professional fees
|
|
|
5,892
|
|
|
|
3,192
|
|
Compensation and employee benefits
|
|
|
2,848
|
|
|
|
4,291
|
|
Royalties payable
|
|
|
3,114
|
|
|
|
4,555
|
|
Other
|
|
|
1,858
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,025
|
|
|
$
|
16,196
|
|
|
|
|
|
|
|
|
|
|
9. Intangible Assets
The
following is a summary of the Companys intangible assets as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
(in thousands)
|
|
Estimated
Useful Life
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
HETLIOZ
®
|
|
|
January 2033
|
|
|
$
|
33,000
|
|
|
$
|
5,635
|
|
|
$
|
27,365
|
|
Fanapt
®
|
|
|
November 2016
|
|
|
|
27,941
|
|
|
|
27,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,941
|
|
|
$
|
33,576
|
|
|
$
|
27,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys intangible assets as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(in thousands)
|
|
Estimated
Useful Life
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
HETLIOZ
®
|
|
|
January 2033
|
|
|
$
|
33,000
|
|
|
$
|
5,181
|
|
|
$
|
27,819
|
|
Fanapt
®
|
|
|
November 2016
|
|
|
|
27,941
|
|
|
|
27,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,941
|
|
|
$
|
33,122
|
|
|
$
|
27,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HETLIOZ
®
.
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 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 remaining life of the U.S. method of use patent for HETLIOZ
®
that expires
in January 2033.
The Company is obligated to make a future milestone payment to BMS of $25.0 million when cumulative worldwide sales of HETLIOZ
®
reach $250.0 million. The obligation of $25.0 million was recorded as a current liability as of March 31, 2017. The $25.0 million was determined to be additional consideration for the
acquisition of the HETLIOZ
®
intangible asset. The intangible asset of $25.0 million is being amortized on a straight-line basis over the remaining life of the U.S. method of use patent for
HETLIOZ
®
that expires in January 2033.
15
Fanapt
®
. 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. The $12.0 million has been fully amortized on a straight-line basis over the remaining life of the U.S. composition of matter patent for Fanapt
®
to November 2016.
Pursuant to a settlement agreement in December 2014, Novartis transferred all U.S. and Canadian rights in the Fanapt
®
franchise to the Company. As a result, the Company recognized an intangible asset of $15.9 million on December 31, 2014 related to the reacquired rights to Fanapt
®
, which has been fully amortized on a straight-line basis to November 2016. The useful life estimation for the Fanapt
®
intangible asset was
based on the market participant methodology prescribed by ASC 805, 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. Amortization of intangible assets relating to Fanapt
®
was completed in November 2016.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense was $0.4 million and $2.9
million for the three months ended March 31, 2017 and 2016, respectively. The following is a summary of the future intangible asset amortization schedule as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
HETLIOZ
®
|
|
$
|
27,365
|
|
|
$
|
1,296
|
|
|
$
|
1,728
|
|
|
$
|
1,728
|
|
|
$
|
1,728
|
|
|
$
|
1,728
|
|
|
$
|
19,157
|
|
10. Income Taxes
Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The fact that the Company has historically generated pretax losses in the U.S. serves as strong evidence that it is more likely than not that deferred tax assets in the U.S. will not be realized in the
future. Therefore, the Company had a full tax valuation allowance against all deferred tax assets in the U.S. as of March 31, 2017 and December 31, 2016. As a result of the tax valuation allowance against deferred tax assets in the U.S.,
the provision or benefit for income taxes for the three months ended March 31, 2017 and 2016 was not material.
Certain tax attributes of the
Company, including net operating losses (NOLs) and credits, are potentially subject to a limitation should an ownership change as defined under the Internal Revenue Code of 1986, as amended (IRC), Section 382, occur. The limitations resulting
from 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 will
be able to utilize all existing NOL carryforwards before their expiration despite these limitations. Any future ownership changes may cause the Companys existing tax attributes to have additional limitations. Additionally, the Company
maintains a valuation allowance on its U.S. tax attributes, therefore, any IRC Section 382 limitation would not have a material impact on the Companys provision for income taxes as of March 31, 2017.
11. Commitments and Contingencies
Operating leases
Commitments relating to operating leases represent the minimum annual future payments under operating leases and subleases 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, 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, and 1,249 square feet of office space in Berlin under a short-term operating lease. The following is a summary of the minimum annual future payments under operating leases and subleases for
office space as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments due by year
|
|
(in thousands)
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
Operating leases
|
|
$
|
21,164
|
|
|
$
|
1,509
|
|
|
$
|
2,220
|
|
|
$
|
2,275
|
|
|
$
|
2,331
|
|
|
$
|
2,171
|
|
|
$
|
10,658
|
|
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 leases 9,928 square feet of office space
for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. The sublease term began in January 2017 and ends in July 2026, but may be terminated earlier by either party under certain circumstances. The Company has the right
to sublease or assign all or a portion of the premises, subject to standard conditions.
16
Rent expense under operating leases was $0.8 million and $0.5 million for the three months ended March 31,
2017 and 2016.
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, which is expected to be in 2018. 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 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
®
,
17
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 up to December 31, 2014. 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 was 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 year ended December 31, 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 did 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 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.
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 Vanda 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. The license agreement includes an initial license fee of $1.0 million, annual maintenance fees
and development, and up to $46.0 million in potential regulatory and sales milestone obligations. UCSF is eligible to receive single-digit tiered royalties on net sales.
18
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.
12. Stock-Based Compensation
As of March 31, 2017,
there were 6,583,429 shares that were subject to outstanding options and RSUs under the 2006 Equity Incentive Plan (the 2006 Plan) and the 2016 Equity Incentive Plan (the 2016 Plan, and together with the 2006 Plan, 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. In June 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 526,661 shares remained available for future grant as of as of March 31, 2017.
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 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 March 31, 2017, $11.1 million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a
weighted average period of 1.4 years. No option awards are classified as a liability as of March 31, 2017.
19
A summary of option activity under the Plans for the three months ended March 31, 2017 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, 2016
|
|
|
5,548,336
|
|
|
$
|
11.62
|
|
|
|
5.58
|
|
|
$
|
32,453
|
|
Granted
|
|
|
592,750
|
|
|
|
14.50
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(212,718
|
)
|
|
|
10.71
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(570,600
|
)
|
|
|
30.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(198,156
|
)
|
|
|
11.14
|
|
|
|
|
|
|
|
669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
5,159,612
|
|
|
|
9.92
|
|
|
|
6.37
|
|
|
|
21,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
3,410,101
|
|
|
|
8.94
|
|
|
|
5.12
|
|
|
|
17,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2017
|
|
|
4,857,256
|
|
|
|
9.75
|
|
|
|
6.18
|
|
|
|
21,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted was $7.84 and $4.27 per share for the three months ended
March 31, 2017 and 2016, respectively. Proceeds from the exercise of stock options amounted to $2.2 million and less than $0.1 million for the three months ended March 31, 2017 and 2016, respectively.
Restricted Stock Units
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 March 31, 2017, $16.9 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, 2017.
A
summary of RSU activity under the Plans for the three months ended March 31, 2017 follows:
|
|
|
|
|
|
|
|
|
2006 and 2016 Plans
|
|
Number of
Shares
Underlying
RSUs
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
Unvested at December 31, 2016
|
|
|
1,138,428
|
|
|
$
|
10.07
|
|
Granted
|
|
|
760,086
|
|
|
|
14.50
|
|
Forfeited
|
|
|
(127,193
|
)
|
|
|
10.49
|
|
Vested
|
|
|
(347,504
|
)
|
|
|
9.60
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2017
|
|
|
1,423,817
|
|
|
|
12.52
|
|
|
|
|
|
|
|
|
|
|
The grant date fair value for the 347,504 shares underlying RSUs that vested during the three months ended March 31, 2017
was $3.3 million.
Stock-Based Compensation
Stock-based compensation expense recognized for the three months ended March 31, 2017 and 2016 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
409
|
|
|
$
|
524
|
|
Selling, general and administrative
|
|
|
1,847
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,256
|
|
|
$
|
2,266
|
|
|
|
|
|
|
|
|
|
|
20
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. Assumptions used in the Black-Scholes-Merton option pricing model for employee and director stock options granted during the three months
ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
57
|
%
|
|
|
57
|
%
|
Weighted average expected term (years)
|
|
|
5.89
|
|
|
|
6.08
|
|
Weighted average risk-free rate
|
|
|
1.98
|
%
|
|
|
1.38
|
%
|
13. 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. Roxane filed its opening appellate brief on February 7, 2017. The Company filed its responsive brief on April 19, 2017.
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. (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. Certain Defendants have since entered into agreements resolving these lawsuits, as discussed below. The remaining parties have agreed, and the Delaware District Court
has ordered, that within 14 days after any decision on the merits in the Roxane appeal, the parties will submit to the Delaware District Court a status report and request a schedule for trial. The Company entered into a confidential stipulation with
Inventia regarding any potential launch of Inventias generic ANDA product. The Company also entered into a confidential stipulation with Lupin regarding any potential launch of Lupins generic ANDA product.
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 by which the Company would not assert those patents against Lupin absent certain changes in Lupins proposed prescribing information
for its iloperidone tablets.
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,
21
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 (FTC) and the U.S. Department of Justice (DOJ), provides for a full settlement and release by the Company and Taro of all claims that are the subject of the litigation.
On December 7, 2016, the Company entered into a License Agreement with Apotex to resolve the Companys patent litigation against Apotex regarding
Apotexs ANDA seeking approval of its generic version of Fanapt
®
(the Apotex License Agreement). Under the Apotex License Agreement, the Company granted Apotex a non-exclusive license to
manufacture and commercialize Apotexs 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. Apotex may enter the market earlier under certain limited circumstances. The Apotex License Agreement, which is subject to review
by the FTC and the DOJ, provides for a full settlement and release by the Company and Apotex 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 Ohio District Court). 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
December 20, 2016, the Ohio District Court ruled in our favor, dismissing Roxanes suit without prejudice for lack of personal jurisdiction.
On
February 26, 2016, Roxane filed a Petition for
Inter Partes
Review (IPR) of the 432 Patent with the Patent Trials and Appeals Board (the 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. On November 4, 2016, the PTAB denied Roxanes Petition for Rehearing.
22