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 Company’s 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. HETLIOZ
®
was commercially launched in Germany in August 2016. HETLIOZ
®
has potential utility in a number of other circadian rhythm disorders and is presently in clinical development for the treatment of jet lag disorder, Smith-Magenis Syndrome (SMS) and pediatric Non-24. An assessment of new HETLIOZ
®
clinical opportunities including the treatment of delayed sleep phase disorder and for sleep disorders in patients with neurodevelopmental disorders is ongoing.
|
|
|
•
|
Fanapt
®
(iloperidone), a product for the treatment of schizophrenia, the oral formulation of which was approved by the FDA in May 2009 and launched commercially in the U.S. by Novartis Pharma AG (Novartis) in January 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt
®
franchise to the Company on December 31, 2014. Additionally, the Company's distribution partners launched Fanapt
®
in Israel in 2014. Fanapt
®
has potential utility in a number of other disorders. Initial clinical work studying a long acting injectable (LAI) formulation of Fanapt
®
began in 2018. An assessment of new Fanapt
®
clinical opportunities including the treatment of bipolar depression 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, gastroparesis, and motion sickness.
|
|
|
•
|
VTR-297, a small molecule histone deacetylase (HDAC) inhibitor presently in clinical development for the treatment of hematologic malignancies.
|
|
|
•
|
Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors. An early stage CFTR activator program is planned for the treatment of dry eye and ocular inflammation. In addition, an early stage CFTR inhibitor program is planned for the treatment of secretory diarrhea disorders, including cholera.
|
|
|
•
|
VQW-765, 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 Company’s consolidated financial statements for the fiscal year ended
December 31, 2018
included in the Company’s annual report on Form 10-K. The financial information as of
March 31, 2019
and for the
three
months ended
March 31, 2019
and
2018
is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included. The condensed consolidated balance sheet data as of
December 31, 2018
was derived from audited financial statements but does not include all disclosures required by GAAP.
The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or for a full fiscal year. The financial information included herein should be read in conjunction with the consolidated financial statements and notes in the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2018
.
2. Summary of Significant Accounting Policies
With the exception of the adoption of Accounting Standards Update (ASU) No. 2016-02,
Leases
and all related amendments (collectively, Accounting Standards Codification (ASC) 842) on January 1, 2019, discussed below, there have been no material
changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with 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. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates.
Leases
In accordance with ASC Subtopic 842,
Leases
, effective January 1, 2019, the Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. For leases with a term greater than 12 months, ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes options to extend the lease when it is reasonably certain the Company will exercise that option. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. In the case the implicit rate is not available, the Company uses its incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments, including publicly available data for instruments with similar characteristics. The Company does not combine lease and non-lease elements for office leases. For existing leases as of January 1, 2019, executory costs are excluded from lease expense, which is consistent with the Company's accounting under ASC 840. For all leases entered into after January 1, 2019, executory costs are allocated between lease and non-lease elements based upon their relative stand-alone prices.
Revenue from Net Product Sales
The Company’s revenues consist of net product sales of HETLIOZ
®
and net product sales of Fanapt
®
. Net sales by product for the
three
months ended
March 31, 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 31,
2019
|
|
March 31,
2018
|
HETLIOZ
®
product sales, net
|
$
|
28,957
|
|
|
$
|
25,423
|
|
Fanapt
®
product sales, net
|
18,756
|
|
|
18,169
|
|
|
$
|
47,713
|
|
|
$
|
43,592
|
|
Major Customers
HETLIOZ
®
is available in the U.S. for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt
®
is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. The Company invoices and records revenue when its customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse which is the point at which control is transferred to the customer. There were
five
major customers that each accounted for more than 10% of total revenues and, as a group, represented
96%
of total revenues for the
three
months ended
March 31, 2019
. There were
five
major customers that each accounted for more than 10% of accounts receivable and, as a group, represented
96%
of total accounts receivable at
March 31, 2019
. The Company evaluates outstanding receivables to assess collectability. In performing this evaluation, the Company analyzes economic conditions, the aging of receivables and customer specific risks. Using this information, the Company reserves an amount that it estimates may not be collected.
Supplemental Cash Flows Information
Cash, Cash Equivalents and Restricted Cash
For purposes of the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows, cash equivalents represent highly-liquid investments with a maturity date of three months or less at the date of purchase. Cash and cash equivalents includes investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Restricted cash relates primarily to amounts held as collateral for letters of credit for leases for office space at the Company’s Washington, D.C. headquarters. The following table provides a
reconciliation of cash, cash equivalents and restricted cash and cash equivalents reported within the Condensed Consolidated Balance Sheets to the total end of period cash, cash equivalents and restricted cash reported within the Condensed Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
|
March 31,
2018
|
Cash and cash equivalents
|
$
|
34,379
|
|
|
$
|
155,293
|
|
Restricted cash included in:
|
|
|
|
Prepaid expenses and other current assets
|
157
|
|
|
—
|
|
Non-current inventory and other
|
586
|
|
|
744
|
|
Total cash, cash equivalents and restricted cash
|
$
|
35,122
|
|
|
$
|
156,037
|
|
Non-Cash Investing and Financing Activities
For the three months ended March 31, 2018, the Company accrued
$0.2 million
in expense associated with the March 2018 public offering of common stock.
Recent Accounting Pronouncements
In August 2018, the U.S. Securities and Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification.
This final rule amends certain disclosure requirements that are redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective for the Company for all filings made on or after November 5, 2018. The SEC staff clarified that the first presentation of the changes in shareholders' equity may be included in the first Form 10-Q for the quarter that begins after the effective date of the amendments. The adoption of the final rule did not have a material impact on the Company’s condensed consolidated financial statements. The Company updated the disclosure of its Condensed Consolidated Statements of Changes in Stockholders' Equity in the first quarter of 2019 to include a reconciliation for the comparative period.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2,
Leases (Topic 842)
, which was further clarified by ASU 2018-10,
Codification Improvements to Topic 842, Leases
, and ASU 2018-11,
Leases - Targeted Improvements
, issued in July 2018. ASC 842 supersedes existing lease guidance, including ASC 840
Leases
. The new leasing standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new leasing standard requires that lessees will need to recognize a ROU asset and a lease liability for virtually all of their leases, and allows companies to make a policy election as to whether short term leases will be accounted for under the new standard. The Company elected to exclude short-term leases in the application of the new standard. Accounting for finance leases is substantially unchanged. The lease liability is equal to the present value of lease payments. The ROU asset is based on the liability subject to certain adjustments. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense, similar to accounting for operating leases under ASC 840, while finance leases will result in a front-loaded expense pattern, similar to accounting for capital leases under ASC 840.
The Company adopted the new leasing standard in the first quarter 2019, using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date of January 1, 2019. There was no impact to retained earnings as a result of adoption. Prior period financial statements were not recast. The Company elected the package of transition provisions available for expired or existing contracts, which allowed it to carryforward its historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of the new leasing standard on January 1, 2019 resulted in the recognition of
$15.8 million
of operating lease liabilities,
$2.2 million
of
which were classified as current liabilities, with corresponding ROU assets of
$12.2 million
, net of lease prepayments and the balance of deferred lease incentives. The Company does not have any financing leases.
3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of
March 31, 2019
, which all have contract maturities of less than one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Market
Value
|
(in thousands)
|
|
|
|
U.S. Treasury and government agencies
|
$
|
112,751
|
|
|
$
|
63
|
|
|
$
|
(4
|
)
|
|
$
|
112,810
|
|
Corporate debt
|
104,867
|
|
|
73
|
|
|
(1
|
)
|
|
104,939
|
|
Asset-backed securities
|
15,707
|
|
|
3
|
|
|
(2
|
)
|
|
15,708
|
|
|
$
|
233,325
|
|
|
$
|
139
|
|
|
$
|
(7
|
)
|
|
$
|
233,457
|
|
The following is a summary of the Company’s available-for-sale marketable securities as of
December 31, 2018
, which all have contract maturities of less than one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Market
Value
|
(in thousands)
|
|
|
|
U.S. Treasury and government agencies
|
$
|
69,275
|
|
|
$
|
12
|
|
|
$
|
(17
|
)
|
|
$
|
69,270
|
|
Corporate debt
|
105,897
|
|
|
38
|
|
|
(25
|
)
|
|
105,910
|
|
Asset-backed securities
|
21,189
|
|
|
—
|
|
|
(14
|
)
|
|
21,175
|
|
|
$
|
196,361
|
|
|
$
|
50
|
|
|
$
|
(56
|
)
|
|
$
|
196,355
|
|
4. Fair Value Measurements
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
|
•
|
Level 1 — defined as observable inputs such as quoted prices in active markets
|
|
|
•
|
Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
|
|
|
•
|
Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
|
Marketable securities classified in Level 1 and Level 2 as of
March 31, 2019
and
December 31, 2018
consist of available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of investments classified in Level 2 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, corporate notes and asset-backed securities that use as their basis readily observable market parameters. The Company did not transfer any assets between Level 2 and Level 1 during the
three
months ended
March 31, 2019
and
2018
.
As of
March 31, 2019
, 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, 2019 Using
|
|
March 31,
2019
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
112,810
|
|
|
$
|
112,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
109,926
|
|
|
—
|
|
|
109,926
|
|
|
—
|
|
Asset-backed securities
|
15,708
|
|
|
—
|
|
|
15,708
|
|
|
—
|
|
|
$
|
238,444
|
|
|
$
|
112,810
|
|
|
$
|
125,634
|
|
|
$
|
—
|
|
As of
December 31, 2018
, the Company held certain assets that are required to be measured at fair value on a recurring basis, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2018 Using
|
|
December 31,
2018
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
69,270
|
|
|
$
|
69,270
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
105,910
|
|
|
—
|
|
|
105,910
|
|
|
—
|
|
Asset-backed securities
|
21,175
|
|
|
—
|
|
|
21,175
|
|
|
—
|
|
|
$
|
196,355
|
|
|
$
|
69,270
|
|
|
$
|
127,085
|
|
|
$
|
—
|
|
Total assets measured at fair value as of
March 31, 2019
includes
$5.0 million
of cash equivalents.
The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and milestone obligations under license agreements, the carrying values of which materially approximate their fair values.
5. Inventory
The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Inventory levels are evaluated for the amount of inventory that would be sold within one year. At certain times, the level of inventory can exceed the forecasted level of cost of goods sold for the next twelve months. The Company classifies the estimate of such inventory as non-current. Inventory consisted of the following as of
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
|
December 31,
2018
|
Current assets
|
|
|
|
Work-in-process
|
$
|
—
|
|
|
$
|
48
|
|
Finished goods
|
1,112
|
|
|
946
|
|
|
$
|
1,112
|
|
|
$
|
994
|
|
Non-Current assets
|
|
|
|
Raw materials
|
$
|
86
|
|
|
$
|
86
|
|
Work-in-process
|
2,056
|
|
|
2,290
|
|
Finished goods
|
616
|
|
|
516
|
|
|
$
|
2,758
|
|
|
$
|
2,892
|
|
6. Leases
The Company's long-term leases primarily include operating leases and subleases for office space in Washington, D.C. and London. The Company recognized ROU assets and lease liabilities related to fixed payments for these long-term operating leases in its condensed consolidated balance sheet as of March 31, 2019. The Company also has various short-term leases, including office space in Berlin.
In June 2011, the Company entered into an operating lease agreement under which it leases
33,534
square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. Subject to the prior rights of other tenants, the Company has the right to renew the lease for five years following its expiration in July 2028. As of
March 31, 2019
, the renewal period has not been included in the lease term. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions. The lease may be terminated early by the Company or the landlord under certain circumstances.
In June 2016, the Company entered into a sublease agreement under which it subleases
9,928
square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. The sublease term began in January 2017 and ends in July 2026, but may be terminated earlier by either party under certain circumstances. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions.
In May 2016, the Company entered into an operating lease agreement under which it leases
2,880
square feet of office space for its European headquarters in London. The Company has the right to renew the lease for five years following its expiration in 2021. As of
March 31, 2019
, the renewal period has not been included in the lease term.
The following is a summary of the Company’s ROU assets and operating lease liabilities as of
March 31, 2019
:
|
|
|
|
|
|
|
|
(in thousands)
|
|
Classification on the Balance Sheet
|
|
March 31, 2019
|
Assets
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
11,994
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease current liabilities
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,249
|
|
Operating lease non-current liabilities
|
|
Operating lease non-current liabilities
|
|
13,324
|
|
Total lease liabilities
|
|
|
|
$
|
15,573
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
8.7 Years
|
|
Weighted-average discount rate
(1)
|
|
|
|
8.1
|
%
|
|
|
(1)
|
Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
|
For the three months ended
March 31, 2019
, the Company recognized operating lease cost of
$0.6 million
and short-term operating lease cost of
$0.1 million
. The Company also recognized
$0.3 million
of expense related to non-lease elements, such as building maintenance services and utilities, and executory costs associated with the operating leases. For existing leases as of January 1, 2019, executory costs are excluded from operating lease expense, which is consistent with the Company's accounting under ASC 840. For all leases entered into after January 1, 2019, executory costs are allocated between lease and non-lease elements based upon their relative stand-alone prices. For the three months ended
March 31, 2018
, the Company recognized
$0.9 million
of rent expense, inclusive of lease expense, non-lease elements, and executory costs for short and long-term operating leases.
Cash paid for amounts included in the measurement of operating lease liabilities is included in operating cash flows was
$0.6 million
for the three months ended
March 31, 2019
.
The table below reconciles the Company's future cash obligations to operating lease liabilities recorded on the balance sheet as of
March 31, 2019
:
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
2019
|
|
$
|
1,903
|
|
2020
|
|
2,324
|
|
2021
|
|
2,332
|
|
2022
|
|
2,355
|
|
2023
|
|
2,420
|
|
Thereafter
|
|
10,669
|
|
Total minimum lease payments
|
|
$
|
22,003
|
|
Less: amount of lease payments representing interest
|
|
(6,430
|
)
|
Present value of future minimum lease payments
|
|
$
|
15,573
|
|
Less: current obligations under leases
|
|
(2,249
|
)
|
Long-term lease obligations
|
|
$
|
13,324
|
|
At
December 31, 2018
, future minimum payments under noncancellable operating leases under ASC 840 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Year
|
(in thousands)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Operating leases
|
22,757
|
|
|
2,483
|
|
|
2,495
|
|
|
2,335
|
|
|
2,355
|
|
|
2,420
|
|
|
10,669
|
|
7. Intangible Assets
HETLIOZ
®
.
In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ
®
. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of
$8.0 million
to BMS. The
$8.0 million
is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in
February 2035
.
In April 2018, the Company met its final milestone under its license agreement when cumulative worldwide sales of HETLIOZ
®
reached
$250.0 million
. As a result of the achievement of this milestone, the Company made a payment to BMS of
$25.0 million
in the second quarter of 2018. The
$25.0 million
was determined to be additional consideration for the acquisition of the HETLIOZ
®
intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents, the latest of which expires in
February 2035
.
The estimated economic useful life of both the
$8.0 million
and the
$25.0 million
intangible assets were changed from
May 2034
to
February 2035
based on the February 2035 expiration date of U.S. patent number 10,071,977 ('977 patent) issued by the U.S. Patent and Trademark Office in September 2018.
The following is a summary of the Company’s intangible assets as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
(in thousands)
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ
®
|
February 2035
|
|
$
|
33,000
|
|
|
$
|
8,838
|
|
|
$
|
24,162
|
|
The following is a summary of the Company’s intangible assets as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in thousands)
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ
®
|
May 2034
|
|
$
|
33,000
|
|
|
$
|
8,458
|
|
|
$
|
24,542
|
|
As of
March 31, 2019
and
December 31, 2018
the Company also had
$27.9
of fully amortized intangible assets related to Fanapt
®
.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense was
$0.4 million
for each of the
three
months ended
March 31, 2019
and
2018
. The following is a summary of the future intangible asset amortization schedule as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
HETLIOZ
®
|
$
|
24,162
|
|
|
$
|
1,138
|
|
|
$
|
1,518
|
|
|
$
|
1,518
|
|
|
$
|
1,518
|
|
|
$
|
1,518
|
|
|
$
|
16,952
|
|
8. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
|
December 31,
2018
|
Research and development expenses
|
$
|
7,857
|
|
|
$
|
5,593
|
|
Consulting and other professional fees
|
7,042
|
|
|
2,924
|
|
Royalties payable
|
4,592
|
|
|
5,172
|
|
Compensation and employee benefits
|
3,730
|
|
|
6,363
|
|
Operating lease liabilities
|
2,249
|
|
|
—
|
|
Other
|
1,953
|
|
|
1,532
|
|
|
$
|
27,423
|
|
|
$
|
21,584
|
|
9. Commitments and Contingencies
The following is a summary of the Company's noncancellable long-term contractual cash obligations as of
March 31, 2019
. See footnote 6,
Leases
, for the maturities of the Company's operating lease liabilities as of
March 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Year (1)
|
(in thousands)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Purchase commitments
|
5,266
|
|
|
3,073
|
|
|
847
|
|
|
890
|
|
|
456
|
|
|
—
|
|
|
—
|
|
Guarantees and Indemnifications
The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual from the date of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain conditions.
License Agreements
The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies.
HETLIOZ
®
.
In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ
®
. As a result of the FDA’s approval of the HETLIOZ
®
NDA in January 2014, the Company made an
$8.0 million
milestone payment to BMS in the first quarter of 2014 under the license agreement that was capitalized as an intangible asset and is being amortized over the estimated economic useful life of the related product patents for HETLIOZ
®
in the U.S. In April 2018, the Company met another milestone under its license agreement when cumulative worldwide sales of HETLIOZ
®
reached
$250.0 million
. As a result of the achievement of this milestone, the Company made a payment to BMS of
$25.0 million
in the second quarter of 2018. The
$25.0 million
milestone obligation was capitalized as an intangible asset in the first quarter of 2015 and is being amortized over the estimated economic useful life of the related product patents for HETLIOZ
®
in the U.S. The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ
®
net sales to BMS in any territory where the Company commercializes HETLIOZ
®
for a period equal to the greater of 10 years following the first commercial sale in the territory or the expiry of the new chemical entity (NCE) patent in that territory. During the period prior to the expiry of the NCE patent in a territory, the Company is obligated to pay a
10%
royalty on net sales in that territory. The royalty rate is decreased by half for countries in which no NCE patent existed or for the remainder of the 10 years after the expiry of the NCE patent. The Company is also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments and milestone and other payments (excluding royalties) that it receives from a third party in connection with any sublicensing arrangement, at a rate which is in the
mid-twenties
. The Company has agreed with BMS in the license agreement for HETLIOZ
®
to use its commercially reasonable efforts to develop and commercialize HETLIOZ
®
.
Fanapt
®
.
Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the
Fanapt
®
franchise to the Company on December 31, 2014. The Company was obligated to make royalty payments to Sanofi S.A. (Sanofi) and Titan Pharmaceuticals Inc. (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 NCE patent for Fanapt
®
in the U.S. on November 15, 2016. Under the amended agreement, the Company pays directly to Sanofi a fixed royalty of
3%
of net sales from November 16, 2016 through December 31, 2019 related to manufacturing know-how. No further royalties on manufacturing know-how are payable by the Company after December 31, 2019. This amended agreement did not alter Titan’s obligation under the license agreement to make royalty payments to Sanofi prior to November 16, 2016 or the Company’s obligations 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 is obligated to pay this 6% royalty on net sales in the U.S. through November 2026. No further royalties on know-how not related to manufacturing are payable by the Company for net sales in the U.S. after November 2026.
Tradipitant.
In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1R antagonist, tradipitant, for all human indications. The patent describing tradipitant as a NCE expires in April 2023, except in the U.S., where it expires in June 2024 absent any applicable patent term adjustments. Lilly is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the
low double digits
. These milestones include
$4.0 million
for pre-NDA approval milestones,
$10.0 million
and
$5.0 million
for the first approval of a marketing authorization for tradipitant in the U.S. and European Union (E.U.), respectively, and up to
$80.0 million
for sales milestones. The
$4.0 million
of pre-NDA approval milestones includes
$2.0 million
due upon enrollment of the first subject into a Phase III study for tradipitant and
$2.0 million
due upon the filing of the first marketing authorization for tradipitant in either the U.S. or the E.U. As a result of enrolling the first subject into a Phase III study for tradipitant in July 2018, the Company made a
$2.0 million
milestone payment to Lilly in the third quarter of 2018. The likelihood of achieving this milestone was determined to be probable during 2017 and the obligation of
$2.0 million
tied to such milestone was recorded as research and development expense in the consolidated statement of operations during the year ended
December 31, 2017
. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.
VQW-765.
In connection with a settlement agreement with Novartis relating to Fanapt
®
, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement,
the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the
mid-teens
.
Portfolio of CFTR activators and inhibitors
. In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which the Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including current pre-investigational new drug development work. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as
single-digit
royalties on net sales. These milestones include an initial license fee of
$1.0 million
that was paid by the Company in 2017, annual maintenance fees,
$12.4 million
for pre-NDA approval milestones and
$33.0 million
for future regulatory approval and sales milestones. Included in the
$12.4 million
in pre-NDA approval milestones is a
$350,000
milestone due upon the conclusion of a Phase I study for each licensed product but not to exceed
$1.1 million
in total for the CFTR portfolio. In the fourth quarter of 2018, the Company determined the first pre-NDA approval milestone to be probable and accrued a current liability of
$0.2 million
as of December 31, 2018. The pre-NDA approval milestone of
$0.2 million
was paid to UCSF in the first quarter of 2019.
Purchase Commitments
In the course of its business, the Company regularly enters into agreements with clinical organizations to provide services relating to clinical development and clinical manufacturing activities under fee service arrangements. The Company’s current agreements for clinical and marketing services may be terminated on generally
90
days’ notice without incurring additional charges, other than charges for work completed but not paid for through the effective date of termination and other costs incurred by the Company’s contractors in closing out work in progress as of the effective date of termination. Purchase commitments included in the noncancellable long-term contractual cash obligations table above include noncancellable purchase commitments longer than one year and primarily relate to commitments for advertising and data services.
10. Public Offering of Common Stock
In March 2018, the Company completed a public offering of
6,325,000
shares of its common stock, including the exercise of the underwriters’ option to purchase an additional
825,000
shares of common stock, at a price to the public of
$17.00
per share. Net cash proceeds from the public offering were
$100.9 million
after deducting the underwriting discounts and commissions and offering expenses.
11. Accumulated Other Comprehensive Income
The accumulated balances related to each component of other comprehensive income (loss) were as follows as of
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
|
December 31,
2018
|
Foreign currency translation
|
$
|
3
|
|
|
$
|
7
|
|
Unrealized gain (loss) on marketable securities
|
132
|
|
|
(6
|
)
|
|
$
|
135
|
|
|
$
|
1
|
|
There was
no
tax provision (benefit) included in accumulated other comprehensive income as of
March 31, 2019
and
December 31, 2018
. There were
no
reclassifications out of accumulated other comprehensive income for either of the
three
months ended
March 31, 2019
or
2018
.
12. Stock-Based Compensation
As of
March 31, 2019
, there were
6,384,857
shares that were subject to outstanding options and restricted stock units (RSUs) under the 2006 Equity Incentive Plan (2006 Plan) and the Amended and Restated 2016 Equity Incentive Plan (2016 Plan, and together with the 2006 Plan, Plans). The 2006 Plan expired by its terms on April 12, 2016, and the Company adopted the 2016 Plan. Outstanding options and RSUs under the 2006 Plan remain in effect and the terms of the 2006 Plan continue to apply, but no additional awards can be granted under the 2006 Plan. In June 2016, the Company’s stockholders approved the 2016 Plan. The 2016 Plan has been amended and restated twice to increase the number of shares reserved for issuance, among other administrative changes. Both amendments and restatements of the 2016 Plan were approved by the Company's stockholders.
There are a total of
7,100,000
shares of common stock reserved for issuance under the 2016 Plan,
3,388,804
shares of which remained available for future grant as of
March 31, 2019
.
Stock Options
The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have
10 years
contractual terms. Service option awards granted to employees and new directors upon their election vest and become exercisable on the first anniversary of the grant date with respect to 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
. Subsequent annual service option awards granted to directors vest and become exercisable in either equal monthly installments over a period of
one year
or on the first anniversary of the grant date. Certain service option awards to executives and directors provide for accelerated vesting if there is a change in control of the Company. Certain service option awards to employees and executives provide for accelerated vesting if the respective employee’s or executive’s service is terminated by the Company for any reason other than cause or permanent disability.
As of
March 31, 2019
,
$11.1 million
of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of
1.6 years
. No option awards are classified as a liability as of
March 31, 2019
.
A summary of option activity under the Plans for the
three
months ended
March 31, 2019
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 and 2016 Plans
(in thousands, except for share and per share amounts)
|
Number of
Shares
|
|
Weighted Average
Exercise Price at
Grant Date
|
|
Weighted Average
Remaining Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2018
|
4,369,042
|
|
|
$
|
11.15
|
|
|
5.28
|
|
$
|
65,438
|
|
Granted
|
427,500
|
|
|
20.62
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(17,468
|
)
|
|
10.27
|
|
|
|
|
143
|
|
Outstanding at March 31, 2019
|
4,779,074
|
|
|
12.00
|
|
|
5.49
|
|
31,963
|
|
Exercisable at March 31, 2019
|
3,573,133
|
|
|
10.10
|
|
|
4.34
|
|
29,714
|
|
Vested and expected to vest at March 31, 2019
|
4,533,107
|
|
|
11.58
|
|
|
5.27
|
|
31,870
|
|
The weighted average grant-date fair value of options granted was
$11.50
and
$10.40
per share for the
three
months ended
March 31, 2019
and
2018
, respectively. Proceeds from the exercise of stock options amounted to
$0.2 million
and
$2.7 million
for the
three
months ended
March 31, 2019
and
2018
, respectively.
Restricted Stock Units
An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that generally vest in
four
equal annual installments provided that the employee remains employed with the Company. Annual service RSUs granted to directors vest on the first anniversary of the grant date.
As of
March 31, 2019
,
$28.3 million
of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of
2.1 years
. No RSUs are classified as a liability as of
March 31, 2019
.
A summary of RSU activity under the Plans for the
three
months ended
March 31, 2019
follows:
|
|
|
|
|
|
|
|
2006 and 2016 Plans
|
Number of
Shares
Underlying
RSUs
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested at December 31, 2018
|
1,313,576
|
|
|
$
|
15.68
|
|
Granted
|
770,328
|
|
|
20.63
|
|
Forfeited
|
(10,506
|
)
|
|
17.18
|
|
Vested
|
(467,615
|
)
|
|
14.16
|
|
Unvested at March 31, 2019
|
1,605,783
|
|
|
18.48
|
|
The grant date fair value for the
467,615
shares underlying RSUs that vested during the
three
months ended
March 31, 2019
was
$6.6 million
.
Stock-Based Compensation
Stock-based compensation expense recognized for the
three
months ended
March 31, 2019
and
2018
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 31,
2019
|
|
March 31,
2018
|
Research and development
|
$
|
728
|
|
|
$
|
321
|
|
Selling, general and administrative
|
2,554
|
|
|
2,830
|
|
|
$
|
3,282
|
|
|
$
|
3,151
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. Expected volatility rates are based on the historical volatility of the Company’s publicly traded common stock and other factors. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has not paid dividends to its stockholders since its inception (other than a dividend of preferred share purchase rights, which was declared in September 2008) and does not plan to pay dividends in the foreseeable future. Assumptions used in the Black-Scholes-Merton option pricing model for stock options granted during the
three
months ended
March 31, 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2019
|
|
March 31,
2018
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Weighted average expected volatility
|
58
|
%
|
|
57
|
%
|
Weighted average expected term (years)
|
5.92
|
|
|
5.90
|
|
Weighted average risk-free rate
|
2.51
|
%
|
|
2.64
|
%
|
13. Income Taxes
The Company assesses the need for a valuation allowance against its deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Except for 2018 income, the Company has historically generated pretax losses in the U.S., both cumulatively and individually. The losses serve 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, and as a result of the losses and all other available positive and negative evidence the Company concluded that a full tax valuation allowance was required against all net deferred tax assets in the U.S. as of
March 31, 2019
and
December 31, 2018
. If the Company begins to regularly generate pretax income, it is reasonably possible that the conclusion about the appropriateness of the valuation allowance could change in a future period. A reduction of the valuation allowance, in whole or in part, would
result in a non-cash income tax benefit during the period of reduction.The potential timing and amount of any future valuation allowance release has yet to be determined and requires an analysis that is highly dependent upon historical and future projected earnings, among other factors. Any such adjustment could have a material impact on the Company’s finance position and results of operations.
As a result of the tax valuation allowance against deferred tax assets in the U.S., there was no expense (benefit) for federal income taxes associated with the income (loss) before income taxes for
three
months ended
March 31, 2019
and
2018
. Taxes have been recorded related to certain U.S. state jurisdictions and non-U.S. income for the
three
months ended
March 31, 2019
and
2018
.
Certain tax attributes of the Company, including net operating losses (NOLs) and credits, would be subject to a limitation should an ownership change as defined under the Internal Revenue Code of 1986, as amended (IRC), Section 382, occur. The limitations resulting from a change in ownership could affect the Company’s ability to utilize its NOLs and credit carryforward (tax attributes). Ownership changes occurred in the years ended December 31, 2014 and December 31, 2008. The Company believes that the ownership changes in 2014 and 2008 will not impact its ability to utilize NOL and credit carryforwards; however, future ownership changes may cause the Company’s existing tax attributes to have additional limitations. Because the Company maintains a valuation allowance on its U.S. tax attributes, any limitation as a result of application of IRC Section 382 limitation would not have a material impact on the Company’s provision for income taxes for the
three
months ended
March 31, 2019
.
The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. During the fourth quarter of 2018, the Company completed its accounting for the tax effects of the TCJA. No material measurement period adjustments were recorded in 2018 to adjust estimated effects of the Act that were recorded in 2017. Immaterial measurement period adjustments that were recorded resulted in no tax expense as they were fully offset by a change in the Company's valuation allowance.
14. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.
The following table presents the calculation of basic and diluted net loss per share of common stock for the
three
months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except for share and per share amounts)
|
March 31,
2019
|
|
March 31,
2018
|
Numerator:
|
|
|
|
Net income (loss)
|
$
|
(612
|
)
|
|
$
|
3,066
|
|
Denominator:
|
|
|
|
Weighted average shares outstanding, basic
|
52,752,774
|
|
|
46,336,430
|
|
Effect of dilutive securities
|
—
|
|
|
1,888,611
|
|
Weighted average shares outstanding, diluted
|
52,752,774
|
|
|
48,225,041
|
|
Net income (loss) per share, basic and diluted:
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
Antidilutive securities excluded from calculations of diluted net income (loss) per share
|
3,068,806
|
|
|
1,057,444
|
|
The Company incurred a net loss for the
three
months ended
March 31, 2019
causing inclusion of any potentially dilutive securities to have an anti-dilutive effect, resulting in dilutive loss per share and basic loss per share attributable to common stockholders being equivalent.
15. Legal Matters
Fanapt
®
. In June 2014, the Company filed suit against Roxane Laboratories, Inc. (Roxane) in the U.S. District Court for the District of Delaware (Delaware District Court). The suit sought an adjudication that Roxane has infringed one or more claims of the Company's U.S. Patent No. 8,586,610 (‘610 Patent) by submitting to the U.S. Food and Drug Administration (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 a settlement agreement with Novartis Pharma AG (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 (‘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 in March 2016. In August 2016, 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 Court’s order. In September 2016, Roxane filed a notice of appeal with the Federal Circuit Court of Appeals (Federal Circuit). In July 2017, Roxane, now a subsidiary of Hikma Pharmaceuticals PLC (Hikma), petitioned the Federal Circuit to substitute Roxane with new defendants West-Ward Pharmaceuticals International Limited and West-Ward Pharmaceuticals Corp. (each of which is a subsidiary of Hikma and both of which are referred to collectively herein as West-Ward). In April 2018, the Federal Circuit affirmed the Delaware District Court’s decision that West-Ward infringed the ‘610 Patent. In June 2018, West-Ward filed with the Federal Circuit a petition seeking rehearing en banc. The Federal Circuit invited the Company to respond to West-Ward’s petition; the Company's response was filed in July 2018. In August 2018, the Federal Circuit denied West-Ward's petition for rehearing. In January 2019, West-Ward filed a petition in the United States Supreme Court for a writ of certiorari seeking reversal of the Federal Circuit’s decision. The Company submitted a response to that petition on February 12, 2019. On March 18, 2019, the United States Supreme Court invited the Solicitor General of the United States to file a brief in the matter expressing the views of the United States.
In 2015, the Company filed six separate patent infringement lawsuits in the Delaware District Court against Roxane, Inventia Healthcare Pvt. Ltd. (Inventia), Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp. (Apotex, and collectively with Roxane, Inventia, Lupin and Taro, the Defendants). The lawsuits each seek an adjudication that the respective Defendants infringed one or more claims of the ‘610 Patent and/or the Company's U.S. Patent No. 9,138,432 (‘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 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 matters have been stayed until the later of November 30, 2018 or 14 days after final disposition by the U.S. Supreme Court of any petition for a writ of certiorari filed by West-Ward. The Company entered into a confidential stipulation with each of Inventia and Lupin regarding any potential launch of Inventia’s and Lupin's generic ANDA products.
HETLIOZ
®
. In March 2018, the Company received a Paragraph IV certification notice letter from Teva Pharmaceuticals USA, Inc. (Teva) notifying the Company that Teva had submitted an ANDA for HETLIOZ
®
to the FDA requesting approval to market, sell and use a generic version of the 20mg HETLIOZ
®
capsules for Non-24. In its notice letter, Teva alleges that the Company's U.S. Patent No. RE46,604, U.S. Patent No. 9,060,995, U.S. Patent 9,539,234, U.S. Patent 9,549,913, U.S. Patent 9,730,910 and U.S. Patent 9,885,241 (collectively, the Vanda Patents), each of which is listed in the
Approved Drug Products with Therapeutic Equivalence Evaluations
(Orange Book), which cover methods of using HETLIOZ
®
, are invalid, unenforceable and/or will not be infringed by Teva’s manufacture, use or sale of the product described in its ANDA. The Company received similar notice letters in April 2018 from MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (together, MSN) and Apotex.
In April 2018, the Company filed a patent infringement lawsuit in the Delaware District Court against Teva and in May 2018, the Company filed patent infringement lawsuits in the Delaware District Court against MSN and Apotex. The lawsuits seek an adjudication that Teva, MSN and Apotex have infringed one or more claims of the Vanda Patents by submitting to the FDA an ANDA for a generic version of HETLIOZ
®
prior to the expiration of the latest to expire of the Vanda Patents in 2034. The relief requested by the Company in the lawsuits includes requests for permanent injunctions preventing Teva, MSN and Apotex from infringing the asserted claims of the Vanda Patents by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of HETLIOZ
®
before the last expiration date of the Vanda Patents and for an order that any effective date of FDA approval of Teva, MSN, and Apotex’s generic versions of HETLIOZ
®
be a date not earlier than the expiration of the Vanda Patents. The lawsuits automatically preclude the FDA from approving the submitted ANDAs until the earlier of seven and one-half years after the January 2014 approval of the Company's NCE status application or entry of a
district court decision finding the Vanda Patents invalid, unenforceable or not infringed. In June 2018, Teva, MSN and Apotex each answered the Company's complaint, and Teva included counterclaims for declarations that the Vanda Patents are invalid. MSN included additional counterclaims for declarations that the Vanda Patents are not infringed. In July 2018, the Company answered Teva and MSN's counterclaims, denying their allegations.
In October 2018, the Company received an additional Paragraph IV certification notice letter from Teva concerning its Orange Book listed U.S. Patent No. 10,071,977, which expires in 2035 (the ‘977 Patent). In November 2018, the Company received a similar additional Paragraph IV certification notice letter from Apotex concerning the ’977 Patent. In December 2018, the Company filed amended complaints against Teva, Apotex, and MSN alleging infringement of one or more claims of the ’977 Patent. The amended complaints seek an adjudication that Teva, Apotex, and MSN have infringed one or more claims of the ’977 Patent by submitting to FDA an ANDA for a generic version of HETLIOZ
®
prior to the expiration of the ’977 Patent. The relief requested by the Company in the amended complaints includes requests for permanent injunctions preventing Teva, Apotex, and MSN from infringing the asserted claims of the ’977 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of HETLIOZ
®
before the expiration date of the ’977 Patent and for an order that any effective date of FDA approval of Teva, MSN, and Apotex’s generic versions of HETLIOZ
®
be a date not earlier than the expiration of the ’977 Patent. In December 2018, Teva, MSN, and Apotex answered the Company's amended complaints, and Teva and MSN included counterclaims for declarations that the ’977 Patent is invalid, and MSN included an additional counterclaim that the ’977 Patent is unenforceable for inequitable conduct. In January 2019, the Company answered Teva and MSN’s counterclaims. A trial date for these lawsuits has been set for September 2020.
In February 2019, the Company received additional Paragraph IV certification notice letters separately from Teva and Apotex concerning Vanda’s Orange Book listed U.S. Patent No. 10,149,829, which expires in 2033 (the ’829 Patent). In their notice letters, Teva and Apotex allege that the ’829 Patent, which covers methods of using HETLIOZ
®
, is invalid, unenforceable and will not be infringed by Teva’s and Apotex’s respective manufacture, use or sale of the product described in their respective ANDAs. In March 2019 and April 2019, Vanda filed separate patent infringement lawsuits in the Delaware District Court against Teva and Apotex, respectively. The lawsuits seek adjudications that Teva and Apotex have infringed one or more claims of the ’829 Patent by submitting to the FDA an ANDA for a generic version of HETLIOZ
®
prior to the expiration of the ’829 Patent. The relief requested by the Company includes permanent injunctions preventing Teva and Apotex from infringing the asserted claims of the ’829 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of HETLIOZ
®
before the expiration of the ’829 Patent, and includes orders that any effective date of FDA approval of Teva and Apotex’s generic versions of HETLIOZ
®
be a date not earlier than the expiration of the ’829 Patent. In April 2019, Teva answered the Company’s complaint, in which Teva included a counterclaim for a declaration that the ’829 Patent is invalid. The Company’s response to Teva’s counterclaim is due May 3, 2019.
Other Matters
. In April 2018, the Company submitted a protocol amendment to the FDA, proposing a 52-week open-label extension (OLE) period for patients who had completed the tradipitant Phase II clinical study (2301) in gastroparesis. In May 2018, based on feedback from the FDA, the Company amended the protocol limiting the duration of treatment in the 2301 study to a total of three months, while continuing to seek further dialogue with the FDA on extending the study duration to 52-weeks. As a part of this negotiation process, in September 2018, the Company submitted a new follow-on 52-week OLE protocol to the FDA (2302) for patients who had completed the 2301 study. While waiting for further feedback, no patients were ever enrolled in any study beyond 12 weeks. On December 19, 2018, the FDA imposed a partial clinical hold (PCH) on the two proposed studies, stating that the Company is required first to conduct additional chronic toxicity studies in canines, monkeys or minipigs before allowing patients access in any clinical protocol beyond 12 weeks. The original PCH was not based on any safety or efficacy data related to tradipitant. Rather, the FDA informed the Company that these additional toxicity studies are required by a guidance document. On February 5, 2019, the Company filed a lawsuit against the FDA in the United States District Court for the District of Columbia (DC District Court), challenging the FDA’s legal authority to issue the PCH, and seeking an order to set it aside. On February 14, 2019, the FDA filed a Motion for Voluntary Remand to the Agency and for a Stay of the Case. On March 14, 2019, the DC District Court granted the FDA’s request for voluntary remand and returned the matter to the FDA for further consideration. On April 26, 2019, the FDA provided its remand response, in which it indicated that, upon review of scientific literature and tradipitant data, it believes that a partial clinical hold continues to be appropriate until Vanda has adequate safety data from a 9-month non-rodent toxicity study. After reviewing the FDA’s remand response, the Company continues to believe that additional chronic toxicity studies are unjustified, and that the Company has provided the FDA with sufficient information regarding the safety of tradipitant to justify the continued study of tradipitant in patients beyond 12 weeks, in accordance with applicable law and FDA regulations. On April 29, 2019, the Company and the FDA filed a Joint Motion for Extension of Time to Propose a Scheduling Order for this matter. On April 30, 2019, the DC District Court granted the motion, thereby extending the deadline until May 3, 2019 for the FDA and the Company to file proposals regarding a scheduling order. The Company intends to continue vigorously pursuing its interests in the matter.
In February 2019, a qui tam action filed against the Company was unsealed by order of the DC District Court. The qui tam action, United States ex rel. Richard Gardner v. Vanda Pharmaceuticals Inc., which was filed under seal in March 2017, was brought by a former Company employee on behalf of the U.S., 28 states and the District of Columbia (collectively, the Plaintiff States) and the policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the Federal False Claims Act and related state laws. The complaint alleges that the Company violated these laws through the promotion and marketing of its products Fanapt
®
and HETLIOZ
®
. The complaint seeks, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs.
By virtue of the court having unsealed the case, it learned that in January 2019, the U.S., as well as the Plaintiff States, filed notice of their election not to intervene in the qui tam action at this time. The U.S.’ and the Plaintiff States’ election not to intervene does not prevent the plaintiff/relator from litigating this action and the U.S. and the Plaintiff States may later seek to intervene in the action. The deadline for the Company to be served with the qui tam complaint was May 1, 2019, and the Company has not been served.
In February 2019, a securities class action,
Gordon v. Vanda Pharmaceuticals Inc.
, Case No. 1:19-cv-01108-ARR-LB, was filed in the U.S. District Court for the Eastern District of New York naming the Company and certain of its officers as defendants. The complaint, filed on behalf of a purported stockholder of the Company, asserts claims on behalf of a putative class of all persons who purchased the Company’s publicly traded securities between November 4, 2015 through February 11, 2019, for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint alleges that the defendants made false and misleading statements and/or omissions regarding Fanapt
®
and HETLIOZ
®
between November 3, 2015 and February 11, 2019. The Company believes that its has meritorious defenses and intends to vigorously defend this lawsuit. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, this lawsuit is subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient. The Company has not yet responded to the complaint.