~~For reasons outside of our control, including those mentioned above, sales of Fanapt~~^® ~~may not meet our or financial or industry analysts’ expectations. Any significant negative developments relating to Fanapt~~^®, such as the loss of patent protection, safety or efficacy issues, the introduction or greater acceptance of competing products or adverse regulatory or legislative developments, will have an adverse effect on our financial condition and results of operations.

~~As a company, we have minimal experience selling, marketing or distributing products, which may make commercializing our products difficult.~~

~~At present, we as a company have minimal marketing experience. Therefore, in order for us to successfully commercialize HETLIOZ~~^®~~, Fanapt~~^® or our other products, we must either acquire or continue to internally develop sales, marketing and distribution capabilities, or enter into collaborations with partners to perform these services for us. We may, in some instances, rely significantly on sales, marketing and distribution arrangements with our collaborative partners and other third parties.

~~For the commercialization of HETLIOZ~~^®~~, Fanapt~~^® or our other products, we may not be able to establish additional sales, marketing and distribution capabilities or partnerships on acceptable terms or at all. In regard to our current foreign partners and any additional distribution arrangements or other agreements we may enter into, our success will be materially dependent upon the performance of our partners. Factors that may inhibit our efforts to commercialize our products without partners or licensees include:

The cost of growing and maintaining a sales, marketing and distribution organization may exceed its cost effectiveness. If we fail to continue to develop sales, marketing and distribution capabilities, if sales efforts are not effective or if costs of developing sales, marketing and distribution capabilities exceed their cost effectiveness, our business, results of operations and financial condition could be materially adversely affected.

~~If we or our partners become subject to any of these foregoing items, our business, results of operations and financial condition could be materially adversely affected.~~

Failure to comply with government regulations regarding the sale and marketing of our products could harm our business.

~~Our and our partners’ activities, including the sale and marketing of our products,~~

The referendum, and the likely withdrawal of the U.K. from the E.U. it triggers, has caused and, along with events that could occur in the future as a consequence of the U.K.’s withdrawal, including the possible breakup of the U.K., may continue to ~~extensive government regulation~~cause significant volatility in global financial markets, including in global currency and ~~oversight. As~~debt markets. This volatility could cause a ~~result, we may become subject to governmental actions~~slowdown in economic activity in the U.K., Europe or globally, which could ~~materially and~~ adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements between the U.K. and other countries, including the U.S., and by the possible imposition of trade or other regulatory barriers in the U.K., especially if the U.K. withdraws from the E.U. These possible negative impacts, and others resulting from the U.K.’s actual or threatened withdrawal from the E.U., may adversely affect our operating results ~~of operations~~ and ~~financial condition, including:~~

new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to patent protection and enforcement, health care availability, method of delivery and payment for health care products and services orgrowth prospects as well as the manner in which we conduct our business operations ~~generally;~~

in Europe.

U.S. federal income tax reform could adversely affect us.

In December 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (TCJA), was signed into law, significantly reforming the Internal Revenue Code of 1986, as amended (IRC). The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits.

We completed our accounting analysis of the impact of the TCJA in the ~~FDA~~fourth quarter of 2018. However, we continue to examine the impact the TCJA may have on our business. The TCJA is a far-reaching and ~~foreign regulatory approval processes~~complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impacts on different categories of taxpayers and industries. The long-term impact of the TCJA on the overall economy, the industries in which we operate and our business cannot be reliably predicted at this early stage of the new law’s implementation. There can be no assurance that ~~may delay or prevent~~ the ~~approval~~TCJA will not negatively impact our operating results, financial condition, and future business operations. The impact of ~~new products~~the TCJA is based on our management’s current knowledge and ~~result in lost market opportunity;~~

~~new laws, regulations and judicial decisions affecting pricing or marketing; and~~

~~changes~~assumptions, following consultation with our tax advisors. Because of our valuation allowance in the U.S., ongoing tax ~~laws relating~~effects of the TCJA are not expected to materially change our ~~operations.~~

effective tax rate in future periods. The impact of the TCJA on holders of common stock is uncertain and could be materially adverse. This Annual Report does not discuss any such tax legislation or the manner in which it might affect investors in common stock. Investors should consult with their own tax advisors with respect to such legislation and the potential tax consequences of investing in common stock.

New legislation or regulation which could affect our tax burden could be enacted by any governmental authority. We cannot predict the timing or extent of such tax-related developments which could have a negative impact on our financial results. Additionally, we use our best judgment in attempting to quantify and reserve for these tax obligations. However, a challenge by a taxing authority, our ability to utilize tax benefits such as carryforwards or tax credits, or a deviation from other tax-related assumptions may cause actual financial results to deviate from previous estimates.

Future transactions may harm our business or the market price of our stock.

We regularly review potential transactions related to technologies, products or product rights and businesses complementary to our business. These transactions could include:

mergers;

acquisitions;

strategic alliances;

licensing agreements; and

co-promotion and similar agreements.

We may choose to enter into one or more of these transactions at any time, which may cause substantial fluctuations in the market price of our stock. Moreover, depending upon the nature of any transaction, we may experience a charge to earnings, which could also materially adversely affect our results of operations and could harm the market price of our stock.

We may undertake strategic acquisitions in the future, and difficulties integrating such acquisitions could damage our ability to achieve or sustain profitability.

Although we have no experience in acquiring businesses, we may acquire businesses or assets that complement or augment our existing business. If we acquire businesses with promising products or technologies, we may not be able to realize

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the benefit of acquiring such businesses if we are unable to move one or more products through preclinical and/or clinical development to regulatory approval and commercialization. Integrating any newly acquired businesses or technologies could be expensive and time-consuming, resulting in the diversion of resources from our current business. We may not be able to integrate any acquired business successfully. We cannot assure you that, following an acquisition, we will achieve revenues, specific net income or loss levels that justify the acquisition or that the acquisition will result in increased earnings, or reduced losses, for the combined company in any future period. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses, which would result in dilution for stockholders or the incurrence of indebtedness and may not be available on terms which would otherwise be acceptable to us. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully.

Our operating results may fluctuate significantly due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our operating results will continue to be subject to fluctuations. The revenues we generate and our operating results will be affected by numerous factors, including:

product sales;

cost of product sales;

marketing and other expenses;

manufacturing or supply issues;

the timing and amount of royalties or milestone payments;

our addition or termination of development programs;

variations in the level of expenses related to our products or future development programs;

regulatory developments affecting our products or those of our competitors;

our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;

any intellectual property infringement or other lawsuit in which we may become involved; and

the timing and recognition of stock-based compensation expense.

If our operating results fall below the expectations of investors or securities analysts or below any guidance we may provide, the price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We are increasingly dependent on information technology systems, infrastructure and data.

Cybersecurity breaches could expose us to liability, damage our reputation, compromise our confidential information or otherwise adversely affect our business.

We are increasingly dependent upon information technology systems, infrastructure and data. Our computer systems may be vulnerable to service interruption or destruction, malicious intrusion and random attack. Security breaches pose a risk that sensitive data, including intellectual property, trade secrets or personal information may be exposed to unauthorized persons or to the public. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, denial-of service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability. Our key business partners face similar risks, and a security breach of their systems could adversely affect our security posture. While we continue to invest in data protection and information technology, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and operations and/or result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm.

Our internal computer systems, or those of our collaborator, CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of development programs for our product candidates.

Despite the implementation of security measures, our internal computer systems and those of our collaborators, CROs, and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters,

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terrorism, war and telecommunication and electrical failures. Information security risks have significantly increased in recent years in part due to the proliferation of new technologies and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security breaches.

While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our independent drug development programs. For example, the loss of clinical trial data from ongoing or future clinical trials for any of our product candidates could result in delays in regulatory approval efforts and significantly increase costs to recover or reproduce the data. Our information security systems are also subject to laws and regulations requiring that we take measures to protect the privacy and security of certain information we gather and use in our business. For example, HIPAA and its implementing regulations impose, among other requirements, certain regulatory and contractual requirements regarding the privacy and security of personal health information. In addition to HIPAA, numerous other federal and state laws, including, without limitation, state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure and storage of personal information. To the extent that any disruption or security breach were to result in a loss of or damage to data or applications, or inappropriate disclosure of confidential or proprietary information or personal health information, we could incur substantial liability, our reputation would be damaged, and the further development of our product candidates could be delayed.

Risks related to intellectual property and other legal matters

Our rights to develop and commercialize our products are subject in part to the terms and conditions of licenses or sublicenses granted to us by other pharmaceutical companies.

~~HETLIOZ~~^® is

Our rights to our product portfolio are based in part on patents ~~that we have licensed on an exclusive basis~~ and other intellectual property licensed from ~~Bristol-Myers Squibb Company (BMS). BMS holds certain rights with respect to HETLIOZ~~^® ~~in the license agreement. Either party~~third-parties. These third parties may generally terminate the license ~~agreement~~agreements under certain circumstances, including a material breach of the agreement by the other. In the event we terminate our license, or if ~~BMS~~the third-party terminates our license due to our breach, ~~all~~ rights to ~~HETLIOZ~~^® ~~(including any~~the intellectual property ~~we develop with respect to HETLIOZ~~^®~~) will~~ revert ~~or otherwise be licensed~~ back to ~~BMS on an exclusive basis.~~the licensor. Any termination or reversion of our rights to develop or commercialize ~~HETLIOZ~~^®~~, including any reacquisition by BMS of~~ our ~~rights,~~products would have a material adverse effect on our business.

~~Fanapt~~^® is based in part on patents and other intellectual property owned by Sanofi. Titan Pharmaceuticals, Inc. (Titan) holds an exclusive license from Sanofi to the intellectual property owned by Sanofi, and Titan has sublicensed its rights under such license on an exclusive basis to Novartis. We acquired exclusive rights to this and other intellectual property through a further sublicense from Novartis. The sublicense with Novartis was amended and restated in October of 2009 to provide Novartis with exclusive rights to commercialize Fanapt^® ~~in the U.S. and Canada. We retained exclusive rights to Fanapt~~^® ~~outside the U.S. and Canada. We acquired all of Novartis’ rights to Fanapt~~^® ~~in the fourth quarter of 2014 pursuant to an asset transfer agreement and related agreements with Novartis. We may lose our rights to develop and commercialize Fanapt~~^® if we fail to comply with certain requirements in the Titan license agreement regarding our financial condition, or if we fail to comply with certain diligence obligations regarding our development or commercialization activities. Our loss of rights in Fanapt^® ~~would have a material adverse effect on our business, financial condition and results of operations.~~

Tradipitant is based in part on patents that we have licensed on an exclusive basis and other intellectual property licensed from Eli Lilly and Company (Lilly). Lilly may terminate our license if we fail to use our commercially reasonable efforts to develop and commercialize tradipitant or if we materially breach the agreement and fail to cure that breach. In the event that we terminate our license, or if Lilly terminates our license for the reasons stated above, all of our rights to tradipitant (including any intellectual property we develop with respect to tradipitant) will revert back to Lilly, subject to payment by Lilly to us of a royalty on net sales of products that contain tradipitant.

AQW051, to which we acquired rights from Novartis in the fourth quarter of 2014, is based on patents and other intellectual property that we have licensed on an exclusive basis from Novartis. Novartis may terminate our license if we materially breach the agreement, which includes an obligation to use commercially reasonable efforts to develop and commercialize AQW051, and fail to cure that breach. In the event that Novartis terminates our license for the reasons stated above, all of our rights to AQW051 (including any intellectual property we develop with respect to AQW051) will revert back to Novartis without compensation.

If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may not be able to compete effectively in our markets.

Method of treatment patents protect the use of a product for the method specified in the patent claims. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for a use that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our patented methods, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method of treatment patents, such infringement may be difficult to prevent.

Our patents and patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to prevent third parties from developing or designing around these patents. In addition, we generally rely on trade secret protection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our drug development processes that involve proprietary know-how, information and technology that is not covered by patent applications. While we require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the U.S. and abroad. If we are unable to protect or defend the intellectual property related to our technologies, we will not be able to establish or maintain a competitive advantage in our market.

Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable and/or not infringed. Alternatively, our competitors may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits

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alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid and/or unenforceable. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.

We are, have been, and may continue to be, involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful, and third parties may challenge the validity or enforceability of our patents and they may be successful.

Even where laws provide protection or we are able to obtain patents, costly and time-consuming litigation may be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring counterclaims against us, and some of our competitors have substantially greater intellectual property portfolios than we have. To counter infringement or unauthorized use of any patents we may obtain, we may be required to file infringement claims, which can be expensive and time-consuming to litigate. In addition, if we or one of our future collaborators were to initiate legal proceedings against a third party to enforce a patent covering one of our products, current product candidates, or one of our future products, the defendant could counterclaim that the patent is invalid or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace and challenges to validity of patents in certain foreign jurisdictions are common as well. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the U.S. Patent and Trademark Office, or made a materially misleading statement, during prosecution. We may assert the patents in Hatch-Waxman litigation against the party filing the ANDA to keep the competing product off of the market until the patents expire but there is a risk that we will not succeed. The party filing the ANDA may also counterclaim in the litigation that our patents are not valid or unenforceable, and the court may find one or more claims of our patents invalid or unenforceable. If this occurs, a competing generic product could be marketed prior to expiration of our patents listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book,” which would harm our business.

We have been and continue to be involved in number of lawsuits with a variety of generic drug manufacturers who have filed ANDAs relating to certain of our patents. We have been successful in asserting that these third parties have infringed certain of our patents, but we may not be successful in such lawsuits in the future. Please see Part I, Item 3, Legal Proceedings, of this annual report on Form 10-K for additional information.

If we do not obtain protection under the Hatch-Waxman Act and similar foreign legislation to extend our patents and to obtain market exclusivity for our products, our business will be harmed.

The Hatch-Waxman Act provides for an extension of patent term for drugs for a period of up to five years to compensate for time spent in development. ~~Assuming we gain~~The HETLIOZ^® U.S. new chemical entity (NCE) patent (the primary patent covering the product as a new composition of matter) received the full five-year patent term extension ~~for HETLIOZ~~^®,under the Hatch-Waxman Act and so, assuming that we continue to have rights under our license agreement with respect to this product, ~~we would have exclusive rights to~~this patent in the ~~HETLIOZ~~^®U.S. ~~“new chemical entity” patent (the primary patent covering the product as a new composition of matter) until~~expires in December 2022. We also own ~~two~~ HETLIOZ^® U.S. method of treatment patents (directed to the approved method of treatment as described in the HETLIOZ^® label approved by the FDA)~~. These patents~~, which expire normally in ~~2033.~~2033 and 2034, and a drug substance patent which expires in 2035. The Fanapt^® U.S. ~~“new chemical entity”~~NCE patent ~~has~~ received the full five-year patent term extension under the Hatch-Waxman Act and so ~~the term of~~ this patent in the U.S. ~~has been extended until~~expired in November 2016. In November 2013, a patent directed to a method of treating patients with Fanapt^® based on genotype was issued to us by the U.S. Patent and Trademark Office. This patent, which was listed in the ~~FDA’s~~ Orange Book in January 2015, is set to expire in 2027. Please see the risk factor entitled “We have been, and may be, involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful, and third parties may challenge the validity or enforceability of our patents and they may be successful,” and Part I, Item 3, Legal Proceedings, of this annual report on Form 10-K for additional information. See also Note 16, Legal Matters, to the consolidated financial statements included in Part II of this annual report on Form 10-K for

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additional information. Eight additional U.S. patents directed to methods of treating patients with Fanapt^®, which are set to expire between 2025 and 2031, were issued to us in ~~2014 and~~ 2015.

A directive in the ~~European Union~~E.U. provides that companies that receive regulatory approval for a new medicinal product will have a 10-year period of market exclusivity for that product (with the possibility of a further one-year extension), beginning on the date of such European regulatory approval, regardless of when the European ~~new chemical entity~~NCE patent covering such product expires. A generic version of the approved drug may not be marketed or sold in Europe during such market exclusivity period. This directive is of material importance with respect to Fanapt^®, since the European ~~new chemical entity~~NCE patent for Fanapt^® has expired.

Assuming we gain a five-year patent term restoration for tradipitant, and that we continue to have rights under our license agreement with respect to this product, we would have exclusive rights to tradipitant’ s U.S. ~~new chemical entity~~NCE patent until 2029. Assuming we gain a five-year patent term restoration for ~~AQW051,~~VQW-765, and that we continue to have rights under our license agreement with respect to this product, we would have exclusive rights to ~~AQW051’s~~VQW-765’s U.S. ~~new chemical entity~~NCE patent until 2028.

However, there is no assurance that we will receive the extensions of our patents or other exclusive rights available under the Hatch-Waxman Act or similar foreign legislation. If we fail to receive such extensions or exclusive rights, our ~~or our partners’~~ ability to prevent competitors from manufacturing, marketing and selling generic versions of our products will be materially impaired.

We may not be successful in the development of products for our own account.

In addition to our business strategy of acquiring rights to develop and commercialize products, we may develop products for our own account by applying our technologies to off-patent drugs as well as developing our own proprietary molecules. Because we will be funding the development of such programs, there is a risk that we may not be able to continue to fund all such programs to completion or to provide the support necessary to perform the clinical trials, obtain regulatory approvals or market any approved products. We expect the development of products for our own account to consume substantial resources. If we are able to develop commercial products on our own, the risks associated with these programs may be greater than those associated with our programs with collaborative partners.

Litigation or third-party claims of intellectual property infringement could require us to divert resources and may prevent or delay our drug discovery and development efforts.

Our commercial success depends in part on our not infringing the patents and proprietary rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents.

Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to develop and commercialize one or more of our products. Defense of these claims, regardless of their merit, would divert substantial financial and employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain additional licenses from third parties to advance our research or allow commercialization of our products. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to develop and commercialize further one or more of our products.

In addition, in the future we could be required to initiate litigation to enforce our proprietary rights against infringement by third parties. Prosecution of these claims to enforce our rights against others could divert substantial financial and employee resources from our business. If we fail to enforce our proprietary rights against others, our business will be harmed.

As described elsewhere in these risk factors and in Part I, Item 3,Legal Proceedings, of this annual report on Form 10-K, we have initiated lawsuits to enforce our patent rights against ~~Roxane, Inventia, Taro, Apotex and Lupin.~~certain generic pharmaceutical companies.

Risks related to our common stock

Our stock price has been highly volatile and may be volatile in the future, and purchasers of our common stock could incur substantial losses.

The realization of any of the risks described in these risk factors or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock. Between January 1, ~~2015~~2018 and December 31, ~~2015,~~2018, the high and low sale prices of our common stock as reported on The ~~NASDAQ~~Nasdaq Global Market varied between ~~$8.00~~$13.75 and ~~$15.00.~~$33.44. Additionally, market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been very

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volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that were unrelated to the operating performance of any one company.

The following factors, in addition to the other risk factors described in this section, may also have a significant impact on the market price of our common stock:

our level of success in commercializing our products;

our level of success in executing our commercialization strategies;

publicity regarding actual or potential testing or trial results relating to products under development by us or our competitors;

the outcome of regulatory review relating to products under development by us or our competitors;

regulatory developments in the U.S. and foreign countries;

developments concerning any collaboration or other strategic transaction we may undertake;

~~the outcome of pending~~publicity regarding actual or potential litigation ~~or the initiation of new litigation concerning us, our products or our intellectual property;~~

involving us;

announcements of patent issuances or denials, technological innovations or new commercial products by us or our competitors;

~~termination or delay of development or commercialization program(s) by our partners;~~

safety issues with our products or those of our competitors;

~~our or our partners’ ability to successfully commercialize our products;~~

~~our ability to successfully execute our commercialization strategies;~~

announcements of technological innovations or new therapeutic products or methods by us or others;

actual or anticipated variations in our quarterly operating results;

changes in estimates of our financial results or recommendations by securities analysts or failure to meet such financial expectations;

changes in government regulations or policies;

changes in patent legislation or patent decisions or adverse changes to patent law;

additions or departures of key personnel or members of our board of directors;

~~financial guidance or business updates we may provide;~~

~~announcements about our financial results that are not in line with analyst expectations or guidance we provide;~~

the publication of negative research or articles about our company, our business or our products by industry analysts or others;

market rumors or press reports;

publicity regarding actual or potential transactions involving us; and

economic, political and other external factors beyond our control.

We have been and may in the future be subject to litigation, which could harm our stock price, business, results of operations and financial condition.

We have been the subject of litigation in the past and may be subject to litigation in the future. In the past, following periods of volatility in the market price of their stock, many companies, including us, have been the subjects of securities class action litigation. Any such litigation can result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business results of operations and financial condition. As a result of these factors, holders of our common stock might be unable to sell their shares at or above the price they paid for such shares.

If there are substantial sales of our common stock, our stock price could decline.

A small number of institutional investors and private equity funds hold a significant number of shares of our common stock. Sales by these stockholders of a substantial number of shares, or the expectation of such sales, could cause a significant reduction in the market price of our common stock.

In addition to our outstanding common stock, as of December 31, ~~2015~~2018 there were a total of ~~7,275,129~~5,682,618 shares of our common stock that we have registered and that we are obligated to issue upon the exercise of currently outstanding options and settlement of restricted stock unit awards granted under our 2006 and 2016 Equity Incentive ~~Plan.~~Plans. Upon the exercise of these options or settlement of the shares underlying these restricted stock units, as the case may be, in accordance with their respective terms, these shares may be resold freely, subject to restrictions imposed on our affiliates under Rule 144. If

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significant sales of these shares occur in short periods of time, these sales could reduce the market price of our common stock. Any reduction in the trading price of our common stock could impede our ability to raise capital on attractive terms, if at all.

If we fail to maintain the requirements for continued listing on The ~~NASDAQ~~Nasdaq Global Market, our common stock could be delisted from trading, which would adversely affect the liquidity of our common stock and our ability to raise additional capital.

Our common stock is currently listed for quotation on The ~~NASDAQ~~Nasdaq Global Market. We are required to meet specified listing criteria in order to maintain our listing on The ~~NASDAQ~~Nasdaq Global Market. If we fail to satisfy The ~~NASDAQ~~Nasdaq Global Market’s continued listing requirements, our common stock could be delisted from The ~~NASDAQ~~Nasdaq Global Market, in which case we may transfer to The ~~NASDAQ~~Nasdaq Capital Market, which generally has lower financial requirements for initial listing or, if we fail to meet its listing requirements, the over-the-counter bulletin board. Any potential delisting of our common stock from The ~~NASDAQ~~Nasdaq Global Market would make it more difficult for our stockholders to sell our stock in the public market and would likely result in decreased liquidity and increased volatility for our common stock.

If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our Company or fails to regularly publish reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume to decline.

~~You~~

Our common stock may experience future dilution as a result of future equity offerings.

In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per share in previous offerings. We may sell shares or other securities in any other offering at a price per share that is less than the price per share paid by investors in previous offerings, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by investors.

Our business could be negatively affected as a result of the actions of activist stockholders.

Proxy contests have been waged against many companies in the biopharmaceutical industry, including us, over the last several years. If faced with a proxy contest or other type of shareholder activism, we may not be able to respond successfully to the contest or dispute, which would be disruptive to our business. Even if we are successful, our business could be adversely affected by a proxy contest or shareholder dispute involving us ~~or our partners~~ because:

responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting operations and diverting the attention of management and employees;

perceived uncertainties as to future direction may result in the loss of potential acquisitions, collaborations or in-licensing opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and

if individuals are elected to a board of directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our stockholders.

These actions could cause our stock price to experience periods of volatility.

Anti-takeover provisions in our charter and bylaws and under Delaware law, and ~~our~~the adoption of a rights plan, could prevent or delay a change in control of our company.

We are a Delaware corporation and the anti-takeover provisions of Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws

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may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws:

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;

do not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors;

establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

require that directors only be removed from office for cause;

provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;

limit who may call special meetings of stockholders;

prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and

establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

~~Moreover, in September 2008, our~~

Our board of directors previously adopted a rights agreement, ~~that unless renewed expires in September 2018,~~ the provisions of which could ~~result in significant dilution~~have had the effect of ~~the proportionate ownership of a potential acquirer and, accordingly, could discourage, delay~~discouraging, delaying or ~~prevent~~preventing a change in ~~our~~or management or control over us.

~~Prolonged~~ While there is no plan to do so at this time, our board of directors may choose to adopt a new rights plan in the future.

Global economic ~~uncertainties or downturns, as well as unstable market, credit and financial~~ conditions may ~~exacerbate certain risks affecting our business and~~ have ~~serious~~an adverse ~~consequences~~effect on our business.

~~The global~~

Financial instability or a general decline in economic ~~downturn~~conditions in the U.S. and ~~market instability has made the business climate more volatile and more costly. These economic~~other countries where we sell our product could adversely affect our operations. Economic conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements, ~~a lingering~~an economic downturn or significant increase in our expenses could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our stock price and could require us to delay or abandon clinical development plans.

Sales of our products will be dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations. ~~As a result~~In the event of ~~negative trends in the general economy in the U.S. or other jurisdictions in which we may do business,~~economic decline, these

organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the availability or extent of reimbursement could negatively affect our ~~or our partners’~~ product sales and revenue.

In addition, we rely on third parties for several important aspects of our business. For example, we use third parties for sales, distribution, medical affairs and clinical research, and we rely upon several single source providers of raw materials and contract manufacturers for the manufacture of our products. During challenging and uncertain economic times and in tight credit markets, there may be a disruption or delay in the performance of our third party contractors, suppliers or partners. If such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.



ITEM 1B.	UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2.	PROPERTIES

Our headquarters ~~is located in Washington, D.C., consisting~~office consists of ~~approximately 30,260~~a total of 43,462 square feet of office ~~space. Our lease~~space located at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. under operating leases and ~~a subsequent amendment for additional~~subleases that expire between 2026 and 2028 and are subject to renewal options. In addition, we have 2,880 square feet of office space for ~~this facility expire~~our European headquarters in ~~2023~~London under an operating lease that has a lease term ending in 2021 and ~~2027, respectively, each~~is subject to ~~five year~~a renewal ~~options. Management believes~~option, and 1,249 square feet of office space in Berlin under a short-term operating lease. We believe that ~~this facility is~~these facilities are suitable and adequate to meet our anticipated near-term needs. We anticipate that following the expiration of the ~~lease,~~leases, additional or alternative space will be available at commercially reasonable terms.



ITEM 3.	LEGAL PROCEEDINGS

Fanapt^®. In June 2014, we filed suit against Roxane Laboratories, Inc. (Roxane) in the U.S. District Court for the District of ~~Delaware.~~Delaware (Delaware District Court). The suit ~~seeks~~sought an adjudication that Roxane has infringed one or more claims of our U.S. Patent No. 8,586,610 ~~(the~~(‘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), we 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 us, 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 we are 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 we obtain 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 us to respond to West-Ward’s petition; our 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. We submitted a response to that petition on February 12, 2019.

In 2015, we 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 our U.S. Patent No. 9,138,432 (‘432 Patent) by submitting to the FDA an ~~Abbreviated New Drug Application (ANDA)~~ANDA for a generic ~~versions~~version of Fanapt^® ~~oral tablets~~ prior to the expiration of the ‘610 Patent in ~~1 mg, 2 mg, 4 mg, 6 mg, 8 mg, 10 mg~~November 2027 or the ‘432 Patent in September 2025. The Defendants denied infringement and ~~12 mg strengths.~~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. We entered into a confidential stipulation with each of Inventia and Lupin regarding any potential launch of Inventia’s and Lupin's generic ANDA products.

Lupin filed counter claims for declaratory judgment of invalidity and noninfringement of seven of our method of treatment patents that are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) related to Fanapt^® (such seven patents, the Method of Treatment Patents). We have not sued Lupin for infringing the Method of Treatment Patents. In October 2016, we, along with Lupin, filed a Stipulation of Dismissal in the Delaware District Court pursuant to which Lupin’s counterclaims relating to the Method of Treatment Patents were dismissed without prejudice in recognition of an agreement reached between the parties by which we would not assert those patents against Lupin absent certain changes in Lupin’s proposed prescribing information for its iloperidone tablets.

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licenses to manufacture and commercialize a version of Fanapt^® in the U.S. effective November 2027, unless prior to that date we obtain pediatric exclusivity for Fanapt^®, in which case, the license will be effective May 2028. Taro and Apotex each may enter the market earlier under certain limited circumstances. The License Agreements, which are subject to review by the U.S. Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ), provide for a full settlement and release of all claims that are the subject of the respective litigation with Taro and Apotex.

In February 2016, Roxane filed suit against us in the U.S. District Court for the Southern District of Ohio (Ohio District Court). The suit sought a declaratory judgment of invalidity and noninfringement of the Method of Treatment Patents. In December 2016, the Ohio District Court dismissed Roxane’s suit without prejudice for lack of personal jurisdiction.

In February 2016, Roxane filed a Petition for Inter Partes Review (IPR) of the ‘432 Patent with the Patent Trials and Appeals Board (PTAB) of the U.S. Patent and Trademark Office. In August 2016, the PTAB denied the request by Roxane to institute an IPR of the ‘432 Patent. In September 2016, Roxane filed a Petition for Rehearing with the PTAB. In November 2016, the PTAB denied Roxane’s Petition for Rehearing.

HETLIOZ^®. In March 2018, we received a Paragraph IV certification notice letter from Teva Pharmaceuticals USA, Inc. (Teva) notifying us 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-Hour-Sleep-Wake Disorder. In its notice letter, Teva alleges that our Orange Book listed 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), 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. We received similar notice letters in April 2018 from MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (together, MSN) and Apotex.

In April 2018, we filed a patent infringement lawsuit in the Delaware District Court against Teva and in May 2018, we 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 us in the lawsuits includes ~~a request~~requests for a permanent ~~injunction~~injunctions preventing ~~Roxane~~Teva, MSN and Apotex from infringing the asserted claims of the ~~‘610~~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 our application for New Chemical Entity Status 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 our 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, we answered Teva and MSN's counterclaims, denying their allegations.

In October 2018, we received an additional Paragraph IV certification notice letter from Teva concerning our Orange Book listed U.S. Patent No. 10,071,977, which expires in 2035 (the ‘977 Patent). In November 2018, we received a similar additional Paragraph IV certification notice letter from Apotex concerning the ’977 Patent. In December 2018, we 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 us 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 ~~Fanapt~~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 ~~‘610~~’977 Patent. In December 2018, Teva, MSN, and Apotex answered our 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, we answered Teva and MSN’s counterclaims. A trial date for these lawsuits has been set for September 2020.

In February 2019, we received an additional Paragraph IV certification notice letter from Teva concerning our Orange Book listed U.S. Patent No. 10,149,829, which expires in ~~2027.~~2033 (the ’829 Patent). In its notice letter, Teva alleges that the ’829 Patent, which covers methods of using HETLIOZ

~~Pursuant~~^®, is invalid, unenforceable and will not be infringed by Teva’s manufacture, use or sale of the product described in its ANDA.

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Other Matters. In April 2018, we submitted a protocol amendment to the ~~Settlement Agreement,~~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, we ~~assumed Novartis’ patent infringement action~~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, we 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 we are 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 PCH was not based on any safety or efficacy data related to tradipitant. Rather, the FDA informed us that these additional toxicity studies are required by a guidance document. We believe that the FDA does not have legal authority to issue the PCH on the basis of the guidance at issue. We also believe that we have 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 February 5, 2019, we filed a lawsuit against ~~Roxane~~the FDA in the U.S. District Court for the District of ~~Delaware. The suit alleges that Roxane’s filing of~~Columbia (DC District Court), challenging the FDA’s legal authority to issue the PCH, and seeking an ~~ANDA for generic iloperidone with a paragraph IV certification infringes Sanofi’s new chemical entity patent. Roxane is defending on~~order to set it aside. On February 14, 2019, the ~~grounds that the patent claims are invalid or unenforceable or that certain patent claims are not infringed. Roxane also~~FDA filed a ~~motion~~Motion for Voluntary Remand to ~~dismiss on~~ the ~~grounds that the court lacks jurisdiction.~~

~~The two pending cases against Roxane were consolidated by agreement~~Agency and for a Stay of the ~~parties in April 2015 and are scheduled~~Case. We intend to ~~be tried together in a four-day bench trial beginning on February 29, 2016.~~

~~In May 2015, we filed a lawsuit against Inventia Healthcare Pvt. Ltd. (Inventia)~~continue vigorously pursuing our interests in the ~~U.S.~~matter. The PCH and Vanda’s plans for tradipitant clinical development are discussed in greater detail in Part I, Item 1, Business, of this annual report on Form 10-K.

On February 4, 2019, a qui tam action filed against us was unsealed by order of the DC District Court ~~for~~entered on January 31, 2019. The qui tam action, United States ex rel. Richard Gardner v. Vanda Pharmaceuticals Inc., which was filed under seal on March 10, 2017, was brought by one of our former employees on behalf of the U.S., 28 states and the District of ~~Delaware.~~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 ~~suit~~complaint alleges that the Company violated these laws through the promotion and marketing of its products Fanapt^® and HETLIOZ^®. The complaint seeks, ~~an adjudication that Inventia has infringed on one or more claims~~among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs.

We have not been served with the qui tam complaint. By virtue of the ~~‘610 Patent by submitting to~~court having unsealed the ~~FDA an ANDA for a generic version of Fanapt~~^®. The relief requested by us includes a request for a permanent injunction preventing Inventia from infringing the asserted claims of the ‘610 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘610 Patent in 2027. This lawsuit is scheduled to be tried in a four-day bench trial beginning~~case, we learned that on January ~~17, 2017.~~

~~In October 2015, we filed four separate patent infringement lawsuits in~~29, 2019, the United States, ~~District Court for~~as well as the ~~District~~Plaintiff States, filed notice of ~~Delaware (the October 2015 Lawsuits). Two of the October 2015 Lawsuits join the existing litigations against the previous Fanapt~~^® ANDA filers, Roxane and Inventia, described above. The other two October 2015 Lawsuits were filed against new ANDA filers, Taro Pharmaceuticals, U.S.A., Inc./Taro Pharmaceuticals Ltd. (Taro) and Apotex Inc. (Apotex).

The first of the October 2015 Lawsuits, which was filed against Roxane, seeks an adjudication that Roxane has infringed one or more claims of our U.S. Patent No. 9,138,432 (the ‘432 Patent) by submittingtheir election not to ~~the FDA its ANDA for a generic version of Fanapt~~^® prior to the expiration of the ‘432 Patent in September 2025. The relief requested by us includes a request for a permanent injunction preventing Roxane from infringing the asserted claims of the ‘432 Patent by engagingintervene in the ~~manufacture, use, offer~~qui tam action at this time. The U.S.’ and the Plaintiff States’ election not to ~~sell, sale, importation or distribution of generic versions of Fanapt~~^® ~~before~~intervene does not prevent the ~~expiration of~~plaintiff/relator from litigating this action and the ~~‘432 Patent in 2025.~~

~~The second of~~U.S. and the ~~October 2015 Lawsuits, which was filed against Inventia, seeks an adjudication that Inventia has infringed one or more claims of the ‘432 Patent by submitting~~Plaintiff States may later seek to ~~the FDA its ANDA for a generic version of Fanapt~~^® prior to the expiration of the ‘432 Patent in September 2025. The relief requested by us includes a request for a permanent injunction preventing Inventia from infringing the asserted claims of the ‘432 Patent by engagingintervene in the ~~manufacture, use, offer~~action. We intend to ~~sell, sale, importation or distribution of generic versions of Fanapt~~^® ~~before the expiration of the ‘432 Patent in 2025.~~

The third of the October 2015 Lawsuits, which was filed against Taro, seeks an adjudication that Taro has infringed one or more claims of the ‘432 Patent and the ‘610 Patent by submitting to the FDA an ANDA for a generic version of Fanapt^® prior to the expiration of the ‘432 patent in September 2025 and the ‘610 Patent in November 2027. The relief requested by us includes a request for a permanent injunction preventing Taro from infringing the asserted claims of the ‘432 Patent and the ‘610 Patent by engagingvigorously defend ourselves in the ~~manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt~~^® ~~before the expiration of the ‘432 Patent in 2025 and the ‘610 Patent in 2027.~~

The fourth of the October 2015 Lawsuits, which was filed against Apotex and Apotex Corp., seeks an adjudication that Apotex has infringed one or more claims of the ‘432 Patent and the ‘610 Patent by submitting to the FDA an ANDA for a generic version of Fanapt^® prior to the expiration of the ‘432 Patent in September 2025 and the ‘610 Patent in November 2027. The relief requested by us includes a request for a permanent injunction preventing Apotex from infringing the asserted claims of the ‘432 Patent and the ‘610 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘432 Patent in 2025 and the ‘610 Patent in 2027.~~

In November 2015, we filed a patent infringement lawsuit in the United States District Court for the District of Delaware against Lupin Limited and Lupin Pharmaceuticals, Inc. (collectively, Lupin). The suit seeks an adjudication that Lupin has infringed one or more claims of the ‘432 Patent and the ‘610 Patent by submitting to the FDA its ANDA for a generic version of Fanapt^® prior to the expiration of the ‘432 Patent in September 2025 and the ‘610 Patent in November 2027. The relief requested by us in the lawsuit includes a request for a permanent injunction preventing Lupin from infringing the asserted claims of the ‘432 Patent and the ‘610 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘432 Patent in 2025 and the ‘610 Patent in 2027.~~

litigation if served.



ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

PART II



ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on The ~~NASDAQ~~Nasdaq Global Market under the symbol “VNDA.” ~~The following table sets forth, for the periods indicated, the range of high and low sale prices of our common stock as reported on The NASDAQ Global Market:~~

Year Ended December 31, 2015
   High    Low
First quarter
   $ 15.00       $ 8.80
Second quarter
   13.92       8.92
Third quarter
   14.50       10.57
Fourth quarter
   12.28       8.00
Year Ended December 31, 2014
   High    Low
First quarter
   $ 19.25       $ 10.00
Second quarter
   17.69       9.27
Third quarter
   16.48       10.33
Fourth quarter
   15.51       8.34

As of ~~January 31, 2016,~~February 12, 2019, there were 117 holders of record of our common stock. The number of holders of record of our common stock does not reflect the number of beneficial holders whose shares are held by depositors, brokers or other nominees.

~~Dividends~~

We have not paid dividends to our stockholders (other than a dividend of preferred share purchase rights which was declared in September 2008) since our inception and do not plan to pay dividends in the foreseeable future. We currently intend to retain earnings, if any, to finance our growth.

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

The following graph shows the cumulative five-year total return on our common stock relative to the cumulative total returns of the ~~NASDAQ~~Nasdaq Composite Index and the ~~NASDAQ~~Nasdaq Biotechnology Index. An investment of $100 (with reinvestment of dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, ~~2010~~2013 and its relative performance is tracked through December 31, ~~2015.~~2018. The comparisons in the table are required by the ~~SEC~~Securities and Exchange Commission (SEC) and are not intended to forecast or be indicative of possible future performance of our common stock. We have not paid dividends to our stockholders since the inception (other than a dividend of preferred share purchase rights which was declared in September 2008) and do not plan to pay dividends in the foreseeable future. The following graph and related information is being furnished solely to accompany this annual report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed “soliciting materials” or to be “filed” with the SEC (other than as provided in

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Item 201), nor shall such information be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, and irrespective of any general incorporation language in any such filing.

Securities Authorized for Issuance under Equity Incentive Plans

Information regarding securities authorized for issuance under equity incentive plans will be contained in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018, under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference pursuant to General Instruction G (3) to Form 10-K.

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ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statements of operations data for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 and the consolidated balance sheet data as of December 31, ~~2015~~2018 and ~~2014~~2017 are each derived from our audited consolidated financial statements included in this annual report on Form 10-K. The consolidated statements of operations data for the years ended December 31, ~~2012~~2015 and ~~2011,~~2014, and the consolidated balance sheet data as of December 31, ~~2013, 2012~~2016, 2015 and ~~2011~~2014 are each derived from our audited consolidated financial statements not included herein. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

The following data should be read together with our consolidated financial statements and accompanying notes and the section entitledManagement’s Discussion and Analysis of Financial Condition and Results of Operations included in this annual report on Form 10-K.

Year Ended December 31,
(in thousands, except for share and per share
amounts)
2015 2014 (1) 2013 2012 2011
Statements of Operations Data

Total revenues
$ 109,925    $ 50,157    $ 33,879    $ 32,727    $ 31,270
Operating expenses:

Cost of goods sold
23,462    1,583    —    129    —
Research and development
29,145    19,230    28,502    45,764    28,857
Selling, general and administrative
84,531    84,644    25,082    14,517    11,294
Intangible asset amortization
12,972    2,254    1,495    1,495    1,495
Gain on arbitration settlement
—    (77,616 ) —    —    —

Total operating expenses
150,110    30,095    55,079    61,905    41,646

Income (loss) from operations
(40,185 ) 20,062    (21,200 ) (29,178 ) (10,376 )
Other income
320    124    145    561    461

Income (loss) before taxes
(39,865 ) 20,186    (21,055 ) (28,617 ) (9,915 )
Tax provision (benefit)
—    —    —    —    (444 )

Net income (loss)
$ (39,865 ) $ 20,186    $ (21,055 ) $ (28,617 ) $ (9,471 )

Net income (loss) per share:

Basic
$ (0.94 ) $ 0.58    $ (0.69 ) $ (1.01 ) $ (0.34 )
Diluted
$ (0.94 ) $ 0.55    $ (0.69 ) $ (1.01 ) $ (0.34 )
Weighted average shares outstanding:

Basic
42,250,254    34,774,163    30,351,353    28,228,409    28,106,831
Diluted
42,250,254    36,686,723    30,351,353    28,228,409    28,106,831

Year Ended December 31,
2015 2014 2013 2012 2011
Balance Sheet Data

Cash and cash equivalents
$ 50,843    $ 60,901    $ 64,764    $ 88,772    $ 87,923
Marketable securities, current
92,337    68,921    65,586    31,631    60,961
Marketable securities, non-current
—    —    —    —    19,012
Working capital
115,230    133,944    102,763    93,705    121,882
Total assets
213,050    171,704    143,349    135,448    182,618
Total liabilities
80,023    10,887    99,225    125,543    149,144
Accumulated deficit
(327,849 ) (287,984 ) (308,170 ) (287,115 ) (258,498 )
Total stockholders’ equity
133,027    160,817    44,124    9,905    33,474



	Year Ended December 31,
(in thousands, except for share and per share amounts)	2018 (1)		2017 (1)			2016 (1)			2015 (1)			2014 (1)(2)
Statements of Operations Data
Total revenues	$	193,118	$	165,083		$	146,017		$	109,925		$	50,157
Operating expenses:
Cost of goods sold excluding amortization	20,508		17,848			24,712			23,462			1,583
Research and development	43,594		38,547			29,156			29,145			19,230
Selling, general and administrative	105,751		123,841			99,787			84,531			84,644
Intangible asset amortization	1,527		1,750			10,933			12,972			2,254
Gain on arbitration settlement	—		—			—			—			(77,616		)
Total operating expenses	171,380		181,986			164,588			150,110			30,095
Income (loss) from operations	21,738		(16,903		)	(18,571		)	(40,185		)	20,062
Other income	3,608		1,472			665			320			124
Income (loss) before income taxes	25,346		(15,431		)	(17,906		)	(39,865		)	20,186
Provision for income taxes	138		136			104			—			—
Net income (loss)	$	25,208	$	(15,567	)	$	(18,010	)	$	(39,865	)	$	20,186
Net income (loss) per share:
Basic	$	0.50	$	(0.35	)	$	(0.41	)	$	(0.94	)	$	0.58
Diluted	$	0.48	$	(0.35	)	$	(0.41	)	$	(0.94	)	$	0.55
Weighted average shares outstanding:
Basic	50,859,947		44,735,146			43,449,441			42,250,254			34,774,163
Diluted	53,045,257		44,735,146			43,449,441			42,250,254			36,686,723



	December 31,
	2018			2017			2016			2015			2014
Balance Sheet Data
Cash and cash equivalents	$	61,005		$	33,627		$	40,426		$	50,843		$	60,901
Marketable securities	196,355			109,786			100,914			92,337			68,921
Working capital	246,117			99,494			123,855			115,230			133,944
Total assets	332,130			205,425			210,374			213,050			171,704
Total liabilities	56,708			74,038			79,044			80,023			10,887
Accumulated deficit	(336,218		)	(361,426		)	(345,859		)	(327,849		)	(287,984		)
Total stockholders’ equity	275,422			131,387			131,330			133,027			160,817


(1)	We adopted Accounting Standards Codification (ASC) Subtopic 606 Revenue from Contracts with Customers (ASC 606), effective January 1, 2018, using the modified retrospective method to those contracts which were not completed as of January 1, 2018. Results for the years ended December 31, 2017, 2016, 2015 and 2014 are accounted for in accordance with ASC 605.

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(2)	Net income for the year ended December 31, 2014 ~~included~~includes a gain on arbitration settlement of $77.6 million, or $2.23 and $2.12 per basic and diluted share, respectively.

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with Selected Consolidated Financial Data and our consolidated financial statements and related notes appearing in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K include historical information and other information with respect to our plans and strategy for our business and contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the “Risk Factors” section of this report and elsewhere in this annual report on Form 10-K.

Overview

Vanda Pharmaceuticals Inc. (we, our or Vanda) is a global biopharmaceutical company focused on the development and commercialization of ~~novel~~innovative therapies ~~addressing~~to address high unmet medical ~~needs.~~needs and improve the lives of patients. We commenced operations in 2003 and our product portfolio includes:


•		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. ~~This authorization is valid in the 28 countries that are members of the European Union, as well as European Economic Area members Iceland, Liechtenstein and Norway. We are preparing to launch~~ 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 and~~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 ~~being marketed~~approved by the FDA in May 2009 and ~~sold~~launched commercially in the U.S. by Novartis Pharma AG (Novartis) ~~until December 31, 2014. On December 31, 2014,~~in January 2010. Novartis transferred all of the U.S. and Canadian commercial rights to the Fanapt^® franchise to ~~us. See Note 3,~~~~Settlement Agreement with Novartis,~~~~to the consolidated financial statements included in Part II of in this annual report~~us on ~~Form 10-K for additional information. In September 2015, the FDA accepted for review a supplemental New Drug Application (sNDA) for Fanapt~~^® ~~for the maintenance treatment of schizophrenia in adults. In~~ December ~~2015, we refiled with the European Medicines Agency (EMA) a Marketing Authorization Application (MAA) for Fanaptum~~^® ~~oral.~~31, 2014. Additionally, our distribution partners launched Fanapt^® in Israel ~~and Mexico~~ 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.~~

dermatitis and the treatment of gastroparesis. An assessment of new tradipitant clinical opportunities including the treatment of motion sickness is ongoing.

~~Trichostatin A,~~

VTR-297, a small molecule histone deacetylase (HDAC) ~~inhibitor.~~

inhibitor presently in clinical development for the treatment of hematologic malignancies.

~~AQW051,~~

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.

Operational Highlights

Tradipitant - Clinical Development

In December 2018, we announced positive results from a Phase II clinical study (2301) of tradipitant in gastroparesis. Gastroparesis patients treated with tradipitant demonstrated significant improvement in nausea and most of the core gastroparesis symptoms.

We expect to meet with the FDA to further define and confirm the path towards approval of tradipitant in the treatment of patients with gastroparesis, including the planned initiation of a Phase III clinical study in the second quarter of 2019.

Enrollment in the Phase III clinical study (EPIONE) of tradipitant in atopic dermatitis is ongoing. Results are expected in the first half of 2020. A second Phase III clinical study is expected to begin in the first quarter of 2020.

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In January 2019, we initiated a Phase II clinical study of tradipitant in motion sickness. Study results are expected in the second quarter of 2019.

HETLIOZ^® ~~(tasimelteon)~~


•		In December 2018, we announced positive results from a clinical study of HETLIOZ^® ~~net product sales grew~~ in SMS. SMS patients treated with HETLIOZ^® demonstrated significant improvement in overall sleep quality and overall total nighttime sleep duration.

•

We expect to ~~$15.1 million~~meet with the FDA in the ~~fourth~~second quarter of ~~2015,~~2019 to confirm the regulatory path forward for HETLIOZ^® in the treatment of patients with SMS and expects to file a ~~30% increase compared to $11.7 million~~supplemental New Drug Application (sNDA) in the third quarter of ~~2015 and a 152% increase compared to $6.0 million reported in the fourth quarter of 2014.~~2019.


•		In December 2018, we announced that the FDA had accepted the HETLIOZ^® ~~net product sales were $44.3 million~~ sNDA for the ~~full year 2015,~~treatment of jet lag disorder with a ~~246% increase compared to $12.8 million reported for the full year 2014.~~Prescription Drug User Fee Act target action date of August 16, 2019.

During the fourth quarter of 2015, we initiated an open label interventional study of tasimelteon for the treatment of SMS. A placebo controlled, Phase III study is planned to begin in the second half of 2016.

~~During the fourth quarter of 2015, we completed an observational study of Jet Lag Disorder. A placebo controlled, Phase III study is planned to begin in the second half of 2016.~~

~~Fanapt~~^® ~~(iloperidone)~~


•		~~Fanapt~~^® ~~net product sales were $16.7 million for the fourth quarter of 2015, compared to $16.7 million~~We plan in the third quarter of ~~2015.~~2019 to initiate a Phase II clinical study of HETLIOZ

•

~~Fanapt~~^® ~~net product sales were $65.6 million~~ in delayed sleep phase disorder (DSPD) in patients who have a mutation in the CRY1 gene which is believed to be causative in a subset of patients with the disorder.

Fanapt^®


•	Enrollment is ongoing in a pharmacokinetic study for the ~~full year 2015, compared to $65.0 million in 2014, as reported by Novartis.~~LAI formulation of Fanapt

•

~~In December 2015, the MAA for oral Fanaptum~~^® ~~tablets was accepted for evaluation by~~. A randomized clinical study of the ~~EMA for the treatment of~~LAI formulation in schizophrenia is planned to begin in ~~adults.~~2019.


•		~~The FDA review~~A randomized study of ~~the sNDA for~~ Fanapt^® ~~for the maintenance treatment of schizophrenia~~ in ~~adults~~bipolar disorder is ~~ongoing. The FDA has set a PDUFA goal date~~planned to begin in ~~May 2016.~~2019.

VTR-297

Enrollment is ongoing in a Phase I clinical study (1101) of VTR-297 in hematologic malignancies.

Tradipitant - Partial Clinical Hold and FDA Dispute

In April 2018, we 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, we 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, we 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 we are 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 PCH was not based on any safety or efficacy data related to tradipitant. Rather, the FDA informed us that these additional toxicity studies are required by a guidance document.

On February 5, 2019, we filed a lawsuit against the FDA in the United States District Court for the District of Columbia, challenging the FDA’s legal authority to issue the PCH, and seeking an order to set it aside (see Part I, Item 3, Legal Proceedings of this annual report on Form 10-K for additional information).

We do not expect the PCH to have any material impact on our ongoing clinical studies in atopic dermatitis and motion sickness or the planned Phase III study in gastroparesis. At present, the PCH has not had any impact on the potential timing of an NDA filing or approval for these indications. We will continually reassess this situation as events unfold.

Since we began operations in March 2003, we have devoted substantially all of our resources to the in-licensing, clinical development and commercialization of our products. Our ability to generate meaningful product sales and achieve profitability largely depends on our ~~ability to successfully commercialize~~level of success in commercializing HETLIOZ^® and Fanapt^® in the U.S. and Europe, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks which are detailed inRisk Factors reported in Item 1A of Part I of this annual report on Form 10-K.

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As described in Part I, Item 3,Legal Proceedings, of this annual report on Form 10-K, we have initiated lawsuits to enforce our patent rights against ~~Roxane Laboratories, Inc., Inventia Healthcare Pvt. Ltd., Taro Pharmaceuticals, U.S.A., Inc./Taro Pharmaceuticals Ltd., Apotex Inc. and Lupin Limited and Lupin Pharmaceuticals, Inc.~~certain generic pharmaceutical companies.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements for the year ended December 31, ~~2015~~2018 included in this annual report on Form 10-K. However, we believe that the following accounting policies are important to understanding and evaluating our reported financial results, and we have accordingly included them in this discussion.

Inventory. Inventory, which is recorded at the lower of cost or ~~market,~~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. We capitalize inventory costs associated with our products upon regulatory approval when, based on management’s 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~~not expected to be sold within 12 months following the balance sheet date are classified as ~~lower of cost or market, net realizable value, obsolescence or expiry.~~non-current.

Net Product ~~Sales.~~Sales. Our net product sales consist of sales of HETLIOZ^® and sales of Fanapt^®. ~~We apply the revenue recognition guidance in~~In accordance with ~~Financial Accounting Standards Board~~ Accounting Standards Codification (ASC) Subtopic ~~605-15,~~ 606 Revenue ~~Recognition—Products~~.from Contracts with Customers (ASC 606), which we adopted January 1, 2018, we account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue ~~from~~when control of the product ~~sales when there~~ is ~~persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed~~transferred to the customer in an amount that reflects the ~~price~~consideration we expect to be entitled to in exchange for those product sales, which is ~~fixed or determinable, collectability is reasonably assured~~typically once the product physically arrives at the customer. Sales, value add, and ~~we have no further performance obligations.~~usage-based taxes are excluded from revenues.

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. We invoice and record revenue when ~~our~~ customers, specialty pharmacies and wholesalers, receive product from the third-party logistics ~~warehouse.~~warehouse which is the point at which control is transferred to the customer. Revenues and accounts receivable are concentrated with these customers.

~~We have entered into distribution agreements with Probiomed S.A. de C.V. (Probiomed) for~~ Outside the ~~commercialization of Fanapt~~U.S., we commercially launched HETLIOZ^® in ~~Mexico and~~Germany in August 2016. We have also entered into a distribution agreement with Megapharm Ltd. for the commercialization of Fanapt^® in Israel.

~~Product Sales Discounts and Allowances.~~ ~~Product~~

The transaction price is determined based upon the consideration to which we will be entitled in exchange for transferring product to the customer. Our product sales are recorded net of applicable discounts, rebates, chargebacks, ~~rebates,~~service fees, co-pay assistance ~~service fees~~ and product returns that are applicable for various government and commercial payors. We estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method and update our estimate at each reporting date. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Reserves ~~established~~ for variable consideration for rebates, chargebacks and co-pay assistance are based upon the insurance benefits of the end customer, which are estimated using historical activity and, where available, actual and pending prescriptions for which we have validated the insurance benefits. Reserves for variable consideration are classified as product revenue allowances on the consolidated balance sheets, with the exception of prompt-pay discounts ~~and returns~~which are classified as reductions of accounts ~~receivable if~~receivable. The reserve for product returns for products that may not be returned for a period of greater than one year from the ~~amount~~balance sheet date is ~~payable~~classified other non-current liabilities on the consolidated balance sheets. Uncertainties related to ~~direct customers,~~variable consideration are generally resolved in the quarter subsequent to period end, with the exception of ~~service fees. Service fees~~product returns which are ~~classified as a liability. Reserves established for chargebacks, rebates or co-pay assistance are classified as a liability if~~resolved during the ~~amount is payable to a party other than customers.~~product expiry period specified in the customer contract. We currently record sales allowances for the following:

Prompt-pay:

Specialty pharmacies and wholesalers are offered discounts for prompt payment. We expect that the specialty pharmacies and wholesalers will earn prompt payment discounts and, therefore, deduct the full amount of these discounts from total product sales when revenues are recognized.

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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 patient utilization. Estimates for the expected utilization of rebates are based on historical activity and, where available, actual and pending prescriptions for which we have 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 quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future invoicing varies from estimates, we may need to adjust accruals, which would affect net revenue in the period of adjustment.

Chargebacks:Chargebacks are discounts that occur when contracted indirect customers purchase directly from specialty pharmacies and wholesalers. Contracted indirect 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 we have validated the insurance benefits.~~

Service Fees: We receive sales order management, data and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter activity. If actual future funding variesdistribution services from ~~estimates, we may need to adjust accruals, which would affect net sales in the period of adjustment.~~

~~Service Fees:~~ ~~We also incur specialty pharmacy fees and wholesaler for services and their data.~~certain customers. These fees are based on contracted terms and are known amounts. We accrue 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~~is a payment for a distinct good or service from the ~~consideration and it can reasonably estimate~~customer in which case the fair value of ~~the benefit received. In which case, service fees~~those distinct goods or services 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 our 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 we have validated the insurance benefits.~~

~~Prompt-pay:~~ Specialty pharmacies and wholesalers are offered discounts for prompt payment. We expect that the specialty pharmacies and wholesalers will earn prompt payment discounts and, therefore, deduct the full amount of these discounts from total product sales when revenues are recognized.

Product Returns: Consistent with industry practice, we generally offer direct customers a limited right to return as defined within our returns policy. We consider 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. We do not expect returned goods to be resalable. There was no right of return asset as of December 31, 2018 or 2017.

The following table summarizes sales discounts and allowance activity as of and for the years ended December 31, ~~2015~~2018, 2017 and ~~2014.~~

(in thousands)
   Rebates &
Chargebacks    Discounts,
Returns
and Other    Total
Balance at December 31, 2013
   $ —       $ —       $ —
Provision related to current period sales
   419       720       1,139
Adjustments for prior period sales
   —       —       —
Credits/payments made
   (51 )    (452 )    (503 )






Balance at December 31, 2014
   368       268       636
Provision related to current period sales
   57,424       17,940       75,364
Adjustments for prior period sales
   (114 )    (25 )    (139 )
Credits/payments made
   (24,255 )    (14,626 )    (38,881 )






Balance at December 31, 2015
   $ 33,423       $ 3,557       $ 36,980

2016:



(in thousands)	Rebates & Chargebacks			Discounts, Returns and Other			Total
Balances at December 31, 2015	$	33,423		$	3,557		$	36,980
Provision related to current period sales	56,133			19,451			75,584
Adjustments for prior period sales	(1,842		)	790			(1,052		)
Credits/payments made	(56,512		)	(17,340		)	(73,852		)
Balances at December 31, 2016	31,202			6,458			37,660
Provision related to current period sales	53,406			23,751			77,157
Adjustments for prior period sales	(3,883		)	1,362			(2,521		)
Credits/payments made	(60,496		)	(24,214		)	(84,710		)
Balances at December 31, 2017	20,229			7,357			27,586
Provision related to current period sales	59,317			23,796			83,113
Adjustments for prior period sales	811			370			1,181
Credits/payments made	(58,223		)	(21,823		)	(80,046		)
Balances at December 31, 2018	$	22,134		$	9,700		$	31,834

The provision ~~of $57.4 million~~ for rebates and chargebacks of $59.3 million and $53.4 million for the ~~year~~years ended December 31, ~~2015~~2018 and 2017, respectively, primarily represents Medicaid rebates ~~and contracted rebate programs~~ applicable to sales of Fanapt^® and HETLIOZ^®. The provision for

Table of ~~$17.9 million for~~ Contents

discounts, returns and other of $23.8 million for each of the ~~year~~years ended December 31, ~~2015~~2018 and 2017, primarily represents wholesaler distribution fees applicable to sales of Fanapt^® and, to a lesser extent, estimated product returns of Fanapt^®, as well as co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ^® and Fanapt^®.

~~License revenue.~~ Our license revenues in 2014 and prior years were derived from the amended and restated sublicense agreement with Novartis and include an upfront payment and future milestone and royalty payments. Pursuant to the amended and restated sublicense agreement, Novartis had the right to commercialize and develop Fanapt^® in the U.S. and Canada. Under the amended and restated sublicense agreement, we received an upfront payment of $200.0 million. Revenue related to the upfront payment was recognized ratably from the date the amended and restated sublicense agreement became effective (November 2009) through the expected duration of the Novartis commercialization of Fanapt^® ~~in the U.S. which was estimated to be through the expiry of the Fanapt~~^® composition of patent, including a granted Hatch-Waxman extension (November 2016). In connection with the Settlement Agreement, we recognized the remaining deferred revenue as of December 31, 2014 as part of the gain on arbitration settlement. See Note 3,~~Settlement Agreement with Novartis,~~~~to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information.~~

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. We use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatility rates are based on the historical volatility of our 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. We have not paid dividends to our stockholders since our inception (other than a dividend of preferred share purchase rights which was declared in September 2008) and do not plan to pay dividends in the foreseeable future. ~~Stock-based~~As stock-based compensation expense ~~is also~~

affected by the expected forfeiture rate for the respective option grants. If our estimates of the fair value of these equity instruments or expected forfeitures are too high or too low, it would have the effect of overstating or understating expenses.

~~Stock-based compensation expense related to stock-based awards for the years ended December 31, 2015, 2014 and 2013, was included~~recognized in the ~~following:~~

   Year Ended December 31,
(in thousands)
   2015    2014    2013
Research and development
   $ 2,269       $ 1,933       $ 2,166
Selling, general and administrative
   5,692       3,945       3,238






   $ 7,961       $ 5,878       $ 5,404

~~Stock-based compensation expense increased by $2.1 million, or 36%,~~consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the ~~year ended December 31, 2015 to $8.0 million compared to $5.9 million for the year ended December 31, 2014. The increase~~time of grant and revised, if necessary, in expense was primarily the result of an increase in the number of employees during 2015 due to the hiring of new members of the executive management team, the field-based sales team and the medical affairs team.

subsequent periods if actual forfeitures differ from those estimates.

Research and development ~~expenses~~expenses.

Research and development expenses consist primarily of fees for services provided by third parties in connection with the clinical trials, costs of contract manufacturing services for clinical trial use, milestone payments made under licensing agreements prior to regulatory approval, costs of materials used in clinical trials and research and development, costs for regulatory consultants and filings, depreciation of capital resources used to develop products, related facilities costs, and salaries, other employee-related costs and stock-based compensation for research and development personnel. We expense research and development costs as they are incurred for products in the development stage, including manufacturing costs and milestone payments made under license agreements prior to FDA approval. Upon and subsequent to FDA approval, manufacturing and milestone payments made under license agreements are capitalized. Milestone payments are accrued when it is deemed probable that the milestone event will be achieved. Costs related to the acquisition of intellectual property are expensed as incurred if the underlying technology is developed in connection with our research and development efforts and has no alternative future use.

Clinical trials are inherently complex, often involve multiple service providers, and can include payments made to investigator physicians at study sites. Because billing for services often lags delivery of service by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. Our assessments include, but are not limited to: (i) an evaluation by the project manager of the work that has been completed during the period, (ii) measurement of progress prepared internally and/or provided by the third-party service provider, (iii) analyses of data that justify the progress, and (iv) management’s judgment. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimates the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high.

Selling, general and administrative ~~expenses~~expenses.

Selling, general and administrative expenses consist primarily of salaries, other related costs for personnel, including stock-based compensation, related to executive, finance, accounting, information technology, marketing, medical affairs and human resource functions. Other costs include facility costs not otherwise included in research and development expenses and fees for marketing, medical affairs, legal, accounting and other professional services. Selling, general and administrative expenses also include third party expenses incurred to support sales, business development, ~~marketing~~ and other business activities. Additionally, selling, general and administrative expenses included our estimate for the annual Patient Protection and Affordable Care fee.

~~Income taxes.~~ OnIntangible Assets. Our intangible assets consist of capitalized license costs for products approved by the FDA. We amortize our intangible assets on a ~~periodic~~straight-line basis over estimated useful economic life of the related product patents. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we ~~evaluate~~consider important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, a significant adverse change in legal or regulatory factors that could affect the ~~realizability~~value or patent life including our ability to defend and enforce patent claims and other intellectual property rights and significant negative industry or economic trends. When we determine that the carrying value of our ~~deferred tax~~intangible assets ~~and liabilities and will adjust such amounts in light~~may not be recoverable based upon the existence of changing facts and circumstances, including but not limited to future projections of taxable income, the reversal of deferred tax liabilities, tax legislation, rulings by relevant tax authorities and tax planning strategies. Settlement of filing positions that may be challenged by tax authorities could impact our income taxes in the year of resolution.

~~In assessing the realizability of deferred tax assets, we consider whether it is~~one or more ~~likely than not that some portion or all~~ of the ~~deferred tax assets will not be realized. The ultimate realization~~indicators of ~~deferred tax assets is dependent upon~~impairment, we measure any impairment based on the ~~generation~~amount that carrying value exceeds fair value. No impairments have been recognized on our intangible assets.

Table of ~~future taxable income during~~Contents

Income taxes. We assess the ~~period in which those temporary differences becomes deductible or the net operating losses (NOLs) and credit carryforwards can be utilized. When considering the reversal of the~~need for a valuation allowance ~~we consider the level of past and future taxable income, the~~

~~reversal of deferred tax liabilities, the utilization of the carryforwards and other factors. Revisions to the estimated net realizable value of the~~against its deferred tax asset ~~could cause our provision for income taxes to vary significantly from period to period.~~

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. The fact that we have historically generated ~~NOLs~~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, we have recorded a full tax valuation allowance against all net deferred tax assets in the U.S. as of December 31, ~~2015.~~

~~Intangible Assets~~

~~The following is a summary of our intangible assets as of December 31, 2015:~~

      December 31, 2015
(in thousands)
   Estimated
Useful Life
(Years)    Gross
Carrying
Amount    Accumulated
Amortization    Net
Carrying
Amount
HETLIOZ^®
   January 2033    $ 33,000       $ 3,460       $ 29,540
Fanapt^®
   November 2016    27,941       18,729       9,212






      $ 60,941       $ 22,189       $ 38,752

~~In January 2014, we announced that the FDA had approved the NDA for HETLIOZ~~^®. As a result of this approval, we met a milestone under our license agreement with Bristol-Myers Squibb (BMS) that required us 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 life2018 and 2017. A reduction of the ~~U.S. patent for HETLIOZ~~^®~~, which prior to June 2014, we expected to last until December 2022. In June 2014, we received~~valuation allowance, in whole or in part, would result in a ~~notice~~non-cash income tax benefit during the period of reduction. The potential timing and amount of any future valuation allowance ~~from the U.S. Patent and Trademark Office for a patent covering the method of use of HETLIOZ~~^®. The patent expires in January 2033, thereby potentially extending the exclusivity protection in the U.S. beyond the composition of matter patent. As a result of the patent allowance, we extended the estimated useful life of the U.S. patent for HETLIOZ^® ~~from December 2022 to January 2033.~~

~~We are obligated to make a future milestone payment to BMS of $25.0 million in the event that cumulative worldwide sales of HETLIOZ~~^® ~~reach $250.0 million. The likelihood of achieving the milestone and the related milestone obligation was determined~~release has yet to be ~~probable during the year ended December 31, 2015. As~~determined and requires an analysis that is highly dependent upon historical and future projected earnings, among other factors. Any such adjustment could have a ~~result, the future obligation~~material impact our finance position and results of ~~$25.0 million was recorded as a non-current liability as of December 31, 2015 along with an addition of $25.0 million to capitalized intangible assets relating to HETLIOZ~~^®operations.~~. The $25.0 million was determined to be additional consideration for the acquisition of the HETLIOZ~~^® ~~intangible asset, which was created upon FDA approval on January 31, 2014. The actual payment of the $25.0 million will occur once the $250.0 million in cumulative worldwide sales of HETLIOZ~~^® ~~is realized. The $25.0 million is being amortized on a straight-line basis over the remaining life of the U.S. patent for HETLIOZ~~^®~~, which is expected to be January 2033. Amortization of intangible assets relating to HETLIOZ~~^® amounted to $2.9 million for the year ended December 31, 2015 and includes a catch-up adjustment of $1.2 million to retroactively record cumulative amortization from January 31, 2014 to December 31, 2014 for the milestone obligation of $25.0 million. In future periods, we expect annual amortization of capitalized intangible asset costs relating to HETLIOZ^® ~~will amount to $1.7 million until the expiration of the patent in 2033.~~

~~In 2009, we announced that the FDA had approved the NDA for Fanapt~~^®. As a result of this approval, we met a milestone under our original sublicense agreement with Novartis that required us to make a license payment of $12.0 million to Novartis. The $12.0 million is being 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 the Settlement Agreement, Novartis transferred all U.S. and Canadian rights in the Fanapt~~^® ~~franchise to us. As a result, we recognized an intangible asset of $15.9 million on December 31, 2014 related to the reacquired rights to Fanapt~~^®~~, which is being amortized on a straight-line basis through November 2016. The useful life estimation for the Fanapt~~^® ~~intangible asset is based on the market participant methodology prescribed~~

~~by ASC 805, and therefore does not reflect the impact of additional Fanapt~~^® ~~patents solely owned by us with varying expiration dates, the latest of which is December 2031. Amortization of intangible assets relating to Fanapt~~^® ~~amounted to $10.1 million for the year ended December 31, 2015. See Note 3,~~~~Settlement Agreement with Novartis,~~~~to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information.~~

The intangible assets are being amortized over their estimated useful economic life using the straight line method. Total amortization expense was $13.0 million, $2.3 million and $1.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

~~The following is a summary of the future intangible asset amortization schedule as of December 31, 2015:~~

(in thousands)
   Total    2016    2017    2018    2019    2020    Thereafter
HETLIOZ^®
   $ 29,540       $ 1,721       $ 1,721       $ 1,721       $ 1,721       $ 1,721       $ 20,935
Fanapt^®
   9,212       9,212       —       —       —       —       —














   $ 38,752       $ 10,933       $ 1,721       $ 1,721       $ 1,721       $ 1,721       $ 20,935

Recent Accounting Pronouncements

See Note 2,Summary of Significant Accounting Policies,to the consolidated financial statements included in Part II of this annual report on Form 10-K for information on recent accounting pronouncements.

Results of Operations

We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to successfully commercialize our products, any possible payments made or received pursuant to license or collaboration agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals. ~~Our limited operating history makes predictions of future operations difficult.~~ Since our inception, we have incurred significant losses resulting in an accumulated deficit of ~~$327.8~~$336.2 million as of December 31, ~~2015.~~2018. Our total stockholders’ equity was ~~$133.0~~$275.4 million as of December 31, ~~2015, and reflects net proceeds of $62.3 million from the public offering of common stock completed in October 2014 and $25.0 million from the issuance of common stock to Novartis in December 2014.~~

2018.

Year ended December 31, ~~2015~~2018 compared to year ended December 31, ~~2014~~2017

~~Revenues.~~Revenues. Total revenues increased by ~~$59.7~~$28.0 million, or ~~119%~~17%, to ~~$109.9~~$193.1 million for the year ended December 31, ~~2015~~2018 compared to ~~$50.2~~$165.1 million for the year ended December 31, ~~2014. During the years ended December 31, 2015 and 2014, revenues consisted of the following:~~2017. Revenues were as follows:

   Year Ended December 31,
(in thousands)
   2015    2014    Change
HETLIOZ^® product sales, net
   $ 44,302       $ 12,802       $ 31,500
Fanapt^® product sales, net
   65,623       107       65,516
Fanapt^® royalty revenue
   —       6,502       (6,502 )
Fanapt^® licensing agreement
   —       30,746       (30,746 )






   $ 109,925       $ 50,157       $ 59,768



	Year Ended December 31,
(in thousands)	2018		2017		Net Change		Percent
HETLIOZ^® product sales, net	$	115,835	$	89,978	$	25,857	29	%
Fanapt^® product sales, net	77,283		75,105		2,178		3	%
	$	193,118	$	165,083	$	28,035	17	%

HETLIOZ^® ~~was commercially launched in the U.S. in April 2014. Pursuant~~ product sales, net increased by $25.9 million, or 29%, to ~~the terms of the Settlement Agreement, Novartis transferred all U.S. and Canadian rights in the Fanapt~~^® ~~franchise to us in December 2014. We began selling Fanapt~~^® ~~commercially in the U.S. in January 2015. Fanapt~~^® ~~royalty revenue for the year ended December 31, 2014 represented amounts due from Novartis based on quarterly U.S. sales of Fanapt~~^® ~~by Novartis, and Fanapt~~^® ~~license revenue for the year ended December 31, 2014 represented amortization of~~

deferred revenue from the $200.0 million up-front license fee received from Novartis. Pursuant to the Settlement Agreement, royalties from Novartis ceased, and the remaining balance of the deferred revenue as of December 31, 2014 related to the up-front license fee was recognized as part of gain on arbitration settlement in the consolidated statement of operations for the year ended December 31, 2014. See Note 3,~~Settlement Agreement with Novartis,~~~~to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information.~~

~~Cost of goods sold.~~ ~~Cost of goods sold was $23.5~~$115.8 million for the year ended December 31, ~~2015,~~2018 compared to ~~$1.6~~$90.0 million for the year ended December 31, ~~2014. HETLIOZ~~2017. The increase to net product sales was attributable to an increase in volume and an increase in price net of deductions.

Fanapt^® product sales, net increased by $2.2 million, or 3%, to $77.3 million for the year ended December 31, 2018 compared to $75.1 million for the year ended December 31, 2017. The increase to net product sales was ~~commercially launched~~attributable to an increase in price net of deductions.

Cost of goods sold. Cost of goods sold increased by $2.7 million, or 15%, to $20.5 million for the year ended December 31, 2018 compared to $17.8 million for the year ended December 31, 2017. Cost of goods sold includes third party manufacturing costs of product sold, third party royalty costs and distribution and other costs. Third party royalty costs were 10% of net sales of HETLIOZ^® in the U.S. ~~in April 2014,~~ and ~~we began selling~~9% of net sales of Fanapt^® ~~commercially~~.

In addition to third party royalty costs, HETLIOZ^® and Fanapt^® cost of goods sold as a percentage of revenue depends upon our cost to manufacture inventory at normalized production levels with our third party manufacturers. We expect that, in the future, total HETLIOZ^® manufacturing costs included in cost of goods sold will continue to be less than 2% of our net HETLIOZ^® product sales. We expect that, in the future, total U.S. Fanapt^® manufacturing costs included in ~~January 2015.~~cost of goods sold will continue to be less than 3% of our net U.S. Fanapt^® product sales.

Research and development expenses. Research and development expenses increased by $5.0 million, or 13%, to $43.6 million for the year ended December 31, 2018 compared to $38.5 million for the year ended December 31, 2017. The increase

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was primarily due to an increase in clinical trial expenses associated with the tradipitant gastroparesis and chronic pruritus in atopic dermatitis programs, preclinical expenses associated with the CFTR programs, as well as clinical manufacturing expenses for our Fanapt LAI program, partially offset by a decrease in expenses associated with the HETLIOZ^® clinical programs and a $2.0 million expense accrued during the year ended December 31, 2017 for a milestone obligation payable to Eli Lilly and Company (Lilly) for tradipitant.

The following table summarizes the costs of our product development initiatives for the year ended December 31, 2018 and 2017.



	Year Ended December 31,
(in thousands)	2018		2017
Direct project costs (1)
HETLIOZ^®	12,709		16,894
Fanapt^®	3,438		2,179
Tradipitant	16,978		11,645
VTR-297	2,190		1,978
CFTR	3,870		1,949
Other	619		425
	39,804		35,070
Indirect project costs (1)
Stock-based compensation	1,290		1,152
Other indirect overhead	2,500		2,325
	3,790		3,477
Total research and development expense	$	43,594	$	38,547

(1)

We record direct costs, including personnel costs and related benefits, on a project-by-project basis. Many of our research and development costs are not attributable to any individual project because we share resources across several development projects. We record indirect costs that support a number of our research and development activities in the aggregate, including stock-based compensation.

We expect to incur significant research and development expenses as we continue to develop our products. In addition, we expect to incur licensing costs in the future that could be substantial, as we continue our efforts to expand our product pipeline.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $18.1 million, or 15%, to $105.8 million for the year ended December 31, 2018 compared to $123.8 million for the year ended December 31, 2017. The decrease was primarily the result of lower spend on Non-24 direct to consumer advertising and sales force costs relating to HETLIOZ^®and Fanapt^®in the U.S.

Intangible asset amortization. Intangible asset amortization was $1.5 million for the year ended December 31, 2018 compared to $1.8 million for the year ended December 31, 2017.

Other income. Other income was $3.6 million for the year ended December 31, 2018 compared to $1.5 million for the year ended December 31, 2017. The increase was primarily the result of an increase in investment income due to an increase in our balance of marketable securities from the proceeds of the public offering of our common stock completed in March 2018 and a higher yield on investments.

Provision for income taxes. The provision for income taxes was $0.1 million for each of the years ended December 31, 2018 and 2017. As a result of the tax valuation allowance against deferred tax assets in the U.S., there was no expense (benefit) for U.S. federal income taxes associated with the income (loss) before income taxes for the years ended December 31, 2018 and 2017. Taxes have been recorded related to certain U.S. state jurisdictions and non-U.S. income for the years ended December 31, 2018 and 2017.

The effective tax rate for the year ended December 31, 2017 included our estimate of the effect of the Tax Cuts and Jobs Act (TCJA). The adjustment that was recorded results in no tax expense as it is fully offset by a change in our valuation

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allowance. In the fourth quarter of 2018 we completed our accounting of the income tax effects of the TCJA. No material measurement period adjustments were recorded in 2018 to adjust estimated effects of the TCJA that were recorded in 2017. Immaterial measurement period adjustments that were recorded resulted in no tax expense as they were fully offset by a change in our valuation allowance.

Year ended December 31, 2017 compared to year ended December 31, 2016

Revenues. Total revenues increased by $19.1 million, or 13%, to $165.1 million for the year ended December 31, 2017 compared to $146.0 million for the year ended December 31, 2016. During the years ended December 31, 2017 and 2016, revenues consisted of the following:



	Year Ended December 31,
(in thousands)	2017		2016		Net Change		Percent
HETLIOZ^® product sales, net	$	89,978	$	71,671	$	18,307	26	%
Fanapt^® product sales, net	75,105		74,346		759		1	%
	$	165,083	$	146,017	$	19,066	13	%

HETLIOZ^® product sales, net increased by $18.3 million, or 26%, to $90.0 million for the year ended December 31, 2017 compared to $71.7 million for the year ended December 31, 2016. The increase to net product sales was attributable to an increase in volume and, to a lesser extent, an increase to price net of deductions.

Fanapt^® product sales, net increased by $0.8 million, or 1%, to $75.1 million for the year ended December 31, 2017 compared to $74.3 million for the year ended December 31, 2016. The increase to net product sales was attributable to an increase in price net of deductions and partially offset by a decrease in volume.

Cost of goods sold. Cost of goods sold was $17.8 million for the year ended December 31, 2017 compared to $24.7 million for the year ended December 31, 2016. Cost of goods sold includes third party manufacturing costs of product sold, third party royalty costs and distribution and other costs. Third party royalty costs are 10% of net ~~U.S.~~ sales of HETLIOZ^® ~~and~~. Third party royalty costs were 23% of net U.S. sales of Fanapt^®. through November 15, 2016 and 9% thereafter. The decrease was primarily the result of the change in the royalty rate on Fanapt

~~HETLIOZ~~^® sales partially offset by an increase in HETLIOZ^® third party royalty costs due to increase in revenue.

In addition to third party royalty costs, HETLIOZ^® and Fanapt^® cost of goods sold as a percentage of ~~HETLIOZ~~^® revenue depends upon our cost to manufacture inventory at normalized production levels with our third party manufacturers. We expect that, in the future, total HETLIOZ^® manufacturing costs included in cost of goods sold will continue to be less than 2% of our net HETLIOZ^® product sales.

~~Fanapt~~^® ~~work-in-process inventory and finished goods inventory acquired from Novartis as part of the acquisition of the Fanapt~~^® business were recorded at fair value. The fair value of the inventory acquired from Novartis represents a higher cost than if new work-in-process inventory and finished goods inventory was manufactured at this time. We expect that, in the future, total U.S. Fanapt^® manufacturing costs included in cost of goods sold will continue to be less than 4% of our net U.S. Fanapt^® product sales.

Research and development expenses. Research and development expenses ~~increased by $9.9~~were $38.5 million ~~or 52%, to $29.1~~and $29.2 million for ~~year~~the years ended December 31, ~~2015 compared to $19.2 million~~2017 and 2016, respectively. Expenses for tradipitant for the year ended December 31, ~~2014. The increase~~2017 include an accrued expense of $2.0 million for a milestone obligation that is ~~primarily the result~~payable to Lilly upon enrollment of the ~~close out~~first subject into a Phase III study for tradipitant. The likelihood of ~~Fanapt~~achieving this milestone was determined to be probable during 2017. As a result, the future obligation of $2.0 million tied to such milestone was recorded as research and development expense. Clinical trial expenses associated with the HETLIOZ^® ~~clinical trial~~ jet lag disorder program and the tradipitant gastroparesis program increased for the year ended December 31, 2017 compared to year ended December 31, 2016. In addition, during the year ended December 31, 2017, expenses ~~transitioned~~include a $1.0 million initial license fee to ~~us as part~~develop and commercialize a portfolio of ~~the Settlement Agreement~~CFTR activators and ~~regulatory expenses related to our sNDA and EMA filings.~~ inhibitors. These increases were partially offset by a decrease in indirect project costs reflecting lower stock-based compensation expense.

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The following table summarizes the costs of our product development initiatives for the ~~years~~year ended December 31, ~~2015~~2017 and ~~2014. Included in this table are the research and development expenses recognized in connection with the clinical development of HETLIOZ~~^®~~, Fanapt~~^®~~, tradipitant and Trichostatin A.~~

   Year Ended December 31,
(in thousands)
       2015            2014
Direct project costs (1)

HETLIOZ^®
   $ 10,444       $ 12,478
Fanapt^®
   8,501       160
Tradipitant
   4,006       2,303
Trichostatin A
   1,681       335




   24,632       15,276




Indirect project costs (1)

Stock-based compensation
   2,269       1,933
Other indirect overhead
   2,244       2,021




   4,513       3,954




Total research & development expense
   $ 29,145       $ 19,230

2016.



	Year Ended December 31,
(in thousands)	2017		2016
Direct project costs (1)
HETLIOZ^®	$	16,894	$	12,658
Fanapt^®	2,179		2,598
Tradipitant	11,645		7,010
VTR-297	1,978		2,218
CFTR	1,949		—
Other	425		—
	35,070		24,484
Indirect project costs (1)
Stock-based compensation	1,152		2,087
Other indirect overhead	2,325		2,585
	3,477		4,672
Total research & development expense	$	38,547	$	29,156

(1)

product pipeline.

Selling, general and administrative expenses. Selling, general and administrative expenses ~~were $84.5~~increased by $24.0 million, or 24%, to $123.8 million for the year ended December 31, ~~2015, relatively unchanged from $84.6~~2017 compared to $99.8 million for the year ended December 31, ~~2014. We incurred costs associated with our Non-24 Disease Awareness campaign and HETLIOZ~~2016. The increase was primarily the result of the Fanapt^® ~~branded advertising campaign during~~ sales force expansion, marketing efforts around Fanapt^® in the ~~year ended December 31, 2014. During~~U.S. and HETLIOZ^® in the ~~year ended December 31, 2015, we continued~~U.S. and Europe and, to ~~incur costs associated with these campaigns but at reduced amounts when compared with the year ended December 31, 2014. The decrease associated with these campaigns was~~a lesser extent, an increase in stock-based compensation expense, partially offset by ~~marketing and sales efforts around both HETLIOZ~~^® ~~and Fanapt~~^®a decrease in ~~the U.S., an increase in the number of employees during the year ended December 31, 2015, as well as increased~~ legal fees associated with ongoing patent litigation. ~~Stock-based compensation expense associated with selling, general and administrative expense increased by~~

Intangible asset amortization. Intangible asset amortization was $1.8 ~~million, or 46%, to $5.7 million, for year ended December 31, 2015 compared to $3.9~~ million for the year ended December 31, 2014. The increase in expense was primarily the result of an increase in the number of employees during 2015 due to the hiring of new members of the executive management team, the field-based sales team and the medical affairs team.

~~Intangible asset amortization.~~ ~~Intangible asset amortization increased by $10.7 million to $13.0 million for year ended December 31, 2015~~2017 compared to ~~$2.3~~$10.9 million for the year ended December 31, ~~2014. The increase reflects additional amortization~~2016. Amortization of ~~$8.3 million~~intangible assets relating to Fanapt^®~~. Pursuant~~ was completed in November 2016 and had amounted to $9.2 million for the ~~terms of the Settlement Agreement, Novartis transferred all U.S. and Canadian rights in~~year ended December 31, 2016. The useful life estimation for the Fanapt^® ~~franchise to us in December 2014 resulting in an increase in capitalized~~ intangible ~~assets~~asset was based on the market participant methodology prescribed by ASC 805, and therefore does not reflect the impact of ~~$15.9 million that is being amortized until November 2016. The increase also reflects~~ additional ~~amortization of $2.4 million relating to HETLIOZ~~Fanapt^®~~. The likelihood~~ patents solely owned by us with varying expiration dates, the latest of ~~achieving a future milestone obligation that becomes payable to BMS when cumulative sales of HETLIOZ~~^® equal $250.0 million was determined to be probable in the first quarter of 2015 resulting in an increase in capitalized intangible assets of $25.0 million and a corresponding increase in accrued non-current liabilities. The additional amortization relating to HETLIOZ^® ~~in 2015 includes a catch-up adjustment of $1.2 million to retroactively record cumulative amortization from February 1, 2014 to~~which is December ~~31, 2014.~~2031. We expect that annual amortization of capitalized intangible asset costs relating to HETLIOZ^® will amount to ~~$1.7~~approximately $1.6 million in future years until the final expiration of the ~~patent~~related product patents in ~~2033.~~2034.

~~Gain on arbitration settlement.~~ ~~Pursuant to the Settlement Agreement with Novartis, we recorded a gain of $77.6~~Provision for income taxes. The provision for income taxes was $0.1 million for each of the ~~year~~years ended December 31, ~~2014. See Note 3,~~~~Settlement Agreement with Novartis,~~ ~~to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information.~~

~~Tax provision (benefit).~~ 2017 and 2016, respectively. The tax provision ~~(benefit)~~for each year is attributable to activities at our foreign subsidiaries and state income taxes. The tax benefit relating to the loss before income taxes for the years ended December 31, ~~2015~~2017 and ~~2014~~2016 in the U.S. was fully offset by a tax valuation allowance resulting from our assessment that it is more likely than not that our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which NOLs and credit carryforwards can be utilized.

~~Year ended December 31, 2014 compared to year ended December 31, 2013~~

~~Revenues.~~ ~~Total revenues increased by $16.3 million, or 48%, to $50.2 million~~

The effective tax rate for the year ended December 31, ~~2014 compared to $33.9 million for the year ended December 31, 2013. During the years ended December 31, 2014 and 2013, revenues consisted~~2017 includes our estimate of the ~~following:~~

   Year Ended December 31,
(in thousands)
   2014    2013    Change
HETLIOZ^® product sales, net
   $ 12,802       $ —       $ 12,802
Fanapt^® product sales, net
   107       —       107
Fanapt^® royalty revenue
   6,502       7,090       (588 )
Fanapt^® licensing agreement
   30,746       26,789       3,957






   $ 50,157       $ 33,879       $ 16,278

~~HETLIOZ~~^® ~~was commercially launched in the U.S. in April 2014. Fanapt~~^® ~~royalty revenues for the years ended December 31, 2014 and 2013 represent amounts due from Novartis based on U.S. sales of Fanapt~~^® ~~by Novartis.~~

~~Fanapt~~^® license revenues for the years ended December 31, 2014 and 2013 represent amortization of deferred revenue from the $200.0 million up-front license fee received from Novartis. The following is a summary of changes in total deferred licensing revenue for the years ended December 31, 2014 and 2013:

   Year Ended December 31,
(in thousands)
           2014                    2013
Balance beginning of year
   $ 90,275       $ 117,064
Licensing revenue recognized
   (30,746 )    (26,789 )
Recognized as part of gain on arbitration settlement
   (59,529 )    —




Balance end of year
   $ —       $ 90,275

~~We entered into an amended and restated sublicense agreement with Novartis in 2009, pursuant to which Novartis had the right to commercialize and develop Fanapt~~^® in the U.S. and Canada. Under the amended and restated sublicense agreement, we received an upfront payment of $200.0 million. Revenue related to the upfront payment was recognized ratably from the date the amended and restated sublicense agreement became effective (November 2009) through the expected lifeeffect of the ~~U.S. patent for Fanapt~~^® ~~(November 2016). During the years ended December 31, 2014 and 2013, we recognized revenue of $30.7 million and $26.8 million, respectively, related to the license agreement.~~

~~In connection with the Settlement Agreement with Novartis, we recognized the remaining deferred revenue balance of $59.5 million as part of the gain on arbitration settlement. See Note 3,~~~~Settlement Agreement with Novartis~~~~, to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information~~

~~Cost of goods sold.~~ Cost of goods sold for the year ended December 31, 2014 was $1.6 million compared to zero for the year ended December 31, 2013. Cost of goods sold includes third party manufacturing costs of product sold, third party royalty costs and distribution and other costs. During the year ended December 31, 2014, we made royalty payments to BMS equal to 10% of net sales of HETLIOZ^®.

Cost of goods sold as a percentage of revenue for the expected sales of inventory capitalized after FDA approval will depend upon our cost to manufacture inventory at normalized production levels with our third party manufacturers. However, we expect that, in the future, total HETLIOZ^® ~~manufacturing cost included in cost of goods sold will be less than 2% of our net HETLIOZ~~^® ~~product sales.~~

~~Research and development expenses.~~ Research and development expenses decreased by $9.3 million, or 33%, to $19.2 million for year ended December 31, 2014 compared to $28.5 million for the year ended December 31, 2013. Lower research and development expenses were primarily due to 2013 costs incurred for the HETLIOZ^® ~~NDA submission to the FDA and completion of Non-24 and Major Depressive Disorder efficacy studies in 2013.~~TCJA. The following table summarizes the costs of our product development initiatives for the years ended December 31, 2014 and 2013. Included in this table are the research and development expenses recognized in connection with the clinical development of HETLIOZ^®~~, tradipitant, Trichostatin A and Fanapt~~^®.

   Year Ended December 31,
(in thousands)
       2014            2013
Direct project costs (1)

HETLIOZ^®
   $ 12,478       $ 22,307
Fanapt^®
   160       493
Tradipitant
   2,303       2,343
Trichostatin A
   335       —




   15,276       25,143




Indirect project costs (1)

Stock-based compensation
   1,933       2,166
Other indirect overhead
   2,021       1,193




   3,954       3,359




Total research & development expense
   $ 19,230       $ 28,502

~~(1)~~

~~Selling, general and administrative expenses.~~ ~~Selling~~, general and administrative expenses increased by $59.5 million, or 237%, to $84.6 million for the year ended December 31, 2014 compared to $25.1 million for the year ended December 31, 2013. The increase is primarily due to the commercial launch of HETLIOZ^® in the U.S. for the treatment of Non-24. Our sales and marketing effort included the addition of marketing programs, field-based sales and national account teams. We incurred cost associated with a HETLIOZ^® branded advertising campaign and our Non-24 Disease Awareness campaign, which included radio and television advertisements broadcast nationwide. In addition, we added a medical affairs team, which were deployed in 2014 to support HETLIOZ^® ~~and Non-24 medical education.~~

~~Gain on arbitration settlement.~~ ~~Pursuant to the Settlement Agreement with Novartis, we recorded a gain of $77.6 million for the year ended December 31, 2014. See Note 3,~~~~Settlement Agreement with Novartis,~~~~to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information.~~

~~Intangible asset amortization.~~ Intangible asset amortization was $2.3 million for year ended December 31, 2014 compared to $1.5 million for the year ended December 31, 2013. The increase is primarily due to amortization related to the $8.0 million milestone payment made to BMS as a result of receiving FDA approval for HETLIOZ^®adjustment that was ~~capitalized~~recorded results in ~~the first quarter of 2014.~~

~~Tax provision (benefit).~~ ~~The~~no tax ~~provision (benefit) for the years ended December 31, 2014 and 2013 was~~expense as it is fully offset by a ~~tax~~change in our valuation allowance. Because of our valuation allowance ~~resulting from~~in the U.S., ongoing tax effects of the TCJA are not expected to materially change our ~~assessment that it is more likely than not that our deferred~~effective tax ~~assets will not be realized. The ultimate realization~~rate in future periods.

Table of ~~deferred tax assets is dependent upon the generation of future taxable income during the period in which NOLs and credit carryforwards can be utilized.~~

Contents

Liquidity and Capital Resources

As of December 31, ~~2015,~~2018, our total cash and cash equivalents and marketable securities were ~~$143.2~~$257.4 million compared to ~~$129.8~~$143.4 million at December 31, ~~2014.~~2017. Our cash and cash equivalents are deposits in operating accounts and highly liquid investments with an original maturity of 90 days or less at date of purchase and consist of ~~time deposits,~~ investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Our marketable securities consist of investments in government sponsored and corporate enterprises and commercial paper.

Our liquidity resources as of December 31, 2018 and 2017 are summarized as follows:



(in thousands)	December 31, 2018		December 31, 2017
Cash and cash equivalents	$	61,005	$	33,627
Marketable securities:
U.S. Treasury and government agencies	69,270		60,618
Corporate debt	105,910		49,168
Asset-backed securities	21,175		—
Total marketable securities	196,355		109,786
Total cash, cash equivalents and marketable securities	$	257,360	$	143,413

As of December 31, ~~2015 and 2014, our liquidity resources are summarized as follows:~~

   December 31,    December 31,
(in thousands)
   2015    2014
Cash and cash equivalents
   $ 50,843       $ 60,901
Marketable securities:

U.S. Treasury and government agencies
   44,057       30,618
Corporate debt
   48,280       38,303




Total marketable securities
   92,337       68,921




Total cash and cash equivalents
   $ 143,180       $ 129,822

~~As of December 31, 2015,~~2018, we maintained all of our cash and cash equivalents in two financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits, but we do not anticipate any losses with respect to such deposits.

We expect to incur substantial costs and expenses throughout ~~2016~~2019 and beyond in connection with our continued clinical development of tradipitant and our other products, U.S. commercial activities for HETLIOZ^® and Fanapt^®, ~~including Medicaid rebates,~~ the European commercial launch activities for HETLIOZ^® and ~~a probable future milestone payment~~payments due upon achievement of ~~$25.0 million to BMS in the event cumulative worldwide sales of HETLIOZ~~^® ~~reach $250.0 million. During this time, we will evaluate the commercial opportunity for Fanapt~~^® ~~in Europe, assuming EMA approval.~~milestones under our license agreements. Additionally, we continue to pursue market approval of HETLIOZ^® and Fanapt^® in other regions. ~~Because of the uncertainties discussed above, the~~The actual costs to advance tradipitant and our research and development projects and ~~the U.S.~~ commercial activities for HETLIOZ^® and Fanapt^®, are difficult to estimate and may vary significantly. Management believes that our existing funds will be sufficient to meet our operating plans for at least the ~~foreseeable future.~~next twelve months. Our future capital requirements and the adequacy of our available funds will depend on many factors, primarily including our ability to generate revenue, the scope and costs of our commercial, manufacturing and process development activities, ~~and~~ the magnitude of our discovery, preclinical and clinical development ~~programs.~~programs, and potential costs to acquire or license the rights to additional products.

We may need or desire to obtain additional capital to finance our operations through debt, equity or alternative financing arrangements. We may also seek capital through collaborations or partnerships with other companies. The issuance of debt could require us to grant liens on certain of our assets that may limit our flexibility and debt securities may be convertible into common stock. If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may significantly dilute the ownership of our existing stockholders. If we are unable to obtain additional financing, we may be required to reduce the scope of our future activities which could harm our business, financial condition and operating results. There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all.

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Cash flow

The following table summarizes our net cash flows from operating, investing and financing activities for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013:~~

   Year Ended December 31,
   2015    2014    2013
Net cash provided by (used in):

Operating activities
   $ 12,449       $ (81,554 )    $ (39,592 )
Investing activities
   (26,598 )    (12,037 )    (34,275 )
Financing activities
   4,091       89,728       49,859






Net decrease in cash and cash equivalents
   $ (10,058 )    $ (3,863 )    $ (24,008 )

In assessing cash used in operating activities, we consider several principal factors: (i) net income (loss) for the period; (ii) adjustments for non-cash charges and credits, including deferred revenue, stock-based compensation expense, amortization of intangible assets and depreciation of property and equipment; and (iii) the extent to which receivables, accounts payable and accrued liabilities, or other working capital components increase or decrease.

2016:



	Year Ended December 31,
(in thousands)	2018			2017			2016
Net cash provided by (used in):
Operating activities:
Net income (loss)	$	25,208		$	(15,567	)	$	(18,010	)
Non-cash charges	12,568			13,610			21,015
Net change in operating assets and liabilities	(7,790		)	(26		)	(11,108		)
Operating activities	29,986			(1,983		)	(8,103		)
Investing activities:
Acquisition of intangible asset	(25,000		)	—			—
Purchases of property and equipment	(368		)	(1,664		)	(1,407		)
Net purchases of marketable securities	(84,292		)	(8,567		)	(8,618		)
Investing activities	(109,660		)	(10,231		)	(10,025		)
Financing activities:
Net proceeds from offering of common stock	100,870			—			—
Proceeds from exercise of employee stock options and other	6,256			5,251			7,751
Financing activities	107,126			5,251			7,751
Effect of exchange rate changes on cash and cash equivalents	(38		)	42			5
Net increase (decrease) in cash and cash equivalents	$	27,414		$	(6,921	)	$	(10,372	)

Year ended December 31, ~~2015~~2018 compared to year ended December 31, ~~2014~~2017

Net cash provided by operating activities was ~~$12.4~~$30.0 million for the year ended December 31, ~~2015,~~2018, an increase of ~~$94.0~~$32.0 million ~~from~~compared to net cash used ~~in operating activities~~ of ~~$81.6~~$2.0 million for the year ended December 31, ~~2014.~~2017. The increase ~~resulted from a reduction in the net loss of $17.6 million, excluding the non-cash gain of $77.6 million on arbitration settlement recognized in 2014, and~~reflects an increase of ~~$44.2~~$40.8 million in net ~~non-cash charges and credits. Non-cash charges resulting~~income, partially offset by a decrease of $7.8 million from the ~~amortization~~net change in operating assets and liabilities. The decrease of ~~intangible~~$7.8 million from the net change in operating assets ~~increased $10.7 million, of which $8.3 million was for Fanapt~~^®and ~~$2.4 million was for HETLIOZ~~^®~~. Non-cash charges for stock-based compensation increased $2.1 million reflecting~~liabilities primarily relates to an increase in accounts receivable attributable to an increase in net product sales, partially offset by an increase in product revenue allowances and the ~~number~~payment of ~~employees~~a $2.0 million accrued milestone obligation during ~~2015. The~~the year ended December 31, ~~2014 included a credit for non-cash licensing revenue of $30.6 million from the amortization of deferred licensing revenue relating~~2018.

Year ended December 31, 2017 compared to ~~Fanapt~~^®year ended December 31, 2016. In addition, the increase in net cash provided by operating activities reflects a net increase in accrued government and other rebates of $34.6 million primarily for sales allowances relating to initial sales of Fanapt^® in 2015 and an increase in accounts payable and accrued liabilities of $8.4 million. The increase in net cash provided by operating activities was partly offset by a net increase of $11.1 million in accounts receivable resulting from U.S. sales of Fanapt^® ~~which we commenced in 2015.~~

Net cash used in ~~investing~~operating activities was ~~$26.6~~$2.0 million for the year ended December 31, ~~2015, an increase~~2017, a decrease of ~~$14.6~~$6.1 million ~~from~~compared to net cash used ~~in investing activities~~ of ~~$12.0~~$8.1 million for the year ended December 31, ~~2014.~~2016. The ~~increase resulted primarily from net purchases~~decrease reflects a decrease of ~~marketable securities of $24.1~~$2.4 million in ~~2015 compared with~~the net ~~purchases~~loss and a decrease of marketable securities of $3.5 million in 2014. Additionally, purchases of property, plant and equipment increased $1.8 million related to leasehold improvements, furniture and fixtures and computer equipment. Net cash used by investing activities for the year ended December 31, 2014 included a milestone payment of $8.0 million to BMS as a result of the FDA approval of HETLIOZ^® ~~in January 2014.~~

Net cash provided by financing activities was $4.1 million for the year ended December 31, 2015, compared with $89.7 million for the year ended December 31, 2014 that had included cash proceeds of $62.3$11.1 million from ~~a public offering of common stock and cash proceeds of $25.0 million related to~~ the ~~issuance of common stock to Novartis. See Note 3,~~~~Settlement Agreement with Novartis,~~to the consolidated financial statements included in Part II of this annual report on Form 10-K for additional information. Proceeds from the exercise of stock options increased by $1.5 million for 2015 compared with 2014.

~~Year ended December 31, 2014 compared to year ended December 31, 2013~~

~~Net cash used~~net change in operating activities was $81.6 million for the year ended December 31, 2014, an increase of $42.0 million from net cash used in operating activities of $39.6 million for the year ended December 31, 2013. The increase in net cash used for operating activities resulted from an increase of $79.9 million in net non-cash credits, driven primarily by a $77.6 million gain on arbitration settlement recognized in 2014assets and ~~a $3.3 million net use of working capital. These increases were~~liabilities, partially offset by a ~~change in net income (loss) of $41.2 million.~~

~~Net cash used in investing activities of $12.0 million for the year ended December 31, 2014, a~~ decrease of ~~$22.3 million, from net cash used in investing activities of $34.3 million for the year ended December 31, 2013. The decrease primarily resulted from $30.6~~$7.4 million in ~~higher net proceeds~~non-cash charges resulting primarily from ~~sales, maturities and purchases of marketable securities, which was partially offset by an $8.0 million milestone payment to BMS as a result~~completion of the ~~FDA approval~~amortization of ~~HETLIOZ~~intangible assets related to Fanapt^® in ~~January 2014.~~

~~Net cash provided by financing activities~~November 2016. The decrease of ~~$89.7 million for the year ended December 31, 2014, an increase of $39.8~~$11.1 million from the net ~~cash provided by financing activities of $49.9 million for the year ended December 31, 2013. The increase~~change in operating assets and liabilities primarily ~~reflects the proceeds related~~relates to a reduction in accrued government and other rebates, a decrease in accounts receivable attributable to the ~~issuance~~timing of ~~stock to Novartis of $25.0 million, $13.8 million~~shipments and payments, and a decrease in ~~higher net proceeds received from the public offering of common stock~~prepaid expenses and other associated with a decrease in ~~2014 versus 2013~~prepaid marketing expenses and ~~$1.3 million higher proceeds received from the exercise of stock options.~~

prepaid royalties.

Off-balance sheet arrangements

We have no off-balance sheet arrangements, as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

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Contractual obligations and commitments

The following is a summary of our non-cancellable long-term contractual cash obligations as of December 31, ~~2015:~~

   Cash payments due by year (1) (2) (3)
(in thousands)
   Total    2016    2017    2018    2019    2020    Thereafter
Operating leases
   $ 13,315       $ 1,500       $ 1,538       $ 1,576       $ 1,616       $ 1,656       $ 5,429

2018:



	Cash payments due by year
(in thousands)	Total		2019		2020		2021		2022		2023		Thereafter
Operating leases (1)	$	22,757	$	2,483	$	2,495	$	2,335	$	2,355	$	2,420	$	10,669
Milestone obligation (2) (3)	200		200		—		—		—		—		—
Purchase commitments (4)	7,315		5,122		847		890		456		—		—
	$	30,272	$	7,805	$	3,342	$	3,225	$	2,811	$	2,420	$	10,669

(1)

This table includes minimum annual future payments under operating leases and subleases for a total of 43,462 square feet of office space for our headquarters office at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. that generally expire in 2028, an operating lease for 2,880 square feet of office space for our 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.

(2)

This table does not include potential future milestone obligations under our license agreement with Lilly for the exclusive rights to develop and commercialize tradipitant of $97.0 million, which consist of $2.0 million due upon the filing of the first marketing authorization for tradipitant in either the U.S. or the E.U., $10.0 million and $5.0 million for the first approval of a marketing authorization for tradipitant in the U.S. and the E.U., respectively, and up to $80.0 million for future sales milestones.

(3)

This table does not include potential future milestone obligations under our license agreement with the University of California San Francisco for the exclusive rights to develop and commercialize a portfolio of CFTR activators and inhibitors under which we could be obligated to make potential future milestone payments of up to $45.2 million, which includes $12.2 million for pre-NDA approval milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $12.2 million 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.

(4)

Purchase commitments include noncancellable purchase commitments for agreements longer than one year and primarily relate to commitments for advertising and data services. This table does not include various other long-term agreements ~~that we have~~ entered into for services with other third party vendors ~~including agreements to conduct clinical trials, to manufacture products, and for consulting and other contracted services~~ due to the cancelable nature of the services. ~~We accrued the costs of these agreements based on estimates of work completed to date.~~ Additionally, this table does not include rebates, chargebacks or discounts recorded as liabilities at the time that product sales are recognized as revenue.

~~(2)~~

This table does not include a probable future milestone obligation under our license agreement with BMS, where we will be obligated to make a future milestone payment of $25.0 million in the event cumulative worldwide sales of HETLIOZ^® ~~reach $250.0 million. This probable obligation has been accrued as a non-current liability in our consolidated balance sheet as of December 31, 2015.~~

~~(3)~~

This table does not include potential future milestone obligations under our license agreement with Eli Lilly for the exclusive rights to develop and commercialize tradipitant where we could be obligated to make future milestone payments of up to $4.0 million for pre-NDA approval milestones and up to $95.0 million for future regulatory approval and sales milestones.

~~Operating leases~~

Our commitments related to operating leases represent the minimum annual payments for the operating leases for our headquarters located in Washington, D.C., which expires in 2023. In 2011 we entered into an office lease, which was subsequently amended in 2014, with Square 54 Office Owner LLC (Landlord) for our headquarters, consisting of a total of 30,260 square feet of office space at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. (Lease). Subject to the prior rights of other tenants in the building, we have the right to renew the Lease for five years following its expiration. We also have the right to sublease or assign all or a portion of the premises, subject to standard conditions. The Lease may be terminated early by us or the Landlord upon certain conditions.



ITEM 7A.	QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risks

Our exposure to market risk is currently confined to our cash and cash equivalents, marketable securities and restricted cash. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents and marketable securities, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments.

Concentrations of credit risk

We deposit our cash with financial institutions that we consider to be of high credit quality and purchase marketable securities which are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S. dollars. Our marketable securities consist of ~~certificates of deposit,~~ commercial paper, corporate notes, asset-backed securities and U.S. government agency notes.

Revenues and accounts receivable are concentrated with specialty pharmacies and wholesalers. ~~The top six~~There were 5 major customers that each accounted for more than 10% of total revenues and, as a group, represented ~~94%~~92% of total revenues for the year ended December 31, ~~2015,~~2018. There were 5 major customers that each accounted for more than 10% of accounts receivable and, ~~the top five customers~~as a group, represented ~~87%~~94% of total accounts receivable at December 31, ~~2015.~~2018. We ~~have not experienced any losses~~mitigate our credit risk relating to ~~receivables~~accounts receivable from ~~customers.~~

customers by performing ongoing credit evaluations.

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Foreign currency risk

We are exposed to risks related to changes in foreign currency exchange rates relating to our foreign operations. The functional currency of our international subsidiaries is the local currency. We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our subsidiaries’ respective functional currencies. We are also exposed to unfavorable fluctuations of the U.S. dollar, which is our reporting currency, against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. We do not currently hedge our foreign currency exchange rate risk. Foreign currency has not had a material impact on our results of operations.

Effects of inflation

Inflation has not had a material impact on our results of operations.



ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related financial statement schedules required to be filed are listed in the Index to Consolidated Financial Statements and are incorporated ~~herein.~~

in Item 15 of Part IV of this annual report on Form 10-K.



ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.



ITEM 9A.	CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (Exchange Act)) as of December 31, ~~2015.~~2018. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of December 31, ~~2015,~~2018, the end of the period covered by this annual report on Form 10-K, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of our internal control over financial reporting based on the original framework established in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control — Integrated Framework. Based

on the assessment, management concluded that, as of December 31, ~~2015,~~2018, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, ~~2015~~2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this annual report on Form 10-K.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of ~~2015~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B.	OTHER INFORMATION

None.

PART III



ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



ITEM 11.	EXECUTIVE COMPENSATION

Information required under this item will be contained in our Proxy Statement for the ~~2016~~2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, ~~2015,~~2018, under the captions “Corporate Governance” and “Executive Compensation,” and is incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K, except that information required by Item 407(e)(5) of Regulation S-K will be deemed furnished in this Form 10-K and will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such filing.



ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE



ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

Table of Contents



ITEM 15.	EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

The consolidated financial statements filed as part of this annual report on Form 10-K are listed in the Index to Consolidated Financial Statements. Certain schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. The Exhibits are listed in the Exhibit Index.

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Signatures

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.



		Vanda Pharmaceuticals Inc.

February ~~12, 2016~~	19, 2019	By:	/s/ Mihael H. Polymeropoulos, M.D.
			Mihael H. Polymeropoulos, M.D.
			President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Name	Title		Date

/s/ Mihael H. Polymeropoulos, M.D. ~~Mihael H. Polymeropoulos, M.D.~~	President and Chief Executive Officer and Director (principal executive officer)		February ~~12, 2016~~19, 2019
Mihael H. Polymeropoulos, M.D.			February ~~12, 2016~~19, 2019

/s/ James P. Kelly ~~James P. Kelly~~	~~Senior~~Executive Vice President, Chief Financial Officer and Treasurer ~~(principal~~ (principal financial officer and principal accounting officer)		February ~~12, 2016~~19, 2019
James P. Kelly			February ~~12, 2016~~19, 2019

/s/ H. Thomas Watkins ~~H. Thomas Watkins~~	Chairman of the Board and Director		February ~~12, 2016~~19, 2019
H. Thomas Watkins	Chairman of the Board and Director		February ~~12, 2016~~19, 2019

/s/ ~~Kenneth M. Bate~~ ~~Kenneth M. Bate~~ Michael Cola	Director		February ~~12, 2016~~19, 2019
Michael Cola	Director		February ~~12, 2016~~19, 2019

/s/ ~~Michael Cola~~ ~~Michael Cola~~ Richard W. Dugan	Director		February ~~12, 2016~~19, 2019

~~/s/~~ Richard W. Dugan ~~Richard W. Dugan~~	Director		February ~~12, 2016~~19, 2019

/s/ Vincent J. Milano	Director		February ~~12, 2016~~19, 2019

~~/s/~~ Vincent J. Milano ~~Vincent J. Milano~~	Director	~~Director~~	February ~~12, 2016~~19, 2019	~~February 12, 2016~~

~~/s/ Howard Pien~~ ~~Howard Pien~~	~~Director~~		~~February 12, 2016~~

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Vanda Pharmaceuticals Inc.

Index to Consolidated Financial Statements



	Page
Report of Independent Registered Public Accounting Firm		69	72
Consolidated Balance Sheets at December 31, ~~2015~~2018 and ~~2014~~2017		70	74
Consolidated Statements of Operations for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013~~2016		71	75
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013~~2016		72	76
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013~~2016		73	77
Consolidated Statements of Cash Flows for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013~~2016		74	78
Notes to the Consolidated Financial Statements		75	79

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Report of Independent Registered Public Accounting Firm

To theBoard of Directors and Stockholders of Vanda Pharmaceuticals Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the consolidated financial statements, including the related notes, of Vanda Pharmaceuticals Inc. and its subsidiaries (the “Company”) as listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the ~~accompanying~~ consolidated ~~balance sheets and the related consolidated~~financial statements ~~of operations, of comprehensive income (loss), of changes in stockholders’ equity, and of cash flows~~referred to above present fairly, in all material respects, the financial position of ~~Vanda Pharmaceuticals Inc. and subsidiaries at~~the Company as of December 31, ~~2015~~2018 and ~~2014,~~2017, and the results of ~~their~~its operations and ~~their~~its cash flows for each of the three years in the period ended December 31, ~~2015~~2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2015,~~2018, based on criteria established in Internal ~~Control—~~Control - Integrated Framework (2013) issued by the ~~Committee of Sponsoring Organizations of the Treadway Commission (COSO).~~ COSO.

Basis for Opinions

The ~~Company’s~~Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in ~~Management’s~~Management's Report on Internal Control over Financial Reporting appearing under ~~item~~Item 9A. Our responsibility is to express opinions on ~~these~~the Company’s consolidated financial statements and on the ~~Company’s~~Company's internal control over financial reporting based on our ~~integrated~~ audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence ~~supporting~~regarding the amounts and disclosures in the consolidated financial ~~statements, assessing~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, ~~and~~as well as evaluating the overall presentation of the consolidated financial ~~statement presentation.~~statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Baltimore, ~~Maryland~~

February ~~12, 2016~~

19, 2019

We have served as the Company’s auditor since 2003.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

   December 31,
December 31,

(in thousands, except for share and per share amounts)
   2015 2014
ASSETS
Current assets:

Cash and cash equivalents
   $ 50,843    $ 60,901
Marketable securities
   92,337    68,921
Accounts receivable, net
   16,331    3,654
Inventory
   1,294    5,170
Prepaid expenses and other current assets
   5,742    3,084


Total current assets
   166,547    141,730
Property and equipment, net
   4,570    2,437
Intangible assets, net
   38,752    26,724
Non-current inventory and other
   3,181    813


Total assets
   $ 213,050    $ 171,704


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable and accrued liabilities
   $ 15,767    $ 7,291
Accrued government and other rebates
   35,550    495


Total current liabilities
   51,317    7,786
Milestone obligation under license agreement
   25,000    —
Other non-current liabilities
   3,706    3,101


Total liabilities
   80,023    10,887


Commitments and contingencies (Notes 13 and 18)

Stockholders’ equity:

Preferred stock, $0.001 par value; 20,000,000 shares authorized, and no shares issued or outstanding
   —    —
Common stock, $0.001 par value; 150,000,000 shares authorized; 42,815,291 and 41,486,361 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively
   43    41
Additional paid-in capital
   460,794    448,744
Accumulated other comprehensive income
   39    16
Accumulated deficit
   (327,849 ) (287,984 )


Total stockholders’ equity
   133,027    160,817


Total liabilities and stockholders’ equity
   $ 213,050    $ 171,704



(in thousands, except for share and per share amounts)	December 31, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	61,005		$	33,627
Marketable securities	196,355			109,786
Accounts receivable, net	28,780			17,601
Inventory	994			840
Prepaid expenses and other current assets	11,998			8,003
Total current assets	299,132			169,857
Property and equipment, net	4,417			5,306
Intangible assets, net	24,542			26,069
Non-current inventory and other	4,039			4,193
Total assets	$	332,130		$	205,425
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	21,584		$	20,335
Product revenue allowances	31,231			23,028
Milestone obligations under license agreements	200			27,000
Total current liabilities	53,015			70,363
Other non-current liabilities	3,693			3,675
Total liabilities	56,708			74,038
Commitments and contingencies (Notes 9 and 16)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000,000 shares authorized, and no shares issued or outstanding	—			—
Common stock, $0.001 par value; 150,000,000 shares authorized; 52,477,593 and 44,938,133 shares issued and outstanding at December 31, 2018 and 2017, respectively	52			45
Additional paid-in capital	611,587			492,802
Accumulated other comprehensive income (loss)	1			(34		)
Accumulated deficit	(336,218		)	(361,426		)
Total stockholders’ equity	275,422			131,387
Total liabilities and stockholders’ equity	$	332,130		$	205,425

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

      Year Ended December 31,
(in thousands, except for share and per share amounts)
   2015 2014 2013
Revenues:

Net product sales
   $ 109,925    $ 12,909    $ —
Royalty revenue
   —    6,502    7,090
Licensing agreement
   —    30,746    26,789


Total revenues
   109,925    50,157    33,879
Operating expenses:

Cost of goods sold
   23,462    1,583    —
Research and development
   29,145    19,230    28,502
Selling, general and administrative
   84,531    84,644    25,082
Intangible asset amortization
   12,972    2,254    1,495
Gain on arbitration settlement
   —    (77,616 ) —


Total operating expenses
   150,110    30,095    55,079


Income (loss) from operations
   (40,185 ) 20,062    (21,200 )
Other income
   320    124    145


Net income (loss)
   $ (39,865 ) $ 20,186    $ (21,055 )


Net income (loss) per share:

Basic
   $ (0.94 ) $ 0.58    $ (0.69 )


Diluted
   $ (0.94 ) $ 0.55    $ (0.69 )


Weighted average shares outstanding:

Basic
   42,250,254    34,774,163    30,351,353


Diluted
   42,250,254    36,686,723    30,351,353



	Year Ended December 31,
(in thousands, except for share and per share amounts)	2018		2017			2016
Revenues:
Net product sales	$	193,118	$	165,083		$	146,017
Total revenues	193,118		165,083			146,017
Operating expenses:
Cost of goods sold excluding amortization	20,508		17,848			24,712
Research and development	43,594		38,547			29,156
Selling, general and administrative	105,751		123,841			99,787
Intangible asset amortization	1,527		1,750			10,933
Total operating expenses	171,380		181,986			164,588
Income (loss) from operations	21,738		(16,903		)	(18,571		)
Other income	3,608		1,472			665
Income (loss) before income taxes	25,346		(15,431		)	(17,906		)
Provision for income taxes	138		136			104
Net income (loss)	$	25,208	$	(15,567	)	$	(18,010	)
Net income (loss) per share:
Basic	$	0.50	$	(0.35	)	$	(0.41	)
Diluted	$	0.48	$	(0.35	)	$	(0.41	)
Weighted average shares outstanding:
Basic	50,859,947		44,735,146			43,449,441
Diluted	53,045,257		44,735,146			43,449,441

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

   Year Ended December 31,
(in thousands)
   2015 2014 2013
Net income (loss)
   $ (39,865 ) $ 20,186    $ (21,055 )


Other comprehensive income (loss):

Change in net unrealized gain (loss) on marketable securities
   23    (5 ) 11
Tax provision on other comprehensive income (loss)
   —    —    —


Other comprehensive income (loss), net of tax
   23    (5 ) 11


Comprehensive income (loss)
   $ (39,842 ) $ 20,181    $ (21,044 )



	Year Ended December 31,
(in thousands)	2018			2017			2016
Net income (loss)	$	25,208		$	(15,567	)	$	(18,010	)
Other comprehensive income (loss):
Net foreign currency translation gain (loss)	(22		)	30			(1		)
Change in net unrealized gain (loss) on marketable securities	57			(122		)	20
Tax provision on other comprehensive income	—			—			—
Other comprehensive income (loss), net of tax	35			(92		)	19
Comprehensive income (loss)	$	25,243		$	(15,659	)	$	(17,991	)

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Common Stock Additional
Paid-in
Capital Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
(in thousands, except for share amounts)
Shares Par Value
Balances at December 31, 2012
28,241,743    $ 28    $ 296,982    $ 10    $ (287,115 ) $ 9,905
Net proceeds from public offering of common stock
4,680,000    5    48,500    —    —    48,505
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
466,320    —    1,550    —    —    1,550
Shares withheld upon settlement of restricted stock units
(49,520 ) —    (196 ) —    —    (196 )
Stock-based compensation expense
—    —    5,404    —    —    5,404
Net loss
—    —    —    —    (21,055 ) (21,055 )
Other comprehensive income, net of tax
—    —    —    11    —    11

Balances at December 31, 2013
33,338,543    33    352,240    21    (308,170 ) 44,124
Net proceeds from public offering of common stock
5,750,000    5    62,308    —    —    62,313
Issuance of common stock to Novartis Pharma AG
1,808,973    2    25,903    —    —    25,905
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
621,231    1    2,851    —    —    2,852
Shares withheld upon settlement of restricted stock units
(32,386 ) —    (436 ) —    —    (436 )
Stock-based compensation expense
—    —    5,878    —    —    5,878
Net income
—    —    —    —    20,186    20,186
Other comprehensive loss, net of tax
—    —    —    (5 ) —    (5 )

Balances at December 31, 2014
41,486,361    41    448,744    16    (287,984 ) 160,817
Issuance of common stock from the exercise of stock options and settlement of restricted stock units
1,353,877    2    4,372    —    —    4,374
Shares withheld upon settlement of equity awards
(24,947 ) —    (283 ) —    —    (283 )
Stock-based compensation expense
—    —    7,961    —    —    7,961
Net loss
—    —    —    —    (39,865 ) (39,865 )
Other comprehensive income, net of tax
—    —    —    23    —    23

Balances at December 31, 2015
42,815,291    $ 43    $ 460,794    $ 39    $ (327,849 ) $ 133,027



	Common Stock			Additional Paid-in Capital		Other Comprehensive Income (Loss)			Accumulated Deficit			Total
(in thousands, except for share amounts)	Shares	Par Value		Additional Paid-in Capital		Other Comprehensive Income (Loss)			Accumulated Deficit			Total
Balances at December 31, 2015	42,815,291	$	43	$	460,794	$	39		$	(327,849	)	$	133,027
Issuance of common stock from the exercise of stock options and settlement of restricted stock units	1,185,323	1		7,750		—			—			7,751
Stock-based compensation expense	—	—		8,543		—			—			8,543
Net loss	—	—		—		—			(18,010		)	(18,010		)
Other comprehensive income, net of tax	—	—		—		19			—			19
Balances at December 31, 2016	44,000,614	44		477,087		58			(345,859		)	131,330
Issuance of common stock from the exercise of stock options and settlement of restricted stock units	937,519	1		5,250		—			—			5,251
Stock-based compensation expense	—	—		10,465		—			—			10,465
Net loss	—	—		—		—			(15,567		)	(15,567		)
Other comprehensive loss, net of tax	—	—		—		(92		)	—			(92		)
Balances at December 31, 2017	44,938,133	45		492,802		(34		)	(361,426		)	131,387
Net proceeds from public offering of common stock	6,325,000	6		100,864		—			—			100,870
Issuance of common stock from the exercise of stock options and settlement of restricted stock units	1,214,460	1		6,255		—			—			6,256
Stock-based compensation expense	—	—		11,666		—			—			11,666
Net income	—	—		—		—			25,208			25,208
Other comprehensive income, net of tax	—	—		—		35			—			35
Balances at December 31, 2018	52,477,593	52		611,587		1			(336,218		)	275,422

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

   Year Ended December 31,
(in thousands)
   2015 2014 2013
Cash flows from operating activities

Net income (loss)
   $ (39,865 ) $ 20,186    $ (21,055 )
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation of property and equipment
   582    530    432
Stock-based compensation
   7,961    5,878    5,404
Amortization of discounts and premiums on marketable securities
   677    174    155
Intangible asset amortization
   12,972    2,254    1,495
Gain on arbitration settlement with Novartis Pharma AG
   —    (77,616 ) —
Deferred revenues
   (174 ) (30,572 ) (26,789 )
Other non-cash adjustments
   657    239    104
Changes in assets and liabilities:

Accounts receivable
   (12,677 ) (1,623 ) (863 )
Prepaid expenses and other current assets
   (2,558 ) (318 ) 1,264
Inventory
   387    (2,210 ) —
Accounts payable and accrued liabilities
   9,432    1,029    261
Accrued government and other rebates
   35,055    495    —


Net cash provided by (used in) operating activities
   12,449    (81,554 ) (39,592 )


Cash flows from investing activities

Acquisition of intangible assets
   —    (8,000 ) —
Purchases of property and equipment
   (2,527 ) (769 ) (176 )
Purchases of marketable securities
   (193,111 ) (93,343 ) (65,598 )
Proceeds from sale of marketable securities
   999    8,948    —
Maturities of marketable securities
   168,041    80,882    31,499
Change in restricted cash
   —    245    —


Net cash used in investing activities
   (26,598 ) (12,037 ) (34,275 )


Cash flows from financing activities

Net proceeds from public offering of common stock
   —    62,313    48,505
Net proceeds from offering common stock to Novartis Pharma AG
   —    25,000    —
Tax obligations paid in connection with settlement of restricted stock units
   (283 ) (436 ) (196 )
Proceeds from exercise of employee stock options
   4,374    2,851    1,550


Net cash provided by financing activities
   4,091    89,728    49,859


Net decrease in cash and cash equivalents
   (10,058 ) (3,863 ) (24,008 )
Cash and cash equivalents

Beginning of year
   60,901    64,764    88,772


End of year
   $ 50,843    $ 60,901    $ 64,764


Non-cash investing and financing activities

Acquisition of intangible asset accrued in non-current liabilities
   $ 25,000    $ —    $ —
Intangible asset related to re-acquired right to Fanapt^®
   —    (15,940 ) —
Inventories
   —    2,960    —
Prepaid services
   —    91    —
Purchases of property and equipment accrued in current liabilities
   187    —    106



	Year Ended December 31,
(in thousands)	2018			2017			2016
Cash flows from operating activities
Net income (loss)	$	25,208		$	(15,567	)	$	(18,010	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation of property and equipment	1,429			1,234			935
Stock-based compensation	11,666			10,465			8,543
Amortization of premiums (discounts) on marketable securities	(2,221		)	(426		)	62
Intangible asset amortization	1,527			1,750			10,933
Other non-cash adjustments, net	167			587			542
Changes in operating assets and liabilities:
Accounts receivable	(11,207		)	2,525			(4,298		)
Prepaid expenses and other assets	(4,258		)	3,652			(6,159		)
Inventory	70			(1,060		)	200
Accounts payable and other liabilities	(618		)	5,953			575
Product revenue allowances	8,223			(11,096		)	(1,426		)
Net cash provided by (used in) operating activities	29,986			(1,983		)	(8,103		)
Cash flows from investing activities
Acquisition of intangible asset	(25,000		)	—			—
Purchases of property and equipment	(368		)	(1,664		)	(1,407		)
Purchases of marketable securities	(282,395		)	(148,135		)	(165,405		)
Maturities of marketable securities	198,103			139,568			156,787
Net cash used in investing activities	(109,660		)	(10,231		)	(10,025		)
Cash flows from financing activities
Net proceeds from offering of common stock	100,870			—			—
Proceeds from exercise of employee stock options	6,256			5,251			7,751
Net cash provided by financing activities	107,126			5,251			7,751
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(38		)	42			5
Net increase (decrease) in cash, cash equivalents and restricted cash	27,414			(6,921		)	(10,372		)
Cash, cash equivalents and restricted cash
Beginning of year	34,335			41,256			51,628
End of year	$	61,749		$	34,335		$	41,256

The accompanying notes are an integral part of these consolidated financial statements.

V~~anda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements~~

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VANDA PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Organization and Presentation

Business organization

Vanda Pharmaceuticals Inc. ~~(Vanda or the~~(the Company) is a global biopharmaceutical company focused on the development and commercialization of ~~novel~~innovative therapies ~~addressing~~to address high unmet medical ~~needs. Vanda~~needs and improve the lives of patients. The Company commenced its operations in 2003 and ~~the~~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), ~~which~~ 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. ~~This authorization is valid~~HETLIOZ^® was commercially launched in ~~the 28 countries that are members of the European Union, as well as European Economic Area members Iceland, Liechtenstein and Norway.~~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 and~~jet lag disorder, Smith-Magenis Syndrome (SMS).

•

~~Fanapt~~ 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 ~~being marketed~~approved by the FDA in May 2009 and ~~sold~~launched commercially in the U.S. by Novartis Pharma AG (Novartis) ~~until December 31, 2014. On December 31, 2014,~~in January 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt^® franchise to the ~~Company. See Note 3,~~~~Settlement Agreement with Novartis~~~~, for additional information.~~Company on December 31, 2014. Additionally, the Company’s distribution partners launched Fanapt^® in Israel ~~and Mexico~~ 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.~~

dermatitis and the treatment of gastroparesis. An assessment of new tradipitant clinical opportunities including the treatment of motion sickness is ongoing.

~~Trichostatin A,~~

VTR-297, a small molecule histone deacetylase (HDAC) ~~inhibitor.~~

inhibitor presently in clinical development for the treatment of hematologic malignancies.

~~AQW051,~~

VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist.

Basis of presentation

The accompanying consolidated financial statements includes the accounts of Vanda Pharmaceuticals Inc. and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of ~~America.~~America (U.S.). All intercompany accounts and transactions have been eliminated in consolidation.

~~Reclassifications~~2. Summary of Significant Accounting Policies

~~Certain reclassifications have been made to prior year amounts to conform with current year classifications.~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

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. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates.

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Cash and Cash Equivalents

For purposes of the consolidated balance sheets and 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. ~~Restricted~~Cash and cash equivalents includes investments in money market funds with commercial banks and financial institutions, and commercial paper of ~~$0.8 million included in current and non-current assets at December 31, 2015 and 2014, respectively, relates to the lease for office space for the Company’s headquarters located in Washington, D.C.~~

high-quality corporate issuers.

Marketable Securities

The Company classifies all of its marketable securities as available-for-sale securities. The Company’s investment policy requires the selection of high-quality issuers, with bond ratings of AAA to A1+/P1. Available-for-sale securities are carried at fair market value, with unrealized gains and losses reported as a component of stockholders’ equity in accumulated other comprehensive ~~income/loss.~~income (loss). At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. If declines in the value of available for-sale securities are determined to be other-than-temporary, a loss is recorded in earnings in the current period. Interest and dividend income is recorded when earned and included in interest income. Premiums and discounts on marketable securities are amortized and accreted, respectively, to maturity and included in interest income. The Company uses the specific identification method in computing realized gains and losses on the sale of investments, which would be included in the consolidated statements of operations when generated. Marketable securities with a maturity of more than one year as of the balance sheet date and which the Company does not intend to sell within the next twelve months are classified as non-current. All other marketable securities are classified as current.

Inventory

Inventory, which is recorded at the lower of cost or ~~market,~~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 management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. Inventory ~~is evaluated for impairment by consideration of factors such as lower of cost or market, net realizable value, obsolescence or expiry. Inventory~~ not expected to be ~~consumed~~sold within 12 months following the balance sheet date are classified as non-current.

Intangible Assets

Costs incurred for products not yet approved by the FDA and for which no alternative future use exists are recorded as expense. Obligations for milestone payments to other pharmaceutical companies that may result in a capitalized intangible asset are recognized when it is deemed probable that the milestone event will occur. In the event a product has been approved by the FDA or an alternative future use exists for a product, patent and license costs are capitalized and amortized on a straight-line basis over the ~~expected patent~~estimated useful economic life of the of the related product patents. For intangible assets related to HETLIOZ^®, the estimated useful life is the estimated economic useful life of the related ~~product. Milestone payments~~product patents, the latest of which expires in February 2035. Intangible assets related Fanapt^® have been fully amortized on a straight-line basis to November 2016. The useful life estimate for Fanapt^® was based on the ~~Company’s partners are recognized when it~~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 ~~deemed probable that the milestone event will occur.~~

December 2031.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The costs of leasehold improvements funded by or reimbursed by the lessor are capitalized and amortized as leasehold improvements along with a corresponding deferred rent liability. Depreciation of most property and equipment is provided on a straight-line basis over the estimated useful lives of the assets. ~~Amortization of leasehold~~Leasehold improvements is

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~provided on~~are amortized using a straight-line basis over the ~~shorter~~lesser of ~~their~~the estimated useful ~~life~~lives of the assets or the ~~lease term.~~terms of the related leases. The costs of additions and improvements are capitalized, and repairs and maintenance costs are charged to operations in the period incurred. Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of operations for that period.

Accounts Payable and Accrued Liabilities

The Company’s management is required to estimate accrued liabilities as part of the process of preparing financial statements. The estimation of accrued liabilities involves identifying services that have been performed on the Company’s

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behalf, and then estimating the level of service performed and the associated cost incurred for such services as of each balance sheet date in the financial statements. Accrued liabilities include ~~professional service fees,~~research and development expenses, such as ~~lawyers and accountants, contract service fees, such as those~~accrued costs under contracts with clinical monitors, data management organizations and investigators in conjunction with clinical trials, fees to contract manufacturers in conjunction with the production of clinical materials, consulting and professional fees, such as lawyers and fees for marketing and other commercialization ~~activities.~~activities, accrued compensation and employee benefits, such as accrued bonus, royalties payable under licensing agreements, and other accrued fees. Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, the Company recognizes these expenses as the services are provided. Such management assessments include, but are not limited to: (i) an evaluation by the project manager of the work that has been completed during the period, (ii) measurement of progress prepared internally and/or provided by the third-party service provider, (iii) analyses of data that justify the progress, and (iv) management’s judgment. In the event that the Company does not identify certain costs that have begun to be incurred or the Company under- or over-estimates the level of services performed or the costs of such services, the Company’s reported expenses for such period would be too low or too high.

Revenue Recognition

~~Net Product~~In accordance with Accounting Standards Codification (ASC) Subtopic 606 Revenue from Contracts with Customers (ASC 606), which the Company adopted January 1, 2018, the Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company recognizes revenue when control of the product is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer. Sales taxes, value add taxes, and usage-based taxes are excluded from revenues.

The Company’s net product sales consist of sales of HETLIOZ^® and ~~beginning in 2015, sales of~~ Fanapt^®. Net sales by product for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2014~~2016 were as follows:

   Year Ended December 31,
(in thousands)
   2015    2014    2013
HETLIOZ^® product sales, net
   $ 44,302       $ 12,802       $ —
Fanapt^® product sales, net
   65,623       107       —






   $ 109,925       $ 12,909       $ —



	Year Ended December 31,
(in thousands)	2018		2017		2016
HETLIOZ^® product sales, net	$	115,835	$	89,978	$	71,671
Fanapt^® product sales, net	77,283		75,105		74,346
	$	193,118	$	165,083	$	146,017

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. Specialty pharmacy customers include Diplomat Pharmacy, Inc., Accredo (a subsidiary of Express Scripts) and Walgreens Company. Fanapt^® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. Wholesaler customers include Cardinal Health, Inc., AmerisourceBergen Drug Corporation, and McKesson Corporation. The Company ~~applies~~invoices and records revenue when its customers, specialty pharmacies and wholesalers, receive product from the ~~revenue recognition guidance in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 605-15,~~ ~~Revenue Recognition—Products~~~~. The Company recognizes revenue from product sales when there~~third-party logistics warehouse which is ~~persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed~~the point at which control is transferred to the customer. Revenues and accounts receivable are concentrated with these customers. The following table presents each major customer that represented more than 10% of total revenues for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
Percent of Net Product Sales	2018		2017		2016
Distributor A	37	%	32	%	23	%
Distributor B	17	%	10	%	1	%
Distributor C	14	%	15	%	16	%
Distributor D	12	%	12	%	15	%
Distributor E	12	%	15	%	16	%
Distributor F	5	%	11	%	16	%

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The following table presents each major customer that represented more than 10% of accounts receivable, net, as of December 31, 2018 and 2017:



	December 31,
Percent of Accounts Receivable, Net	2018		2017
Distributor A	30	%	28	%
Distributor B	15	%	9	%
Distributor C	20	%	18	%
Distributor D	16	%	21	%
Distributor E	13	%	10	%

Reserves for Variable Consideration

The transaction price is ~~fixed or determinable, collectability is reasonably assured and~~determined based upon the consideration to which the Company ~~has no further performance obligations.~~

~~Product Sales Discounts and Allowances~~

will be entitled in exchange for transferring product to the customer. The Company’s product sales are recorded net of applicable discounts, rebates, chargebacks, ~~rebates,~~service fees, co-pay assistance ~~service fees~~ and product returns that are applicable for various government and commercial payors. The Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method and updates its estimate at each reporting date. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Reserves ~~established~~ for variable consideration for rebates, chargebacks and co-pay assistance are based upon the insurance benefits of the end customer, which are estimated using historical activity and, where available, actual and pending prescriptions for which the Company has validated the insurance benefits. Reserves for variable consideration are classified as product revenue allowances on the consolidated balance sheets, with the exception of prompt-pay discounts ~~and returns~~which are classified as reductions of accounts ~~receivable if~~receivable. The reserve for product returns for which the ~~amount~~product may not be returned for a period of greater than one year from the balance sheet date is ~~payable~~included as a component of other non-current liabilities in the consolidated balance sheets. Uncertainties related to ~~direct customers,~~variable consideration are generally resolved in the quarter subsequent to period end, with the exception of ~~service fees. Service fees~~product returns which are ~~classified as a liability. Reserves established for chargebacks, rebates or co-pay assistance are classified as a liability if~~resolved during the ~~amount is payable to a party other than customers.~~product expiry period specified in the customer contract. The Company currently records sales allowances for the following:

~~Vanda Pharmaceuticals Inc.~~Prompt-pay:

~~Notes to~~ Specialty pharmacies and wholesalers are offered discounts for prompt payment. The Company expects that the ~~Consolidated Financial Statements — (Continued)~~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 patient 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 quarter’s activity, plus an accrual balance for known prior quarter’s 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.

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.~~patients through 2018. Public Law No. 115-123, also known as the Bipartisan Budget Act of 2018 enacted on February 9, 2018 increased the manufacturer discount from 50% to 70% effective in 2019 for applicable drugs. Vanda accounts for the Medicare Part D coverage gap using a point of sale model. 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 quarter’s 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~~receives sales order management, data and ~~wholesaler fees for~~distribution services ~~and their data.~~from certain customers. 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~~is a payment for a distinct good or service from the ~~consideration and it can reasonably estimate~~customer in which case the fair value of ~~the benefit received. In which case, service fees~~those distinct goods or services are recorded as selling, general and administrative expense.

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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 Company’s 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.

~~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.

Product ~~Returns:~~Returns: Consistent with industry practice, the Company generally offers direct customers a limited right to return as defined within the Company’s returns policy. The Company considers several factors in the estimation process, including historical return activity, expiration dates of product shipped to specialty pharmacies and wholesalers, inventory levels within the distribution channel, product shelf life, prescription trends and other relevant ~~factors~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes~~factors. The Company does not expect returned goods to ~~the Consolidated Financial Statements — (Continued)~~

be resalable. There was no right of return asset as of December 31, 2018 or 2017. The following table summarizes ~~accounts receivable allowance~~ activity for product returns as of and for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013.~~

(in thousands)
   Accounts
Receivable
Allowances
Balance at December 31, 2012
   $ —
Provision related to current period sales
   —
Adjustments for prior period sales
   —
Credits/payments made
   —


Balance at December 31, 2013
   $ —
Provision related to current period sales
   85
Adjustments for prior period sales
   —
Credits/payments made
   —


Balance at December 31, 2014
   $ 85
Provision related to current period sales
   1,071
Adjustments for prior period sales
   (85 )
Credits/payments made
   (12 )


Balance at December 31, 2015
   $ 1,059

~~License Revenue~~2016:

The Company’s license revenues for the years ended December 31, 2014 and 2013 were derived from the amended and restated sublicense agreement with Novartis and include an upfront payment and future milestone and royalty payments. Pursuant to the amended and restated sublicense agreement, Novartis had the right to commercialize and develop Fanapt^® in the U.S. and Canada. Under the amended and restated sublicense agreement, the Company received an upfront payment of $200.0 million. Revenue related to the upfront payment was recognized ratably from the date the amended and restated sublicense agreement became effective (November 2009) through the expected duration of the Novartis commercialization of Fanapt^® ~~in the U.S. which was estimated to be through the expiry of the Fanapt~~^® composition of patent, including a granted Hatch-Waxman extension (November 2016). In connection with the Settlement Agreement with Novartis, the Company recognized the remaining deferred revenue as of December 31, 2014 as part of the gain on arbitration settlement. See Note 3,~~Settlement Agreement with Novartis~~~~, for additional information.~~

~~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. Revenues and accounts receivable are concentrated with these customers. The Company has not experienced any losses relating to receivables from customers.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~The following table presents each major customer that represented more than 10% of total revenues for the years ended December 31, 2015, 2014 and 2013:~~

   Year Ended December 31,
Percent of Total Revenues
   2015    2014    2013
Novartis -royalty revenue
   —       13%       21%
Novartis -license agreement
   —       61%       79%
Distributor A
   17%       —       —
Distributor B
   18%       —       —
Distributor C
   19%       —       —
Distributor D
   14%       —       —
Distributor E
   14%       —       —
Distributor F
   12%       —       —

~~The following table presents each major customer that represented more than 10% of accounts receivable, net, as of December 31, 2015 and 2014:~~

   December 31,
Percent of Accounts Receivable, Net
   2015    2014
Novartis -royalty
   —       42%
Distributor A
   22%       —
Distributor B
   24%       —
Distributor C
   17%       —
Distributor D
   12%       21%
Distributor E
   12%       17%
Distributor F
   —       20%

(in thousands) Reserve for Product Returns
Balances at December 31, 2015 $ 1,059
Additions 2,507
Credits/payments (486 )
Balances at December 31, 2016 3,080
Additions 5,978
Credits/payments (4,939 )
Balances at December 31, 2017 4,119
Additions 2,684
Credits/payments (1,616 )
Balances at December 31, 2018 $ 5,187

Cost of Goods Sold

Cost of goods sold includes royalties payable, the cost of inventory sold, manufacturing and supply chain costs and product shipping and handling costs related to ~~U.S.~~ sales of HETLIOZ^® and ~~sales of~~ Fanapt^® to the Company’s distribution partners.

Research and Development Expenses

Research and development expenses consist primarily of fees for services provided by third parties in connection with the clinical trials, costs of contract manufacturing services, milestone payments, costs of materials used in clinical trials and research and development, costs for regulatory consultants and filings, depreciation of capital resources used to develop products, related facilities costs, and salaries, other employee-related costs and stock-based compensation for research and development personnel. The Company expenses research and development costs as they are incurred for products in the development stage, including manufacturing costs and milestone payments made under license agreements prior to FDA approval. Upon and subsequent to FDA approval, manufacturing and milestone payments related to license agreements are capitalized. Milestone payments are accrued when it is deemed probable that the milestone event will be achieved. Costs related to the acquisition of intellectual property are expensed as incurred if the underlying technology is developed in connection with the Company’s research and development efforts and has no alternative future use.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of salaries, stock-based compensation, facilities and third party expenses. Selling, general and administrative expenses are associated with the activities of the executive, finance, accounting, information technology, business development, commercial support, trade and distribution, sales, marketing, legal, medical affairs and human resource functions. Additionally, selling, general and administrative expenses included an estimate for the annual Patient Protection and Affordable Care fee.

~~Stock-based~~

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 award’s vesting period. The fair value of stock options

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granted and restricted stock units (RSUs) awarded are amortized using the straight-line method. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are ~~required to be~~ estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those ~~estimates~~

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. Expected volatility rates are based on the historical volatility of the 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 employee and director stock options granted during the years ended December 31, 2015, 2014 and 2013 were as follows:~~

   Year Ended December 31,
   2015 2014 2013
Expected dividend yield
   0 % 0 % 0 %
Weighted average expected volatility
   60 % 62 % 65 %
Weighted average expected term (years)
   6.00    5.90    6.03
Weighted average risk-free rate
   1.67 % 1.73 % 1.59 %
Weighted average fair value per share
   $ 11.74    $ 6.99    $ 6.10

~~Stock-based compensation expense recognized for the years ended December 31, 2015, 2014 and 2013 was comprised of the following:~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

estimates.

Advertising Expense

The Company expenses the costs of advertising, including branded promotional expenses, as incurred. Branded advertising expenses, recorded in selling, general and administrative expenses, were ~~$3.4~~$0.9 million, $1.3 million and ~~$5.0~~$1.4 million for the years ended December 31, ~~2015~~2018, 2017 and ~~2014,~~2016, respectively.

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s international subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies, including intercompany balances for which settlement is anticipated in the foreseeable future, are translated at exchange rates in effect at the balance sheet date. Foreign currency equity balances are translated at historical rates. Revenues and expenses denominated in foreign currencies are translated at average exchange rates for the respective periods. Foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss).

Transactions denominated in currencies other than subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in the consolidated balance sheets related to these items will result in unrealized foreign currency transaction gains and losses based upon period-end exchange rates. The Company ~~did not incur any advertising expense during~~also records realized foreign currency transaction gains and losses upon settlement of the ~~year~~transactions. Foreign currency transaction gains and losses are included in other income and amounted to loss of $0.5 million, income of $0.1 million, and loss of $0.2 million for the years ended December 31, ~~2013.~~

2018, 2017 and 2016, respectively.

Income ~~taxes~~

Taxes

The Company accounts for ~~income taxes in accordance with the authoritative guidance on accounting for income taxes, which requires companies to account for deferred~~ income taxes using the asset and liability method. Under the asset and liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The fact that the Company has historically generated net operating losses (NOLs) serves as strong evidence that it is more likely than not that deferred tax assets will not be realized in the future. Therefore, the Company has a full valuation allowance against all deferred tax assets as of December 31, 2015 and 2014. Tax rate changes are reflected in income during the period such changes are enacted. Changes in ownership may limit the amount of NOL carryforwards that can be utilized in the future to offset taxable income.

Non-Cash Investing and Financing Activities

Purchases of property and equipment accrued in current liabilities amounted to $0.2 million, zero and $0.2 million for each of the years ended December 31, 2018, 2017 and 2016, respectively.

Certain ~~risks~~Risks and ~~uncertainties~~

Uncertainties

The Company’s products under development require approval from the FDA or other international regulatory agencies prior to commercial sales. There can be no assurance the products will receive the necessary clearance. If the Company is denied clearance or clearance is delayed, it may have a material adverse impact on the Company.

The Company’s products are concentrated in rapidly-changing, highly-competitive markets, which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements or changes in regulatory requirements or industry standards or any significant delays in the development or introduction of products or services could have a material adverse effect on the Company’s business, operating results and future cash flows.

The Company depends on single source suppliers for critical raw materials for manufacturing, as well as other components required for the administration of its products. The loss of these suppliers could delay the clinical trials or prevent or delay commercialization of the products.

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Concentrations of ~~credit risk~~

Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash, cash equivalents and marketable securities. The Company places its cash, cash equivalents and marketable securities with highly-rated financial institutions. At December 31, ~~2015,~~2018, the Company maintained all of its cash, cash equivalents and marketable securities in two financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and the Company believes there is minimal risk of losses on such balances.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

Segment ~~information~~

and Geographic Information

The Company operates in one reporting segment and, accordingly, no segment disclosures are presented herein.

Foreign sales were not material for each of the years ended December 31, 2018, 2017 and 2016.

Recent ~~accounting pronouncements~~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 consolidated financial statements. The Company will change its presentation of shareholder's equity in the first quarter of 2019.

In November ~~2015,~~2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2015-17,~~~~Balance Sheet Classification~~2016-18, Restricted Cash. The new standard requires that a statement of ~~Deferred Taxes.~~~~Currently deferred taxes for each tax jurisdiction are presented~~cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as ~~a net current asset~~restricted cash or ~~liability~~restricted cash equivalents. Therefore, amounts generally described as restricted cash and ~~net noncurrent asset or liability~~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 balance sheet. To simplify the presentation, the new guidance requires that all deferred tax assets and liabilities for each jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet.statement of cash flows. The ~~new guidance becomes~~standard is effective for ~~public business entities in fiscal years~~annual reporting periods beginning after December 15, ~~2016.~~2017, and interim periods within annual periods beginning after December 15, 2017. The Company adopted this new standard in the ~~fourth~~first quarter of 2018 and applied the provisions retrospectively. As a result of the adoption of the new guidance, the Company increased the beginning of year total amount shown on the consolidated statements of cash flows by $0.7 million, $0.8 million, and $0.8 million for the years ended December 31, 2018, 2017 and 2016, equal to the balance of restricted cash included in the consolidated balance sheets as of December 31, 2017, 2016 and 2015, respectively. 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. As of December 31, 2018, restricted cash of $0.1 million and $0.6 million is included in prepaid and other current assets and other non-current assets, respectively. As of December 31, 2017, restricted cash of $0.7 million is included in other non-current assets.

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. The Company’s adoption ~~did not~~of this standard in the first quarter of 2018 had no impact to the Company’s 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 Company’s consolidated financial statements.

In ~~September 2015,~~February 2016, the FASB issued ASU ~~2015-16,~~~~Simplifying the Accounting for Measurement –Period Adjustments~~~~. Changes~~2016-2, Leases, which was further clarified by ASU 2018-10, Codification Improvements to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments,Topic 842, Leases, and ~~instead require the acquiring entity to record these adjustments~~ASU 2018-11, Leases - Targeted Improvements, issued in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard is not expected to have a material impact on the Company’s consolidated financial statements.

In July ~~2015, the FASB issued ASU 2015-11,~~~~Simplifying the Measurement of Inventory,~~dealing with changes to the subsequent measurement of inventory. Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for both public and private companies for periods beginning after December 15, 2016. Adoption of this new standard is not expected to have a material impact on the Company’s consolidated financial statements.2018. ASC 842 supersedes existing lease guidance, including ASC 840 -

~~In January 2015, the FASB issued ASU 2015-01,~~~~Income Statement-Extraordinary and Unusual Items~~, to simplify income statement classification by removing the concept of extraordinary items from U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard is not expected to have a material impact on the Company’s consolidated financial statements.Leases.

~~In August 2014, the FASB issued ASU 2014-15,~~~~Presentation of Financial Statements – Going Concern~~. The new standard requires ~~management~~that lessees will need to recognize a right-of-use asset and a lease liability for virtually all of ~~public and private companies~~their leases (other than leases that meet the definition of a short-term

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lease). The liability will be equal to ~~evaluate whether there is substantial doubt about~~ the ~~entity’s ability~~present value of lease payments. The asset will be based on the liability subject to ~~continue~~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 ~~going concern and, if so, disclose that fact. Management~~front-loaded expense pattern (similar to current capital leases). The Company will ~~also be required to evaluate and disclose whether its plans alleviate that doubt. The~~adopt the new leasing standard ~~is effective~~in the first quarter of 2019 using the modified retrospective approach transition method through a cumulative-effect adjustment at the beginning of the period of adoption. Results for ~~annual periods ending after December 15, 2016, and interim periods within annual~~reporting periods beginning after ~~December 15, 2016. Adoption~~January 1, 2019 will be presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC 840. The Company expects to elect the package of ~~this~~practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of past leases, classification and initial direct costs. The Company does not expect to elect the hindsight practical expedient. The Company expects that the adoption of the new leasing standard ~~is not expected to have a~~will result in the recognition of material ~~impact~~right-of-use asset and liabilities on the ~~Company’s~~ consolidated ~~financial statements.~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

balance sheets for its operating lease commitments with terms greater than twelve months.

In May 2014, the FASB issued ASU ~~2014-09,~~2014-9, Revenue from Contracts with Customers ~~(Topic 606)~~. This ~~new standards~~ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and creates ASC 606, Revenue from Contracts with Customers. ASC 606 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 methods—entities can either apply the new standard (i) retrospectively to each prior reporting period presented (full retrospective), or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial ~~adoption. At the time the new standard was issued, it was set to be effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.~~adoption (modified retrospective). In July 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers ~~(Topic 606)~~, 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 2016-8 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 2014-9. ASU 2016-8, ASU 2016-10, and ASU 2016-12 follow the same implementation guidelines as ASU 2014-9 and ASU 2015-14. The Company ~~is evaluating~~adopted this new standard ~~to determine if adoption will have a material impact on the Company’s consolidated financial statements.~~

~~3. Settlement Agreement with Novartis~~

~~In May 2014, the Company commenced arbitration proceedings with Novartis relating to the license of Fanapt~~^® ~~(the Fanapt~~^® Arbitration). In December 2014, the Company entered into a settlement agreement with Novartis and certain of its affiliates (the Settlement Agreement). Pursuant to the terms of the Settlement Agreement, the Company and Novartis dismissed the Fanapt^® ~~Arbitration and released each other from any related claims. In addition, in connection with the Settlement Agreement, Novartis (i) transferred all U.S. and Canadian rights~~ in the ~~Fanapt~~^® ~~franchise to the Company, (ii) purchased $25.0 million~~first quarter of the Company’s common stock at a price per share equal to $13.82, and (iii) granted to the Company an exclusive worldwide license to AQW051, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist.

Pursuant to the stock purchase agreement entered into as part of the Settlement Agreement, Novartis purchased $25.0 million of the Company’s common stock. The Company issued to Novartis an aggregate of 1,808,973 shares at $13.82 per share, which per share represented a 10% premium to the average closing prices of the Company’s common stock for the ten trading days prior to December 22, 2014. The Company recorded a loss of $0.9 million as part of gain on arbitration settlement in the consolidated statement of operations for the period ending December 31, 2014 related to the issuance of stock, which was valued2018 using the ~~Company’s closing stock price on December 31, 2014, the effective date~~modified retrospective method to those contracts which were not completed as of ~~the transaction.~~

~~In connection with the Settlement Agreement, the Company received an exclusive worldwide license~~January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ~~certain patents~~ASC 606, while prior period amounts are not adjusted and ~~patent applications, and other licenses~~continue to intellectual property, to develop and commercialize AQW051. Under the AQW051 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. Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens. The Company evaluated AQW051 and determined that the asset is both incomplete and has substance. However, given the early stage of AQW051 and the future costs of development, no transaction value was allocated to this asset.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~The Company accounted for the Settlement Agreement~~be reported in accordance with ~~the provisions~~historic accounting under ASC 605. There was no impact to opening retained earnings as of ~~ASC Subtopic 805,~~ ~~Business Combinations~~ ~~(ASC 805). Under the provisions~~January 1, 2018 as a result of ~~ASC 805, the acquisition date for a business is the date on which the company obtains control~~adoption of the ~~acquiree.~~new standard. The ~~Company obtained control on December 31, 2014, the effective date of the Settlement Agreement. The following summarizes the fair value of consideration exchanged as part of the Settlement Agreement:~~

(in thousands)

Equity issued
   $ 25,904
Cash received
   (25,000 )
Settlement of pre-existing non-contractual relationship
   18,087


   $ 18,991

~~Assets acquired and recorded at fair value as of December 31, 2014 were as follows:~~

(in thousands)

Inventory
   $ 2,960
Intangible—Re-acquired right
   15,940
Prepaid services
   91


   $ 18,991

~~The Company recorded the reacquired right as an intangible asset as of December 31, 2014. The Company is amortizing the reacquired right on a straight-line basis through November 2016.~~

~~Due~~impact to the ~~effective date~~consolidated statements of ~~the Settlement Agreement being December 31, 2014,~~operations if the Company ~~did not recognize any revenue or operating expenses related to U.S. or Canadian commercial sales of Fanapt~~^® ~~in the consolidated statement of operations for the year ended December 31, 2014.~~

In connection with the Settlement Agreement, the Company and Novartis terminated the 2009 Amended Sublicense Agreement (the 2009 Agreement). Given the termination of this pre-existing contractual relationship and that there is no further obligation under the 2009 Agreement, the Company recognized a gain of $59.5 million, representing the remaining deferred revenue related to the $200.0 million upfront payment received from Novartis under the 2009 Agreement. This amount was included in gain on arbitration settlement in the consolidated statement of operations in the fourth quarter of 2014.

~~The Settlement Agreement provided for a mutual release of claims and dismissed the Fanapt~~^® Arbitration, which effectively settled a pre-existing non-contractual relationship. As a result, the Company recorded an $18.1 million gain on the settlement of arbitration, which represented the value of a potential future arbitration outcome. This amount was valued based on a probability weighted scenario analysis that took into consideration the probability of each potential future alternative outcomes of the arbitration between the parties. This amount is included in gain on arbitration settlement in the consolidated statement of operations in the fourth quarter of 2014.

~~4. 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.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~The following table presents the calculation of basic and diluted net income (loss) per share of common stock~~had applied ASC 605 for the years ended December 31, ~~2015, 2014,~~2017 and ~~2013:~~

      Year Ended December 31,
(in thousands, except for share and per share amounts)
   2015 2014    2013
Numerator:

Net income (loss)
   $ (39,865 ) $ 20,186       $ (21,055 )




Denominator:

Weighted average shares outstanding: Basic
   42,250,254    34,774,163       30,351,353
Effect of dilutive securities
   —    1,912,560       —




Weighted average shares outstanding: Diluted
   42,250,254    36,686,723       30,351,353




Net income (loss) per share, basic and diluted:

Basic
   $ (0.94 ) $ 0.58       $ (0.69 )




Diluted
   $ (0.94 ) $ 0.55       $ (0.69 )




Antidilutive securities excluded from calculations of diluted net income (loss) per share
   5,660,199    3,524,656       4,409,811

~~The~~2016 is not material. As a result of adoption, the Company ~~incurred a~~reclassified the provision for product revenue returns of $5.2 million from accounts receivable, net ~~loss for each~~to product revenue allowances and other non-current liabilities in the consolidated balance sheets as of ~~the years ended~~ December 31, ~~2015 and 2013 causing inclusion~~2018. The provision for product returns as of ~~any potentially dilutive securities to have an anti-dilutive effect, resulting~~December 31, 2017 of $4.1 million is included in ~~dilutive loss per share and basic loss per share attributable to common stockholders being equivalent.~~

5.accounts receivable in the consolidated balance sheet.

3. Marketable Securities

The following is a summary of the Company’s available-for-sale marketable securities as of December 31, ~~2015,~~2018, all of which have contract maturities of less than one year:

December 31, 2015
(in thousands)
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses Fair
Market
Value
U.S. Treasury and government agencies
   $ 44,059       $ 6       $ (8 ) $ 44,057
Corporate debt
   48,239       46       (5 ) 48,280






   $ 92,298       $ 52       $ (13 ) $ 92,337



December 31, 2018 (in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
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

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The following is a summary of the Company’s available-for-sale marketable securities as of December 31, ~~2014:~~

December 31, 2014
(in thousands)
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses Fair
Market
Value
U.S. Treasury and government agencies
   $ 30,618       $ 4       $ (4 ) $ 30,618
Corporate debt
   38,287       25       (9 ) 38,303






   $ 68,905       $ 29       $ (13 ) $ 68,921

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

6.2017:



December 31, 2017 (in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
U.S. Treasury and government agencies	$	60,681	$	—	$	(63	)	$	60,618
Corporate debt	49,168		12		(12		)	49,168
	$	109,849	$	12	$	(75	)	$	109,786

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 December 31, ~~2015~~2018 and ~~2014~~2017 consist of cash equivalents and available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of investments classified in Level 2 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 years ended December 31, ~~2015~~2018 and ~~2014.~~

~~As of December 31, 2015, the~~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 December 31, 2015 Using
(in thousands)
December 31,
2015    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
$ 44,057       $ 44,057       $ —       $ —
Corporate debt
48,280       —       48,280







$ 92,337       $ 44,057       $ 48,280       $ —

As of December 31, ~~2014, the~~2018, as follows:



			Fair Value Measurement as of December 31, 2018 Using
(in thousands)	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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	$	—

The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2017, as follows:

   Fair Value Measurement as of December 31, 2014 Using
(in thousands)
December 31,
2014    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
$ 30,618       $ 30,618       $ —       $ —
Corporate debt
38,303       —       38,303







$ 68,921       $ 30,618       $ 38,303       $ —



			Fair Value Measurement as of December 31, 2017 Using
(in thousands)	December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury and government agencies	$	60,618	$	60,618	$	—	$	—
Corporate debt	53,164		—		53,164		—
	$	113,782	$	60,618	$	53,164	$	—

Total assets measured at fair value as of December 31, 2017 include $4.0 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

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liabilities, and milestone obligations under license agreements, the carrying ~~value~~values of which materially approximate their fair values.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

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 December 31, ~~2015~~2018 and ~~2014:~~

   December 31,    December 31,
(in thousands)
   2015    2014
Current assets

Raw materials
   $ —       $ 198
Work-in-process
   —       1,326
Finished goods
   1,294       3,394
Deferred cost of goods sold
   —       252




   $ 1,294       $ 5,170




Non-Current assets

Raw materials
   $ 127       $ —
Work-in-process
   2,369       —




   $ 2,496       $ —

~~8. Prepaid Expenses and Other Current Assets~~

~~The following is a summary of the Company’s prepaid expenses and other current assets as of December 31, 2015 and 2014:~~

   December 31,    December 31,
(in thousands)
   2015    2014
Prepaid insurance
   $ 423       $ 270
Prepaid manufacturing cost
   346       358
Other prepaid expenses and vendor advances
   4,763       2,302
Other current assets
   210       154




   $ 5,742       $ 3,084

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

9.2017:



(in thousands)	December 31, 2018		December 31, 2017
Current assets
Work-in-process	$	48	$	80
Finished goods	946		760
	$	994	$	840
Non-Current assets
Raw materials	$	86	$	87
Work-in-process	2,290		2,821
Finished goods	516		408
	$	2,892	$	3,316

6. Property and Equipment

The following is a summary of the Company’s property and ~~equipment-at~~equipment, at cost, as of December 31, ~~2015~~2018 and ~~2014:~~

(in thousands)
   Estimated
Useful Life
(Years)    December 31,
      2015 2014
Computer and other equipment
   3       $ 2,046    $ 1,316
Furniture and fixtures
   7       1,318    765
Leasehold improvements
   11       3,519    2,089


      6,883    4,170
Accumulated depreciation and amortization

   (2,313 ) (1,733 )


      $ 4,570    $ 2,437

2017:



(in thousands)	Estimated Useful Life (Years)	December 31, 2018			December 31, 2017
Computer and other equipment	3	$	3,642		$	3,342
Furniture and fixtures	5 - 7	1,488			1,929
Leasehold improvements	5 - 11	4,506			4,515
		9,636			9,786
Accumulated depreciation and amortization		(5,219		)	(4,480		)
		$	4,417		$	5,306

Depreciation expense was $1.4 million, $1.2 million and $0.9 million for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013 was $0.6 million, $0.5 million and $0.4 million,~~2016, respectively.

~~10.~~

7. Intangible Assets

HETLIOZ

~~The following is a summary of the Company’s intangible assets as of December 31, 2015:~~

      December 31, 2015
(in thousands)
   Estimated Useful
Life (Years)    Gross Carrying
Amount    Accumulated
Amortization    Net Carrying
Amount
HETLIOZ^®
   January 2033    $ 33,000       $ 3,460       $ 29,540
Fanapt^®
   November 2016    27,941       18,729       9,212






      $ 60,941       $ 22,189       $ 38,752

~~The following is a summary of the Company’s intangible assets as of December 31, 2014:~~

      December 31, 2014
(in thousands)
   Estimated
Useful life    Gross Carrying
Amount    Accumulated
Amortization    Net Carrying
Amount
HETLIOZ^®
   January 2033    $ 8,000       $ 539       $ 7,461
Fanapt^®
   November 2016    27,941       8,678       19,263






      $ 35,941       $ 9,217       $ 26,724

^®.In January 2014, the Company announced that the FDA had approved the ~~NDA~~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 ~~remaining~~estimated economic useful life of the related product patents, the latest of which expires in February 2035. The estimated economic useful life of the intangible asset was changed from May 2034 to February 2035 based on the February 2035 expiration date of U.S. patent ~~for HETLIOZ~~^®~~, which prior to June 2014, the Company expected to last until December 2022. In June 2014, the Company received a notice of allowance from~~number 10,071,977 ('977 patent) issued by the U.S. Patent and Trademark Office ~~for a patent covering~~in September 2018.

In April 2018, the ~~method~~Company met its final milestone under its license agreement when cumulative worldwide sales of ~~use of~~ HETLIOZ^®~~. The patent expires in January 2033, thereby potentially extending the exclusivity protection in the U.S. beyond the composition of matter patent.~~ reached $250.0 million. As a result of the ~~patent allowance,~~achievement of this milestone, the Company ~~extended the estimated useful life of the U.S. patent for HETLIOZ~~^® ~~from December 2022 to January 2033.~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~The Company is obligated to make~~made a ~~future milestone~~ payment to BMS of $25.0 million in ~~the event that cumulative worldwide sales of HETLIOZ~~^® ~~reach $250.0 million.~~2018. The ~~likelihood of achieving the milestone and the related milestone obligation was determined to be probable during the year ended December 31, 2015. As a result, the future obligation of~~ $25.0 million obligation was recorded as a ~~non-current~~current liability as of December 31, ~~2015 along with an addition of $25.0 million to capitalized intangible assets relating to HETLIOZ~~^®.2017. The $25.0 million was determined to be additional consideration for the acquisition of the HETLIOZ^® intangible asset ~~which was created upon FDA approval on January 31, 2014. The actual payment of the $25.0 million will occur once the $250.0 million in cumulative worldwide sales of HETLIOZ~~^® ~~is realized. The $25.0 million~~and is being amortized on a straight-line basis over the ~~remaining~~estimated economic useful life of the related product patents, the latest of which expires in February 2035. The estimated economic useful life of the intangible asset was changed from May 2034 to February

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2035 based on the February 2035 expiration date of the '977 patent issued by the U.S. ~~patent for HETLIOZ~~Patent and Trademark Office in September 2018.

Fanapt^®~~, which is expected to be January 2033. Amortization of intangible assets relating to HETLIOZ~~^® amounted to $2.9 million for the year ended December 31, 2015 and includes a catch-up adjustment of $1.2 million to retroactively record cumulative amortization from January 31, 2014 to December 31, 2014 for the milestone obligation of $25.0 million. In future periods the Company expects annual amortization of capitalized intangible asset costs relating to HETLIOZ^® ~~will amount to $1.7 million until the expiration of the patent in 2033.~~

. In 2009, the Company announced that the FDA had approved the NDA for Fanapt^®. As a result of this approval, the Company met a milestone under its original sublicense agreement with Novartis that required the Company to make a license payment of $12.0 million to Novartis. The $12.0 million ~~is being~~was 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 ~~the Settlement Agreement,~~a settlement agreement entered into 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 ~~is being~~was fully amortized on a straight-line basis ~~through~~as of November 2016. The useful life estimation for the Fanapt^® intangible asset iswas 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~~

The following is a summary of the Company’s intangible assets ~~relating to Fanapt~~^® ~~amounted to $10.1 million for the year ended~~as of December 31, ~~2015. See Note 3,~~~~Settlement Agreement with Novartis~~~~, for additional information.~~

2018:



		December 31, 2018
(in thousands)	Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
HETLIOZ^®	February 2035	$	33,000	$	8,458	$	24,542
Fanapt^®	November 2016	27,941		27,941		—
		$	60,941	$	36,399	$	24,542

The following is a summary of the Company’s intangible assets as of December 31, 2017:



		December 31, 2017
(in thousands)	Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
HETLIOZ^®	May 2034	$	33,000	$	6,931	$	26,069
Fanapt^®	November 2016	27,941		27,941		—
		$	60,941	$	34,872	$	26,069

Intangible assets are ~~being~~ amortized over their estimated useful economic life using the ~~straight line~~straight-line method. ~~Total amortization~~Amortization expense ~~was $13.0 million, $2.3 million and $1.5 million~~ for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013, respectively.~~

2016 was as follows:



	Year Ended December 31,
(in thousands)	2018		2017		2016
HETLIOZ^®	$	1,527	$	1,750	$	1,721
Fanapt^®	—		—		9,212
	$	1,527	$	1,750	$	10,933

The following is a summary of the future intangible asset amortization schedule as of December 31, ~~2015:~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~11.~~2018:



(in thousands)	Total		2019		2020		2021		2022		2023		Thereafter
HETLIOZ^®	$	24,542	$	1,518	$	1,518	$	1,518	$	1,518	$	1,518	$	16,952

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8. Accounts Payable and Accrued Liabilities

The following is a summary of the Company’s accounts payable and accrued liabilities as of December 31, ~~2015~~2018 and ~~2014:~~

(in thousands)
   December 31,
2015    December 31,
2014
Research and development expenses
   $ 3,199       $ 1,759
Consulting and other professional fees
   5,088       2,522
Compensation and employee benefits
   468       388
Royalties payable
   5,328       602
Other
   1,684       2,020




   $ 15,767       $ 7,291

~~12. Deferred Licensing Revenue~~

2017:



(in thousands)	December 31, 2018		December 31, 2017
Compensation and employee benefits	$	6,363	$	5,323
Research and development expenses	5,593		4,663
Royalties payable	5,172		4,394
Consulting and other professional fees	2,924		3,961
Other	1,532		1,994
	$	21,584	$	20,335

9. Commitments and Contingencies

The following is a summary of ~~changes in deferred licensing revenue for~~ the ~~years ended~~Company's noncancellable long-term contractual cash obligations as of December 31, ~~2014 and 2013:~~

   Year Ended December 31,
(in thousands)
   2015    2014    2013
Balance beginning of year
   $ —       $ 90,275       $ 117,064
Licensing revenue recognized
   —       (30,746)       (26,789)
Recognized as part of gain on arbitration settlement
   —       (59,529)       —






Balance end of year
   $           —       $ —       $ 90,275

~~The Company entered into an amended and restated sublicense agreement with Novartis in 2009, pursuant~~2018:



	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
Milestone obligations	200		200		—		—		—		—		—
Purchase commitments	7,315		5,122		847		890		456		—		—
	$	30,272	$	7,805	$	3,342	$	3,225	$	2,811	$	2,420	$	10,669

Operating Leases

Commitments relating to ~~which Novartis had the right to commercialize and develop Fanapt~~^® in the U.S. and Canada. Under the amended and restated sublicense agreement, the Company received an upfront payment of $200.0 million. Revenue related to the upfront payment was recognized ratably from the date the amended and restated sublicense agreement became effective (November 2009) through the expected duration of the Novartis commercialization of Fanapt^® ~~in the U.S. which was estimated to be through the expiry of the Fanapt~~^® composition of patent, including a granted Hatch-Waxman extension (November 2016). During the year ended December 31, 2014, the Company recognized revenue of $30.7 million related to the license agreement. In connection with the Settlement Agreement, the Company recognized the remaining deferred revenue balance of $59.5 million during the three months ended December 31, 2014, as part of the gain on arbitration settlement. See Note 3,~~Settlement Agreement with Novartis~~~~, for additional information.~~

~~13. Commitments and Contingencies~~

~~Operating Leases~~

~~The following is a summary of~~operating leases represent the minimum annual future payments under operating leases ~~as of December 31, 2015:~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

The minimum annual future payments for operating leases consists of the lease for office space for the Company’s headquarters located in Washington, D.C., which expires in 2023. In 2011 the Company entered into an office lease, which was subsequently amended in 2014, with Square 54 Office Owner LLC (Landlord)and subleases for its Company's headquarters ~~consisting of a total of 30,260 square feet of office space~~ at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. ~~(Lease).~~, and operating leases for office space in London and Berlin.

In June 2011, the Company entered into an operating lease for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. for 21,400 square feet of office space. The Company subsequently amended the lease in March 2014 and March 2018 to increase the office space under lease to 33,534 square feet and, in March 2018, extended the lease term to July 2028. Subject to the prior rights of other tenants, ~~in the building,~~ the Company has the right to renew the ~~Lease~~lease for five years following its expiration. The ~~company~~Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions. The ~~Lease~~lease may be terminated early by the Company or the ~~Landlord upon~~landlord under certain ~~conditions. The Landlord provided~~circumstances.

In June 2016, the Company ~~with~~entered into a ~~cash allowance~~sublease under which the Company leases 9,928 square feet of ~~$0.8 million~~office space for ~~tenant improvements.~~its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. The ~~allowance~~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.

The Company has an operating lease for ~~tenant improvements is reflected in the consolidated financial statements as an increase to the deferred rent liability~~2,880 square feet of office space for the ~~year ended December 31, 2015.~~

Company’s 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.

Rent expense under operating leases and subleases was ~~$1.9~~$3.6 million, ~~$1.7~~$3.2 million and ~~$1.1~~$2.5 million for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, respectively.

Guarantees and Indemnifications

The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the 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

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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^®. 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 Company’s 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 FDA’s approval of the HETLIOZ^® NDA in January 2014, the Company ~~incurred~~made an $8.0 million milestone ~~obligation~~payment to BMS 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~~estimated economic useful life of the related product patents for HETLIOZ^® ~~patent life~~ in the U.S. ~~The~~In April 2018, the Company ~~is obligated to make~~met another milestone under its license agreement when cumulative worldwide sales of HETLIOZ^® reached $250.0 million. As a ~~future~~result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in the ~~event that cumulative worldwide sales of HETLIOZ~~^® ~~reach $250.0 million. During the first~~second quarter of ~~2015, the likelihood of achieving the milestone and the related milestone obligation was determined to be probable. As such, the~~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 ~~expected~~estimated economic useful life of the related product patents for 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.~~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 ~~new chemical entity~~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

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

for countries in which no ~~new chemical entity~~NCE patent existed or for the remainder of the 10 years after the expiry of the ~~new chemical entity~~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^®.

~~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~~Fanapt^® 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 Company’s 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~~^®. Pursuant to the terms of ~~the Settlement Agreement,~~a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the Fanapt^® franchise to the Company on December 31, 2014.

~~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 FDA’s approval of the NDA for Fanapt~~^®, the Company entered into an amended and restated sublicense agreement with Novartis, which amended and restated the June 2004 sublicense agreement. Pursuant to the amended and restated sublicense agreement, Novartis had exclusive commercialization rights to all formulations of Fanapt^® ~~in the U.S. and Canada. Novartis began selling Fanapt~~^® ~~in the U.S. during the first quarter of 2010. Novartis was responsible for the further clinical development activities in the U.S. and Canada.~~ The Company ~~also received royalties equal to 10% of net sales of Fanapt~~^® ~~in the U.S. and Canada. The Company retained exclusive rights to Fanapt~~^® ~~outside the U.S. and Canada and~~ was obligated to make royalty payments to Sanofi S.A. (Sanofi) ~~on Fanapt~~^® ~~sales outside the U.S. and Canada.~~

~~Pursuant to the terms of the Settlement Agreement, Novartis transferred all U.S. and Canadian rights in the Fanapt~~^® ~~franchise to the Company on December 31, 2014. The Company is obligated to make royalty payments to Sanofi~~ and Titan 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. ~~See Note 3,~~~~Settlement Agreement with Novartis~~~~, for additional information.~~ In February 2016, the Company amended the agreement with Sanofi and Titan to remove Titan as the entity through which royalty payments from ~~Vanda~~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~~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. The Company ~~will make~~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 Vanda’s cumulative royalty obligations during this period exceed the amount of the pre-payment.~~royalty. No further royalties on manufacturing know-how are payable by ~~Vanda~~the Company after December 31, 2019. This amended agreement ~~does~~did not alter Titan’s obligation under the ~~License Agreement~~license agreement to make royalty payments to Sanofi prior to November 16, 2016 or ~~Vanda’s~~the Company’s obligations ~~under the~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~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~~new chemical entity patent has expired or was not issued.

~~The Company has entered into agreements with the following partners for the commercialization of Fanapt~~Tradipitant.^® ~~in the countries set forth below:~~


~~Country~~	~~Partner~~	~~Market Approval Date~~
~~Mexico~~	~~Probiomed S.A. de C.V.~~	~~October 2013~~
~~Israel~~	~~Megapharm Ltd.~~	~~August 2012~~

~~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~~NCE 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~~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 ~~$95.0~~$80 million for ~~future regulatory approval and~~ sales milestones. ~~Vanda~~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

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recorded as research and development expense in the consolidated statement of operations during the year ended December 31, 2017 and a current liability in the consolidated balance sheet as of December 31, 2017. 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 Vanda terminates the license agreement, or if Lilly terminates due to Vanda’s breach or for certain other reasons set forth in the license agreement, all rights licensed and developed by Vanda 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.~~VQW-765. In connection with ~~the Settlement Agreement,~~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 ~~AQW051,~~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 ~~AQW051~~VQW-765 and is responsible for all development ~~costs under the AQW051 license agreement.~~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.

~~Research~~Portfolio of CFTR activators and ~~Development~~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 ~~Marketing Agreements~~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.

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 6090 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.

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~14. Income Taxes~~

~~Deferred tax assets are reduced by a tax valuation allowance when,~~ Purchase commitments included in the ~~opinion of management, it is more likely~~noncancellable long-term contractual cash obligations table above include noncancellable purchase commitments longer than not that some portion or all of the deferred tax assets will not be realized. The fact that the Company has historically generated net operating losses (NOLs) serves as strong evidence that it is more likely than not that deferred tax assets will not be realized in the future. Therefore, the Company has a full tax valuation allowance against all deferred tax assets as ofone year and ~~December 31, 2015~~primarily relate to commitments for advertising and ~~2014. As a result of the tax valuation allowance against deferred tax assets, there was no provision for income taxes for the years ended December 31, 2015, 2014 and 2013.~~

~~The following is reconciliation between the Company’s statutory tax rate and effective tax rate for the years ended December 31, 2015, 2014 and 2013:~~

   Year Ended December 31,
          2015         2014         2013
Federal tax at statutory rate
   35.0 % 34.0 % -34.0 %
State taxes
   -0.1 % 7.2 % -4.0 %
Change in valuation allowance
   -25.4 % -59.7 % 43.9 %
Research and development credit
   1.5 % 1.3 % -1.1 %
Orphan drug credit
   1.6 % 8.5 % -22.7 %
Section 162(m) limitation
   -5.7 % 1.1 % 1.2 %
Tax rate change
   -0.3 % 4.8 % -0.3 %
Change in State NOLs
   -1.4 % 0.0 % 18.5 %
Non-deductible stock-based compensation
   -5.1 % 0.0 % 0.0 %
Other non-deductible items
   -0.1 % 2.8 % -1.5 %


Effective tax rate
   0.0 % 0.0 % 0.0 %

As of December 31, 2015, the Company has early adopted the balance sheet reclassification of all current deferred taxes to non-current deferred taxes. The Company has presented this information prospectively; therefore, prior periods were not retrospectively adjusted.

~~The following is a summary of the components of the Company’s deferred tax assets, net, and the related tax valuation allowance as of December 31, 2015 and 2014:~~

   December 31,
(in thousands)
   2015 2014
Deferred tax assets:

Net operating loss carry forwards
   $ 86,640    $ 73,626
Stock-based compensation
   12,919    17,160
Accrued and deferred expenses
   1,443    532
Research and development and orphan drug credit carryforwards
   38,333    36,772
Other
   802    806


Total deferred tax assets
   140,137    128,896
Deferred tax liabilities:

Other
   (1,100 ) (6 )


Total deferred tax liabilities
   (1,100 ) (6 )
Deferred tax assets, net
   139,037    128,890
Valuation allowance
   (139,037 ) (128,890 )


Net deferred tax assets
   $ —    $ —

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2015, 2014 and 2013:~~

(in thousands)
   Balance at
Beginning
of Year    Additions Charged
to Tax Expense    Reductions Credited
to Tax Expense Balance at End
of Year
Year Ended:

December 31, 2015
   $ 128,890       $ 17,002       $ (6,855 ) 139,037
December 31, 2014
   141,150       27,893       (40,153 ) 128,890
December 31, 2013
   133,271       22,998       (15,119 ) 141,150

As of December 31, 2015, the Company had federal and state NOL carryforwards of $232.6 million, including $6.5 million of gross excess windfall benefits generated from stock-based compensation from which the tax benefit would be recorded to Additional Paid in Capital if realized. As of December 31, 2015, the Company also had research and development credits of $6.8 million and orphan drug carryforward credits of $31.6 million. These NOL carryforwards and credits will begin to expire in 2028 and 2024, respectively.

Because the Company has generated NOLs from inception through December, 31, 2015, all income tax returns filed by the Company are open to examination by tax jurisdictions. As of December 31, 2015, the Company’s income tax returns have not been under examination by any federal or state tax jurisdictions. As of December 31, 2015 and 2014, the Company had no uncertain tax positions.

Certain tax attributes of the Company, including NOLs and credits, are subject to any ownership change as defined under IRC Section 382, A change in ownership could affect the Company’s ability to use NOLs and credit carryforward (tax attributes). Ownership changes did occur as of December 31, 2014 and December 31, 2008. However, the Company believes that it had sufficient Built-In-Gain to offset the Internal Revenue Code of 1986, as amended (IRC), Section 382 limitation generated by the ownership changes. Any future ownership changes may cause the Company’s existing tax attributes to have additional limitations. Additionally, the Company maintains a valuation allowance on its tax attributes, therefore, any IRC Section 382 limitation would not have a material impact on the Company’s provision for income taxes as of December 31, 2015.

~~15.~~data services.

10. Public Offering of Common Stock

In ~~October 2014,~~March 2018, the Company completed a public offering of ~~5,750,000~~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 ~~$11.60~~$17.00 per share. Net cash proceeds from the public offering were ~~$62.3~~$100.9 million, after deducting the underwriting discounts and commissions and offering expenses. ~~In August 2013,~~

11. Accumulated Other Comprehensive Income (Loss)

The accumulated balances related to each component of other comprehensive income (loss) were as follows for the Company completed a public offering of 4,680,000 shares of common stock at a price to the public of $11.14 per share. Net cash proceeds from the 2013 public offering were $48.5 million, after deducting the underwriting discounts and commissions and offering expenses.

~~16. Equity Incentive Plans~~

~~During the year~~years ended December 31, ~~2015,~~2018 and 2017:



(in thousands)	December 31, 2018			December 31, 2017
Foreign currency translation	$	7		$	29
Available-for-sale securities	(6		)	(63		)
	$	1		$	(34	)

There were no reclassifications out of accumulated other comprehensive income (loss) for the ~~Company had two equity incentive plans, the Second Amended~~years ended December 31, 2018, 2017 and ~~Restated Management Equity Plan (the 2004 Plan)~~2016.

12. Stock-Based Compensation

As of December 31, 2018, there were 5,682,618 shares that were subject to outstanding options and restricted stock units (RSUs) under the 2006 Equity Incentive Plan ~~(the~~(2006 Plan) and the Amended and Restated 2016 Equity Incentive Plan

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(2016 Plan, and together with the 2006 ~~Plan) that were~~Plan, Plans). The 2006 Plan expired by its terms on April 12, 2016, and the Company adopted ~~in December 2004~~the 2016 Plan. Outstanding options and ~~April 2006, respectively. There were no shares subject to outstanding options granted~~RSUs under the ~~2004~~2006 Plan asremain in effect and the terms of ~~December 31, 2015, and~~the 2006 Plan continue to apply, but no additional ~~options will~~awards can be granted under the ~~2004~~2006 Plan. AsIn June 2016, the Company’s stockholders approved the 2016 Plan. The 2016 Plan has been amended and restated twice to increase the number of ~~December 31, 2015, there were 11,829,472~~ shares reserved for issuance, among other administrative changes. Both amendments and restatements of the ~~Company’s~~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 ~~2006~~2016 Plan, 4,576,126 shares of which ~~7,275,129 shares were subject to outstanding options and RSUs and 1,733,142 shares~~ remained available for future ~~grant. On January 1~~grant as of each year, the number of shares reserved under the 2006 Plan is automatically increased by the lesser of 4% of the total number of shares of common stock that are outstanding at that time or 1,500,000 shares (or such lesser number as may be approved

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

by the Company’s board of directors). As of January 1, 2016, the number of shares of common stock that may be issued under the 2006 Plan was automatically increased by 1,500,000 shares, increasing the number of shares of common stock available for issuance under the Plan to 13,329,472 shares.

December 31, 2018.

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 employee’s or executive’s service is terminated by the Company for any reason other than cause or permanent disability.

As of December 31, ~~2015, $12.6~~2018, $7.2 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 December 31, ~~2015.~~

~~The following is a summary of option activity for the 2004 Plan for the years ended December 31, 2015, 2014, and 2013:~~

2004 Option Plan
(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, 2012
   672,145    $ 1.79       2.78       $ 1,512
Exercised
   (115 ) 4.73
Expired
   (1,286 ) 3.67



Outstanding at December 31, 2013
   670,744    1.79       1.78       7,124
Exercised
   (17,934 ) 3.57



Outstanding at December 31, 2014
   652,810    1.74       0.78       8,212
Exercised
   (652,810 ) 1.74          6,129



Outstanding at December 31, 2015
   —

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

2018.

The following is a summary of option activity for the 2006 Plan and the 2016 Plan for the years ended December 31, ~~2015, 2014,~~2018, 2017, and ~~2013:~~

2006 Option Plan
(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, 2012
   4,865,487    $ 10.83       7.15       $ 634
Granted
   1,245,500    10.18
Forfeited
   (54,226 ) 6.14
Expired
   (259,295 ) 10.65
Exercised
   (263,848 ) 5.86          1,545



Outstanding at December 31, 2013
   5,533,618    10.98       6.93       21,264
Granted
   1,324,337    12.17
Forfeited
   (237,108 ) 8.35
Exercised
   (393,735 ) 7.08          2,923



Outstanding at December 31, 2014
   6,227,112    11.58       6.71       28,523
Granted
   1,056,500    11.74
Forfeited
   (496,854 ) 10.75
Expired
   (64,336 ) 25.69
Exercised
   (469,974 ) 7.02          2,594



Outstanding at December 31, 2015
   6,252,448    11.87       6.16       7,498



Exercisable at December 31, 2015
   4,163,690    12.11       4.86       6,616



Vested and expected to vest at December 31, 2015
   6,120,365    11.87       6.10       7,491

2016:



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, 2015	6,252,448		$	11.87	6.16	$	7,498
Granted	866,011		8.43
Forfeited	(392,700	)	11.23
Expired	(279,766	)	17.38
Exercised	(897,657	)	8.63			4,264
Outstanding at December 31, 2016	5,548,336		11.62		5.58	32,453
Granted	643,000		14.44
Forfeited	(290,729	)	10.73
Expired	(605,617	)	29.87
Exercised	(575,206	)	9.13			3,140
Outstanding at December 31, 2017	4,719,784		10.03		5.63	24,421
Granted	567,500		19.22
Forfeited	(232,527	)	13.99
Exercised	(685,715	)	9.12			5,945
Outstanding at December 31, 2018	4,369,042		11.15		5.28	65,438
Exercisable at December 31, 2018	3,487,495		10.01		4.48	56,222
Vested and expected to vest at December 31, 2018	4,248,680		10.96		5.18	64,466

The weighted average grant-date fair value of options granted was $10.66, $7.81 and $4.53 per share for the years ended December 31, 2018, 2017 and 2016, respectively. Proceeds from the exercise of stock options amounted to ~~$4.4~~$6.3 million, ~~$2.9~~$5.3 million and ~~$1.6~~$7.8 million for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, respectively.

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Restricted Stock Units

An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that vest in four equal annual installments provided that the employee remains employed with the Company. Annual service RSUs granted to directors vest on the first anniversary of the grant date.

As of December 31, ~~2015, $8.5~~2018, $14.9 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of ~~2.0~~1.8 years. No ~~service~~ RSUs are classified as a liability as of December 31, ~~2015.~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

2018.

The following is a summary of RSU activity for the 2006 Plan and the 2016 Plan for the years ended December 31, ~~2015, 2014,~~2018, 2017, and ~~2013:~~

RSUs    Number of
Shares
Underlying
RSUs Weighted
Average
Grant Date
Fair Value
Unvested at December 31, 2012
   705,376    $ 5.91
Granted
   400,500    10.29
Forfeited
   (21,000 ) 6.41
Vested
   (201,186 ) 6.71


Unvested at December 31, 2013
   883,690    7.70
Granted
   436,115    12.28
Forfeited
   (84,282 ) 6.75
Vested
   (209,562 ) 6.67


Unvested at December 31, 2014
   1,025,961    9.94
Granted
   417,000    11.51
Forfeited
   (189,187 ) 10.60
Vested
   (231,093 ) 7.96


Unvested at December 31, 2015
   1,022,681    10.90

2016:



RSUs	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015	1,022,681		$	10.90
Granted	657,742		8.71
Forfeited	(254,329	)	10.38
Vested	(287,666	)	9.65
Unvested at December 31, 2016	1,138,428		10.07
Granted	857,336		14.57
Forfeited	(275,613	)	11.41
Vested	(362,313	)	9.78
Unvested at December 31, 2017	1,357,838		12.72
Granted	714,086		18.93
Forfeited	(229,603	)	15.19
Vested	(528,745	)	12.69
Unvested at December 31, 2018	1,313,576		15.68

The grant date fair value for the ~~231,093~~528,745 shares underlying RSUs that vested during the year ended December 31, ~~2015~~2018 was ~~$1.8~~$6.7 million.

~~17.~~

Stock-Based Compensation Expense

Stock-based compensation expense recognized for the years ended December 31, 2018, 2017 and 2016 was allocated as follows:



	Year Ended December 31,
(in thousands)	2018		2017		2016
Research and development	$	1,290	$	1,152	$	2,087
Selling, general and administrative	10,376		9,313		6,456
	$	11,666	$	10,465	$	8,543

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	Year Ended December 31,
	2018		2017		2016
Expected dividend yield	—	%	—	%	—	%
Weighted average expected volatility	58	%	57	%	57	%
Weighted average expected term (years)	5.90		5.89		6.08
Weighted average risk-free rate	2.68	%	1.97	%	1.37	%

13. Employee Benefit Plan

The Company has a defined contribution plan under IRC Section 401(k). This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Currently, the Company matches 50fifty percent up to the first six percent of employee contributions. All matching contributions have been paid by the Company. The Company match vests over a ~~four year period. The total Company match was $0.3~~4-year period and amounted to $0.9 million, ~~$0.2~~$0.8 million and ~~$0.2~~$0.4 million for the years ended December 31, ~~2015,~~2018, 2017 and 2016, respectively.

14. Income Taxes

The Company recorded total tax expense of $0.1 million on consolidated pretax income of $25.3 million, consisting of $25.1 million and $0.2 million of pretax income in the U.S. and foreign subsidiaries, respectively, for the year ended December 31, 2018. The Company recorded total tax expense of $0.1 million on consolidated pretax loss of $15.4 million, consisting of $15.7 million of pretax loss in the U.S. and $0.3 million of pretax income from foreign subsidiaries for the year ended December 31, 2017. The Company recorded total tax expense of $0.1 million on consolidated pretax loss of $17.9 million, consisting of $18.1 million of pretax loss in the U.S. and $0.2 million of pretax income from foreign subsidiaries for the year ended December 31, 2016.

The following is a summary of the provision (benefit) for income taxes for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
(in thousands)	2018			2017			2016
Current:
Federal	$	—		$	—		$	—
State	53			65			66
Foreign	99			(66		)	142
Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(14		)	137			(104		)
Provision for income taxes	$	138		$	136		$	104

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. 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 net deferred tax assets in the U.S. as of December 31, 2018 and 2017. 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.

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As a result of the tax valuation allowance against deferred tax assets in the U.S., there was no expense (benefit) for income taxes associated with the U.S. income (loss) before income taxes for each of the years ended December 31, 2018, 2017 and 2016. The following is reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
	2018		2017		2016
Federal tax at statutory rate	21.0	%	35.0	%	35.0	%
State taxes	1.7	%	1.7	%	0.8	%
U.S. Tax Cuts and Job Act (1)	0.0	%	-262.6	%	0.0	%
Change in valuation allowance - U.S. Tax Cuts and Jobs Act	0.0	%	262.6	%	0.0	%
Other change in valuation allowance (2)	-16.4	%	-47.8	%	-38.4	%
Research and development credit	-9.1	%	9.0	%	3.8	%
Orphan drug credit	-2.7	%	6.3	%	7.6	%
Section 162(m) limitation	3.1	%	8.1	%	0.0	%
Other tax rate changes	-0.7	%	-2.6	%	3.9	%
Other changes in state deferred taxes (3)	5.9	%	5.1	%	0.0	%
Stock-based compensation	-3.9	%	-13.0	%	-12.5	%
Other items	1.6	%	-2.7	%	-0.8	%
Effective tax rate	0.5	%	-0.9	%	-0.6	%


(1)	Includes the effect of the Tax Cuts and Jobs Act, which primarily relates to the remeasurement of existing deferred taxes as a result of the change to the U.S. federal tax rate.


(2)	Reductions in 2018 valuation allowances are attributable to profitable 2018 U.S. results.


(3)	Includes adjustments to state deferred taxes based on changes to filing jurisdictions.

The following is a summary of the components of the Company’s deferred tax liabilities, net, and the related tax valuation allowance as of December 31, 2018 and 2017:



(in thousands)	December 31, 2018			December 31, 2017
Deferred tax assets:
Net operating loss carryforwards	$	55,742		$	59,222
Stock-based compensation	5,202			5,383
Accrued and deferred expenses	2,096			1,967
Allowance for returns and uncollectable receivables	1,247			1,051
Research and development and orphan drug credit carryforwards	48,066			43,976
Intangible assets	—			3,745
Other	1,405			1,123
Total deferred tax assets	113,758			116,467
Deferred tax liabilities:
Intangible assets	(1,247		)	—
Other	(576		)	(386		)
Total deferred tax liabilities	(1,823		)	(386		)
Deferred tax assets, net	111,935			116,081
Valuation allowance	111,950			116,110
Net deferred tax assets (liabilities)	$	(15	)	$	(29	)

The Company’s net deferred tax liability of less than $0.1 million as of December 31, 2018 and 2017 is included as a component of other non-current liabilities.

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The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2018, 2017 and 2016:



(in thousands)	Balance at Beginning of Year		Additions		Reductions			Balance at End of Year
Year Ended:
December 31, 2018	$	116,110	$	4,036	$	(8,196	)	$	111,950
December 31, 2017	146,012		12,403		(42,305		)	116,110
December 31, 2016	139,037		11,031		(4,056		)	146,012

The Company has net operating loss (NOL) and other tax credit carryforwards in several jurisdictions. As of December 31, 2018, the Company has $46.7 million of deferred tax assets relating to U.S. federal NOL carryforwards, along with deferred tax assets of $12.1 million and $36.0 million related to U.S. federal research and development credits and orphan drug credits, respectively. These tax attributes will begin to expire in 2029, 2024 and 2030, respectively. In addition, the Company has $9.0 million of deferred tax assets relating to U.S. state NOL carryforwards, which primarily relate to the District of Columbia. State NOLs for the District of Columbia will begin to expire in 2031 and other state NOLs will begin to expire in 2019. A valuation allowance is recorded against these U.S. federal and U.S. state deferred tax assets.

Because the Company has generated or utilized NOLs from inception through December 31, 2018, all income tax returns filed by the Company are open to examination by tax jurisdictions. As of December 31, 2018, the Company’s income tax returns had not been under examination by any federal or state tax jurisdictions. As of December 31, 2018 and 2017, the Company had no uncertain tax positions.

Certain tax attributes of the Company, including 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 ending December 31, 2014 and ~~2013, respectively.~~

~~18.~~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 year ended December 31, 2018.

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. 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.

15. 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.

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The following table presents the calculation of basic and diluted net income (loss) per share of common stock for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
(in thousands, except for share and per share amounts)	2018		2017			2016
Numerator:
Net income (loss)	$	25,208	$	(15,567	)	$	(18,010	)
Denominator:
Weighted average shares outstanding, basic	50,859,947		44,735,146			43,449,441
Effect of dilutive securities	2,185,310		—			—
Weighted average shares outstanding, diluted	53,045,257		44,735,146			43,449,441
Net income (loss) per share, basic and diluted:
Basic	$	0.50	$	(0.35	)	$	(0.41	)
Diluted	$	0.48	$	(0.35	)	$	(0.41	)
Antidilutive securities excluded from calculations of diluted net income (loss) per share	903,265		3,136,515			4,943,797

The Company incurred a net loss for each of the years ended December 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.

16. 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 (Delaware District Court). The suit ~~seeks~~sought an adjudication that Roxane has infringed one or more claims of the ~~Company’s~~Company's U.S. Patent No. 8,586,610 ~~(the~~(‘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.

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 ~~Abbreviated New Drug Application (ANDA)~~ANDA for a generic ~~versions~~version of Fanapt^® ~~oral tablets~~ prior to the expiration of the ‘610 Patent in ~~1 mg, 2 mg, 4 mg, 6 mg, 8 mg, 10 mg,~~November 2027 or the ‘432 Patent in September 2025. The Defendants denied infringement and ~~12 mg strengths.~~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

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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.

Lupin filed counter claims for declaratory judgment of invalidity and noninfringement of seven of the Company's method of treatment patents that are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (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. In October 2016, the Company, along with Lupin, filed a Stipulation of Dismissal in the Delaware District Court pursuant to which Lupin’s 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 Lupin’s proposed prescribing information for its iloperidone tablets.

Taro and Apotex each entered into separate License Agreements (together, the License Agreements) resolving these lawsuits in October 2016 and December 2016, respectively. The License Agreements grant Taro and Apotex non-exclusive licenses to manufacture and commercialize a version of Fanapt^® in the U.S. effective November 2027, unless prior to that date the Company obtains pediatric exclusivity for Fanapt^®, in which case, the license will be effective May 2028. Taro and Apotex each may enter the market earlier under certain limited circumstances. The License Agreements, which are subject to review by the U.S. Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ), provide for a full settlement and release of all claims that are the subject of the respective litigation with Taro and Apotex.

In February 2016, Roxane filed suit against the Company in the U.S. District Court for the Southern District of Ohio (Ohio District Court). The suit sought a declaratory judgment of invalidity and noninfringement of the Method of Treatment Patents. In December 2016, the Ohio District Court dismissed Roxane’s suit without prejudice for lack of personal jurisdiction.

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-Hour-Sleep-Wake Disorder. In its notice letter, Teva alleges that the Company's Orange Book listed 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), 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 ~~a request~~requests for a permanent ~~injunction~~injunctions preventing ~~Roxane~~Teva, MSN and Apotex from infringing the asserted claims of the ~~‘610~~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 application for New Chemical Entity Status 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

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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 ~~Fanapt~~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 ~~‘610~~’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 an additional Paragraph IV certification notice letter from Teva concerning its Orange Book listed U.S. Patent No. 10,149,829, which expires in ~~2027.~~2033 (the ’829 Patent). In its notice letter, Teva alleges that the ’829 Patent, which covers methods of using HETLIOZ

~~Pursuant~~^®, is invalid, unenforceable and will not be infringed by Teva’s manufacture, use or sale of the product described in its ANDA.

Other Matters. In April 2018, the Company submitted a protocol amendment to the ~~Settlement Agreement,~~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 ~~assumed Novartis’ patent infringement action against Roxane~~amended the protocol limiting the duration of treatment in the ~~U.S. District Court~~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 ~~District of Delaware. The suit alleges that Roxane’s filing of an ANDA~~2301 study. While waiting for ~~generic iloperidone with~~further feedback, no patients were ever enrolled in any study beyond 12 weeks. On December 19, 2018, the FDA imposed a ~~paragraph IV certification infringes Sanofi’s new chemical entity patent. Roxane is defending~~partial clinical hold (PCH) on the ~~grounds~~two proposed studies, stating that the ~~patent claims~~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 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 ~~invalid or unenforceable or~~required by a guidance document. The Company believes that ~~certain patent claims are~~the FDA does not ~~infringed. Roxane also filed a motion~~have legal authority to ~~dismiss~~issue the PCH on the ~~grounds that the court lacks jurisdiction.~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~The two pending cases against Roxane were consolidated by agreement~~basis of the ~~parties~~guidance at issue. The Company also believes that it has provided the FDA with sufficient information regarding the safety of tradipitant to justify the continued study of tradipitant in ~~April 2015~~patients beyond 12 weeks, in accordance with applicable law and ~~are scheduled to be tried together in a four-day bench trial beginning on~~FDA regulations. On February ~~29, 2016.~~

~~In May 2015,~~5, 2019, the Company filed a lawsuit against Inventia Healthcare Pvt. Ltd. (Inventia) in the U.S. District Court for the District of Delaware. The suit seeks an adjudication that Inventia has infringed on one or more claims of the ‘610 Patent by submitting to the FDA ~~an ANDA for a generic version of Fanapt~~^®. The relief requested by the Company includes a request for a permanent injunction preventing Inventia from infringing the asserted claims of the ‘610 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘610 Patent in 2027. This lawsuit is scheduled to be tried in a four-day bench trial beginning on January 17, 2017.~~

~~In October 2015, the Company filed four separate patent infringement lawsuits~~ in the United States District Court for the District of ~~Delaware (the October 2015 Lawsuits). Two~~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 ~~October 2015 Lawsuits join~~Case. The Company intends to continue vigorously pursuing its interests in the ~~existing litigations~~matter. The PCH and the Company's plans for tradipitant clinical development are discussed in greater detail in Part I, Item 1, Business, of this annual report on Form 10-K.

On February 4, 2019, a qui tam action filed against the ~~previous Fanapt~~^® ANDA filers, Roxane and Inventia, described above. The other two October 2015 Lawsuits were filed against new ANDA filers, Taro Pharmaceuticals, U.S.A., Inc. /Taro Pharmaceuticals Ltd. (Taro) and Apotex Inc. (Apotex).

~~The first~~Company was unsealed by order of the ~~October 2015 Lawsuits,~~DC District Court entered on January 31, 2019. The qui tam action, United States ex rel. Richard Gardner v. Vanda Pharmaceuticals Inc., which was filed ~~against Roxane, seeks an adjudication that Roxane has infringed one or more claims~~under seal on March 10, 2017, was brought by a former Company employee on behalf of the ~~Company’s~~ U.S. ~~Patent No. 9,138,432 (the ‘432 Patent) by submitting to the FDA its ANDA for a generic version of Fanapt~~^® prior to the expiration of the ‘432 Patent in September 2025. The relief requested by the Company includes a request for a permanent injunction preventing Roxane from infringing the asserted claims of the ‘432 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘432 Patent in 2025.~~

The second of the October 2015 Lawsuits, which was filed against Inventia, seeks an adjudication that Inventia has infringed one or more claims of the ‘432 Patent by submitting to the FDA its ANDA for a generic version of Fanapt^® prior to the expiration of the ‘432 Patent in September 2025. The relief requested by the Company includes a request for a permanent injunction preventing Inventia from infringing the asserted claims of the ‘432 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘432 Patent in 2025.~~

The third of the October 2015 Lawsuits, which was filed against Taro, seeks an adjudication that Taro has infringed one or more claims of the ‘432 Patent and the ‘610 Patent by submitting to the FDA an ANDA for a generic version of Fanapt^® prior to the expiration of the ‘432 patent in September 2025 and the ‘610 Patent in November 2027. The relief requested by the Company includes a request for a permanent injunction preventing Taro from infringing the asserted claims of the ‘432 Patent and the ‘610 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘432 Patent in 2025 and the ‘610 Patent in 2027.~~

~~The fourth of the October 2015 Lawsuits, which was filed against Apotex and Apotex Corp.~~, ~~seeks an adjudication that Apotex has infringed one or more claims of the ‘432 Patent~~28 states and ~~the ‘610 Patent by submitting to the FDA an ANDA for a generic version of Fanapt~~^® prior to the expiration of the ‘432 Patent in September 2025 and the ‘610 Patent in November 2027. The relief requested by the Company includes a request for a permanent injunction preventing Apotex from infringing the asserted claims of the ‘432 Patent and the ‘610 Patent by engaging in the manufacture, use, offer to sell, sale, importation or distribution of generic versions of Fanapt^® ~~before the expiration of the ‘432 Patent in 2025 and the ‘610 Patent in 2027.~~

~~In November 2015, the Company filed a patent infringement lawsuit in the United States District Court for~~ the District of ~~Delaware against Lupin Limited and Lupin Pharmaceuticals, Inc.~~Columbia (collectively, ~~Lupin). The suit seeks an adjudication that Lupin has infringed one or more claims of~~ the ~~‘432 Patent~~Plaintiff States) and the ~~‘610 Patent by submitting~~policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the ~~FDA~~Federal False Claims Act and related state laws. The complaint alleges that the Company violated these laws through the promotion and marketing of its ~~ANDA for a generic version of~~products Fanapt^® ~~prior to~~ and HETLIOZ^®. The complaint seeks, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs.

The Company has not been served with the ~~expiration~~qui tam complaint. By virtue of the ~~‘432 Patent~~court having unsealed the case, it learned that on January 29, 2019, the U.S., as well as the Plaintiff States, filed notice of their election not to intervene in ~~September 2025~~the qui tam action at this time. The U.S.’ and the ~~‘610 Patent in November 2027. The relief requested by~~Plaintiff States’ election not to intervene does not prevent the ~~Company~~plaintiff/relator from litigating this action and the U.S. and the Plaintiff States may later seek to intervene in the ~~lawsuit includes a request for a permanent injunction preventing Lupin from infringing the asserted claims of the ‘432 Patent and the ‘610 Patent by engaging~~action. The Company intends to vigorously defend itself in the ~~manufacture, use, offer to sell, sale, importation or distribution~~litigation if served.

Table of ~~generic versions of Fanapt~~^® ~~before the expiration of the ‘432 Patent in 2025 and the ‘610 Patent in 2027.~~

~~Vanda Pharmaceuticals Inc.~~

~~Notes to the Consolidated Financial Statements — (Continued)~~

~~19.~~Contents

17. Quarterly Financial Data ~~(unaudited)~~

   First Second Third Fourth
(in thousands, except for per share amounts)
   Quarter Quarter Quarter Quarter
2015

Revenue
   $ 22,150    $ 27,582    $ 28,344    $ 31,849
Gross profit
   17,135    21,816    21,834    25,678
Loss from operations
   (10,293 ) (5,458 ) (9,541 ) (14,893 )
Net loss
   (10,221 ) (5,386 ) (9,461 ) (14,798 )
Net loss per share, basic and diluted
   $ (0.24 ) $ (0.13 ) $ (0.22 ) $ (0.35 )
2014

Revenue
   $ 9,143    $ 10,862    $ 14,782    $ 15,370
Gross profit
   9,143    10,664    14,079    14,688
Income (loss) from operations
   (26,578 ) (21,606 ) (1,448 ) 69,693
Net income (loss)
   (26,533 ) (21,575 ) (1,426 ) 69,719
Net income (loss) per share:

Basic
   $ (0.79 ) $ (0.64 ) $ (0.04 ) $ 1.85
Diluted
   $ (0.79 ) $ (0.64 ) $ (0.04 ) $ 1.77

(Unaudited)

The ~~Company’s results~~following is a summary of quarterly financial data for the ~~fourth quarter~~years ended December 31, 2018 and 2017:



(in thousands, except for per share amounts)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Year Ended December 31, 2018
Revenues	$	43,592		$	47,350		$	49,135		$	53,041
Gross profit (1)	38,680			41,739			43,670			46,994
Income from operations	2,442			3,913			6,233			9,150
Net income	3,066			4,611			7,171			10,360
Net income per share, basic	$	0.07		$	0.09		$	0.14		$	0.20
Net income per share, diluted	$	0.06		$	0.09		$	0.13		$	0.19
Year Ended December 31, 2017
Revenues	$	37,415		$	42,056		$	41,336		$	44,276
Gross profit (1)	32,958			37,095			36,379			39,053
Loss from operations	(7,906		)	(1,924		)	(4,923		)	(2,150		)
Net loss	(7,645		)	(1,534		)	(4,550		)	(1,838		)
Net loss per share, basic and diluted	$	(0.17	)	$	(0.03	)	$	(0.10	)	$	(0.04	)


(1)	Gross profit includes revenues less cost of goods sold, excluding amortization, and less intangible asset amortization.

Table of ~~2014 include a gain on arbitration settlement of $77.6 million, or $2.06 and $1.97 per basic and diluted share, respectively. See Note 3,~~~~Settlement Agreement with Novartis~~~~, for additional information. Gross profit has been calculated by subtracting Cost of Goods Sold from Total Revenues in the period.~~

Contents

VANDA PHARMACEUTICALS INC.

EXHIBIT INDEX



Exhibit Number		Description


3.1		Form of Amended and Restated Certificate of Incorporation of the registrant (filed as Exhibit 3.8 to Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on March 17, 2006 and incorporated herein by reference).


3.2		Form of Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.10 to the registrant’s current report on Form 8-K (File No. 001-34186) on September 25, 2008 and incorporated herein by reference).

~~3.3~~		Fourth Amended and Restated Bylaws of the registrant, as amended and restated on December 17, 2015 (filed as Exhibit 3.1 to the registrant’s current report on Form 8-K (File No. 001-34186) on December 21, 2015 and incorporated herein by reference).


4.1		Specimen certificate representing the common stock of the registrant (filed as Exhibit 4.4 to Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on March 17, 2006, and incorporated herein by reference).

~~4.2~~		Rights Agreement, dated as of September 25, 2008, by and between the registrant and American Stock Transfer & Trust Company, LLC, as Rights Agent (filed as Exhibit 4.5 to the registrant’s current report on Form 8-K (File No. 001-34186) on September 25, 2008 and incorporated herein by reference).

~~4.3~~10.1#		Amendment to Rights Agreement, dated as of December 22, 2009, by and between the registrant and American Stock Transfer & Trust Company, LLC, as Rights Agent (filed as Exhibit 4.6 to the registrant’s current report on Form 8-K (File No. 001-34186) on December 22, 2009 and incorporated herein by reference).

~~10.1†~~		Registrant’s Second Amended and Restated Management Equity Plan (filed as Exhibit 10.1 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on December 29, 2005 and incorporated herein by reference).

~~10.2#~~		Amended and Restated License, Development and Commercialization Agreement, dated July 24, 2005, by and between Bristol-Myers Squibb Company and the registrant (relating to ~~HETLIOZ~~^®HETLIOZ®) (filed as Exhibit 10.3 to Amendment No. 1 to the registrant’s registration Statement on Form S-1 (File No. 333-130759) on February 16, 2006 and incorporated herein by reference).

~~10.3~~		Summary Plan Description provided for the registrant’s 401(k) Profit Sharing Plan & Trust (filed as Exhibit 10.10 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on December 29, 2005 and incorporated herein by reference).

~~10.4~~10.2		Form of Indemnification Agreement entered into by directors and executive officers (filed as Exhibit 10.11 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on December 29, 2005 and incorporated herein by reference).

~~10.5†~~
10.3†		2006 Equity Incentive Plan, as amended (filed as Exhibit ~~10.38~~10.17 to Amendment No. 2 to the registrant’s ~~current report~~Registration Statement on Form ~~8-K~~S-1 (File No. ~~001-34186)~~333-130759), as filed on March ~~7, 2010~~17, 2006, and incorporated herein by reference).

~~10.6~~		~~Form of Tax Indemnity Agreement (filed as Exhibit 10.20 to the registrant’s quarterly report on Form 10-Q (File No. 000-51863) on August 8, 2007 and incorporated herein by reference).~~

~~10.7†~~10.4†		Amended and Restated Employment Agreement, dated December 16, 2008, by and between Mihael H. Polymeropoulos and the registrant (filed as Exhibit 10.34 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on August 10, 2009 and incorporated herein by reference).

Table of Contents



~~10.18†~~ Exhibit Number		Employment Agreement, dated as of April 15, 2013, by and between Paolo Baroldi and the registrant (filed as Exhibit 10.51 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on July 31, 2013 and incorporated herein by reference).Description

~~10.19#~~
10.13#		Manufacturing Agreement, dated January 24, 2014, by and between Patheon Pharmaceuticals Inc. and the registrant (relating to ~~HETLIOZ~~^®HETLIOZ®) (filed as Exhibit 10.53 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 8, 2014 and incorporated herein by reference).

~~10.20~~
10.14		Amendment to Lease Agreement, dated March 18, 2014, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.54 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 8, 2014 and incorporated herein by reference).

Table of Contents



Exhibit Number		Description

10.35†*10.30†		Form of Restricted Stock Unit Award Agreement under the UK Sub ~~Plan.~~

~~18.1~~		~~Preferability Letter of Independent Public Accounting Firm, dated May 8, 2014~~Plan under the Amended and Restated 2016 Equity Incentive Plan (filed as Exhibit ~~18.1~~10.6 to the registrant’s registration statement on Form S-8 (File No. 333-218774) on June 15, 2017 and incorporated herein by reference).

10.31#		Manufacturing Agreement, dated May 6, 2016, by and between Patheon Pharmaceuticals Inc. and the registrant (relating to Fanapt®) (filed as Exhibit 10.42 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on July 28, 2016 and incorporated herein by reference).

10.32		Second Amendment to Lease Agreement, dated June 20, 2016, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.43 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on July 28, 2016 and incorporated herein by reference).

10.33		Sublease Agreement, dated June 22, 2016, by and between Hunton & Williams LLP and the registrant (filed as Exhibit 10.44 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on July 28, 2016 and incorporated herein by reference).

10.34#		License Agreement, dated October 24, 2016, by and among Taro Pharmaceuticals USA, Inc., Taro Pharmaceuticals Industries Ltd. and the registrant (filed as Exhibit 10.45 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 17, 2017 and incorporated herein by reference).

10.35#		License Agreement, dated December 7, 2016, by and between Apotex, Inc. and the registrant (filed as Exhibit 10.46 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 17, 2017 and incorporated herein by reference).

10.36		Third Amendment to Lease Agreement, dated March 28, 2018, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.38 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May ~~8, 2014~~2, 2018 and incorporated herein by reference).

21.1*
10.37		Fourth Amendment to Lease Agreement, dated March 29, 2018, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.39 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 2, 2018 and incorporated herein by reference).

10.38†		Amended and Restated Employment Agreement, dated April 30, 2018, by and between Gunther Birznieks and the registrant (filed as Exhibit 10.40 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 2, 2018 and incorporated herein by reference).

10.39†		Employment Agreement, dated August 13, 2018, by and between Timothy Williams and the registrant (filed as Exhibit 10.41 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on November 7, 2018 and incorporated herein by reference).

21.1		List of ~~Subsidiaries.~~Subsidiaries (filed as Exhibit 21.1 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 17, 2017 and incorporated herein by reference).

23.1*		Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

31.1*		Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of the Chief Executive Officer and Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.

101*		The following financial information from this annual report on Form 10-K for the fiscal year ended December 31, ~~2015,~~2018, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets as of December 31, ~~2015~~2018 and ~~2014;~~2017; (ii) Consolidated Statements of Operations for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013;~~2016; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013;~~2016; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013;~~2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, ~~2015, 2014~~2018, 2017 and ~~2013;~~2016; and (vi) Notes to the Consolidated Financial Statements.


†		Indicates management contract or compensatory plan.


#		Confidential treatment has been granted with respect to certain provisions of this exhibit.


*		Filed herewith.

~~105~~

104



Delaware		03-0491827
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.001		The Nasdaq Stock Market LLC
		(~~NASDAQ~~Nasdaq Global Market)
Rights to Purchase Series A Junior Participating Preferred Stock		The Nasdaq Stock Market LLC (~~NASDAQ~~Nasdaq Global Market)



Product	Indication	~~Country~~Geography	Select Historical Milestones
HETLIOZ^® (tasimelteon)	Non-24	United States	FDA approval in January 2014; Commercial launch in April 2014

		Europe	EC approval in July 2015; ~~Expected commercial~~ Commercial launch in Germany in August 2016

Fanapt^® (Oral) (iloperidone)	Schizophrenia	United States	FDA approval in May 2009; Commercial launch in January 2010; U.S. and Canada rights sublicensed to Novartis in October 2009 and reacquired by Vanda in December 2014; Long term maintenance ~~sNDA accepted for review by FDA in September 2015 with a PDUFA date~~supplemental New Drug Application (sNDA) approval in May 2016

~~Fanaptum~~^® ~~(Oral)~~ ~~(iloperidone)~~
Fanaptum^® (Oral) (iloperidone)	~~Europe~~	~~EMA accepted for evaluation our MAA in December 2015~~

Israel		~~Mexico~~	Market approval ~~in October 2013;~~ August 2012; Commercial launch in the fourth quarter of 2014 by our local distribution partner ~~Probiomed S.A. de C.V.~~

		~~Israel~~	~~Market approval August 2012;~~ ~~Commercial launch in the fourth quarter of 2014 by our local distribution partner, Megapharm Ltd.~~



Product	Target Indication	Select Historical Milestones
HETLIOZ^® (tasimelteon)	~~Pediatric Non-24~~	~~Plan to initiate a pharmacokinetic study in the second quarter 2016;~~ ~~Plan to initiate a Phase III study in the second half of 2016~~

	~~SMS~~	~~Initiated open label interventional study in the fourth quarter 2015;~~ ~~Plan to initiate placebo controlled Phase III study in the second half of 2016~~

	Jet Lag Disorder	Completed ~~observational~~a Phase III clinical study (JET8) and reported results in the first quarter of 2018; Completed a Phase II clinical study (JET) and reported results in the second quarter of 2018; sNDA PDUFA-VI (as defined below) action target date of August 16, 2019

	SMS	Completed a placebo controlled study and reported results in the fourth quarter of ~~2015;~~ ~~Plan to initiate Phase III~~2018

	Pediatric Non-24	Completed a pharmacokinetic study in the ~~second half~~first quarter of ~~2016~~ 2018

Fanapt^® ~~(Oral)~~ (iloperidone)	Schizophrenia	~~Positive results from~~Initiated a ~~Phase III long-term maintenance~~pharmacokinetic study of the LAI formulation in ~~patients with schizophrenia were announced in June 2015~~the fourth quarter of 2018

	Other Disorders	Potential indications are under evaluation including bipolar depression, major depressive disorder and post-traumatic stress disorder – nightmares

Tradipitant (VLY-686)	Chronic Pruritus in ~~patients with~~ Atopic Dermatitis	~~Plan to initiate~~ Completed a ~~pruritus proof~~placebo controlled clinical study and reported results in the third quarter of ~~concept~~2017; Initiated a Phase III study ~~during 2016~~(EPIONE) in the second quarter of 2018
~~Trichostatin A~~
	Gastroparesis	Completed a placebo controlled study and reported results in the fourth quarter of 2018

VTR-297	Oncology	~~Plan to file an Investigational New Drug (IND) application~~Initiated a clinical study in ~~2016~~patients with hematologic malignancies in the fourth quarter of 2018
~~AQW051~~
VQW-765	CNS Disorders	Potential indications are under strategic evaluation including cognitive impairment


ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



		Page
Part I
	~~Page~~
		~~Part I~~
		Cautionary Note Regarding Forward-Looking Statements		1
Item 1		Business		3
Item 1A		Risk Factors		20	21
Item 1B		Unresolved Staff Comments		45	48
Item 2		Properties		45	49
Item 3		Legal Proceedings		45	49
Item 4		Mine Safety Disclosures		46	51
				Part II
		~~Part II~~
Item 5		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		47	51
Item 6		Selected Consolidated Financial Data		48	53
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations		50	55
Item 7A		Qualitative and Quantitative Disclosures about Market Risk		64	66
Item 8		Financial Statements and Supplementary Data		64	67
Item 9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		64	67
Item 9A		Controls and Procedures		64	67
Item 9B		Other Information		65	68
				Part III
		~~Part III~~
Item 10		Directors, Executive Officers and Corporate Governance		65	68
Item 11		Executive Compensation		65	68
Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		65	68
Item 13		Certain Relationships and Related Transactions, and Director Independence		65	68
Item 14		Principal Accountant Fees and Services		65	68
				Part IV
		~~Part IV~~
Item 15		Exhibits and Financial Statement Schedules		66	69
Signatures			67	70
Exhibits			102


•		the ability of Vanda Pharmaceuticals Inc. (we, our, the Company or Vanda) to ~~successfully~~continue to commercialize HETLIOZ^® (tasimelteon) for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) in the ~~U.S.~~United States (U.S.) and Europe;


•		uncertainty as to the ability to increase market awareness of Non-24 and the market acceptance of HETLIOZ^®;


•		our ability to continue to generate U.S. sales of Fanapt^® (iloperidone) for the treatment of schizophrenia;


•		~~the timing and costs of continuing to build a sales and marketing, supply chain, distribution, pharmacovigilance, compliance and safety infrastructure to promote Fanapt~~^® ~~in the U.S.;~~


•		~~the regulatory status~~our level of ~~Fanapt~~success in commercializing HETLIOZ^® ~~in Europe;~~ and Fanapt


•		Maximize the commercial success of HETLIOZ^®and Fanapt^®;



	Number	Type
HETLIOZ^®	US 5,856,529	New chemical entity
	US 9,060,995	Method of treatment
	US 9,539,234	Method of treatment
	US 9,549,913	Method of treatment
	US 9,730,910	Method of treatment
	US 9,855,241	Method of treatment
	US RE46604	Method of treatment
	US 10,071,977	Drug substance
	US 10,149,829	Method of treatment
Fanapt^®	US 8,586,610	Method of treatment
	US 8,652,776	Method of treatment
	US 8,999,638	Method of treatment
	US 9,072,742	Method of treatment
	US 9,074,254	Method of treatment
	US 9,074,255	Method of treatment
	US 9,074,256	Method of treatment
	US 9,138,432	Method of treatment
	US 9,157,121	Method of treatment



ITEM 1.	BUSINESS



ITEM 1A.	RISK FACTORS


•		~~our ability to~~ obtain ~~third-party coverage or reimbursement~~regulatory approval for HETLIOZ^®; or Fanapt ^® in additional countries;


•		not provide us accurate or timely information regarding their inventories, the number of patients who are using HETLIOZ^® or complaints about HETLIOZ^®;


•		reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support HETLIOZ^®;


•		not devote the resources necessary to sell HETLIOZ^® in the volumes and within the time frames that we expect;


•		For HETLIOZ^® in the treatment of Non-24, there are no FDA approved direct competitors. Sedative-Hypnotic treatments for certain sleep related disorders include, Ambien^® (zolpidem) by Sanofi (including Ambien CR^®), Lunesta^® (eszopiclone) by Sunovion Pharmaceuticals Inc., Sonata^® (zaleplon) by Pfizer Inc., Rozerem^® (ramelteon) by Takeda Pharmaceuticals Company Limited, Silenor^® (doxepin) by Pernix Therapeutics, Belsomra^® (suvorexant) by Merck & Co., Inc., generic products such as zolpidem, trazodone and doxepin, and over-the-counter remedies such as Benadryl^® and Tylenol PM^®. The class of melatonin agonists includes Rozerem^® (ramelteon) by Takeda Pharmaceuticals Company Limited, Valdoxan^® ~~(agemelatine)~~(agomelatine) by Servier, Circadin^® (long-acting melatonin) by Neurim Pharmaceuticals Ltd. and the food supplement melatonin. Shift work and excessive sleepiness disorder treatments include Nuvigil^® (armodafinil) and Provigil^® (modafinil) both by Teva Pharmaceutical Industries Ltd.


•		For Fanapt^® in the treatment of schizophrenia, the atypical antipsychotics competitors are Risperdal^® (risperidone), including the ~~depot~~long acting injectable (LAI) formulation Risperdal Consta^® ~~Consta~~ and Invega^® ~~and Invega~~^® (paliperidone), including the ~~depot~~LAI formulation Invega^® Sustenna^®, each by Ortho-McNeil-Janssen Pharmaceuticals, Inc., Zyprexa^® (olanzapine), including the ~~depot~~LAI formulation Zyprexa^® ~~Relprevv™~~ Relprevv^TM, each by Eli Lilly and Company, Seroquel^® and Seroquel XR^® (quetiapine) by AstraZeneca PLC, Abilify^® (aripiprazole) by ~~BMS/~~Otsuka America Pharmaceutical Inc., Abilify Maintena^® ~~Maintena~~ (the LAI formulation of Abilify^® ~~(the depot formulation of Abilify~~^®) by Lundbeck/Otsuka America Pharmaceutical Inc., Geodon^® (ziprasidone) by Pfizer Inc., Saphris^® (asenapine) by ~~Actavis~~Allergan plc, Latuda^® (lurasidone) by Sunovion Pharmaceuticals Inc., Rexulti^® (brexpiprazole) by Lundbeck/Otsuka America Pharmaceutical, Inc., ~~Aristada™~~Aristada^TM (aripiprazole lauroxil) extended-release ~~injectible~~injectable suspension by Alkermes, Inc., Vraylar^TM (cariprazine) by Teva Pharmaceutical Industries Ltd., and generic clozapine, as well as the typical antipsychotics haloperidol, chlorpromazine, thioridazine, and sulpiride (all of which are generic).


•		our ~~ability to obtain and maintain regulatory approval for our products, particularly~~level of success in commercializing HETLIOZ^® ~~for the treatment of Non-24, both in the U.S. and in foreign countries;~~


•		our ~~ability to successfully market~~level of success in marketing and ~~sell~~selling Fanapt^® in the U.S. and our or our partners’ ~~ability to successfully market~~level of success in marketing and ~~sell~~selling Fanapt^® in Israel ~~Mexico~~ and other jurisdictions in which we may receive regulatory approval, if any;


•		our ~~ability to successfully commercialize~~level of success in commercializing HETLIOZ^® and Fanapt^® globally;


Year Ended December 31, 2015	High		Low
First quarter	$	15.00	$	8.80
Second quarter		13.92		8.92
Third quarter		14.50		10.57
Fourth quarter		12.28		8.00

Year Ended December 31, 2014	High		Low
First quarter	$	19.25	$	10.00
Second quarter		17.69		9.27
Third quarter		16.48		10.33
Fourth quarter		15.51		8.34


*(in thousands)*	Rebates & Chargebacks			Discounts, Returns and Other			Total
Balance at December 31, 2013	$	—		$	—		$	—
Provision related to current period sales		419			720			1,139
Adjustments for prior period sales		—			—			—
Credits/payments made		(51	)		(452	)		(503	)

Balance at December 31, 2014		368			268			636
Provision related to current period sales		57,424			17,940			75,364
Adjustments for prior period sales		(114	)		(25	)		(139	)
Credits/payments made		(24,255	)		(14,626	)		(38,881	)

Balance at December 31, 2015	$	33,423		$	3,557		$	36,980


		December 31, 2015
*(in thousands)*	Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
HETLIOZ^®	January 2033	$	33,000	$	3,460	$	29,540
Fanapt^®	November 2016		27,941		18,729		9,212

		$	60,941	$	22,189	$	38,752


	Cash payments due by year (1) (2) (3)
*(in thousands)*	Total		2016		2017		2018		2019		2020		Thereafter
Operating leases	$	13,315	$	1,500	$	1,538	$	1,576	$	1,616	$	1,656	$	5,429


	December 31,			December 31,
*(in thousands, except for share and per share amounts)*	2015			2014
ASSETS
Current assets:
Cash and cash equivalents	$	50,843		$	60,901
Marketable securities		92,337			68,921
Accounts receivable, net		16,331			3,654
Inventory		1,294			5,170
Prepaid expenses and other current assets		5,742			3,084

Total current assets		166,547			141,730
Property and equipment, net		4,570			2,437
Intangible assets, net		38,752			26,724
Non-current inventory and other		3,181			813

Total assets	$	213,050		$	171,704


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	15,767		$	7,291
Accrued government and other rebates		35,550			495

Total current liabilities		51,317			7,786
Milestone obligation under license agreement		25,000			—
Other non-current liabilities		3,706			3,101

Total liabilities		80,023			10,887

Commitments and contingencies (Notes 13 and 18)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000,000 shares authorized, and no shares issued or outstanding		—			—
Common stock, $0.001 par value; 150,000,000 shares authorized; 42,815,291 and 41,486,361 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively		43			41
Additional paid-in capital		460,794			448,744
Accumulated other comprehensive income		39			16
Accumulated deficit		(327,849	)		(287,984	)

Total stockholders’ equity		133,027			160,817

Total liabilities and stockholders’ equity	$	213,050		$	171,704


	Common Stock					Additional Paid-in Capital			Other Comprehensive Income (Loss)			Accumulated Deficit			Total
*(in thousands, except for share amounts)*	Shares			Par Value		Additional Paid-in Capital			Other Comprehensive Income (Loss)			Accumulated Deficit			Total
Balances at December 31, 2012		28,241,743		$	28	$	296,982		$	10		$	(287,115	)	$	9,905
Net proceeds from public offering of common stock		4,680,000			5		48,500			—			—			48,505
Issuance of common stock from the exercise of stock options and settlement of restricted stock units		466,320			—		1,550			—			—			1,550
Shares withheld upon settlement of restricted stock units		(49,520	)		—		(196	)		—			—			(196	)
Stock-based compensation expense		—			—		5,404			—			—			5,404
Net loss		—			—		—			—			(21,055	)		(21,055	)
Other comprehensive income, net of tax		—			—		—			11			—			11

Balances at December 31, 2013		33,338,543			33		352,240			21			(308,170	)		44,124
Net proceeds from public offering of common stock		5,750,000			5		62,308			—			—			62,313
Issuance of common stock to Novartis Pharma AG		1,808,973			2		25,903			—			—			25,905
Issuance of common stock from the exercise of stock options and settlement of restricted stock units		621,231			1		2,851			—			—			2,852
Shares withheld upon settlement of restricted stock units		(32,386	)		—		(436	)		—			—			(436	)
Stock-based compensation expense		—			—		5,878			—			—			5,878
Net income		—			—		—			—			20,186			20,186
Other comprehensive loss, net of tax		—			—		—			(5	)		—			(5	)

Balances at December 31, 2014		41,486,361			41		448,744			16			(287,984	)		160,817
Issuance of common stock from the exercise of stock options and settlement of restricted stock units		1,353,877			2		4,372			—			—			4,374
Shares withheld upon settlement of equity awards		(24,947	)		—		(283	)		—			—			(283	)
Stock-based compensation expense		—			—		7,961			—			—			7,961
Net loss		—			—		—			—			(39,865	)		(39,865	)
Other comprehensive income, net of tax		—			—		—			23			—			23

Balances at December 31, 2015		42,815,291		$	43	$	460,794		$	39		$	(327,849	)	$	133,027


*(in thousands)*	Accounts Receivable Allowances
Balance at December 31, 2012	$	—
Provision related to current period sales		—
Adjustments for prior period sales		—
Credits/payments made		—

Balance at December 31, 2013	$	—
Provision related to current period sales		85
Adjustments for prior period sales		—
Credits/payments made		—

Balance at December 31, 2014	$	85
Provision related to current period sales		1,071
Adjustments for prior period sales		(85	)
Credits/payments made		(12	)

Balance at December 31, 2015	$	1,059


	Year Ended December 31,
Percent of Total Revenues	2015		2014		2013
Novartis -royalty revenue		—		13%		21%
Novartis -license agreement		—		61%		79%
Distributor A		17%		—		—
Distributor B		18%		—		—
Distributor C		19%		—		—
Distributor D		14%		—		—
Distributor E		14%		—		—
Distributor F		12%		—		—



(in thousands)	Reserve for Product Returns
Balances at December 31, 2015	$	1,059
Additions	2,507
Credits/payments	(486		)
Balances at December 31, 2016	3,080
Additions	5,978
Credits/payments	(4,939		)
Balances at December 31, 2017	4,119
Additions	2,684
Credits/payments	(1,616		)
Balances at December 31, 2018	$	5,187


*(in thousands)*
Equity issued	$	25,904
Cash received		(25,000	)
Settlement of pre-existing non-contractual relationship		18,087

	$	18,991


*(in thousands)*
Inventory	$	2,960
Intangible—Re-acquired right		15,940
Prepaid services		91

	$	18,991

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