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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form10-K

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

Form 10-K

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017

2022
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-34186
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission FileNo. 001-34186

VANDA PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

Delaware
03-0491827

Delaware

03-0491827
(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

2200 Pennsylvania Avenue NW, Suite 300 E

Washington, D.C.DC 20037

(202)734-3400

(Address andof principal executive offices)

(202) 734-3400
(Registrant’s telephone number, including area code, of registrant’s principal executive offices)

code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class

each class		Trading Symbol(s)

Name of Each Exchangeeach exchange on Which Registered

which registered
Common Stock, par value $0.001 per shareVNDAThe Nasdaq StockGlobal Market LLC
(Nasdaq Global Market)
Rights to Purchase Series A Junior Participating Preferred Stock

The Nasdaq Stock Market LLC

(Nasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.    ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

Large accelerated filer☒Accelerated filer☐
Large acceleratedNon-accelerated filer☒☐Accelerated filer☐
Non-accelerated filer☐ (Do not check if a smaller reporting company)Smaller reporting company☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Securities Exchange Act of 1934).    Yes  ☐    No  ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.    ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).    ☐

As of June 30, 2017,2022, the last business day of the registrant’s last completed second quarter, the aggregate market value of the Common Stock held bynon-affiliates of the registrant was approximately $715.2$601.3 million based on the closing price of the registrant’s Common Stock, as reported by theThe Nasdaq Global Market, on such date. Shares of Common Stock held by each executive officer and director and stockholders known by the registrant to own 10% or more of the outstanding stock based on public filings and other information known to the registrant have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s Common Stock, par value $0.001 per share, outstanding as of February 1, 20182, 2023 was 45,437,938.

56,785,264.

The exhibit indexExhibit Index as required by Item 601(a) of RegulationS-K is included in Item 15 of Part IV of this report.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s proxy statement with respect to the registrant’s 20182023 Annual Meeting of Stockholders, which is to be filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2017,2022, are incorporated by reference into Part III of this Form10-K.



Table of Contents
Vanda Pharmaceuticals Inc.

Form10-K

Table of Contents

Page

Part I

1

Item 1

Business3

3

Item 1

5
Item 1A

17
31

Item 1B

42
61

Item 2

42
61

Item 3

42
61

Item 4

43
62
Part II

Item 5

44
62

Item 6

Selected Consolidated Financial Data63

46

Item 7

47
64

Item 7A

56
72

Item 8

57
73

Item 9

57
73

Item 9A

57
73

Item 9B

57
73
Item 9C
73
Part III

Item 10

58
74

Item 11

58
74

Item 12

58
74

Item 13

58
74

Item 14

58
74
Part IV

Item 15

58
74

Signatures

Item 16		59
74

Exhibits

75
89
104



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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various statements throughout this

This annual report areon Form 10-K (Annual Report) contains “forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995.1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “goal,” “likely,” “will,” “would,” and “could,” or the negative of these terms and similar expressions or words, identify forward-looking statements. Forward-looking statements are based upon current expectations and assumptions that involve risks, changes in circumstances assumptions and uncertainties. Important factors that could cause actualIf the risks, changes in circumstances or uncertainties materialize or the assumptions prove incorrect, the results toof Vanda Pharmaceuticals Inc. (we, our, the Company or Vanda) may differ materially from those reflected in ourexpressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this Annual Report may include, among others:

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

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

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

•our dependence on third-party manufacturers to manufacture HETLIOZ® and Fanapt® in sufficient quantities and quality;

•our level of success in commercializing HETLIOZ® and Fanapt® in new markets;

but are not limited to, statements about:
•our ability to continue to commercialize HETLIOZ® (tasimelteon) capsules for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) in the United States (U.S.), in light of existing and potential generic competition, and Europe and HETLIOZ® capsules and oral suspension (HETLIOZ LQ®) for the treatment of nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) in the U.S.;
•our ability to increase market awareness of Non-24 and SMS and market acceptance of HETLIOZ®;
•our ability to overcome the continued reimbursement and patient access challenges we face as a result of third-party payor coverage;
•our ability to continue to generate U.S. sales of Fanapt® (iloperidone) oral tablets for the treatment of schizophrenia;
•our ability to obtain regulatory approval for tradipitant from the U.S. Food and Drug Administration (FDA);
•the impact of public health crises, epidemics, pandemics or similar events on our business and operations, including our revenue, our supply chain, our commercial activities, our ongoing and planned clinical trials and our regulatory activities;
•our dependence on third-party manufacturers to manufacture HETLIOZ®, HETLIOZ LQ®, and Fanapt® in sufficient quantities and quality;
•our ability to prepare, file, prosecute, defend and enforce any patent claims and other intellectual property rights;

a loss of•our ability to maintain rights to develop and commercialize our products under our license agreements;

the•our ability to obtain and maintain regulatory approval of our products, and the labeling for any approved products;

•our ability to obtain approval from the FDA for HETLIOZ® beyond the currently approved indications;
•our ability to obtain approval from the FDA for Fanapt® beyond the currently approved indications;
•our expectations regarding the timing and success of preclinical studies and clinical trials;

a failure•the safety and efficacy of our products to be demonstrably safeproducts;
•regulatory developments in the U.S., Europe and effective;other jurisdictions;

the size and growth of the potential markets for our products and the ability to serve those markets;

our expectations regarding trends with respect to our revenues, costs, expenses, liabilities and cash, cash equivalents and marketable securities;

the scope, progress, expansion, and costs of developing and commercializing our products;

our failure to identify or obtain rights to new products;

a loss of any of our key scientists or management personnel;

•limitations on our ability to utilize some or all of our prior net operating losses and orphan drug and research and development credits;

•the size and growth of the potential markets for our products and our ability to serve those markets;
•our expectations regarding trends with respect to our revenues, costs, expenses, liabilities and cash, cash equivalents and marketable securities;
•our ability to identify or obtain rights to new products;
•our ability to attract and retain key scientific or management personnel;
•the cost and effects of litigation;

•our ability to obtain the capital necessary to fund our research and development or commercial activities;

•potential losses incurred from product liability claims made against us; and

•the use of our existing cash, cash equivalents and marketable securities.

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All written and verbal forward-looking statements attributable to us or any person acting on our behalfin this report are expressly qualified in their entirety by the cautionary statements contained or referred to inthroughout this section.report. We caution investorsyou not to rely too heavily on such forward-looking statements. Each forward-looking statement speaks only as of the forward-looking statementsdate of this Annual Report, and we make or that are made on our behalf. We undertake no obligation, and specifically decline any obligation, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

otherwise, except as required by law.

We encourage you to read Part II, Item 7, Management’s Discussion and Analysis of our Financial Condition and Results of Operations, and our consolidated financial statements contained in this annual report on Form10-K.Annual Report. We also encourage you to read Summary of Principal Risk Factors below and Part I, Item 1A of Part I of this annual report on Form10-K,Annual Report, entitledRisk Factors, which contains a more complete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of this report,Annual Report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the Securities and Exchange Commission from time to time, including on Form10-Q and Form8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

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SUMMARY OF PRINCIPAL RISK FACTORS
This summary briefly lists the principal risks and uncertainties facing our business, which are only a select portion of those risks. A more complete discussion of those risks and uncertainties is set forth in Part I, Item 1A of this Annual Report, entitled Risk Factors. Additional risks not presently known to us or that we currently deem immaterial may also affect us. If any of these risks occur, our business, financial condition or results of operations could be materially and adversely affected.
Our business is subject to the following principal risks and uncertainties:

Risks Related to our Business and Industry
•We are dependent on the commercial success of HETLIOZ® and Fanapt®.
•We face generic competition for HETLIOZ®.
•Future performance of HETLIOZ® and Fanapt® may be impacted by a number of factors including competing products or unanticipated safety issues.
•We are subject to uncertainty relating to pricing and reimbursement policies in the U.S.
•We have encountered third-party payors that refuse to cover or reimburse prescriptions written for HETLIOZ®.
•The FDA may not accept our tradipitant New Drug Application (NDA) or supplemental New Drug Application (sNDA) filings for the use of tradipitant for patients with gastroparesis and patients with motion sickness, or the FDA may determine that our clinical trial results for tradipitant for these indications do not demonstrate adequate safety and substantial evidence of efficacy.
•Global economic conditions may have an adverse effect on our business.
•Global health crises and pandemics may adversely impact our business.
•The FDA may not approve our sNDA for HETLIOZ® for the treatment of jet lag disorder or insomnia.
•The FDA may not approve our sNDA for Fanapt® for the treatment of bipolar I disorder.
•We may be unable to enter into third-party collaborations to develop and commercialize our products, or collaborations we enter into with any such third party may not be commercially successful.
•Even after we obtain regulatory approvals of a product, acceptance of the product in the marketplace is uncertain.
•We rely on, and will continue to rely on, outsourcing arrangements for many of our activities, including preclinical and clinical development and supply of HETLIOZ®, HETLIOZ LQ®, Fanapt® and our other products.
•We may experience disruptions to our HETLIOZ®, HETLIOZ LQ® or Fanapt® supply chains.
•We may fail to comply with government regulations regarding the sale and marketing of our products.
•We may fail to comply with regulations and obligations related to the ongoing oversight of our products regarding, among other things, development, manufacturing, labeling, recordkeeping and reporting.
•We may not market or distribute our products in a manner compliant with federal or state healthcare fraud and abuse laws.
•We rely on a limited number of specialty pharmacies for distribution of HETLIOZ® in the U.S., and the loss of one or more of these specialty pharmacies or their failure to distribute HETLIOZ® effectively would materially harm our business.
•Our revenues from Fanapt® are substantially dependent on sales through a limited number of wholesalers.
•We face substantial competition, which may result in others developing or commercializing products before or more successfully than we do.
•FDA and foreign regulatory approval of our products is uncertain.
•Our products may cause undesirable side effects or have other properties that could delay, prevent or result in the revocation of their regulatory approval or limit their marketability.
•Clinical trials for our products are expensive and their outcomes are uncertain.
•Our ability to use net operating loss carryforwards and tax credit carryforwards to offset future taxable income is dependent on generating future taxable income and may be limited, including as a result of transactions involving our common stock.
•Our contract research organizations (CROs) may not successfully carry out their duties or we may lose our relationships with CROs.
•We rely on a limited number of third-party manufacturers to formulate and manufacture our products and these manufacturers may not be able to satisfy our demand and alternative sources may not be available.
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•Materials necessary to manufacture our products may not be available on commercially reasonable terms, or at all.
•We may lose key scientists or management personnel or fail to recruit additional highly skilled personnel.
•We may be subject to product liability lawsuits.
•European Union (E.U.) Member States tend to impose strict price controls, which may delay or prevent the further commercial launch or impede the commercial success of HETLIOZ® in Europe and adversely affect our future results of operations.
•We may not be able to effectively market and sell our future products, if approved, in the U.S.
•Healthcare legislative reform measures or developments arising from changes in political climate may have a material adverse effect on our business and results of operations.
•We are subject to stringent laws, rules, regulations, policies, industry standards and contractual obligations regarding data privacy and security in foreign jurisdictions which are subject to change and reinterpretation.
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.
•Our efforts to protect the proprietary nature of the intellectual property related to our products may not be adequate.
•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.
•We may not be able to obtain protection under the Hatch-Waxman Act and similar foreign legislation to extend our patents and to obtain market exclusivity for our products.
•Generic competitors have obtained FDA approval of generic versions of HETLIOZ® in the U.S.
•We may not be successful in the development of products for our own account.
•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.
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ITEM 1. BUSINESS

ITEM 1.BUSINESS

Overview

Vanda Pharmaceuticals Inc. (we, our, the Company or Vanda) is a leading global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. Vanda commenced its operations
We strive to advance novel approaches to bring important new medicines to market through responsible innovation. We are committed to the use of technologies that support sound science, including genetics and genomics, in 2003drug discovery, clinical trials and the commercial positioning of our productproducts.
Our commercial portfolio includes:

•HETLIOZ® (tasimelteon), a product for the treatment ofNon-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 ofNon-24 in totally blind adults. HETLIOZ® was commercially launched in Germany in August 2016. HETLIOZ® has potential utility in a number of other circadian rhythm disorders and is presently in clinical development for the treatment of PediatricNon-24, Jet Lag Disorder and Smith-Magenis Syndrome (SMS).

•Fanapt® (iloperidone), a product for the treatment of schizophrenia, the oral formulation of which was approved by the FDA in May 2009 and launched commercially in the U.S. by Novartis Pharma AG (Novartis) in January 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt® franchise to us on December 31, 2014. Additionally, our distribution partners launched Fanapt® in Israel and Mexico in 2014. Fanapt® has potential utility in a number of other disorders. An assessment of new Fanapt® clinical opportunities is ongoing.

Tradipitant(VLY-686), a small moleculeneurokinin-1 receptor(NK-1R) antagonist, which is presently in clinical developmentcurrently comprised of two products, HETLIOZ® for the treatment of chronic pruritusNon-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the FDA for patients with Non-24 and patients with SMS. In addition, we have a number of drugs in development, including:
•HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, insomnia, delayed sleep phase disorder (DSPD), sleep disturbances in autism spectrum disorder (ASD) and pediatric Non-24;
•Fanapt® (iloperidone) for the treatment of bipolar I disorder and Parkinson’s disease psychosis and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
•Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis, and the treatment of gastroparesis.COVID-19 pneumonia;

•VTR-297, (formerly Trichostatin A), a small molecule histone deacetylase (HDAC) inhibitor.

VQW-765 (formerlyAQW-051),inhibitor for the treatment of hematologic malignancies and with potential use as a Phase IIalpha-7 nicotinic acetylcholine receptor partial agonist.treatment for several oncology indications;

•Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors.inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and VPO-227 for the treatment of secretory diarrhea disorders, including cholera;

Since we began

•VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, for the treatment of performance anxiety and psychiatric disorders;
•VHX-896, the active metabolite of iloperidone; and
•Antisense oligonucleotide (ASO) molecules.
We were incorporated in 2002 and commenced operations in March 2003, we have devoted substantially all of our resources to thein-licensing, clinical development and commercialization of our products. Our ability to generate meaningful product sales and achieve profitability largely depends on our level of success in commercializing HETLIOZ® in the U.S. and Europe and Fanapt® in the U.S. 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 fromyear-to-year andquarter-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 in Item 1A of Part I entitledRisk Factors and Item 7 of Part II entitledManagement’s Discussion and Analysis of Financial Condition and Results of Operations of this annual report on Form10-K.

Our activities will necessitate significant uses of working capital in 2018 and beyond.2003. We are currently concentrating our efforts on selling HETLIOZ® and Fanapt®headquartered in the U.S. and our continued commercialization of HETLIOZ® in Europe. Additionally, we continue to pursue market approval of HETLIOZ® and Fanapt® in other regions. We will continue to work with our distribution partners on the commercialization of Fanapt® outside the U.S. We see opportunities to grow our commercial products through life cycle management strategies that include the addition of new indications and formulations. We have built a research and development organization that includes extensive expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. We operate cross-functionally and are led by an experienced research and development management team. Our pipeline includes novel programs that could address largely unmet medical needs.

Our founder and Chief Executive Officer, Mihael H. Polymeropoulos, M.D., started Vanda’s operations in early 2003 after establishing and leading the Pharmacogenetics Department at Novartis. In acquiring and developing our products, we have relied upon our deep expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. These scientific disciplines examine both genetic variations among people that influence response to a particular drug, and the multiple pathways through which drugs affect people.

Washington, D.C.

Our Strategy

Our goal is to createfurther solidify our position as a leading global biopharmaceutical company focused on developing and commercializing innovative therapies addressing high unmet medical needs through the application of our drug development expertise and our pharmacogenetics and pharmacogenomics expertise. The key elements of our strategy to accomplish this goal are to:

•Maximize the commercial success of HETLIOZ®and Fanapt®;
•Enter into strategic partnerships to supplement our capabilities and to extend our commercial reach;
•Pursue the clinical development and regulatory approval of our products, including tradipitant;
•Apply our pharmacogenetics and pharmacogenomics expertise to differentiate our products;
•Expand our product portfolio through the identification and acquisition of additional products; and
•Utilize novel and innovative approaches in pursuit of each of these strategies.

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Commercialized Products
Our commercial product portfolio consists of:
•Maximize the commercial success of
ProductIndication2022 Net Sales (in millions)Geography
vnda-20221231_g1.gif
vnda-20221231_g2.jpg
Non-24 (capsules)

Nighttime sleep disturbances in SMS (capsules and HETLIOZ LQ® and Fanapt®; oral suspension)
$159.7United States

Europe (Non-24 in blind patients only)

•Enter into strategic partnerships to supplement our capabilities and to extend our commercial reach;

•Pursue the clinical development and regulatory approval of our products;

•Apply our pharmacogenetics and pharmacogenomics expertise to differentiate our products; and

•Expand our product portfolio through the identification and acquisition of additional products.

Products

We have the following products on the market or under regulatory review:

Product

vnda-20221231_g3.gif

Indication

Schizophrenia (tablets)

Geography

$94.7

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;

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 supplemental New Drug Application (sNDA) approval in May 2016

Fanaptum® (Oral)

(iloperidone)

Mexico

Market approval in October 2013;

Commercial launch in the fourth quarter of 2014 by our local distribution partner



Israel

Israel

Market approval August 2012;

Commercial launch in the fourth quarter of 2014 by our local distribution partner

We have the following products in clinical development:

Product

Target Indication

Select Historical Milestones

HETLIOZ®

(tasimelteon)

PediatricNon-24Initiated a liquid formulation pharmacokinetic study in the fourth quarter of 2016
SMSInitiated a placebo controlled study in the fourth quarter of 2016
Jet Lag Disorder

Initiated a placebo controlled transmeridian travel study in the fourth quarter of 2016;

Initiated a placebo controlled simulated jet lag study in the fourth quarter of 2017

Fanapt® (Oral)

(iloperidone)

SchizophreniaLong-acting injectable under evaluation
Other DisordersPotential indications are under evaluation including bipolar depression, major depressive disorder and post-traumatic stress disorder – nightmares
Tradipitant (VLY-686)Pruritus in patients with Atopic DermatitisCompleted a placebo controlled clinical study and reported results in the third quarter of 2017
GastroparesisInitiated a placebo controlled study in fourth quarter of 2016
VTR-297OncologyIn development for hematologic malignancies
VQW-765CNS DisordersPotential indications are under strategic evaluation including cognitive impairment

HETLIOZ®

Commercial opportunity:for Non-24

(capsules)

In January 2014, HETLIOZ® was capsules were approved in the U.S. for the treatment ofNon-24.Non-24 adults with Non-24. Non-24 is a serious, rare and chronic circadian rhythm sleep-wake disorder characterized by the inability to entrain (synchronize) the master body clock with the24-hourday-night 24-hour day-night cycle. HETLIOZ® is the first FDA approved treatment forNon-24. HETLIOZ® is a melatonin agonist of the human MT1 and MT2 receptors, with greater specificity for MT2. These receptors are thought to be involved in the control of circadian rhythms. HETLIOZ® is believed to reset the master body clock in the suprachiasmatic nucleus, located in the hypothalamus, resulting in the entrainment and alignment of the body’s melatonin and cortisol rhythms to the24-hourday-night 24-hour day-night cycle.
Most people have a master body clock that naturally runs longer than 24 hours and light is the primary environmental cue that resets it to 24 hours each day. Individuals with Non-24 have a master body clock that is not reset, and continually delays, resulting in prolonged periods of misalignment between their circadian rhythms and the 24-hour day-night cycle, including the timing of melatonin and cortisol secretion. As a result of this misalignment, Non-24 is associated with significant disruption of the sleep-wake cycle and impairments in social and occupational functioning, and marked subjective distress. Individuals with Non-24 cycle in and out of phase and suffer from disrupted nighttime sleep patterns and/or excessive daytime sleepiness.
HETLIOZ® was launched commercially in the U.S. in April 2014. In addition, in July 2015, the ECEuropean Commission (EC) granted centralized marketing authorization with unified labeling for HETLIOZ® for the treatment ofNon-24 in totally blind adults and included post-marketing commitments related to a pediatric investigation plan. This authorization was renewed in July 2020 for an unlimited duration, and is valid in the 2827 countries that are members of the European Union (E.U.), as well as European Economic Area members Iceland, Liechtenstein and Norway. HETLIOZ® was launched commercially in Germany in August 2016.

In January 2010, the FDA granted orphan drug designation status for HETLIOZ® inNon-24 in blind individuals. The FDA grants orphan drug designation to drugs that may provide significant therapeutic advantage over existing treatments and target conditions affecting 200,000 or fewer U.S. patients per year. Orphan drug designation provides potential financial and regulatory incentives, including study design assistance, tax credits, waiver of FDA user fees, and up to seven years of market exclusivity upon marketing approval. In February 2011, the European Medicines Agency (EMA) designated HETLIOZ® as an orphan medicinal product for the same indication.

Non-24 affects a majority of totally blind individuals, or approximately 80,000 people in the U.S. Blind individuals who developNon-24 lack the light sensitivity necessary to synchronize the master body clock in the brain with the24-hourday-night 24-hour day-night cycle. InNon-24 also can affect sighted individuals. As with the totally blind, Non-24 in sighted individuals decreased exposure or sensitivityappears to lightbe a comorbidity with certain other conditions. For example, a comorbidity has been established between psychiatric mood disorders and social and physical activity cues may contribute to a free-running circadian rhythm. With the high frequency of mental disorders involving social isolation and cases ofNon-24 developing after a change in sleep habits, behavioral factors in combination with physiological tendency may precipitate and perpetuate this disorder in sighted individuals.Non-24. Hospitalized individuals with neurological and psychiatric disorders can become insensitive to social cues, predisposingwhich
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may predispose them to the development ofNon-24.

Most people have a master body clock that naturally runs longer than24-hours and light is This recognition of comorbidity led Vanda to an initiative to engage with the primary environmental cue that resets it to 24 hours each day. Individualspsychiatric community. Patients diagnosed withNon-24 have a master body clock that is not reset, and continually delays, resulting in prolonged periods of misalignment between their circadian rhythms and the24-hourday-night cycle, traumatic brain injury, including the timing of melatonin and cortisol secretion. As a result of this misalignment,Non-24 is associated with significant disruption of the sleep-wake cycle and impairments in social and occupational functioning, and marked subjective distress. Individuals withNon-24 cyclein-andout-of phase andconcussions, frequently suffer from disrupted nighttime sleep patterns and/or excessive daytime sleepiness.

disorders, some of which may be circadian rhythm sleep-wake disorders, including Non-24.

While there are no FDA or EC approved treatments forNon-24 other than HETLIOZ®, and only recently has the FDA approved generics for the treatment of Non-24, there are a number of drugs approved and prescribed for patients with sleep disorders. The most commonly prescribed drugs are hypnotics. SeeCompetition below for a discussion of commonly prescribed drugs for patients with sleep disorders.

Therapeutic opportunity: Circadian Rhythm Sleep Disorders

Sleep disorders are segmented into three major categories: primary insomnia, secondary insomnia

HETLIOZ® for SMS (capsules and circadian rhythm sleep disorders (CRSDs). Insomnia is a symptom complex that comprises difficulty falling asleep or staying asleep, ornon-refreshing sleep,oral suspension)
In December 2020, HETLIOZ® capsules and oral suspension (HETLIOZ LQ®) were approved in combination with daytime dysfunction or distress. The symptom complex can be an independent disorder (primary insomnia) or be a result of another condition such as depression or anxiety (secondary insomnia). CRSDs result from a misalignment of the sleep/wake cycle and an individual’s daily activities or lifestyle. The circadian rhythm is the rhythmic output of the human biological clock and is governed by the hormones melatonin and cortisol. Both the timing of behavioral events (activity, sleep, and social interactions) and the environmental light/dark cycle result in a sleep/wake cycle that follows the circadian rhythm. Examples of CRSDs include transient disorders such as jet lag and chronic disorders such as delayed sleep phase disorder, shift work sleep disorder andNon-24. We are planning to develop HETLIOZ®U.S. for the treatment of pediatricNon-24. We initiated a pediatric adults and children, respectively, with nighttime sleep disturbances in SMS. HETLIOZ® capsules, for adults with SMS, were immediately available after approval and the HETLIOZ LQ® liquid formulation, pharmacokinetic studyfor children with SMS, became available in the fourthfirst quarter of 2016.

We initiated an open label interventional study2021. SMS is a developmental disorder that is caused by a small deletion of human chromosome 17p. In more rare cases, SMS is caused by a point mutation in the RAI1 gene, which resides in the deleted region. HETLIOZ® is the first FDA-approved medication for patients with SMS.

In April 2010, the FDA granted orphan drug designation status for HETLIOZ® in the treatment of sleep disorder in SMS. SMS is estimated to affect 1/15,000-25,000 births in the U.S. SMS is not usually inherited but rather is caused by a de-novo deletion. Patients with SMS present with a number of physical, mental and behavioral problems. The most common symptom of SMS is a severe sleep disorder associated with significant disruption in the lives of patients and their families.
While there are no FDA approved treatments for patients with SMS in the fourth quarterother than HETLIOZ®, there are a number of 2015drugs approved and shared the results at the joint congressprescribed for patients with sleep disorders that may be used to treat patients with SMS. The most commonly prescribed drugs are hypnotics. See Competition below for a discussion of World Association of Sleep Medicine and World Sleep federation in October 2017, which showed that parents of childrencommonly prescribed drugs for patients with SMS reported improvement in sleep quality and a decrease in aberrant behaviors during treatment as compared to baseline. We initiated a SMS placebo controlled study in the fourth quarter of 2016. Enrollment in this study is ongoing. SMSdisorders.
Fanapt® for schizophrenia (tablets)
Fanapt® is a rare genetic disorder caused by a deletion on chromosome 17. The U.S. National Institute of Health estimates that SMS affects approximately one in 20,000 births in the U.S.

We initiated an observational study in Jet Lag Disorder in the fourth quarter of 2015. The data from that study was used to support clinical study design for our two placebo controlled studies. We initiated a placebo controlled transmeridian travel study in the fourth quarter of 2016 and a placebo controlled simulated jet lag study in the fourth quarter of 2017.

Fanapt®

Commercial Opportunity: Schizophrenia

Fanapt® is a product approved for the treatment of schizophrenia. In May 2009, the FDA granted U.S. marketing approval of Fanapt® for the acute treatment of schizophrenia in adults. At that time, we had certain worldwide exclusive rights relating to Fanapt®, which we obtained pursuant to a sublicense agreement entered into with Novartis Pharma AG (Novartis) in June 2004. In October 2009, we entered into an amended and restated sublicense agreement with Novartis. We had originally entered into aour sublicense agreement with Novartis in June 2004 pursuant to which we obtained certain worldwide exclusive licenses from Novartis relating to Fanapt®. Pursuant to the amended and restated sublicense agreement, Novartis hadretained exclusive commercialization rights to all formulations of Fanapt® in the U.S. and Canada. In January 2010, Novartis launched Fanapt® in the U.S. On December 31, 2014, Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt® franchise to Vandaus as part of a settlement agreement. In June 2015, we announced positive results from REPRIEVE, a Phase III long-term maintenance study that was conducted by Novartis.Additionally, our distribution partners launched Fanapt® in Israel in 2014. In May 2016, the FDA approved a sNDAsupplemental New Drug Application (sNDA) for Fanapt® for the maintenance treatment of schizophrenia in adults.

In July 2017, the EMA’s Committee for Medicinal Products for Human Use (CHMP) issued a negative opinion recommending against approval of Fanaptum® (oral iloperidone tablets) for the treatment of schizophrenia in adult patients in the E.U. The CHMP was of the opinion that the benefits of Fanaptum® did not outweigh its risks and recommended against marketing authorization. The negative opinion was upheld upon appeal in November 2017.

We received market approval for the commercialization of Fanapt® in Israel in August 2012 and in Mexico in October 2013. Our distribution partners launched Fanapt® in Israel and Mexico in 2014. As of December 31, 2017, we no longer have an active distributor relationship in Mexico.

Schizophrenia is a chronic, debilitating mental disorder characterized by hallucinations, delusions, racing thoughts and other psychotic symptoms (collectively referred to as “positive symptoms”), as well as moodiness, anhedonia (inability to feel pleasure), loss of interest, eating disturbances and withdrawal (collectively referred to as “negative symptoms”), and attention and memory deficits (collectively referred to as “cognitive symptoms”). Schizophrenia develops in late adolescence or early adulthood in approximately 1% of the world’s population. Most schizophrenia patients today are treated with drugs known as “atypical” antipsychotics, which were first approved in the U.S. in the late 1980s. These antipsychotics have been named “atypical” for their ability to treat a broader range of negative symptoms than the first-generation “typical” antipsychotics, which were introduced in the 1950s and are now generic. Atypical antipsychotics are generally regarded as having improved side effect profiles and efficacy relative to typical antipsychotics. SeeCompetition below for a discussion of commonly prescribed atypical antipsychotics in addition to Fanapt®.

Pursuant

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Research and Development
We have built a research and development organization that includes extensive expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. We operate cross-functionally and are led by an experienced research and development management team. We use rigorous project management techniques to assist us in making disciplined strategic research and development program decisions and to help limit the risk profile of our product pipeline. We also access relevant market information and key opinion leaders in creating target product profiles and, when appropriate, as we advance our programs towards commercialization. We engage third parties to conduct portions of our preclinical research. In addition, we utilize multiple clinical sites to conduct our clinical trials; however, we are not substantially dependent upon any one of these sites for our clinical trials nor do any of them conduct a settlement agreementmajor portion of our clinical trials.

Our product pipeline currently consists of the following products in clinical development or under regulatory review:

vnda-20221231_g4.jpg
HETLIOZ® for jet lag disorder
In March and May 2018, respectively, we announced the results of our JET8 and JET studies for the treatment of jet lag disorder. In the JET8 clinical study, HETLIOZ® demonstrated significant and clinically meaningful benefits in nighttime and daytime symptoms of jet lag disorder, including improvement in sleep time and benefits in measurements of next day alertness. The JET study showed effectiveness in treating travelers who traveled either five or eight time zones from Washington, DC to London and San Francisco or Los Angeles to London, respectively. The results support the previously reported pivotal JET5 and JET8 Phase III studies, which demonstrated improvements in patients who experienced circadian advances of five and eight hours, respectively. Additionally, in September 2018, we announced results from a driving study, which demonstrated that tasimelteon did not impair measures of driving performance.
The FDA accepted the filing of our sNDA for HETLIOZ® for the treatment of jet lag disorder in December 2018. The FDA determined the action target date under the Prescription Drug User Fee Act Amendments of 2017 to be August 16, 2019 and, on that date, we received a complete response letter (CRL) from the FDA. The FDA asserted in the CRL that the measures demonstrating improved sleep were of unclear clinical significance. We met with Novartis,the FDA to discuss the CRL in a Post Action meeting and in 2022 we reacquiredrequested the opportunity for a hearing with the FDA on the approvability of the jet lag disorder sNDA. We filed a lawsuit against the FDA in September 2022 demanding that the FDA immediately publish in the Federal
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Register a notice of opportunity for a hearing on the jet lag disorder sNDA. The FDA then published the notice in the Federal Register in October 2022. We are undergoing discussions with the FDA on the timing of such hearing.
Jet lag disorder is a common circadian disorder frequently observed in millions of travelers who cross multiple time zones. Jet lag disorder is characterized by nighttime sleep disruption, a decrease in daytime alertness and impairment to social and occupational functioning. Jet lag disorder symptoms are more severe during eastward travel. U.S. Department of Commerce, International Trade Administration reports state that more than 20 million U.S. residents make trips abroad each year to overseas destinations in Europe, the Middle East and Asia.
HETLIOZ® for insomnia
HETLIOZ® is effective in improving sleep onset difficulty in people with primary insomnia with the effect observed as early as the first night of treatment. A Phase III, multi-center, placebo-controlled, 4-week trial evaluated patients with chronic primary insomnia. Two transient insomnia studies induced by phase advance of the sleep-wake cycle were also conducted with five-hour and eight-hour phase advance, which showed a significant effect the first night in improving sleep parameters.
HETLIOZ® for pediatric Non-24
We plan to develop HETLIOZ® for the treatment of pediatric Non-24. A pharmacokinetic study of the HETLIOZ® pediatric liquid formulation was completed in the first quarter of 2018.
HETLIOZ® for DSPD
A Phase III study of HETLIOZ® in DSPD is ongoing. DSPD is a circadian rhythm disorder in which a person’s sleep is delayed beyond the socially acceptable or conventional bedtime. This delay in falling asleep causes difficulty in waking up at the desired time and affects social and occupational functioning. DSPD is likely the most prevalent circadian-rhythm sleep disorder, affecting approximately 1% of the population, and there is no FDA approved treatment at this time.
HETLIOZ® for ASD
A clinical program of HETLIOZ® for the treatment of symptoms of ASD is ongoing. Sleep disturbances in ASD are a high unmet medical need in people with ASD and have been characterized in the literature to include difficulties falling and staying asleep.
Fanapt® for bipolar I disorder
In December 2022, we announced Fanapt® was effective in the treatment of acute manic and mixed episodes associated with bipolar I disorder in adults in a randomized double-blind placebo controlled Phase III study. The primary endpoint measured in Week 4 of treatment was assessed by the Young Mania Rating Scale (YMRS), a rating scale of clinical severity in the core symptoms of mania. At the end of the 4-week study, Fanapt® treated patients showed a larger improvement than placebo treated patients, and this difference was highly statistically significant. Statistically significant benefit in the Fanapt® group over placebo was observed as early as the Week 2 assessment. Consistent with the total YMRS score, the individual YMRS subscale items also showed improvement in the Fanapt® group versus the placebo group over the course of the 4-week study. Other outcomes, such as Clinician Global Impression of Severity (CGI-S) and Clinician Global Impression of Change (CGI-C), also achieved statistical significance.
Bipolar disorders are brain disorders that cause changes in a person’s mood, energy and ability to function. Bipolar disorder is a category that includes three different conditions - bipolar I, bipolar II and cyclothymic disorder.
People with bipolar disorders have extreme and intense emotional states that occur at distinct times, called mood episodes. These mood episodes are categorized as manic, hypomanic or depressive. People with bipolar disorders generally have periods of normal mood as well.
Fanapt® for schizophrenia (LAI)
In October 2018, we enrolled our first patient in a pharmacokinetic study of the LAI formulation of Fanapt®. This pharmacokinetic study is ongoing and will serve to inform the dosing for a later clinical study of Fanapt® LAI for the treatment of schizophrenia.
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Fanapt® for Parkinson’s disease psychosis
A clinical program of Fanapt® in Parkinson’s disease psychosis is ongoing. Parkinson’s disease is a neurodegenerative disorder that affects predominately dopaminergic neurons in a specific area of the brain called substantia nigra.
There are approximately one million adults in the U.S. with Parkinson’s disease. Between 20% and Canadian rights40% of persons with Parkinson’s disease experience a combination of hallucinations and delusions. The disease is associated with significant caregiver burden.
Tradipitant for gastroparesis
In December 2018, we announced results from a Phase II randomized clinical study (2301) of tradipitant as a monotherapy in the treatment of gastroparesis. Several symptom severity scales were used to assess gastroparesis symptoms, including the long-acting injectable (depot) formulationGastroparesis Symptom Index (GCSI), Patients Assessment of Fanapt®Upper Gastrointestinal Disorders-Symptoms (PAGI-SYM), and Patient Global Impression of Change (PGI-C) as well as a Clinician Global Impression of Severity (CGI-S). We areTradipitant met the primary endpoint of the study of change in nausea score as measured by patient daily diaries and also met the related endpoint of improvement in the number of nausea free days. Tradipitant also showed significant improvement in most of the secondary endpoints studied, including several key scales reflecting overall gastroparesis symptoms, specifically GCSI, PAGI-SYM, CGI-S, and PGI-C.
In February 2022, we announced results from our Phase III clinical study, VP-VLY-686-3301, evaluating the commercial opportunity aroundefficacy and safety of tradipitant in treating the depot formulation.

Therapeutic opportunity: Other

We are currentlysymptoms of gastroparesis. The study did not meet its prespecified primary endpoint, which was the difference between drug and placebo on the change of the severity of nausea from baseline at week 12 of treatment. Both treatment arms showed significant improvements from baseline on nausea as well as the other core symptoms of gastroparesis. When restricting the analysis in the processgroup of evaluating potential indications, including bipolar depression, major depressive disorderpatients that used no rescue medications at baseline and post-traumatic stress disorder – nightmares.

Tradipitant(VLY-686)

Tradipitant isadjusting for poor compliance, we identified strong evidence of a small moleculeNK-1R antagonist that we licensed from Eli Lilly and Company (Lilly) in April 2012.NK-1R antagonists have been evaluated indrug effect across a number of symptoms and across the duration of the study, including a significant and meaningful effect at the prespecified primary endpoint of nausea change at week 12. The FDA may not view this data as constituting substantial evidence of efficacy for tradipitant in any indication for the treatment of gastroparesis or its symptoms, for any length of treatment. We are preparing for submission of an NDA for tradipitant for patients with gastroparesis.

We believe that tradipitant has a well-established safety profile, as demonstrated by the results of extensive testing in animals and humans. Despite these results, however, the FDA informed us in December 2018 that in order to treat patients beyond 12 weeks, we will have to conduct a nine-month non-rodent chronic toxicity study. This currently limits our ability to collect safety data in humans for more than 12 weeks. The non-rodent study required by the FDA necessitates the sacrifice of dozens of animals and we have disputed the necessity of a nine-month non-rodent chronic toxicity study. In February 2019, we filed a lawsuit in the U.S. District Court for the District of Columbia (DC District Court) challenging the FDA’s position, but we ultimately did not prevail. Despite our disagreement with the FDA, the preclinical package has allowed us to continue to conduct all of the efficacy studies necessary for New Drug Application (NDA) filing. Moreover, in July 2020, the FDA authorized tradipitant through an expanded access program (EAP) for a single patient. An EAP allows a patient to request the use of tradipitant, prior to NDA approval, for up to six months with an option to request renewal. Since then, certain patients who experienced a benefit in tradipitant studies have requested and received expanded access, while others have been denied treatment under the EAP. The EAP is ongoing and a number of patients have initiated treatment. Although this EAP is not intended for data collection, we collect safety data from this cohort of expanded access patients and plan to include this data in the NDA for tradipitant for patients with gastroparesis. The FDA may disregard such safety data when reviewing the NDA. The lack of long-term (i.e., more than 12 weeks in humans) safety data would likely impact the FDA’s willingness to approve tradipitant for a chronic indication. However, because long-term safety data is not normally a requirement for short-term indications, including chemotherapy-inducedand with a preclinical profile that has not precluded clinical development, we believe the package is complete for any NDA filing to treat patients for 12 weeks or less. For example, the FDA has communicated to us that it is considering an indication for the short-term relief of nausea and vomiting, post-operative nausea and vomiting, gastroparesis, alcohol dependence, anxiety, depression andin gastroparesis. While this short-term indication is not preferred, we would consider accepting this limited indication while continuing to pursue a chronic pruritusindication. However, the FDA may not deem the safety information sufficient even for a short-term indication. Moreover, FDA authorization of an EAP is not a guarantee of or a step in obtaining full FDA approval of an NDA.
Gastroparesis is a serious medical condition characterized by delayed gastric emptying associated with the symptoms of nausea, vomiting, bloating, fullness after meals and abdominal pain, along with significant impairment of social and occupational functioning. A paper by Rey et al published in the January 2012 Journal of Neurogastroenterology and Motility estimated the prevalence of gastroparesis in the U.S. to be approximately six million patients, many of whom remain undiagnosed.
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Tradipitant for motion sickness
In July 2019, we reported tradipitant was effective in treating motion sickness in a randomized double blind placebo controlled Phase II clinical study conducted in the Pacific Ocean. The study had two primary endpoints: percentage of participants vomiting, and Motion Sickness Severity Scale (MSSS) Worst score. In the overall population, a significantly higher percentage of participants experienced vomiting in the placebo arm as compared to the tradipitant arm. The MSSS Worst score endpoint also favored tradipitant, but the difference did not reach statistical significance. The protocol for a pivotal Phase III motion sickness study was discussed with the FDA at the end of Phase II meeting, and the FDA agreed with the adequacy of the program design to support an NDA. The Phase III study is ongoing.
Motion sickness is a disorder that arises often as a response to real or perceived movement, as occurring during vehicular travel. Vomiting is the most disturbing symptom of motion sickness, although the disorder is often accompanied by a constellation of symptoms that includes nausea, sweating, pallor, headache and anorexia. Motion sickness is one of the most prevalent episodic disorders in the world, whose prevalence has dramatically increased with world population mobility over the last 100 years. It is reported that approximately 30% of the general population suffers from motion sickness under ordinary travel conditions that include sea, air and land travel.
Tradipitant for atopic dermatitis.

dermatitis

We commencedannounced results in September 2017 from a randomized Phase II clinical study of tradipitant as a monotherapy in the treatment of chronic pruritus in patients with atopic dermatitis. Tradipitant was shown to improve the intensity of the worst itch patients experienced, as well as atopic dermatitis in 2014. Results fromdisease severity. On the pre-specified primary endpoint of Average Itch Visual Analog Scale (VAS), tradipitant showed improvement over placebo, but this study, which were announced in March 2015, showed noimprovement was not significant difference fromdue to high placebo oneffect and thepre-specified primary endpoint. Vanda believes lack of sensitivity of this proof of conceptmeasure.
In June 2018, we initiated EPIONE, a Phase III study was informative, in that through subsequent analyses, it revealed statistically significant and clinically meaningful responses across multiple outcomes evaluated in individuals with higher blood plasma levels of tradipitant at the time of theirfor pruritus assessments. We initiatedin atopic dermatitis. In October 2019, we began enrolling patients in EPIONE 2, a placebo controlled pruritus proof of concept study in the second quarter of 2016. Results from this study, which were announced in September 2017, showed significant improvements in itch and disease severity. These results were presented at the 9th World Congress of Itch in October 2017.

We initiated a placebo controlled Phase IIIII clinical study of tradipitant in atopic dermatitis. We announced results of EPIONE in February 2020. The EPIONE study did not meet its primary endpoint in reduction of pruritus across the overall study population. However, the antipruritic effect of tradipitant was robust in the mild atopic dermatitis population. The EPIONE study continued to demonstrate that tradipitant is safe and well-tolerated. The EPIONE 2 study was placed on hold in 2020.

Atopic dermatitis is a chronic, relapsing inflammatory skin disorder characterized by the symptom of intense and persistent pruritus or itch. Other clinical features include erythema, excoriation, edema, lichenification, oozing and xerosis. Atopic dermatitis is a common skin disorder affecting millions of people worldwide. Currently, there are very few safe systemic treatments available for atopic dermatitis, representing a significant unmet medical need in this population. A 2015 Decision Resources Group report estimated that 9.8 million individuals were diagnosed with atopic dermatitis in the U.S., of which approximately 6.4 million were drug-treated atopic dermatitis patients.
Tradipitant for COVID-19 pneumonia
In April 2020, we announced the initiation of a Phase III clinical study, ODYSSEY VLY-686-3501, in hospitalized patients with COVID-19. We received permission from the FDA to proceed with the study for the treatment and prevention of gastroparesispneumonia associated with COVID-19. Enrollment in the VLY-686-3501 study closed in August 2021 because the study met the pre-defined futility criteria, indicating that the study was unlikely to succeed in its pre-specified primary endpoint. The study was designed to determine whether tradipitant plus standard of care is superior to placebo plus standard of care in treating hospitalized patients with COVID-19 pneumonia who required supplemental oxygen support. An independent data and safety monitoring board (DSMB) met to assess the planned interim analysis results and determined that the study is unlikely to show a significant difference between treatment arms at the pre-specified primary endpoint and recommended termination of the study for futility. The DSMB also determined that there are no safety concerns that contributed to its recommendation. We have continued the genetics component of the study with the goal of identifying genetic susceptibility factors contributing to the incidence of severe pneumonia among patients infected with COVID-19.
COVID-19 is associated with a lower respiratory tract inflammation that often progresses to acute respiratory distress syndrome requiring mechanical ventilation. Tradipitant targets the neurokinin-1 receptor, which is coded by the TACR1 gene and is the main receptor for substance P, an 11 amino acid neuropeptide with a diverse set of functions. It has been shown that the substance P NK-1 receptor system is involved in the neuroinflammatory processes that leads to significant lung injury following a number of insults, including viral challenges.
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VTR-297
In the fourth quarter of 2016.

2018, we initiated a clinical study in patients with hematologic malignancies. Enrollment in the Phase I/II clinical study (1101) of VTR-297

in hematologic malignancies is ongoing. VTR-297 is a small molecule HDAC inhibitor with potential use as a treatment for several oncology indications. The FDA accepted an Investigational New Drug (IND) application

Portfolio of CFTR activators and inhibitors
A clinical program in VSJ-110 is ongoing. We are evaluating VSJ-110 forVTR-297 in 2017 and provided authorization to proceed with the treatment of patientsallergic conjunctivitis. VSJ-110 is a small molecule nanomolar potency CFTR activator. VSJ-110 has shown efficacy in a dry eye model and exhibited anti-inflammatory properties in both in vitro and in vivo assays.
In addition, an early stage CFTR inhibitor program is planned for VPO-227 for the treatment of secretory diarrhea disorders, including cholera. We believe that VPO-227 has the potential to be an orally administered treatment for cholera. In October 2022, VPO-227 was granted orphan drug designation by FDA for the treatment of cholera.
VQW-765
We are evaluating VQW-765 for the treatment of psychiatric disorders. In December 2022, we announced results from our Phase II study, VP-VQW-765-2201 (Study 2201), of a single-dose treatment to alleviate acute performance anxiety in social situations. In the clinical study, 230 volunteers with relapsed and/prior history of performance anxiety were randomized to receive a single dose of VQW-765 or refractory hematologic malignancies.

placebo and were challenged with the standardized Trier Social Stress Test (TSST). The TSST creates an acute stress by requiring participants to make an interview-style presentation in front of a panel who provides no feedback or encouragement. Participants who received VQW-765

showed numerically lower stress levels compared to those who received placebo. A significant relationship was also seen between exposure to VQW-765 (amount of drug measured in blood) and the clinical response.

VQW-765 is a Phase IIalpha-7 nicotinic acetylcholine receptor partial agonist that we licensed from Novartis on December 31, 2014 pursuant to a settlement agreement.
Other products
VHX-896
In 2021, we initiated a bioequivalence study of Fanapt® and VHX-896, the active metabolite of iloperidone. We are evaluatingbelieve that VHX-896 has the potential indications, including cognitive impairment.

to improve the clinical profile of Fanapt® and create sustained, long-term value in the treatment of psychiatric disorders.

ASO Molecules
In 2022, we announced a research and development collaboration agreement with OliPass Corporation (OliPass) to jointly develop a set of ASO molecules based on OliPass’ proprietary modified peptide nucleic acids. The collaboration focuses on editing and modifying gene expression using ASOs in disease states where the expression of genes is either altered or the sequence of the expressed genes can be altered for therapeutic benefit. OliPass’ unique OliPass Peptide Nucleic Acids technology provides the delivery platform to enable these gene expression modifications.
    For more detailed information regarding our clinical trial results and regulatory activities for our products please refer to our SEC filings and press releases, which can be found on the SEC EDGAR website and on our website www.vandapharma.com. Information contained on those websites is not incorporated by reference into this Annual Report or any other report or document that we file with the SEC.
License Agreements

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

HETLIOZ®

In February 2004, we entered into a license agreement with Bristol-Myers Squibb (BMS) under which we received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ®. As a resultWe have paid BMS $37.5 million in upfront fees and milestone obligations. We have no
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Table of the FDA’s approval of the HETLIOZ® New Drug Application (NDA) in January 2014, we made an $8.0 millionContents
remaining milestone paymentobligations to BMS in the first quarter of 2014 under the license agreement that was capitalized as an intangible asset and is being amortized over the estimated economic useful life of the related product patents which is the remaining life of the U.S. method of use patent for HETLIOZ® in the U.S. We are obligated to make a future milestone payment to BMS of $25.0 million when cumulative worldwide sales of HETLIOZ® reach $250.0 million, which is expected to occur in the first half of 2018. The probable future $25.0 million milestone obligation was capitalized as an intangible asset in the first quarter of 2015 and is being amortized over the estimated economic useful life of the related product patents which is the remaining life of the U.S. method of use patent for HETLIOZ® in the U.S.BMS. Additionally, we are obligated to make royalty payments on HETLIOZ® net sales to BMSBMS. The royalty period in anyeach territory where we commercialize HETLIOZ® for a period equal to the greater of is 10 years following the first commercial sale in the territory orterritory. In territories outside the expiry ofU.S., the new chemical entity patent in that territory. Duringroyalty is 5% on net sales. In December 2022, the period prior to the expiry of the new chemical entity patent in a territory, we are obligated to pay a 10% royalty on net sales in that territory. Thethe U.S. decreased from 10% to 5%. This U.S. royalty rate is decreased by half for countrieswill end in which no new chemical entity patent existed or for the remainder of the 10 years after the expiry of the new chemical entity patent.April 2024. We are 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 we receive from a third party in connection with any sublicensing arrangement, at a rate which is inthe mid-twenties. We have agreed with BMS in our license agreement for HETLIOZ® are obligated to use our commercially reasonable efforts to develop and commercialize HETLIOZ®.Either.
Either party may terminate the HETLIOZ® license agreement under certain circumstances, including a material breach of the agreement by the other. In the event we terminate our license, or if BMS terminates our license due to our breach, all rights licensed and developed by us under this agreement will revert or otherwise be licensed back to BMS on an exclusive basis.

Fanapt®

Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to us on December 31, 2014. We were obligated to make royalty paymentspaid directly to Sanofi S.A. (Sanofi) and Titan Pharmaceuticals Inc. (Titan) at a percentage rate equal to 23% on annual U.S. net sales of Fanapt® up to $200.0 million, and at a percentage rate inthe mid-twenties on sales over $200.0 million through November 2016. In February 2016, we amended the agreement with Sanofi and Titan to remove Titan as the entity through which royalty payments from Vanda are directed to Sanofi following the expiration of the new chemical entity patent for Fanapt® in the U.S. on November 15, 2016. Under the amended agreement, we pay directly to Sanofi a fixed royalty of 3% of net sales from November 16, 2016 through December 31, 2019 related tomanufacturing know-how. We made a $2.0 millionpre-payment during the year ended December 31, 2016 that applied to this 3%manufacturing know-how royalty. No further royalties onmanufacturing know-how are payable by us after December 31, 2019. This amended agreement did not alter Titan’s obligation under the license agreement to make royalty payments to Sanofi prior to November 16, 2016 or our obligationus. We are also obligated to pay Sanofi a fixed royalty on Fanapt® net sales equal up to 6% onSanofi know-how not

related to manufacturing under certain conditions for a period of up to 10 years in markets where the new chemical entityNCE patent has expired or was not issued. We are obligated to pay this 6% royalty on net sales in the U.S. through November 2026. No further royalties on know-how not related to manufacturing will be payable by us for net sales in the U.S. after November 2026. 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.

Tradipitant(VLY-686)

In April 2012, we entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which we acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize anNK-1R NK-1 receptor antagonist, tradipitant, for all human indications. The patent describing tradipitant as a new chemical entity expires in April 2023, except in the U.S., where it expires in June 2024 absent any applicable patent term adjustments. Lilly is eligible to receive future payments based upon achievement of specified development, regulatory approval and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. TheseWe have paid Lilly $3.0 million in upfront fees and development milestones. As of December 31, 2022, remaining milestones include $4.0 millionfor pre-NDA approval milestones and up to $95.0 million for future regulatory approval and sales milestones. The $4.0 millionof pre-NDA approval milestones includesa $2.0 million due upon enrollment of the first subject into a Phase III study for tradipitant and $2.0 milliondevelopment milestone due upon the filing of the first marketing authorization for tradipitant in either the U.S. or the E.U. The likelihood of achieving the enrollment ofE.U, $10.0 million and $5.0 million for the first subject intoapproval of a Phase III studymarketing authorization for tradipitant was determinedin the U.S. and E.U., respectively, and up to be probable during the third quarter of 2017. As a result, the future obligation of $2.0$80.0 million tied to such milestone was recorded as research and development expense in 2017.for sales milestones. We are obligated to use commercially reasonable efforts to develop and commercialize tradipitant.
Either party may terminate the agreement under certain circumstances, including a material breach of the agreement by the other. In the event that we terminate the agreement, or if Lilly terminates the agreement due to our breach or for certain other reasons set forth in the agreement, all rights licensed and developed by us under the agreement will revert or otherwise be licensed back to Lilly on an exclusive basis, subject to payment by Lilly to us of a royalty on net sales of products that contain tradipitant.

Portfolio of CFTR activators and inhibitors
In March 2017, we entered into a license agreement with the University of California San Francisco (UCSF), under which we acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, we will develop and commercialize the CFTR activators and inhibitors and are 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, regulatory approval and commercialization milestones as well as single-digit tiered-royalties on net sales. We have paid UCSF $1.6 million in upfront fees and development milestones. As of December 31, 2022, remaining milestones include $11.9 million for development milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $11.9 million in development milestones are $1.1 million of milestone obligations due upon the conclusion of clinical studies for each licensed product, not to exceed $3.2 million in total for the CFTR portfolio.
Either party may terminate the agreement under certain circumstances. In the event that we terminate the agreement, or if UCSF terminates the agreement due to our breach or for certain other reasons set forth in the agreement, all rights licensed
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and developed by us under the agreement will revert or otherwise be licensed back to UCSF. Termination will not relieve us of our obligation to pay royalties or other payments owed, if any, to UCSF under the terms of the agreement.
VQW-765

In connection with the settlement agreement with Novartis relating to Fanapt®, we received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercializeVQW-765, a PhaseII alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, we are obligated to use commercially reasonable efforts to develop and commercializeVQW-765 and are responsible for all development costs. We have no milestone obligations, but Novartis is eligible to receive tiered-royalties on net sales at percentage rates up tothe mid-teens.

Either party may terminate the agreement under certain circumstances, including a material breach of the agreement by the other. In the event that we terminate the agreement, or if Novartis terminates the agreement due to our breach or for certain other reasons set forth in the agreement, all rights licensed and developed by us under the agreement will revert or otherwise be licensed back to Novartis on an exclusive basis, subject to payment by Novartis to us of a royalty on net sales of products that containVQW-765.

Portfolio

Patents and Proprietary Rights; Hatch-Waxman Protection
Our products are protected from unauthorized use by others only to the extent that our products are covered through regulatory protections or by valid and enforceable patents, either licensed to us by others or generated through our activities internally, that give us sufficient proprietary rights. Accordingly, securing patents, regulatory data package protection, and other proprietary rights is an essential element of CFTR activatorsour business strategies.
Tradipitant and inhibitors

VQW-765 are covered by NCE and other patents and patent applications related to their respective medicinal uses. In March 2017,addition, NCE patent protection has been sought for VTR-297 and CFTR. Patent applications for these active ingredients remain pending. Although the NCE patents protecting Fanapt® and HETLIOZ® have expired, Fanapt® remains protected by additional patents and HETLIOZ® remains protected by additional patents, some of which we have asserted against current generic competitors. For more on the license and sublicense arrangements related to these active ingredients, see License Agreements above. For more on patent litigation, see Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “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,” in Part I, Item 1A of this Annual Report, each of which is incorporated herein by reference. In addition, we have filed for patents based on our own discoveries that seek to provide additional protection for HETLIOZ® and Fanapt®.

A comprehensive list of active patents for our U.S. commercial products is available in the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) for our commercial products and is also provided in the table below. Members of these patent families are also issued or pending in a number of territories, such as Europe and Japan. The patents in the table below that are marked with “*” are the subject of ongoing patent litigation. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “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,” in Part I, Item 1A of this Annual Report, each of which is incorporated herein by reference, for additional information.
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ProductNumberType
HETLIOZ®
US 9,060,995Method of treatment
US 9,539,234Method of treatment
US 9,549,913Method of treatment
US 9,730,910*Method of treatment
US 9,855,241Method of treatment
US RE46604*Method of treatment
US 10,071,977Drug substance
US 10,149,829*Method of treatment
US 10,179,119Method of treatment
US 10,376,487*Method of treatment
US 10,449,176Method of treatment
US 10,610,510Method of treatment
US 10,610,511Method of treatment
US 10,829,465Drug substance
US 10,945,988Method of treatment
US 10,980,770Method of treatment
US 11,141,400Method of treatment
US 11,266,622Method of treatment
US 11,285,129*Method of treatment
HETLIOZ LQ®
US 9,539,234Method of treatment
US 9,730,910*Method of treatment
US 10,071,977Drug substance
US 10,149,829*Method of treatment
US 10,179,119Method of treatment
US 10,376,487*Method of treatment
US 10,610,510Method of treatment
US 10,610,511Method of treatment
US 10,829,465Drug substance
US 10,980,770Method of treatment
US 11,141,400Method of treatment
US 11,202,770Drug formulation
US 11,266,622Method of treatment
US 11,285,129*Method of treatment
Fanapt®
US 8,586,610*Method of treatment
US 8,652,776Method of treatment
US 8,999,638Method of treatment
US 9,072,742Method of treatment
US 9,074,254Method of treatment
US 9,074,255Method of treatment
US 9,074,256Method of treatment
US 9,138,432*Method of treatment
US 9,157,121Method of treatment
HETLIOZ® and HETLOZ LQ®
Our rights to the NCE patent covering HETLIOZ® capsules and oral suspension (HETLIOZ LQ®) and related intellectual property have been acquired through a license with BMS. HETLIOZ® and its formulations, genetic markers and
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uses are the subject of numerous patent filings for which protection has been sought in selected countries worldwide. The NCE patent covering HETLIOZ® expired in December 2022 in the U.S., which is inclusive of a five-year extension granted under the Hatch-Waxman Act in October 2018. Corresponding NCE patent protection has expired in most other markets. The U.S. Patent and Trademark Office has issued 17 method of treatment patents for HETLIOZ® that will expire between 2033 and 2035 and three drug substance patents that will expire in 2035. Additionally, the U.S. Patent and Trademark Office has issued a drug formulation patent for HETLIOZ LQ® that will expire in 2040. We also have other pending patent applications covering methods of treatment and compositions of tasimelteon (HETLIOZ® active ingredient) oral suspensions.
We filed several Hatch-Waxman lawsuits in the U.S. District Court for the District of Delaware (Delaware District Court) against Teva Pharmaceuticals USA, Inc. (Teva), Apotex Inc. (Apotex), MSN Pharmaceuticals, Inc. and MSN Laboratories Private Limited (MSN) (collectively, the HETLIOZ® Defendants) asserting infringement of patents covering HETLIOZ® 20 mg capsules. In January 2022, we entered into a license agreement with MSN and Impax Laboratories LLC resolving the Universitylawsuits against MSN. The consolidated lawsuits against the remaining HETLIOZ® Defendants were tried in March 2022. In December 2022, the Delaware District Court ruled that Teva and Apotex did not infringe U.S. Patent No. RE46,604, and that the asserted claims of California San Francisco (UCSF)U.S. Patent Nos. RE46,604; 9,730,910; 10,149,829; and 10,376,487 were invalid. We have appealed the decision to the U.S. Court of Appeals for the Federal Circuit. We have also filed Hatch-Waxman lawsuits in U.S. District Court for the District of New Jersey against each of Teva and Apotex and in the U.S. District Court for the Southern District of Florida against Apotex, in each case, asserting infringement of a method of administration patent that was not litigated in the Delaware District Court. This litigation does not affect the sale of HETLIOZ® in the E.U. and there is no generic litigation pending outside of the U.S. with respect to HETLIOZ®. Furthermore, the litigation does not relate to the HETLIOZ LQ® oral suspension formulation. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “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,” in Part I, Item 1A of this Annual Report, each of which is incorporated herein by reference, for additional information.
In Europe, the law provides for 10 years of data exclusivity (with the potential for an additional year if a medicine is developed for a significant new indication). In addition, Europe provides for 10 years of market exclusivity for orphan indications. As such, in Europe, data or market exclusivity will provide protection for HETLIOZ® for at least 10 years from approval. It is also possible that the protection through a basic patent (i.e., a patent that protects a product as such, a process to obtain a product, or an application of a product) in Europe could be extended for up to five years by the issuance of a supplementary protection certificate (SPC). A completed Pediatric Investigation Plan (PIP) could further extend SPC protection for an additional six months or the market exclusivity in an orphan indication for two additional years. Thus, a PIP could provide a total of 12 years of market exclusivity for an orphan indication. The European Patent Office has granted our patent application directed to the 20 mg/day dose. This patent will expire in 2027 and provides the basis for an SPC. Other pending patent applications in Europe, if granted, may offer additional protection for HETLIOZ®.
Outside the U.S. and Europe, data exclusivity will protect HETLIOZ® from generic competition for varying numbers of years depending on the country.
Additional patent applications directed to specific sleep disorders and to methods of treating patients with HETLIOZ®, if issued, could provide exclusivity for such indications and methods of treatment.
Fanapt®
The NCE patent for Fanapt®, which expired in 2016 in the U.S. and in 2010 in other countries, was owned by Sanofi. Other patents and patent applications relating to Fanapt® are owned by Vanda.
Fanapt® metabolites, formulations, genetic markers and uses are the subject of numerous patent filings in which protection has been sought in the U.S., Europe, and other markets. In November 2013, a U.S. patent (U.S. 8,586,610) 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 Orange Book in January 2015, is set to expire in 2027, potentially further extending the U.S. marketing exclusivity for Fanapt®. Additional method of treatment patents have been issued in the U.S. and listed in the Orange Book, with the latest expiration date in December 2031.
We have also filed and plan on filing additional patent applications covering the use of iloperidone (Fanapt® active ingredient) LAI formulations. Patents for the microsphere LAI formulation of Fanapt® expired in 2022 in some markets in Europe and will expire in 2024 in the U.S. Patents for the aqueous microcrystals LAI formulation of Fanapt® expire in 2023 in
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the U.S. and in some markets in Europe. We have pending patent applications covering the use of iloperidone and plan on filing additional applications based on discoveries made throughout the development plan of this molecule.
We filed several Hatch-Waxman lawsuits in the Delaware District Court against a number of generic company competitors asserting infringement of two of our Fanapt® patents. The litigation has been resolved with respect to all but one of these competitors. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “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,” in Part I, Item 1A of this Annual Report, each of which is incorporated herein by reference, for additional information.
In Europe, the law provides for 10 years of regulatory exclusivity (with the potential for an additional year if the drug is developed for a significant new indication). No generic versions of Fanapt® would be permitted to be marketed or sold during the applicable regulatory exclusivity period in most European countries. Outside the U.S. and Europe, similar regulatory package protection periods may be available and could protect Fanapt® from generic competition for varying numbers of years depending upon the country.
Tradipitant
Lilly owns the NCE patent as well as patent applications directed to polymorphic forms of, and methods of making tradipitant. This patent protection was sought in the U.S. and in other countries worldwide. These patents and patent applications have been licensed to us. The NCE patent covering tradipitant expires in April 2023, except in the U.S., where it expires normally in June 2024, subject to any extension that may be received under which we acquired an exclusive worldwide license to developthe Hatch-Waxman Act. We have filed additional patent applications based on discoveries made during recent studies with tradipitant.
VTR-297
VTR-297 is a small molecule HDAC inhibitor with potential use as a treatment for several oncology indications. We have pending patent applications covering the use of VTR-297 and commercialize aplan on filing additional applications based on discoveries made throughout the development plan of this molecule.
Portfolio of CFTR activators and inhibitors
Our portfolio of CFTR activators and inhibitors. Pursuantinhibitors may have broad applicability in addressing a number of high unmet medical needs, including chronic dry eye, constipation, polycystic kidney disease, cholestasis and secretory diarrheas. We plan on filing applications based on discoveries made throughout the development plan of these product candidates.
VQW-765
Novartis owns the NCE patent as well as patent applications directed to methods of using VQW-765, VQW-765 formulations, and combinations of VQW-765 with other active pharmaceutical ingredients. In connection with the settlement agreement with Novartis relating to Fanapt®, we received an exclusive worldwide license agreement, we willunder certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. The NCE patent expires normally in 2023 in the CFTR activatorsU.S., Europe, and inhibitorsother markets.
Other patents
Aside from the NCE patents and other in-licensed patents discussed above, we have obtained or filed numerous patents and patent applications, most of which have been filed in key markets including the U.S., relating to our products and product candidates. In addition, we have filed numerous other patent applications relating to drugs not presently in clinical studies. The claims in these various patents and patent applications are directed to compositions of matter, including claims covering other products, pharmaceutical compositions and methods of use.
Proprietary know-how
For proprietary know-how that is not appropriate for patent protection, processes for which patents are difficult to enforce and any other elements of our discovery process that involve proprietary know-how and technology that are not covered by patent applications, we generally rely on trade secret protection and confidentiality agreements to protect our interests. We require all of our employees, relevant consultants and advisors to enter into confidentiality agreements. Where it is necessary to
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share our proprietary information or data with outside parties, our policy is to make available only that information and data required to accomplish the desired purpose and only pursuant to a duty of confidentiality on the part of those parties.
Marketing and Sales
HETLIOZ® capsules were approved in the U.S. for the treatment of Non-24 in January 2014 and HETLIOZ® capsules and oral suspension were approved for the treatment of nighttime sleep disturbances in SMS in December 2020. We commercially launched HETLIOZ® capsules in the U.S. in April 2014 and the oral suspension in March 2021. Additionally, HETLIOZ® capsules were approved in the E.U. for the treatment of Non-24 in totally blind adults in July 2015 and, in August 2016, we commercially launched HETLIOZ® in Germany. Given the range of potential indications for HETLIOZ®, we may pursue one or more partnerships for the development and commercialization of HETLIOZ® worldwide.
Fanapt® oral tablets were approved in the U.S. for the treatment of schizophrenia in May 2009 and commercially launched in the U.S. in January 2010. We continue to explore the regulatory path and commercial opportunity for Fanapt® oral formulation in other regions.
Major Customers
Our revenues are generated from product sales and are concentrated with specialty pharmacies, including Accredo (a subsidiary of Express Scripts) and OptumRx (a subsidiary of UnitedHealth Group), and wholesalers, including AmerisourceBergen Drug Corporation, Cardinal Health, Inc., and McKesson Corporation. These five major customers each accounted for more than 10% of total revenues for 2022 and, as a group, represented 87% of total revenues for the year ended December 31, 2022.
Competition
The pharmaceutical industry, in particular, is highly competitive and includes a number of established large and mid-sized companies with greater financial, technical and personnel resources than we have and significantly greater commercial infrastructures than we have. Our market segment also includes several smaller emerging companies whose activities are directly focused on our target markets and areas of expertise. Our products, once approved for commercial use, will compete with numerous therapeutic treatments offered by these competitors. While we believe that our products will have certain favorable features, existing and new treatments may also possess advantages. Additionally, the development of other drug technologies and methods of disease prevention are occurring at a rapid pace. These developments may render our products or technologies obsolete or noncompetitive.
We believe the primary competitors for HETLIOZ® and Fanapt® are as follows:
•For HETLIOZ® in the treatment of nighttime sleep disturbances in SMS, there are no FDA approved direct competitors. For HETLIOZ® in the treatment of Non-24, Teva has launched at risk, and the FDA has approved the Abbreviated New Drug Applications (ANDA) for Apotex and MSN. In addition, sedative-hypnotic treatments for certain sleep related disorders include, Ambien® (zolpidem) by Sanofi (including Ambien CR®), Lunesta® (eszopiclone) by Sunovion Pharmaceuticals Inc., Rozerem® (ramelteon) by Takeda Pharmaceuticals Company Limited, Silenor® (doxepin) by Currax Pharmaceuticals LLC, Belsomra® (suvorexant) by Merck & Co., Inc., Dayvigo® (lemborexant) by Eisai Inc., generic products such as zaleplon, 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® (agomelatine) by Servier Laboratories Limited, 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 LAI formulation Risperdal Consta® and Invega® (paliperidone), including the LAI formulation Invega® Sustenna®, each by Johnson & Johnson, the LAI formulation Zyprexa® RelprevvTM (olanzapine) by Lilly, Abilify® (aripiprazole) by Otsuka America Pharmaceutical Inc., Abilify Maintena® (the LAI formulation of Abilify®) by Lundbeck/Otsuka America Pharmaceutical Inc., Geodon® (ziprasidone) by Viatris, Inc., Saphris® (asenapine) by AbbVie Inc., Latuda® (lurasidone) by Sunovion Pharmaceuticals Inc., Rexulti® (brexpiprazole) by Lundbeck/Otsuka America Pharmaceutical, Inc., Aristada® (aripiprazole lauroxil) extended-release injectable suspension by Alkermes, plc, Vraylar® (cariprazine) by AbbVie Inc., Perseris® (risperidone) extended-release injectable suspension by Indivior plc, Caplyta® (lumapteperone) by Intra-Cellular Therapies,
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Inc., Lybalvi® (olanzapine and samidorphan) by Alkermes, plc, and generic clozapine and quetiapine, as well as the typical antipsychotics haloperidol, chlorpromazine, thioridazine, and sulpiride (all of which are generic).
Our ability to compete successfully will depend in part on our ability to utilize our pharmacogenetics and pharmacogenomics and drug development expertise to identify, develop, secure rights to and obtain regulatory approvals for promising pharmaceutical products before others are able to develop competitive products. Our ability to compete successfully will also depend on our ability to attract and retain skilled and experienced personnel. Additionally, our ability to compete may be affected because insurers and other third-party payors in some cases seek to encourage the use of cheaper, generic products, which could make our products less attractive.
Manufacturing
We currently utilize a virtual supply manufacturing and distribution chain, meaning that we do not have our own facilities to manufacture commercial or clinical trial supplies of drugs, and we do not have our own distribution facilities. Instead, we contract with third parties to source critical raw materials and for the manufacture, warehousing, order management, billing and collection and distribution of our products and product candidates.
We expect to continue to rely solely on third-party manufacturers to manufacture drug substance and final drug products for both clinical development and commercial sale. However, there are numerous factors that could cause interruptions in the supply of our products, including regulatory reviews, changes in our sources for manufacturing, disputes with a manufacturer, or financial instability of manufacturers, all of which could negatively impact our operation and our financial results.
We have agreements in place with Patheon Pharmaceuticals Inc. and Patheon Inc. (collectively, Patheon), subsidiaries of Thermo Fisher Scientific, for the manufacture of HETLIOZ® capsules and Fanapt® oral tablets.
In January 2014, we entered into a manufacturing agreement with Patheon for the manufacture of commercial supplies of HETLIOZ® 20 mg capsules at Patheon’s Cincinnati, Ohio manufacturing site. Under the HETLIOZ® manufacturing agreement, we are responsible for all development costs undersupplying the licenseactive pharmaceutical ingredient (tasimelteon) for HETLIOZ® to Patheon and have agreed to order from Patheon at least 80% of the total expected yearly production of new units of HETLIOZ® capsules. Patheon is responsible for manufacturing the HETLIOZ® 20 mg capsules, conducting quality control and stability testing, and packaging the HETLIOZ® capsules. The HETLIOZ® manufacturing agreement includingcurrent pre-investigational new drug development work. The license agreement provides forhad an initial license feeterm of $1.0 million, which was paid by us infive years and automatically renews after the first quarterinitial term for successive terms of 2017, annual maintenance fees and upone year each, unless either party gives notice of its intention to $46.0 million in potential regulatory and sales milestone obligations. UCSF is also eligibleterminate the agreement at least 12 months prior to receive single-digit tiered royalties on net sales.

the end of the then current term. Either party may terminate the HETLIOZ® manufacturing agreement under certain circumstances.circumstances upon specified written notice to the other party.

As part of a settlement agreement in 2014, we assumed Novartis’ manufacturing agreement with Patheon for the manufacture of commercial supplies of Fanapt®. In May 2016, we entered into a new manufacturing agreement with Patheon for the event thatmanufacture of commercial supplies of Fanapt® 1, 2, 4, 6, 8, 10 and 12 mg tablets at Patheon’s Mississauga, Ontario, Canada manufacturing site. Under the Fanapt® manufacturing agreement, we are responsible for sourcing the supply of the active pharmaceutical ingredient (iloperidone), and have agreed to order from Patheon at least 70% of the total expected yearly production of new units of Fanapt® tablets for the U.S. and other specified countries each year for the term of the agreement. Patheon is responsible for manufacturing the Fanapt® 1, 2, 4, 6, 8, 10 and 12 mg tablets, conducting quality control and stability testing, and packaging the Fanapt® tablets. The Fanapt® manufacturing agreement had an initial term of five years and automatically renews after the initial term for successive terms of one year each, unless either party gives notice of its intention to terminate the agreement or if UCSF terminatesat least 12 months prior to the end of the then current term. Either party may terminate the Fanapt® manufacturing agreement under certain circumstances upon specified written notice to the other party.
In December 2020, we entered into a non-exclusive manufacturing agreement for the manufacture of commercial supplies of both 48 and 158 mL HETLIOZ LQ® bottles. The HETLIOZ LQ® manufacturing agreement has an initial term of five years and automatically renews after the initial term for successive terms of one year each, unless either party gives notice of its intention to terminate the agreement dueat least 12 months prior to our breach or for certain other reasons set forth in the agreement, all rights licensed and developed by us under the agreement will revert or otherwise be licensed back to UCSF. Termination will not relieve Vanda of its obligation to pay royalties or other payments owed, if any, to UCSF under the termsend of the agreement.

then current term.

Government Regulation

Government authorities in the U.S., at the federal, state and local level, as well as foreignlevels and in other countries and local foreign governments,extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, recordkeeping, promotion, advertising, distribution, sampling, marketing import and export and import of ourpharmaceutical products. Other than HETLIOZ®A new drug must be approved by the FDA through the NDA process before it may be legally marketed in the U.S. and the E.U. and Fanapt® in the U.S., Israel and Mexico, all of our products will require regulatory approval by government agencies prior to commercialization. In particular, human pharmaceutical products are subject to rigorouspre-clinical and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The process of obtaining these
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regulatory approvals and the subsequent compliance with appropriate domesticapplicable federal, state, local and foreign laws rules and regulations require the expenditure of significantsubstantial time and humanfinancial resources. Moreover, failure to comply with applicable requirements may result in, among other things, warning letters, clinical holds, civil or criminal penalties, recall or seizure of products, injunction, disbarment, partial or total suspension of production or withdrawal of the product from the market. Any judicial, administrative or other governmental enforcement action could have a material adverse effect on our business.
U.S. government regulation
U.S. drug development and financial resources.

United States government regulation

FDA approval process

In the U.S., the FDA regulates drugs under the Federalfederal Food, Drug, and Cosmetic Act as amended,(FDCA) and implementsrelated regulations. If we failDrugs are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state and local statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, wepost-approval may become subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawalswithdrawal of approvals,an approval, a clinical holds,hold, warning letters, product recalls, product seizures, total or partial suspension of our operations,production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil penalties or criminal prosecution.penalties. Any such sanctionagency or judicial enforcement action could have a material adverse effect on our business.

The steps required before

Once a drug may be marketed incandidate is identified for development, it enters the U.S. include:

pre-clinicalpreclinical testing stage. Preclinical tests include laboratory tests, animal studiesevaluations of product chemistry, toxicity and formulation, studies under Current Good Laboratory Practices (cGLP);

submission to the FDA of an investigational new drugas well as animal studies. An Investigational New Drug (IND) application (IND), whichsponsor must become effective before human clinical trials may begin;

execution of adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication for which approval is sought;

submission to the FDA of an NDA;

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with Current Good Manufacturing Practices (cGMP); and

FDA review and approval of the NDA.

Pre-clinical studies generally are conducted in laboratory animals to evaluate the potential safety and activity of a drug. Violation of the FDA’s cGLP regulations can, in some cases, lead to invalidation of the studies, requiring these studies to be replicated. In the U.S., drug developers submit the results ofpre-clinical trials, the preclinical tests, together with manufacturing information and analytical and stability data, to the FDA as part of the IND, whichIND. The sponsor must become effective beforealso include a protocol detailing, among other things, the objectives of the first phase of clinical trials, can beginthe parameters to be used in monitoring the U.S. Ansafety of the trial, and the effectiveness criteria to be evaluated should the first phase lend itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA, raiseswithin the 30-day time period, places the clinical trial on a clinical hold. Clinical holds also may be imposed by the FDA at any time before or during clinical trials due to safety concerns or questions about issues such as theon-going or proposed clinical trials outlined in the IND. In that case, the IND sponsoror non-compliance with specific FDA requirements, and the trials may not begin or continue until the FDA must resolve any outstanding FDA concerns or questions beforenotifies the sponsor that the hold has been lifted.

All clinical trials can proceed. If these concerns or questions are unresolved, the FDA may not allow the clinical trials to commence.

Pilot studies generally aremust be conducted in a limited patient population, approximately three to 25 subjects, to determine whether the drug warrants further clinical trials based on preliminary indications of efficacy. These pilot studies may be performed in the U.S. after an IND has become effective or outside of the U.S. prior to the filing of an IND in the U.S. in accordance with applicable government regulations and institutional procedures.

Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of one or more qualified investigators.investigators in accordance with FDA good clinical practice (GCP) requirements, which include a requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials aremust be conducted under protocols detailing among other things, the objectives of the study,trial, dosing procedures, subject selection and exclusion criteria and the parameterssafety and/or effectiveness criteria to be used in assessing the safety and the effectiveness of the drug.evaluated. Each protocol must be submitted to the FDA as part of the IND, prior to beginning the trial.

Typically, clinical evaluation involves a time-consuming and costly three-Phase sequential process, but the phases may overlap. Each trialtimely safety reports must be reviewed, approvedsubmitted to the FDA and conducted under the auspices of an independentinvestigators for serious and unexpected adverse events. An Institutional Review Board (IRB) at each institution participating in the clinical trial must review and approve each protocol before a clinical trial may commence at the institution and must also approve the information regarding the trial as well as the consent form that must be provided to each trial must includesubject or his or her legal representative, monitor the patient’s informed consent.

study until completed and otherwise comply with all applicable IRB regulations.
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined in certain cases:
•Phase I: refers typically to closely-monitored clinical trialsThe compound is initially introduced into healthy human subjects and includes the initial introduction of an investigational new drug into human patients or healthy volunteer subjects. Phase I trials are designed to determine thetested for safety, dosage tolerance, absorption, metabolism, distribution and pharmacologic actions of a drug in humans, the potential side effects associated with increasing drug dosesexcretion and, if possible, to gain an early evidenceindication of the drug’sits effectiveness. In most cases, initial Phase I clinical trials also includeare conducted with healthy volunteers. However, where the studycompound being evaluated is for the treatment of structure-activity relationshipssevere or life-threatening diseases, such as cancer, and mechanism of action in humans, as well as studies in which investigational new drugs are used as research toolsespecially when the product may be too toxic to explore biological phenomenaethically administer to healthy volunteers, the initial human testing may be conducted on patients with the target disease or disease processes. Duringcondition. Sponsors sometimes subdivide their Phase I clinical trials sufficient information about a drug’sinto Phase Ia and Phase Ib clinical trials. Phase Ib clinical trials are typically aimed at confirming dosage, pharmacokinetics and pharmacological effects should be obtained to permit the design of well-controlled, scientifically valid Phase II studies. The totalsafety in a larger number of subjects and patients included inpatients. Some Phase I trials varies, but is generally in the range of 20 to 80 people.

Phase II: refers to controlled clinical trials conducted toIb studies evaluate appropriate dosage and the effectiveness of a drug for a particular indicationbiomarkers or indicationssurrogate markers that may be associated with efficacy in patients with specific types of diseases or conditions.
•Phase II: This phase involves clinical trials in a diseaselimited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases or condition under studyconditions and to determine the common short-term side effectsconfirm dosage tolerance and risks associated with the drug. Theseappropriate dosage.
•Phase III: Phase III clinical trials are typically well-controlled, closely monitoredundertaken to further evaluate dosage, clinical efficacy and conductedsafety in a relatively small numberan expanded patient population, generally at geographically dispersed clinical study sites. These clinical trials, often
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Phase III: refersreferred to expanded controlled and uncontrolledas “pivotal” clinical trials. These trials are performed after preliminary evidence suggesting effectiveness of a drug has been obtained. Phase III trials, are intended to gather additional information about the effectiveness and safety that is needed to evaluateestablish the overall benefit-risk relationshiprisk-benefit ratio of the drugcompound and to provide, if appropriate, an adequate basis for physicianproduct labeling. Phase III trials usually include several hundred to several thousand subjects.

Phase I, II and III testing may not be completed successfully within any specified time period, if at all.

The FDA closely monitorsor the progress of each of the three phases of clinical trials that are conducted in the U.S. and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. A clinical program is designed after assessing the causes of the disease, the mechanism of action of the active pharmaceutical ingredient of the drug and all clinical andpre-clinical data of previous trials performed. Typically, the trial design protocols and efficacy endpoints are established in consultation with the FDA. Upon request through a special protocol assessment, the FDA can also provide specific guidance on the acceptability of protocol design for clinical trials. The FDA, we or our partnerssponsor may suspend or terminatea clinical trialstrial at any time foron various reasons,grounds, including aany finding that the research subjects or patients are being exposed to an unacceptable health risk. The FDASimilarly, an IRB can also request additionalsuspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected, serious harm to study subjects. In addition, clinical trials may be overseen by a DSMB, an independent group of qualified experts organized by the sponsor. Depending on its charter, the DSMB may determine whether a trial may move forward at designated check points based on access to certain data from the trial.
Post-approval trials may also be conducted after a drug receives initial marketing approval. These trials, often referred to as “Phase IV” trials, are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of such clinical trials as a condition of approval of an NDA.
During the development of a new drug, sponsors are given several opportunities to drug approval. During allmeet with the FDA. These meetings can provide an opportunity for the sponsor to share information about the progress of the application or clinical trials, physicians monitorfor the patientsFDA to determine effectivenessprovide advice, and for the sponsor and the FDA to observereach agreement on the next phase of development. These meetings may occur prior to the submission of an IND, at the end of Phase II clinical trials, or before an NDA is ultimately submitted. Sponsors typically use the meetings at the end of the Phase II trials to discuss Phase II clinical results and report any reactionspresent plans for the pivotal Phase III clinical trials that they believe will support approval of the new drug. Meetings at other times may be made upon request.
Concurrent with clinical trials, companies typically complete additional, animal or other safety risks that may result from usenon-clinical studies, develop additional information about the chemistry and physical characteristics of the drug.

Assuming successful completiondrug, and finalize a process for manufacturing the product in commercial quantities in accordance with the FDA’s current Good Manufacturing Practices (cGMP) requirements. The manufacturing process must consistently produce quality batches of the requireddrug and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug. In addition, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate the effectiveness of the packaging and that the compound does not undergo unacceptable deterioration over its shelf life.

While the IND is active, progress reports summarizing the results of ongoing clinical trials drug developers submitand nonclinical studies performed since the last progress report must be submitted on at least an annual basis to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected adverse events, findings from other studies suggesting a significant risk to humans exposed to the same or similar drugs, findings from animal or in vitro testing suggesting a significant risk to humans, and any clinically important, increased incidence of a serious adverse reaction compared to that listed in the protocol or investigator brochure.
There are also requirements governing the submission of certain clinical trials and completed trial results to public registries. Sponsors of certain clinical trials of FDA-regulated products are required to register and disclose specified clinical trial registration and results information, which is made publicly available at www.clinicaltrials.gov. Failure to properly report clinical trial results can result in civil monetary penalties. Disclosure of clinical trial results can often be delayed until the new product or new indication being studied has been approved.
U.S. review and approval process
The results ofpre-clinical product development, preclinical and other non-clinical studies and clinical trials, togetheralong with other detailed information including informationdescriptions of the manufacturing process, analytical tests conducted on the manufacture and compositionchemistry of the drug, proposed labeling and other relevant information are submitted to the FDA in the formas part of an NDA. The submission of an NDA requesting approvalis subject to market the drug for one or more indications. In most cases, the NDA must be accompanied by apayment of substantial user fee. fees; a waiver of which may be obtained under certain limited circumstances.
The FDA reviews an NDANDAs to determine, among other things, whether a drugthe product is safe and effective for its intended use.

use and whether it is manufactured in a cGMP-compliant manner, which will assure and preserve the product’s identity, strength, quality and purity. Under Prescription Drug User Fee Act Amendments of 2022 (PDUFA), the FDA has a goal of 10 months from the date of “filing” of a standard, completed NDA for a new molecular entity to review and act on the submission. This review typically takes 12 months from the date the NDA is submitted to the FDA because the FDA has 60 days to make a “filing” decision after the application is submitted. The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be

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resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.
The FDA may refer an application for a new drug to an advisory committee within the FDA. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether and under what conditions the application should be approved. The FDA is not bound by the recommendations of such an advisory committee, but it considers advisory committee recommendations carefully when making decisions.
Before approving an NDA, the FDA will also inspect the facility or facilities where the drugproduct is manufactured. The FDA will not approve thean application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and are adequate to assure consistent production of the product within required specifications. Before approving an NDA, the FDA may also inspect one or more clinical trial sites to assure compliance is satisfactory. Thewith GCP requirements.
After the FDA evaluates an NDA, it will issue an approval letter if it determines that the application, manufacturing process and manufacturing facilities are acceptable. If the FDA determines that the NDA, manufacturing process or manufacturing facilities are not acceptable, it will issue a complete response letter (CRL),. A CRL indicates that the review cycle of the application is complete, and the application will not be approved in which it will outlineits present form. A CRL usually describes the specific deficiencies in the submission and will often request additional testing or information. Notwithstanding the submission of any requested additional information,NDA identified by the FDA and may ultimatelyrequire additional clinical data, such as an additional pivotal Phase III trial or other significant and time-consuming requirements related to clinical trials, nonclinical studies or manufacturing. If a CRL is issued, the sponsor must resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, the FDA may decide that the NDA does not satisfy the regulatory criteria for approval. An approval letter authorizes commercial marketing of the drug with prescribing information for specific indications.
The Pediatric Research Equity Act (PREA) requires IND sponsors to conduct pediatric clinical trials for most drugs, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under the PREA, original NDAs and refusesupplements must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must evaluate the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The sponsor or the FDA may request a deferral of pediatric clinical trials for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug is ready for approval for use in adults before pediatric clinical trials are complete or that additional safety or effectiveness data needs to approvebe collected before the NDA.

pediatric clinical trials begin. The FDA must send a non-compliance letter to any sponsor that fails to submit the required assessment, keep a deferral current or fails to submit a request for approval of a pediatric formulation.

If a drug receives FDA approval, the approval may be limited to specific diseases and dosages, which could restrict the commercial value of the product. In addition, the FDA may require testing and approval process requires substantial time, effortsurveillance programs to monitor the safety of approved products that have been commercialized, and financial resources,may require a sponsor to conduct post-marketing clinical trials, which are designed to further assess a drug’s safety and each may take several years to complete.effectiveness after NDA approval. The FDA may not grant approval on a timely basis, or at all. We or our partners may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us or our partners from marketing our products. Furthermore, the FDA may prevent a drug developer from marketing a drug under a label for its desired indications oralso place other conditions on distribution asapproval, including a condition of any approvals, which may impair commercializationrequirement for a risk evaluation and mitigation strategy (REMS) to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescribing or dispensing of products. Marketing approval may be withdrawn for non-compliance with REMS or other regulatory requirements, or if problems occur following initial marketing.
Post-approval requirements
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory standards is not maintained or if problems occur after the drug reaches the market. Later discovery of previously unknown problems with a drug may result in restrictions on the drug or even complete withdrawal of the drug from the market. After approval, some types of changes to the approved drug, such as adding new indications, certain manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Similar regulatory procedures must also be followed within countries outside the U.S.

If the FDA approves the NDA, the drug becomes available for physicians to prescribeManufacturers and other entities involved in the U.S. After approval of our products, we have to comply with a number of post-approval requirements, including delivering periodic reports to the FDA, submitting descriptions of any adverse reactions reported, and complying with drug samplingmanufacture and distribution requirements. We and our partners also are required to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling. Also, our quality control and manufacturing procedures must continue to conform to cGMP after approval. Drug manufacturers and their subcontractorsof approved drugs are required to register their facilitiesestablishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA to assessand certain state agencies for compliance with cGMP which imposes certain procedural and documentation requirements relating to quality assurance and quality control. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMPregulations and other aspects of regulatory compliance. Thelaws and regulations.

Our approved products are, and any additional product manufactured or distributed by us following FDA may require post market testing and surveillanceapproval will be, subject to monitor the drug’s safety or efficacy, including additional studies, known as Phase IV trials, to evaluate long-term effects.

In addition to studies requestedcontinuing regulation by the FDA, after approval, weincluding, among other things, recordkeeping requirements, reporting of

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adverse experiences with the drug, providing the FDA with updated safety and efficacy information, drug sampling and distribution requirements, complying with certain electronic records and signature requirements, and complying with FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information regarding approved drugs that are placed on the market, and imposes requirements and restrictions on drug manufacturers, such as those related to direct-to-consumer advertising, the prohibition on promoting products for uses or our partners may have to conduct other trials and studies to explore use of the approved product for treatment of new indications, which require FDA approval. The purpose of these trials and studies is to broaden the application and use of the product and its acceptancein patient populations that are not described in the medical community.

We use,product’s approved labeling (known as “off-label use”), industry-sponsored scientific and will continue to use, third-party manufacturers to produce our products in clinicaleducational activities and commercial quantities. Future FDA inspections may identify compliance issues at our facilities or atpromotional activities involving the facilitiesinternet. Discovery of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery ofpreviously unknown problems with a product or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product manufacturerfor a certain indication or holder of an approved NDA, including withdrawal or recall of the product from the market as well as possible civil or criminal sanctions. Failure to comply with the applicable governmental requirements at any time during the product development process, approval process or after approval, may subject an applicant or manufacturer to administrative or judicial civil or criminal sanctions and adverse publicity. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, clinical holds on post-marketing clinical trials, enforcement letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated corrective advertising or communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties, any of which could have a material adverse effect on our business.

Orphan drug designation
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, generally a disease or condition that affects fewer than 200,000 individuals in the U.S or, if it affects more than 200,000 individuals in the U.S., there is no reasonable expectation that sales of the drug will be sufficient to offset the cost of developing and making the drug available in the U.S. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the U.S. for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and development expenses and a waiver of the NDA application user fee.
Expedited development and review programs
The FDA has a fast track designation program that is intended to expedite or facilitate the process for reviewing new drug products that meet certain criteria. Specifically, new drugs are eligible for fast track designation if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. With regard to a fast track product, the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.
Any product submitted to the FDA for approval, including a product with a fast track designation, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval.
A product is eligible for priority review if it is intended to treat a serious condition, and if approved, would provide a significant improvement in safety or efficacy compared to currently marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review. The FDA endeavors to review applications with priority review designations within six months of the filing date, as compared to 10 months for review of NDAs under its current PDUFA review goals.
In addition, a product may be eligible for accelerated approval. Drugs intended to treat serious or life-threatening diseases or conditions may be eligible for accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other voluntaryclinical benefit, taking into account the severity, rarity, orFDA-initiated action that could delay further marketing. Newly discovered prevalence of the condition and the availability or developed safety or effectiveness datalack of alternative treatments. As a condition of approval, the FDA may require changesthat a sponsor of a drug receiving accelerated approval
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perform adequate and well-controlled post-marketing clinical trials. Drugs receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required post-marketing trials or if such trials fail to verify the predicted clinical benefit. In addition, the FDA currently requires as a product’s approved labeling, includingcondition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.
Recently, the accelerated approval pathway has come under scrutiny within the FDA and by Congress. The FDA has put increased focus on ensuring that confirmatory studies are conducted with diligence and, ultimately, that such studies confirm the benefit. For example, the FDA has convened its Oncologic Drugs Advisory Committee to review what the FDA has called dangling or delinquent accelerated approvals where confirmatory studies have not been completed or where results did not confirm benefit. In addition, of new warnings and contraindications.

In September 2007, the Food and Drug Administration Amendments Act (FDAAA), was enacted into law, amending the U.S. Federal Food, Drug, and Cosmetic Act and the Public Health Service Act. The FDAAA made a number of substantive and incrementalCongress is considering various proposals to potentially make changes to the review andaccelerated approval processespathway, including proposals to increase the likelihood of withdrawal of approval in ways that could make it more difficult or costly to obtain approval for new pharmaceutical products, or to produce, market and distribute existing pharmaceutical products. Most significantly, the law changed the FDA’s handling of postmarked drug product safety issues by giving the FDA authority to require post approval studies or clinical trials, to request that safety information be provided in labeling, or to require an NDA applicant to submit and execute a Risk Evaluation and Mitigation Strategy (REMS).

The FDAAA made certain changes to the user fee provisions to permit the use of user fee revenue to fund the FDA’s drug product safety activities and the review ofDirect-to-Consumer advertisements. such circumstances.

The Food and Drug Administration Safety and Innovation Act established a category of 2012, which became effectivedrugs referred to as “breakthrough therapies” that may be eligible to receive breakthrough therapy designation. A sponsor may seek FDA designation of a compound as a “breakthrough therapy” if the product is intended, alone or in October 2012, reauthorizedcombination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the authorityproduct may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the fast track program features, as well as more intensive FDA interaction and guidance. The breakthrough therapy designation is a distinct status from both accelerated approval and priority review, which can also be granted to collect user feesthe same drug if relevant criteria are met. If a product is designated as a breakthrough therapy, the FDA will work to fundexpedite the development and review of such drug.
Fast track designation, priority review and breakthrough therapy designation do not change the standards for approval but may expedite the development or approval process. However, even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Marketing exclusivity
The FDA provides periods of regulatory exclusivity, which provide the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented by its approved drug for a period of three or five years following the FDA’s approval of the NDA. Five years of exclusivity are available to NCEs. An NCE is a drug that contains no active moiety that has been approved by the FDA in any other NDA. An active moiety is the molecule or ion, excluding those appended portions of the molecule that cause the drug to be an ester, salt, including a salt with hydrogen or coordination bonds, or other noncovalent, or not involving the sharing of electron pairs between atoms, derivatives, such as a complex (i.e., formed by the chemical interaction of two compounds), chelate (i.e., a chemical compound), or clathrate (i.e., a polymer framework that traps molecules), of the molecule, responsible for the therapeutic activity of the drug substance. During the exclusivity period, the FDA may not accept for review activities.

or approve an ANDA or a 505(b)(2) NDA submitted by another company that contains the previously approved active moiety. An ANDA or 505(b)(2) application, however, may be submitted one year before NCE exclusivity expires if it includes a certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid. If a product is not eligible for the NCE exclusivity, it may be eligible for three years of exclusivity. Three-year exclusivity is available to the holder of an NDA, including a 505(b)(2) NDA, for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical trials, other than bioavailability or bioequivalence trials, was essential to the approval of the application and was conducted or sponsored by the applicant. This three-year exclusivity period protects against FDA approval of ANDAs and 505(b)(2) NDAs for the condition of the new drug’s approval. As a general matter, three-year exclusivity does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions of the original, unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.

Pediatric exclusivity is another type of marketing exclusivity available in the U.S. Pediatric exclusivity provides for an additional six months of marketing exclusivity attached to another period of exclusivity if a sponsor conducts clinical trials in children in response to a written request from the FDA. The issuance of a written request does not require the sponsor to undertake the described clinical trials. In addition, new government requirementsorphan drug designation, as described above, may be established that could delay or prevent regulatory approvaloffer a seven-year period of our products under development.

Themarketing exclusivity, except in certain circumstances.

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Orange Book listing, the Hatch-Waxman Act

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’s drug. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’sApproved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Orange Book.” Drugs listed in the Orange Book can, in turn be cited by potential competitors in support of approval of an abbreviated new drug application (ANDA).ANDA. An ANDA provides for marketing of a drug that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. ANDA applicants are not required to conduct or submit results ofpre-clinical preclinical or clinical tests to prove the safety or effectiveness of their drug, other than the requirement for bioequivalence testing. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.

The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved drug in the Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new drug. A certification that the new drug will not infringe the already approved drug’s listed patents or that such patents are invalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced drug have expired.

If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.

The ANDA application also will not be approved until anynon-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity,an NCE, listed in the Orange Book for the referenced drug has expired. The U.S. Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the “Hatch-Waxman Act,” provides a period of five years following approval of a drug containing no previously approved active ingredients, during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains a Paragraph IV challenge to a listed patent, in which case the submission may be made four years following the original drug approval. Federal law provides for a period of three years of exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new use, the approval of which was required to be supported by new clinical trials conducted by or for the sponsor, during which FDA cannot grant effective approval of an ANDA based on that listed drug.

Fraud and abuse laws and other U.S. regulatory matters
Pharmaceutical companies are subject to broadly applicable fraud and abuse and other healthcare laws and regulations, in addition to the FDCA, that may constrain the business or financial arrangements and relationships through which these companies market, sell and distribute the products for which they obtain marketing approval. Some of the laws and regulations that may affect the ability of pharmaceutical companies to operate are described below.
Anti-kickback laws
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease, or order of any health care item or service reimbursable under federal healthcare programs such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value, and the government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the law or specific intent to violate it. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, patients, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, however, the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particular statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute, but the legality of the arrangement will be evaluated on a case-by-case basis based on the totality of the facts and circumstances. Violations of the Anti-Kickback Statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from the participation in federal healthcare programs, such as Medicare and Medicaid. A
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number of states also have anti-kickback laws that establish similar prohibitions that may apply to items or services reimbursed by government programs, as well as any third-party payors, including commercial payors, known as “all-payor” laws.
Prescription Drug Marketing Act
As part of the sales and marketing process, pharmaceutical companies frequently provide healthcare providers with samples of approved drugs. The Prescription Drug Marketing Act (PDMA) imposes requirements and limitations upon the distribution of drugs and drug samples, and prohibits states from licensing distributors of prescription drugs unless the state licensing program meets certain federal guidelines that include minimum standards for storage and handling, as well as recordkeeping and other requirements. Violations of the PDMA may result in criminal and civil penalties. In addition, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively known as the Affordable Care Act or ACA), discussed in more detail in Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform below, imposes annual reporting requirements related to sample distribution.
False Claims Act
The False Claims Act prohibits, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment of government funds and knowingly making, or causing to be made or used, a false record or statement to get a false claim paid. Certain marketing practices may implicate the False Claims Act, including promotion of pharmaceutical products for unapproved uses, providing free product to customers with the expectation that customers would bill federal programs for the product, or inflating prices reported to private price publication services used to set drug reimbursement rates under federal healthcare programs. In addition, the ACA amended the Social Security Act to provide that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false claim for purposes of the False Claims Act. Actions under the False Claims Act may be brought by the government or as a qui tam action by private individuals who may receive financial awards if their claims are successful. False Claims Act liability is potentially significant in the healthcare industry because the statute provides for treble damages and monetary penalties of $5,500 to $11,000 per false claim or statement, adjusted for inflation as applicable, with respect to violations occurring after November 2, 2015. Violations of the False Claims Act are also punishable by exclusion from participation in federal healthcare programs, such as Medicare and Medicaid. Pharmaceutical and other life sciences companies often resolve allegations without admissions of liability for significant and sometimes material amounts to avoid the uncertainty of treble damages and per claim penalties that may be awarded in litigation. These companies may be required, however, to enter into corporate integrity agreements with the government, which may impose substantial costs on companies to ensure compliance.
Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability and Accountability Act of 1996 (HIPAA), includes federal criminal statutory provisions that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH) and their implementing regulations, impose certain requirements and restrictions on certain types of individuals and entities relating to the privacy and security of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable not only to covered entities (e.g., health care providers and health plans), but also to business associates (i.e., independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity). HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions.
Physician Payment Sunshine Act
The Physician Payment Sunshine Act requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually (with certain exceptions) to Centers for Medicare & Medicaid Services (CMS) information related to payments or other “transfers of value” made to physicians and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members and payments or other “transfers of value” to such physician owners. Failure to report relevant data may result in civil fines and/or penalties.
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Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (FCPA), prohibits U.S. corporations and their representatives and intermediaries from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Violation of the FCPA could result in substantial civil and criminal penalties and remedies, including fines, disgorgement, and/or imprisonment.
Analogous state laws
Analogous state fraud and abuse laws and regulations, such as state anti-kickback and false claims laws, can apply to the business practices of pharmaceutical companies, including but not limited to research, distribution, sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors and are generally broad and are enforced by many different federal and state agencies as well as through private actions. In addition to requiring reporting transfers of value, some states have imposed price reporting requirements. These state laws apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. In addition, a number of states require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states restrict when pharmaceutical companies may provide meals to prescribers or engage in other marketing related activities or require pharmaceutical companies to implement compliance programs or marketing codes of conduct, and file periodic reports or disclosures with states. Compliance with these laws requires significant resources and companies that do not comply may face civil penalties or other consequences.
Many state laws govern the privacy and security of personal information in specified circumstances. For example, the California Consumer Privacy Act (CCPA), which became effective on January 1, 2020, established a new legal framework governing covered businesses’ collection and use of personal information of California residents by, among other things, creating an expanded definition of covered personal information, establishing new privacy rights for California residents, imposing an opt-in standard for certain disclosures of personal information about minors, and creating a new and potentially severe statutory damages framework for businesses subject to certain data breaches resulting from the failure to implement and maintain reasonable security procedures and practices. While properly collected clinical trial data and all protected health information governed by HIPAA are exempt from the current version of the CCPA, other personal information may be applicable and possible changes to the CCPA may broaden its scope.
Foreign regulation

Whether or not we or our partners obtain

Foreign drug development, review and approval processes
Regardless of whether a sponsor obtains FDA approval for a product, weit must obtain approval by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the U.S. typically are administered with the three-Phase sequential process that is discussed above under “United States government regulation.”U.S. drug development and regulation. However, the foreign equivalent of an IND is not a prerequisite to performing pilot studies or Phase I clinical trials.

Under E.U. regulatory systems, wea sponsor may submit Marketing Authorization Applications (MAAs) either under a centralized or decentralized procedure. The centralized procedure, which is available for drugs produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all E.U. member states. This authorization is a marketing authorization approval. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure.

In addition, regulatory approval of prices is required in most countries other than the U.S. WeCompanies face the risk that the resulting prices would be insufficient to generate an acceptable returnreturn.

Foreign fraud and abuse laws and other regulatory matters
Outside the U.S., companies are subject to ussimilar regulations in those countries where we market and sell products, including with respect to transparency, bribery and other laws mentioned above. In some foreign countries, including major markets in the E.U. and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take nine to 12 months or longer after the receipt of regulatory
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marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our partners.

Patentsproduct to other available therapies, which can be costly and proprietary rights; Hatch-Waxmantime-consuming.

The collection and processing of personal data in the E.U. is governed by the General Data Protection Regulation (GDPR), which became applicable in May 2018. The GDPR implements stringent operational requirements for processors and controllers of personal data, including, for example, expanded disclosure requirements about how personal information is to be used, strengthened individual data subject rights, limitations on retention of personal data, increased requirements pertaining to health data and pseudonymised (i.e., key-coded) data, shortened mandatory data breach notification timelines and higher standards for controllers to demonstrate they have obtained valid consent for certain data processing activities. The GDPR provides that E.U. member states may make their own additional laws and regulations in relation to the processing of genetic, biometric or health data, which could result in differences between member states, limit our ability to use and share personal data or cause our costs to increase, and harm our business and financial condition. Further, the U.K.’s exit from the E.U., often referred to as Brexit, has created uncertainty with regard to data protection

We regulation in the U.K. While the transition period has now concluded, decisions are still to be made on how data transfers to and our partnersfrom the U.K. will be ableregulated. We are also subject to protect our products from unauthorized use by third parties onlyevolving and strict rules on the transfer of personal data out of the E.U. Failure to comply with E.U. data protection laws may result in significant fines, including GDPR fines of up to the higher of €20,000,000 or 4% of total worldwide annual revenue of the preceding financial year, and other administrative penalties.

Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform
Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Sales of products will depend, in part, on the extent that ourto which the costs of the products arewill be covered by valid and enforceable patents, either licensed in from third parties or generated internally, that give us or our partners sufficient proprietary rights. Accordingly, patents and other proprietary rights are essential elements of our business.

HETLIOZ®, Fanapt®, tradipitant andVQW-765 are covered by new chemical entity and other patents and patent applications. In addition, new chemical entity patent protection has been requested forVTR-297 and CFTR and patent applications for the active ingredients in these products remain pending. For more on these license and sublicense arrangements, seeLicense Agreements above. In addition, we have filed for patents based on our own discoveries that seek to provide additional protection for HETLIOZ® and Fanapt®. The primary new chemical entity patent covering Fanapt® expired in November 2016.

The table below is a summary of Orange Book listed patents for our commercial products. Members of these patent families are also issued or pending in a number of major market territories, such as Europe and Japan.

NumberType

HETLIOZ®

US 5,856,529New chemical entity
US 9,060,995Method of treatment
US 9,539,234Method of treatment
US 9,549,913Method of treatment
US 9,730,910Method of treatment
US 9,855,241Method of treatment
US RE46604Method of treatment

Fanapt®

US 8,586,610Method of treatment
US 8,652,776Method of treatment
US 8,999,638Method of treatment
US 9,072,742Method of treatment
US 9,074,254Method of treatment
US 9,074,255Method of treatment
US 9,074,256Method of treatment
US 9,138,432Method of treatment
US 9,157,121Method of treatment

HETLIOZ®

Our rights to the new chemical entity patent covering HETLIOZ® and related intellectual property have been acquired through a license with BMS. HETLIOZ® and its formulations, genetic markers and uses are covered by a total of 14 patent and patent application families worldwide. The primary new chemical entity patent covering HETLIOZ® expires in December 2018third-party payors, including government health programs in the U.S. such as Medicare and expired in 2017 in most other markets.Medicaid, commercial health insurers and managed care organizations. The Hatch-Waxman Act providesprocess for an extension of new chemical entity patentsdetermining whether a payor will provide coverage for a period of up to five years followingproduct may be separate from the normal expiration ofprocess for setting the patent coveringprice or reimbursement rate that compound to compensate for time spent in development. We believe that HETLIOZ®the payor will meet the various criteria of the Hatch-Waxman Act and will receive five additional years of patent protection in the U.S., which would extend its new chemical entity patent protection in the U.S. until 2022. An applicationpay for the five year patent term extension has been filed andproduct once coverage is being processed by the U.S. Patent and Trademark Office. The U.S. Patent and Trademark Office has issued six method of use patents for HETLIOZ® that will expire during 2033 and 2034. Both the new chemical entity patent and the method of use patents are listed in the Orange Book.

In Europe, the law provides for ten years of data exclusivity (with the potential for an additional year if the drug is developed for a significant new indication). As such, in Europe, data exclusivity will protect HETLIOZ® for at least ten years from approval. A completed Pediatric Investigation Plan could further extend this exclusivity for two years in an orphan indication, for a total of 12 years of exclusivity. It is also possible that the term of the new chemical entity patent in Europe could be extended by issuance of a supplementary protection certificate (SPC). The European Patent Office has granted our patent application directed to the 20 mg/day dose. This patent will expire normally in 2027. Patent applications directed to the treatment ofNon-24, if granted, would provide exclusivity in Europe for this indication until at least 2033.

Outside the U.S. and Europe, data exclusivity will protect HETLIOZ® from generic competition for varying numbers of years depending on the country.

Additional patent applications directed to specific sleep disorders and to methods of treating patients with HETLIOZ®, if issued, would provide exclusivity for such indications and methods of treatment, potentially extending the effective patent protection period in the U.S., Europe, and other major markets.

Fanapt®

The new chemical entity patent for Fanapt®, which expired in 2016, is owned by Sanofi, and other patents and patent applications relating to Fanapt® previously owned by Novartis are now owned by Vanda. We originally obtained exclusive worldwide rights to develop and commercialize the products covered by these patents through license and sublicense arrangements. Then, pursuant to an amended sublicense agreement with Novartis, Novartis retained exclusive commercialization rights to all formulations of Fanapt® in the U.S. and Canada. However, as of December 2014, pursuant to an asset transfer agreement, we acquired all rights in Fanapt®, including in the U.S. and Canada.

Fanapt® and its metabolites, formulations, genetic markers and uses are covered by a total of 17 patent and patent application families in the U.S., Europe, and other markets. The primary new chemical entity patent covering Fanapt® expired in November 2016 in the U.S. and expired in 2010 in major markets outside the U.S. 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 Orange Book in January 2015, is set to expire in 2027, potentially further extending the exclusivity protection of Fanapt®. Additional method of treatment patents were issued and listed in the Orange Book with the latest expected expiry in December 2031. See Note 16,Legal Matters, to the consolidated financial statements included in Part II of this annual report on Form10-K for additional information.

In Europe, the law provides for ten years of data exclusivity (with the potential for an additional year if the drug is developed for a significant new indication). No generic versions of Fanapt® would be permitted to be marketed or sold during this10-year (or11-year) period in most European countries. Outside the U.S. and Europe, data exclusivity will protect Fanapt® from generic competition for varying numbers of years depending upon the country. Several other patent applications covering metabolites, uses, formulations and genetic markers relating to Fanapt® extend beyond 2020. The patent family for the microsphere depot formulation of Fanapt® expires in 2024 in the U.S. and 2022 in most of the major markets in Europe. The patent family for the aqueous microcrystals depot formulation of Fanapt® expires in 2023 in the U.S. and in most of the major markets in Europe.

Tradipitant

Lilly owns a new chemical entity patent as well as patent applications directed to polymorphic forms of, and methods of making tradipitant. Thus, tradipitant is covered by a total of three patent and patent application families worldwide, which have been licensed to us. The new chemical entity patent covering tradipitant expires in 2023, except in the U.S., where it expires normally in 2024 subject to any extension that may be received under Hatch-Waxman. We have filed additional patent applications based on discoveries made during recent studies with tradipitant.

VQW-765

Novartis owns a new chemical entity patent as well as patent applications directed to methods of usingVQW-765,VQW-765 formulations, and combinations ofVQW-765 with other active pharmaceutical ingredients. The new chemical entity patent expires normally in 2023 in the U.S., Europe, and other markets.

VTR-297

VTR-297 is a small molecule HDAC inhibitor with potential use as a treatment for several oncology indications. We have pending patent applications covering the use ofVTR-297 and plan on filing additional applications based on discoveries made throughout the development plan of this molecule.

Portfolio of CFTR activators and inhibitors

Our portfolio of CFTR activators and inhibitors may have broad applicability in addressing a number of high unmet medical needs, including chronic dry eye, constipation, polycystic kidney disease, cholestasis and secretory diarrheas. We plan on filing applications based on discoveries made throughout the development plan of these compounds.

Other Patents

Aside from the new chemical entity patents and otherin-licensed patents relating to Fanapt®, HETLIOZ®, tradipitant andVQW-765, we have numerous patent and patent application families, most of which have been filed in key markets including the U.S., relating to our products and development compounds. In addition, we have several other patent application families relating to drugs not presently in clinical studies. The claims in these various patents and patent applications are directed to compositions of matter, including claims covering other products, pharmaceutical compositions and methods of use.

ProprietaryKnow-how

For proprietaryknow-how that is not appropriate for patent protection, processes for which patents are difficult to enforce and any other elements of our discovery process that involve proprietaryknow-how and technology that are not covered by patent applications, we generally rely on trade secret protection and confidentiality agreements to protect our interests. We require all of our employees, consultants and advisors to enter into confidentiality agreements. Where it is necessary to share our proprietary information or data with outside parties, our policy is to make available only that information and data required to accomplish the desired purpose and only pursuant to a duty of confidentiality on the part of those parties.

Third-Party Reimbursement and Pricing Controls

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (together, PPACA), has changed and is expected to further significantly change the way healthcare is financed by both governmental and private insurers. The provisions of PPACA became effective over various periods from 2010 through 2014. We cannot predict the complete impact of PPACA on pharmaceutical companies because many of PPACA’s reforms require the promulgation of detailed regulations to implement the statutory provisions, which has not yet occurred. While we cannot predict the complete impact on federal reimbursement policies this law will have in general or specifically on any product we commercialize, PPACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of new products. The rebates, discounts, taxes and other costs resulting from PPACA may have a significant effect on our profitability in the future. In addition, potential reductions of the per capita rate of growth in Medicare spending under PPACA, could potentially limit access to certain treatments or mandate price controls for our products. Moreover, although the U.S. Supreme Court has upheld the constitutionality of most of PPACA, some states have indicated that they intend not to implement certain sections of PPACA, and some members of the U.S. Congress are still working to repeal PPACA. We cannot predict whether these challenges will continue or other proposals will be made or adopted, or what impact these efforts may have on us or our partners.

In the U.S. and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans.approved. Third-party payors are increasingly challenging the prices charged, forexamining the medical necessity, and reviewing the cost-effectiveness of medical products and services. Itservices and imposing controls to manage costs. Third-party payors may also limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication.

In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. A payor’s decision to provide coverage for a drug product does not imply that the reimbursement rate ultimately paid will be time consuming and expensive for us or our partners to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost-effective, and coverage andadequate. Third party reimbursement may not be available or sufficient to allow us or our partnersmaintain price levels high enough to sell our compoundsrealize an appropriate return on a competitive and profitable basis. The passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes additional requirements for the distribution and pricing of prescription drugs which may affect the marketing of our products.

In many foreign markets, including the countriesinvestment in product development.

A primary trend in the E.U.U.S. healthcare industry and Japan, pricing of pharmaceutical productselsewhere is subject to governmental control. In the U.S., therecost containment. There have been and we expect that there will continue to be, a number of federal and state proposals during the last several years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the U.S. By way of example, the ACA was passed in 2010 and made significant changes to the coverage and payment for products under government health care programs. Among the provisions of the ACA of importance to pharmaceutical companies are:
•an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, although this fee does not apply to sales of certain products approved exclusively for orphan indications;
•expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level;
•expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program (MDRP) by increasing the minimum rebate for both branded and generic drugs and extending rebate liability to prescriptions for individuals enrolled in Medicaid managed care plans;
•introduced a new methodology for the reporting of average manufacturer price by manufacturers under the MDRP for drugs that are inhaled, infused, instilled, implanted or injected;
•expanded the types of entities eligible for the 340B drug discount program;
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•established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a point‑of‑sale‑discount off the negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D;
•established a new Patient‑Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;
•added a requirement to annually report product samples that manufacturers and distributors provide to physicians;
•expanded healthcare fraud and abuse laws, including the False Claims Act and the federal Anti-Kickback Statute, and enhanced penalties for noncompliance; and
•established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.
Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA. In June 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA.
Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include the Budget Control Act of 2011, which, among other things, included aggregate reductions of Medicare payments to providers that started in 2013 and will stay in effect through 2031 unless additional congressional action is taken. More recently, in March 2021, President Biden signed into law the American Rescue Plan Act of 2021, which will eliminate the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, for single source and innovator multiple source drugs, beginning January 1, 2024. Additionally, in December 2020, CMS issued a final rule that materially modifies current MDRP regulations by, among other things, broadening the definitions of what constitutes a “line extension.” A “line extension” drug may be subject to a higher Medicaid rebate, and broadening this definition is likely to subject a greater number of drugs to the higher rebate. These new definitions became effective on January 1, 2022.
Most significantly, in August 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law. This statute marks the most significant action by Congress with respect to the pharmaceutical industry since adoption of the ACA in 2010. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap; imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (beginning October 1, 2022); and replaces the Medicare Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the Department of Health and Human Services (HHS) to implement many of these provisions through guidance, as opposed to regulation, for the initial years. For that and other reasons, it is currently unclear how the IRA will be effectuated, and while the impact of the IRA on the pharmaceutical industry cannot yet be fully determined, it is likely to be significant.
The cost of prescription pharmaceuticals in the U.S. is likely to remain the subject of considerable discussion. There have been several Congressional inquiries and proposed and enacted legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare, and reform government program reimbursement methodologies for drug products. The likelihood of implementation of these and other reform initiatives is uncertain. In the coming years, additional legislative and regulatory changes could be made to governmental health programs that could significantly impact pharmaceutical companies and the success of our product candidates. We expect that healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our product candidates.
At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures. Some measures encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. The IRA, as well as other federal, state and foreign healthcare reform measures that have been and may be adopted in the future, could have a material adverse effect on our business.
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These healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price for any approved product and/or the level of reimbursement physicians receive for administering any approved product. Reductions in reimbursement levels may negatively impact the prices we can charge or the frequency with which products are prescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. 
Similarly, pricing and reimbursement and the containment of healthcare costs has become a priority in a number of foreign jurisdictions. In the E.U., pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular drug candidate to currently available therapies, or so-called health technology assessments, in order to obtain reimbursement or pricing approval. For example, the E.U. provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. E.U. member states may approve a specific price for a drug product or may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not provide favorable reimbursement and pricing arrangements.
See the risk factor entitled “If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing control. Whileprograms in the U.S., we cannot predict whether such legislative or regulatory proposals willcould be adopted, the adoption of such proposalssubject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and profitability.

Marketinggrowth prospects” in Part I, Item 1A of this Annual Report for additional information regarding our participation in federal healthcare programs and Sales

HETLIOZ® was approved in the U.S. for the treatment ofNon-24 in January 2014 and commercially launched in the U.S. in April 2014. Additionally, HETLIOZ® was approved in the E.U. for the treatment ofNon-24 in totally blind adults in July 2015. We commercially launched HETLIOZ® in Germany in August 2016.

Given the range of potential indications for HETLIOZ®, we may pursue one or more partnerships for the development and commercialization of HETLIOZ® worldwide.

Fanapt® was approved in the U.S. for the treatment of schizophrenia in May 2009 and commercially launched in the U.S. in January 2010. In October 2009, we entered into an amended and restated sublicense agreement with Novartis pursuant to which Novartis has 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. Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to Vanda on December 31, 2014.

Fanapt® was launched in Israel and Mexico by our distribution partners in 2014. As of December 31, 2017, we no longer have an active distributor relationship in Mexico. We continue to explore the regulatory path and commercial opportunity for Fanapt® oral formulation in other regions.

Manufacturing

We currently utilize a virtual supply manufacturing and distribution chain in which we do not have our own facilities to manufacture commercial or clinical trial supplies of drugs and we do not have our own distribution facilities. Additionally, we do not intend to develop such facilities for any product in the near future. Instead, we contract with third parties for the manufacture, warehousing, order management, billing and collection and distribution of our products and product candidates.

We expect to continue to rely solely on third-party manufacturers to manufacture drug substance and final drug products for both clinical development and commercial sale. However, there are numerous factors that could cause interruptions in the supply of our products, including regulatory reviews, changes in our sources for manufacturing, disputes with a manufacturer, or financial instability of manufacturers, all of which could negatively impact our operation and our financial results.

We have agreements in place with Patheon Pharmaceuticals Inc. and Patheon Inc. (collectively, Patheon), subsidiaries of Thermo Fisher Scientific, for the manufacture of HETLIOZ® and Fanapt®.

In January 2014, we entered into a manufacturing agreement with Patheon for the manufacture of commercial supplies of HETLIOZ® 20 mg capsules at Patheon’s Cincinnati, Ohio manufacturing site. Under the HETLIOZ® manufacturing agreement, we are responsible for supplying the active pharmaceutical ingredient for HETLIOZ® to Patheon and have agreed to certain minimum yearly order requirements. Patheon is responsible for manufacturing the HETLIOZ® 20 mg capsules, conducting quality control and stability testing, and packaging the HETLIOZ® capsules. The HETLIOZ® manufacturing agreement has an initial term of five years and will automatically renew after the initial term for successive terms of one year each, unless either party gives notice of its intention to terminate the agreement at least twelve months prior to the end of the then current term. Either party may terminate the HETLIOZ® manufacturing agreement under certain circumstances upon specified written notice to the other party.

As part of a settlement agreement, we assumed Novartis’ manufacturing agreement with Patheon for the manufacture of commercial supplies of Fanapt®. In May 2016, we entered into a new manufacturing agreement with Patheon for the manufacture of commercial supplies of Fanapt® 1, 2, 4, 6, 8, 10 and 12 mg tablets at Patheon’s Mississauga, Ontario, Canada manufacturing site. Under the Fanapt® manufacturing agreement, we are responsible for sourcing the supply of the active pharmaceutical ingredient (iloperidone), and have agreed to order from Patheon at least 70% of the total yearly requirement of new units of Fanapt® tables for the U.S. and other specified countries each year for the term of the agreement. The Fanapt® manufacturing agreement has an initial term of five years and will automatically renew after the initial term for successive terms of one year each, unless either party gives notice of its intention to terminate the agreement at least twelve months prior to the end of the then current term. Either party may terminate the Fanapt® manufacturing agreement under certain circumstances upon specified written notice to the other party.

Research and Development

We have built a research and development organization that includes extensive expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. We operate cross-functionally and are led by an experienced research and development management team. We use rigorous project management techniques to assist us in making disciplined strategic research and development program decisions and to help limit the risk profile of our product pipeline. We also access relevant market information and key opinion leaders in creating target product profiles and, when appropriate, as we advance our programs towards commercialization. We engage third parties to conduct portions of our preclinical research. In addition, we utilize multiple clinical sites to conduct our clinical trials; however, we are not substantially dependent upon any one of these sites for our clinical trials nor do any of them conduct a major portion of our clinical trials.

Research and development expenses amounted to $38.5 million, $29.2 million and $29.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Major Customers

Our revenues are generated from product sales and are concentrated with specialty pharmacies and wholesalers. There were six major customers that each accounted for more than 10% of total revenues and, as a group, represented 95% of total revenues for the year ended December 31, 2017.

Competition

The pharmaceutical industry, in particular, is highly competitive and includes a number of established large andmid-sized companies with greater financial, technical and personnel resources than we have and significantly greater commercial infrastructures than we have. Our market segment also includes several smaller emerging companies whose activities are directly focused on our target markets and areas of expertise. Our products, once approved for commercial use, will compete with numerous therapeutic treatments offered by these competitors. While we believe that our products will have certain favorable features, existing and new treatments may also possess advantages. Additionally, the development of other drug technologies and methods of disease prevention are occurring at a rapid pace. These developments may render our products or technologies obsolete or noncompetitive.

We believe the primary competitors for HETLIOZ® and Fanapt® are as follows:

•For HETLIOZ® in the treatment ofNon-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, andover-the-counter remedies such as Benadryl® and Tylenol PM®. The class of melatonin agonists includes Rozerem® (ramelteon) by Takeda Pharmaceuticals Company Limited, Valdoxan® (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 formulation Risperdal Consta® and Invega® (paliperidone), including the depot formulation Invega® Sustenna®, each by Ortho-McNeil-Janssen Pharmaceuticals, Inc., Zyprexa® (olanzapine), including the depot formulation Zyprexa® Relprevv™, each by Eli Lilly and Company, Seroquel® and Seroquel XR® (quetiapine) by AstraZeneca PLC, Abilify® (aripiprazole) by Otsuka America Pharmaceutical Inc., Abilify Maintena® (the depot formulation of Abilify®) by Lundbeck/Otsuka America Pharmaceutical Inc., Geodon® (ziprasidone) by Pfizer Inc., Saphris® (asenapine) by Allergan plc, Latuda® (lurasidone) by Sunovion Pharmaceuticals Inc., Rexulti® (brexpiprazole) by Lundbeck/Otsuka America Pharmaceutical, Inc., Aristada™ (aripiprazole lauroxil) extended-release injectible suspension by Alkermes, Inc., Vraylar™ (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 compete successfully will depend in part on our ability to utilize our pharmacogenetics and pharmacogenomics and drug development expertise to identify, develop, secure rights to and obtain regulatory approvals for promising pharmaceutical products before others are able to develop competitive products. Our ability to compete successfully will also depend on our ability to attract and retain skilled and experienced personnel. Additionally, our ability to compete may be affected because insurers and other third-party payors in some cases seek to encourage the use of cheaper, generic products, which could make our products less attractive.

Employees

related compliance obligations.

Human Capital
We had 273290 full-time employees as of December 31, 2017,2022, compared with 142278 employees as of December 31, 2016.2021. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good.

Our human capital objectives include attracting, training and retaining employees in a manner that supports innovation across our business.

Corporate Information

We were incorporated in Delaware in 2002. Our principal executive offices are located at 2200 Pennsylvania Avenue NW, Suite 300E, Washington, D.C. 20037, and our telephone number is(202) 734-3400. Our website address is www.vandapharma.com, and the information contained in, or that can be accessed through, our website is not part ofincorporated by reference in this annual reportAnnual Report and should not be considered a part of this annual report.

Annual Report.

Available Information

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Also, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.

We also make available free of charge on our Internet website at www.vandapharma.com our annual reports onForm 10-K, quarterly reports on Form10-Q, current reports on Form8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Our code of business conduct and ethics, other corporate policies and procedures, and the charters of our Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee are available throughat our Internetcorporate website at www.vandapharma.com.

To access these documents from the main page of our website, click on “Investor” at the top of the page, then click on “Learn More” under “Corporate Governance” and then click on the desired document. We intend
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to satisfy the disclosure requirements under Item 5.05 of Form 8‑K regarding amendments to, or waivers from, provisions of our code of business conduct and ethics by posting such information on the website address and location specified above.
None of the information contained on our website or www.sec.gov is incorporated by reference into this Annual Report or any other report or document filed with the SEC unless expressly stated otherwise therein.
ITEM 1A.RISK FACTORS

Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and the price of our common stock.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any statement in this annual report on Form10-K (Annual Report) or elsewhere. The following information should be read in conjunction with the consolidated financial statements and related notes in Part I,II, Item 1,8, Financial Statements and Supplementary Data and Part I,II, Item 2,7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Because of the following risk factors, as well as other risk factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

Risks relatedRelated to our businessBusiness and industry

Industry

We are dependent on the commercial success of HETLIOZ® and Fanapt®.

Our future success is currently In the U.S., HETLIOZ® competes with a generic version of HETLIOZ® and we could experience increased generic competition in the near term.

We are substantially dependent upon the commercial success of HETLIOZ® capsules for the treatment ofNon-24-Hour Sleep-Wake Disorder(Non-24) and HETLIOZ® capsules and oral suspension (HETLIOZ LQ®) for the treatment of nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® oral tablets for the treatment of schizophrenia.

In January 2014, the U.S. Food and Drug Administration (FDA) approved our New Drug Application (NDA) for HETLIOZ® for the treatment ofNon-24 and in April 2014, we commenced the U.S. commercial launch of HETLIOZ®. In July 2015, the European Commission (EC) granted centralized marketing authorization with unified labeling for HETLIOZ® for the treatment ofNon-24 in totally blind adults, and in August 2016 we commenced the commercial launch of HETLIOZ® in Germany. This authorization, which was renewed in July 2020 for an unlimited duration, is valid in the 2827 countries that are members of the European Union (E.U.), as well as European Economic Area members Iceland, Liechtenstein and Norway.

In December 2020, the FDA approved our NDA and supplemental New Drug Application (sNDA) for HETLIOZ® for the treatment of nighttime sleep disturbances in SMS in adults and children, respectively. HETLIOZ® capsules, for adults with SMS, were immediately available after approval and the HETLIOZ LQ® liquid formulation, for children with SMS, became available in March 2021.

On December 13, 2022, the U.S. District Court for the District of Delaware (the Delaware District Court) ruled in favor of certain generic drug companies in our patent litigation alleging that the companies’ generic versions of HETLIOZ® capsules, for which they were seeking FDA approval, infringed our patents covering HETLIOZ®. We disagree with the ruling that certain claims of our patents are invalid or not infringed by the defendants and have appealed the decision to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit). Teva Pharmaceuticals USA, Inc. (Teva) has launched its generic version of HETLIOZ® at risk in the U.S. The FDA has approved Abbreviated New Drug Applications (ANDA) for generic versions of tasimelteon for Apotex Inc. (Apotex) and MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN). HETLIOZ® could face even more competition from generic companies in the U.S. in the near term in light of the patent litigation rulings against us. Sales of generic versions of HETLIOZ® could result in a significant reduction in the demand for HETLIOZ® and/or the price at which we can sell it, which would have a material and adverse impact on our revenues and results of operations. Unless and until our appeal is successful, we may reduce the amount we spend with the intention of retaining the capability to ramp-up promptly if we win upon appeal. Our expansion and development of HETLIOZ® outside the U.S. is generally not subject to the adverse patent ruling in the U.S.
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In the firstfourth quarter of 2015,2014, we acquired the U.S. commercial rights to Fanapt®, and began selling, marketing and distributing Fanapt® in the U.S.

Our ability to generate significant product revenue from sales of HETLIOZ® and Fanapt®, both in the U.S. and abroad, in the near term will depend on, among other things, our ability to:

•defend our patents and intellectual property from generic competition;

maintain commercial manufacturing arrangements with third-party manufacturers;

produce, through a validated process, sufficiently large quantitiescompetition, including the impact of inventoryand outcome of our products to meet demand;

continue to maintain and grow a wide varietypending appeal of internal sales, distribution and marketing capabilities sufficient to sustain growth in sales of our products;

gain broad acceptance of our products from physicians, health care payors, patients, pharmaciststhe December 2022 Delaware District Court’s ruling and the medical community;litigation that we recently commenced in the New Jersey and Florida District Courts;

•properly price and obtain adequate coverage and reimbursement of these products by governmental authorities, private health insurers, managed care organizations and other third-party payors;

•gain broad acceptance of our products from physicians, health care payors, patients, pharmacists and the medical community;
•minimize the impact of disruptions caused by public health crises;
•maintain commercial manufacturing arrangements with third-party manufacturers;
•produce, through a validated process, sufficiently large quantities of inventory of our products to meet demand;
•continue to maintain and grow a wide variety of internal sales, distribution and marketing capabilities sufficient to sustain sales trajectories of our products;
•maintain compliance with ongoing labeling, packaging, storage, advertising, promotion, recordkeeping, safety and other post-market requirements;

•obtain regulatory approval to expand the labeling of our approved products for additional indications;

•obtain regulatory approval for HETLIOZ® or Fanapt® in additional countries;

•obtain regulatory approval for HETLIOZ® or Fanapt® in additional countries;
•maintain our existing regulatory approval for HETLIOZ® in Europe;
•adequately protect against and effectively respond to any claims by holders of patents and other intellectual property rights that our products infringe their rights; and

•adequately protect against and effectively respond to any unanticipated adverse effects or unfavorable publicity that develops in respect to our products, as well as the emergence of new or existing competitive products, which may be proven to be more clinically effective and cost-effective.

We expect to continue to incur significant expenses and to utilize a substantial portion of our cash resources as we continue the commercialization of HETLIOZ® and Fanapt®, evaluate foreign market opportunities for HETLIOZ® and Fanapt® and continue to grow our operational capabilities, both domestically and abroad. This activity represents a significant investment in the commercial success of HETLIOZ® and Fanapt®, which is uncertain.

If our continued commercial efforts are not successful with respect to HETLIOZ® and Fanapt® in the U.S., Europe or other jurisdictions in which these products may be approved for sale, our ability to generate increased product sales revenue may be jeopardized and, consequently, our business may be seriously harmed.

adversely affected.

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.

Growth

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As a result of the decision in favor of generic drug companies in connection with our HETLIOZ® patent litigation, we could face increased generic competition in the near term and Fanaptour revenues and results of operations could be materially and adversely affected by the launch of one or more additional generic versions of HETLIOZ® in the U.S.
Between April 2018 and March 2021, we filed numerous Hatch-Waxman lawsuits in the Delaware District Court against Teva, MSN and Apotex asserting that our patents would be infringed by their generic versions of HETLIOZ®. In January 2022, we entered into a license agreement with MSN and Impax Laboratories LLC (Impax), resolving the lawsuits against MSN. A trial was held in March 2022 in the Delaware District Court to resolve the consolidated lawsuits against the remaining companies (the Defendants).
On December 13, 2022, following conclusion of the trial, the Delaware District Court issued its ruling in favor of the Defendants, finding that the Defendants’ use of a generic HETLIOZ®, for which they were seeking FDA approval, did not infringe one of our HETLIOZ® patents and the asserted claims of certain of our other HETLIOZ® patents were invalid. On December 14, 2022, we appealed the decision to the Federal Circuit and requested a stay of market entry by the Defendants while the appeal is pending. On December 16, 2022, the Federal Circuit granted a temporary injunction to prohibit market entry by Teva and Apotex until the Federal Circuit entered its order on our motion for a stay pending appeal. On December 28, 2022, the Federal Circuit denied our request for an injunction. Our appeal is pending before the Federal Circuit. Teva has since launched its generic version at risk. The commercial launch of the generic version, and potential increased competition from additional generic entrants in the near term, could have a material and adverse impact on our revenues and our results of operations. MSN and Impax may be slowpermitted to launch a generic version of HETLIOZ® under certain limited circumstances pursuant to the license agreement with us.
Further, although we are appealing the ruling of the Delaware District Court, and are pursuing additional remedies in other courts, including seeking injunctions against Apotex and Teva, we may not be successful in any such efforts, which will be costly and time-consuming to pursue. Such efforts will also require considerable attention of management and could, even if ultimately successful, negatively impact our results of operations. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “We are, have been, and may continue to be, involved in lawsuits to protect or limitedenforce 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,” each of which is incorporated herein by reference, for additional information.
In addition, while we believe that HETLIOZ® is difficult to manufacture and that building capacity to manufacture HETLIOZ® is time-consuming and expensive, which may limit the amount of tasimelteon supply available to generic companies, we do not have direct visibility into the supply levels of any of the generic companies and we rely on our own experience together with information from third parties, which information may not be reliable. The generic companies could potentially find or develop sources of qualified HETLIOZ® supply that are not known to us and that are more efficient or inexpensive than our sources. Furthermore, generic companies could potentially convince our suppliers or third-party manufacturers to prioritize supply to the generic companies ahead of any applicable contractual commitments to supply us. Such circumstances could have a varietymaterial and adverse impact on our revenues and results of reasonsoperations directly in the U.S. and potentially outside of the U.S. as well if supply costs and availability are affected.
Future performance of HETLIOZ® and Fanapt® may be impacted by a number of factors including competing products or unanticipated safety issues. If either HETLIOZ® or Fanapt® is not successful in gaining broad commercial acceptance, our business would be harmed.

Any increase in sales

Future performance of HETLIOZ® and Fanapt® sales will be dependent on several factors, including our ability to educate physicians and to increase physician awareness of the benefits and cost-effectiveness of our products relative to competing products. The degree of further market acceptance of any of our products, including with respect to new indications, or market acceptance of approved product candidates among physicians, patients, health care payors and the medical community will depend on a number of factors, including but not limited to:

•the impact and outcome of our pending patent litigation and appeals efforts;
•the commercialization and pricing of any generic version of HETLIOZ® on the market;
•acceptable evidence of safety and efficacy;

•relative convenience and ease of administration;

•the prevalence and severity of any adverse side effects;

•availability of alternative treatments;
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•market awareness of the condition to be treated; and

•pricing and cost effectiveness.

In addition, HETLIOZ® and Fanapt® are subject to continual review by the FDA, and we cannot assure that newly discovered or reported safety issues will not arise. With the use of any newly marketed drug by a wider patient population, serious adverse events may occur from time to time that initially do not appear to relate to the drug itself. Any safety issues could cause us to suspend or cease marketing of our approved products, cause us to modify how we market our approved products, subject us to substantial liabilities and adversely affect our revenues and financial condition. In the event of a withdrawal of either HETLIOZ® or Fanapt® from the market, our revenues would decline significantly and our business would be seriously harmed.

With the at risk launch of a generic version of HETLIOZ® and further generic versions possible, it may not be viable for us to invest in market education to grow the U.S. market and our ability to maintain current promotional efforts and attract favorable commercial terms in several aspects of our business will likely be adversely affected as we face increased generic competition.
We are subject to uncertainty relating to pricing and reimbursement policies in the U.S., including recent and future health reform measures, which, if not favorable for our products, could hinder or prevent our products’ commercial success.
Our ability to commercialize our products successfully depends in part on the coverage and reimbursement levels with governmental authorities, private health insurers and other third-party payors. In determining whether to reimburse our products and at what level, third-party payors consider factors that include the efficacy, cost effectiveness and safety of our products, as well as the availability of other treatments including generic prescription drugs and over-the-counter alternatives. We expect to continue to face pressure to make unfavorable pricing modifications, such as discounts or rebates. Negotiating favorable reimbursement can be a time consuming and expensive process, and there is no guarantee that we will be able to reach pricing terms with third-party payors at levels that are profitable to us. Certain third-party payors also have reimbursement or coverage processes that we believe are difficult to navigate and require prior authorization for, or even refuse to provide, reimbursement for our products, and others may do so in the future. Our business may be materially adversely affected if our patients are not able to receive approval for reimbursement of our products from third-party payors on a broad, timely or satisfactory basis; if reimbursement is subject to difficult reimbursement or coverage processes or prior authorization requirements; or if reimbursement is not maintained at satisfactory levels. In addition, our business could be adversely affected if third-party payors limit or reduce the indications for, or conditions under which, or the patient populations for whom, our products may be reimbursed. Moreover, as discussed further below and above in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform, changes in insurance coverage or reimbursement levels by third-party payors, or in the type of such coverage held by patients may materially harm our business and commercialization efforts.
We expect to experience pricing pressures in connection with the sale of our current and future products due to the healthcare reforms discussed below and above in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform, as well as the trend toward initiatives aimed at reducing healthcare costs, the increasing influence of managed care, the scrutiny of pharmaceutical pricing, the ongoing debates on reducing government spending and additional legislative proposals. There has been significant scrutiny of pharmaceutical pricing and the resulting costs of pharmaceutical products that could cause significant operational and reimbursement changes for the pharmaceutical industry. There have been a number of federal and state efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices, price increases or other related costs.
Most significantly, in August 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law. This statute marks the most significant action by Congress with respect to the pharmaceutical industry since adoption of the ACA in 2010. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap; imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (beginning October 1, 2022); and replaces the Medicare Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the Department of Health and Human Services (HHS) to implement many of these provisions through guidance, as opposed to regulation, for the initial years. For that and other reasons, it is currently unclear how the IRA will be effectuated, and while the impact of the IRA on the pharmaceutical industry cannot yet be fully determined, it is likely to be significant.
Healthcare reform efforts or any future legislation or regulatory actions aimed at controlling and reducing healthcare costs, including through measures designed to limit reimbursement, restrict access or impose unfavorable pricing modifications
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on pharmaceutical products, could impact our ability to obtain or maintain reimbursement for our products at satisfactory levels, or at all, which could materially harm our business and financial results.
We have encountered third-party payors that refuse to cover or reimburse prescriptions written for HETLIOZ® and patients who are unable to navigate the coverage or reimbursement processes established by these third-party payors. If this trend continues, the commercial success of HETLIOZ® may be limited, and our business and results of operations may be materially harmed.
We have encountered third-party payors that refuse to cover or reimburse prescriptions written for HETLIOZ®. This rate may increase further as a result of the recent entry into the market of generic versions of HETLIOZ®. Additionally, we are aware of patients who are experiencing difficulties navigating coverage processes established by third-party payors, making it difficult for them to fill a prescription for HETLIOZ®. The revenue that we receive from HETLIOZ® is significantly less than it would be if third-party payors were to remove or lessen these reimbursement challenges and hurdles and approve a greater percentage of the prescriptions written for HETLIOZ®. Our business may be materially adversely affected if this trend continues and large numbers of patients cannot fill their HETLIOZ® prescriptions due to coverage or reimbursement challenges.
If the FDA does not accept our tradipitant NDA or sNDA filings for the use of tradipitant for patients with gastroparesis and patients with motion sickness; if the FDA determines that our clinical trial results for tradipitant for the treatment of gastroparesis or for the treatment of motion sickness do not demonstrate adequate safety and substantial evidence of efficacy; or if the FDA does not approve an applicable PDUFA date, continued development of tradipitant will be significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.
In February 2022, we announced results from our Phase III clinical study, VP-VLY-686-3301, evaluating the efficacy and safety of tradipitant in treating the symptoms of gastroparesis. The study did not meet its prespecified primary endpoint, which was the difference between drug and placebo on the change of the severity of nausea from baseline at week 12 of treatment. Both treatment arms showed significant improvements from baseline on nausea as well as the other core symptoms of gastroparesis. When restricting the analysis in the group of patients that used no rescue medications at baseline and adjusting for poor compliance, we identified strong evidence of a drug effect across a number of symptoms and across the duration of the study, including a significant and meaningful effect at the prespecified primary endpoint of nausea change at week 12. The FDA may not view this data as constituting substantial evidence of efficacy for tradipitant in any indication for the treatment of gastroparesis or its symptoms, for any length of treatment. We are preparing for submission of an NDA for tradipitant for patients with gastroparesis. We have also initiated a Phase III clinical study of tradipitant for the treatment of motion sickness. Any adverse developments or results or perceived adverse developments or results with respect to our regulatory submission or the tradipitant clinical programs in any or all indications will significantly harm our business and could cause the market price of our stock to decline. Examples of such adverse developments include, but are not limited to:
•the FDA determining that they believe additional clinical studies are required with respect to tradipitant for the treatment of gastroparesis or for the treatment of motion sickness;
•safety, efficacy or other concerns arising from clinical or non-clinical studies in these programs; or
•the FDA determining that the tradipitant clinical trial programs raise safety concerns or do not demonstrate substantial evidence of efficacy.
We believe that tradipitant has a well-established safety profile, as demonstrated by the results of extensive testing in animals and humans. Despite these results, however, the FDA informed us in December 2018 that in order to treat patients beyond 12 weeks, we will have to conduct a nine-month non-rodent chronic toxicity study. This currently limits our ability to collect safety data in humans for more than 12 weeks. The non-rodent study required by the FDA necessitates the sacrifice of dozens of animals and we have disputed the necessity of a nine-month non-rodent chronic toxicity study. In February 2019, we filed a lawsuit in the U.S. District Court for the District of Columbia (DC District Court) challenging the FDA’s position, but we ultimately did not prevail. Despite our disagreement with the FDA, the preclinical package has allowed us to continue to conduct all of the efficacy studies necessary for NDA filing. Moreover, in July 2020, the FDA authorized tradipitant through an expanded access program (EAP) for a single patient. An EAP allows a patient to request the use of tradipitant, prior to NDA approval, for up to six months with an option to request renewal. Since then, certain patients who experienced a benefit in tradipitant studies have requested and received expanded access, while others have been denied treatment under the EAP. The EAP is ongoing and a number of patients have initiated treatment. Although this EAP is not intended for data collection, we collect safety data from this cohort of expanded access patients and plan to include this data in the NDA for tradipitant for patients with gastroparesis. The FDA may disregard such safety data when reviewing the NDA. The lack of long-term (i.e., more than 12 weeks in humans) safety data would likely impact the FDA’s willingness to approve tradipitant for a chronic
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indication. However, because long-term safety data is not normally a requirement for short-term indications, and with a preclinical profile that has not precluded clinical development, we believe the package is complete for any NDA filing to treat patients for 12 weeks or less. For example, the FDA has communicated to us that it is considering an indication for the short-term relief of nausea in gastroparesis. While this short-term indication is not preferred, we would consider accepting this limited indication while continuing to pursue a chronic indication. However, the FDA may not deem the safety information sufficient even for a short-term indication. Moreover, FDA authorization of an EAP is not a guarantee of or a step in obtaining full FDA approval of an NDA. Our business will be materially adversely impacted if we are not able to agree with the FDA on a regulatory path to approval for tradipitant, we experience any delay in filing, or the FDA delays or denies approval of NDA or sNDA filings for the treatment of gastroparesis or motion sickness.
Global economic conditions may have an adverse effect on our business.
Financial instability or a general decline in economic conditions in the U.S. and other countries caused by political instability and conflict and economic challenges caused by general health crises such as the COVID-19 pandemic have led to market disruptions, including significant volatility in commodity prices, credit and capital market instability and supply chain interruptions, which have caused record inflation globally and 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, costly and dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements, 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.
As discussed in the risk factor entitled “We are subject to uncertainty relating to pricing and reimbursement policies in the U.S., including recent and future health reform measures, which, if not favorable for our products, could hinder or prevent our products’ commercial success”, sales of our products are dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations. In the event of economic decline, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, federal and state health authorities may further reduce Medicare and Medicaid reimbursements, and private insurers may further increase their scrutiny of claims. A reduction in the availability or extent of reimbursement could negatively affect our 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.
Global health crises and pandemics may adversely impact our business.
Global health crises and pandemics, such as the novel coronavirus (COVID-19), could lead to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures that may negatively impact productivity and disrupt our business. Additionally, the COVID-19 pandemic has caused global supply chain disruptions that may have lasting impacts and consequences that are difficult to predict.
The COVID-19 pandemic has impacted clinical research globally, including delays in our development programs. While our clinical trials have since resumed patient enrollment, we may experience future disruptions as a result of the COVID-19 pandemic or other health crises that could adversely impact our sales activities, supply chain, our ongoing and planned clinical trials, and other regulatory activities, including:
•curtailment of our sales force or patient access to healthcare providers, which may reduce the number of prescription refills or new patient starts, thereby adversely affecting our revenues;
•interruption of, or delays in receiving, supplies of the active pharmaceutical ingredients that our contract manufacturing organizations use to manufacture our products and any related interruption of, or delays in receiving, supplies of our products from these organizations, due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;
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•delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
•diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;
•delays or difficulties in enrolling patients in our clinical trials;
•interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures (such as procedures that are deemed non-essential), which may impact the integrity of subject data and clinical study endpoints;
•limitations on our employee resources or those of third-party clinical research organizations towards the development of our products, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; and
•interruption or delays in the operations of regulatory agencies, which may impact review and approval timelines.
The COVID-19 pandemic continues to rapidly evolve. The extent to which the pandemic may continue to impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration and severity of the pandemic, the emergence of new variant strains of the virus, travel restrictions and social distancing practices, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease.
If the FDA does not approve our sNDAs for HETLIOZ® for the treatment of jet lag disorder or insomnia or continued development of tasimelteon for the treatment of jet lag disorder is significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.
In December 2018, we announced that the FDA had accepted the HETLIOZ® sNDA for the treatment of jet lag disorder. We received a complete response letter (CRL) in August 2019 in which the FDA asserted that the measures of the study were of unclear clinical significance and declined to approve our sNDA. We met with the FDA to discuss the CRL in a Post Action meeting and in 2022 we requested the opportunity for a hearing with the FDA on the approvability of the jet lag disorder sNDA. We filed a lawsuit against the FDA in September 2022 demanding that the FDA immediately publish in the Federal Register a notice of opportunity for a hearing on the jet lag disorder sNDA. The FDA then published the notice in the Federal Register in October 2022. We are undergoing discussions with the FDA on the timing of such hearing.
In November 2022, we announced that we were preparing for the submission of an sNDA for HETLIOZ® in the treatment of insomnia.
Any additional adverse developments or results or perceived adverse developments or results with respect to our regulatory submission for jet lag disorder or insomnia will significantly harm our business and could cause the market price of our stock to decline. Examples of such adverse developments include, but are not limited to:
•the FDA determining that additional clinical studies are required with respect to the jet lag disorder or insomnia programs;
•safety, efficacy or other concerns arising from clinical or non-clinical studies in the jet lag disorder or insomnia programs, or the manufacturing processes or facilities used for the jet lag disorder program; or
•the FDA determining that the jet lag disorder or insomnia programs raise safety concerns or does not demonstrate substantial evidence of efficacy.
If the FDA does not approve our sNDA for Fanapt® for the treatment of bipolar I disorder, our business will be significantly harmed, and the market price of our stock could decline.
In December 2022, we announced Fanapt® was effective in the treatment of acute manic and mixed episodes associated with bipolar I disorder in adults in a randomized double-blind placebo controlled Phase III study. We intend to submit an sNDA for Fanapt® for the treatment of acute manic and mixed episodes associated with bipolar I disorder in adults in 2023.
Any additional adverse developments or results or perceived adverse developments or results with respect to our regulatory submission for bipolar I disorder will significantly harm our business and could cause the market price of our stock to decline. Examples of such adverse developments include, but are not limited to:
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•the FDA determining that additional clinical studies are required with respect to the bipolar I disorder program;
•safety, efficacy or other concerns arising from clinical or non-clinical studies in the bipolar I disorder program, or the manufacturing processes or facilities used for the bipolar I disorder program; or
•the FDA determining that the bipolar I disorder program raises safety concerns or does not demonstrate substantial evidence of efficacy.
We may enter into third partythird-party collaborations from time to time in order to develop and commercialize our products. If we are unable to identify or enter into an agreement with any material third-party collaborator, if our collaborations with any such third-partythird party are not commercially successful or if our agreement with any such third-partythird party is terminated or allowed to expire, we could be adversely affected financially or our business reputation could be harmed.

Our business strategy includes entering into collaborations with corporate collaborators for the commercialization of HETLIOZ®, Fanapt® and our other products. AreasWhile we are not currently party to any material commercial collaborative arrangements, areas in which we may potentially enter into third-party collaboration arrangements include joint sales and marketing arrangements for sales and marketing in certain E.U. countries and elsewhere outside of the U.S., and future product development arrangements. If we are unable to identify or enter into an agreement with any material third-party collaborator, this could result in an adverse effect on our business, results of operations or financial condition.condition could be adversely affected. The at risk launch of a generic version of HETLIOZ® and further generic competition may make it more difficult for us to identify or attract third-party collaborators and obtain favorable commercial terms in any such agreement or arrangement. Any arrangements we do enter into may not be scientifically or commercially successful. The termination of any of these arrangements might adversely affect our ability to develop, commercialize and market our products.

The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations. We expect that the risks which we face in connection with these future collaborations will include the following:

•our collaboration agreements are expected to be for fixed terms and subject to termination under various circumstances, including, in many cases, on short notice without cause;

•our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with our products whichthat are the subject of their collaboration with us; and

•our collaborators may change the focus of their commercialization efforts.

In recent years there have been a significant number of mergers and consolidations in the pharmaceutical and biotechnology industries, some of which have resulted in the participant companies reevaluating and shifting the focus of their business following the completion of these transactions. The ability of our products to reach their potential could be limited if any of our future collaborators decreases or fails to increase spending relating to such products.

Collaborations with pharmaceutical companies and other third-partiesthird parties often are terminated or allowed to expire by the other party. WithAny such termination or expiration with respect to our future collaborations any such termination or expiration could adversely affect us financially as well as harm our business reputation.

Even after we or our partners obtain regulatory approvals of a product, acceptance of the product in the marketplace is uncertain and failure to achieve commercial acceptance will prevent or delay our ability to generate significant revenue from such product.

Even after obtaining regulatory approvals for the sale of our products, the commercial success of these products will depend, among other things, on their acceptance by physicians, patients, third-party payors and other members of the medical community as therapeutic and cost-effective alternatives to competing products and treatments. The degree of market acceptance of any product will depend on a number of factors, including the demonstration of its safety and efficacy, its cost-effectiveness, its potential advantages over other therapies, the reimbursement policies of government and third-party payors with respect to such product, our ability to attract and maintain corporate partners, including pharmaceutical companies, to assist in commercializing our products, receipt of regulatory clearance of marketing claims for the uses that we or our partners are developing and the effectiveness of our and our partners’ marketing and distribution capabilities. If our approved products fail to gain market acceptance or do not become widely accepted by physicians, patients, third-party payors and other members of the medical community, it is unlikely that we will ever become profitable on a sustained basis or achieve significant revenues.

Generic competition may also adversely affect our ability to grow our markets and obtain acceptance of our products in the marketplace.

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We rely on, and will continue to rely on, outsourcing arrangements for many of our activities, including preclinical and clinical development and supply of HETLIOZ®, HETLIOZ LQ®, Fanapt® and our other products.

As of December 31, 2017, we had 273 full-time employees, including our sales team.

We rely on outsourcing arrangements for a significant portion of our activities, including distribution, preclinical and clinical research and development, data collection and analysis and manufacturing, as well as for certain functions as a public company.manufacturing. We have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timely manner.

Disruptions to our HETLIOZ®, HETLIOZ LQ® or Fanapt® supply chains could materially affect our level of success in commercializing HETLIOZ® or Fanapt®,these products, thereby reducing our future earnings and prospects.

A loss or disruption with any one of our manufacturers or suppliers could disrupt the supply of HETLIOZ®, HETLIOZ LQ® or Fanapt®, possibly for a significant time period, and we may not have sufficient inventories to maintain supply before the manufacturer or supplier could be replaced or the disruption is resolved. In addition, marketed drugs and their contract manufacturing organizations are subject to continual review, including review and approval by regulatory authorities of their manufacturing facilities and the manufacturing processes, which can result in delays in the regulatory approval process and/or commercialization. Introducing a replacement or backup manufacturer or supplier for HETLIOZ®, HETLIOZ LQ® or Fanapt® requires a lengthy regulatory and commercial process, including FDA approval of chemistry, manufacturing and controls (CMC) changes, and there can be no guarantee that we could obtain necessary regulatory approvals in a timely fashion or at all. In addition, it is difficult to identify and select qualified suppliers and manufacturers with the necessary technical capabilities, and establishing new supply and manufacturing sources involves a lengthy and technical engineering process.

Failure

If we fail to comply with government regulations regardingour reporting and payment obligations under the sale and marketing of our productsMedicaid Drug Rebate Program or other governmental pricing programs in the U.S., we could harm our business.

Pharmaceutical companies arebe subject to extensive government regulationadditional reimbursement requirements, penalties, sanctions and oversight by government authorities in countries in which they do business. As a result, we may become subject to governmental actionsfines which could materially and adversely affecthave a material adverse effect on our business, financial condition, results of operations and financial condition, certain of which are described below.

Pharmaceutical Pricing and Reimbursement

growth prospects.

In U.S. markets, our ability and that of our partners to commercialize our products successfully, and to attract commercialization partners for our products, should we choose to do so, depends in significant part on the availability of adequate financial coverage and reimbursement from third-party payors, including, in the U.S., governmental payors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers.

We therefore participate in, and have drug price reporting, payment, and other compliance obligations under, these programs.

We participate in the Medicaid Drug Rebate Program for both HETLIOZ® and Fanapt®(MDRP). Under the Medicaid Drug Rebate Program,MDRP, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having our drugs eligible for coverage under Medicaid and Medicare Part B. Those rebates are based on pricing data that are reported by us on a monthly and quarterly basis to the Centers for Medicare & Medicaid Services (CMS). If we become aware that our MDRP submissions for a prior period were incorrect or have changed as a result of recalculation of the pricing data, we must resubmit the corrected data for up to three years after those data originally were due. Such restatements and recalculations increase our costs for complying with the laws and regulations governing the MDRP and the 340B program discussed below. Pursuant to the IRA, certain figures we report under the MDRP will also be used to compute rebates under Medicare Part D triggered by price increases that outpace inflation. If we fail to provide information timely or are found to have knowingly submitted false information to CMS, we may be subject to civil monetary penalties and other sanctions, including termination from the MDRP.
Federal law requires that any company that participates in the Medicaid Drug Rebate ProgramMDRP also participate in the Public Health Service’sService Act’s 340B drug pricing discount program (340B program), in order for the manufacturer’s drugs to be eligible for coverage under Medicaid and Medicare Part B. The 340B program is administered by the Health Resources and Services Administration (HRSA) and requires participating manufacturersus to agree to charge statutorily-definedstatutorily defined covered entities no more than the 340B “ceiling price” for our covered drugs when used in an outpatient setting. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the manufacturer’s covered outpatient drugs.Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The ceiling price can represent a significant discount and is based on the pricing data reporting to the Medicaid Drug Rebate Program.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (together, PPACA)ACA expanded the 340B program to include additional entity types: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by PPACA. PPACAbut exempts drugs designated under section 526 of the FDCFederal Food, Drug and Cosmetic Act as “orphan drugs” from the ceiling price requirements for these newly-eligiblecovered entities.

PPACA The 340B ceiling price is calculated using a statutory formula, which is based on pricing data we report under the MDRP and the rebate amount for the covered outpatient drug as calculated under the MDRP. In general, products subject to Medicaid price reporting and rebate liability are also obligates the Health Resources and Services Administration (HRSA)subject to create regulations and processes to improve the integrity of the 340B programceiling price requirement. We must report 340B ceiling prices to HRSA on a quarterly basis, and HRSA publishes them to update the agreement that manufacturers must sign to participate in the 340B program.covered entities. HRSA issued a final regulation in January of 2017has finalized regulations regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities although that regulationfor 340B eligible drugs. HRSA has been withdrawn and is not currently applicable. The withdrawn final regulation regarding the 340B program included a requirement that a manufacturer calculate the 340B ceiling price on a quarterly basis, the requirement that a manufacturer charge $0.01 per unit

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Table of measure if the 340B ceiling price calculation results in a ceiling price that equals zero (penny pricing), the methodology manufacturers must use when estimating the ceiling price for a new covered outpatient drug, an explanation of how a civil monetary penalty (CMP) would be imposed on a manufacturer that knowingly and intentionally overcharges a covered entity; and an explanation of what would constitute an instance of overcharging to trigger a CMP. HRSA recently issued a proposed regulation regardingContents
also finalized an administrative

dispute resolution process through which 340B covered entities may pursue claims against participating manufacturers for the 340B program. Any final regulations and guidance could affect our obligations under the 340B program in ways we cannot anticipate.overcharges. In addition, legislation may be introduced that, if passed, would further expand the 340B program, to additionalsuch as adding further covered entities or otherwise expand therequiring participating manufacturers to agree to provide 340B program.

Federal law also requires thatdiscounted pricing on drugs when used in an inpatient setting.

In order for a drug manufacturer’s products to be eligible for coverage under the Medicaid and Medicare Part B programs and to be purchased by certain federal agencies and grantees, the manufacturerwe must also participate in the Department of Veterans Affairs Federal Supply Schedule (FSS), pricing program, established by Section 603 of the Veterans Health Care Act of 1992. Manufacturers that participate in the FSS pricing programprogram. As a participant, we must list theirour covered (innovator and authorized generic) drugs on an FSS contract and charge no more than Federal Ceiling Price (FCP), to the Department of Veterans Affairs, Department of Defense, Public Health Service, and Coast Guard when those agencies purchase from the FSS contract or a depot contract. FCP is calculated based onnon-federal average manufacturer price data, which manufacturers mustwe are required to submit quarterly and annually. In addition, because our products are available in the retail and specialty pharmacy setting, we are required to provide rebates to the Department of Defense for prescriptions dispensed to Tricare beneficiaries from Tricare retail network pharmacies under the Tricare Retail Refund Program. ToIf a manufacturer participating in the extent we chooseFSS program fails to participate in these governmentprovide timely information or is found to have knowingly submitted false information, the manufacturer may be subject to civil monetary penalties.
Individual states continue to consider and have enacted legislation to limit the growth of healthcare programs for our currentcosts, including the cost of prescription drugs and future products, these and other requirementscombination products. A number of states have either implemented or are considering implementation of drug price transparency legislation that may affectprevent or limit our ability to profitably sell anytake price increases at certain rates or frequencies. Requirements under such laws include advance notice of planned price increases, reporting price increase amounts and factors considered in taking such increases, wholesale acquisition cost information disclosure to prescribers, purchasers, and state agencies, and new product notice and reporting. Such legislation could limit the price or payment for certain drugs, and a number of states are authorized to impose civil monetary penalties or pursue other enforcement mechanisms against manufacturers for the untimely, inaccurate, or incomplete reporting of drug pricing information or for otherwise failing to comply with drug price transparency requirements. If we are found to have violated state law requirements, we may become subject to penalties or other enforcement mechanisms, which we obtain marketing approval.

could have a material adverse effect on our business.

Pricing and rebate calculations vary among products and programs. The calculations are complex and will often be subject to interpretation by us, governmental or regulatory agencies and the courts. If we become aware that our reporting of pricing data for a prior quarter was incorrect, we will be obligated to resubmit the corrected data. For the Medicaid Drug Rebate Program, corrected data must be submitted for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate Program and other governmental pricing programs.

We may be liable for errors associated with our submission of pricing data. If we are found to have knowingly submitted false pricing data to the Medicaid program or the FSS pricing program, we may be liable for civil monetary penalties in the amount of up to $100,000 per item of false information. Our failureor fail to submit pricing data to the Medicaid program or the FSS pricing program on a timely basis, could result in awe may be subject to significant civil monetary penalty of $10,000 per day for each day the information is late.penalties. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, which is the agreement under which we would participate in the Medicaid Drug Rebate Program.MDRP. In the event that CMS terminates our rebate agreement, our products may no longer be eligible for coverage under Medicaid or Medicare Part B. There can be no assurance that our submissions will not be found to be incomplete or incorrect.

Third-party payors decide which drugs they will cover and establish reimbursement andco-pay levels. Third-party payors are increasingly challenging the prices charged for medical products and services and examining their cost effectiveness, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost effectiveness of our products. Even with such studies, any of our products that are commercialized may be considered less cost-effective than other products, and third-party payors may not provide coverage and reimbursement, in whole or in part, for our products.

Political, economic and regulatory influences are subjecting the healthcare industry in the U.S. to fundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals to change the healthcare system and reimbursement systems in ways that could impact our ability and that of our partners to profitably sell commercialized products.

Payors also are increasingly considering new metrics as the basis for reimbursement rates. It is difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover any of our commercialized products.

In addition, we anticipate that a significant portion of our or our partners’ revenue from sales of commercialized products will be obtained through government payors, including Medicare and Medicaid. Any failure to obtain eligibility for coverage under those programs for products we are able to commercialize would have a material adverse effect on revenues and royalties from sales of such products.

Interactions with Healthcare Providers

Physicians and other healthcare providers often play a primary role in the recommendation and prescription of pharmaceutical products. Manufacturers of branded prescription drugs are subject to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which manufacturers market, sell and distribute the products for which they obtain marketing approval. Some of the laws and regulations that may affect our ability to operate are described below.

Anti-Kickback Laws

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for the purchase, lease, or order of any health care item or service reimbursable under federal healthcare programs such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value, and the government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the law or specific intent to violate it. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, patients, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, however, the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particular statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute, but the legality of the arrangement will be evaluated on acase-by-case basis based on the totality of the facts and circumstances. A number of states also have anti-kickback laws that establish similar prohibitions that may apply to items or services reimbursed by government programs, as well as any third-party payors, including commercial payors. Violations of the Anti-Kickback Statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from the participation in federal healthcare programs, such as Medicare and Medicaid.

Prescription Drug Marketing Act

As part of the sales and marketing process, pharmaceutical companies frequently provide healthcare providers with samples of approved drugs. The Prescription Drug Marketing Act (PDMA) imposes requirements and limitations upon the distribution of drugs and drug samples, and prohibits states from licensing distributors of prescription drugs unless the state licensing program meets certain federal guidelines that include minimum standards for storage and handling, as well as record keeping and other requirements. Violations of the PDMA may result in criminal and civil penalties. In addition, the PPACA imposes annual reporting requirements related to sample distribution.

False Claims Act

The federal civil False Claims Act prohibits, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment of government funds and knowingly making, or causing to be made or used, a false record or statement to get a false claim paid. Certain marketing practices may implicate the federal civil False Claims Act, including promotion of pharmaceutical products for unapproved uses, providing free product to customers with the expectation that the customer would bill federal programs for the product, or inflating prices reported to private price publication services used to set drug reimbursement rates under federal healthcare programs. In addition, PPACA amended the Social Security Act to provide that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false claim for purposes of the False Claims Act. Actions under the False Claims Act may be brought by the government or as a qui tam action by a private individual in the name of the government. False Claims Act liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $5,500 to $11,000 per false claim or statement, which increased to a range of $10,957 to $21,916 in February 2017. Violations of the False Claims Act are also punishable by exclusion from participation in federal healthcare programs, such as Medicare and Medicaid. Pharmaceutical and other life sciences companies often resolve allegations without admissions of liability for significant and sometimes material amounts to avoid the uncertainty of treble damages and per claim penalties that may awarded in litigation proceedings. They may be required, however, to enter into corporate integrity agreements with the government, which may impose substantial costs on companies to ensure compliance.

Health Insurance Portability and Accountability Act

The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), includes federal criminal statutory provisions that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH) and their implementing regulations, impose certain requirements and restrictions on certain types of individuals and entities relating to the privacy and security of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable not only to covered entities (e.g. health care providers and health plans), but also to business associates, i.e., independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions.

Physician Payment Sunshine Act

The federal Physician Payment Sunshine Act requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually (with certain exceptions) to CMS, information related to payments or other “transfers of value” made to physicians and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members and payments or other ‘‘transfers of value’’ to such physician owners. Failure to report relevant data may result in civil fines and/or penalties.

Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act (FCPA), prohibits U.S. corporations and their representatives and intermediaries from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations.

Analogous State and Foreign Laws

Many states also have statutes or regulations similar to the federal laws described above, including state anti-kickback and false claims laws. In addition to requiring reporting transfers of value, some states have imposed price reporting requirements, and an increasing number of countries worldwide have either adopted or are considering similar laws requiring disclosure of various interactions with healthcare professionals. These state laws apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. In addition, a number of states require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states restrict when pharmaceutical companies may provide meals to prescribers or engage in other marketing related activities, or require pharmaceutical companies to implement compliance programs or marketing codes of conduct. Compliance with these laws requires significant resources and companies that do not comply may face civil penalties or other consequences.

Outside the U.S., we are subject to similar regulations in those countries where we market and sell products, including with respect to transparency, bribery and other laws mentioned above. In some foreign countries, including major markets in the E.U. and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take nine to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. Our business could be materially harmed if reimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.

Additionally, drug prices are under significant scrutiny, and along with other health care costs, continue to be subject to intense political and societal pressures, which we anticipate will continue and escalate, including on a global basis. As a result, our business and reputation may be harmed, our stock price may be adversely impacted and experience periods of volatility, and our results of operations may be adversely impacted.

Other Laws and Regulations

There are evolving legal requirements and other statutory and regulatory regimes that will continue to affect our business.

Efforts to ensure that business activities andour business arrangements with third parties, and our business generally, will comply with applicable healthcare laws and regulations can be costly for manufacturers of branded prescription products.may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws and regulations. If a manufacturer’sour operations including activities conducted by its sales or marketing teams, are found to be in violation of any of these laws or any other governmental regulations that may apply to the company, the companyus, we may be subject to significant civil, criminal and administrative sanctions, including imprisonment, monetary penalties, damages, fines, imprisonment, exclusion from participation in federalgovernment funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.

In addition, the requirements and penalties described above may affect our ability to profitably sell any product for which we obtain marketing approval.

We intendare subject to seekongoing regulatory obligations and oversight of our products, and any failure by us to maintain compliance with applicable regulations may result in adverse consequences including the suspension of the manufacturing, marketing and sale of our respective products, the incurrence of significant additional expense and other limitations on our ability to commercialize our respective products.
We are subject to ongoing regulatory requirements and review, including periodic audits pertaining to the development, manufacture, labeling, packaging, adverse event reporting, distribution, storage, marketing, promotion, recordkeeping and export of our products. Failure to comply with such regulatory requirements or the later discovery of previously unknown problems with the manufacture, distributions and storage of our products, or our third-party contract manufacturing facilities or processes by which we manufacture our products may result in restrictions on our ability to develop, manufacture, market, distribute or sell our products, including potential withdrawal of our products from the market. Any such restriction could slow or stop production development or result in decreased sales, damage to our reputation or the initiation of
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lawsuits against us or our third-party contract manufacturers. We may also be subject to additional sanctions, including, but not limited, to the following:
•Warning letters, public warnings and untitled letters;
•Court-ordered seizures or injunctions;
•Civil or criminal penalties, or criminal prosecutions;
•Variation, suspension or withdrawal of regulatory approvals for our products;
•Changes to the package insert of our products, such as additional warnings regarding potential side effects or potential limitations on the current dosage or administration;
•Requirements to communicate with physicians and other customers about concerns related to actual or potential safety, efficacy, or other issues involving our products;
•Implementation of risk mitigation programs and post-approval obligations;
•Restrictions on our continued manufacturing, marketing, distribution or sale of our products;
•Temporary or permanent closing of the facilities of our third-party contract manufacturers;
•Interruption or suspension of clinical trials; and
•Refusal by regulators to consider or approve applications for additional indications.
Any of the above sanctions could have a material adverse impact on our revenues or our reputation, and cause us to incur significant additional expenses.
In addition, if our products face any safety or efficacy issues, including drug interaction problems, under the federal Food, Drug, and Cosmetic Act (FDCA), the FDA has broad authority to force us to take any number of actions, including, but not limited to, the following:
•Requiring us to conduct post-approval clinical studies to assess product efficacy or known risks or new signals of serious risks, or to evaluate unexpected serious risks;
•Mandating changes to a product’s label;
•Requiring us to implement a risk evaluation and mitigation strategy (REMS) where necessary to assure safe use of the drug; or
•Removing an already approved product from the market.
Further, our partners, including our licensors, are subject to similar requirements and obligations as well as the attendant risks and uncertainties. If our partners, including our licensors, suffer material and adverse effects from such risks and uncertainties, our rights and benefits for our licensed products could be negatively impacted, which could have a material adverse effect on our business.
If our products are marketed or distributed in additional foreign jurisdictions, buta manner that violates federal or state healthcare fraud and abuse laws, marketing disclosure laws or other federal or state laws and regulations, we may not obtain any such approvals.

We intendbe subject to marketcivil or criminal penalties.

In addition to FDA and related regulatory requirements, our general operations, and the research, development, manufacture, sale and marketing of our products, alone or with others,are subject to extensive additional federal and state healthcare regulation, including the federal Anti-Kickback Statute, the Prescription Drug Marketing Act, and the federal False Claims Act (FCA), the federal Health Insurance Portability and Accountability Act of 1996, the federal Physician Payment Sunshine Act and the Foreign Corrupt Practices Act (and their state analogues), as discussed above in foreign jurisdictions. In order to market our products in foreign jurisdictions,Part I, Item 1 under the heading Government Regulation - Fraud and abuse laws and other U.S. regulatory matters. If we or our partners, may be required to obtain separate regulatory approvals andsuch as licensors, fail to comply with numerousany federal and varyingstate laws or regulations governing our industry, we could be subject to administrative, criminal and civil penalties and a range of regulatory requirements.actions that could adversely affect our ability to commercialize our products, harm or prevent sales of our products, or substantially increase the costs and expenses of commercializing and marketing our products, all of which could have a material adverse effect on our business, financial condition and results of operations. In recent years, CMS has been actively proposing and implementing changes to the list of business practices that are protected by safe harbors. There is inherent risk and uncertainty in any changing regulatory environment as companies work to transition business practices to conform with new regulations.
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Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws, and private individuals have been active in bringing so-called “whistleblower” lawsuits on behalf of the government (as Relators) under the FCA and similar regulations in other countries. In addition, incentives exist under applicable U.S. law that encourage employees and physicians to report violations of rules governing promotional activities for pharmaceutical products. These incentives have led to, and could continue to lead to, FCA lawsuits, which attempt to recoup moneys paid by government agencies and extract penalties from manufacturers. For example, federal enforcement agencies have recently pursued enforcement actions against pharmaceutical companies’ product and patient assistance programs, including relationships with specialty pharmacies, and support for charitable foundations providing patients with co-pay assistance. In addition, Relators have filed lawsuits involving manufacturer reimbursement support services as well as promotion of pharmaceutical products beyond labeled claims. Some FCA lawsuits have resulted in government enforcement authorities obtaining significant civil and criminal settlements. Such lawsuits, whether with or without merit, are typically time-consuming and costly to defend. Such suits may also result in related shareholder lawsuits, which are also time-consuming and costly to defend. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report, which is incorporated herein by reference, for information regarding ongoing litigation related to similar matters.
Further, the FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. A product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. The approval procedure variesFDA also regulates the content of promotional material, including, among countries and jurisdictions andother things, the presentation of efficacy information, the types of comparative claims that can involve additional trials,be made to distinguish products from those with similar indications, and the balance of risk information provided. For drug products that are approved by the FDA under the FDA’s accelerated approval regulations, unless otherwise informed by the FDA, the sponsor must submit promotional materials at least 30 days prior to the intended time required to obtain approval may differ from that required to obtain FDA approval. Additionally, the foreign regulatory approval process may include allof initial dissemination of the risks associated with obtaining FDA approval.promotional materials, which delays and may negatively impact a company’s ability to implement changes to its marketing materials, thereby negatively impacting revenues. For all of these reasons, we or our partners may not obtain foreign regulatory approvals on a timely basis, if at all. Approval byother products, the FDA does not ensurereview promotional materials prior to dissemination but does issue “Untitled Letters” or “Warning Letters” if it objects to content that has been used promotionally. The FDA may also withdraw approval by regulatory authoritiesof drug products under certain conditions. In particular, the FDA may withdraw approval of a drug if, among other things, the promotional materials are false or misleading, or other evidence demonstrates that the drug is not shown to be safe or effective under its conditions of use.
In recent years, in addition to federal legislation related to transparency reporting of transfers of value to healthcare providers and healthcare organizations, several states have enacted legislation requiring pharmaceutical companies to file periodic reports. Several states have adopted legislation to require pharmaceutical companies to establish marketing and promotional compliance programs or codes of conduct or to file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other countriesactivities. Several states have also adopted laws that prohibit certain marketing-related activities, including the provision of gifts, meals or jurisdictions,other items to certain healthcare providers.
We have developed and approval by one foreign regulatory authority does not ensure approval by regulatory authoritiesimplemented a corporate compliance program based on what we believe are current best practices in other foreign countries or jurisdictions or by the FDA. We or our partnerspharmaceutical industry; however, relevant compliance laws are broad in scope and there may not be ableregulations, guidance or court decisions that definitively interpret these laws in the context of particular industry practices. We cannot guarantee that we, our employees, our partners, our consultants or our contractors are or will be in compliance with all federal and state regulations. If we, our partners, or our representatives fail to file forcomply with any of these laws or regulations, a range of fines, penalties or other sanctions and regulatory approvalsactions could be imposed on us, including, but not limited to, restrictions on how we market and sell our products, significant fines, exclusions from government healthcare programs, including Medicare and Medicaid, litigation, or other sanctions. Even if it is not determined that we have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could also have a material adverse effect on our business, financial condition and results of operations. Such investigations or suits have resulted in, and may not receive necessary approvalscontinue to commercializeresult in, related shareholder lawsuits, which can also have a material adverse effect on our business.
Our partners, including our licensors, are subject to similar requirements and obligations as well as the attendant risks and uncertainties. If our partners, including our licensors, suffer material and adverse effects from such risks and uncertainties, our rights and benefits for our licensed products in any market. The failure to obtain these approvals could harmbe negatively impacted, which could have a material adverse effect on our business materially.

business.

We rely on a limited number of specialty pharmacies for distribution of HETLIOZ® in the U.S., and the loss of one or more of these specialty pharmacies or their failure to distribute HETLIOZ® effectively would materially harm our business.

HETLIOZ® is only available for distribution through a limited number of specialty pharmacies in the U.S. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions whichthat often require a
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high level of patient education and ongoing management. The use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:

•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;

•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®, particularly in light of the recent entry into the market of a generic version of HETLIOZ®;
•not devote the resources necessary to sell HETLIOZ® in the volumes and within the time frames that we expect;
•be unable to satisfy financial obligations to us or others; or

•cease operations.

In addition, if one or more of our specialty pharmacies do not fulfill their contractual obligations to us, or refuse or fail to adequately serve patients, or their agreements are terminated without adequate notice, shipments of HETLIOZ®, and associated revenues, would be adversely affected. We expect that it would take a significant amount of time if we were required to replace one or more of our specialty pharmacies.

Our revenues from Fanapt® are substantially dependent on sales through a limited number of wholesalers, and such revenues may fluctuate from quarter to quarter.

We sell Fanapt® primarily through a limited number of pharmaceutical wholesalers in the U.S. The use of pharmaceutical wholesalers involves certain risks, including, but not limited to, risks that these pharmaceutical wholesalers will:

•not provide us accurate or timely information regarding their inventories, demand from wholesaler customers buying Fanapt® or complaints about Fanapt®;

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

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

•not provide us accurate or timely information regarding their inventories, demand from wholesaler customers buying Fanapt® or complaints about Fanapt®;
•reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support Fanapt®;
•not devote the resources necessary to sell Fanapt® in the volumes and within the time frames that we expect;
•be unable to satisfy financial obligations to us or others; or

•cease operations.

Additionally, our reliance on a small number of wholesalers could cause revenues to fluctuate from quarter to quarter based on the buying patterns of these wholesalers. In addition, if any of these wholesalers fails to pay on a timely basis or at all, our business, financial condition and results of operations could be materially adversely affected.

We face substantial competition, which may result in others developing or commercializing products before or more successfully than we do.

Our future success will depend on our or our partners’ ability to demonstrate and maintain a competitive advantage with respect to our products and our ability to identify and develop additional products. Large, fully integrated pharmaceutical companies, either alone or together with collaborative partners, have substantially greater financial resources and have significantly greater experience than we do in:

•developing products;

•undertakingpre-clinical preclinical testing and clinical trials;

•obtaining FDA and other regulatory approvals of products; and

•manufacturing, marketing and selling products.

These companies may invest heavily and quickly to discover and develop novel products that could make our products obsolete. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or foreign regulatory approval or commercializing superior products or other competing products before we do. Technological developments or the approval by the FDA or foreign regulatory approvalregulators of new therapeutic indications for existing products may make our products obsolete or may make them more difficult to market successfully, any of which could have a material adverse effect on our business, results of operations and financial condition.

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Our products, if successfully developed and approved for commercial sale, will compete with a number of drugs and therapies currently manufactured and marketed by other biotechnology companies, including major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others or with products whichthat may cost less than our products. Physicians, patients, third partythird-party payors and the medical community may not accept or utilize any of our products that may be approved. If HETLIOZ®, Fanapt® and our other products, if and when approved, do not achieve significant market acceptance, our business, results of operations and financial condition would be materially adversely affected. We believeSee Part I, Item 1, Competition, for a discussion of the primary competitors for HETLIOZ® and Fanapt® are as follows:

•For HETLIOZ® in the treatment ofNon-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, andover-the-counter remedies such as Benadryl® and Tylenol PM®. The class of melatonin agonists includes Rozerem® (ramelteon) by Takeda Pharmaceuticals Company Limited, Valdoxan® (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 formulation Risperdal Consta® and Invega® (paliperidone), including the depot formulation Invega® Sustenna®, each by Ortho-McNeil-Janssen Pharmaceuticals, Inc., Zyprexa® (olanzapine), including the depot formulation Zyprexa® Relprevv™, each by Eli Lilly and Company, Seroquel® and Seroquel XR® (quetiapine) by AstraZeneca PLC, Abilify® (aripiprazole) by Otsuka America Pharmaceutical Inc., Abilify Maintena® (the depot formulation of Abilify®) by Lundbeck/Otsuka America Pharmaceutical Inc., Geodon® (ziprasidone) by Pfizer Inc., Saphris® (asenapine) by Allergan plc, Latuda® (lurasidone) by Sunovion Pharmaceuticals Inc., Rexulti® (brexpiprazole) by Lundbeck/Otsuka America Pharmaceutical, Inc., Aristada™ (aripiprazole lauroxil) extended-release injectible suspension by Alkermes, Inc., Vraylar™ (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).

Additionally,.

In addition, we may face competition from newly developed generic products. Under the Hatch-Waxman Act, newly approved drugs and indications may benefit from a statutory period ofnon-patent marketing exclusivity. The Hatch-Waxman Act seeks to stimulate competition by providing incentives to generic pharmaceutical manufacturers to introducenon-infringing forms of patented pharmaceutical products and to challenge patents on branded pharmaceutical products. If we are unsuccessful at challenging an Abbreviated New Drug Application (ANDA),ANDA filed pursuant to the Hatch-Waxman Act, cheaper generic versions of our products, which may be favored by insurers and third-party payors, may be launched commercially, which would significantly harm our business.

In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ® in the U.S. We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal. However, Teva has launched its generic version of HETLIOZ® at risk in the U.S. The FDA has approved ANDAs for Apotex and MSN and other potential competitors may be successful in obtaining ANDA approval and launching generic versions as well.

To obtain an ANDA approval for a generic drug, the generic company needs to show, among other things, that its version of the product is bioequivalent to the Reference Listed Drug (RLD). This usually requires the generic company to conduct bioequivalence studies comparing its product to the RLD, and to retain sufficient samples of the RLD used in testing after a study is complete. In recent years, U.S. federal lawmakers and the FDA have considered proposals and enacted legislation to facilitate the generic drug company’s access to samples and foster the generic competition. For example, the Creating and Restoring Equal Access to Equivalent Samples Act (CREATES Act) allows a biosimilar or generic product developer to bring a civil action against a brand drug manufacturer for failing to provide samples of the brand product for comparative testing “on commercially reasonable, market-based terms.” The developer could receive injunctive relief and a monetary award “sufficient to deter the license holder from failing to provide other eligible product developers with sufficient quantities of a covered product on commercially reasonable, market-based terms” in certain cases. While the full impact of the CREATES Act is unclear at this time, its provisions do have the potential to facilitate the development and future approval of generic versions of our products, introducing generic competition that could have a material adverse effect on our business, results of operations and financial condition.
Certain states have also taken similar actions. For example, in 2018, Maine passed a new law that requires brand drug manufacturers to make samples of drugs distributed in the state available for sale in Maine at a price no greater than wholesale acquisition cost and without any restriction that would block or delay a biosimilar and generic drug application in a manner inconsistent with federal law. The state may seek injunctive relief and attorney’s fees from a drug manufacturer who fails to comply with this requirement.
FDA and foreign regulatory approval of our products is uncertain.

The research, testing, manufacturing and marketing of products such as those that we have developed or that we or our partners are developing are subject to extensive regulation by federal, state and local government authorities, including the FDA, as well as foreign regulatory authorities in jurisdictions in which we seek approval. To obtain regulatory approval of such products, we or our partners must demonstrate to the satisfaction of the applicable regulatory agency that, among other things, the product is safe and effective for its intended use. In addition, we or our partners must show that the manufacturing facilities used to produce such products are in compliance with current Good Manufacturing Practices regulations (cGMP)good manufacturing practices (cGMPs).

The process of obtaining FDA and other required regulatory approvals and clearances can take many years and will require us and our partners, as applicable, to expend substantial time and capital. Despite the time and expense expended, regulatory approval is never guaranteed. The number ofpre-clinical preclinical and clinical trials that will be required for FDA or foreign regulatory approval varies depending on the product, the disease or condition that the product is in development for, and the requirements applicable to that particular product. The FDA or applicable foreign regulatory agency can delay, limit or deny approval of a product for many reasons, including that:

•a product may not be shown to be safe or effective;

•the FDA or foreign agency may interpret data frompre-clinical preclinical and clinical trials in different ways than we or our partners do;

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•the FDA or foreign agency may not approve our or our partners’ manufacturing processes or facilities;

•a product may not be approved for all the indications we or our partners request;

•the FDA or foreign agency may change its approval policies or adopt new regulations;

•the FDA or foreign agency may not meet, or may extend, the Prescription Drug User Fee Act(PDUFA-V)PDUFA date or its foreign equivalent with respect to a particular NDA or foreign application; and

•the FDA or foreign agency may not agree with our or our partners’ regulatory approval strategies or components of the regulatory filings, such as clinical trial designs.

For example, if certain of our or our partners’ methods for analyzing trial data are not accepted by the FDA or the applicable foreign agency, we or our partners may fail to obtain regulatory approval for our products.

Additionally, the approval procedure varies among countries and jurisdictions and can involve additional trials, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA.
Any delay or failure to obtain regulatory approvals for our products will result in increased costs, could diminish competitive advantages that we may attain and would adversely affect the marketing and sale of our products. Other than HETLIOZ® and HETLIOZ LQ® in the U.S. and HETLIOZ® in the 31 countries in Europe covered by the centralized marketing authorization by the EC, and Fanapt® in the U.S., Mexico and Israel, we have not received, and may never receive, regulatory approval to market any of our products in any jurisdiction.

Even following regulatory approval of our products, the FDA or the applicable foreign agency may impose limitations on the indicated uses for which such products may be marketed, subsequently withdraw approval or take other actions against us, our partners or such products that are adverse to our business. The FDA and foreign agencies generally approve drugs for particularuse in specific indications. An approval for a more limited indication reduces the size of the potential market for the product. Product approvals, once granted, may be withdrawn or modified if problems occur after initial marketing.

We and our partners also are subject to numerous federal, state, local and foreign laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the environment and the use and disposal of hazardous substances used in connection with discovery, research and development work. In addition, we cannot predict the extent to which new governmental regulations might significantly impede the discovery, development, production and marketing of our products. We or our partners may be required to incur significant costs to comply with current or future laws or regulations, and we may be adversely affected by the cost of such compliance or the inability to comply with such laws or regulations.

If our products are determined to be unsafe or ineffective in humans, whether commercially or in clinical trials, our business will be materially harmed.

Despite the FDA’s approval of the NDA for HETLIOZ® in January 2014 and the NDA for Fanapt® in May 2009, the EC’s grant of the centralized marketing authorization for HETLIOZ® in July 2015, and the positive results of our completed trials for HETLIOZ® and Fanapt®, we are uncertain whether either of these products will ultimately prove to be effective and safe in humans long term and in all uses. Frequently, products that have shown promising results in clinical trials have suffered significant setbacks in later clinical trials or even after they are approved for commercial sale. Future uses of our products, whether in clinical trials or commercially, may reveal that the product is ineffective, unacceptably toxic, has other undesirable side effects, is difficult to manufacture on a large scale, is uneconomical, infringes on proprietary rights of another party or is otherwise not fit for further use. If our products are determined to be unsafe or ineffective in humans, our business will be materially harmed.

Clinical trials for our products are expensive and their outcomes are uncertain. Any failure or delay in completing clinical trials for our products could severely harm our business.

Pre-clinical studies and clinical trials required to demonstrate the safety and efficacy of our products are time-consuming and expensive and together take several years to complete. Before obtaining regulatory approvals for the commercial sale of any of our products, we or our partners must demonstrate through preclinical testing and clinical trials that such product is safe and effective for use in humans. We have incurred, and we will continue to incur, substantial expense for, and devote a significant amount of time to, preclinical testing and clinical trials.

Historically, the results from preclinical testing and early clinical trials often have not predicted results of later clinical trials. A number of new drugs have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Clinical trials conducted by us, by our partners or by third parties on our or our partners’ behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for our products. Regulatory authorities may not permit us or our partners to undertake any additional clinical trials for our products, may force us to stop any ongoing clinical trials and it may be difficult to design efficacy studies for our products in new indications.

Clinical development efforts performed by us or our partners may not be successfully completed, or completed in a timely manner. Completion of clinical trials may take several years or more. The length of time can vary substantially with the type, complexity, novelty and intended use of the products and the size of the prospective patient population. Our ability to enroll patients in, and the commencement and rate of completion of, clinical trials for our products may be affected by many factors, including:

the size and nature of the patient population;

the design of the trial protocol for our clinical trials;

the eligibility and exclusion criteria for the trial in question;

the availability of competing therapies and competing clinical trials, and physician and patient perception of our product candidates and our other product candidates being studied in relation to these other potential options;

the availability of raw materials and the possibility of raw materials expiring prior to their use;

difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

poor effectiveness of our products during clinical trials;

unforeseen safety issues or side effects;

the number and location of clinical sites in our clinical trials;

the proximity and availability of clinical trial sites for prospective patients;

the availability of time and resources at the institutions where clinical trials are and will be conducted;

the availability of adequate financing to fund ongoing clinical trial expenses;

the study endpoints that rely on subjective patient reported outcomes; and

governmental or regulatory delays and changes in regulatory requirements and guidelines.

If we or our partners fail to complete successfully, or have difficulty enrolling a sufficient number of patients for, our clinical trials, we or they may not receive the regulatory approvals needed to market that product. Any such failure or difficulty could have a material adverse effect on our business.

Our products may cause undesirable side effects or have other properties that could delay, prevent or result in the revocation of their regulatory approval or limit their marketability.

Undesirable side effects caused by our products could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us or our partners from commercializing or continuing the commercialization of such products and generating revenues from their sale. We will continue to assess the side effect profile of our products in ongoing clinical development programs. However, we cannot predict whether the commercial use of our approved products (or our products in development, if and when they are approved for commercial use) will produce undesirable or unintended side effects that have not been evident in the use of, or in clinical trials conducted for, such products to date. For example, despite the positive results of our completed trials for HETLIOZ® and Fanapt®, as well as the FDA’s approval of the NDA for HETLIOZ® for the treatment of Non-24 in January 2014, the NDA for Fanapt® for the treatment of schizophrenia in May 2009, the EC’s grant of the centralized marketing authorization for HETLIOZ® for the treatment of Non-24 in totally blind adults in July 2015, and the FDA’s approval of the sNDA and NDA for HETLIOZ® capsule and liquid formulation for the treatment of adults and children, respectively, with nighttime sleep disturbances in SMS in December 2020, we are uncertain whether either of these products will ultimately prove to be effective and safe in humans long term and in all uses. Frequently, products that have shown promising results in clinical trials have suffered significant setbacks in later clinical trials or even long after they are approved for commercial sale. Additionally, incidents of product misuse may occur. These events, among others, could result in product recalls, product liability actions or withdrawals or additional regulatory controls, allany of which could have a material adverse effect on our business, results of operations and financial condition.

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In addition, if after receiving marketing approval of a product, we our partners or others identify undesirable side effects caused by such product, we or our partners could face one or more of the following:

•regulatory authorities may require us to implement a REMS, such as the addition of labeling statements such as a(e.g., “black box” warning or a contraindication;contraindication);

•regulatory authorities may withdraw their approval of the product;

•we or our partners may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product; and

•our our partner’s or the product’s reputation may suffer.

Any of these events could prevent us or our partners from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from its sale.

Clinical trials for our products are expensive and their outcomes are uncertain. Any failure or delay in completing clinical trials for our products could severely harm our business.
Preclinical studies and clinical trials required to demonstrate the safety and efficacy of our products are time-consuming and expensive and together take several years to complete. Before obtaining regulatory approvals for the commercial sale of any of our products, we must demonstrate through preclinical testing and clinical trials that such product is safe and effective for use in humans. We have incurred, and we will continue to incur, substantial expense for, and devote a historysignificant amount of operating losses, anticipate future lossestime to, preclinical testing and clinical trials.
Historically, the results from preclinical testing and early clinical trials often have not predicted results of later clinical trials. A number of new drugs have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Clinical trials conducted by us or by third parties on our behalf may never become profitablenot demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for our products. Regulatory authorities may not permit us to undertake any additional clinical trials for our products, may force us to stop any ongoing clinical trials and it may be difficult to design efficacy studies for our products in new indications.
Clinical development efforts performed by us may not be successfully completed or completed in a timely manner. Completion of clinical trials may take several years or more. The length of time can vary substantially with the type, complexity, novelty and intended use of the products and the size of the prospective patient population. Our ability to enroll patients in, and the commencement and rate of completion of, clinical trials for our products may be affected by many factors, including:
•the size and nature of the patient population;
•the design of the trial protocol for our clinical trials;
•the eligibility and exclusion criteria for the trial in question;
•the availability of competing therapies and competing clinical trials, and physician and patient perception of our product candidates and our other product candidates being studied in relation to these other potential options;
•the availability of raw materials and the possibility of raw materials expiring prior to their use;
•difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
•poor effectiveness of our products during clinical trials;
•unforeseen safety issues or side effects;
•the number and location of clinical sites in our clinical trials;
•the proximity and availability of clinical trial sites for prospective patients;
•the availability of time and resources at the institutions where clinical trials are and will be conducted;
•the availability of adequate financing to fund ongoing clinical trial expenses;
•the study endpoints that rely on subjective patient reported outcomes; and
•the impact of global health crises;
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•governmental or regulatory delays and changes in regulatory requirements and guidelines.
If we fail to complete successfully, or have difficulty enrolling a sufficient number of patients for, our clinical trials, we or they may not receive the regulatory approvals needed to market that product. Any such failure or difficulty could have a material adverse effect on our business.
We may not be able to achieve sustained basis.

profitability.

We have been engaged in identifying and developing drug products since March 2003, which has required, and will continue to require, significant research and development expenditures. The continued commercialization of HETLIOZ® and Fanapt® will also require substantial additional expenditures.

As of December 31, 2017,2022, we had an accumulated deficit of $361.4$157.9 million and we cannot estimate with precision the extent of our future losses. In April 2014, we commercially launched HETLIOZ® in the U.S. for the treatment ofNon-24 and in August 2016 we commercially launched HETLIOZ® in Germany for the treatment ofNon-24 in totally blind adults. We are currently evaluating the commercial opportunity for HETLIOZ® in the rest of Europe. In December 2014, we acquired all rights to Fanapt® from Novartis. The continued commercialization of HETLIOZ® and Fanapt® will require substantial additional expenditures. Novartis launched Fanapt® in the U.S. in the first quarter of 2010 and we began selling Fanapt® on our own in the first quarter of 2015.income or loss. We may not succeed in maintaining or gaining additional market acceptance of HETLIOZ® and Fanapt® in the U.S. and we may not succeed in commercializing HETLIOZ® or Fanapt® outside of the U.S. We may not be profitable even if our products are successfully commercialized. We may be unable to fully develop, obtain regulatory approval for, commercialize, manufacture, market, sell and derive revenue from our products in the timeframes we project, if at all, and our inability to do so would materially and adversely impact the market price of our common stock and our ability to raise capital and continue operations.

There can be no assurance that we will achieve sustained profitability. Our abilityprofitability, which depends on many factors, including but not limited to, achieve sustained profitability in the future depends, in part, upon:

•our ability to obtain and maintain regulatory approval for our products, particularly HETLIOZ® for the treatment ofNon-24, both in the U.S. and in foreign countries;

•our level of success in commercializing HETLIOZ® in the U.S., Europe and other jurisdictions in which HETLIOZ® may receive regulatory approval, if any;

our level of success in raising awareness regardingNon-24 in the medical and patient communities;

•our level of success in marketing and selling Fanapt® in the U.S. and our or our partners’ level of success in marketing and selling Fanapt® in Israel and other jurisdictions in which we may receive regulatory approval, if any;

our ability to enter into and maintain agreements to develop and commercialize our products;

our and our partners’ ability to develop, have manufactured and market our products;

our and our partners’ ability to obtain adequate reimbursement coverage for our products from insurance companies, government programs and other third party payors; and

our ability to obtain additional research and development funding from collaborative partners or fundingregulatory approval for our products.products and achieve success in commercializing them in the U.S., Europe and our other target jurisdictions, as well as other factors described in this Annual Report.

In addition, the amount we spend on developing, obtaining and maintaining regulatory approval for and commercializing our products, among other expenditures described in this Annual Report, will impact our profitability. Our spending will depend, in part, upon:

the costs of our marketing or awareness campaigns;

the progress of our research and development programs for our products, including clinical trials;

the time and expense that will be required to pursue FDA and/or foreign regulatory approvals for our products and whether such approvals are obtained on a timely basis, if at all;

the time and expense required to prosecute, enforce and/or challenge patent and other intellectual property rights;

the cost of third party manufacturers;

the number of additional products we pursue;

how competing technological and market developments affect our products;

the cost of possible acquisitions of technologies, products, product rights or companies;

the cost of obtaining licenses to use technology owned by others for proprietary products and otherwise;

the costs and effects of potential litigation; and

the costs associated with recruiting and compensating a highly skilled workforce in an environment where competition for such employees may be intense.

We may not achieve all or any of these goals and, thus, we cannot provide assurances that we will ever be profitable on a sustained basis or achieve significant revenues. Even if we do achieve some or all of these goals, we may not achieve significant or sustained commercial success.

Our ability to use net operating loss carryforwards and tax credit carryforwards to offset future taxable income is dependent on generating future taxable income and may be limited, including as a result of transactions involving our common stock.

We have recorded deferred tax assets based on our assessment that we will be able to realize the benefits of our net operating losses and other favorable tax attributes. Realization of deferred tax assets involves significant judgments and estimates, which are subject to change and ultimately depends on generating sufficient taxable income of the appropriate character during the appropriate periods. Changes in circumstances may affect the likelihood of such realization, which in turn may trigger the need for additional valuation allowance against our deferred tax assets and adversely affect our net income and financial condition. In addition, we are potentially subject to ongoing and periodic tax examinations and audits in various jurisdictions, including with respect to the amount of our net operating losses and any limitation thereon. An adjustment to such net operating loss carryforwards, including an adjustment from a taxing authority, could result in higher tax costs, penalties and interest, thereby adversely impacting our financial condition.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (IRC), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize itspre-change net operating losses (NOLs) and certain other tax assets (tax attributes) to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). Transactions involving our common stock, even those outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change. A limitation on our ability to utilize some or all of our NOLsnet operating losses (NOLs) or credits could have a material adverse effect on our results of operations and cash flows. Ownership changes occurred in the years endingended December 31, 2014 and 2008. We believe that the ownership changes in 2014 and 2008 will not impact our ability to utilize NOL and credit carryforwards; however, future ownership changes may cause our existing tax attributes to have additional limitations.

If we fail to obtain the capital necessary toadequately fund our research and development activities and commercialization efforts, we may be unable to continue operations or we may be forced to share our rights to commercialize our products with third parties on terms that may not be attractive to us.

Our activities will necessitate significant uses of working capital throughout 20182023 and beyond. It is uncertain whether cash provided by our operating activities, together with our existing funds, will be sufficient to meet our long-term operating needs. As of December 31, 2017,2022, our total cash and cash equivalents and marketable securities were $143.4$466.9 million. Our long termlong-term capital requirements are expected to depend on many factors, including, among others:

•our level of success in commercializing HETLIOZ® and Fanapt® globally;

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•our level of success in commercializing HETLIOZ® and Fanapt®, as well as other products that may be approved, globally;
•outcomes of ongoing and potential patent litigation;litigation, including the outcome of our pending appeal of the December 2022 Delaware District Court’s ruling;

•costs of developing and maintaining sales, marketing and distribution channels and our ability to sell our products;

•market acceptance of our products;

•costs involved in establishing and maintaining manufacturing capabilities for commercial quantities of our products;

•the number of potential formulations and products in development;

•progress withpre-clinical preclinical studies and clinical trials;

•time and costs involved in obtaining regulatory (including FDA) approval;

•costs involved in preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property claims;

•cost of evaluating and acquiring new products from third parties;
•competing technological and market developments;

•costs for recruiting and retaining employees and consultants;

•costs for training physicians; and

•legal, accounting, insurance and other professional and business relatedbusiness-related costs.

As a result, we may need to raise additional capital to fund our anticipated operating expenses and execute on our business plans. In our capital-raising efforts, we may seek to sell debt securities or additional equity securities, obtain a bank credit facility, or enter into partnerships or other collaboration agreements. The sale of additional equity or debt securities, if convertible, could result in dilution to our stockholders and may also result in a lower price for our common stock. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that could restrict our operations.operations, including potentially limiting our ability to license product rights or enter into product development collaborations. However, we may not be able to raise additional funds on acceptable terms, or at all. If we are unable to secure sufficient capital to fund our planned activities, we may not be able to continue operations, or we may have to enter into partnerships or other collaboration agreements that could require us to share commercial rights to our products to a greater extent or at earlier stages in the drug development process than is currently intended. These partnerships or collaborations, if consummated prior toproof-of-efficacy or safety of a given product, could impair our ability to realize value from that product. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our operations and planned growth, develop or enhance our technologies or products, take advantage of business opportunities or respond to competitive market pressures, any of which would materially harm our business, financial condition and results of operations.

If our contract research organizations (CROs) do not successfully carry out their duties or if we lose our relationships with contract research organizations,CROs, our drug development efforts could be delayed.

Our arrangements with contract research organizationsCROs are critical to our success in bringing our products to the market and promoting such marketed products profitably.market. We are dependent on contract research organizations,CROs, third-party vendors and investigators forpre-clinical preclinical testing and clinical trials related to our drug discovery and development efforts and we will likely continue to depend on them to assist in our future discovery and development efforts. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. As such, they may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The parties with which we contract for execution of our clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. If they fail to devote sufficient time and resources to our drug development programs or if their performance is substandard, it will delay the development, approval and commercialization of our products. Moreover, these parties may also have relationships with other commercial entities, some of which may compete with us. If they assist our competitors, it could harm our competitive position.

Our contract research organizationsCROs could merge with or be acquired by other companies or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, materially adversely affect our business, results of operations and financial condition.

If we lose our relationship with any one or more of these parties, we could experience a significant delay in both identifying another comparable provider and then contracting for its services. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, it is likely that this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. In addition, any provider that we retain will be subject to current Good Laboratory Practices as set forth in 21 Code of Federal
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Regulations (C.F.R.) Part 58 and Good Clinical Practices as set forth in 21 C.F.R. Part 50, 54, and 312, and similar foreigninternational standards and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the development and commercialization of our products could be delayed.

We rely on a limited number of third partythird-party manufacturers to formulate and manufacture our products, and our business will be seriously harmed if these manufacturers are not able to satisfy our demand and alternative sources are not available.

Our expertise is primarily in the research and development andpre-clinical and clinical trial phases of product development.

We do not have anin-house manufacturing capability and depend completely on a small number of third-party manufacturers and active pharmaceutical ingredient formulators for the manufacture of our products. Therefore, we are dependent on third parties for our formulation development and manufacturing of our products. This may expose us to the risk of not being able to directly oversee the production and quality of the manufacturing process and provide ample commercial supplies to successfully launch and maintain the marketing of our products. Furthermore, these third partythird-party contractors, whether foreign or domestic, may experience regulatory compliance difficulty, mechanical shut downs, employee strikes, or other unforeseeable events that may delay or limit production. Our inability to adequately establish, supervise and conduct (either ourselves or through third parties) all aspects of the formulation and manufacturing processes would have a material adverse effect on our ability to develop and commercialize our products.

In addition, if we are not able to continue to operate our business relationships in a manner that is sufficiently profitable for us and our suppliers, certain members of our supply chain could compete with us through supply to competitors, such as generic drug companies, through breach of our agreements or otherwise.

We have agreements in place with Patheon Pharmaceuticals Inc. and Patheon Inc. (collectively, Patheon), subsidiaries of Thermo Fisher Scientific, for the manufacture of HETLIOZ® and Fanapt®.

In January 2014, we entered into a manufacturing agreement with Patheon for the manufacture of commercial supplies of HETLIOZ® 20 mg capsules at Patheon’s Cincinnati, Ohio manufacturing site. In May 2016, we entered into a manufacturing agreement with Patheon for the manufacture of commercial supplies of Fanapt® capsules tablets at Patheon’s Mississauga, Ontario, Canada manufacturing site. Additionally, in December 2020, we entered into a non-exclusive third-party manufacturing agreement for the manufacture of commercial supplies of HETLIOZ LQ®. We do not have exclusive long-term agreements with any other third partythird-party manufacturers of our products. If our current manufacturers, or any other third partythird-party manufacturer, is unable or unwilling to perform its obligations under our manufacturing agreements for any reason, we may not be able to locate alternative acceptable manufacturers or formulators or enter into favorable agreements with them. Any inability to acquire sufficient quantities of our products in a timely manner from these third parties could adversely affect sales of our products, delay clinical trials and prevent us from developing our products in a cost-effective manner or on a timely basis. In addition, manufacturers of our products are subject to cGMP and similar foreign standards and we do not have control over compliance with these regulations by our manufacturers. If one of our contract manufacturers fails to maintain compliance, the production of our products could be interrupted, resulting in delays and additional costs. In addition,Moreover, if the facilities of such manufacturers do not pass apre-approval or post-approval plant inspection, the FDA will not grant approval for our products and may institute restrictions on the marketing or sale of our products.

Similarly, if we change contract manufacturers, the FDA must approve these contract manufacturers or any other CMC changes before our products can be manufactured.

Our manufacturing strategy presents the following additional risks:

•because most of our third-party manufacturers and formulators are located outside of the U.S., there may be difficulties in importing our products or their components into the U.S. as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentation or defective packaging; and

•because of the complex nature of our products, our manufacturers may not be able to successfully manufacture our products in a cost-effective and/or timely manner.

Materials necessary to manufacture our products may not be available on commercially reasonable terms, or at all, which may delay the development, regulatory approval and commercialization of our products.

We and our partners rely on manufacturers to purchase from third-party suppliers the materials necessary to produce our products for clinical trials and commercialization. Suppliers may not sell these materials to such manufacturers at the times we or our partners need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by these manufacturers. Moreover, we currently do not have any agreements for the commercial production of these materials. If the manufacturers are unable to obtain these materials for our or our partners’ clinical trials, including due to supply chain issues caused by global health crises, product testing, potential regulatory approval of our products and commercial scale manufacturing could be delayed, significantly affecting our and our partners’ ability to further develop and commercialize our products. If we or our manufacturers or our partners, as applicable, are
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unable to purchase these materials for our products, there would be a shortage in supply or the commercial launch of such products would be delayed, which would materially and adversely affect our or our partners’ ability to generate revenues from the sale of such products.

If we cannot identify, or enter into licensing arrangements for, new products, our ability to develop a diverse product portfolio will be limited.

A component of our business strategy is acquiring rights to develop and commercialize products discovered or developed by other pharmaceutical and biotechnology companies for which we may find effective uses and markets through our unique pharmacogenetics and pharmacogenomics expertise for the treatment of central nervous system disorders.expertise. Competition for the acquisition of these products is intense. If we are not able to identify opportunities to acquire rights to commercialize additional products, we may not be able to develop a diverse portfolio of products and our business may be harmed.products. Additionally, it may take substantial human and financial resources to secure commercial rights to promising products. Moreover, if other firms develop pharmacogenetics and pharmacogenomics capabilities, we may face increased competition in identifying and acquiring additional products.

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 tooff-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.

If we lose key scientists or management personnel, or if we fail to recruit additional highly skilled personnel, it will impair our ability to identify, develop, and commercialize products.

new products will be impaired.

We are highly dependent on principal members of our management team and scientific staff, including our Chief Executive Officer, Mihael H. Polymeropoulos, M.D. These executives each have significant pharmaceutical industry experience. The loss of any such executives, including Dr. Polymeropoulos, or any other principal member of our management team or scientific staff, would impair our ability to identify, develop and market new products. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of the services of these or other key personnel, or the inability to attract and retain additional qualified personnel, could result in delays to development or approval, loss of sales and diversion of management resources. In addition, we depend on our ability to attract and retain other highly skilled personnel, including research scientists. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy. We may be unable to recruit such personnel on a timely basis, if at all, which would negatively impact our development and commercialization programs.

Additionally, we do not currently maintain “key person” life insurance on the lives of our executives or any of our employees. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.

The risk that we may be sued on product liability claims is inherent in the development and sale of pharmaceutical products. For example, we face a risk of product liability exposure related to the testing of our products in clinical trials and will face even greater risks upon commercialization by us or our partners of our products. We believe that we may be at a greater risk of product liability claims relative to other pharmaceutical companies because certain of our products are intended to treat central nervous system disorders, among others, and it is possible that we may be held liable for the behavior and actions of patients who use our products. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and we or our partners may be forced to limit or forego further commercialization of one or more of our products. Although we maintain product liability insurance, our aggregate coverage limit under this insurance is $30.0 million, and while we believe this amount of insurance is sufficient to cover our product liability exposure, these limits may not be high enough to fully cover potential liabilities. As our development activities and commercialization efforts progress and we and our partners sell our products, this coverage may be inadequate, we may be unable to obtain adequate coverage at an acceptable cost or we may be unable to get adequate coverage at all or our insurer may disclaim coverage as to a future claim. This could prevent the commercialization or limit the commercial potential of our products. Even if we are able to maintain insurance that we believe is adequate, our results of operations and financial condition may be materially adversely affected by a product liability claim. Uncertainties resulting from the initiation and continuation of products liability litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Product liability litigation and other related proceedings may also require significant management time.

E.U. Member States tend to impose strict price controls, which may delay or prevent the further commercial launch or impede the commercial success of HETLIOZ® in Europe and adversely affect our future results of operations.

In the E.U., prescription drug pricing and reimbursement are subject to governmental control and reimbursement mechanisms used by private and public health insurers in the E.U. vary by Member State. For the public systems,
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reimbursement is determined by law and/or by guidelines established by the legislature or responsible national authority. As elsewhere, inclusion in reimbursement catalogues focuses on the medical usefulness, need, quality and economic benefits to patients and the health care system. Acceptance for reimbursement comes with cost, use and often volume restrictions, which can vary by Member State. Although we have received marketing authorization for HETLIOZ® capsules from the EC, pricing negotiations with governmental authorities may take a considerable amount of time in those Member States that impose price controls. For example, we launched HETLIOZ® commercially in Germany in August 2016, and concluded our pricing negotiations with German authorities in October 2017. In addition, to obtain reimbursement or pricing approval for HETLIOZ® in some Member States, we may be required to conduct aan additional clinical trial that compares the cost-effectiveness of HETLIOZ®, to other available therapies.

Some Member States require approval of the sale price of a drug before it can be marketed. In many countries,others, the pricing review period begins after marketing or product licensing approval is granted. In some Member States, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we may be subject to lengthy price regulations that delay or prevent the commercial launch of HETLIOZ® in a particular Member State and negatively impact the revenues that are generated from the sale of HETLIOZ® in that country. If reimbursement of HETLIOZ® is unavailable or limited in scope or amount, or if pricing for HETLIOZ® is set at unsatisfactory levels or takes too long to establish, or if there is competition from lower priced cross-border sales, our results of operations will be negatively affected.

We may not be able to effectively market and sell our future products, if approved, in the U.S.

We plan to continue to build our sales and marketing capabilities in the U.S. to commercialize future products, if approved. Our current sales and marketing capabilities in the U.S. may not be adequate to support the commercialization of future products and we would expect to build such capabilities by investing significant amounts of financial and management resources. Furthermore, the cost of establishing and maintaining marketing and sales capabilities may not be justifiable in light of the revenues generated by any future products.

If we are unable to establish and maintain adequate sales and marketing capabilities for future products or are unable to do so in a timely manner, we may not be able to generate product revenues from these products, which may prevent us from reaching or maintaining profitability.

Legislative or regulatory reform of the healthcare system in the U.S. may affect our ability to sell our products profitably.

PPACA substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. PPACA contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business if we or our partners commercialize our products in the future include those governing enrollment in federal healthcare programs, reimbursement changes, rules regarding prescription drug benefits under the health insurance exchanges, and fraud and abuse and enforcement. In addition, continued implementation of PPACA may result in the expansion of new programs such as Medicare payment for performance initiatives, and may impact existing government healthcare programs, such as by improving the physician quality reporting system and feedback program.

Additional provisions of PPACA may negatively affect our revenues from products that we or our partners commercialize in the future. For example, as part of PPACA’s provisions closing a coverage gap that currently exists in the Medicare Part D prescription drug program, manufacturers of branded prescription drugs are required to provide a 50% discount on branded prescription drugs dispensed to beneficiaries within this coverage gap. Medicare Part D is a prescription drug benefit available to all Medicare beneficiaries. It is a voluntary benefit that is implemented through private plans under contractual arrangements with the federal government. Similar to pharmaceutical coverage through private health insurance, Part D plans negotiate discounts from drug manufacturers and pass on some of those savings to Medicare beneficiaries. PPACA also makes changes to the Medicaid Drug Rebate Program, discussed in more detail below, including increasing the minimum rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products. On February 1, 2016, CMS, the federal agency that administers the Medicare and Medicaid programs, issued final regulations to implement the changes to the Medicaid Drug Rebate Program under PPACA. These regulations became effective on April 1, 2016.

Many of PPACA’s most significant reforms did not take effect until 2014 or thereafter, and the resulting new programs and requirements will continue to evolve in the next few years. Some states have chosen not to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level. In part because not all states have expanded their Medicaid programs, it is unclear whether there will be more uninsured patients than anticipated when Congress passed PPACA. For each state that has opted not to expand its Medicaid program, there will be fewer insured patients overall. An increase in the proportion of uninsured patients who are prescribed products resulting from our proprietary or partnered programs could impact the future sales of any products that are commercialized in the future and our business and results of operations.

Further, in September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted giving the FDA enhanced post-marketing authority including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information and compliance with Risk Evaluation and Mitigation Strategy (REMS) approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to ensure compliance with post-approval regulatory requirements and potential restrictions on the sale and/or distribution of approved products.

In addition, other

Healthcare legislative changes have been proposed and adopted in the U.S. since PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013, which will remain in effect until 2024 unless additional congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of certain development projects and reduce our profitability.

More recently, the current presidential administration and many members of the U.S. Congress have attempted to repeal and replace PPACA, but they have been unsuccessful in doing so as of the date of the filing of this report. We cannot predict the ultimate form or timing of any repeal or replacement of PPACA or the effect such repeal or replacement would have on our business. Regardless of the impact of repeal or replacement of PPACA on us, the government has shown significant interest in pursuing healthcare reform and reducing healthcare costs.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures, and may adversely affect our operating results.

Significant developments arising from changes in the political climate couldmay have a material adverse effect on us.

our business and results of operations.

In the U.S., there have been and continue to be a number of legislative initiatives to contain healthcare costs. Most significantly, in August 2022, President Biden signed the IRA into law. This statute marks the most significant action by Congress with respect to the pharmaceutical industry since adoption of the ACA in 2010. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap; imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (beginning October 1, 2022); and replaces the Medicare Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years. For that and other reasons, it is currently unclear how the IRA will be effectuated, and while the impact of the IRA on the pharmaceutical industry cannot yet be fully determined, it is likely to be significant.
Healthcare reforms are discussed above in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform and in the risk factor entitled “We are subject to uncertainty relating to pricing and reimbursement policies in the U.S., including recent and future health reform measures, which, if not favorable for our products, could hinder or prevent our products’ commercial success.”
These healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price for any approved product and/or the level of reimbursement physicians receive for administering any approved product which could affect our business strategy or commercial prospects. Reductions in reimbursement levels may negatively impact the prices we can charge or the frequency with which products are prescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.
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Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment, and any negative sentiments towards the U.S. as a result of such changes, could also adversely affect our business.

Additionally,

We are subject to stringent laws, rules, regulations, policies, industry standards and contractual obligations regarding data privacy and security in June 2016,foreign jurisdictions and may be subject to additional related laws and regulations in other jurisdictions into which we expand. Many of these laws and regulations are subject to change and reinterpretation and could result in claims, changes to our business practices, monetary penalties, increased cost of operations or other harm to our business.
The regulatory framework for privacy and personal information security issues worldwide is rapidly evolving and is likely to remain uncertain for the United Kingdom (U.K.) held a referendumforeseeable future. Various foreign government bodies and voted in favoragencies have adopted or are considering adopting laws, rules, regulations and standards limiting, or laws, rules, regulations and standards regarding, the collection, distribution, use, disclosure, storage, security and other processing of leaving the E.U. In February 2017, the U.K. parliament voted to allow the U.K. to exit the E.U. by passing a bill that gives the prime ministerpersonal information.
Outside of the U.K.U.S., legal requirements relating to the authoritycollection, storage, processing and transfer of personal data continue to invoke Article 50evolve. For example, the collection and use of health data and other personal data is governed in the European Union by the General Data Protection Regulation (GDPR), which became applicable in May 2018. The GDPR implements stringent operational requirements for processors and controllers of personal data, including, for example, expanded disclosure requirements about how personal information is to be used, strengthened individual data subject rights, limitations on retention of personal data, increased requirements pertaining to health data and pseudonymised (i.e., key-coded) data, shortened mandatory data breach notification timelines and higher standards for controllers to demonstrate they have obtained valid consent for certain data processing activities. The GDPR provides that E.U. member states may make their own additional laws and regulations in relation to the processing of genetic, biometric or health data, which could result in differences between member states, limit our ability to use and share personal data. Failure to comply with the GDPR may result in fines up to €20,000,000 or 4% of the Lisbon Treaty. This referendum has created politicaltotal worldwide annual revenue of the preceding financial year, whichever is higher, and economic uncertainty, particularlyother administrative penalties. The GDPR may increase our responsibility and liability in relation to personal data that we may process, and we may be required to implement additional measures in an effort to comply with the GDPR and with other laws, rules, regulations and standards in the U.K.E.U., including those of E.U. Member States, relating to privacy and thedata protection. This may be onerous and if our efforts to comply with GDPR or other applicable E.U., laws, rules, regulations and this uncertainty may last for years. Therestandards are many ways in which our business couldnot successful, or are perceived to be affected, only some of which we can identify.

The referendum, and the likely withdrawal of the U.K. from the E.U.unsuccessful, 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 cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the U.K., Europe or globally, which could adversely affect our operating results and growth prospects.business. In addition, our business could be negatively affected by new trade agreements betweenJuly 2020, the U.K. and other countries, includingEuropean Court of Justice (ECJ) invalidated the U.S., and byE.U.-U.S. Privacy Shield, which had enabled the possible impositiontransfer of trade or other regulatory barriers in the U.K., especially if the U.K. withdrawspersonal data 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 and growth prospects as well as the manner in which we conduct our business operations 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 continue to examine the impact the TCJA may have on our business. The TCJA is afar-reaching and complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impactsfor companies that had self-certified to the Privacy Shield. While we do not rely on different categories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impactthe Privacy Shield, the ECJ decision also raised questions about the continued validity of the TCJAEuropean Commission’s Standard Contractual Clauses, on the overall economy, the industries in which we operaterely. E.U. regulators have issued additional guidance regarding considerations and ourrequirements that we and our partners’ business cannotother companies must consider and undertake when using the Standard Contractual Clauses. Although the European Commission has presented a new set of Standard Contractual Clauses, which are required to be reliably predicted at this early stage ofimplemented, there are few, if any, viable alternatives to the new law’s implementation. There canStandard Contractual Clauses and it remains to be no assurance that the TCJAseen whether additional means for lawful data transfers will not negatively impact our operating results, financial condition,become available. The ECJ’s decision and future business operations. The estimated impact of the TCJA is based on our management’s current knowledge and assumptions, following consultation with our tax advisors. Because of our valuation allowance in the U.S., ongoing tax effects of the Act are not expected to materially change our 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 legislationother regulatory guidance or the manner in which it might affect investors in common stock. Investors should consult with their own tax advisorsdevelopments may impose additional obligations with respect to such legislation and the potential tax consequencestransfer of investing in common stock.

New legislation or regulationpersonal data from the E.U. to the U.S, all of which could affectrestrict our tax burden could be enacted by any governmental authority. We cannot predict the timing or extent of suchtax-related developments which could have a negative impact on our financial results. Additionally, we use our best judgmentactivities in attempting to quantify and reserve for these tax obligations. However, a challenge by a taxing authority,those jurisdictions, limit our ability to utilize tax benefits such as carryforwardsprovide our products and services in those jurisdictions, require us to modify our policies and practices, and to engage in additional contractual negotiations, or tax credits, or a deviation from othertax-related assumptions may cause actual financial results to deviate from previous estimates.

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

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

mergers;

acquisitions;

strategic alliances;

licensing agreements;obligations 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 impose limitations 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 realizeefficiently transfer personal data from 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 orE.U. 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.

U.S.

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.

Our rights to our product portfolio are based in part on patents and other intellectual property licensed from third-parties.third parties. These third parties may generally terminate the license agreements under certain circumstances, including a material breach of the agreement by the other. In the event we terminate our license, or if the third-partythird party terminates our license due to our breach, rights to the intellectual property revert back to the licensor. Any termination or reversion of our rights to develop or commercialize our products would have a material adverse effect on our business.

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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. “off-label.” Althoughoff-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 proprietaryknow-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 proprietaryknow-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 proprietaryknow-how, information and technology to enter into confidentiality agreements, we cannot be certain that thisknow-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. In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ® in the U.S. We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal.
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 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 rights 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

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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’sApproved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book,” which would harm our business.

In June 2014, we

We have been and continue to be involved in number of lawsuits with a variety of generic drug manufacturers who have filed suit against Roxane Laboratories, Inc. (Roxane) in the U.S. District Court for the District of Delaware (Delaware District Court). The suit seeks an adjudication that Roxane has infringed one or more claimsANDAs relating to certain of our U.S. Patent No. 8,586,610 (‘610 Patent) by submitting to the FDA an ANDA for a generic version of Fanapt® prior to the expiration of the ‘610 Patent in November 2027.patents. 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 afive-day bench trial that concluded on March 4, 2016. On August 25, 2016,December 2022, the Delaware District Court ruled in favor of the Defendants in our favor, findingpatent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ® in the U.S. We disagree with the ruling that Roxane’s ANDA product infringed the asserted claims of the ‘610 Patentour patents are invalid and the ‘198 Patent. The Delaware District Court ruled thatare vigorously pursuing appeal. However, 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 describedmay not be successful 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. On September 23, 2016, Roxane filed a notice of appeal with the Federal Circuit Court of Appeals (Federal Circuit). Roxane filed its opening appellate brief on February 7, 2017. We filed our responsive brief on April 19, 2017,this lawsuit and Roxane filed its reply brief on May 3, 2017. On July 27, 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). We did not oppose the substitution of West-Ward for Roxane. The appeal is fully briefed, and oral argument was held on December 5, 2017. The Federal Circuit has not yet issued a decision.

In 2015, we filed six separate patent infringementother such lawsuits in the Delaware District Court against Roxane, Inventia Healthcare Pvt. Ltd. (Inventia), Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp. (collectively, the Defendants). The lawsuits each seek an adjudication that the respective Defendants infringed one or more claims of the ‘610 Patent and/or our U.S. Patent No. 9,138,432 (‘432 Patent) by submittingfuture. Please see Note 16, Legal Matters, to the FDA an ANDA for a generic versionconsolidated financial statements in Part II, Item 8 of Fanapt® prior to the expiration of the ‘610 Patent in November 2027 or the ‘432 Patent in September 2025. The Defendants have denied infringement and counterclaimed for declaratory judgment of invalidity and noninfringement of the ‘610 Patent and the ‘432 Patent. Certain Defendants have since entered into agreements resolving these lawsuits, as discussed below. The remaining parties have agreed, and the Delaware District Court has ordered, that within 14 days after any decision on the merits in the Roxane appeal, the parties will submit to the Delaware District Court a status report and request a schedule for trial. We entered into a confidential stipulation with Inventia regarding any potential launch of Inventia’s generic ANDA product. We also entered into a confidential stipulation with Lupin regarding any potential launch of Lupin’s generic ANDA product.

Lupin filed counter-claims for declaratory judgment of invalidity and noninfringement of seven of our method of treatment patents that are listed in theOrange Book related to Fanapt® (such seven patents, the Method of Treatment Patents). We have not sued Lupin for infringing the Method of Treatment Patents. On October 13, 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 Lupin and us by which we would not assert those patents against Lupin absent certain changes in Lupin’s proposed prescribing information for its iloperidone tablets.

On October 24, 2016, we entered into a License Agreement with Taro to resolve our patent litigation against Taro regarding Taro’s ANDA seeking approval of its generic version of Fanapt® (Taro License Agreement). Under the Taro License Agreement, we granted Taro anon-exclusive license to manufacture and commercialize Taro’s version of Fanapt® in the U.S. effective November 2, 2027, unless prior to that date we obtain pediatric exclusivity for Fanapt®, in which case, the license will be effective May 2, 2028. Taro may enter the market earlier under certain limited circumstances. The Taro License Agreement,this Annual Report, which is subject to reviewincorporated herein by the U.S. Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ), providesreference, for a full settlement and release by us and Taro of all claims that are the subject of the litigation.

On December 7, 2016, we entered into a License Agreement with Apotex to resolve our patent litigation against Apotex regarding Apotex’s ANDA seeking approval of its generic version of Fanapt® (Apotex License Agreement). Under the Apotex License Agreement, we granted Apotex anon-exclusive license to manufacture and commercialize Apotex’s version of Fanapt® in the U.S. effective November 2, 2027, unless prior to that date we obtain pediatric exclusivity for Fanapt®, in which case, the license will be effective May 2, 2028. Apotex may enter the market earlier under certain limited circumstances. The Apotex License Agreement, which is subject to review by the FTC and the DOJ, provides for a full settlement and release by us and Apotex of all claims that are the subject of the litigation.

On February 26, 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. We have not sued Roxane for infringing the Method of Treatment Patents. We filed a motion to dismiss this lawsuit for lack of personal jurisdiction or to transfer the lawsuit to the Delaware District Court. On December 20, 2016, the Ohio District Court ruled in our favor, dismissing Roxane’s suit without prejudice for lack of personal jurisdiction.

On February 26, 2016, Roxane filed a Petition for Inter Partes Review (IPR) of the ‘432 Patent with the Patent Trials and Appeals Board (PTAB) of the U.S. Patent and Trademark Office. We filed a Preliminary Response on June 7, 2016, and on August 30, 2016, the PTAB denied the request by Roxane to institute an IPR of the ‘432 Patent. On September 29, 2016, Roxane filed a Petition for Rehearing with the PTAB, and on October 13, 2016, we filed a Response to Roxane’s Petition. On November 4, 2016, the PTAB denied Roxane’s Petition for Rehearing.

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 gainThe 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 tothis patent in the HETLIOZ®U.S. new chemical entity patent (the primary patent covering the product as a new composition of matter) untilexpired in December 2022. We also own HETLIOZ® U.S. method of treatment patents (directed to the approved method of treatment as described in the HETLIOZ® label approved by the FDA), which expire normally inbetween 2033 and 2034.2035, and three drug substance patents that expire in 2035. Additionally, the U.S. Patent and Trademark Office has issued a drug formulation patent for HETLIOZ LQ® that will expire in 2040. The Fanapt® U.S. new chemical entityNCE patent received the full five-year patent term extension under the Hatch-Waxman Act and so this patent in the U.S. 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 Orange Book in January 2015, is set to expire in 2027. Please seeEight 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 2015.
In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ® in the U.S. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “We“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,” and Part I, Item 3,Legal Proceedings,each of this annual report on Form10-Kwhich is incorporated herein by reference, for additional information. See also Note 16,Legal Matters, to the consolidated financial statements included in Part II of this annual report on Form10-K for 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 2015.

A directive in the

The E.U. provides that companies that receive regulatory approval for a new medicinal product will have a10-year period of regulatory data protection and market exclusivityprotection for that product (with the possibility of a furtherone-year extension) extension under certain conditions), beginning on the date of such European regulatory approval, regardless of when the European new chemical entityNCE patent covering such product expires. A generic version of the approved drug that refers to the approved drug’s regulatory data may not be marketed or sold in Europe during such market exclusivityprotection period. This directivelegislation is of material importance with respect to Fanapt®, since the European new chemical entityNCE 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’ stradipitant’s U.S. new chemical entityNCE patent until 2029. Assuming we gain a five-year patent term restoration forVQW-765, and that we continue to have rights under our license agreement with respect to this product, we would have exclusive rights toVQW-765’s U.S. new chemical entityNCE 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. Such extensions may not be granted because of, for example, the failure to exercise due diligence during the testing phase or regulatory review process, the failure to apply within applicable deadlines, the failure to apply prior to expiration of relevant patents, or any other failure to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we fail to
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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.

Generic company competitors have received FDA approval of generic versions of HETLIOZ® in the U.S. We are pursuing an appeal of the December 2022 Delaware District Court decision that declared as invalid claims of a group of patents that protect our exclusivity in the U.S.
The FDCA, as amended by the Drug Price Competition and Patent Term Restoration Act of 1984, as amended, or the Hatch-Waxman Amendments, permits the FDA to approve ANDAs for generic versions of brand name drugs like HETLIOZ®. We refer to the process of generic drug applications as the “ANDA process.” The ANDA process permits competitor companies to obtain marketing approval for a drug product with the same active ingredient, dosage form, strength, route of administration, and labeling as the approved brand name drug, but without having to conduct and submit clinical studies to establish the safety and efficacy of the proposed generic product. In place of such clinical studies, an ANDA applicant needs to submit data demonstrating that its product is bioequivalent to the brand name product, usually based on pharmacokinetic studies.
As an alternate path to FDA approval for modifications of products previously approved by the FDA, an applicant may submit an NDA, under Section 505(b)(2) of the FDCA (enacted as part of the Hatch-Waxman Amendments). This statutory provision permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference from the owner of the data. The Hatch-Waxman Amendments permit the applicant to rely upon the FDA findings of safety and effectiveness of a drug that has obtained FDA approval based on preclinical or clinical studies conducted by others. In addition to relying on FDA prior findings of safety and effectiveness for a referenced drug product, the FDA may require companies to perform additional preclinical or clinical studies to support approval of the modification to the referenced product.
If an application for a generic version of a branded product or a Section 505(b)(2) application relies on a prior FDA finding of safety and effectiveness of a previously-approved product including an alternative strength thereof, the applicant is required to certify to the FDA concerning any patents listed for the referenced product in the Orange Book. Specifically, the applicant must certify in the application that:
I.there is no patent information listed for the reference drug;
II.the listed patent has expired for the reference drug;
III.the listed patent for the reference drug has not expired, but will expire on a particular date and approval is sought after patent expiration; or
IV.the listed patent for the reference drug is invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the product for which the ANDA or 505(b)(2) NDA is submitted.
The Hatch-Waxman Amendments require an applicant for a drug product that relies, in whole or in part, on the FDA’s prior approval of HETLIOZ®, to notify us of its application, a “paragraph IV” notice, if the applicant is seeking to market its product prior to the expiration of the patents that both claim HETLIOZ® and are listed in the Orange Book. A bona fide paragraph IV notice may not be given under the Hatch-Waxman Amendments until after the generic company receives from the FDA an acknowledgement letter stating that its ANDA is sufficiently complete to permit a substantive review.
The paragraph IV notice is required to contain a detailed factual and legal statement explaining the basis for the applicant’s opinion that the proposed product does not infringe our patents, that the relevant patents are invalid, or both. After receipt of a valid notice, the branded product manufacturer has the option of bringing a patent infringement suit in federal district court against any generic company seeking approval for its product within 45 days from the date of receipt of each notice. If such a suit is commenced within this 45-day period, the Hatch-Waxman Amendments provide for a 30-month stay on FDA’s ability to give final approval to the proposed generic product, which period begins on the date the paragraph IV notice is received. Generally, during a period of time in which generic applications may be submitted for a branded product based on a product’s regulatory exclusivity status, if no patents are listed in the Orange Book before the date on which a complete ANDA application for a product (excluding an amendment or supplement to the application) is submitted, an ANDA application could be approved by FDA without regard to a stay. For products entitled to five-year exclusivity status, the Hatch-Waxman Amendments provide that an ANDA application may be submitted after four years following FDA approval of the branded product if it contains a certification of patent invalidity or non-infringement to a patent listed in the Orange Book. In such a case, the 30-month stay runs from the end of the five-year exclusivity period. Statutory stays may be shortened or lengthened if either party fails to cooperate in the litigation and it may be terminated if the court decides the case in less than 30 months. If the litigation is resolved in favor of the ANDA applicant before the expiration of the 30-month period, the stay will be
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immediately lifted and the FDA’s review of the application may be completed. Such litigation is often time-consuming and costly, and may result in generic competition if such patents are not upheld or if the generic competitor is found not to infringe such patents.
Between April 2018 and March 2021, we filed numerous Hatch-Waxman lawsuits in the Delaware District Court against Teva, MSN and Apotex asserting that U.S. Patent Nos. RE46,604 ('604 Patent) , 9,060,995, 9,539,234, 9,549,913, 9,730,910 (‘910 Patent), 9,844,241, 10,071,977, 10,149,829 (‘829 Patent), 10,376,487 (‘487 Patent), 10,449,176, 10,610,510, 10,610,511, 10,829,465, and 10,611,744 would be infringed by their generic versions of HETLIOZ®, for which they were seeking FDA approval. In January 2022, we entered into a license agreement with MSN and Impax resolving the lawsuits against MSN. The license agreement grants MSN and Impax a non-exclusive license to manufacture and commercialize MSN’s version of HETLIOZ® in the U.S. effective as of March 13, 2035, unless prior to that date the Company obtains pediatric exclusivity for HETLIOZ®, in which case the license will be effective as of July 27, 2035. MSN and Impax may enter the market earlier under certain limited circumstances. The consolidated lawsuits against the remaining Defendants went to trial in March 2022.
On December 13, 2022, the Delaware District Court ruled that Teva and Apotex did not infringe the ‘604 Patent, and that the asserted claims of the ‘604 Patent, ‘910 Patent, ‘829 Patent and ‘487 Patent were invalid. On December 14, 2022, we appealed the Delaware District Court’s decision to the Federal Circuit and requested an injunction prohibiting market entry by Teva and Apotex while the appeal is pending. On December 16, 2022, the Federal Circuit granted a temporary injunction to prohibit market entry by Teva and Apotex until the Federal Circuit entered its order on our motion for a stay pending appeal. On December 28, 2022, the Federal Circuit denied our request for an injunction, and Teva has since launched a generic version of HETLIOZ® at risk. While we are pursuing additional remedies beyond our pending appeal of the Delaware District Court’s decision, we cannot be certain of the success, timing or efforts involved in connection with these efforts. If any of the generic manufacturers has adequate supply available and is successful, such generic competition in the short term could have a material and adverse impact on our revenues and our stock price.
We may also face challenges to the validity of our patents through a procedure known as inter partes review. Inter partes review is a trial proceeding conducted through the Patent Trial and Appeal Board, of the U.S. Patent and Trademark Office. Such a proceeding could be introduced against us within the statutory one-year window triggered by service of a complaint for infringement related to an ANDA filing or at any time by an entity not served with a complaint. Such proceedings may review the patentability of one or more claims in a patent on specified substantive grounds such as allegations that a claim is obvious on the basis of certain prior art.
We intend to continue to vigorously enforce our intellectual property rights relating to HETLIOZ®, but we cannot predict the outcome of the pending lawsuits, our appeal, or any subsequently filed lawsuits or inter partes review. See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “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,” each of which is incorporated herein by reference, for additional information.
Any significant degree of generic market entry would limit our U.S. sales, which would have a significant adverse impact on our business and results of operations. In addition, even if a competitor’s effort to introduce a generic product is ultimately unsuccessful, the perception that such development is in progress and/or news related to such progress could materially affect the perceived value of our company and our stock price. For example, our stock price suffered a significant decline following our announcement of the Delaware District Court’s ruling in favor of the Defendants.
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.
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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 Note 16, Legal Matters, to the consolidated financial statements in Part I,II, Item 3,Legal Proceedings,8 of this annual report on Form10-K,Annual Report, incorporated herein by reference, we have initiated lawsuits to enforce our patent rights against certain generic pharmaceutical companies.

Risks related to our common stock

General Risk Factors
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, 20172022 and December 31, 2017,2022, the high and low sale prices of our common stock as reported on The Nasdaq Global Market varied between $11.90$6.73 and $18.99.$16.93. Additionally, market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been very 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 or our partners’ level of success in commercializing our products;

•our level of success in executing our commercialization strategies;

•publicity regarding actual or potential litigation involving us and the outcome of any such litigation;
•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;

•newly enacted healthcare legislation or changes to existing legislation;
•developments concerning any collaboration or other strategic transaction we may undertake;

publicity regarding actual or potential litigation 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;

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

•actual or anticipated variations in our quarterly operating results;

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•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;

•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. For example, our stock price suffered a significant decline following our announcement of the Delaware District Court’s ruling in favor of the Defendants. 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, 20172022, there were a total of 6,077,6226,147,756 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 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 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 TheNasdaq 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 Global Market. We are required to meet specified listing criteria in order to maintain our listing on The Nasdaq Global Market. If we fail to satisfy The Nasdaq Global Market’s continued listing requirements, our common stock could be delisted from The Nasdaq Global Market, in which case we may transfer to The Nasdaq Capital Market, which generally has lower financial requirements for initial listing or, if we fail to meet its listing requirements, theover-the-counter bulletin board. Any potential delisting of our common stock from The 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 Companycompany 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.

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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:

for several reasons, including, among others:
•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 orin-licensing opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and

•if individuals are elected to aour 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 ourthe 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 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-creatednewly 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 expires in September 2018, the provisions of which could result in significant dilutionhave had the effect of the proportionate ownership of a potential acquirer and, accordingly, could discourage, delaydiscouraging, delaying or preventpreventing a change in ouror management or control over us. While there is no determination has yet been made,plan to do so at this time, our board of directors may choose to adopt a new rights agreementplan in the future.
Changes to replacetax regulations to which we are subject could adversely affect us.
We are subject to tax laws, treaties and regulations in the current one uponcountries in which we operate, and these laws and treaties are subject to interpretation. New legislation or prior to its expiration.

Global economic conditions mayregulation that 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 an adverse effecta negative impact on our business.

Financial instabilityfinancial results. We have taken, and will continue to take, tax positions based on our interpretation of such tax laws. However, a challenge by a taxing authority, our ability to utilize tax benefits such as carryforwards or tax credits, or a general decline in economic conditionsdeviation from other tax-related assumptions may cause our actual financial results to deviate from previous estimates.

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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 U.S.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 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 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 and are affected by numerous factors, including:
•product sales;
•cost of product sales;
•the rate at which third-party payors approve coverage for our products;
•marketing and other countries whereexpenses;
•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 sellmay 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 productoperating 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.
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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 operations. Economic conditions,security posture. While we continue to invest in data protection and uncertainty asinformation 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 collaborators, 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, terrorism, war and telecommunication and electrical failures. Information security risks have significantly increased in recent years in part due to the general directionproliferation of new technologies and the macroeconomic environment, are beyondincreased 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 controlprotective measures or to investigate and may makeremediate any necessary debt or equity financing more difficult, more costly, and more dilutive. information security breaches.
While we believe we have adequate capital resourcesnot experienced any such system failure, accident or security breach to meet current working capitaldate, if such an event were to occur and capital expenditure requirements, an economic downturn or significant increasecause interruptions in our expensesoperations, it could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financingresult 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.

Salesdisruption of our products will be dependent,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 large part, on reimbursement from government health administration authorities, private health insurers, distribution partnersdelays in regulatory approval efforts and other organizations. Insignificantly increase costs to recover or reproduce the eventdata. Our information security systems are also subject to laws and regulations requiring that we take measures to protect the privacy and security of economic decline, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, federalcertain information we gather and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reductionuse 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, 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 use third parties for sales, distribution, medical affairscould incur substantial liability, our reputation would be damaged, and clinical research, and we rely upon several single source providers of raw materials and contract manufacturers for the manufacturefurther development of our products. During challenging and uncertain economic times and in tight credit markets, there mayproduct candidates could 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.

delayed.

ITEM 1B.UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.PROPERTIES

Our headquarters office consists of a total of 40,18843,462 square feet of office space located at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. under operating leases and subleases that expire inbetween 2026 and 2028 and are subject to renewal options. In addition, we have 2,880 square feet of office space for our European headquarters in London, England under an operating lease that has a lease term ending in 20212026, and is subject to a renewal option, and 1,249 square feet of office space in Berlin under aother short-term operating lease.leases. We believe that these facilities are suitable and adequate to meet our anticipated near-term needs. We anticipate that following the expiration of the leases, additional or alternative space will be available at commercially reasonable terms.

ITEM 3.LEGAL PROCEEDINGS

In June 2014, we filed suit against Roxane Laboratories, Inc. (Roxane)

Information with respect is item may be found in the U.S. District Court for the District of Delaware (Delaware District Court). The suit seeks an adjudication that Roxane has infringed one or more claims of our U.S. Patent No. 8,586,610 (‘610 Patent) by submittingNote 16, Legal Matters, to the U.S. Food and Drug Administration (FDA) an Abbreviated New Drug Application (ANDA) for a generic versionconsolidated financial statements in Part II, Item 8 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),this annual report on Form 10-K, which is licensed exclusively to us,incorporated herein by filing an ANDA for a generic versionreference.
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Table 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 afive-day bench trial that concluded on March 4, 2016. On August 25, 2016, the Delaware District Court ruled in our favor, finding that Roxane’s ANDA product infringed the asserted claims of the ‘610 Patent and the ‘198 Patent. 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. On September 23, 2016, Roxane filed a notice of appeal with the Federal Circuit Court of Appeals. Roxane filed its opening appellate brief on February 7, 2017. We filed our responsive brief on April 19, 2017, and Roxane filed its reply brief on May 3, 2017. On July 27, 2017, Roxane, now a subsidiary of Hikma Pharmaceuticals PLC (Hikma), petitioned the Federal Circuit Court 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). We did not oppose the substitution of West-Ward for Roxane. The appeal is fully briefed, and oral argument was held on December 5, 2017. The Federal Circuit has not yet issued a decision.

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. (collectively, 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 ANDA for a generic version of Fanapt® prior to the expiration of the ‘610 Patent in November 2027 or the ‘432 Patent in September 2025. The Defendants have denied infringement and counterclaimed for declaratory judgment of invalidity and noninfringement of the ‘610 Patent and the ‘432 Patent. Certain Defendants have since entered into agreements resolving these lawsuits, as discussed below. The remaining parties have agreed, and the Delaware District Court has ordered, that within 14 days after any decision on the merits in the Roxane appeal, the parties will submit to the Delaware District Court a status report and request a schedule for trial. We entered into a confidential stipulation with Inventia regarding any potential launch of Inventia’s generic ANDA product. We also entered into a confidential stipulation with Lupin regarding any potential launch of Lupin’s generic ANDA product.

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. On October 13, 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 Lupin and us by which we would not assert those patents against Lupin absent certain changes in Lupin’s proposed prescribing information for its iloperidone tablets.

On October 24, 2016, we entered into a License Agreement with Taro to resolve our patent litigation against Taro regarding Taro’s ANDA seeking approval of its generic version of Fanapt® (Taro License Agreement). Under the Taro License Agreement, we granted Taro anon-exclusive license to manufacture and commercialize Taro’s version of Fanapt® in the U.S. effective November 2, 2027, unless prior to that date we obtain pediatric exclusivity for Fanapt®, in which case, the license will be effective May 2, 2028. Taro may enter the market earlier under certain limited circumstances. The Taro License Agreement, which is subject to review by the U.S. Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ), provides for a full settlement and release by us and Taro of all claims that are the subject of the litigation.

On December 7, 2016, we entered into a License Agreement with Apotex to resolve our patent litigation against Apotex regarding Apotex’s ANDA seeking approval of its generic version of Fanapt® (Apotex License Agreement). Under the Apotex License Agreement, we granted Apotex anon-exclusive license to manufacture and commercialize Apotex’s version of Fanapt® in the U.S. effective November 2, 2027, unless prior to that date we obtain pediatric exclusivity for Fanapt®, in which case, the license will be effective May 2, 2028. Apotex may enter the market earlier under certain limited circumstances. The Apotex License Agreement, which is subject to review by the FTC and the DOJ, provides for a full settlement and release by us and Apotex of all claims that are the subject of the litigation.

On February 26, 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. We have not sued Roxane for infringing the Method of Treatment Patents. We filed a motion to dismiss this lawsuit for lack of personal jurisdiction or to transfer the lawsuit to the Delaware District Court. On December 20, 2016, the Ohio District Court ruled in our favor, dismissing Roxane’s suit without prejudice for lack of personal jurisdiction.

On February 26, 2016, Roxane filed a Petition for Inter Partes Review (IPR) of the ‘432 Patent with the Patent Trials and Appeals Board (PTAB) of the U.S. Patent and Trademark Office. We filed a Preliminary Response on June 7, 2016, and on August 30, 2016, the PTAB denied the request by Roxane to institute an IPR of the ‘432 Patent. On September 29, 2016, Roxane filed a Petition for Rehearing with the PTAB, and on October 13, 2016, we filed a Response to Roxane’s Petition. On November 4, 2016, the PTAB denied Roxane’s Petition for Rehearing.

Contents
ITEM 4.MINE SAFETYDISCLOSURESSAFETY 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 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, 2017  High   Low 

First quarter

  $16.30   $12.70 

Second quarter

   16.65    13.20 

Third quarter

   18.99    15.01 

Fourth quarter

   18.25    11.90 
Year Ended December 31, 2016  High   Low 

First quarter

  $9.58   $6.91 

Second quarter

   11.4    8.02 

Third quarter

   18.00    10.81 

Fourth quarter

   17.65    13.55 

As of February 1, 2018,2, 2023, there were 7eight 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 Composite Index and the 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, 20122017 and its relative performance is tracked through December 31, 2017.2022. The comparisons in the table are required by the Securities and Exchange Commission (SEC) and are not intended to forecast or be indicative of possible future performance of our common stock. We have notnever paid cash 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 Form10-K pursuant to Item 201(e) of RegulationS-K and shall not be deemed “soliciting materials” or to be “filed” with the SEC (other than as provided in 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 2018 Annual Meeting

vnda-20221231_g5.jpg
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Table of Stockholders to be filed with the SEC within 120 days after the endContents
ITEM 6.RESERVED

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Table of the fiscal year ended December 31, 2017, 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 Form10-K.

ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are each derived from our audited consolidated financial statements included in this annual report on Form10-K. The consolidated statements of operations data for the years ended December 31, 2014 and 2013, and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 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 Form10-K.

   Year Ended December 31, 
(in thousands, except for share and per share amounts)  2017  2016  2015  2014 (1)  2013 

Statements of Operations Data

      

Total revenues

  $165,083  $146,017  $109,925  $50,157  $33,879 

Operating expenses:

      

Cost of goods sold, excluding amortization

   17,848   24,712   23,462   1,583   —   

Research and development

   38,547   29,156   29,145   19,230   28,502 

Selling, general and administrative

   123,841   99,787   84,531   84,644   25,082 

Intangible asset amortization

   1,750   10,933   12,972   2,254   1,495 

Gain on arbitration settlement

   —     —     —     (77,616)   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   181,986   164,588   150,110   30,095   55,079 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

   (16,903)   (18,571)   (40,185)   20,062   (21,200) 

Other income

   1,472   665   320   124   145 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   (15,431)   (17,906)   (39,865)   20,186   (21,055) 

Provision for income taxes

   136   104   —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $(15,567)  $(18,010)  $(39,865)  $20,186  $(21,055) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) per share:

      

Basic

  $(0.35)   (0.41)  $(0.94)  $0.58  $(0.69) 

Diluted

  $(0.35)   (0.41)  $(0.94)  $0.55  $(0.69) 

Weighted average shares outstanding:

      

Basic

   44,735,146   43,449,441   42,250,254   34,774,163   30,351,353 

Diluted

   44,735,146   43,449,441   42,250,254   36,686,723   30,351,353 

   December 31, 
   2017   2016  2015  2014  2013 

Balance Sheet Data

        

Cash and cash equivalents

  $33,627    $40,426  $50,843  $60,901  $64,764 

Marketable securities

   109,786     100,914   92,337   68,921   65,586 

Working capital

   99,494     123,855   115,230   133,944   102,763 

Total assets

   205,425     210,374   213,050   171,704   143,349 

Total liabilities

   74,038     79,044   80,023   10,887   99,225 

Accumulated deficit

   (361,426)     (345,859)   (327,849)   (287,984)   (308,170) 

Total stockholders’ equity

   131,387     131,330   133,027   160,817   44,124 

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

Contents

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 onForm 10-K.10-K (Annual Report). This discussion and analysis generally addresses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report onForm 10-KAnnual Report 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 reportPart I, Item 1A, Risk Factors, and elsewhere in this annual report on Form10-K.

Annual Report.

Overview

Vanda Pharmaceuticals Inc. (we, our or Vanda) is a leading global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients.
We commenced operationsstrive to advance novel approaches to bring important new medicines to market through responsible innovation. We are committed to the use of technologies that support sound science, including genetics and genomics, in 2003drug discovery, clinical trials and the commercial positioning of our productproducts.
Our commercial portfolio includes:

•HETLIOZ® (tasimelteon), a product for the treatment ofNon-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 ofNon-24 in totally blind adults. HETLIOZ® was commercially launched in Germany in August 2016. HETLIOZ® has potential utility in a number of other circadian rhythm disorders and is presently in clinical development for the treatment of PediatricNon-24, Jet Lag Disorder and Smith-Magenis Syndrome (SMS).

•Fanapt® (iloperidone), a product for the treatment of schizophrenia, the oral formulation of which was approved by the FDA in May 2009 and launched commercially in the U.S. by Novartis Pharma AG (Novartis) in January of 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt® franchise to us on December 31, 2014. Additionally, our distribution partners launched Fanapt® in Israel and Mexico in 2014. Fanapt® has potential utility in a number of other disorders. An assessment of new Fanapt® clinical opportunities is ongoing.

Tradipitant(VLY-686), a small moleculeneurokinin-1 receptor(NK-1R) antagonist, which is presently in clinical developmentcurrently comprised of two products, HETLIOZ® for the treatment of chronic pruritusNon-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the U.S. Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, we have a number of drugs in development, including:
•HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, insomnia, delayed sleep phase disorder (DSPD), sleep disturbances in autism spectrum disorder (ASD) and pediatric Non-24;
•Fanapt® (iloperidone) for the treatment of bipolar I disorder and Parkinson’s disease psychosis and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
•Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis, and the treatment of gastroparesis.COVID-19 pneumonia;

•VTR-297, (formerly Trichostatin A), a small molecule histone deacetylase (HDAC) inhibitor.

VQW-765 (formerlyAQW-051),inhibitor for the treatment of hematologic malignancies and with potential use as a Phase IIalpha-7 nicotinic acetylcholine receptor partial agonist.treatment for several oncology indications;

•Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors.inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and VPO-227 for the treatment of secretory diarrhea disorders, including cholera;

•VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, for the treatment of performance anxiety and psychiatric disorders;
•VHX-896, the active metabolite of iloperidone; and
•Antisense oligonucleotide (ASO) molecules.
Operational Highlights

HETLIOZ®
•We are continuing to pursue regulatory approvals for HETLIOZ® in the indications of insomnia and jet lag disorder.
•In December 2022, the U.S. District Court for the District of Delaware delivered its decision for the consolidated HETLIOZ® patent lawsuit against defendants Teva Pharmaceuticals USA, Inc. (Teva) and Apotex Inc. and Apotex Corp. (Apotex), ruling in favor of the defendants. We filed an appeal to the U.S. Court of Appeals for the Federal Circuit where an oral argument is scheduled for March 14, 2023. Despite the pending appeal, Teva has launched at risk its generic version of HETLIOZ® in the U.S.
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•In December 2022, we filed patent infringement lawsuits against each of Teva and Apotex in the U.S. District Court for the District of New Jersey asserting that Teva and Apotex’s generic versions of HETLIOZ® infringe U.S. Patent No. 11,285,129.
Tradipitant

A•We are continuing to conduct an open-label safety study for tradipitant in gastroparesis and approximately the first 400 patients enrolled in the study were locked in preparation for the Company’s planned New Drug Application (NDA) submission. The study continues to enroll open label patients and we continue to receive requests from patients seeking access to tradipitant through the Expanded Access program, which has multiple patients who have taken tradipitant for atopic dermatitis Phase III clinical study is expectedmore than one year.
•We are preparing for the submission of an NDA for tradipitant for patients with gastroparesis. We expect to beginsubmit this NDA to the FDA in the first half of 2018.2023.

A•The Phase III study of tradipitant clinical study forin the treatment of gastroparesismotion sickness is ongoing.over 75% enrolled. Results are expected by the end of 2018.mid-2023.

HETLIOZ

Fanapt®

•HETLIOZ® studies for the treatment of jet lag disorder (2102 and 3107) have each completed enrollment. Results from the jet lag disorder clinical program are expected in the first quarter of 2018.

•Enrollment in a pharmacokinetic study of the HETLIOZ® pediatric liquid formulation was completed in the fourth quarter of 2017.

Enrollment•In December 2022, we announced positive results in the SMSPhase III clinical study is ongoing. Results are expected by the end of 2018.

VTR-297 (histone deactetylase (HDAC) inhibitor)

A VTR-297 PhaseFanapt® in acute manic and mixed episodes associated with bipolar I study (1101)disorder in patients with hematologic malignancies is expectedadults. We plan to startsubmit a supplemental New Drug Application (sNDA) in the secondfirst half of 2018.2023.

Cash, cash equivalents and marketable securities (Cash) were $143.4 million as

Early-Stage Programs
•In December 2022, we announced results in a Phase II clinical study of December 31, 2017, representingVQW-765 in the treatment of acute performance anxiety in social situations. This is the first time that an increase to Cashalpha 7 nicotinic acetylcholine receptor (α7-nAChR) partial agonist has shown efficacy in a clinical study of $2.1 million during 2017.

performance anxiety.

Since we began operations, in March 2003, we have devoted substantially all of our resources to thein-licensing, clinical development and commercialization of our products. Our ability to generate meaningful product sales and achieve profitability largely depends on our 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 fromyear-to-year andquarter-to-quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks whichthat are detailed inRisk Factors reported in Item 1A of Part I of this annual report on Form10-K.

As described in Part I, Item 3,Legal Proceedings,1A, Risk Factors, of this annual report on Form10-K, we have initiated lawsuits to enforce our patent rights against certain generic pharmaceutical companies.

Annual Report.

Critical Accounting Policies

and Estimates

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, 20172022 included in this annual report on Form10-K.Annual Report. However, we believe that the following accounting policies are important to understanding and evaluating our reported financial results as they involve the most significant judgments and estimates used in the preparation of our consolidated financial statements, and we have accordingly included them in this discussion.

Inventory. Inventory, which is recorded at the lower of cost or net realizable value, includes the cost of third-party manufacturing and other direct and indirect costs and is valued using thefirst-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 not expected to be sold within 12 months following the balance sheet date are classified asnon-current.

Net Product Sales. Our

Revenue from net product sales consist of sales of HETLIOZ® and sales of Fanapt®. We applyaccount for a contract when it has approval and commitment from both parties, the revenue recognition guidance in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC)Subtopic 605-15,Revenue Recognition—Products.rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue fromwhen control of the product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passedtransferred to the customer in an amount that reflects the priceconsideration we expect to be entitled to in exchange for those product sales, which is fixed or determinable, collectability is reasonably assured and we have no further performance obligations.

typically once the product physically arrives at the customer.

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HETLIOZ® is available in the U.S. for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. 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. Outside the U.S., we commercially launchedsell HETLIOZ® in Germany in August 2016. Weand have also entered into a distribution agreement with Megapharm Ltd. for the commercialization of Fanapt® in Israel.

Product Sales Discounts Receivables are carried at transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and Allowances. Productincorporating current conditions and forward-looking estimates.

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 product revenue allowances for which reserves are established and include discounts, rebates, chargebacks, service fees,co-pay assistance and product returns estimates that are applicable for various government and commercial payors. Where appropriate, our estimates of variable consideration included in the transaction price consider a range of possible outcomes. Allowances 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. 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. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts. If actual results in the future vary from our estimates, we adjust our estimate in the period identified, which would affect net product sales in the period such variances become known.
Reserves established for variable consideration are classified as product revenue allowances on the Consolidated Balance Sheets, with the exception of prompt-pay discounts and returnswhich are classified as reductions of accounts receivable ifreceivable. The reserve for product returns for which the amountproduct may not be returned for a period of greater than one year from the balance sheet date is payableincluded 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 feesMedicaid rebates, which are classified as a liability. Reserves established fordependent upon the timing of when states submit reimbursement claims, Medicare inflationary rebates, chargebacks orco-pay assistanceand product returns that are classified as a liability ifresolved 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.

•Rebates: Allowances for rebates include mandated and supplemental discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors.payors, including the new Medicare Part D inflationary rebate effective October 1, 2022. 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 expectedestimated 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 institutionsnon-profit clinics, and Federalfederal 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.

•Medicare Part D Coverage Gap:coverage gap: The Medicare Part D prescription drug benefit mandatesrequires manufacturers to fund approximately 50%70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients.patients for applicable drugs. We account 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 whichwhen we have validated the insurance benefits. Funding of the coverage gap is generally invoiced
•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 incurreddistribution services from certain customers, for the current quarter’s activity, plus an accrual balance for known prior quarter activity. If actual future funding varies from estimates,which we may need to adjust accruals, which would affect net sales in the period of adjustment.

Service Fees: We incur specialty pharmacy fees and wholesaler fees for services and their data.are assessed fees. 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 benefitis a payment for a distinct good or service from the consideration and it can reasonably estimatecustomer in which case the fair value of the benefit received. In which case, service feesthose distinct goods or services are recorded as selling, general and administrative expense.

•Co-payment Assistance: assistance:Patients who have commercial insurance and meet certain eligibility requirements may receiveco-payment assistance.Co-pay assistance utilization is based on information provided by our third-party administrator. The allowance forco-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.

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•Product Returns: Consistent with industry practice, wereturns: We generally offer direct customers a limited right to return as contractually defined withinwith our returns policy.customers. We consider several factors in the estimation process, including historical return activity, expiration dates of product shipped to specialty pharmacies,customers, inventory levels within the distribution channel, product shelf life, historical return activity, including activity for product sold for which the return period has past, 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, 2022 or 2021.

The following table summarizes sales discounts and allowance activity as of and for the years ended December 31, 2017, 20162022, 2021 and 2015:

       Discounts,     
   Rebates &   Returns
and Other		     
(in thousands)  Chargebacks     Total 

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 

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) 
  

 

 

   

 

 

   

 

 

 

Balance 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) 
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

  $20,229   $7,357   $27,586 
  

 

 

   

 

 

   

 

 

 

2020:

(in thousands)Rebates &
Chargebacks		Discounts,
Returns
and Other		Total
Balances at December 31, 201922,392 10,151 32,543 
Provision related to current period sales70,563 27,952 98,515 
Adjustments for prior period sales(480)1,327 847 
Credits/payments made(65,605)(30,557)(96,162)
Balances at December 31, 202026,870 8,873 35,743 
Provision related to current period sales83,965 31,176 115,141 
Adjustments for prior period sales(853)193 (660)
Credits/payments made(78,128)(30,641)(108,769)
Balances at December 31, 202131,854 9,601 41,455 
Provision related to current period sales92,109 30,636 122,745 
Adjustments for prior period sales(2,647)1,396 (1,251)
Credits/payments made(83,857)(31,609)(115,466)
Balances at December 31, 2022$37,459 $10,024 $47,483 
The provision for rebates and chargebacks of $53.4$92.1 million and $56.1$84.0 million for the years ended December 31, 20172022 and 2016,2021, respectively, and their ending balances at December 31, 2022 and 2021, primarily representsrepresent Medicaid rebates and contracted rebate programs applicable to sales of Fanapt® and, to a lesser extent, Medicaid rebates applicable to sales of HETLIOZ®. The provision for discounts, returns and other of $23.8$30.6 million and $19.5$31.2 million for the years ended December 31, 20172022 and 2016, respectively, primarily2021, represents wholesaler distribution fees applicable to sales of Fanapt® and to a lesser extent,estimated product returns of Fanapt® in the normal course of business, as well as, and co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ® and Fanapt®.

The ending balances of discounts, returns and other as of December 31, 2022 and 2021 primarily represent estimated product returns of Fanapt® and wholesaler distribution fees applicable to sales of Fanapt®.

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 notnever paid cash 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. As stock-based compensation expense recognized in the consolidated statementsConsolidated Statements of operationsOperations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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 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
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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-estimatesover-estimate 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

Intangible assets and administrative expenses.Selling, general and administrative expenses consist primarilyimpairment 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, and other business activities. Additionally, selling, general and administrative expenses included our estimate for the annual Patient Protection and Affordable Care fee.

Intangible Assets.long-lived assets.Our intangible assets consist of capitalized license costs for products approved by the FDA. We amortize our intangible assets on a straight-line basis over the 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 consider important whichthat 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 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 intangible assets may not be recoverable based upon the existence of one or more of the indicators of impairment, we measure any impairment based on the amount that carrying value exceeds fair value. No impairments

We filed several Hatch-Waxman lawsuits in the U.S. District Court for the District of Delaware (Delaware District Court) against Teva Pharmaceuticals USA, Inc. (Teva), Apotex Inc. (Apotex), MSN Pharmaceuticals, Inc. and MSN Laboratories Private Limited (MSN) (collectively, the HETLIOZ® Defendants) asserting infringement of patents covering HETLIOZ® 20 mg capsules. In January 2022, we entered into a license agreement with MSN and Impax Laboratories LLC resolving the lawsuits against MSN. The consolidated lawsuits against the remaining HETLIOZ® Defendants were tried in March 2022. In December 2022, the Delaware District Court ruled that Teva and Apotex did not infringe U.S. Patent No. RE46,604, and that the asserted claims of U.S. Patent Nos. RE46,604; 9,730,910; 10,149,829; and 10,376,487 were invalid. We have been recognized onappealed the decision to the U.S. Court of Appeals for the Federal Circuit. We have also filed Hatch-Waxman lawsuits in U.S. District Court for the District of New Jersey against each of Teva and Apotex and in the U.S. District Court for the Southern District of Florida against Apotex, in each case, asserting infringement of a method of administration patent that was not litigated in the Delaware District Court. This litigation does not affect the sale of HETLIOZ® in the E.U. and there is no generic litigation pending outside of the U.S. with respect to HETLIOZ®. Furthermore, the litigation does not relate to the HETLIOZ LQ® oral suspension formulation. The unfavorable ruling by the Delaware District Court and subsequent developments related to the HETLIOZ® patent litigation was determined to be a triggering event for potential impairment. As a result, we performed an impairment review for our HETLIOZ® asset group and determined, based upon our review of undiscounted cash flows, that the carrying value of our HETLIOZ® asset group, inclusive of the intangible assets.

asset, is recoverable. Accordingly, we did not record an intangible asset impairment charge during the year ended December 31, 2022. Additionally, our expected cash flows continue to support our estimated useful economic life of the intangible asset through March 2035.

Income taxes. On We assess the need for a periodic basis, we evaluate the realizability ofvaluation allowance against our deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets and liabilities and will adjust such amounts in light of changing facts and circumstances, including but not limited to future projections of taxable income, the reversal of deferredare reduced by a 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 taxesvaluation allowance when, in the yearopinion of resolution.

In assessing the realizability of deferred tax assets, we consider whethermanagement, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assetsanalysis is highly dependent upon the generation of futurehistorical and projected taxable income. Projected taxable income duringincludes significant assumptions related to revenue, commercial expenses and research and development activities, which could be affected by the period in which those temporary differences becomes deductible orresolution of our HETLIOZ® patent litigation, amongst other factors. Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the net operating losses (NOLs) and credit carryforwards cantax position will be utilized. When consideringsustained on examination by the reversaltaxing authorities based on the technical merits of the valuation allowance, we considerposition. The tax benefit recognized in the level of past and future taxable income,financial statements for a particular tax position is based on the reversal of deferred tax liabilities, the utilization of the carryforwards and other factors. Revisionslargest benefit that is more likely than not to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

be realized upon settlement.

Recent Accounting Pronouncements

See Note 2,Summary of Significant Accounting Policies,to the consolidated financial statements included in Part II, Item 8 of this annual report on Form10-KAnnual Report for information on recent accounting pronouncements.

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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 continue 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. SinceIn December 2022, the Delaware District Court ruled in favor of the Defendants in our inception,patent litigation relating to the Defendants’ filing of Abbreviated New Drug Applications (ANDAs) for generic versions of HETLIOZ® in the U.S. We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal. Teva has since launched its generic version of HETLIOZ® at risk in the U.S. The FDA has approved the ANDAs for Apotex and MSN, and HETLIOZ® could face even more competition from generic companies in the U.S. in the near term in light of the patent litigation rulings against us. Sales of generic versions of HETLIOZ® could result in a significant reduction in the demand for HETLIOZ® and/or the price at which we can sell it, which would have incurred significant losses resulting in an accumulated deficita material and adverse impact on our revenues and results of $361.4 million asoperations. Unless and until our appeal is successful, we may reduce the amount we spend with the intention of December 31, 2017. Our total stockholders’ equity was $131.4 million as of December 31, 2017.

retaining the capability to ramp-up promptly if we win upon appeal.

Year ended December 31, 20172022 compared to year ended December 31, 2016

Revenues.2021

Revenues. Total revenues increaseddecreased by $19.1$14.3 million, or 13%5%, to $165.1$254.4 million for the year ended December 31, 20172022 compared to $146.0$268.7 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% 
  

 

 

   

 

 

   

 

 

   

2021. Revenues were as follows:

 Year Ended December 31,
(in thousands)20222021Net
Change		Percent
HETLIOZ® net product sales
$159,655 $173,536 $(13,881)(8)%
Fanapt® net product sales
94,727 95,146 (419)— %
Total net product sales$254,382 $268,682 $(14,300)(5)%
HETLIOZ® net product sales increaseddecreased by $18.3$13.9 million, or 26%8%, to $90.0$159.7 million for the year ended December 31, 20172022 compared to $71.7$173.5 million for the year ended December 31, 2016.2021. The increasedecrease to net product sales was attributable to a decrease in volume partially offset by an increase in volume and, to a lesser extent, an increase to price net of deductions.

The decrease in volume was due in part to continued reimbursement challenges for prescriptions for patients with Non-24.

Fanapt® net product sales increaseddecreased by $0.8$0.4 million or 1%, to $75.1$94.7 million for the year ended December 31, 20172022 compared to $74.3$95.1 million for the year ended December 31, 2016.2021. The increasedecrease to net product sales was attributable to a decrease in volume partially offset by an increase in price net of deductions and partially offset by a decrease in volume.

deductions.

Cost of goods sold. Cost of goods sold was $17.8decreased by $1.3 million, or 5%, to $24.3 million for the year ended December 31, 20172022 compared to $24.7$25.6 million for the year ended December 31, 2016.2021. Cost of goods sold includes third partythird-party manufacturing costs of product sold, third partythird-party royalty costs and distribution and other costs. Third party royalty costs are 10% of net sales of HETLIOZ®. Third partyThird-party royalty costs were 23%5% of HETLIOZ®net U.S.product sales in Germany and 6% of Fanapt® through November 15, 2016 and 9% thereafter. The decrease was primarily the result of the change net product sales. Third-party royalty costs on HETLIOZ® net product sales in the royalty rate on Fanapt® sales partially offset by an increaseU.S. decreased from 10% to 5% 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 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 cost of goods sold will continue to be less than 4% of our net U.S. Fanapt® product sales.

December 2022.

Research and development expenses. Research and development expenses were $38.5increased by $10.4 million, and $29.2or 14%, to $85.8 million for the years ended December 31, 2017 and 2016, respectively. Expenses for tradipitant for the year ended December 31, 2017 include an accrued expense of $2.02022 compared to $75.4 million for a milestone obligation that is payable to Eli Lilly and Company (Lilly) upon enrollment of the first subject into a Phase III study for tradipitant. The likelihood of 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® Jet Lag Disorder program and the tradipitant gastroparesis program increased for the year ended December 31, 2017 compared2021. The increase was primarily due to year ended December 31, 2016. In addition, during the year ended December 31, 2017,an increase in clinical trial expenses associated with our Fanapt® development program and our other development programs, which include a $1.0$3.0 million initial licenseupfront fee to developexpensed in the third quarter of 2022 in consideration for entering into a research and commercialize a portfoliodevelopment agreement.
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Table of CFTR activators and inhibitors. These increases were partially offset by a decrease in indirect project costs reflecting lower stock-based compensation expense. Contents
The following table summarizes the costs of our product development initiatives for the yearyears ended December 31, 20172022 and 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)We record direct costs, including personnel costs and related benefits, on aproject-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 expense.

2021.

 Year Ended December 31,
(in thousands)20222021
Direct project costs (1)
HETLIOZ®
$12,084 $11,450 
Fanapt®
26,931 22,284 
Tradipitant25,232 23,460 
VTR-2971,814 1,928 
CFTR1,168 3,180 
VQW-7653,570 2,548 
Other7,230 3,067 
Total direct project costs78,029 67,917 
Indirect project costs (1)
Stock-based compensation3,964 3,955 
Other indirect overhead3,777 3,491 
Total indirect project costs7,741 7,446 
Total research and development expense$85,770 $75,363 
(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 increased by $24.0$12.4 million, or 24%10%, to $123.8$136.5 million for the year ended December 31, 20172022 compared with $99.8to $124.0 million for the year ended December 31, 2016.2021. The increase in selling, general and administrative expenses was primarily the result of the Fanapt® sales force expansion, marketing efforts around Fanapt® in the U.S. and HETLIOZ® in the U.S. and Europe and, to a lesser extent, an increase in stock-based compensation expense,spending on ongoing litigation and other corporate activities as well as costs related to our sales force, partially offset by a decrease in legal fees associated with ongoing patent litigation.

spending on marketing activities for our commercial products.

Intangible asset amortization.amortization. Intangible asset amortization was $1.8 million for the year ended December 31, 2017 compared to $10.9 million for the year ended December 31, 2016. Amortization of intangible assets relating to Fanapt® was completed in November 2016 and had amounted to $9.2 million for the year ended December 31, 2016. The useful life estimation for the Fanapt® intangible asset was based on the market participant methodology prescribed by ASC 805, and therefore does not reflect the impact of additional Fanapt® patents solely owned by us with varying expiration dates, the latest of which is December 2031. We expect that annual amortization of capitalized intangible asset costs relating to HETLIOZ® will amount to approximately $1.6 million in future years until the final expiration of the related product patents in 2034.

Provision for income taxes.The provision for income taxes was $0.1$1.5 million for each of the years ended December 31, 20172022 and 2016, respectively. The tax provision for each year is attributable to activities at our foreign subsidiaries and state2021.

Other income taxes. The tax benefit relating to the loss before. Other income taxes for the years ended December 31, 2017 and 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.

The effective tax rate for the year ended December 31, 2017 includes 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 allowance. Because of our valuation allowance in the U.S., ongoing tax effects of the TCJA are not expected to materially change our effective tax rate in future periods.

Year ended December 31, 2016 compared to year ended December 31, 2015

Revenues. Total revenues increased by $36.1 million, or 33%, to $146.0$5.0 million for the year ended December 31, 20162022 compared to $109.9$0.2 million for the year ended December 31, 2015. During the years ended December 31, 20162021. Other income primarily consists of investment income on our marketable securities, which increased in 2022 as a result of higher yields on our marketable securities.

Provision for income taxes. A provision for income taxes of $5.0 million and 2015, revenues consisted of the following:

   Year Ended December 31, 
(in thousands)  2016   2015   Net Change   Percent 

HETLIOZ® product sales, net

  $71,671   $44,302   $27,369    62% 

Fanapt® product sales, net

   74,346    65,623    8,723    13% 
  

 

 

   

 

 

   

 

 

   
  $146,017   $109,925   $36,092    33% 
  

 

 

   

 

 

   

 

 

   

HETLIOZ® product sales increased by $27.4$9.2 million or 62%, to $71.7 million for the year ended December 31, 2016 compared to $44.3 million for the year ended December 31, 2015. The increase to net product sales was attributable to an increase in volume and an increase to price net of deductions.

Fanapt® product sales increased by $8.7 million, or 13%, to $74.3 million for the year ended December 31, 2016 compared to $65.6 million for the year ended December 31, 2015. 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 $24.7 million for the year ended December 31, 2016, compared to $23.5 million for the year ended December 31, 2015. 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®. Third party royalty costs were 23% of net U.S. sales of Fanapt® through November 15, 2016 and 9% thereafter.

Research and development expenses. Research and development expenses were $29.2 and $29.1 millionrecorded for the years ended December 31, 20162022 and 2015,2021, respectively. Increased clinical trial expenses associated withOur income tax expense or benefit is determined by applying the HETLIOZ® Jet Lag Disorder and SMS programs and the tradipitant chronic pruritusstatutory tax rates in atopic dermatitis program that were incurredjurisdictions where we operate to each period’s income before income taxes. Adjustments are made for the year ended December 31, 2016 were offset by the close outpermanent differences in taxability or deductibility of Fanapt® clinical trial expenses transitioned to us as part of a settlement agreement with Novartis and regulatory expenses related to our supplemental New Drug Application (sNDA) filing incurred during the year ended December 31, 2015. The following table summarizes the costs of our product development initiatives for the year ended December 31, 2016 and 2015.

   Year Ended December 31, 
(in thousands)  2016   2015 

Direct project costs (1)

    

HETLIOZ®

  $12,658   $10,444 

Fanapt®

   2,598    8,501 

Tradipitant

   7,010    4,006 

VTR-297

   2,218    1,681 
  

 

 

   

 

 

 
   24,484    24,632 
  

 

 

   

 

 

 

Indirect project costs (1)

    

Stock-based compensation

   2,087    2,269 

Other indirect overhead

   2,585    2,244 
  

 

 

   

 

 

 
   4,672    4,513 
  

 

 

   

 

 

 

Total research & development expense

  $29,156   $29,145 
  

 

 

   

 

 

 

(1)We record direct costs, including personnel costs and related benefits, on aproject-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 expense.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $15.3 million, or 18%, to $99.8 million for the year ended December 31, 2016, compared with $84.5 million for the year ended December 31, 2015. The increase was primarily the result of marketing and sales efforts around Fanapt® in the U.S. and HETLIOZ® in Europe, an increase in the number of employees, including the hiring of new members of the executive management team at the end of 2015,pretax items as well as increased legal fees associated with ongoing patent litigation.

Intangible asset amortization. Intangible asset amortization decreased by $2.1 million, or 16 %, to $10.9 million for year ended December 31, 2016 compared to $13.0 million for the year ended December 31, 2015. The likelihood of achieving a future milestone obligationother items, such as tax credits 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. As a result, intangible asset amortization relating to HETLIOZ® for the year ended December 31, 2015 had included additional amortization of $1.2 million for acatch-up adjustment to retroactively record cumulative amortization from February 1 to December 31, 2014 relatingare generated on our research and development activities. See Note 14, Income Taxes, to the capitalized intangible assetconsolidated financial statements in Part II, Item 8 of $25.0 million.

Amortization of intangible assets relating to Fanapt® was completed in November 2016 and amounted to $9.2 millionthis Annual Report for the year ended December��31, 2016, compared to $10.1 million for the year ended December 31, 2015. Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to us on December 31, 2014 resulting in an increase in capitalized intangible assets of $15.9 million that has been amortized until November 2016. The useful life estimation for the Fanapt® intangible asset was based on the market participant methodology prescribed by ASC 805, and therefore does not reflect the impact of additional Fanapt® patents solely owned by us with varying expiration dates, the latest of which is December 2031.

Provision for income taxes.The provision for income taxes was $0.1 million and zero for the years ended December 31, 2016 and 2015, respectively. The tax provision for the year ended December 31, 2016 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, 2016 and 2015 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.

information.

Liquidity and Capital Resources

As of December 31, 2017,2022, our total cash and cash equivalents and marketable securities were $143.4$466.9 million compared to $141.3$432.8 million at December 31, 2016.2021. 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 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.

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Our liquidity resources as of December 31, 20172022 and December 31, 20162021 are summarized as follows:

   December 31,   December 31, 
(in thousands)  2017   2016 

Cash and cash equivalents

  $33,627   $40,426 

Marketable securities:

    

U.S. Treasury and government agencies

   60,618    50,647 

Corporate debt

   49,168    50,267 
  

 

 

   

 

 

 

Total marketable securities

   109,786    100,914 
  

 

 

   

 

 

 

Total cash, cash equivalents and marketable securities

  $143,413   $141,340 
  

 

 

   

 

 

 

(in thousands)December 31, 2022December 31, 2021
Cash and cash equivalents$135,029 $52,071 
Marketable securities:
U.S. Treasury and government agencies177,170 194,719 
Corporate debt154,660 186,023 
Total marketable securities331,830 380,742 
Total cash, cash equivalents and marketable securities$466,859 $432,813 
As of December 31, 2017,2022, we maintained all of our cash, and cash equivalents and marketable securities in threetwo 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.

In the normal course of our business, we regularly enter into agreements with third-party vendors under fee service arrangements which generally may be terminated on 90 days’ notice without incurring additional charges, other than charges for work completed or materials procured but not paid for through the effective date of termination and other costs incurred by our contractors in closing out work in progress as of the effective date of termination. Our non-cancellable purchase commitments for agreements longer than one year are not material. Various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase arrangements, are cancellable in nature or contain variable commitment terms within the agreement that are within our control.
We expectalso have long-term contractual obligations related to incur substantialour operating leases and license agreements. Refer to Note 7, Leases, and Note 10, Commitments and Contingencies, respectively, to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information about these commitments.
We do not have any off-balance sheet arrangements.
Based on our current operating plans, which include costs and expenses throughout 2018 and beyond in connection with our U.S. commercial activities for HETLIOZ® and Fanapt®, including Medicaid rebates, the European commercial launch activities for HETLIOZ®, a probable future milestone payment of $25.0 million to BMS in the first half of 2018 when we expect cumulative worldwide sales of HETLIOZ® to reach $250.0 million, a probable future milestone payment of $2.0 million to Lilly due upon enrollment of the first subject into a Phase III study for tradipitant, and the continued clinical development of tradipitant and our other products. Additionally, we continue to pursueproducts, U.S. commercial activities for HETLIOZ® and Fanapt®, pursuit of market approval of HETLIOZ® and Fanapt® in other regions. Becauseregions and in other indications, and payments due upon achievement of the uncertainties discussed above, the costs to advancemilestones under our research and development projects and the commercial activities for HETLIOZ® and Fanapt® are difficult to estimate and may vary significantly. Management believeslicense agreements, we believe that our existing fundscash, cash equivalents and marketable securities and cash received from product sales will be sufficient to meet our operating plans for at least the next twelve12 months. Our future capitalcash 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, the magnitude of our discovery, preclinical and clinical development 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

Flow

The following table summarizes our net cash flows from operating, investing and financing activities for the years ended December 31, 2017, 20162022 and 2015:

   Year Ended December 31, 
(in thousands)  2017   2016   2015 

Net cash provided by (used in):

      

Operating activities:

      

Net loss

  $(15,567)   $(18,010)   $(39,865) 

Non-cash charges

   13,610    21,015    22,675 

Net change in operating assets and liabilities

   (26)    (11,108)    29,639 
  

 

 

   

 

 

   

 

 

 

Operating activities

   (1,983)    (8,103)    12,449 
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Net purchases of marketable securities

   (8,567)    (8,618)    (24,071) 

Other

   (1,540)    (1,453)    (2,527) 
  

 

 

   

 

 

   

 

 

 

Investing activities

   (10,107)    (10,071)    (26,598) 
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Proceeds from exercise of employee stock options and other

   5,251    7,751    4,091 
  

 

 

   

 

 

   

 

 

 

Financing activities

   5,251    7,751    4,091 
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

   40    6    —   
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  $(6,799)   $(10,417)   $(10,058) 
  

 

 

   

 

 

   

 

 

 

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

Net cash used in2021:

 Year Ended December 31,
(in thousands)20222021Net Change
Net cash provided by (used in):
Operating activities:
Net income$6,275 $33,152 $(26,877)
Non-cash charges19,635 28,325 (8,690)
Net change in operating assets and liabilities6,074 2,737 3,337 
Operating activities31,984 64,214 (32,230)
Investing activities:
Purchases of property and equipment(679)(552)(127)
Net purchases, sales and maturities of marketable securities50,604 (76,144)126,748 
Investing activities49,925 (76,696)126,621 
Financing activities:
Proceeds from the exercise of stock options734 3,550 (2,816)
Financing activities734 3,550 (2,816)
Effect of exchange rate changes on cash, cash equivalents and restricted cash265 (91)356 
Net change in cash, cash equivalents and restricted cash$82,908 $(9,023)$91,931 
Operating Activities. Cash flows provided by operating activities was $2.0 million forduring the year ended December 31, 2017,2022 were $32.0 million, a decrease of $6.1$32.2 million compared with net cash used of $8.1to $64.2 million forduring the year ended December 31, 2016.2021. The decrease reflects a decrease of $2.4$26.9 million in the net lossincome and a decrease of $11.1$8.7 million in non-cash charges primarily due to a decrease in the change in deferred tax assets and additional amortization of discounts on our marketable securities, partially offset by an increase of $3.3 million from the net change in operating assets and liabilities, partially offsetliabilities.
Investing Activities. Cash flows provided by a decrease of $7.4 millionin non-cash charges resulting primarily from completion of the amortization of intangible assets related to Fanapt® in November 2016. The decrease of $11.1 million from the net change in operating assets and liabilities primarily relates to a reduction in accrued government and other rebates, a decrease in accounts receivable attributable to the timing of shipments and payments, and a decrease in prepaid expenses and other associated with a decrease in prepaid marketing expenses and prepaid royalties.

Year ended December 31, 2016 compared to year ended December 31, 2015

Net cash used in operatinginvesting activities was $8.1 million forduring the year ended December 31, 2016, a decrease2022 were $49.9 million, an increase of $20.6$126.6 million compared with netto cash providedused in investing activities of $12.4$76.7 million forduring the year ended December 31, 2015.2021. The decrease reflects a net reduction of $40.7 million from the net change in operating assetsinvesting activities reflects the timing of net reinvestment of available cash and liabilities, includingcash equivalents in our portfolio of marketable securities.

Financing Activities. Cash flows provided by financing activities during the year ended December 31, 2022 were $0.7 million, a decrease in accrued government and other rebates of $36.5$2.8 million primarily from sales allowances relatingcompared to our initial sales of Fanapt® in 2015 and a decrease in accounts payable and accrued liabilities of $8.9$3.6 million partly offset by a net decrease of $8.4 million in accounts receivable primarily relating to initial U.S. sales of Fanapt® in 2015. The effect ofduring the net changes in operating assets and liabilities was partially offset by a reduction in the net loss of $21.9 million.

Off-balance sheet arrangements

We have nooff-balance sheet arrangements, as defined in Item 303(a)(4) of the Securities and Exchange Commission’sRegulation S-K.

Contractual obligations and commitments

The following is a summary of ournon-cancellable long-term contractual cash obligations as ofyear ended December 31, 2017:

   Cash payments due by year (1) (2) 
(in thousands)  Total   2018   2019   2020   2021   2022   Thereafter 

Operating leases

  $19,789   $2,311   $2,295   $2,351   $2,174   $2,187   $8,471 

Milestone obligations (3) (4)

   27,000    27,000    —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $46,789   $29,311   $2,295   $2,351   $2,174   $2,187   $8,471 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)This table does not include various agreements that we have entered into for services with 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 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 where we could be obligated to make potential future milestone payments of up to $46.0 million for regulatory and sales milestones.
(3)This table includes a probable future $2.0 million milestone obligation under our license agreement with Lilly, for the exclusive rights to develop and commercialize tradipitant, which is due upon enrollment of the first subject into a Phase III study for tradipitant. This table does not include other potential future milestone obligations under the license agreement 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. and up to $95.0 million for future regulatory approval and sales milestones.
(4)This table includes a probable future milestone obligation under our license agreement with BMS, where we are obligated to make a milestone payment of $25.0 million when cumulative worldwide sales of HETLIOZ® reach $250.0 million, which is expected to occur in the first half of 2018. This obligation is accrued as a current liability in our consolidated balance sheet as of December 31, 2017.

Operating leases

Commitments relating to operating leases represent the minimum annual future payments under operating leases and subleases for a total2021. Financing activities include proceeds from exercises of 40,188 square feet of office space for our headquarters office at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. that expire in 2026, the operating lease for 2,880 square feet of office space for 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.

stock options.

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 whichthat are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S. dollars. Our marketable securities consist of commercial paper, corporate notes and U.S. government agency notes.

Revenuesnotes and accounts receivablehave maturities of less than two years. We do not believe that an increase in market rates would have any significant impact on the realized value of our cash equivalents and marketable securities.

We are concentrated with specialty pharmacies and wholesalers. There were six major customers that each accounted for more than 10% of total revenues and, as a group, represented 95% of total revenues for the year ended December 31, 2017. There were four major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 77% of total accounts receivable at December 31, 2017. We mitigate our credit risk relating to accounts receivable from customers by performing ongoing credit evaluations.

Foreign currency risk

We arealso 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

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had, nor do we believe that a decrease or increase in any foreign currency exchange rates would have, 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 in Part IV, Item 15 of Part IV of this annual report on Form10-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 inRules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934 (Exchange Act)) as of December 31, 2017.2022. 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, 2017,2022, the end of the period covered by this annual report on Form10-K, 10- K (Annual Report), 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 Rule13a-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, 2017,2022, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 20172022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this annual report on Form10-K.

Annual Report.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the fourth quarter of 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.OTHER INFORMATION

None.

ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III

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ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required under this item will be contained in our Proxy Statement for the 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017, under the captions “Election of Directors,” “Executive Officers,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance”2022 and is incorporated herein by reference pursuant to General Instruction G(3) to Form10-K.

reference.
ITEM 11.EXECUTIVE COMPENSATION

Information required under this item will be contained in our Proxy Statement for the 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017, under the captions “Corporate Governance” and “Executive Compensation,”2022 and is incorporated herein by reference, pursuant to General Instruction G(3) toForm 10-K, except that information required by Item 407(e)(5) of RegulationS-K will be deemed furnished in this Form10-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

Information required under this item will be contained in our Proxy Statement for the 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017,2022 and is incorporated herein by reference.
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 captions “Equity Compensation Plan Information” and “Security Ownership2023 Annual Meeting of Certain Beneficial Owners and Management”Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022 and is incorporated herein by reference pursuant to General Instruction G(3) to Form10-K.

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

Information required under this item will be contained in our Proxy Statement for the 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017, under the caption “Corporate Governance”2022 and is incorporated herein by reference pursuant to General Instruction G(3) to Form10-K.

reference.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this item will be contained in our Proxy Statement for the 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017, under the caption “Ratification of Selection of Independent Registered Public Accounting Firm”2022 and is incorporated herein by reference pursuant to General Instruction G (3) to Form10-K.

reference.

PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENTSSTATEMENT SCHEDULES

The consolidated financial statements filed as part of this annual report on Form10-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.

ITEM 16.Form 10-K Summary
None.
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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 Form10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Vanda Pharmaceuticals Inc.
February 15, 20189, 2023By:By:

/s/ Mihael H. Polymeropoulos, M.D.

Mihael H. Polymeropoulos, M.D.
President, and Chief Executive Officer and Chairman of the Board of Directors

Pursuant to the requirements of the Securities Act of 1934, this annual report on Form10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NameTitleDate

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 15, 2018

/s/ James P. Kelly

James P. Kelly

Executive Vice President, Chief Financial Officer and Treasurer (principal financialFebruary 15, 2018
officer and principal accounting officer)

/s/ H. Thomas Watkins

H. Thomas Watkins

Chairman of the Board and

Director

of Directors (Principal Executive Officer)		February 15, 20189, 2023
Mihael H. Polymeropoulos, M.D.

/s/ Kenneth M. Bate

Kenneth M. Bate

DirectorFebruary 15, 2018

/s/ Michael Cola

Michael Cola

DirectorFebruary 15, 2018

/s/ Richard W. Dugan

Richard W. Dugan

DirectorFebruary 15, 2018

/s/ Vincent J. Milano

Vincent J. Milano

DirectorFebruary 15, 2018

Vanda Pharmaceuticals Inc.

Index to Consolidated Financial Statements

/s/ Kevin MoranPageChief Financial Officer (Principal Financial Officer and Principal Accounting Officer)February 9, 2023

Kevin Moran

/s/ Richard W. DuganLead Independent DirectorFebruary 9, 2023
Richard W. Dugan
/s/ Anne Sempowski WardDirectorFebruary 9, 2023
Anne Sempowski Ward
/s/ Phaedra ChrousosDirectorFebruary 9, 2023
Phaedra Chrousos
/s/ Stephen Ray MitchellDirectorFebruary 9, 2023
Stephen Ray Mitchell
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Vanda Pharmaceuticals Inc.
Index to Consolidated Financial Statements
Page
61
77

62
79

63
80

64
81

65
82

66
83

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Report of Independent Registered Public Accounting Firm

TotheBoard


To the Board of Directors and Stockholders of Vanda Pharmaceuticals Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated financial statements, including the related notes,balance sheets of Vanda Pharmaceuticals Inc. and its subsidiaries (the “Company”) as listedof December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the accompanying indexperiod ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 20172022, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172022 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, 2017,2022, based on criteria established inInternal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The 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 the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(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 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 consolidated financial 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 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.

Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Medicaid Rebates for Fanapt®
As described in Note 2 to the consolidated financial statements, the allowances for rebates include mandated 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 estimated patient utilization. The Company has recorded product revenue allowances of $45.9 million as of December 31, 2022, of which a significant amount relates to allowances for Medicaid Rebates for Fanapt®.
The principal considerations for our determination that performing procedures relating to Medicaid Rebates for Fanapt® is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty involved in developing the allowances, as these allowances are based on assumptions developed for estimated patient utilization, primarily payor mix and invoice lag; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the estimated patient utilization assumption.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowances for Medicaid Rebates for Fanapt®, including controls over the assumptions used to estimate these rebates. These procedures also included, among others, (i) developing an independent estimate of the Medicaid Rebates for Fanapt® by utilizing third-party information related to patient utilization, as well as the historical trends of the invoice lag; and (ii) comparing the independent estimate to management’s estimate. Developing the independent estimate involved (i) testing the completeness and accuracy of the patient utilization data from third-party reports, and (ii) testing rebate claims processed by the Company, including evaluating those claims for consistency with the contractual and mandated terms of the Medicaid Drug Rebate Program.



/s/ PricewaterhouseCoopers LLP



Baltimore, MD

Maryland

February 15, 2018

9, 2023

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)  2017  2016 

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $33,627  $40,426 

Marketable securities

   109,786   100,914 

Accounts receivable, net

   17,601   20,268 

Inventory

   840   779 

Prepaid expenses and other current assets

   8,003   11,788 
  

 

 

  

 

 

 

Total current assets

   169,857   174,175 

Property and equipment, net

   5,306   5,015 

Intangible assets, net

   26,069   27,819 

Non-current inventory and other

   4,193   3,365 
  

 

 

  

 

 

 

Total assets

  $205,425  $210,374 
  

 

 

  

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current liabilities:

   

Accounts payable and accrued liabilities

  $20,335  $16,196 

Accrued government and other rebates

   23,028   34,124 

Milestone obligations under license agreements

   27,000   —   
  

 

 

  

 

 

 

Total current liabilities

   70,363   50,320 

Milestone obligations under license agreements

   —     25,000 

Othernon-current liabilities

   3,675   3,724 
  

 

 

  

 

 

 

Total liabilities

   74,038   79,044 
  

 

 

  

 

 

 

Commitments and contingencies (Notes 11 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; 44,938,133 and 44,000,614 shares issued and outstanding at December 31, 2017 and 2016, respectively

   45   44 

Additionalpaid-in capital

   492,802   477,087 

Accumulated other comprehensive income (loss)

   (34)   58 

Accumulated deficit

   (361,426)   (345,859) 
  

 

 

  

 

 

 

Total stockholders’ equity

   131,387   131,330 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $205,425  $210,374 
  

 

 

  

 

 

 

(in thousands, except for share and per share amounts)December 31, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$135,029 $52,071 
Marketable securities331,830 380,742 
Accounts receivable, net33,512 32,467 
Inventory1,194 1,025 
Prepaid expenses and other current assets17,727 11,996 
Total current assets519,292 478,301 
Property and equipment, net2,573 3,113 
Operating lease right-of-use assets8,400 9,272 
Intangible assets, net18,565 20,081 
Deferred tax assets74,039 74,878 
Non-current inventory and other11,378 8,147 
Total assets$634,247 $593,792 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities$45,551 $34,438 
Product revenue allowances45,885 39,981 
Total current liabilities91,436 74,419 
Operating lease non-current liabilities8,813 10,055 
Other non-current liabilities6,800 4,390 
Total liabilities107,049 88,864 
Commitments and contingencies (Notes 10 and 16)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000,000 shares authorized, and no shares issued or outstanding at December 31, 2022 and 2021, respectively— — 
Common stock, $0.001 par value; 150,000,000 shares authorized; 56,783,764 and 55,900,855 shares issued and outstanding at December 31, 2022 and 2021, respectively57 56 
Additional paid-in capital686,235 669,223 
Accumulated other comprehensive loss(1,193)(175)
Accumulated deficit(157,901)(164,176)
Total stockholders’ equity527,198 504,928 
Total liabilities and stockholders’ equity$634,247 $593,792 
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)  2017  2016  2015 

Revenues:

    

Net product sales

  $165,083  $146,017  $109,925 
  

 

 

  

 

 

  

 

 

 

Total revenues

   165,083   146,017   109,925 

Operating expenses:

    

Cost of goods sold, excluding amortization

   17,848   24,712   23,462 

Research and development

   38,547   29,156   29,145 

Selling, general and administrative

   123,841   99,787   84,531 

Intangible asset amortization

   1,750   10,933   12,972 
  

 

 

  

 

 

  

 

 

 

Total operating expenses

   181,986   164,588   150,110 
  

 

 

  

 

 

  

 

 

 

Loss from operations

   (16,903)   (18,571)   (40,185) 

Other income

   1,472   665   320 
  

 

 

  

 

 

  

 

 

 

Loss before income taxes

   (15,431)   (17,906)   (39,865) 

Provision for income taxes

   136   104   —   
  

 

 

  

 

 

  

 

 

 

Net loss

  $(15,567)  $(18,010)  $(39,865) 
  

 

 

  

 

 

  

 

 

 

Net loss per share:

    

Basic

  $(0.35)  $(0.41)  $(0.94) 
  

 

 

  

 

 

  

 

 

 

Diluted

  $(0.35)  $(0.41)  $(0.94) 
  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding:

    

Basic

   44,735,146   43,449,441   42,250,254 
  

 

 

  

 

 

  

 

 

 

Diluted

   44,735,146   43,449,441   42,250,254 
  

 

 

  

 

 

  

 

 

 

 Year Ended December 31,
(in thousands, except for share and per share amounts)202220212020
Revenues:
Net product sales$254,382 $268,682 $248,168 
Total revenues254,382 268,682 248,168 
Operating expenses:
Cost of goods sold excluding amortization24,282 25,629 23,364 
Research and development85,770 75,363 55,577 
Selling, general and administrative136,485 124,047 140,510 
Intangible asset amortization1,516 1,478 1,478 
Total operating expenses248,053 226,517 220,929 
Income from operations6,329 42,165 27,239 
Other income4,971 199 4,416 
Income before income taxes11,300 42,364 31,655 
Provision for income taxes5,025 9,212 8,318 
Net income$6,275 $33,152 $23,337 
Net income per share:
Basic$0.11 $0.60 $0.43 
Diluted$0.11 $0.58 $0.42 
Weighted average shares outstanding:
Basic56,461,877 55,548,122 54,427,683 
Diluted56,983,171 56,921,836 55,190,802 
The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

   Year Ended December 31, 
(in thousands)  2017  2016  2015 

Net loss

  $(15,567)  $(18,010)  $(39,865) 
  

 

 

  

 

 

  

 

 

 

Other comprehensive income:

    

Net foreign currency translation gain (loss)

   30   (1)   —   

Change in net unrealized gain (loss) on marketable securities

   (122)   20   23 

Tax provision on other comprehensive income

   —     —     —   
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss), net of tax

   (92)   19   23 
  

 

 

  

 

 

  

 

 

 

Comprehensive loss

  $(15,659)  $(17,991)  $(39,842) 
  

 

 

  

 

 

  

 

 

 

INCOME

 Year Ended December 31,
(in thousands)202220212020
Net income$6,275 $33,152 $23,337 
Other comprehensive income (loss):
Net foreign currency translation gain (loss)(39)(49)68 
Change in net unrealized gain (loss) on marketable securities(1,271)(472)(102)
Tax benefit on other comprehensive income (loss)292 107 24 
Other comprehensive loss, net of tax(1,018)(414)(10)
Comprehensive income$5,257 $32,738 $23,327 
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

          Additional  Other       
   Common Stock   Paid-in  Comprehensive  Accumulated    
(in thousands, except for share amounts)  Shares  Par Value   Capital  Income (Loss)  Deficit  Total 

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 

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 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

 Common StockAdditional
 Paid-in Capital		Accumulated Other
 Comprehensive
 Income (Loss)		Accumulated
 Deficit		Total
(in thousands, except for share amounts)SharesPar Value
Balances at December 31, 201953,549,612 $54 $631,307 $249 $(220,665)$410,945 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units1,315,480 1 5,633 — — 5,634 
Stock-based compensation expense— — 13,360 — — 13,360 
Net income— — — — 23,337 23,337 
Other comprehensive loss, net of tax— — — (10)— (10)
Balances at December 31, 202054,865,092 55 650,300 239 (197,328)453,266 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units1,035,763 1 3,549 — — 3,550 
Stock-based compensation expense— — 15,374 — — 15,374 
Net income— — — — 33,152 33,152 
Other comprehensive loss, net of tax— — — (414)— (414)
Balances at December 31, 202155,900,855 56 669,223 (175)(164,176)504,928 
Issuance of common stock from the exercise of stock options and settlement of restricted stock units882,909 1 733 — — 734 
Stock-based compensation expense— — 16,279 — — 16,279 
Net income— — — — 6,275 6,275 
Other comprehensive loss, net of tax— — — (1,018)— (1,018)
Balances at December 31, 202256,783,764 $57 $686,235 $(1,193)$(157,901)$527,198 
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)  2017  2016  2015 

Cash flows from operating activities

    

Net loss

  $(15,567)  $(18,010)  $(39,865) 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation of property and equipment

   1,234   935   582 

Stock-based compensation

   10,465   8,543   7,961 

Amortization of (discounts) premiums on marketable securities

   (426)   62   677 

Intangible asset amortization

   1,750   10,933   12,972 

Othernon-cash adjustments, net

   587   542   483 

Changes in operating assets and liabilities:

    

Accounts receivable

   2,525   (4,298)   (12,677) 

Prepaid expenses and other assets

   3,652   (6,159)   (2,558) 

Inventory

   (1,060)   200   387 

Accounts payable and other liabilities

   5,953   575   9,432 

Accrued government and other rebates

   (11,096)   (1,426)   35,055 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

   (1,983)   (8,103)   12,449 
  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities

    

Purchases of property and equipment

   (1,664)   (1,407)   (2,527) 

Purchases of marketable securities

   (148,135)   (165,405)   (193,111) 

Proceeds from sale of marketable securities

   —     —     999 

Maturities of marketable securities

   139,568   156,787   168,041 

Other investing activities

   124   (46)   —   
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (10,107)   (10,071)   (26,598) 
  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

    

Proceeds from exercise of employee stock options

   5,251   7,751   4,374 

Tax obligations paid in connection with settlement of restricted stock units

   —     —     (283) 
  

 

 

  

 

 

  

 

 

 

Net cash provided by financing activities

   5,251   7,751   4,091 
  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash and cash equivalents

   40   6   —   
  

 

 

  

 

 

  

 

 

 

Net decrease in cash and cash equivalents

   (6,799)   (10,417)   (10,058) 

Cash and cash equivalents

    

Beginning of year

   40,426   50,843   60,901 
  

 

 

  

 

 

  

 

 

 

End of year

  $33,627  $40,426  $50,843 
  

 

 

  

 

 

  

 

 

 

 Year Ended December 31,
(in thousands)202220212020
Cash flows from operating activities
Net income$6,275 $33,152 $23,337 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment1,217 1,363 1,386 
Stock-based compensation16,279 15,374 13,360 
Amortization of premiums and accretion of discounts on marketable securities(2,963)1,649 179 
Gains on sales of marketable securities— (12)(229)
Intangible asset amortization1,516 1,478 1,478 
Deferred income taxes1,130 6,745 6,189 
Other non-cash adjustments, net2,456 1,728 1,758 
Changes in operating assets and liabilities:
Accounts receivable(1,089)(2,469)(3,767)
Prepaid expenses and other assets(6,136)(1,247)4,068 
Inventory(4,479)(2,233)(2,876)
Accounts payable and other liabilities11,793 3,040 3,759 
Product revenue allowances5,985 5,646 3,133 
Net cash provided by operating activities31,984 64,214 51,775 
Cash flows from investing activities
Purchases of property and equipment(679)(552)(1,795)
Purchases of marketable securities(349,258)(420,461)(346,622)
Sales and maturities of marketable securities399,862 344,317 306,918 
Net cash provided by (used in) investing activities49,925 (76,696)(41,499)
Cash flows from financing activities
Proceeds from exercise of stock options734 3,550 5,634 
Net cash provided by financing activities734 3,550 5,634 
Effect of exchange rate changes on cash, cash equivalents and restricted cash265 (91)53 
Net change in cash, cash equivalents and restricted cash82,908 (9,023)15,963 
Cash, cash equivalents and restricted cash
Beginning of year52,590 61,613 45,650 
End of year$135,498 $52,590 $61,613 
The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Organization and Presentation

Business organization

Organization

Vanda Pharmaceuticals Inc. (the Company) is a global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. The Company commenced its operations in 2003 and operates in one reporting segment.
The Company’s commercial portfolio includes the following products:

•HETLIOZ® (tasimelteon), a product for the treatment ofNon-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 ofNon-24 in totally blind adults. HETLIOZ® was commercially launched in Germany in August 2016. HETLIOZ® has potential utility in a number of other circadian rhythm disorders and is presently in clinical development for the treatment of PediatricNon-24, Jet Lag Disorder and Smith-Magenis Syndrome (SMS).

•Fanapt® (iloperidone), a product for the treatment of schizophrenia, the oral formulation of which was approved by the FDA in May 2009 and launched commercially in the U.S. by Novartis Pharma AG (Novartis) in January of 2010. Novartis transferred all the U.S. and Canadian commercial rights to the Fanapt® franchise to the Company on December 31, 2014. Additionally, the Company’s distribution partners launched Fanapt® in Israel and Mexico in 2014. Fanapt® has potential utility in a number of other disorders. An assessment of new Fanapt® clinical opportunities is ongoing.

Tradipitant(VLY-686), a small moleculeneurokinin-1 receptor(NK-1R) antagonist, which is presently in clinical developmentcurrently comprised of two products, HETLIOZ® for the treatment of chronic pruritusNon-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the United States Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, the Company has a number of drugs in development, including:
•HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, insomnia, delayed sleep phase disorder (DSPD), sleep disturbances in autism spectrum disorder (ASD) and pediatric Non-24;
•Fanapt® (iloperidone) for the treatment of bipolar I disorder and Parkinson’s disease psychosis and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
•Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis, and the treatment of gastroparesis.COVID-19 pneumonia;

•VTR-297, (formerly Trichostatin A), a small molecule histone deacetylase (HDAC) inhibitor.

VQW-765 (formerlyAQW-051),inhibitor for the treatment of hematologic malignancies and with potential use as a Phase IIalpha-7 nicotinic acetylcholine receptor partial agonist.treatment for several oncology indications;

•Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors.inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and VPO-227 for the treatment of secretory diarrhea disorders, including cholera;

•VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, for the treatment of performance anxiety and psychiatric disorders;
•VHX-896, the active metabolite of iloperidone; and
•Antisense oligonucleotide (ASO) molecules.
Basis of presentation

Presentation

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

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

Cash, and Cash Equivalents

and Restricted Cash

For purposes of the consolidated balance sheetsConsolidated Balance Sheets and consolidated statementsConsolidated Statements of cash flows,Cash Flows, cash equivalents represent highly-liquid investments with a maturity date of three months or less at the date of purchase. Cash and cash equivalents includesinclude investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Restricted cash of $0.7 million and $0.8 million relatingrelates primarily to amounts held as collateral for letters of credit for leases for office space is included in other currentat the Company’s Washington, D.C. headquarters. 
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The following table provides a reconciliation of cash, cash equivalents and othernon-current assets at December 31, 2017restricted cash reported within the Consolidated Balance Sheets to the total end of period cash, cash equivalents and 2016.

restricted cash reported within the Consolidated Statements of Cash Flows:

December 31,
(in thousands)20222021
Cash and cash equivalents$135,029 $52,071 
Restricted cash included in non-current inventory and other469 519 
Total cash, cash equivalents and restricted cash$135,498 $52,590 
Marketable Securities

The Company classifies all of its marketable securities asavailable-for-sale securities. The Company’s investment policy requires the selection of high-quality issuers, with bond ratings of AAA to A1+/P1.issuers. 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 assessesavailable-for-sale securities in an unrealized loss position to determine whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. The Company also reviews its available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary.the result of a change in creditworthiness or other factors. If declines in the value ofavailable-for-sale available for-sale securities are determined to be other-than-temporary,credit-related, a loss is recorded in earnings in the current period. Interest and dividend income is recorded when earned and included in interestother income. Premiums and discounts on marketable securities are amortized and accreted, respectively, to earliest call date and maturity, respectively, and included in interestother 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 statementsConsolidated Statements of operationsOperations 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 asnon-current.All otheravailable-for-sale marketable securities are available for use in current operations and are classified as current.

Inventory

Inventory, which is recorded at the lower of cost or net realizable value, includes the cost of third-party manufacturing and other direct and indirect costs and is valued using thefirst-in,first-out method. 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. 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 not expected tolevels 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 12 months followingmonths. The Company classifies the balance sheet date are classifiedestimate of such inventory asnon-current.

Intangible Assets

Costs incurred for products not yet approved by the FDA and for which no alternative future use exists are recorded as research and development 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 estimated useful economic life of the of the related product patents. For intangible assets related to HETLIOZ®, the estimated useful life is based onthrough March 2035, which is the U.S. methodestimated economic useful life of use patent that expires in May 2034.the related product patents. 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 market participant methodology prescribed by ASCAccounting Standards Codification (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.

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. Leasehold improvements are amortized using a straight-line basis over the lesser of the estimated useful lives of the assets or the 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.
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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 statementConsolidated Statement of operationsOperations for that period.

Leases
The Company determines if an arrangement contains a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from that lease. For leases with a term greater than 12 months, ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes the option to extend the lease when it is reasonably certain the Company will exercise that option. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. In the case the implicit rate is not available, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including publicly available data for instruments with similar characteristics, to determine the present value of lease payments. The Company does not combine lease and non-lease elements for office leases. For existing office leases as of the adoption date of ASC 842, Leases, on January 1, 2019, executory costs are excluded from lease expense, which is consistent with the Company’s accounting under ASC 840, Leases. For all office leases entered into after January 1, 2019, executory costs are allocated between lease and non-lease elements based upon their relative stand-alone prices.
Impairment of Long-Lived Assets
The Company evaluates if events and circumstances have occurred that indicate the remaining estimated useful life of its long-lived assets, such as identifiable intangible assets, may warrant revision or that the remaining balance of these assets may not be recoverable. In evaluating for recoverability, the Company estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. In the event that the balance of any asset exceeds the future undiscounted or discounted cash flow estimate, impairment is recognized based on the excess of the carrying amounts of the asset above its estimated fair value. No impairment was recognized for the years ended December 31, 2022, 2021 and 2020.
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 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 research and development expenses, such as 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, 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

Revenue from Net Product Sales
The Company accounts for a contract when it has approval and commitment from both parties, the project managerrights of the workparties 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 has been completed duringreflects 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 thatconsideration the Company does not identify certain costs that have begunexpects to be incurred orentitled to in exchange for those product sales, which is typically once the Company under- or over-estimatesproduct physically arrives at 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.

Net Productcustomer. 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 Fanapt®. Net sales by product for the years ended December 31, 2017, 20162022, 2021 and 20152020 were as follows:

   Year Ended December 31, 
(in thousands)  2017   2016   2015 

HETLIOZ® product sales, net

  $89,978   $71,671   $44,302 

Fanapt® product sales, net

   75,105    74,346    65,623 
  

 

 

   

 

 

   

 

 

 
  $165,083   $146,017   $109,925 
  

 

 

   

 

 

   

 

 

 

The Company applies the revenue recognition guidance in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic605-15, Revenue Recognition—Products. The Company recognizes revenue from product sales when there

 Year Ended December 31,
(in thousands)
202220212020
HETLIOZ® net product sales
$159,655 $173,536 $160,686 
Fanapt® net product sales
94,727 95,146 87,482 
Total net product sales$254,382 $268,682 $248,168 
HETLIOZ® is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and the Company has no further performance obligations.

Major Customers

HETLIOZ® is only available in the U.S.United States (U.S.) for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Specialty pharmacy customers include Accredo (a subsidiary of Express Scripts) and

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OptumRx (a subsidiary of UnitedHealth Group). Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. Wholesaler customers include AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation. The Company invoices and records revenue when its 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. Outside the U.S., the Company sells HETLIOZ® in Germany and has a distribution agreement for the commercialization of Fanapt® in Israel. Receivables are carried at transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and incorporating current conditions and forward-looking estimates.  
The following table presents each major customer that represented more than 10% of total revenues for the years ended December 31, 2017, 20162022, 2021 and 2015:

   Year Ended December 31, 
Percent of Net Product Sales  2017  2016  2015 

Distributor A

   32%   23%   14% 

Distributor B

   15%   16%   18% 

Distributor C

   15%   16%   19% 

Distributor D

   12%   15%   17% 

Distributor E

   11%   16%   14% 

Distributor F

   10%   1%   0% 

Distributor G

   —     9%   12% 

2020:

 Year Ended December 31,
Percent of Net Product Sales202220212020
Distributor A36 %40 %43 %
Distributor B16 %18 %19 %
Distributor C13 %12 %12 %
Distributor D11 %10 %11 %
Distributor E11 %11 %10 %
The following table presents each major customer that represented more than 10% of accounts receivable, net, as of December 31, 20172022 and 2016:

   December 31, 
Percent of Accounts Receivable, Net  2017  2016 

Distributor A

   28%   22% 

Distributor B

   18%   19% 

Distributor C

   10%   15% 

Distributor D

   21%   25% 

Distributor E

   8%   11% 

Product Sales Discounts and Allowances

2021:

 December 31,
Percent of Accounts Receivable, Net20222021
Distributor A18 %31 %
Distributor B13 %*
Distributor C20 %17 %
Distributor D16 %16 %
Distributor E14 %14 %
*Represents less than 10% of respective balance.
The transaction price is determined based upon the consideration to which the Company will be entitled in exchange for transferring product to the customer. The Company’s product sales are recorded net of applicable product revenue allowances for which reserves are established and include discounts, rebates, chargebacks, service fees,co-pay assistance and product returns estimates that are applicable for various government and commercial payors. Where appropriate, the Company’s estimates of variable consideration included in the transaction price consider a range of possible outcomes. Allowances 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. 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. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. If actual results in the future vary from the Company’s estimates, it adjusts its estimates in the period identified, which would affect net product sales in the period such variances become known.
Reserves established for variable consideration are classified as product revenue allowances on the Consolidated Balance Sheets, with the exception of prompt-pay discounts and returnsthat are classified as reductions of accounts receivable ifreceivable. The reserve for product returns for which the amountproduct may not be returned for a period of greater than one year from the balance sheet date is payableincluded 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 feesMedicaid rebates, which are classified as a liability. Reserves established fordependent upon the timing of when states submit reimbursement claims, Medicare inflationary rebates, chargebacks orco-pay assistanceand product returns that are classified as a liability ifresolved 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:

•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.

87

•Rebates:Allowances for rebates include mandated and supplemental discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors.payors, including the new Medicare Part D inflationary rebate effective October 1, 2022. 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 expectedestimated 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.

•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 institutionsnon-profit clinics, and Federalfederal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy or wholesaler, in turn, charges back the difference between the price initially paid by the specialty pharmacy or wholesaler and the discounted price paid to the specialty pharmacy or wholesaler by the contracted customer. The allowance for chargebacks is based on historical activity and, where available, actual and pending prescriptions for which the Company has validated the insurance benefits.

•Medicare Part D Coverage Gap: The Medicare Part D prescription drug benefit mandatesrequires manufacturers to fund approximately 50%70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients.patients 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 whichwhen 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 incurs specialty pharmacyreceives sales order management, data and wholesaler feesdistribution services from certain customers, for services and their data.which it is assessed fees. 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 benefitis a payment for a distinct good or service from the consideration and it can reasonably estimatecustomer in which case the fair value of the benefit received. In which case, service feesthose 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 receiveco-payment assistance.Co-pay assistance utilization is based on information provided by the Company’s third-party administrator.
•Product Returns: The allowance forco-pay assistance is based on actual sales and an estimate for pending sales based on either historical activity or pending sales for which the Company has validated the insurance benefits.

Product Returns: Consistent with industry practice, the Company generally offers direct customers a limited right to return as contractually defined within the Company’s returns policy.with its customers. The Company considers several factors in the estimation process, including historical return activity, expiration dates of product shipped to specialty pharmacies,customers, inventory levels within the distribution channel, product shelf life, historical return activity, including activity for product sold for which the return period has past, prescription trends and other relevant factors. The Company does not expect returned goods to be resalable. There was no right of return asset as of December 31, 2022 or 2021. The following table summarizes activity for product returns as of and for the years ended December 31, 2017, 20162022, 2021 and 2015:

(in thousands)    

Balance at December 31, 2014

  $85 

Additions

   986 

Credits/payments

   (12) 
  

 

 

 

Balance at December 31, 2015

   1,059 

Additions

   2,507 

Credits/payments

   (486) 
  

 

 

 

Balance at December 31, 2016

   3,080 

Additions

   5,978 

Credits/payments

   (4,939) 
  

 

 

 

Balance at December 31, 2017

  $4,119 
  

 

 

 

2020, all of which relates to sales of Fanapt®:

(in thousands)Reserve for Product Returns
Balances at December 31, 2019$6,120 
Additions3,844 
Credits/payments(5,266)
Balances at December 31, 20204,698 
Additions2,870 
Credits/payments(3,017)
Balances at December 31, 20214,551 
Additions4,332 
Credits/payments(3,739)
Balances at December 31, 2022$5,144 
Cost of Goods Sold

Cost of goods sold includes royalties payable, the cost of inventory sold, costs to write down inventory to net realizable value, manufacturing and supply chain costs and product shipping and handling costs related to sales of HETLIOZ® and 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
88

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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of salaries, other employee-related costs and stock-based compensation, and facilities and third partythird-party expenses. Selling, general and administrative expenses are associated with the activities of the executive,corporate, 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 Act fee.

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 granted and restricted stock units (RSUs) awarded are amortized using the straight-line method. As stock-based compensation expense recognized in the consolidated statementsConsolidated Statements of operationsOperations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those 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 $1.3$2.6 million, $1.4$6.7 million and $3.4$12.6 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, 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 inter-companyintercompany balances for which settlement is anticipated in the foreseeable future, denominated in foreign currencies 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.

income (loss).

Transactions denominated in currencies other than subsidiaries’ functional currenciescurrency 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 sheetsConsolidated Balance Sheets related to these items will result in unrealized foreign currency transaction gains and losses based uponperiod-end exchange rates. The Company also records realized foreign currency transaction gains and losses upon settlement of the transactions. Foreign currency transaction gains and losses are included in other income and amounted to income of $0.1 million, a loss of $0.2 million, and zerowere not material for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.

Income Taxes

The Company accounts for 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. Tax rate changes are reflected in income during the period such changes are enacted. Changes in ownership may limit the amount of NOLnet operating loss (NOL) carryforwards that can be utilized in the future to offset taxable income.

Non-Cash Investing and Financing Activities

Purchases Tax benefits are recognized from an uncertain tax position only if it is

89

more likely than not that the position will be sustained on examination by the taxing authorities based on the technical merits of the years ended December 31, 2017, 2016position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. Interest and 2015, respectively. The acquisitionpenalties related to income taxes are recognized as a component of an intangible asset relating to HETLIOZ®income tax expense in the Consolidated Statements of Operations, and cumulative accrued innon-current liabilities amounted to $25.0 million forinterest and penalties are recognized within the year ended December 31, 2015.

related liability line items in the Consolidated Balance Sheets.

Certain Risks and 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-competitiverapidly changing, highly competitive markets, which are characterized by rapid technological advances, increasing generic competition, 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, challenges from new generic market entrants, changes in customer or regulatory 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.

Concentrations of 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-ratedhighly rated financial institutions. At December 31, 2017,2022, the Company maintained all of its cash, cash equivalents and marketable securities in threetwo 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.

Segment 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, 2017, 20162022, 2021 and 2015.

2020.

Recent Accounting Pronouncements

In November 2016, the FASB issued Accounting Standards Update (ASU)2016-18,Restricted Cash. The new standard requires

There are no recent accounting pronouncements that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. 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 will adopt this new standard in the first quarter of 2018. Under the new standard, the Company will reclassify its restricted cash amounts within the consolidated statements of cash flows and include footnote disclosures to be able to reconcile amounts per the consolidated balance sheets to the statement of cash flows.

In August 2016, the FASB issued ASU2016-15, 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 will adopt this new standard in the first quarter of 2018. Adoption of this new standard is notare expected to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU2016-13, Financial Instruments – Credit Losses,statements or 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 March 2016, the FASB issued ASU2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The ASU provides that all of the tax effects related to share-based payments are recorded as part of the provision for income taxes, allows entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction, allows entities to estimate the effect of forfeitures or recognized forfeitures when they occur, and other improvements to the accounting for share-based awards. The new standard was effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. The Company adopted this new standard in the first quarter of 2017. As a result of adoption of the new guidance, the Company recognized deferred tax assets related to the previously unrecognized tax benefits, fully reduced by a valuation allowance as it is more likely than not that such benefits will not be realized. The Company will recognize excess tax benefits arising from share-based payments in the Company’s provision for income taxes as opposed to additionalpaid-in capital on a prospective basis. Additionally, the Company elected to continue to estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each period rather than to account for them as they occur. The remaining updates required by this standard did not have a material impact to the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU2016-02, Leases. The new standard requires that lessees will need to recognize aright-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability subject to certain adjustments. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The new standard is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU2014-09, Revenue from Contracts with Customers. This new standard requires companies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. Under the new standard, revenue is recognized when a customer obtains control of a good or service. The standard allows for two transition methods—entities can either apply the new standard (i) retrospectively to each prior reporting period presented, or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. In July 2015, the FASB issued ASU2015-14, Revenue from Contracts with Customers, which defers the effective date by one year to December 15, 2017 for fiscal years, and interim periods within those fiscal years, beginning after that date. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. In March 2016, the FASB issued ASU2016-08 Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue versus Net), in April 2016, the FASB issued ASU2016-10, Revenue from Contracts with Customers, identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, which provide additional clarification on certain topics addressed in ASU2014-09. ASU2016-08, ASU2016-10, and ASU2016-12 follow the same implementation guidelines as ASU2014-09 and ASU2015-14. The analysis identifying areas that will be impacted by the new guidance as well as the impacts to the consolidated financial statements and related disclosures is substantially complete. As part of the analysis, the Company completed an analysis of existing contracts with its customers and assessed the differences in accounting for such contracts under this guidance compared with current revenue accounting standards. Based on its review of customer contracts, adoption of the new standard is not expected to have a material impact on the Company’s revenue from product sales. The Company will adopt the new standard on January 1, 2018 using the modified retrospective method.

disclosures.

3. Earnings per Share

Basic earnings per share (EPS) is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net loss by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.

The following table presents the calculation of basic and diluted net income (loss) per share of common stock for the years ended December 31, 2017, 2016, and 2015:

   Year Ended December 31, 
(in thousands, except for share and per share amounts)  2017   2016   2015 

Numerator:

      

Net loss

  $(15,567)   $(18,010)   $(39,865) 
  

 

 

   

 

 

   

 

 

 

Denominator:

      

Weighted average shares outstanding, basic and diluted

   44,735,146    43,449,441    42,250,254 
  

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted:

      

Basic

  $(0.35)   $(0.41)   $(0.94) 
  

 

 

   

 

 

   

 

 

 

Diluted

  $(0.35)   $(0.41)   $(0.94) 
  

 

 

   

 

 

   

 

 

 

Antidilutive securities excluded from calculations of diluted net income (loss) per share

   3,136,515    4,943,797    5,660,199 
  

 

 

   

 

 

   

 

 

 

The Company incurred a net loss for each of the years ended December 31, 2017, 2016 and 2015 causing inclusion of any potentially dilutive securities to have an anti-dilutive effect, resulting in dilutive loss per share and basic loss per share attributable to common stockholders being equivalent.

4. Marketable Securities

The following is a summary of the Company’savailable-for-sale marketable securities as of December 31, 2017,2022, which all of which have contractcontractual maturities of less than one year:

       Gross   Gross   Fair 
December 31, 2017  Amortized   Unrealized   Unrealized   Market 
(in thousands)  Cost   Gains   Losses   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 
  

 

 

   

 

 

   

 

 

   

 

 

 

two years:

(in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Market
Value
U.S. Treasury and government agencies$178,351 $— $(1,181)$177,170 
Corporate debt155,017 14 (371)154,660 
Total marketable securities$333,368 $14 $(1,552)$331,830 
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The following is a summary of the Company’savailable-for-sale marketable securities as of December 31, 2016:

       Gross   Gross   Fair 
December 31, 2016  Amortized   Unrealized   Unrealized   Market 
(in thousands)  Cost   Gains   Losses   Value 

U.S. Treasury and government agencies

  $50,661   $3   $(17)   $50,647 

Corporate debt

   50,194    89    (16)    50,267 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $100,855   $92   $(33)   $100,914 
  

 

 

   

 

 

   

 

 

   

 

 

 

5.2021, which all have contractual maturities of less than two years:

(in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Market
Value
U.S. Treasury and government agencies$195,076 $1 $(358)$194,719 
Corporate debt185,933 113 (23)186,023 
Total marketable securities$381,009 $114 $(381)$380,742 
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

The Company’s assets classified in Level 1 and Level 2 as of December 31, 20172022 and 20162021 consist of cash equivalents andavailable-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 instruments is 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, 2017 and 2016.

The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2017,2022, as follows:

       Fair Value Measurement as of December 31, 2017 Using 
       Quoted Prices in       Significant 
       Active Markets for   Significant Other   Unobservable 
   December 31,   Identical Assets   Observable Inputs   Inputs 
(in thousands)  2017   (Level 1)   (Level 2)   (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.

  Fair Value Measurement as of December 31, 2022 Using
(in thousands)Total Fair ValueQuoted 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$177,170 $177,170 $— $— 
Corporate debt154,660 — 154,660 — 
Total assets measured at fair value$331,830 $177,170 $154,660 $— 
The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2016,2021, as follows:

       Fair Value Measurement as of December 31, 2016 Using 
       Quoted Prices in       Significant 
       Active Markets for   Significant Other   Unobservable 
   December 31,   Identical Assets   Observable Inputs   Inputs 
(in thousands)  2016   (Level 1)   (Level 2)   (Level 3) 

U.S. Treasury and government agencies

  $50,647   $50,647   $—     $—   

Corporate debt

   50,267    —      50,267    —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $100,914   $50,647   $50,267   $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

  Fair Value Measurement as of December 31, 2021 Using
(in thousands)Total Fair ValueQuoted 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$194,719 $194,719 $— $— 
Corporate debt186,023 — 186,023 — 
Total assets measured at fair value$380,742 $194,719 $186,023 $— 
Total assets measured at fair value as of December 31, 2022 and 2021 include no cash equivalents.
The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities and product revenue allowances, the carrying valuevalues of which materially approximate their fair values.

6.

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 asnon-current.

Inventory consisted of the following as of December 31, 20172022 and 2016:

   December 31,   December 31, 
(in thousands)  2017   2016 

Current assets

    

Work-in-process

  $80   $17 

Finished goods

   760    762 
  

 

 

   

 

 

 
  $840   $779 
  

 

 

   

 

 

 

Non-Current assets

    

Raw materials

  $87   $127 

Work-in-process

   2,821    2,225 

Finished goods

   408    83 
  

 

 

   

 

 

 
  $3,316   $2,435 
  

 

 

   

 

 

 

7. Prepaid Expenses and Other Current Assets

The following is a summary2021:

91

(in thousands)December 31, 2022December 31, 2021
Current assets
Work-in-process$23 $30 
Finished goods1,171 995 
Total inventory, current$1,194 $1,025 
Non-Current assets
Raw materials$1,043 $2,143 
Work-in-process8,212 3,934 
Finished goods1,041 1,150 
Total inventory, non-current10,296 7,227 
Total inventory$11,490 $8,252 
6. Property and Equipment

The following is a summary of the Company’s property and equipment, at cost, as of December 31, 20172022 and 2016:

   Estimated         
   Useful Life   December 31, 
(in thousands)  (Years)   2017   2016 

Computer and other equipment

   3   $3,342   $2,426 

Furniture and fixtures

   5 - 7    1,929    1,412 

Leasehold improvements

   5 - 11    4,515    4,408 
    

 

 

   

 

 

 
     9,786    8,246 

Accumulated depreciation and amortization

 

   (4,480)    (3,231) 
  

 

 

   

 

 

 
    $5,306   $5,015 
    

 

 

   

 

 

 

2021:

(in thousands)Estimated
Useful Life
(Years)		December 31, 2022December 31, 2021
Computer and other equipment3$5,941 $5,481 
Furniture and fixtures5 - 71,634 1,546 
Leasehold improvements5 - 115,417 5,463 
Total property and equipment, gross12,992 12,490 
Accumulated depreciation and amortization(10,419)(9,377)
Total property and equipment, net$2,573 $3,113 
Depreciation expense was $1.2 million, $0.9$1.4 million and $0.6$1.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

9. Intangible Assets

HETLIOZ®. In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ®. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $8.0 million to BMS. The $8.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents which is the remaining life of the U.S. method of use patent for HETLIOZ®that expires in May 2034.

The Company is obligated to make a future milestone payment to BMS of $25.0 million when cumulative worldwide sales of HETLIOZ® reach $250.0 million, which is expected to occur in the first half of 2018. The future obligation of $25.0 million was recorded as a current liability as of December 31, 2017 and as anon-current liability as of December 31, 2016. The $25.0 million was determined to be additional consideration for the acquisition of the HETLIOZ® intangible asset. The intangible asset of $25.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents which is the remaining life of the U.S. method of use patent for HETLIOZ® that expires in May 2034.

Fanapt®. In 2009, the Company announced that the FDA had approved the NDA for Fanapt®. As a result of this approval, the Company met a milestone under its original sublicense agreement with Novartis that required the Company to make a license payment of $12.0 million to Novartis. The $12.0 million 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 a settlement agreement in December 2014, Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to the Company. As a result, the Company recognized an intangible asset of $15.9 million on December 31, 2014 related to the reacquired rights to Fanapt®, which was fully amortized on a straight-line basis as of November 2016. The useful life estimation for the Fanapt® intangible asset was based on the market participant methodology prescribed by ASC 805, and therefore does not reflect the impact of additional Fanapt® patents solely owned by the Company with varying expiration dates, the latest of which is December 2031.

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

       December 31, 2017 
   Estimated   Gross       Net 
   Useful Life   Carrying   Accumulated   Carrying 
(in thousands)  (Years)   Amount   Amortization   Amount 

HETLIOZ®

   May 2034   $33,000   $6,931   $26,069 

Fanapt®

   November 2016    27,941    27,941    —   
    

 

 

   

 

 

   

 

 

 
    $60,941   $34,872   $26,069 
    

 

 

   

 

 

   

 

 

 

The following is a summary of the Company’s intangible assets as of December 31, 2016:

       December 31, 2016 
   Estimated   Gross       Net 
   Useful Life   Carrying   Accumulated   Carrying 
(in thousands)  (Years)   Amount   Amortization   Amount 

HETLIOZ®

   January 2033   $33,000   $5,181   $27,819 

Fanapt®

   November 2016    27,941    27,941    —   
    

 

 

   

 

 

   

 

 

 
    $60,941   $33,122   $27,819 
    

 

 

   

 

 

   

 

 

 

Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense for the years ended December 31, 2017, 2016 and 2015 was as follows:

   Year Ended December 31, 
(in thousands)  2017   2016   2015 

HETLIOZ®

  $1,750   $1,721   $2,922 

Fanapt®

   —      9,212    10,050 
  

 

 

   

 

 

   

 

 

 
  $1,750   $10,933   $12,972 
  

 

 

   

 

 

   

 

 

 

The following is a summary of the future intangible asset amortization schedule as of December 31, 2017:

(in thousands)  Total   2018   2019   2020   2021   2022   Thereafter 

HETLIOZ®

  $26,069   $1,545   $1,591   $1,591   $1,591   $1,591   $18,160 

10. Accounts Payable and Accrued Liabilities

The following is a summary of the Company’s accounts payable and accrued liabilities as of December 31, 2017 and 2016:

   December 31,   December 31, 
(in thousands)  2017   2016 

Research and development expenses

  $4,663   $3,024 

Consulting and other professional fees

   3,961    3,192 

Compensation and employee benefits

   5,323    4,291 

Royalties payable

   4,394    4,555 

Other

   1,994    1,134 
  

 

 

   

 

 

 
  $20,335   $16,196 
  

 

 

   

 

 

 

11. Commitments and Contingencies

Operating Leases

Commitments relating to operating leases represent the minimum annual future payments under operating leases and subleases for a total of 40,188 square feet of office space for the Company’s headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. that expire in 2026, the operating lease for 2,880 square feet of office space for the Company’s European headquarters in London that has a noncancellable lease term ending in2022, 2021 and 1,249 square feet of office space in Berlin under a short-term operating lease. 2020, respectively.

7. Leases
The following is a summary of the minimum annual future payments underCompany’s long-term leases primarily include operating leases and subleases for office space in Washington, D.C. and London, England. The Company recognized ROU assets and lease liabilities related to fixed payments for these long-term operating leases in its Consolidated Balance Sheets as of December 31, 2017:

   Cash payments due by year 
(in thousands)  Total   2018   2019   2020   2021   2022   Thereafter 

Operating leases

  $19,789   $2,311   $2,295   $2,351   $2,174   $2,187   $8,471 

2022 and 2021. The Company also has short-term leases, including office space in Berlin, Germany.

In June 2011, the Company entered into an operating lease agreement under which it leases 33,534 square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. for 21,400 square feet of office space. A lease amendment in 2014 increased the office space under lease to 30,260 square feet, and a lease amendment in June 2016 extended the lease term from April 2023 to September 2026. Subject to the prior rights of other tenants, the Company has the right to renew the lease for five years following its expiration.expiration in July 2028. As of December 31, 2022, the renewal period has not been included in the lease term. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions. The lease may be terminated early by the Company or the landlord under certain circumstances.

In June 2016, the Company entered into a sublease agreement under which the Company leasesit subleases an additional 9,928 square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. The sublease term began in January 2017 and ends in July 2026 but may be terminated earlier by either party under certain circumstances. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions.

Rent expense

In May 2016, the Company entered into an operating lease agreement under which it leases 2,880 square feet of office space in London, England. In November 2022, the Company extended the non-cancellable portion of the lease term from 2023 to 2026.
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The following is a summary of the Company’s ROU assets and operating leaseslease liabilities as of December 31, 2022 and subleases, was $3.22021:
(in thousands)Classification on the Balance SheetDecember 31, 2022December 31, 2021
Assets 
Operating lease assetsOperating lease right-of-use assets$8,400 $9,272 
  
Liabilities 
Operating lease current liabilitiesAccounts payable and accrued liabilities$2,328 $2,311 
Operating lease non-current liabilitiesOperating lease non-current liabilities8,813 10,055 
Total lease liabilities $11,141 $12,366 
  
Weighted average remaining lease term 5.26.2
Weighted average discount rate 8.2 %8.1 %

The Company recognized operating lease cost of $2.2 million, $2.5$2.3 million and $1.9$2.3 million and short-term operating lease cost of $0.4 million for each of the years ended December 31, 2022, 2021 and 2020, respectively. The Company also recognized $1.4 million, $1.4 million and $1.5 million, respectively, of expense related to non-lease elements, such as building maintenance services and utilities, and executory costs associated with the operating leases.
Cash paid for amounts included in the measurement of operating lease liabilities is included in operating cash flows and was $2.6 million, $2.3 million and $2.6 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.

The table below reconciles the Company’s future cash obligations to operating lease liabilities recorded on the balance sheet as of December 31, 2022:
(in thousands)Operating Leases
2023$2,647 
20242,714 
20252,784 
20262,407 
20272,159 
Thereafter1,099 
Total minimum lease payments13,810 
Less: amount of lease payments representing interest(2,669)
Present value of future minimum lease payments11,141 
Less: current obligations under leases(2,328)
Operating lease non-current liabilities$8,813 
8. Intangible Assets
HETLIOZ®. In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ®. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $8.0 million to BMS. In April 2018, the Company met its final milestone under its license agreement with BMS when cumulative worldwide sales of HETLIOZ® reached $250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in 2018. These milestone payments were determined to be additional consideration for the acquisition of the HETLIOZ® and capitalized as an intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents.
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The following is a summary of the Company’s intangible assets as of December 31, 2022:
  December 31, 2022
(in thousands)Estimated
Useful Life		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
HETLIOZ®
March 2035$33,000 $14,435 $18,565 
The following is a summary of the Company’s intangible assets as of December 31, 2021:
  December 31, 2021
(in thousands)Estimated
Useful Life		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
HETLIOZ®
July 2035$33,000 $12,919 $20,081 
As of December 31, 2022 and 2021, the Company also had $27.9 million of fully amortized intangible assets related to Fanapt®.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense for the years ended December 31, 2022, 2021 and 2020 was as follows:
 Year Ended December 31,
(in thousands)202220212020
HETLIOZ®
$1,516 $1,478 $1,478 
The following is a summary of the future intangible asset amortization schedule as of December 31, 2022:
(in thousands)Total20232024202520262027Thereafter
HETLIOZ®
$18,565 $1,516 $1,516 $1,516 $1,516 $1,516 $10,985 
9. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of December 31, 2022 and 2021:
(in thousands)December 31, 2022December 31, 2021
Research and development expenses$9,474 $10,082 
Consulting and other professional fees9,241 8,732 
Compensation and employee benefits6,839 6,515 
Royalties payable4,979 5,873 
Operating lease liabilities2,328 2,311 
Accounts payable and other accrued liabilities12,690 925 
Total accounts payable and accrued liabilities$45,551 $34,438 
10. Commitments and Contingencies
Guarantees and Indemnifications

The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual from the date of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain conditions.

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License Agreements

The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies.

HETLIOZ®. In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ®. As a result of the FDA’s approval of the HETLIOZ® NDA in January 2014,December 31, 2022, the Company made an $8.0has paid BMS $37.5 million in upfront fees and milestone payment to BMS in the first quarterobligations, including $33.0 million of 2014 under the license agreement that wasregulatory approval and commercial milestones capitalized as an intangible asset and is being amortized over the estimated economic useful life of the related product patents which is the remaining life of the U.S. method of use patent for HETLIOZ® in the U.S.assets (see Note 8). The Company is obligatedhas no remaining milestone obligations to make a future milestone payment to BMS of $25.0 million when cumulative worldwide sales of HETLIOZ® reach $250.0 million, which is expected to occur in the first half of 2018. The probable future $25.0 million milestone obligation was capitalized as an intangible asset in the first quarter of 2015 and is being amortized over the estimated economic useful life of the related product patents which is the remaining life of the U.S. method of use patent for HETLIOZ® in the U.S.BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ® net sales to BMSBMS. The royalty period in anyeach territory where the Company commercializes HETLIOZ® for a period equal to the greater of is 10 years following the first commercial sale in the territory orterritory. In territories outside the expiry ofU.S., the new chemical entity patent in that territory. Duringroyalty is 5% on net sales. In the period prior toU.S., the expiry of the new chemical entity patent in a territory, the Company is obligated to pay a 10% royalty on net sales in that territory. Thethe U.S. decreased from 10% to 5% in December 2022. This U.S. royalty rate is decreased by half for countrieswill end in which no new chemical entity patent existed or for the remainder of the 10 years after the expiry of the new chemical entity patent.April 2024. 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 themid-twenties. The Company has agreed with BMS in the license agreement for HETLIOZ®is obligated to use its commercially reasonable efforts to develop and commercialize HETLIOZ®.

Fanapt®. Pursuant to the terms of a settlement agreement with Novartis Pharma AG (Novartis), Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to the Company on December 31, 2014. The Company was obligated to make royalty paymentspaid directly to Sanofi S.A. (Sanofi) and Titan Pharmaceuticals Inc. (Titan) at a percentage rate equal to 23% on annual U.S. net sales of Fanapt® up to $200.0 million, and at a percentage rate in themid-twenties on sales over $200.0 million through November 2016. In February 2016, the Company amended the agreement with Sanofi and Titan to remove Titan as the entity through which royalty payments from the Company are directed to Sanofi following the expiration of the new chemical entity patent for Fanapt® in the U.S. on November 15, 2016. Under the amended agreement, the Company pays directly to Sanofi a fixed royalty of 3% of net sales from November 16, 2016 through December 31, 2019 related to manufacturingknow-how. The Company made a $2.0 million payment during the year ended December 31, 2016 that applied to this 3% manufacturingknow-how royalty. No further royalties on manufacturingknow-how are payable by the Company after December 31, 2019. This amended agreement did not alter Titan’s obligation under the license agreement to make royalty payments to Sanofi prior to November 16, 2016 or the Company’s obligationsis also obligated to pay Sanofi a fixed royalty on Fanapt® net sales equal up to 6% on Sanofiknow-how not related to manufacturing under certain conditions for a period of up to 10 years in markets where the new chemical entity (NCE) patent has expired or was not issued.

The Company is obligated to pay this 6% royalty on net sales in the U.S. through November 2026.

Tradipitant. In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize anNK-1R NK-1 receptor antagonist, tradipitant, for all human indications. The patent describing tradipitant as a new chemical entity expires in April 2023, except in the U.S., where it expires in June 2024 absent any applicable patent term adjustments. Lilly is eligible to receive future payments based upon achievement of specified development, regulatory approval and

commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. These milestonesAs of December 31, 2022, the Company has paid Lilly $3.0 million in upfront fees and development milestones. As of December 31, 2022, remaining milestone obligations include $4.0 million forpre-NDA approval milestones and up to $95.0 million for future regulatory approval and sales milestones. The $4.0 million ofpre-NDA approval milestones includesa $2.0 million due upon enrollment of the first subject into a Phase III study for tradipitant and $2.0 milliondevelopment milestone due upon the filing of the first application for marketing authorization for tradipitant in either the U.S. or the E.U. The likelihood of achieving the enrollment ofEuropean Union (E.U.), $10.0 million and $5.0 million for the first subject into a Phase III studyapproval of an application for marketing authorization for tradipitant 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 in the consolidated statement of operationsU.S. and E.U., respectively, and up to $80.0 million for the year ended December 31, 2017 and a current liability in the consolidated balance sheet as of December 31, 2017.sales milestones. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.

VQW-765 (formerlyAQW-051). In connection with a settlement agreement with Novartis relating to Fanapt®, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercializeVQW-765, a Phase IIalpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercializeVQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to themid-teens.

Portfolio of CFTR activators and inhibitors. In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which Vandathe Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including currentpre-investigational new drug development work. The license agreement provides for an initial license fee of $1.0 million that was paid by the Company in the first quarter of 2017, annual maintenance fees and up to $46.0 million in potential regulatory and sales milestone obligations. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as single-digit tiered royalties on net sales.

Research As of December 31, 2022, the Company has paid UCSF $1.6 million in upfront fees and Developmentdevelopment milestones. As of December 31, 2022, remaining milestone obligations include $11.9 million for development milestones and Marketing$33.0 million for future regulatory approval and sales milestones. Included in the $11.9 million of development milestones are $1.1 million of milestone obligations due upon the conclusion of clinical studies for each licensed product but not to exceed $3.2 million in total for the CFTR portfolio.

VQW-765. In connection with a settlement agreement with Novartis relating to Fanapt®, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens.
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Other Agreements

In September 2022, the Company entered into an agreement with OliPass Corporation (OliPass) to jointly develop a set of antisense oligonucleotide (ASO) molecules based on OliPass’ proprietary modified peptide nucleic acids. As consideration for entering into the arrangement, the Company paid OliPass an upfront fee of $3.0 million, which was recorded as research and development expense during the three months ended September 30, 2022. The Company will fund the research and development activities and has the option to license jointly developed intellectual property upon successful development.
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 activitiesthird-party vendors under fee service arrangements. The Company’s current agreements for clinical servicesarrangements, which generally may be terminated on generally 6090 days’ notice without incurring additional charges, other than charges for work completed or materials procured 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.

The Company’s non-cancellable purchase commitments for agreements longer than one year are not material. Various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase commitments, are cancellable in nature or contain variable commitment terms within the agreement.

11. Accumulated Other Comprehensive Loss
The accumulated balances related to each component of other comprehensive loss, net of taxes, were as follows for the years ended December 31, 2022 and 2021:
(in thousands)December 31, 2022December 31, 2021
Foreign currency translation$(7)$32 
Unrealized loss on marketable securities(1,186)(207)
Accumulated other comprehensive loss$(1,193)$(175)
12. Income Taxes

Stock-Based Compensation

As of December 31, 2022, there were 6,147,756 shares subject to outstanding options and RSUs under the 2006 Equity Incentive Plan (2006 Plan) and the Amended and Restated 2016 Equity Incentive Plan (2016 Plan, and together with the 2006 Plan, Plans). The 2006 Plan expired by its terms in April 2016, and the Company adopted the 2016 Plan. Outstanding options under the 2006 Plan remain in effect and the terms of the 2006 Plan continue to apply, but no additional awards can be granted under the 2006 Plan. In June 2016, the Company’s stockholders approved the 2016 Plan. The 2016 Plan has been amended a number of times since to increase the number of shares reserved for issuance, among other administrative changes. Each of the amendments to the 2016 Plan was approved by the Company’s stockholders. There is a total of 11,890,000 shares of common stock authorized for issuance under the 2016 Plan, 4,257,565 shares of which remained available for future grant as of December 31, 2022.
Stock Options
The Company recordedhas granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have 10-year contractual terms. Service option awards granted to employees and new directors upon their election vest and become exercisable over four years, with the first 25% of the shares subject to service option awards vesting on the first anniversary of the grant date and the remaining 75% of the shares subject to the service option awards in 36 equal monthly installments thereafter. Subsequent annual service option awards granted to directors vest and become exercisable in full on the first anniversary of the grant date. Certain service option awards granted to employees and executive officers provide for partial acceleration of vesting if the employee or executive officer is subject to an involuntary termination, and full acceleration of vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control of the Company. Service option awards granted to directors provide for accelerated vesting if there is a change in control of the Company or if the director’s service terminates as a result of the director’s death or total tax expenseand permanent disability.
As of $0.1 million on consolidated pretax loss of $15.4 million, consisting of $15.7December 31, 2022, $7.1 million of pretax loss inunrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.2 years. No option awards are classified as a liability as of December 31, 2022.
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A summary of option activity under the U.S. and $0.3 million of pretax income from foreign subsidiariesPlans for the year ended December 31, 2017.2022 is as follows:

(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, 20213,721,148 $14.16 5.77$11,327 
Granted745,028 11.10 
Expired(14,000)11.95 
Exercised(219,966)3.34 1,579 
Outstanding at December 31, 20224,232,210 14.19 5.81— 
Exercisable at December 31, 20222,969,040 14.43 4.62— 
Vested and expected to vest at December 31, 20224,104,620 14.23 5.72— 
The weighted average grant-date fair value of options granted was $5.18, $8.91 and $5.53 per share for the years ended December 31, 2022, 2021 and 2020, respectively. The total intrinsic value of options exercised was $1.6 million, $4.1 million and $2.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. Proceeds from the exercise of stock options amounted to $0.7 million, $3.6 million and $5.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Restricted Stock Units
An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company recorded total tax expensehas granted RSUs under the Plans with service conditions (service RSUs) that are subject to terms and conditions established by the compensation committee of $0.1 millionthe board of directors. Service RSUs granted to employees vest in four equal annual installments provided that the employee remains employed with the Company. Certain service RSUs granted to employees and executive officers provide for accelerated vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control. Annual service RSUs granted to directors vest on consolidated pretax lossthe first anniversary of $17.9 million, consistingthe grant date and provide for accelerated vesting if there is a change in control of $18.1the Company.
As of December 31, 2022, $19.1 million of pretax loss inunrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.6 years. No RSUs are classified as a liability as of December 31, 2022.
A summary of RSU activity for the U.S. and $0.2 million of pretax income from foreign subsidiariesPlans for the year ended December 31, 2016. 2022 is as follows:
Number of
Shares		Weighted
Average
Grant Date Fair Value
Unvested at December 31, 20211,764,740 $17.27 
Granted944,374 11.24 
Forfeited(130,625)14.48 
Vested(662,943)17.49 
Unvested at December 31, 20221,915,546 14.41 
The weighted average grant-date fair value of RSUs granted was $11.24, $19.57 and $11.28 per share for the years ended December 31, 2022, 2021 and 2020, respectively. The total fair value of the RSUs that vested during the years ended December 31, 2022, 2021 and 2020 was $11.6 million, $9.1 million, and $9.6 million, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense recognized for the years ended December 31, 2022, 2021 and 2020 comprised of the following:
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 Year Ended December 31,
(in thousands)202220212020
Research and development$3,964 $3,955 $3,804 
Selling, general and administrative12,315 11,419 9,556 
Total stock-based compensation expense$16,279 $15,374 $13,360 
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 expected terms are determined based on a combination of historical exercise data and hypothetical exercise data for unexercised stock options. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has never paid cash dividends to its stockholders and does not plan to pay dividends in the foreseeable future. Assumptions used in the Black-Scholes-Merton option pricing model for employee and director stock options granted during the years ended December 31, 2022, 2021 and 2020 were as follows:
 Year Ended December 31,
 202220212020
Expected dividend yield— %— %— %
Weighted average expected volatility46 %46 %51 %
Weighted average expected term (years)6.055.986.07
Weighted average risk-free rate2.03 %0.75 %1.14 %
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 fifty 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 4-year period and amounted to $1.1 million, $1.0 million and $0.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
14. Income Taxes
The following is a summary of the domestic and foreign components of income before income taxes for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
(in thousands)202220212020
Domestic$11,216 $42,221 $31,667 
Foreign84 143 (12)
Total income before income taxes$11,300 $42,364 $31,655 
The following is a summary of the provision (benefit) for income taxes for the years ended December 31, 2017, 20162022, 2021 and 2015:

   Year Ended December 31, 
(in thousands)  2017   2016   2015 

Current:

      

Federal

  $ —     $—     $ —   

State

   65    66    —   

Foreign

   (66)    142   

Deferred:

      

Federal

   —      —      —   

State

   —      —     

Foreign

   137    (104)    —   
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

  $136   $104   $—   
  

 

 

   

 

 

   

 

 

 

Deferred tax assets are reduce by a tax valuation allowance when, in the opinion2020:

 Year Ended December 31,
(in thousands)202220212020
Current
Federal$— $— $— 
State3,710 2,200 2,061 
Foreign185 267 68 
Deferred
Federal1,238 6,604 6,076 
State(111)119 155 
Foreign3 22 (42)
Provision for income taxes$5,025 $9,212 $8,318 
98

The following is reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2017, 20162022, 2021 and 2015:

   Year Ended December 31, 
   2017  2016  2015 

Federal tax at statutory rate

   35.0%   35.0%   35.0% 

State taxes

   1.7%   0.8%   -0.1% 

The U.S. Tax Cuts and Job Act (1)

   -262.6%   0.0%   0.0% 

Change in valuation allowance - U.S. Tax Cuts and Jobs Act

   262.6%   0.0%   0.0% 

Other change in valuation allowance

   -47.8%   -38.4%   -25.4% 

Research and development credit

   9.0%   3.8%   1.5% 

Orphan drug credit

   6.3%   7.6%   1.6% 

Section 162(m) limitation

   8.1%   0.0%   -5.7% 

Other tax rate changes

   -2.6%   3.9%   -0.3% 

Change in state NOLs

   5.1%   0.0%   -1.4% 

Stock-based compensation

   -13.0%   -12.5%   -5.1% 

Other items

   -2.7%   -0.8%   -0.1% 
  

 

 

  

 

 

  

 

 

 

Effective tax rate

   -0.9%   -0.6%   0.0% 
  

 

 

  

 

 

  

 

 

 

(1)The effective tax rate for the year ended December 31, 2017 includes the estimate of the effect of the U.S. 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.

2020:

 Year Ended December 31,
 202220212020
Federal tax at statutory rate21.0 %21.0 %21.0 %
State taxes4.8 %2.3 %2.6 %
Change in valuation allowance1.0 %(0.1)%(3.5)%
Research and development credit(25.9)%(6.5)%(5.4)%
Orphan drug credit(0.9)%(0.1)%(1.3)%
Section 162(m) limitation9.4 %2.6 %1.7 %
Other tax rate changes1.7 %(0.2)%0.2 %
Uncertain tax positions24.5 %4.0 %4.7 %
Stock-based compensation5.8 %(1.8)%5.1 %
Settlements2.6 %— %— %
Other items0.5 %0.5 %1.2 %
Effective tax rate44.5 %21.7 %26.3 %
The following is a summary of the components of the Company’s net deferred tax assets net, and the related tax valuation allowance as of December 31, 20172022 and 2016:

   December 31, 
(in thousands)  2017   2016 

Deferred tax assets:

    

Net operating loss carryforwards

  $59,222   $84,177 

Stock-based compensation

   5,383    12,443 

Accrued and deferred expenses

   1,967    2,558 

Research and development and orphan drug credit carryforwards

   43,976    41,104 

Intangible assets

   3,745    5,477 

Other

   2,174    1,019 
  

 

 

   

 

 

 

Total deferred tax assets

   116,467    146,778 

Deferred tax liabilities:

    

Other

   (386)    (666) 
  

 

 

   

 

 

 

Total deferred tax liabilities

   (386)    (666) 

Deferred tax assets, net

   116,081    146,112 

Valuation allowance

   116,110    146,012 
  

 

 

   

 

 

 

Net deferred tax assets (liabilities)

  $(29)   $100 
  

 

 

   

 

 

 

The Company’s net deferred tax liability of less than $0.1 million as of December 31, 2017 is included as a component of othernon-current liabilities. The Company’s net deferred tax asset of $0.1 million as of December 31, 2016 is included as a component ofnon-current inventory and other in the consolidated balance sheet.

2021.

(in thousands)December 31, 2022December 31, 2021
Deferred tax assets
Net operating loss carryforwards$13,746 $35,509 
Stock-based compensation4,930 4,846 
Accrued expenses1,469 1,409 
Allowance for returns and credit losses1,560 1,142 
Research and development and orphan drug credit carryforwards42,402 39,975 
Capitalized research and development expenses16,990 — 
Other3,798 3,081 
Total deferred tax assets84,895 85,962 
Deferred tax liabilities
Intangible assets(1,924)(1,919)
Other(1,796)(2,140)
Total deferred tax liabilities(3,720)(4,059)
Deferred tax assets, net81,175 81,903 
Less: Valuation allowance7,136 7,025 
Net deferred tax assets$74,039 $74,878 
The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2017, 20162022, 2021 and 2015:

   Balance at           Balance at 
   Beginning           End of 
(in thousands)  of Year   Additions   Reductions   Year 

Year Ended:

        

December 31, 2017

  $146,012   $12,403   $(42,305)   $116,110 

December 31, 2016

   139,037    11,031    (4,056)    146,012 

December 31, 2015

   128,890    17,002    (6,855)    139,037 

2020:

(in thousands)
Balance at
Beginning
of Year
AdditionsReductions
Balance at
End of
Year
Year Ended
December 31, 2022$7,025 $111 $— $7,136 
December 31, 20217,051 — (26)7,025 
December 31, 20208,155 — (1,104)7,051 
The Company has net operating loss (NOL)NOL and other tax credit carryforwards in several jurisdictions. As of December 31, 2017,2022, the Company has $49$6.1 million of deferred tax assets relating to U.S. federal NOL carryforwards, along with deferred tax assets of $9$17.9 million and $35$24.5 million related to U.S. federal research and development credits and orphan drug credits, respectively. These tax attributes will begin to expire in 2028,2035, 2024 and 2030, respectively. In addition, the Company has $10$7.7 million of
99

deferred tax assets relating to other 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 20312032 and other state NOLs will begin to expire in 2018. 2029.

A valuation allowancereconciliation of the beginning and ending amount of gross unrecognized tax benefits is recorded against these U.S. federal and U.S. state deferredas follows:
Year Ended December 31,
(in thousands)202220212020
Unrecognized tax benefits at the beginning of the year$12,935 $11,233 $9,741 
Increases (decreases) related to prior year tax positions(75)122 (121)
Increases related to current year tax positions2,895 1,580 1,613 
Settlements(270)— — 
Unrecognized tax benefits at the end of the year$15,485 $12,935 $11,233 
The amount of uncertain tax assets.

Becausebenefits that, if recognized, would impact the Company has generated NOLs from inceptioneffective tax rate is $15.5 million. Unrecognized tax benefits are not expected to change materially over the next 12 months. Generally, the tax years 2019 through December, 31, 2017, all income tax returns filed by the Company are2021 remain open to examination by the major taxing jurisdiction to which the Company is subject. To the extent the Company has tax jurisdictions.attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, or state or foreign tax authorities, to the extent utilized in a future period. As of December 31, 2017,2022, the Company’s income tax returns hadCompany is not been under examination by any federal or state tax jurisdictions. As of December 31, 2017 and 2016, the Company had no uncertain tax positions.

jurisdiction.

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 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
15. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the Company maintains a valuation allowance on its U.S. tax attributes, any limitation as a resultnet income by the weighted average number of applicationshares of IRC Section 382 limitation would not have a material impact oncommon stock outstanding. Diluted EPS is computed by dividing the Company’s provision fornet income taxesby the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the year ended December 31, 2017.

period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.

The Tax Cutsfollowing table presents the calculation of basic 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 aone-time transition tax on earningsdiluted net income per share of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, the Company has not completed our accounting for the tax effects of the TCJA. Certain U.S. federal deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the U.S. international and executive compensation provisions of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Because the Company has recorded a valuation allowance against deferred tax assets in the U.S., future adjustments recorded as we complete our analysis will not have a material impact to our net deferred tax asset or liability.

13. Accumulated Other Comprehensive Income (Loss)

The accumulated balances related to each component of other comprehensive income (loss) were as followscommon stock for the years ended December 31, 20172022, 2021 and 2016:

   December 31,   December 31, 
(in thousands)  2017   2016 

Foreign currency translation

  $29   $(1) 

Available-for-sale securities

   (63)    59 
  

 

 

   

 

 

 
  $(34)   $58 
  

 

 

   

 

 

 

There were no reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015.

14. Equity Incentive Plans

As of December 31, 2017, there were 6,077,622 shares that were subject to outstanding options and RSUs under the 2006 Equity Incentive Plan (2006 Plan) and the 2016 Equity Incentive Plan (2016 Plan, and together with the 2006 Plan, Plans)2020:

 Year Ended December 31,
(in thousands, except for share and per share amounts)202220212020
Numerator:
Net income$6,275 $33,152 $23,337 
Denominator:
Weighted average shares outstanding, basic56,461,877 55,548,122 54,427,683 
Effect of dilutive securities521,294 1,373,714 763,119 
Weighted average shares outstanding, diluted56,983,171 56,921,836 55,190,802 
Net income per share, basic and diluted:
Basic$0.11 $0.60 $0.43 
Diluted$0.11 $0.58 $0.42 
Antidilutive securities excluded from calculations of diluted net income per share4,786,891 2,176,944 3,407,409 
16. Legal Matters
Fanapt®. The 2006 Plan expired by its terms on April 12, 2016, and the Company adopted the 2016 Plan. Outstanding options and RSUs under the 2006 Plan remain in effect and the terms of the 2006 Plan continue to apply, but no additional awards can be granted under the 2006 Plan. In June 2016, the Company’s stockholders approved the 2016 Plan under which 2,000,000 shares of common stock were reserved for issuance. In June 2017, the Company’s stockholders approved the amendment and restatement of the 2016 Plan pursuant to which an additional 2,700,000 shares were reserved for issuance, among other administrative changes. As a result, there are a total of 4,700,000 shares of common stock reserved for issuance under the 2016 Plan, 3,168,565 shares of which remained available for future grant as of December 31, 2017.

Stock Options

The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have10-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, 2017, $7.3 million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.2 years. No option awards are classified as a liability as of December 31, 2017.

The Company’s equity incentive plan, the Second Amended and Restated Management Equity Plan (2004 Plan), expired by its terms in 2014 and no additional options will be granted under the 2004 Plan. There were no shares subject to outstanding options granted under the 2004 Plan as of December 31, 2017 and 2016. The following is a summary of option activity for the 2004 Plan for the year ended December 31, 2015:

       Weighted Average   Weighted Average   Aggregate 
2004 Plan  Number of   Exercise Price at   Remaining Term   Intrinsic 
(in thousands, except for share and per share amounts)  Shares   Grant Date   (Years)   Value 

Outstanding at December 31, 2014

   652,810   $1.74    0.78   $8,212 

Exercised

   (652,810)    1.74      6,129 
  

 

 

       

Outstanding at December 31, 2015

   —         
  

 

 

       

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

       Weighted Average   Weighted Average   Aggregate 
2006 and 2016 Plans  Number of   Exercise Price at   Remaining Term   Intrinsic 
(in thousands, except for share and per share amounts)  Shares   Grant Date   (Years)   Value 

Outstanding at December 31, 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 

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 
  

 

 

       

Exercisable at December 31, 2017

   3,540,804    9.35    4.73    20,715 
  

 

 

       

Vested and expected to vest at December 31, 2017

   4,589,591    9.94    5.56    24,129 
  

 

 

       

The weighted average grant-date fair value of options granted was $7.81, $4.53 and $6.59 per share for the years ended December 31, 2017, 2016 and 2015, respectively. Proceeds from the exercise of stock options amounted to $5.3 million, $7.8 million and $4.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Restricted Stock Units

An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that vest in four equal annual installments provided that the employee remains employed with the Company. As of December 31, 2017, $12.1 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.7 years. No RSUs are classified as a liability as of December 31, 2017.

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

   Number of   Weighted 
   Shares   Average 
   Underlying   Grant Date 
RSUs  RSUs   Fair Value 

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 

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 
  

 

 

   

The grant date fair value for the 362,313 shares underlying RSUs that vested during the year ended December 31, 2017 was $3.5 million.

Stock-Based Compensation Expense

Stock-based compensation expense recognized for the years ended December 31, 2017, 2016 and 2015 was allocated as follows:

   Year Ended December 31, 
(in thousands)  2017   2016   2015 

Research and development

  $1,152   $2,087   $2,269 

Selling, general and administrative

   9,313    6,456    5,692 
  

 

 

   

 

 

   

 

 

 
  $10,465   $8,543   $7,961 
  

 

 

   

 

 

   

 

 

 

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, 2017, 2016 and 2015 were as follows:

   Year Ended December 31, 
   2017  2016  2015 

Expected dividend yield

   0%   0%   0% 

Weighted average expected volatility

   57%   57%   60% 

Weighted average expected term (years)

   5.89   6.08   6.00 

Weighted average risk-free rate

   1.97%   1.37%   1.67% 

15. 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 apre-tax basis. Currently, the Company matches 50 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 and amounted to $0.8 million, $0.4 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

16. Legal Matters

In June 2014, the Company filed suit against Roxane Laboratories, Inc. (Roxane) in the U.S. District Court for the District of Delaware (Delaware District Court). The suit seeks an adjudication that Roxane has infringed one or more claims of the Company’s U.S. Patent No. 8,586,610 (‘610 Patent) by submitting to the 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, 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 afive-day bench trial that concluded on March 4, 2016. On August 25, 2016, the Delaware District Court ruled in favor of the Company, finding that Roxane’s ANDA product infringed the asserted claims of the ‘610 Patent and the ‘198 Patent. The Delaware District Court ruled that the Company is entitled to a permanent injunction against Roxane enjoining Roxane from infringing the ‘610 Patent, including the manufacture, use, sale, offer to sell, sale, distribution or importation of any generic iloperidone product described in the ‘610 Patent ANDA until the expiration of the ‘610 Patent in November 2027. If the Company obtains pediatric exclusivity, the injunction against Roxane would be extended until May 2028 under the Delaware District Court’s order. On September 23, 2016, Roxane filed a notice of appeal with the Federal Circuit Court of Appeals (Federal Circuit). Roxane filed its opening appellate brief on February 7, 2017. The Company filed its responsive brief on April 19, 2017, and Roxane filed its reply brief on May 3, 2017. On July 27, 2017, Roxane, now a subsidiary of Hikma Pharmaceuticals PLC (Hikma), petitioned the Federal Circuit to substitute Roxane with new defendantsaffiliates, 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). The Company did not oppose the substitution of West-Ward for Roxane. The appeal is fully briefed, and oral argument was held on December 5, 2017. The Federal Circuit has not yet issued a decision.

In 2015, the Company filed six separate patent infringement lawsuits in the Delaware District Court against Roxane,Corp (West-Ward), 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) (collectively, the Fanapt®Defendants). The lawsuits each seeksubmitted an adjudication thatAbbreviated New Drug

100

Application (ANDA) to the respective Defendants infringed one or more claimsFDA seeking approval to market generic versions of Fanapt® prior to the expiration of certain of the ‘610Company’s patents covering Fanapt®, including U.S. Patent and/or the Company’sNo. 8,586,610 (‘610 Patent) and U.S. Patent No. 9,138,432 (‘432 Patent) by submitting. In response, the Company filed separate lawsuits in 2014 and 2015 against each of the Fanapt® Defendants in the U.S. District Court for the District of Delaware (Delaware District Court) for patent infringement.
In August 2016, the Delaware District Court ruled in the Company’s favor, permanently enjoining Roxane from manufacturing, using, selling, offering to the FDA ansell, distributing or importing any generic iloperidone product described in Roxane’s ANDA for a generic version of Fanapt® prior tountil the expiration of the ‘610 Patent in November 2027, or May 2028 if the Company obtains pediatric exclusivity. This ruling was affirmed on appeal by the U.S Court of Appeals for the Federal Circuit (Federal Circuit) in April 2018. West-Ward, having replaced Roxane as defendant following the acquisition of Roxane by West-Ward’s parent company, Hikma Pharmaceuticals PLC (Hikma), petitioned the U.S. Supreme Court for a writ of certiorari, which was denied in January 2020.
The Company entered into separate license agreements with each of Taro, Apotex and Lupin resolving these lawsuits in October 2016, December 2016 and July 2020, respectively. The license agreements grant Taro, Apotex and Lupin non-exclusive licenses to manufacture and commercialize a version of Fanapt® in the U.S. effective as of the expiration of the ‘610 Patent or earlier under certain limited circumstances. The Company entered into a license agreement with Hikma regarding the ‘432 Patent in September 2025.2022. The Defendants have denied infringementlicense agreement grants Hikma a non-exclusive license to manufacture and counterclaimed for declaratory judgmentcommercialize a version of invalidity and noninfringementFanapt® in the U.S. effective as of the expiration of the ‘610 Patent and the ‘432 Patent. Certain Defendants have since entered into agreements resolving these lawsuits, as discussed below. The remaining parties have agreed, and the Delaware District Court has ordered, that within 14 days after any decision on the merits in the Roxane appeal, the parties will submit to the Delaware District Court a status report and request a schedule for trial. The Company entered into a confidential stipulation with Inventia regarding any potential launch of Inventia’sits generic ANDA product. The Company also entered into a confidential stipulation with Lupin regarding any potential launchversion of Lupin’s generic ANDA product.

Lupin filed counter claims for declaratory judgment of invalidity and noninfringement of seven ofFanapt®, but the Company’s method of treatment patents that are listed inlawsuit against Inventia regarding the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) related to Fanapt ‘610 and ‘432 Patents remains pending.

HETLIOZ® (such seven patents, the Method of Treatment Patents). The Company has not sued Lupin for infringing the Method of Treatment Patents. On October 13, 2016,Between April 2018 and March 2021, the Company and Lupin filed a Stipulation of Dismissalnumerous Hatch-Waxman lawsuits in the Delaware District Court pursuant toagainst Teva Pharmaceuticals USA, Inc. (Teva), MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN) and Apotex (collectively the HETLIOZ® Defendants) asserting that U.S. Patent Nos. RE46,604 (‘604 Patent), 9,060,995, 9,539,234, 9,549,913, 9,730,910 (‘910 Patent), 9,844,241, 10,071,977, 10,149,829 (‘829 Patent), 10,376,487 (‘487 Patent), 10,449,176, 10,610,510, 10,610,511, 10,829,465,and 10,611,744 will be infringed by the HETLIOZ® Defendants’ generic versions of HETLIOZ® for which Lupin’s counterclaims relating to the Method of Treatment Patentsthey 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.

On October 24, 2016,seeking FDA approval. In January 2022, the Company entered into a License Agreementlicense agreement with Taro to resolveMSN and Impax Laboratories LLC (Impax) resolving the Company’s patent litigationlawsuits against Taro regarding Taro’s ANDA seeking approval of its generic version of Fanapt® (Taro License Agreement). Under the Taro License Agreement, the Company granted TaroMSN. The license agreement grants MSN and Impax anon-exclusive license to manufacture and commercialize Taro’sMSN’s version of FanaptHETLIOZ® in the U.S. effective November 2, 2027,as of March 13, 2035, unless prior to that date the Company obtains pediatric exclusivity for FanaptHETLIOZ®, in which case the license will be effective May 2, 2028. Taroas of July 27, 2035. MSN and Impax may enter the market earlier under certain limited circumstances. The Taro License Agreement, whichconsolidated lawsuits against the remaining HETLIOZ® Defendants were tried in March 2022.

On December 13, 2022, the Delaware District Court ruled that Teva and Apotex did not infringe the ‘604 Patent, and that the asserted claims of the ‘604, ‘910, ‘829 and ‘487 Patents were invalid. On December 14, 2022, Vanda appealed the Delaware District Court’s decision to the Federal Circuit and requested an injunction prohibiting market entry by Teva and Apotex while the appeal is subjectpending. On December 16, 2022, the Federal Circuit granted a temporary injunction to reviewprohibit market entry by Teva and Apotex until the U.S. Federal Trade Commission (FTC) andCircuit entered its order on the U.S. Department of Justice (DOJ), providesCompany’s motion for a full settlement and release bystay pending appeal. On December 28, 2022, the Federal Circuit denied the Company’s request for an injunction, which therefore lifted the stay pending appeal. The oral argument for the Company’s appeal is scheduled for March 14, 2023.
On December 27, 2022, the Company filed patent infringement lawsuits, including Hatch-Waxman Act claims, against each of Teva and Taro of all claims that are the subject of the litigation.

On December 7, 2016, the Company entered into a License Agreement with Apotex to resolve the Company’s patent litigation against Apotex regarding Apotex’s ANDA seeking approval of its generic version of Fanapt® (Apotex License Agreement). Under the Apotex License Agreement, the Company granted Apotex anon-exclusive license to manufacture and commercialize Apotex’s version of Fanapt® in the U.S. District Court for the District of New Jersey (NJ District Court) asserting that U.S. Patent No. 11,285,129, a method of administration patent that was not litigated in the Delaware District Court cases (‘129 Patent), will be infringed by Teva’s and Apotex’ generic versions of HETLIOZ®, each of which was approved by the FDA. The Company has asked the NJ District Court to, among other things, order that the effective November 2, 2027, unless prior todate of the FDA’s approval of Teva’s and Apotex’ generic versions of HETLIOZ® be a date that is no earlier than the expiration of the ‘129 Patent, or such later date that the NJ District Court may determine, and enjoin each of Teva and Apotex from the commercial manufacture, use, import, offer for sale and/or sale of their generic versions of HETLIOZ® until the expiration of the ‘129 Patent, or such later date that the NJ District Court may determine. On December 28, 2022, the Company obtains pediatric exclusivity for Fanapt®, in which case, the license will be effective May 2, 2028.filed a similar lawsuit against Apotex may enter the market earlier under certain limited circumstances. The Apotex License Agreement, which is subject to review by the FTC and the DOJ, provides for a full settlement and release by the Company and Apotex of all claims that are the subject of the litigation.

On February 26, 2016, Roxane filed suit against the Company in the U.S. District Court for the Southern District of Ohio (OhioFlorida asserting the same claims and seeking the same relief against Apotex as are asserted and sought in the litigation pending before the NJ District Court).Court.

In January 2023, the Company filed a lawsuit in the NJ District Court against Teva challenging Teva’s advertising and marketing practices related to its at risk launch of its generic version of HETLIOZ® for the single indication of Non-24. The suitCompany believes that Teva’s advertising and marketing practices related to its generic version of HETLIOZ® promote its product for uses beyond the limited labeling that Teva sought and the FDA approved. The Company seeks to, among other things, enjoin Teva from engaging in false and misleading advertising and recover monetary damages.
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In January 2023, the Company filed a declaratory judgmentlawsuit in the U.S. District Court for the District of invalidityColumbia (DC District Court) against the FDA challenging the FDA’s approval of Teva’s ANDA for its generic version of HETLIOZ® capsules under the Administrative Procedure Act, the Food, Drug, and noninfringementCosmetic Act (FDCA), and FDA regulations. Under the FDCA, every ANDA must contain information to show that the labeling proposed for the generic drug is the same as the labeling approved for the listed drug; additionally, the generic drug must have the same conditions of use as the Method of Treatment Patents.listed drug. The Company believes that Teva’s approved labeling does not comply with these requirements. The Company has asked the DC District Court to, among other things, vacate the FDA’s approval of Teva’s ANDA, declare that the approval of the ANDA was unlawful, arbitrary, and capricious and compel the FDA to order Teva to recall its shipments or sales of its generic HETLIOZ® product. In February 2023, Teva filed a motion with the DC District Court to intervene as a defendant in the lawsuit. Vanda did not sued Roxaneoppose Teva’s motion.
Other Matters. In February 2019, a securities class action, Gordon v. Vanda Pharmaceuticals Inc., was filed in the U.S. District Court for infringing the MethodEastern District of Treatment Patents.New York (New York District Court) naming the Company and certain of its officers as defendants. An amended complaint was filed in July 2019. The amended complaint, filed on behalf of a purported stockholder, asserted claims on behalf of a putative class of all persons who purchased the Company’s publicly traded securities between November 4, 2015 and February 11, 2019 (the Class), for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that the defendants made false and misleading statements and/or omissions regarding Fanapt®, HETLIOZ® and the Company’s interactions with the FDA regarding tradipitant between November 3, 2015 and February 11, 2019. In March 2020, the Company filed a motion to dismiss this lawsuitthe complaint. In March 2021, the motion to dismiss was granted in part and denied in part. In May 2022, the parties executed a stipulation of settlement for lack$11.5 million to resolve the claims asserted with no admission of personal jurisdiction or to transferwrongdoing by any defendant. The settlement was preliminarily approved by the lawsuit to the Delaware District Court. On December 20, 2016, the OhioNew York District Court ruledin September 2022. Payment of the settlement amount was made by the Company’s insurers into an escrow account and is recognized in the Consolidated Balance Sheet as of December 31, 2022 in prepaid and other current assets and accounts payable and accrued liabilities. In January 2023, the New York District Court fully and finally approved the settlement and issued its final judgment and order of dismissal with prejudice, thereby resolving the class action with respect to all plaintiffs other than three individuals who requested exclusion from the Class. The settlement is not expected to have a material adverse effect on the Company’s favor, dismissing Roxane’s suit without prejudice for lackbusiness, results of personal jurisdiction.

On February 26, 2016, Roxane filed a Petition for Inter Partes Review (IPR) of the ‘432 Patent with the Patent Trials and Appeals Board (PTAB) of the U.S. Patent and Trademark Office. The Company filed a Preliminary Response on June 7, 2016, and on August 30, 2016 the PTAB denied the request by Roxane to institute an IPR of the ‘432 Patent. On September 29, 2016, Roxane filed a Petition for Rehearing with the PTAB, and on October 13, 2016operations or financial condition.

In April 2022, the Company filed a Responselawsuit in the DC District Court against the FDA to Roxane’s Petition. On November 4, 2016,compel the PTAB denied Roxane’s PetitionFDA to produce, as required by the Freedom of Information Act (FOIA), certain records relating to its denial of the Company’s supplemental NDA for Rehearing.

17. Quarterly Financial Data (Unaudited)

HETLIOZ® in the treatment of jet lag disorder. The following isCompany has repeatedly attempted to obtain these records from the FDA pursuant to a summaryFOIA request submitted by the Company in December of quarterly financial data2019, but the FDA has refused to provide them, claiming an exemption under FOIA. The Company does not believe that the exemption claimed by the FDA applies to the records requested.

In April 2022, the Company filed a lawsuit in the U.S. District Court for the years endedDistrict of Maryland (the MD District Court) against the Centers for Medicare & Medicaid Services (CMS) and the Administrator of CMS challenging CMS’ rule broadly interpreting the defined terms “line extension” and “new formulation” under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (ACA), which went into effect in January 2022 (the Rule). The Company believes that the Rule is unlawful and contrary to the intent of Congress when it passed the ACA. Under the Rule, certain of the Company’s products would be treated as line extensions and new formulations subject to enhanced rebates, despite the statutory text and CMS’ own long-standing practice, under which such products would not constitute line extensions or new formulations. The Company seeks to, among other things, have the MD District Court set aside the definitions of “line extension” and “new formulation” in the Rule, declare the Rule unlawful and void and enjoin CMS from enforcing, applying, or implementing the Rule as applied to require the Company to treat these products as line extensions.
In May 2022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to produce, as required by FOIA, certain records relating to cases in which the FDA waived its putative requirement of a 9-month non-rodent toxicity study before drugs can be tested on human patients for extended durations. The Company attempted to obtain these records from the FDA pursuant to a FOIA request submitted by the Company in January of 2020, but the FDA has failed to respond to the request.
In May 2022, the Company filed a lawsuit in the DC District Court against the FDA challenging the FDA’s denial of Fast Track designation for tradipitant. In October 2021, the Company submitted to the FDA a request for Fast Track designation for tradipitant under the Food and Drug Administration Modernization Act of 1997 (FDAMA). The FDAMA provides for expedited development and review of drugs that receive Fast Track designation from the FDA. Under the FDAMA, the FDA must designate a drug as a Fast Track product if it both (1) is intended to treat a serious or life-threatening
102

disease or condition and (2) demonstrates the potential to address unmet medical needs for such disease or condition. Although Fast Track designation is non-discretionary when the criteria are satisfied, the FDA denied the Company’s request for Fast Track designation. The Company does not believe that the FDA based its decision on the relevant criteria. Therefore, among other reasons, the Company maintains that the FDA’s denial is unlawful. The Company has asked the DC District Court to, among other things, set aside and vacate the FDA’s denial.
In September 2022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to comply with two separate nondiscretionary obligations under the FDCA and its implementing regulations: an obligation to publish a notice of an opportunity for a hearing on Vanda’s supplemental New Drug Application (sNDA) in the Federal Register within 180 days of the filing of the sNDA, and a separate obligation to publish the same notice within 60 days of the request for a hearing. The FDA published the notice of an opportunity for a hearing on October 11, 2022. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates the FDCA and the FDA regulations.
In October 2022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to produce, as required by FOIA, documents responsive to the Company’s request seeking communications external to the FDA from 11 specified FDA employees relating to tradipitant. The FDA has failed to respond and disclose the requested documents within the statutory timeframe. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates FOIA.
In November 2022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to produce, as required by FOIA, documents responsive to the Company’s request seeking communications within the FDA relating to tradipitant. The FDA has failed to respond and disclose the requested documents within the statutory timeframe. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates FOIA.
In December 31, 20172022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to produce, as required by FOIA, documents responsive to the Company’s request seeking communications external to the FDA from specified FDA employees relating to HETLIOZ®. The FDA has failed to respond and 2016:

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

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) 

Year Ended December 31, 2016

        

Revenues

  $33,262   $36,029   $38,482   $38,244 

Gross profit (1)

   24,363    26,593    28,549    30,867 

Loss from operations

   (12,475)    (4,789)    (653)    (654) 

Net loss

   (12,358)    (4,618)    (430)    (604) 

Net loss per share, basic and diluted

  $(0.29)   $(0.11)   $(0.01)   $(0.01) 

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

disclose the requested documents within the statutory timeframe. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates FOIA.

In December 2022, the Company filed a lawsuit in the DC District Court against the FDA to compel the FDA to produce, as required by FOIA, documents responsive to the Company’s request seeking communications within the FDA relating to HETLIOZ®. The FDA has failed to respond and disclose the requested documents within the statutory timeframe. The Company has asked the DC District Court to, among other things, compel the FDA to comply with its obligations and declare that its lack of compliance violates FOIA.
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Table of Contents
VANDA PHARMACEUTICALS INC.

EXHIBIT INDEX

Exhibit
Number		Description
Exhibit
Number3.1

Description

3.1
3.2Form of Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.10 to the registrant’s current report on Form8-K (FileNo. 001-34186) on September 25, 2008 and incorporated herein by reference).
3.33.2
4.1
4.2
4.3Amendment 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 Form8-K (FileNo. 001-34186) on December  22, 2009 and incorporated herein by reference).
10.1#10.1
10.210.2†
10.3†

Exhibit
Number10.4†

Description

10.4†
10.5†Employment Agreement, dated December  13, 2010, by and between James Kelly and the registrant (filed as Exhibit 10.38 to the registrant’s annual report on Form10-K (FileNo.  001-34186) on March 10, 2011 and incorporated herein by reference).
10.6†10.5†
10.710.6†
10.810.7
10.910.8
10.1010.9
10.11#10.10
10.1210.11

104

Table of Contents
Exhibit

Number

Description

10.12‡
10.13#
10.1410.13
10.1510.14
10.16#10.15
10.17#10.16
10.18#10.17
10.19#10.18
10.20#10.19
10.2110.20

Exhibit
Number10.21

Description

10.22#
10.23†Employment Agreement, dated September  3, 2015, by and between Gian Piero Reverberi, Senior Vice President and General Manager Europe, and the registrant (filed as Exhibit 10.64 to the registrant’s quarterly report on Form10-Q (FileNo. 001-34186) on November 4, 2015 and incorporated herein by reference).
10.24†10.22Employment Agreement, dated September  14, 2015, by and between Richard L. Gulino, Senior Vice President, General Counsel and Secretary, and the registrant (filed as Exhibit 10.65 to the registrant’s quarterly report on Form10-Q (FileNo. 001-34186) on November 4, 2015 and incorporated herein by reference).
10.25
10.26†10.23†
10.27†10.24†
10.28†10.25†
10.29†10.26†
10.30†10.27†
10.31†10.28†

105

Table of Contents
Exhibit

Number

Description

10.29‡
10.32#
10.3310.30
10.3410.31
10.35#10.32
10.36#10.33
10.37†*10.34
10.35
10.36†
21.1*10.37†
10.38†
10.39†
10.40
10.41
10.42
21.1
23.1*
31.1*
31.2*
32.1*
106

Table of Contents
101*Exhibit
Number		Description
101*
The following financial information from this annual report on Form10-K for the fiscal year ended December 31, 2017,2022, formatted in XBRL (eXtensibleInline Extensible Business Reporting Language)Language (iXBRL) and furnished electronically herewith: (i) Consolidated Balance Sheets as of December 31, 20172022 and 2016;2021; (ii) Consolidated Statements of Operations for the years ended December 31, 2017, 20162022, 2021 and 2015;2020; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 20162022, 2021 and 2015;2020; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 20162022, 2021 and 2015;2020; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162022, 2021 and 2015;2020; and (vi) Notes to the Consolidated Financial Statements.

†
104Cover Page Interactive Data File (embedded within the Inline XBRL document).
†Indicates management contract or compensatory plan.plan or arrangement.
#Confidential treatment has been granted with respect to certain provisions
‡Portions of this exhibit.exhibit have been omitted under rules of the Securities and Exchange Commission permitting the confidential treatment of select information.
*Filed herewith.
*Filed herewith.

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107