e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 001-34186
VANDA PHARMACEUTICALS
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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03-0491827
(I.R.S. Employer
Identification No.)
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9605 Medical Center Drive, Suite 300
Rockville, Maryland 20850
(240) 599-4500
(Address and telephone number,
including area code, of registrants principal executive
offices)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001
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The Nasdaq Stock Market LLC
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(NASDAQ Global Market)
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Rights to Purchase Series A Junior Participating Preferred Stock
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The Nasdaq Stock Market LLC
(NASDAQ Global Market)
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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 o No þ
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 o No þ
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 þ No o
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
Regulation S-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 o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Securities Exchange Act of
1934). Yes o No þ
The aggregate market value of the 19,506,882 shares of
Common Stock held by non-affiliates of the registrant was
$229,596,001 as of the last business day of the
registrants most recently completed second quarter based
on the closing price of the registrants Common Stock on
such date. Shares of Common Stock held by each executive
officer, 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 registrants Common Stock, par
value $0.001 per share, outstanding as of March 12, 2010
was 27,860,232.
The exhibit index as required by Item 601(a) of
Regulation S-K
is included in Item 15 of Part IV of this report.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2010
Annual Meeting of Stockholders to be filed within 120 days
after the end of the registrants fiscal year ended
December 31, 2009, are incorporated by reference in
Part III of this annual report on
Form 10-K.
Vanda
Pharmaceuticals Inc.
Form 10-K
Table of Contents
1
PART I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this report are forward-looking
statements under the securities laws. Words such as, but
not limited to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, and similar expressions or words, identify
forward-looking statements. Forward-looking statements are based
upon current expectations that involve risks, changes in
circumstances, assumptions and uncertainties. Important factors
that could cause actual results to differ materially from those
reflected in our forward-looking statements include, among
others:
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the extent and effectiveness of the development, sales and
marketing and distribution support
Fanapttm
receives;
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our ability to successfully commercialize
Fanapttm
outside of the U.S. and Canada;
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delays in the completion of our clinical trials;
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a failure of our products, product candidates or partnered
products to be demonstrably safe and effective;
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our failure to obtain regulatory approval for our products or
product candidates or to comply with ongoing regulatory
requirements;
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a lack of acceptance of our products, product candidates or
partnered products in the marketplace, or a failure to become or
remain profitable;
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our expectations regarding trends with respect to our costs and
expenses;
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our inability to obtain the capital necessary to fund our
research and development activities;
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our failure to identify or obtain rights to new products or
product candidates;
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our failure to develop or obtain sales, marketing and
distribution resources and expertise or to otherwise manage our
growth;
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a loss of any of our key scientists or management personnel;
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losses incurred from product liability claims made against
us; and
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a loss of rights to develop and commercialize our products or
product candidates under our license and sublicense agreements.
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All written and verbal forward-looking statements attributable
to us or any person acting on our behalf are expressly qualified
in their entirety by the cautionary statements contained or
referred to in this section. We caution investors not to rely
too heavily on the forward-looking statements 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.
We encourage you to read the discussion and analysis of our
financial condition and our consolidated financial statements
contained in this annual report on
Form 10-K.
We also encourage you to read Item 1A of Part 1 of
this annual report on
Form 10-K,
entitled Risk 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, other unknown or unpredictable
factors also could affect our results. There can be no assurance
that the actual results or developments anticipated by us will
be realized or, even if substantially realized, that they will
have the expected consequences to, or effects on, us. Therefore
no assurance can be given that the outcomes stated in such
forward-looking statements and estimates will be achieved.
2
Overview
Vanda Pharmaceuticals Inc. (We, Vanda or the Company) is a
biopharmaceutical company focused on the development and
commercialization of clinical-stage products for central nervous
system disorders. We believe that each of our products and
partnered products will address a large market with significant
unmet medical needs by offering advantages over currently
available therapies. Our product portfolio includes:
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Fanapttm
(iloperidone), a compound for the treatment of schizophrenia. On
October 12, 2009, we entered into an amended and restated
sublicense agreement with Novartis. We had originally entered
into a sublicense agreement with Novartis on June 4, 2004
pursuant to which we obtained certain worldwide exclusive
licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapttm
in the U.S. Except for two post-approval studies started by
us prior to the execution date of the amended and restated
sublicense agreement, both of which were substantially completed
by December 31, 2009, Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot) formulation of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada. On February 23, 2010,
the U.S. Patent and Trademark Office (PTO) issued a notice
of allowance for our patent application for the long acting
injectable (or depot) formulation of
Fanapttm.
The PTO has informed us that the application is eligible for
patent term adjustment of an additional 300 days, making
the patent expiration date August 26, 2023.
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Tasimelteon, a compound for the treatment of sleep and mood
disorders, including Circadian Rhythm Sleep Disorders (CRSD). In
November 2006, we announced positive top-line results from the
Phase III trial of tasimelteon in transient insomnia. In
June 2008, we announced positive top-line results from the
Phase III trial of tasimelteon in chronic primary insomnia.
On January 19, 2010, the United States Food and Drug
Administration (FDA) granted orphan drug designation status for
tasimelteon in a specific CRSD, Non-24-Hour Sleep/Wake Disorder
in blind individuals without light perception. 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. We will continue to
explore the path to a New Drug Application (NDA) for
tasimelteon. Tasimelteon is also ready for Phase II trials
for the treatment of depression. Given the range of potential
indications for tasimelteon, we may pursue one or more
partnerships for the development and commercialization of
tasimelteon worldwide.
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Throughout this annual report on
Form 10-K,
we refer to
Fanapttm
within the U.S. and Canada as our partnered product and we
refer to
Fanapttm
outside the U.S. and Canada and tasimelteon as our
products. All other compounds are referred to herein as our
product candidates. In addition, we refer to our partnered
products, products and product candidates collectively as our
compounds. Moreover, we refer to drug products generally as
drugs or products.
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Since we began our operations in March 2003, we have devoted
substantially all of our resources to the in-licensing and
clinical development of our compounds. Our ability to generate
revenue and achieve profitability largely depends on
Novartis ability to successfully commercialize
Fanapttm
in the U.S. and to successfully develop and commercialize
Fanapttm
in Canada and upon our ability, alone or with others, to
complete the development of our products or product candidates,
and to obtain the regulatory approvals for and manufacture,
market and sell our products and product candidates. The results
of our operations will vary significantly from
year-to-year
and
quarter-to-quarter
and depend on a number of factors, including risks related to
our business, risks related to our industry, and other risks
which are detailed in Item 1A of Part I of this annual
report on
Form 10-K,
entitled Risk Factors.
Our activities will necessitate significant uses of working
capital throughout 2010 and beyond. However, for the immediate
future, we expect to continue to operate on a reduced spending
plan. We are currently concentrating our efforts on supporting
Novartis commercial launch of
Fanapttm
in the U.S. In addition, we intend to engage in discussions
with several foreign regulatory agencies to review their filing
requirements with respect to
Fanapttm.
We also plan to continue the clinical, regulatory and commercial
evaluation of tasimelteon, including exploring the path to a NDA
for tasimelteon.
Our founder and Chief Executive Officer, Mihael H.
Polymeropoulos, M.D., started our operations early in 2003
after establishing and leading the Pharmacogenetics Department
at Novartis. In acquiring and developing our compounds, 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. We believe that the
combination of our expertise in these disciplines and our drug
development expertise may provide us with preferential access to
compounds discovered by other pharmaceutical companies, and will
allow us to identify new uses for these compounds. These
capabilities should also enable us to shorten the time it takes
to commercialize a drug when compared to traditional approaches.
Fanapttm
and tasimelteon both target large prescription markets with
significant unmet medical needs. We believe that
Fanapttm
may address some of the shortcomings of other currently
available drugs, based on its observed safety profile and the
extended release injectable formulation for
Fanapttm
that Novartis plans to develop further. Approved drugs in both
the sleep and mood disorders markets have
sub-optimal
safety and efficacy profiles. We believe tasimelteon may
represent a breakthrough in each of these markets, based on the
compounds demonstrated efficacy and safety to date and its
novel mechanism of action.
Our
strategy
Our goal is to create a leading biopharmaceutical company
focused on developing and commercializing products that address
critical 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:
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Pursue the clinical development and regulatory approval of
our products and product candidates. On
May 6, 2009, the FDA granted U.S. marketing approval
of
Fanapttm
for the acute treatment of schizophrenia in adults. On
October 12, 2009, we entered into an amended and restated
sublicense agreement with Novartis. We had originally entered
into a sublicense agreement with Novartis on June 4, 2004
pursuant to which we obtained certain worldwide exclusive
licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapttm
in the U.S. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. We have successfully completed
a Phase III trial of tasimelteon in transient insomnia and
announced positive top-line results in November 2006. In
addition, we have successfully completed a Phase III trial
of tasimelteon in chronic primary insomnia and announced
positive top-line results in June 2008. On January 19,
2010, the FDA granted orphan drug designation status for
tasimelteon in a specific CRSD, Non-24-Hour Sleep/Wake Disorder
in blind
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individuals without light perception. 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. We will continue to explore
the path to a NDA for tasimelteon. Tasimelteon is also ready for
Phase II trials for the treatment of depression.
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Enter into partnerships to extend our commercial
reach. We may seek commercial partners for
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada, or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada. In addition, given the
range of potential indications for tasimelteon, we may pursue
one or more partnerships for the development and
commercialization of tasimelteon worldwide.
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Apply our pharmacogenetics and pharmacogenomics expertise to
differentiate our products and product
candidates. We believe that our pharmacogenetics
and pharmacogenomics expertise will yield new insights into our
products and product candidates. These insights may enable us to
target our products and product candidates to certain patient
populations and to identify unexpected conditions for our
products and product candidates to treat.
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Expand our product portfolio through the identification and
acquisition of additional compounds. We intend to
continue to draw upon our clinical development expertise and
pharmacogenetics and pharmacogenomics expertise to identify and
pursue additional clinical-stage compounds.
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Development
programs
We have the following products and partnered products in
clinical development:
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Product
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Target indications
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Clinical status
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Fanapttm
(Oral)
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Schizophrenia
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FDA approval May 6, 2009; Commercial rights in the U.S. and
Canada sublicensed to Novartis on October 12, 2009
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Fanapttm
(Injectable)
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Schizophrenia
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Ready for Phase II trial; Novartis responsible for further
clinical development
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Tasimelteon
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Sleep Disorders, including CRSD
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Phase III trial for transient insomnia completed in 2006
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Phase III trial for chronic primary insomnia completed in
2008 Orphan drug designation granted on January 19, 2010 for
Non-24-Hour Sleep/Wake Disorder in blind individuals without
light perception
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Depression
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Ready for Phase II trial
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Fanapttm
Fanapttm
is a compound for the treatment of schizophrenia. On May 6,
2009, the FDA granted U.S. marketing approval of
Fanapttm
for the acute treatment of schizophrenia in adults. On
October 12, 2009, we entered into an amended and restated
sublicense agreement with Novartis. We had originally entered
into a sublicense agreement with Novartis on June 4, 2004
pursuant to which we obtained certain worldwide exclusive
licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapttm
in the U.S. Except for two post-approval studies started by
us prior to the execution date of the amended and restated
sublicense agreement, both of which were substantially completed
by December 31, 2009, Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot)
5
formulation of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada.
Therapeutic
opportunity
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 additionally attention and
memory deficits (collectively referred to as cognitive
symptoms). Schizophrenia develops in late adolescence or
early adulthood in approximately 1% of the worlds
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
and currently comprise approximately 90% of schizophrenia
prescriptions. Currently approved atypical antipsychotics
include, in addition to
Fanapttm,
olanzapine
(Zyprexa®)
by Eli Lilly and Company, risperidone
(Risperdal®)
and paliperidone
(Invega®),
each by Ortho-McNeil-Janssen Pharmaceuticals, Inc., quetiapine
(Seroquel®)
by AstraZeneca, aripiprazole
(Abilify®)
by Bristol-Myers Squibb (BMS), ziprasidone
(Geodon®)
by Pfizer, asenapine
(Saphris®)
by Schering-Plough and generic clozapine.
Pursuant to the amended and restated sublicense agreement,
Novartis will be responsible for the further clinical
development of the long-acting injectable or depot formulation
of
Fanapttm.
The depot formulation is administered once every four weeks and
we believe will be a compelling complement to the oral
formulation for both physicians and patients. Novartis conducted
a two-month Phase I/IIa safety trial of this formulation in
schizophrenia patients, in which it demonstrated the benefit of
consistent release over a four-week time period with no greater
side effects relative to oral dosing. The commercial potential
for the extended-release injectable formulation has been
demonstrated by the success of the injectable formulation for
risperidone,
Risperdal®
Consta®,
which achieved worldwide sales of approximately
$1.3 billion in 2008, according to Alkermes Company press
releases.
Intellectual
property
Fanapttm
and its metabolites, formulations, genetic markers and uses are
covered by a total of twenty-two patent and patent application
families worldwide. The primary new chemical entity patent
covering
Fanapttm
expires normally in 2011 in the U.S. and 2010 in most of
the major markets in Europe. In the U.S., the United States
Drug Price Competition and Patent Term Restoration Act of 1984,
more commonly known as the Hatch-Waxman Act provides
for an extension of new chemical entity patents for a period of
up to five years following the expiration of the patent covering
that compound to compensate for time spent in development. We
believe that
Fanapttm
will qualify for the full five-year patent term extension and,
in addition, will be eligible for 6 months of pediatric
exclusivity. In Europe, statutes provide 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
Fanapttm
would be permitted to be marketed or sold during this
10-year (or
11-year)
period in most European countries. Consequently, assuming that
patent term restoration and pediatric exclusivity are granted by
the PTO and FDA and that we receive regulatory approval in
Europe, we expect
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that Novartis rights to commercialize
Fanapttm
will be exclusive until May 2017 in the U.S. and for at
least 10 years from approval in Europe. Additionally, the
patent application covering the depot formulation of
Fanapttm,
which Novartis will be responsible for, if it is granted, will
expire normally in 2023 in the U.S. Several other patent
applications covering metabolites, uses, formulations and
genetic markers relating to
Fanapttm
extend beyond 2020.
We acquired worldwide, exclusive rights to the new chemical
entity patent covering
Fanapttm
and certain related intellectual property from Novartis under a
sublicense agreement we entered into in 2004, which was restated
and amended in 2009. Please see License agreements
below for a more complete description of the rights we acquired
from and relinquished to Novartis with respect to
Fanapttm.
Tasimelteon
Tasimelteon is an oral compound in development for sleep and
mood disorders, including CRSD. The compound binds selectively
to the brains melatonin receptors, which are thought to
govern the bodys natural sleep/wake cycle. Compounds that
bind selectively to these receptors are thought to be able to
help treat sleep disorders, and additionally are believed to
offer potential benefits in mood disorders. We announced
positive top-line results from our Phase III trial of
tasimelteon in transient insomnia in November 2006. In June
2008, we announced positive top-line results from the
Phase III trial of tasimelteon in chronic primary insomnia.
On January 19, 2010, the FDA granted orphan drug
designation status for tasimelteon in a specific CRSD,
Non-24-Hour Sleep/Wake Disorder in blind individuals without
light perception. 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. We will continue to explore the path to a
NDA for tasimelteon.
Therapeutic
opportunity
Sleep disorders are segmented into three major categories:
primary insomnia, secondary insomnia and circadian rhythm sleep
disorders. Insomnia is a symptom complex that comprises
difficulty falling asleep or staying asleep, or non-refreshing
sleep, 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). CRSD results from a
misalignment of the sleep/wake cycle and an individuals
daily activities or lifestyle. The circadian rhythm is the
rhythmic output of the human biological clock and is governed
primarily by the hormone melatonin. 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 CRSD includes
transient disorders such as jet lag and chronic disorders such
as shift work sleep disorder and Non-24-Hour Sleep/Wake
Disorder. Market research we have conducted with LEK Consulting
indicates that CRSD represents a significant portion of the
market for sleep disorders.
While there are no FDA-approved treatments for insomnia
specifically related to CRSD, there are a number of drugs
approved and prescribed for patients with sleep disorders. The
most commonly prescribed drugs are hypnotics, such as generic
zolpidem, zolpidem tartrate (Ambien
CR®,
sanofi-aventis), eszopiclone
(Lunesta®,
Sepracor, Inc.) and zaleplon
(Sonata®,
King Pharmaceuticals, Inc.). Hypnotics work by acting upon a set
of brain receptors known as GABA receptors, which are separate
and distinct from the melatonin receptors to which tasimelteon
binds. Several drugs in development, including indiplon
(Neurocrine Biosciences), also utilize a mechanism of action
involving binding to GABA receptors. Members of the
benzodiazapine class of sedatives are also approved for
insomnia, but their usage has declined due to an inferior safety
profile compared to hypnotics. Anecdotal evidence also suggests
that sedative antidepressants, such as trazodone and doxepin,
are prescribed off-label for insomnia. FDA approved drugs for
the treatment of insomnia also include ramelteon
(Rozeremtm,
Takeda Pharmaceuticals Company Limited), a compound with a
mechanism of action similar to tasimelteon.
7
Limitations
of current treatments
We believe that each of the drugs currently used to treat
insomnia has inherent limitations that leave patients
underserved. The key limitations include the potential for
abuse, significant side effects, and a failure to address the
underlying causes of sleeplessness:
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Many of the products prescribed commonly for sleep disorders,
including
Ambien®,
Lunesta®,
and
Sonata®,
are classified as Schedule IV controlled substances by the
United States Drug Enforcement Administration (DEA) due to their
potential for abuse, tolerance and withdrawal symptoms. Drugs
that are classified as Schedule IV controlled substances
are subject to restrictions on how such drugs are prescribed and
dispensed.
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Many drugs approved for and used in sleep disorders also induce
a number of nuisance side effects beyond the more serious abuse
and addiction effects associated with most approved products.
These side effects include
next-day
grogginess, memory loss, unpleasant taste, dry mouth and
hormonal changes.
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We believe that none of the drugs used and approved for sleep,
other than
Rozeremtm,
work through the bodys natural sleep/wake cycle, which is
governed by melatonin. We believe that, for patients whose sleep
disruption is due to a misalignment of this sleep/wake cycle (as
is the case in CRSD), a drug that naturally modulates the
sleep/wake cycle would be an attractive new alternative because
it would address the underlying cause of the sleeplessness,
rather than merely addressing its symptoms.
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Potential
advantages of tasimelteon
We believe that tasimelteon may offer efficacy similar to the
most efficacious of the approved sleep drugs, and that it may
provide significant benefits to patients beyond those offered by
the approved drugs. We believe that tasimelteon is unlikely to
be scheduled as a controlled substance by the DEA because
Rozeremtm,
which has a similar mechanism of action to tasimelteon, was
shown not to have potential for abuse and was not classified as
a Schedule IV controlled substance by the DEA. However,
despite the fact that the drugs have a similar mechanism of
action, our Phase III results have demonstrated that
tasimelteon may offer superior sleep maintenance to
Rozeremtm.
Tasimelteon also appears to be safe and well-tolerated, with no
significant side effects or effects on
next-day
performance. For patients with circadian rhythm disorders,
tasimelteon may be able to align the patients sleep/wake
cycle with his or her lifestyle, something we believe no
approved sleep therapy has demonstrated. For example, in our
Phase II trial of tasimelteon in transient insomnia with 37
healthy participants, tasimelteon induced a statistically
significant (p<0.025) shift in circadian rhythm of up to
five hours on the first night.
Overview
of Phase III clinical trials
In November 2006, we reported positive top-line results in a
randomized, double-blind, multi-center, placebo-controlled
Phase III trial that enrolled 412 adults in a sleep
laboratory setting using a phase-advance, first-night assessment
model of induced transient insomnia. The trial examined
tasimelteon dosed 30 minutes before bedtime at 20, 50 and 100
milligrams versus placebo.
Tasimelteon achieved significant results in multiple endpoints,
demonstrating a benefit in both sleep onset, or time to fall
asleep, and sleep maintenance, or ability to stay asleep. Based
on these trial results, we believe that tasimelteon will compare
favorably to efficacy achieved by currently approved insomnia
drugs, not only for circadian rhythm sleep disorders but also
for other types of insomnia. The Phase III trial also
demonstrated that tasimelteon was safe and well-tolerated, with
no significant side effects versus placebo and no impairment of
next-day
performance or mood.
In June 2008, we reported positive top-line results in a
randomized, double-blind, placebo-controlled Phase III
trail in chronic primary insomnia that enrolled
324 patients. The trial examined tasimelteon at 20 and 50
milligrams versus placebo over a period of 35 days. The
trial measured time to fall asleep and sleep maintenance, as
well as
next-day
performance. We will need to conduct additional Phase III
trials of
8
tasimelteon for the treatment of chronic sleep disorders to
receive FDA approval of tasimelteon for the treatment of
insomnia.
Potential
indication for depression
We believe that tasimelteon may also be effective in treating
depression. Agomelatine, another drug that acts on the
brains melatonin receptors, has demonstrated efficacy and
safety in the treatment of depression that compared favorably to
an approved antidepressant,
Paxil®
(paroxetine, GSK), in a Phase III trial. While the precise
mechanism for the effect of drugs like tasimelteon, agomelatine
and
Rozeremtm,
which act on the brains melatonin receptors, is currently
unknown, it is possible that, by improving sleep, these drugs
could improve mood, since depressed patients are likely to have
sleep disorders. It is also possible that mood disorders such as
depression have an association with circadian rhythm
misalignments.
We believe that tasimelteon will be differentiated from approved
antidepressants in several ways. In the Phase III trial of
agomelatine described above, agomelatine showed significantly
improved mood in two weeks, versus four weeks for
Paxil®.
Consequently, tasimelteon may, with its similar properties to
agomelatine, offer a more rapid onset of action than approved
antidepressants. We believe that tasimelteon should also have an
improved side effect profile when compared to approved products
because we believe that it should not have the sexual side
effects, weight gain, and sleep disruption associated with these
products.
Tasimelteon is ready for Phase II trials in depression. It
has demonstrated an antidepressant effect in animal models and
has completed several Phase I trials, including one with four
weeks of exposure, showing none of the serious side effects
associated with the approved antidepressants.
Intellectual
property
Tasimelteon and its formulations and uses are covered by a total
of eleven patent and patent application families worldwide. The
primary new chemical entity patent covering tasimelteon expires
normally in 2017 in the U.S. and in most European markets.
We believe that, like
Fanapttm,
tasimelteon 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 patent protection in the
U.S. until 2022. In Europe, data exclusivity will protect
tasimelteon for at least ten years from approval. Additional
patent applications directed to specific sleep disorders and to
methods of administration, if issued, would provide exclusivity
for such indications and methods of administration until at
least 2026.
Our rights to the new chemical entity patent covering
tasimelteon and related intellectual property have been acquired
through a license with BMS. Please see License
agreements below for a discussion of this license.
License
agreements
Our rights to develop and commercialize our products and product
candidates are subject to the terms and conditions of licenses
granted to us by other pharmaceutical companies.
Fanapttm
We acquired exclusive worldwide rights to patents and patent
applications for
Fanapttm
through a sublicense agreement with Novartis. A predecessor
company of sanofi-aventis, Hoechst Marion Roussel, Inc. (HMRI),
discovered
Fanapttm
and completed early clinical work on the compound. In 1996,
following a review of its product portfolio, HMRI licensed its
rights to the
Fanapttm
patents and patent applications to Titan Pharmaceuticals, Inc.
(Titan) on an exclusive basis. In 1997, soon after it had
acquired its rights, Titan sublicensed its rights to
Fanapttm
on an exclusive basis to Novartis. In June 2004, we acquired
exclusive worldwide rights to these patents and patent
applications as well as certain Novartis patents and patent
applications to develop and commercialize
Fanapttm
through a sublicense agreement with Novartis. In partial
consideration for this sublicense, we paid Novartis an initial
license fee of $0.5 million and were obligated to make
future milestone payments to Novartis of less than
$100.0 million in the aggregate (the majority of
9
which were tied to sales milestones), as well as royalty
payments to Novartis at a rate which, as a percentage of net
sales, was in the mid-twenties. In November 2007, we met a
milestone under this sublicense agreement relating to the
acceptance of our filing of the NDA for
Fanapttm
for the treatment of schizophrenia and made a corresponding
payment of $5.0 million to Novartis. As a result of the
FDAs approval of the NDA for
Fanapttm,
we met an additional milestone under this sublicense agreement
which required us to make a payment of $12.0 million to
Novartis.
On October 12, 2009, we entered into an amended and
restated sublicense agreement with Novartis which amended and
restated our June 2004 sublicense agreement with Novartis
relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Novartis began selling
Fanapttm
in the U.S. during the first quarter of 2010. Except for
two post-approval studies started by us prior to the execution
date of the amended and restated sublicense agreement, both of
which were substantially completed by December 31, 2009,
Novartis is responsible for the further clinical development
activities in the U.S. and Canada, including the
development of a long-acting injectable (or depot) formulation
of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and are
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada.
We may lose our rights to develop and commercialize
Fanapttm
outside the U.S. and Canada if we fail to comply with
certain requirements in the amended and restated sublicense
agreement regarding our financial condition, or if we fail to
comply with certain diligence obligations regarding our
development or commercialization activities or if we otherwise
breach the amended and restated sublicense agreement and fail to
cure such breach. Our rights to develop and commercialize
Fanapttm
outside the U.S. and Canada may be impaired if we do not
cure breaches by Novartis of similar obligations contained in
its sublicense agreement with Titan for
Fanapttm.
We are not aware of any such breach by Novartis. In addition, if
Novartis breaches the amended and restated sublicense agreement
with respect to its commercialization activities in the
U.S. or Canada, we may terminate Novartis
commercialization rights in the applicable country and we would
no longer receive royalty payments from Novartis in connection
with such country in the event of such termination.
Tasimelteon
In February 2004, we entered into a license agreement with 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 tasimelteon.
In partial consideration for the license, we paid BMS an initial
license fee of $0.5 million. We are also obligated to make
future milestone payments to BMS of less than $40.0 million
in the aggregate (the majority of which are tied to sales
milestones) as well as royalty payments based on the net sales
of tasimelteon at a rate which, as a percentage of net sales, is
in the low teens. We made a milestone payment to BMS of
$1.0 million under this license agreement in 2006 relating
to the initiation of our first Phase III clinical trial for
tasimelteon. We are also obligated under this 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 in the mid-twenties. We have
agreed with BMS in our license agreement for tasimelteon to use
our commercially reasonable efforts to develop and commercialize
tasimelteon and to meet certain milestones in initiating and
completing certain clinical work.
BMS holds certain rights with respect to tasimelteon in the
license agreement. If we have not agreed to one or more
partnering arrangements to develop and commercialize tasimelteon
in certain significant markets
10
with one or more third parties by a certain date, BMS has the
option to exclusively develop and commercialize tasimelteon on
its own on pre-determined financial terms, including milestone
and royalty payments.
Either party may terminate the tasimelteon license agreement
under certain circumstances, including a material breach of the
agreement by the other. In the event that BMS has not exercised
its option to reacquire the rights to tasimelteon and 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.
Government
regulation
Government authorities in the U.S., at the federal, state and
local level, as well as foreign countries and local foreign
governments, regulate the research, development, testing,
manufacture, labeling, promotion, advertising, distribution,
sampling, marketing, import and export of our products. Other
than
Fanapttm
in the U.S., all of our compounds will require regulatory
approval by government agencies prior to commercialization. In
particular, human pharmaceutical products are subject to
rigorous pre-clinical and clinical trials and other approval
procedures of the FDA and similar regulatory authorities in
foreign countries. The process of obtaining these approvals and
the subsequent compliance with appropriate domestic and foreign
laws, rules and regulations require the expenditure of
significant time and human and financial resources.
United
States government regulation
FDA
approval process
In the U.S., the FDA regulates drugs under the Federal Food,
Drug and Cosmetic Act and implements regulations. If we fail to
comply with the applicable requirements at any time during the
product development process, approval process, or after
approval, we may become subject to administrative or judicial
sanctions. These sanctions could include the FDAs refusal
to approve pending applications, withdrawals of approvals,
clinical holds, warning letters, product recalls, product
seizures, total or partial suspension of our operations,
injunctions, fines, civil penalties or criminal prosecution. Any
such sanction could have a material adverse effect on our
business.
The steps required before a drug may be marketed in the
U.S. include:
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pre-clinical laboratory tests, animal studies and formulation
studies under Current Good Laboratory Practices (cGLP)
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submission to the FDA of an investigational new drug
application, or IND, which must become effective before human
clinical trials may begin
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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
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submission to the FDA of an NDA
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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)
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FDA review and approval of the NDA
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Pre-clinical studies generally are conducted in laboratory
animals to evaluate the potential safety and activity of a drug.
Violation of the FDAs 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
of pre-clinical trials, together with manufacturing information
and analytical and stability data, to the FDA as part of the
IND, which must become effective before clinical trials can
begin in the U.S.. An IND becomes effective 30 days after
receipt by the FDA unless before that time the FDA raises
concerns or questions about issues such as the proposed clinical
trials outlined in the IND. In that case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. If these concerns or
questions are unresolved, the FDA may not allow the clinical
trials to commence.
11
Pilot studies generally are 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 government regulations and
institutional procedures.
Clinical trials involve the administration of the
investigational new drug to human subjects under the supervision
of qualified investigators. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the
study, the parameters to be used in assessing the safety and the
effectiveness of the drug. 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 trial must be reviewed, approved and conducted
under the auspices of an independent Institutional Review Board,
and each trial must include the patients informed consent.
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Phase I: refers typically to closely-monitored clinical trials
and includes the initial introduction of an investigational new
drug into human patients or health volunteer subjects. Phase I
trials are designed to determine the safety, metabolism and
pharmacologic actions of a drug in humans, the potential side
effects associated with increasing drug doses and, if possible,
to gain early evidence of the drugs effectiveness. Phase I
trials also include the study of structure-activity
relationships and mechanism of action in humans, as well as
studies in which investigational new drugs are used as research
tools to explore biological phenomena or disease processes.
During Phase I trials, sufficient information about a
drugs pharmacokinetics and pharmacological effects should
be obtained to permit the design of well-controlled,
scientifically valid Phase II studies. The total number of
subjects and patients included in Phase I trials varies, but is
generally in the range of 20 to 80 people.
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Phase II: refers to controlled clinical trials conducted to
evaluate appropriate dosage and the effectiveness of a drug for
a particular indication or indications in patients with a
disease or condition under study and to determine the common
short-term side effects and risks associated with the drug.
These trials are typically well-controlled, closely monitored
and conducted in a relatively small number of patients, usually
involving no more than several hundred subjects.
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Phase III: refers to expanded controlled and uncontrolled
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
evaluate the overall benefit-risk relationship of the drug and
to provide an adequate basis for physician labeling.
Phase III trials usually include several hundred to several
thousand subjects.
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Phase I, II and III testing may not be completed
successfully within any specified time period, if at all. The
FDA closely monitors 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
FDAs 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 and pre-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 or we may suspend
or terminate clinical trials at any time for various reasons,
including a finding that the subjects or patients are being
exposed to an unacceptable health risk. The FDA can also request
additional clinical trials be conducted as a condition to drug
approval. During all clinical trials, physicians monitor the
patients to determine effectiveness and to observe and report
any reactions or other safety risks that may result from use of
the drug.
Assuming successful completion of the required clinical trials,
drug developers submit the results of pre-clinical studies and
clinical trials, together with other detailed information
including information on the manufacture and composition of the
drug, to the FDA, in the form of an NDA, requesting approval to
market the drug for one or more indications. In most cases, the
NDA must be accompanied by a substantial user fee.
12
The FDA reviews an NDA to determine, among other things, whether
a drug is safe and effective for its intended use.
Before approving an NDA, the FDA will inspect the facility or
facilities where the drug is manufactured. The FDA will not
approve the application unless cGMP compliance is satisfactory.
The FDA 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 outline the deficiencies in the submission
and will often request additional testing or information.
Notwithstanding the submission of any requested additional
information, the FDA may ultimately decide that the NDA does not
satisfy the regulatory criteria for approval and refuse to
approve the NDA by issuing a not approvable letter
which is not subsequently withdrawn or reversed by the FDA.
The testing and approval process requires substantial time,
effort and financial resources, and each may take several years
to complete. The FDA may not grant approval on a timely basis,
or at all. We may encounter difficulties or unanticipated costs
in our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products and
product candidates. Furthermore, the FDA may prevent a drug
developer from marketing a drug under a label for its desired
indications or place other conditions on distribution as a
condition of any approvals, which may impair commercialization
of the drug. After approval, some types of changes to the
approved drug, such as adding new indications, manufacturing
changes and additional labeling claims, are subject to further
FDA review and approval. Similar regulatory procedures must also
be complied within countries outside the U.S.
If the FDA approves the new drug application, the drug becomes
available for physicians to prescribe in the U.S. After approval
of our products and product candidates, 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 sampling and
distribution requirements. We 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 subcontractors are required to register their
facilities and are subject to periodic unannounced inspections
by the FDA to assess 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 cGMP
and other aspects of regulatory compliance. The FDA may require
post market testing and surveillance to monitor the drugs
safety or efficacy, including additional studies, known as
Phase IV trials, to evaluate long-term effects.
In addition to studies requested by the FDA after approval, we
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
acceptance in the medical community.
We use, and will continue to use, third-party manufacturers to
produce our products and product candidates in clinical and
commercial quantities. Future FDA inspections may identify
compliance issues at our facilities or at the facilities of our
contract manufacturers that may disrupt production or
distribution, or require substantial resources to correct. In
addition, discovery of problems with a product or the failure to
comply with requirements may result in restrictions on a
product, manufacturer or holder of an approved NDA, including
withdrawal or recall of the product from the market or other
voluntary or FDA-initiated action that could delay further
marketing. Newly discovered or developed safety or effectiveness
data may require changes to a products approved labeling,
including the addition of new warnings and contraindications.
On September 27, 2007, the Food and Drug Administration
Amendments Act, or the FDAAA, was enacted into law, amending
both the FDC Act and the Public Health Service Act. The FDAAA
makes a number of substantive and incremental changes to the
review and approval processes 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 changes the
FDAs handling of postmarked drug product safety issues by
giving the FDA authority to require post approval studies or
clinical
13
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, or REMS.
The FDAAA also reauthorized the authority of the FDA to collect
user fees to fund the FDAs review activities and made
certain changes to the user fee provisions to permit the use of
user fee revenue to fund the FDAs drug product safety
activities and the review of
Direct-to-Consumer
advertisements.
In addition, new government requirements may be established that
could delay or prevent regulatory approval of our products and
product candidates under development.
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 applicants drug. Upon approval of a drug, each of the
patents listed in the application for the drug is then published
in the FDAs Approved Drug Products with Therapeutic
Equivalence Evaluations, commonly known as the 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, or 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 of pre-clinical 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 FDAs
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 drugs 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 any
non-patent exclusivity, such as exclusivity for obtaining
approval of a new chemical entity, listed in the Orange Book for
the referenced drug has expired. Federal law 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.
Foreign
regulation
Whether or not we obtain FDA approval for a product or product
candidate, we must obtain approval by the comparable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing
14
of the product or product candidate 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. However, the foreign
equivalent of an IND is not a prerequisite to performing pilot
studies or Phase I clinical trials.
Under European Union regulatory systems, we may submit marketing
authorization applications 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 European Union 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. We face the risk that the
resulting prices would be insufficient to generate an acceptable
return to us or our partners.
Third-party
reimbursement and pricing controls
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. Third-party payors are increasingly
challenging the prices charged for medical products and
services. It 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 compounds may not be considered
cost-effective, and coverage and reimbursement may not be
available or sufficient to allow us or our partners to sell our
compounds on a competitive and profitable basis. The passage of
the Medicare Prescription Drug and Modernization Act of 2003
imposes new requirements for the distribution and pricing of
prescription drugs which may affect the marketing of our
compounds.
In many foreign markets, including the countries in the European
Union and Japan, pricing of pharmaceutical products is subject
to governmental control. In the U.S., there have been, and we
expect that there will continue to be, a number of federal and
state proposals to implement similar governmental pricing
control. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on our business,
financial condition and profitability.
Marketing
and sales
On October 12, 2009, we entered into an amended and
restated sublicense agreement with Novartis. We had originally
entered into a sublicense agreement with Novartis on
June 4, 2004 pursuant to which we obtained certain
worldwide exclusive licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Novartis began selling
Fanapttm
in the U.S. during the first quarter of 2010. Except for
two post-approval studies started by us prior to the execution
date of the amended and restated sublicense agreement, both of
which were substantially completed by December 31, 2009,
Novartis is responsible for the further clinical development
activities in the U.S. and Canada, including the
development of a long-acting injectable (or depot) formulation
of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any future royalty payments with respect to
15
sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada. In addition, given the
range of potential indications for tasimelteon, we may pursue
one or more partnerships for the development and
commercialization of tasimelteon worldwide.
Patents
and proprietary rights; Hatch-Waxman protection
We and our partners will be able to protect our compounds from
unauthorized use by third parties only to the extent that our
compounds are 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.
Fanapttm
and tasimelteon are covered by new chemical entity and other
patents. These patents cover the active pharmaceutical
ingredient and provide patent protection for all formulations
containing these active pharmaceutical ingredients. The new
chemical entity patent for
Fanapttm
is owned by sanofi-aventis, and other patents and patent
applications relating to
Fanapttm
are owned by Novartis. BMS owns the new chemical entity patent
for tasimelteon. We originally obtained exclusive worldwide
rights to develop and commercialize the compounds covered by
these patents through license and sublicense arrangements.
However, pursuant to the amended and restated sublicense
agreement with Novartis, Novartis obtained exclusive
commercialization rights to all formulations of
Fanapttm
in the U.S. and Canada. For more on these license and
sublicense arrangements, please see License
agreements above. In addition, we have generated
intellectual property, and filed patent applications covering
this intellectual property, for each of these compounds.
The new chemical entity patent covering
Fanapttm
expires normally in 2011 in the U.S. and in 2010 in most
European markets. The new chemical entity patent covering
tasimelteon expires in 2017 in the U.S. and most European
markets. Additionally, for each of our late-stage compounds, an
additional period of exclusivity in the U.S. of up to five
years following the expiration of the patent covering that
compound may be obtained pursuant to the Hatch-Waxman Act.
Fanapttm
will also be eligible for 6 months of additional protection
for successfully completing studies in the pediatric population.
These studies, for which Novartis is responsible, are required
by the FDA approval letter. In Europe, statutes provide for ten
years of data exclusivity with the potential for an additional
year if the company develops the drug for a significant new
indication. No generic versions of
Fanapttm
would be permitted to be marketed or sold during this
10-year (or
11-year)
period in most European countries. Consequently, assuming that
patent term restoration and pediatric exclusivity are granted by
the PTO and FDA and that we receive regulatory approval in
Europe, we expect that Novartis rights to commercialize
Fanapttm
will be exclusive until May 2017 in the U.S. and for at
least 10 years from approval in Europe. Additionally, the
U.S. patent application covering the depot formulation of
Fanapttm,
which Novartis will be responsible for, if it is granted, will
expire in 2023. Several other patent applications covering
metabolites, uses, formulations and genetic markers relating to
Fanapttm
extend beyond 2020.
Aside from the new chemical entity patents covering
Fanapttm
and tasimelteon, as of December 31, 2009 we had thirteen
pending provisional patent applications in the U.S., nine
U.S. national stage applications under U.S.C. 371 and seven
pending Patent Cooperation Treaty applications. The claims in
these various patents and patent applications are directed to
compositions of matter, including claims covering other product
candidates, pharmaceutical compositions, genetic markers, and
methods of use.
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 is 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.
16
Manufacturing
We currently depend on, and expect to continue to depend on, a
small number of third-party manufacturers to produce sufficient
quantities of our products and product candidates for use in our
clinical studies. We are not obligated to obtain our products
and product candidates from any particular third-party
manufacturer and we believe that we would be able to obtain our
products and product candidates from a number of third-party
manufacturers at comparable cost.
If any of our products or product candidates are approved for
commercial use in the future, we plan to rely on third-party
contract manufacturers to produce sufficient quantities for
large-scale commercialization. If we do enter into commercial
manufacturing arrangements with third parties, these third-party
manufacturers will be subject to extensive governmental
regulation. Specifically, regulatory authorities in the markets
which we intend to serve will require that drugs be
manufactured, packaged and labeled in conformity with cGMP or
equivalent foreign standards. We intend to engage only those
contract manufacturers who have the capability to manufacture
drugs in compliance with cGMP and other applicable standards in
bulk quantities for commercial use.
Competition
The pharmaceutical industry and the central nervous system
segment of that 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
partnered product and if approved in the future, our other
compounds, will compete with numerous therapeutic treatments
offered by these competitors. While we believe that our
compounds 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 compounds or technologies obsolete or noncompetitive.
We believe the primary competitors for
Fanapttm
and tasimelteon are as follows:
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For
Fanapttm
in the treatment of schizophrenia, the atypical antipsychotics
Risperdal®
(risperidone), including the depot formulation
Risperdal®
Consta®,
and
Invega®
(paliperidone), including the depot formulation
Invega®
Sustennatm,
each by Ortho-McNeil-Janssen Pharmaceuticals, Inc.,
Zyprexa®
(olanzapine), including the depot formulation
Zyprexa®
Relprevytm,
by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
Abilify®
(aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd.,
Geodon®
(ziprasidone) by Pfizer Inc.,
Saphris®
(asenapine) by Schering-Plough, and generic clozapine, as well
as the typical antipsychotics haloperidol, chlorpromazine,
thioridazine, and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials (or for which an NDA has been recently filed) for the
treatment of schizophrenia include bifeprunox (Solvay
S.A./Lundbeck A/S) and pimavanserin (Acadia
Pharmaceuticals).
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For tasimelteon in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as zolpidem, trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia (or for which an NDA has been
recently filed) include indiplon (Neurocrine Biosciences, Inc.)
and low-dose doxepin
(Silenortm)
by Somaxon Pharmaceuticals, Inc.
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For tasimelteon in the treatment of depression, antidepressants
such as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK,
Cymbalta®
(duloxetine) by Eli Lilly, and Valdoxan (agomelatine) by
Novartis and Les Laboratories Servier.
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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
compounds 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 compounds less attractive.
Employees
As of December 31, 2009, we had 20 full-time
employees. Of these employees, 11 were primarily engaged in
research and development activities. 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.
Corporate
information
We were incorporated in Delaware in 2002. Our principal
executive offices are located at 9605 Medical Center Drive,
Suite 300, Rockville, Maryland, 20850 and our telephone
number is
(240) 599-4500.
Our website address is www.vandapharma.com.
Available
Information
Vanda Pharmaceuticals Inc. files annual, quarterly, and current
reports, proxy statements, and other documents with the
Securities and Exchange Commission (SEC) under the Securities
Exchange Act of 1934 (the Exchange Act). The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information
regarding issuers, including us, that file electronically with
the SEC. The public can obtain any documents that we file with
the SEC at www.sec.gov.
We also make available free of charge on our Internet website at
www.vandapharma.com our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-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 ethics, other corporate policies and procedures, and
the charters of our Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee are available through
our Internet website at www.vandapharma.com.
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this report, including the consolidated financial statements and
the related notes appearing at the end of this annual report on
Form 10-K,
with respect to any investment in shares of our common stock. If
any of the following risks actually occurs, our business,
financial condition, results of operations and future prospects
would likely be materially and adversely affected. In that
event, the market price of our common stock could decline and
you could lose all or part of your investment.
18
Risks
related to our business and industry
Novartis
began selling, marketing and distributing our first approved
product,
Fanapttm,
in the U.S. in the first quarter of 2010 and we will depend
heavily on the success of this product in the
marketplace.
Our ability to generate revenue for the next few years will
depend substantially on the success of
Fanapttm
and the sales of this product by Novartis in the U.S. and
Canada. The ability of
Fanapttm
to generate revenue at the levels we expect will depend on many
factors, including the following:
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the ability of patients to be able to afford
Fanapttm
or obtain health care coverage that covers
Fanapttm
in the current uncertain economic climate
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acceptance of, and ongoing satisfaction, with
Fanapttm
by the medical community, patients receiving therapy and third
party payers
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a satisfactory efficacy and safety profile as demonstrated in a
broad patient population
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the size of the market for
Fanapttm
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successfully expanding and sustaining manufacturing capacity to
meet demand
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cost and availability of raw materials
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the extent and effectiveness of the sales and marketing and
distribution support
Fanapttm
receives
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safety concerns in the marketplace for schizophrenia therapies
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regulatory developments relating to the manufacture or continued
use of
Fanapttm
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decisions as to the timing of product launches, pricing and
discounts
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the competitive landscape for approved and developing therapies
that will compete with
Fanapttm
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Novartis ability to successfully develop and commercialize
a long acting injectable (or depot) formulation of
Fanapttm
in the U.S. and Canada
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Novartis ability to expand the indications for which
Fanapttm
can be marketed in the U.S.
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Novartis ability to obtain regulatory approval in Canada
for
Fanapttm
and our ability to obtain regulatory approval for
Fanapttm
in countries outside the U.S. and Canada
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our ability to successfully develop and commercialize
Fanapttm,
including a long acting injectable (or depot)
formulation of
Fanapttm,
outside of the U.S. and Canada
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the unfavorable outcome of any potential litigation relating to
Fanapttm
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We have entered into an amended and restated sublicense
agreement with Novartis to commercialize
Fanapttm
in the U.S. and Canada and to further develop and
commercialize a long-acting injectable (or depot) formulation of
Fanapttm
in the U.S. and Canada. As such, we will not be involved in
the marketing or sales efforts for
Fanapttm
in the U.S. and Canada. Our future revenues depend
substantially on royalties and milestone payments we may receive
from Novartis. Pursuant to the amended and restated sublicense
agreement with Novartis, we received an upfront payment of
$200.0 million and will be eligible for additional payments
totaling up to $265.0 million upon Novartis
achievement of certain commercial and development milestones for
Fanapttm
in the U.S. and Canada, which may or may not be achieved or
met. We will also receive royalties, which, as a percentage of
net sales, are in the low double-digits, on net sales of
Fanapttm
in the U.S. and Canada. Such royalties may not be
significant and will depend on numerous factors. We cannot
control the amount and timing of resources that Novartis may
devote to
Fanapttm
or the depot formulation of
Fanapttm.
If Novartis fails to successfully commercialize
Fanapttm
in the U.S., fails to develop and commercialize
Fanapttm
in Canada or further develop a long-acting injectable (or depot)
formulation of
Fanapttm,
if Novartis efforts are not effective, or if Novartis
focuses its efforts on other schizophrenia therapies or
schizophrenia drug candidates, our business will be negatively
affected. If Novartis does not successfully commercialize
Fanapttm
in the U.S. or Canada, we will receive limited revenues
from them.
19
Although we have developed and continue to develop additional
products and product candidates for commercial introduction, we
expect to be substantially dependent on sales from
Fanapttm
for the foreseeable future. For reasons outside of our control,
including those mentioned above, sales of
Fanapttm
may not meet our expectations. Any significant negative
developments relating to
Fanapttm,
such as safety or efficacy issues, the introduction or greater
acceptance of competing products or adverse regulatory or
legislative developments, will have a material adverse effect on
our results of operations.
If our
compounds are determined to be unsafe or ineffective in humans,
whether commercially or in clinical trials, our business will be
materially harmed.
Despite the FDAs approval of the NDA for
Fanapttm
and the positive results of our completed trials for
Fanapttm
and tasimelteon, we are uncertain whether either of these
products will ultimately prove to be effective and safe in
humans. 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 compounds, 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 compounds are determined to be
unsafe or ineffective in humans, our business will be materially
harmed.
Clinical
trials for our compounds are expensive and their outcomes are
uncertain. Any failure or delay in completing clinical trials
for our compounds could severely harm our
business.
Pre-clinical studies and clinical trials required to demonstrate
the safety and efficacy of our compounds are time-consuming and
expensive and together take several years to complete. Before
obtaining regulatory approvals for the commercial sale of any of
our compounds, we or our partners must demonstrate through
preclinical testing and clinical trials that such compound 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 compounds. Regulatory
authorities may not permit us or our partners to undertake any
additional clinical trials for our compounds, and it may be
difficult to design efficacy studies for our compounds in new
indications.
Clinical development efforts performed by us or our partners may
not be successfully completed. 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 compounds. The commencement and rate of completion of
clinical trials for our compounds may be delayed by many
factors, including:
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the inability to manufacture or obtain from third parties
materials sufficient for use in pre-clinical studies and
clinical trials
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delays in beginning a clinical trial
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delays in patient enrollment and variability in the number and
types of patients available for clinical trials
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difficulty in maintaining contact with patients after treatment,
resulting in incomplete data
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poor effectiveness of our compounds during clinical trials
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unforeseen safety issues or side effects and
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governmental or regulatory delays and changes in regulatory
requirements and guidelines
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If we or our partners fail to complete successfully one or more
clinical trials for our compounds, we or they may not receive
the regulatory approvals needed to market that compound.
Therefore, any failure or delay in commencing or completing
these clinical trials would harm our business materially.
We and
our partners face heavy government regulation. FDA regulatory
approval of our compounds is uncertain and we and our partners
are continually at risk of the FDA requiring us or them to
discontinue marketing any compounds that have obtained, or in
the future may obtain, regulatory approval.
The research, testing, manufacturing and marketing of compounds
such as those that we have developed or we or in regard to
partnered products, our partners, are developing are subject to
extensive regulation by federal, state and local government
authorities, including the FDA. To obtain regulatory approval of
such compounds, we or our partners must demonstrate to the
satisfaction of the applicable regulatory agency that, among
other things, the compound is safe and effective for its
intended use. In addition, we or our partners must show that the
manufacturing facilities used to produce such compounds are in
compliance with current Good Manufacturing Practices regulations
or cGMP.
The process of obtaining FDA and other required regulatory
approvals and clearances can take many years and will require us
and, in the case of partnered products, our partners to expend
substantial time and capital. Despite the time and expense
expended, regulatory approval is never guaranteed. The number of
pre-clinical and clinical trials that will be required for FDA
approval varies depending on the compound, the disease or
condition that the compound is in development for, and the
requirements applicable to that particular compound. The FDA can
delay, limit or deny approval of a compound for many reasons,
including that:
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a compound may not be shown to be safe or effective
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the FDA may interpret data from pre-clinical and clinical trials
in different ways than we or our partners do
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the FDA may not approve our or our partners manufacturing
processes or facilities
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a compound may not be approved for all the indications we or our
partners request
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the FDA may change its approval policies or adopt new regulations
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the FDA may not meet, or may extend, the Prescription Drug User
Fee Act (PDUFA) date with respect to a particular NDA and
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the FDA may not agree with our or our partners regulatory
approval strategies or components of the regulatory filings,
such as clinical trial designs
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For example, if certain of our or our partners methods for
analyzing trial data are not accepted by the FDA, we or our
partners may fail to obtain regulatory approval for our
compounds.
Moreover, the marketing, distribution and manufacture of
approved products remain subject to extensive ongoing regulatory
requirements. Failure to comply with applicable regulatory
requirements could result in, among other things:
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warning letters
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fines
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civil penalties
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injunctions
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recall or seizure of products
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total or partial suspension of production
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refusal of the government to grant future approvals
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withdrawal of approvals and
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criminal prosecution
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Any delay or failure to obtain regulatory approvals for our
compounds will result in increased costs, could diminish
competitive advantages that we may attain and would adversely
affect the marketing of our compounds. Other than
Fanapttm
in the U.S., which is being marketed and sold by Novartis, we
have not received regulatory approval to market any of our
compounds in any jurisdiction.
Even following regulatory approval of our compounds, the FDA may
impose limitations on the indicated uses for which such
compounds may be marketed, subsequently withdraw approval or
take other actions against us, our partners or such compounds
that are adverse to our business. The FDA generally approves
drugs for particular 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 if
problems occur after initial marketing.
We and our partners also are subject to numerous federal, state
and local 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
compounds. 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.
We
intend to seek regulatory approvals for our compounds in foreign
jurisdictions, but we may not obtain any such
approvals.
Pursuant to our amended and restated sublicense agreement with
Novartis, we retained the right to develop and commercialize
Fanapttm
outside the U.S. and Canada. We intend to market our
compounds outside the U.S. and Canada with one or more
commercial partners. In order to market our compounds in foreign
jurisdictions, we may be required to obtain separate regulatory
approvals and to comply with numerous and varying regulatory
requirements. 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. We have no experience obtaining any such
foreign approvals. Additionally, the foreign regulatory approval
process may include all of the risks associated with obtaining
FDA approval. For all of these reasons, we may not obtain
foreign regulatory approvals on a timely basis, if at all.
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. We may not be able to file for
regulatory approvals and may not receive necessary approvals to
commercialize our compounds in any market. The failure to obtain
these approvals could harm our business materially.
Our
compounds may cause undesirable side effects or have other
properties that could delay or prevent their regulatory approval
or limit their marketability.
Undesirable side effects caused by our compounds 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 compounds and generating revenues
from their sale. We and our partners, as applicable, will
continue to assess the side effect profile of our compounds in
ongoing clinical development programs. However, we cannot
predict whether the commercial use of our approved compounds (or
our compounds 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 compounds to date. 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, all of
which could have a material adverse effect on our business,
results of operations and financial condition.
22
In addition, if after receiving marketing approval of a
compound, we, our partners or others later identify undesirable
side effects caused by such compound, we or our partners could
face one or more of the following:
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regulatory authorities may require the addition of labeling
statements, such as a black box warning or a
contraindication
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regulatory authorities may withdraw their approval of the
compound
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we or our partners may be required to change the way the
compound is administered, conduct additional clinical trials or
change the labeling of the compound and
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our reputation may suffer
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Any of these events could prevent us or our partners from
achieving or maintaining market acceptance of the affected
compound or could substantially increase the costs and expenses
of commercializing the compound, which in turn could delay or
prevent us from generating significant revenues from its sale.
Even
after we or our partners obtain regulatory approvals of a
product, acceptance of such compound in the marketplace is
uncertain and failure to achieve market acceptance will prevent
or delay our ability to generate revenues.
Even after obtaining regulatory approvals for the sale of our
compounds, the commercial success of these compounds will
depend, among other things, on their acceptance by physicians,
patients, third-party payors and other members of the medical
community as a therapeutic and cost-effective alternative to
competing products and treatments. The degree of market
acceptance of any compound 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 compound, our ability to
attract corporate partners, including pharmaceutical companies,
to assist in commercializing our compounds, 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 compounds fail to gain market acceptance, we may be
unable to earn sufficient revenue to continue our business. If
our approved compounds 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.
If we
fail to obtain the capital necessary to 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 and product candidates with
third parties on terms that may not be attractive to
us.
Our activities will necessitate significant uses of working
capital throughout 2010 and beyond. As of December 31,
2009, we had cash of approximately $205.3 million. Our long
term capital requirements are expected to depend on many
factors, including, among others:
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the amount of royalty and milestone payments received from our
commercial partners
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our ability to commercialize
Fanapttm
outside the U.S. and Canada
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costs of developing sales, marketing and distribution channels
and our ability to sell our products
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costs involved in establishing manufacturing capabilities for
commercial quantities of our products
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the number of potential formulations, products and product
candidates in development
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progress with pre-clinical studies and clinical trials
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time and costs involved in obtaining regulatory (including FDA)
clearance
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costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent, trademark and other intellectual property
claims
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competing technological and market developments
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market acceptance of our products
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costs for recruiting and retaining employees and consultants
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costs for training physicians and
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legal, accounting, insurance and other professional and business
related costs
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We expect to receive royalty payments and hope to receive
milestone payments relating to
Fanapttm
in connection with our amended and restated sublicense agreement
with Novartis. However, if
Fanapttm
is not as commercially successful as we expect and we do not
receive such payments, 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 or 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. However, given the current global
economic climate, we may have more difficulty raising funds than
we would during a period of economic stability, and 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
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 to
proof-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.
We
have a history of operating losses, anticipate future losses and
may never become profitable on a sustained basis.
We have a limited operating history. As of December 31,
2009, we have accumulated net losses of approximately
$260.8 million. Our ability to generate revenue and achieve
profitability largely depends on Novartis ability to
successfully commercialize
Fanapttm
in the U.S. and Canada and upon our ability, alone or with
others, to complete the development of our products or product
candidates, obtain the regulatory approvals and manufacture,
market and sell our products and product candidates. We and our
partners may be unable to achieve these goals.
Although we have generated some licensing-related and other
revenue to date and have received an upfront payment of
$200.0 million pursuant to our amended and restated
sublicense agreement with Novartis, as well as product revenue
of $2.0 million from the sale of our finished product to
Novartis, we have not generated any revenue from the commercial
sale of our compounds and we cannot estimate with precision the
extent of our future losses. We have been engaged in identifying
and developing compounds since March 2003, which has required,
and will continue to require, significant research and
development expenditures. This relatively limited operating
history may not be adequate to enable you to fully assess our
ability to develop and commercialize our technologies and
compounds, obtain FDA or other regulatory approvals and achieve
market acceptance of our compounds and respond to competition.
A major component of our revenue for the foreseeable future will
depend on Novartis and our ability to sell
Fanapttm.
Fanapttm
may not be as commercially successful as we expect, Novartis may
not succeed in commercializing
Fanapttm
in the U.S., developing and commercializing
Fanapttm
in Canada and we may not succeed in commercializing
Fanapttm
outside of the U.S. and Canada. In addition, we may not
succeed in
24
commercializing any other compounds. We cannot assure you that
we will be profitable even if our compounds are successfully
commercialized. We may be unable to fully develop, obtain
regulatory approval for, commercialize, manufacture, market,
sell and derive revenue from our compounds 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 ability to achieve sustained profitability in
the future depends, in part, upon:
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our and our partners ability to obtain and maintain
regulatory approval for our compounds, both in the U.S. and
in foreign countries
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Novartis ability to successfully market and sell
Fanapttm
in the U.S. and Canada and achieve certain product
development and sales milestones
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our ability to successfully commercialize
Fanapttm
outside the U.S. and Canada
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our ability to enter into agreements to develop and
commercialize our products and product candidates
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our ability to develop, have manufactured and market our
products and product candidates
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our and our partners ability to obtain adequate
reimbursement coverage for our compounds from insurance
companies, government programs and other third party payors
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our ability to obtain additional research and development
funding from collaborative partners or funding for our products
and product candidates
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In addition, the amount we spend will impact our profitability.
Our spending will depend, in part, upon:
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the progress of our research and development programs for our
products and product candidates, including clinical trials
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the time and expense that will be required to pursue FDA
and/or
foreign regulatory approvals for our compounds and whether such
approvals are obtained
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the time and expense required to prosecute, enforce
and/or
challenge patent and other intellectual property rights
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the cost of operating and maintaining development and research
facilities
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the cost of third party manufacturers
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the number of product candidates we pursue
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how competing technological and market developments affect our
compounds
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the cost of possible acquisitions of technologies, compounds,
product rights or companies
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the cost of obtaining licenses to use technology owned by others
for proprietary products and otherwise
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the costs of potential litigation and
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the costs associated with recruiting and compensating a highly
skilled workforce in an environment where competition for such
employees may be intense
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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.
If our
contract research organizations do not successfully carry out
their duties or if we lose our relationships with contract
research organizations, our drug development efforts could be
delayed.
Our arrangements with contract research organizations are
critical to our success in bringing our products and product
candidates to the market and promoting such marketed products
profitably. We are dependent on
25
contract research organizations, third-party vendors and
investigators for pre-clinical 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 and product candidates.
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 organizations 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 or cGLP, and similar foreign 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 or product candidates could be
delayed.
We
rely on a limited number of third party manufacturers to
formulate and manufacture our products and product candidates
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 and
pre-clinical and clinical trial phases of product development.
We do not have an in-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 and product candidates. Therefore, we are
dependent on third parties for our formulation development and
manufacturing of our products and product candidates. 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 and product candidates.
Furthermore, these third 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 and
product candidates.
We do not have long-term agreements with any of these third
parties, and if they are unable or unwilling to perform 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 or product candidates 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 and product candidates in a cost-effective manner or on
a timely basis. In addition, manufacturers of our products and
product candidates 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 or product candidates could be interrupted,
resulting in delays and additional costs. In addition, if the
facilities of such manufacturers do not pass a pre-approval or
post-approval plant inspection, the FDA will not grant approval
and may institute restrictions on the marketing or sale of our
products or product candidates.
26
Our manufacturing strategy presents the following additional
risks:
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because most of our third-party manufacturers and formulators
are located outside of the U.S., there may be difficulties in
importing our products and product candidates 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
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because of the complex nature of our products and product
candidates, our manufacturers may not be able to successfully
manufacture our products and product candidates in a
cost-effective
and/or
timely manner.
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Materials
necessary to manufacture our compounds may not be available on
commercially reasonable terms, or at all, which may delay the
development, regulatory approval and commercialization of our
compounds.
We and our partners rely on manufacturers to purchase from
third-party suppliers the materials necessary to produce our
compounds for our 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, product testing, potential
regulatory approval of our compounds and commercial scale
manufacturing could be delayed, significantly affecting our and
our partners ability to further develop and commercialize
our compounds. If we, our manufacturers or, in the case of our
partnered products, our partners are unable to purchase these
materials for our products or partnered products, as applicable,
there would be a shortage in supply or the commercial launch of
such products or partnered products would be delayed, which
would materially affect our or our partners ability to
generate revenues from the sale of such products or partnered
products.
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 compounds and our ability to identify and develop
additional products or product candidates through the
application of our pharmacogenetics and pharmacogenomics
expertise. 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:
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developing products and product candidates
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undertaking pre-clinical testing and clinical trials
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obtaining FDA and other regulatory approvals of products and
product candidates and
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manufacturing, marketing and selling products
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These companies may invest heavily and quickly to discover and
develop novel products that could make our compounds obsolete.
Accordingly, our competitors may succeed in obtaining patent
protection, receiving FDA approval or commercializing superior
products or other competing products before we do. Technological
developments or the FDAs approval of new therapeutic
indications for existing products may make our compounds
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.
Fanapttm,
and our other compounds, if successfully developed and approved
for commercial sale, will compete with a number of drugs and
therapies currently manufactured and marketed by major
pharmaceutical and other biotechnology companies. Our compounds
may also compete with new products currently under development
by others or with products which may cost less than our
compounds. Physicians, patients, third party payors and the
medical community may not accept or utilize any of our compounds
that may be approved. If
Fanapttm
(and our other compounds, if and when approved) do not achieve
significant market
27
acceptance, our business, results of operations and financial
condition would be materially adversely affected. We believe the
primary competitors for
Fanapttm
and tasimelteon are as follows:
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For
Fanapttm
in the treatment of schizophrenia, the atypical antipsychotics
Risperdal®
(risperidone), including the depot formulation
Risperdal®
Consta®,
and
Invega®
(paliperidone), including the depot formulation
Invega®
Sustennatm,
each by Ortho-McNeil-Janssen Pharmaceuticals, Inc.,
Zyprexa®
(olanzapine), including the depot formulation
Zyprexa®
Relprevytm,
by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
Abilify®
(aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd.,
Geodon®
(ziprasidone) by Pfizer Inc.,
Saphris®
(asenapine) by Schering-Plough, and generic clozapine, as well
as the typical antipsychotics haloperidol, chlorpromazine,
thioridazine, and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials (or for which an NDA has been recently filed) for the
treatment of schizophrenia include bifeprunox (Solvay
S.A./Lundbeck A/S) and pimavanserin (Acadia
Pharmaceuticals).
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For tasimelteon in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as zolpidem, trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia (or for which an NDA has been
recently filed) include indiplon (Neurocrine Biosciences, Inc.)
and low-dose doxepin
(Silenortm)
by Somaxon Pharmaceuticals, Inc.
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For tasimelteon in the treatment of depression, antidepressants
such as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK,
Cymbalta®
(duloxetine) by Eli Lilly, and Valdoxan (agomelatine) by
Novartis and Les Laboratories Servier.
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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 compounds less attractive.
We
have no experience selling, marketing or distributing products
and no internal capability to do so, which may make
commercializing our products and product candidates
difficult.
At present, we have no marketing experience or sales
capabilities. Therefore, in order for us to commercialize
Fanapttm,
outside the U.S. and Canada, or our other compounds, we
must either acquire or internally develop sales, marketing and
distribution capabilities, or enter into collaborations with
partners to perform these services for us. We may, in some
instances, rely significantly on sales, marketing and
distribution arrangements with our collaborative partners and
other third parties. For example, we rely completely on Novartis
to market, sell and distribute
Fanapttm
in the U.S. and Canada and our future revenues are
materially dependent on the success of the efforts of Novartis.
For the commercialization of
Fanapttm
outside the U.S. and Canada or our other compounds, we may
not be able to establish sales and distribution partnerships on
acceptable terms or at all, and if we do enter into a
distribution arrangement, our success will be materially
dependent upon the performance of our partner. In the event that
we attempt to acquire or develop our own in-house sales,
marketing and distribution capabilities, factors that may
inhibit our efforts to commercialize our products and product
candidates without partners or licensees include:
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our inability to recruit and retain adequate numbers of
effective sales and marketing personnel
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the inability of sales personnel to obtain access to or persuade
adequate numbers of physicians to prescribe our products
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the lack of complementary products to be offered by our sales
personnel, which may put us at a competitive disadvantage
against companies with broader product lines and
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unforeseen costs associated with creating our own sales and
marketing team or with entering into a partnering agreement with
an independent sales and marketing organization
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The cost of establishing and maintaining a sales, marketing and
distribution organization may exceed its cost effectiveness. If
we fail to develop sales and marketing capabilities, if sales
efforts are not effective or if costs of developing sales and
marketing capabilities exceed their cost effectiveness, our
business, results of operations and financial condition could be
materially adversely affected.
If we
cannot identify, or enter into licensing arrangements for, new
products or product candidates, our ability to develop a diverse
product portfolio will be limited.
A component of our business strategy is acquiring rights to
develop and commercialize compounds 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. Competition for
the acquisition of these compounds is intense. If we are not
able to identify opportunities to acquire rights to
commercialize additional products or product candidates, we may
not be able to develop a diverse portfolio of products and
product candidates and our business may be harmed. Additionally,
it may take substantial human and financial resources to secure
commercial rights to promising products or product candidates.
Moreover, if other firms develop pharmacogenetics and
pharmacogenomics capabilities, we may face increased competition
in identifying and acquiring additional products or product
candidates.
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 and product candidates, we
may develop products and product candidates 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.
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.
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.
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Product
liability lawsuits could divert our resources, result in
substantial liabilities and reduce the commercial potential of
our compounds.
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 and product candidates in
clinical trials and will face even greater risks upon
commercialization by us or our partners of our compounds. We
believe that we may be at a greater risk of product liability
claims relative to other pharmaceutical companies because our
compounds are intended to treat behavioral disorders, and it is
possible that we may be held liable for the behavior and actions
of patients who use our compounds. 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 compounds. Although we
maintain product liability insurance, our aggregate coverage
limit under this insurance is $10.0 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 compounds, 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 compounds. 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.
Legislative
or regulatory reform of the healthcare system in the U.S. and
foreign jurisdictions may affect our or our partners
ability to sell our products or partnered products
profitably.
The continuing efforts of the U.S. and foreign governments,
insurance companies, managed care organizations and other payors
of health care services to contain or reduce health care costs
may adversely affect our or our partners ability to set
prices for our products or partnered products which we or our
partners believe are fair, and our ability to generate revenues
and achieve and maintain profitability.
Specifically, in both the U.S. and some foreign
jurisdictions there have been a number of legislative and
regulatory proposals to change the healthcare system in ways
that could affect our or our partners ability to sell our
products or partnered products profitably. In the U.S., the
Medicare Prescription Drug Improvement and Modernization Act of
2003 reformed the way Medicare covered and provided
reimbursement for pharmaceutical products. This legislation
could decrease the coverage and price that we or our partners
may receive for our products or partnered products. Other
third-party payors are increasingly challenging the prices
charged for medical products and services. It 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 or partnered products may not be
considered cost effective, and coverage and reimbursement may
not be available or sufficient to allow the sale of such
products on a competitive and profitable basis. Further federal
and state proposals and healthcare reforms are likely which
could limit the prices that can be charged for the drugs we
develop and may further limit our commercial opportunity. Our
results of operations could be materially adversely affected by
the Medicare prescription drug coverage legislation, by the
possible effect of this legislation on amounts that private
insurers will pay and by other healthcare reforms that may be
enacted or adopted in the future.
In some foreign countries, including major markets in the
European Union 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
30
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.
Our
business is subject to extensive governmental regulation and
oversight and changes in laws could adversely affect our
revenues and profitability.
Our business is subject to extensive government regulation and
oversight. As a result, we may become subject to governmental
actions which could materially adversely affect our business,
results of operations and financial condition, including:
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new laws, regulations or judicial decisions, or new
interpretations of existing laws, regulations or decisions,
related to patent protection and enforcement, health care
availability, method of delivery and payment for health care
products and services or our business operations generally
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changes in the FDA and foreign regulatory approval processes
that may delay or prevent the approval of new products and
result in lost market opportunity
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new laws, regulations and judicial decisions affecting pricing
or marketing and
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changes in the tax laws relating to our operations
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In addition, the Food and Drug Administration Amendments Act of
2007 or the FDAAA included new authorization for the FDA to
require post-market safety monitoring, along with a clinical
trials registry, and expanded authority for the FDA to impose
civil monetary penalties on companies that fail to meet certain
commitments. The amendments among other things, require some new
drug applicants to submit risk evaluation and minimization
strategies to monitor and address potential safety issues for
products upon approval, grant the FDA the authority to impose
risk management measures for marketed products and to mandate
labeling changes in certain circumstances, and establish new
requirements for disclosing the results of clinical trials.
Companies that violate the law are subject to substantial civil
monetary penalties. Additional measures have also been enacted
to address the perceived shortcomings in the FDAs handling
of drug safety issues, and to limit pharmaceutical company sales
and promotional practices. While we expect the FDAAA to have a
substantial effect on the pharmaceutical industry, the extent of
that effect is not yet known. As the FDA issues regulations,
guidance and interpretations relating to the new legislation,
the impact on the industry as well as our business will become
clearer. The requirements and other changes that the FDAAA
imposes may make it more difficult, and likely more costly, to
obtain approval of new pharmaceutical products and to produce,
market and distribute existing products. Our and our
partners ability to commercialize approved products
successfully may be hindered, and our business may be harmed as
a result.
Failure
to comply with government regulations regarding the sale and
marketing of our products or partnered products could harm our
business.
Our and our partners activities, including the sale and
marketing of our products or partnered products, are subject to
extensive government regulation and oversight, including
regulation under the federal Food, Drug and Cosmetic Act and
other federal and state statutes. We are also subject to the
provisions of the Federal Anti-Kickback Statute and several
similar state laws, which prohibit payments intended to induce
physicians or others either to purchase or arrange for or
recommend the purchase of healthcare products or services. While
the federal law applies only to products or services for which
payment may be made by a federal healthcare program, state laws
may apply regardless of whether federal funds may be involved.
These laws constrain the sales, marketing and other promotional
activities of manufacturers of drugs and biologicals, such as
us, by limiting the kinds of financial arrangements, including
sales programs, with hospitals, physicians, and other potential
purchasers of drugs and biologicals. Other federal and state
laws generally prohibit individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third party payors that are false
or fraudulent, or are for items or services that were not
provided as claimed. Anti-kickback and false claims laws
prescribe civil and criminal penalties for noncompliance that
can be substantial, including the possibility of exclusion from
federal healthcare programs (including Medicare and Medicaid).
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Pharmaceutical and biotechnology companies have been the target
of lawsuits and investigations alleging violations of government
regulation, including claims asserting antitrust violations,
violations of the Federal False Claim Act, the Anti-Kickback
Statute, the Prescription Drug Marketing Act and other
violations in connection with off-label promotion of products
and Medicare
and/or
Medicaid reimbursement or related to environmental matters and
claims under state laws, including state anti-kickback and fraud
laws.
While we continually strive to comply with these complex
requirements, interpretations of the applicability of these laws
to marketing practices are ever evolving. If any such actions
are instituted against us or our partners and we or they are not
successful in defending such actions or asserting our rights,
those actions could have a significant and material impact on
our business, including the imposition of significant fines or
other sanctions. Even an unsuccessful challenge could cause
adverse publicity and be costly to respond to, and thus could
have a material adverse effect on our business, results of
operations and financial condition.
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:
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mergers
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acquisitions
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strategic alliances
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licensing agreements and
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co-promotion and similar agreements
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We may choose to enter into one or more of these transactions at
any time, which may cause substantial fluctuations in the market
price of our stock. Moreover, depending upon the nature of any
transaction, we may experience a charge to earnings, which could
also materially adversely affect our results of operations and
could harm the market price of our stock.
We may
undertake strategic acquisitions in the future, and difficulties
integrating such acquisitions could damage our ability to
achieve or sustain profitability.
Although we have no experience in acquiring businesses, we may
acquire businesses that complement or augment our existing
business. If we acquire businesses with promising product
candidates 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 or product candidates 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. We may not be
able to operate acquired businesses profitably or otherwise
implement our growth strategy successfully.
Our
quarterly operating results may fluctuate
significantly.
Our operating results will continue to be subject to quarterly
fluctuations. The revenues we generate, if any, and our
operating results will be affected by numerous factors,
including:
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our addition or termination of development programs
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variations in the level of expenses related to our products,
product candidates or future development programs
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our execution of collaborative, licensing or other arrangements,
and the timing of payments we may make or receive under these
arrangements
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the timing of royalties or milestone payments, if any, from the
sales of
Fanapttm
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regulatory developments affecting our compounds or those of our
competitors
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product sales
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cost of product sales
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marketing and other expenses
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manufacturing or supply issues and
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any intellectual property infringement lawsuit in which we may
become involved
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If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
Risks
related to intellectual property and other legal
matters
Our
rights to develop and commercialize our product and, product
candidates are subject in part to the terms and conditions of
licenses or sublicenses granted to us by other pharmaceutical
companies. With respect to tasimelteon, these terms and
conditions include an option in favor of the licensor to
reacquire rights to commercialize and develop this product in
certain circumstances.
Fanapttm
(iloperidone) is based in part on patents and other intellectual
property owned by sanofi-aventis and Novartis. Titan
Pharmaceuticals, Inc. (Titan) holds an exclusive license from
sanofi-aventis to the intellectual property owned by
sanofi-aventis, and Titan has sublicensed its rights under such
license on an exclusive basis to Novartis. We acquired exclusive
rights to this and other intellectual property through a further
sublicense from Novartis. The sublicense with Novartis was
amended and restated in October of 2009 to provide Novartis with
exclusive rights to commercialize
Fanapttm
in the U.S. and Canada and further develop and
commercialize a long acting injectable or depot
formulation of
Fanapttm
in the U.S. and Canada. We retained exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada. We may lose our rights to
develop and commercialize
Fanapttm
outside the U.S. and Canada if we fail to comply with
certain requirements in the amended and restated sublicense
agreement regarding our financial condition, or if we fail to
comply with certain diligence obligations regarding our
development or commercialization activities or if we otherwise
breach the amended and restated sublicense agreement and fail to
cure such breach. Our rights to develop and commercialize
Fanapttm
outside the U.S. and Canada may be impaired if we do not
cure breaches by Novartis of similar obligations contained in
its sublicense agreement with Titan, although we are not aware
of any such breach by Novartis. Our loss of rights in
Fanapttm
to Novartis would have a material adverse effect on our
business. In addition, if Novartis breaches the amended and
restated sublicense agreement with respect to its
commercialization activities in the U.S. or Canada, we may
terminate Novartis commercialization rights in the
applicable country. We would no longer receive royalty payments
from Novartis in connection with such country in the event of
such termination.
Tasimelteon is based in part on patents that we have licensed on
an exclusive basis and other intellectual property licensed from
Bristol-Myers Squibb Company (BMS). BMS holds certain rights
with respect to tasimelteon in the license agreement. If we have
not agreed to one or more partnering arrangements to develop and
commercialize tasimelteon in certain significant markets with
one or more third parties by a certain date,
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BMS has the option to exclusively develop and commercialize
tasimelteon on its own on pre-determined financial terms,
including milestone and royalty payments. BMS may terminate our
license if we fail to meet certain milestones or if we otherwise
breach our royalty or other obligations in the agreement. In the
event that we terminate our license, or if BMS terminates our
license due to our breach, all of our rights to tasimelteon
(including any intellectual property we develop with respect to
tasimelteon) will revert back to BMS or otherwise be licensed
back to BMS on an exclusive basis. Any termination or reversion
of our rights to develop or commercialize tasimelteon, including
any reacquisition by BMS of our rights, may have a material
adverse effect on our business.
If our
efforts to protect the proprietary nature of the intellectual
property related to our compounds are not adequate, we may not
be able to compete effectively in our markets.
In addition to the rights we have licensed from Novartis and BMS
relating to our compounds, we rely upon intellectual property we
own relating to these compounds, including patents, patent
applications and trade secrets. As of December 31, 2009 we
had thirteen pending provisional patent applications in the
U.S., nine U.S. national stage applications under U.S.C.
371 and seven pending Patent Cooperation Treaty applications,
which permit the pursuit of patents outside of the U.S.,
relating to our compounds in clinical development. Our patent
applications may be challenged or fail to result in issued
patents and our existing or future patents may be too narrow to
prevent third parties from developing or designing around these
patents. In addition, we generally rely on trade secret
protection and confidentiality agreements to protect certain
proprietary know-how that is not patentable, for processes for
which patents are difficult to enforce and for any other
elements of our drug development processes that involve
proprietary know-how, information and technology that is not
covered by patent applications. While we require all of our
employees, consultants, advisors and any third parties who have
access to our proprietary know-how, information and technology
to enter into confidentiality agreements, we cannot be certain
that this know-how, information and technology will not be
disclosed or that competitors will not otherwise gain access to
our trade secrets or independently develop substantially
equivalent information and techniques. Further, the laws of some
foreign countries do not protect proprietary rights to the same
extent as the laws of the U.S. As a result, we may
encounter significant problems in protecting and defending our
intellectual property both in the U.S. and abroad. If we
are unable to protect or defend the intellectual property
related to our technologies, we will not be able to establish or
maintain a competitive advantage in our market.
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 and partnered products, our
business will be materially harmed.
The United States Drug Price Competition and Patent Term
Restoration Act of 1984, more commonly known as the
Hatch-Waxman Act, provides for an extension of
patent term for drugs for a period of up to five years to
compensate for time spent in development. Assuming we gain a
five-year patent term restoration for tasimelteon, and that we
continue to have rights under our license agreement with respect
to this product, we would have exclusive rights to
tasimelteons U.S. new chemical entity
patent (the primary patent covering the compound as a new
composition of matter) until 2022. During the second quarter of
2009, we submitted to the PTO our application to extend the term
of our patent relating to
Fanapttm
under the Hatch-Waxman Act. As of this time, the PTO has
preliminarily determined that the patent is eligible for patent
term restoration under the Hatch-Waxman Act. Assuming we gain a
five-year extension for
Fanapttm,
pursuant to the terms and conditions of our amended and restated
sublicense agreement, Novartis would have the benefit of
exclusive rights to the new chemical entity patent until 2016,
with a further six months of pediatric exclusivity. A directive
in the European Union provides that companies that receive
regulatory approval for a new compound will have a
10-year
period of market exclusivity for that compound (with the
possibility of a further one-year extension) in most countries
in Europe, beginning on the date of such European regulatory
approval, regardless of when the European new chemical entity
patent covering such compound expires. A generic version of the
approved drug may not be marketed or sold in Europe during such
market exclusivity period. This directive may be of particular
importance with respect to
Fanapttm,
since the European new chemical entity patent for
Fanapttm
will expire prior to the end of this
10-year
period of market exclusivity.
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However, there is no assurance that we will receive the
extensions of our patents or other exclusive rights available
under the Hatch-Waxman Act or similar foreign legislation. If we
fail to receive such extensions and exclusive rights, our
ability or our partners ability to prevent competitors
from manufacturing, marketing and selling generic versions of
our products or partnered products will be materially impaired.
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.
If we
use hazardous and biological materials in a manner that causes
injury or violates applicable law, we may be liable for
damages.
Our research, development and commercialization activities
involve the controlled use of potentially hazardous substances,
including toxic chemical and biological materials. Although we
believe that our safety procedures for handling and disposing of
such materials comply with state and federal standards, there
will always be the risk of contamination, injury or other
damages resulting from these hazardous substances. If we were to
become liable for an accident, or if we or our partners were to
suffer an extended facility shutdown, we could incur significant
costs, damages and penalties that could materially harm our
business, results of operations and financial condition.
In addition, our operations produce hazardous waste products.
While third parties are responsible for disposal of our
hazardous waste, we could be liable under environmental laws for
any required cleanup of sites at which our waste is disposed.
Federal, state, foreign and local laws and regulations govern
the use, manufacture, storage, handling and disposal of these
hazardous materials. If we fail to comply with these laws and
regulations at any time, or if they change, we may be subject to
criminal sanctions and substantial civil liabilities, which may
adversely affect our business.
Even if we continue to comply with all applicable laws and
regulations regarding hazardous materials, we cannot eliminate
the risk of accidental contamination or discharge and our
resultant liability for any injuries or other damages caused by
these accidents. Although we maintain pollution liability
insurance, our coverage limit under this insurance is
$2.0 million, and while we believe this amount and type of
insurance is sufficient to cover risks typically associated with
our handling of materials, the insurance may not cover all
environmental liabilities, and these limits may not be high
enough to cover potential liabilities for these damages fully.
The amount of uninsured liabilities may exceed our financial
resources and materially harm our business.
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Risks
related to our common stock
Our
stock price has been highly volatile and may be volatile in the
future, and purchasers of our common stock could incur
substantial losses.
The realization of any of the risks described in these risk
factors or other unforeseen risks could have a dramatic and
adverse effect on the market price of our common stock. Between
December 31, 2008 and December 31, 2009, the high and
low sale prices of our common stock as reported on the NASDAQ
Global Market varied between $16.65 and $0.47. 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:
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publicity regarding actual or potential testing or trial results
relating to products under development by us or our competitors
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the outcome of regulatory review relating to products under
development by us or our competitors
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regulatory developments in the U.S. and foreign countries
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developments concerning any collaboration or other strategic
transaction we may undertake
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announcements of patent issuances or denials, technological
innovations or new commercial products by us or our competitors
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termination or delay of development or commercialization
program(s) by our partners
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safety issues with our products or those of our competitors
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our partners ability to successfully commercialize our
partnered products
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our ability to successfully execute our commercialization
strategies
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announcements of technological innovations or new therapeutic
products or methods by us or others
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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
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changes in government regulations or policies or patent decisions
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changes in patent legislation or adverse changes to patent law
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additions or departures of key personnel or members of our board
of directors
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publicity regarding actual or potential transactions involving
us or
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economic and other external factors beyond our control
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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. Additionally,
a small number of early investors in our company have rights,
subject to certain conditions, to require us to file
registration statements to permit the resale of their shares in
the public market or to include their shares in registration
statements that we may file for ourselves or other stockholders.
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In addition to our outstanding common stock, as of
December 31, 2009, there were a total of
4,516,739 shares of common stock that we have registered
and that we are obligated to issue upon the exercise of
currently outstanding options and restricted stock units granted
under our Second Amended and Restated Management Equity Plan and
2006 Equity Incentive Plan. Upon the exercise or settlement of
these options or 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
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. If one or more of the analysts
who covers the Company downgrades our stock, our stock price
would likely decline. If one or more of these analysts ceases to
cover us or fails to publish regular reports on us, interest in
the purchase of our stock could decrease, which could cause our
stock price or trading volume to decline.
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 few
years. If faced with another proxy contest, we may not be able
to respond successfully to the contest, which would be
disruptive to our business. Even if we are successful, our
business could be adversely affected by a proxy contest
involving us or our partners because:
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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
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perceived uncertainties as to future direction may result in the
loss of potential acquisitions, collaborations or in-licensing
opportunities, and may make it more difficult to attract and
retain qualified personnel and business partners and
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if individuals are elected to a board of directors with a
specific agenda, it may adversely affect our ability to
effectively and timely implement our strategic plan and create
additional value for our stockholders
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These actions could cause our stock price to experience periods
of volatility.
Anti-takeover
provisions in our charter and bylaws, and in Delaware law, and
our 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:
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt
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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
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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
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require that directors only be removed from office for cause
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provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office
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limit who may call special meetings of stockholders
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prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders
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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
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Moreover, on September 25, 2008, our board of directors
adopted a rights agreement, the provisions of which could result
in significant dilution of the proportionate ownership of a
potential acquirer and, accordingly, could discourage, delay or
prevent a change in our management or control over us.
Unstable
market, credit and financial conditions may exacerbate certain
risks affecting our business and have serious adverse
consequences on our business.
The recent economic downturn and market instability has made the
business climate more volatile and more costly. Our general
business strategy may be adversely affected by unpredictable and
unstable market conditions. If the current equity and credit
markets deteriorate further, or do not improve, it may make any
necessary debt or equity financing more difficult, more costly,
and more dilutive. While we believe we have adequate capital
resources to meet current working capital and capital
expenditure requirements, a lingering economic downturn or
significant increase in our expenses could require additional
financing on less than attractive rates or on terms that are
excessively dilutive to existing stockholders. Failure to secure
any necessary financing in a timely manner and on favorable
terms could have a material adverse effect on our stock price
and could require us to delay or abandon clinical development
plans.
Sales of our products and partnered products will be dependent,
in large part, on reimbursement from government health
administration authorities, private health insurers,
distribution partners and other organizations. As a result of
the current credit and financial market conditions, these
organizations may be unable to satisfy their reimbursement
obligations or may delay payment. In addition, federal and state
health authorities may reduce Medicare and Medicaid
reimbursements, and private insurers may increase their scrutiny
of claims. A reduction in the availability or extent of
reimbursement could negatively affect our or our partners
product sales and revenue. Customers may also reduce spending
during times of economic uncertainty.
In addition, we rely on third parties for several important
aspects of our business. For example, we depend upon Novartis
for both royalty revenue and the further clinical development of
Fanapttm,
we use third party contract research organizations for many of
our clinical trials, and we rely upon several single source
providers of raw materials and contract manufacturers for the
manufacture of our products and product candidates. Due to the
recent tightening of global credit and the continued
deterioration in the financial 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 would be
adversely affected.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Our current headquarters are located in Rockville, Maryland,
consisting of approximately 27,000 square feet of office
and laboratory space. Our lease for this facility expires in
2016.
Management believes that the leased facilities are suitable and
adequate to meet the Companys anticipated needs.
38
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The Company is not a party to any material pending legal
proceedings, and management is not aware of any contemplated
proceedings by any governmental authority against the Company.
|
|
ITEM 4.
|
(REMOVED
AND RESERVED)
|
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER 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, 2008
|
|
High
|
|
|
Low
|
|
|
First quarter 2008
|
|
$
|
7.13
|
|
|
$
|
2.70
|
|
Second quarter 2008
|
|
$
|
6.59
|
|
|
$
|
2.98
|
|
Third quarter 2008
|
|
$
|
4.03
|
|
|
$
|
0.76
|
|
Fourth quarter 2008
|
|
$
|
1.02
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
High
|
|
|
Low
|
|
|
First quarter 2009
|
|
$
|
0.99
|
|
|
$
|
0.47
|
|
Second quarter 2009
|
|
$
|
14.79
|
|
|
$
|
0.82
|
|
Third quarter 2009
|
|
$
|
16.65
|
|
|
$
|
10.46
|
|
Fourth quarter 2009
|
|
$
|
13.21
|
|
|
$
|
9.45
|
|
As of March 12, 2010, there were 17 holders of record of
our common stock.
Dividends
The Company has not paid dividends to its stockholders (other
than a dividend of preferred share purchase rights which was
declared on September 25, 2008) since its inception
and does not plan to pay dividends in the foreseeable future.
The Company currently intends to retain earnings, if any, to
finance the growth of the Company.
39
Market
Price of and Dividends on the Registrants Common Equity
and Related Stockholder Matters
The following graph shows the cumulative total return, assuming
the investment of $100 on April 12, 2006 (the date of the
initial public offering) on an investment in each of the
Companys common stock, the NASDAQ Composite Index and the
Amex Biotechnology Index (in either case, assuming reinvestment
of dividends). The comparisons in the table are required by the
SEC and are not intended to forecast or be indicative of
possible future performance of the Companys common stock.
We have not paid dividends to our stockholders since the
inception (other than a dividend of preferred share purchase
rights which was declared on September 25, 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
Form 10-K
pursuant to Item 201(e) of
Regulation S-K
and shall not be deemed soliciting materials or to
be filed with the SEC (other than as provided in
Item 201), nor shall such information be incorporated by
reference into any of our filings under the Securities Act of
1933 or the Securities Exchange Act of 1934, whether made before
or after the date hereof, and irrespective of any general
incorporation language in any such filing.
40
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The consolidated statements of operations data for the years
ended December 31, 2009, 2008 and 2007 and the consolidated
balance sheet data as of December 31, 2009 and 2008 are
each derived from our audited consolidated financial statements
included in this annual report on
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2006 and 2005, and the consolidated
balance sheet data as of December 31, 2007, 2006 and 2005
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
entitled Managements discussion and analysis of
financial condition and results of operations included in
this annual report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statements of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,547,744
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,897,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
13,873,961
|
|
|
|
23,935,541
|
|
|
|
47,234,867
|
|
|
|
52,070,776
|
|
|
|
16,890,615
|
|
General and administrative
|
|
|
23,724,101
|
|
|
|
28,909,580
|
|
|
|
32,803,508
|
|
|
|
13,637,664
|
|
|
|
7,396,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
40,495,687
|
|
|
|
52,845,121
|
|
|
|
80,038,375
|
|
|
|
65,708,440
|
|
|
|
24,286,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(35,947,943
|
)
|
|
|
(52,845,121
|
)
|
|
|
(80,038,375
|
)
|
|
|
(65,708,440
|
)
|
|
|
(24,286,653
|
)
|
Total other income, net
|
|
|
89,097
|
|
|
|
1,780,880
|
|
|
|
5,978,564
|
|
|
|
2,197,821
|
|
|
|
410,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(35,858,846
|
)
|
|
|
(51,064,241
|
)
|
|
|
(74,059,811
|
)
|
|
|
(63,510,619
|
)
|
|
|
(23,876,652
|
)
|
Tax provision
|
|
|
|
|
|
|
|
|
|
|
9,879
|
|
|
|
549
|
|
|
|
7,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(35,858,846
|
)
|
|
|
(51,064,241
|
)
|
|
|
(74,069,690
|
)
|
|
|
(63,511,168
|
)
|
|
|
(23,884,301
|
)
|
Beneficial conversion feature-deemed dividend to preferred
stockholders(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(35,858,846
|
)
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(57,370,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
$
|
(3,374.33
|
)
|
Shares used in calculation of basic and diluted net loss per
shares attributable to common stockholders
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
17,002
|
|
|
|
|
(1) |
|
In September and December of 2005, we completed the sale of an
additional 27,235,783 shares of Series B preferred
stock for net proceeds of approximately $33.5 million.
After evaluating the fair value of the common stock obtainable
upon conversion by the stockholders, we determined that the
issuance of the Series B preferred stock sold in 2005
resulted in a beneficial conversion feature which was fully
accreted in 2005 and is recorded as a deemed dividend to
preferred stockholders of approximately $33.5 million for
the year ended December 31, 2005. |
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
205,295,488
|
|
|
$
|
39,079,304
|
|
|
$
|
41,929,533
|
|
|
$
|
30,928,895
|
|
|
$
|
21,012,815
|
|
Marketable securities
|
|
|
|
|
|
|
7,378,798
|
|
|
|
51,223,291
|
|
|
|
941,981
|
|
|
|
10,141,189
|
|
Working capital
|
|
|
181,416,315
|
|
|
|
44,334,703
|
|
|
|
74,177,567
|
|
|
|
24,714,285
|
|
|
|
28,308,434
|
|
Total assets
|
|
|
225,714,081
|
|
|
|
49,933,843
|
|
|
|
96,860,780
|
|
|
|
36,260,276
|
|
|
|
35,752,770
|
|
Total liabilities
|
|
|
202,683,223
|
|
|
|
3,913,569
|
|
|
|
13,131,849
|
|
|
|
9,503,404
|
|
|
|
5,087,963
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,795,187
|
|
Accumulated deficit
|
|
|
(260,833,353
|
)
|
|
|
(224,974,507
|
)
|
|
|
(173,910,266
|
)
|
|
|
(99,840,576
|
)
|
|
|
(36,329,408
|
)
|
Total stockholders equity
|
|
|
23,030,858
|
|
|
|
46,020,274
|
|
|
|
83,728,931
|
|
|
|
26,756,872
|
|
|
|
30,664,807
|
|
42
|
|
ITEM 7.
|
MANAGEMENTS
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 at
the end of this annual report on
Form 10-K.
Some of the information contained in this discussion and
analysis or set forth elsewhere in this annual report on
Form 10-K
include historical information and other information with
respect to our plans and strategy for our business and contain
forward-looking statements that involve risk, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of
certain factors, including but not limited to those set forth
under the Risk Factors section of this report and
elsewhere in this annual report on
Form 10-K.
Overview
We are a biopharmaceutical company focused on the development
and commercialization of clinical-stage products for central
nervous system disorders. We believe that each of our products
and partnered products will address a large market with
significant unmet medical needs by offering advantages over
currently available therapies. Our product portfolio includes:
|
|
|
|
|
Fanapttm
(iloperidone), a compound for the treatment of schizophrenia. On
October 12, 2009, we entered into an amended and restated
sublicense agreement with Novartis. We had originally entered
into a sublicense agreement with Novartis on June 4, 2004
pursuant to which we obtained certain worldwide exclusive
licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Novartis began selling
Fanapttm
in the U.S. during the first quarter of 2010. Except for
two post-approval studies started by us prior to the execution
date of the amended and restated sublicense agreement, both of
which were substantially completed by December 31, 2009,
Novartis is responsible for the further clinical development
activities in the U.S. and Canada, including the
development of a long-acting injectable (or depot) formulation
of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada. On February 23, 2010,
the PTO issued a notice of allowance for our patent application
for the long acting injectable (or depot) formulation of
Fanapttm.
The PTO has informed us that the application is eligible for
patent term adjustment of an additional 300 days, making
the patent expiration date August 26, 2023.
|
|
|
|
Tasimelteon, a compound for the treatment of sleep and mood
disorders, including Circadian Rhythm Sleep Disorders (CRSD). In
November 2006, we announced positive top-line results from the
Phase III trial of tasimelteon in transient insomnia. In
June 2008, we announced positive top-line results from the
Phase III trial of tasimelteon in chronic primary insomnia.
On January 19, 2010, the United States Food and Drug
Administration (FDA) granted orphan designation status for
tasimelteon in the CRSD, Non-24-Hour Sleep/Wake Disorder in
blind individuals without light perception. 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, waiver
of FDA
|
43
|
|
|
|
|
user fees, tax credits, and up to seven years of market
exclusivity upon marketing approval. We will continue to explore
the path to an NDA for tasimelteon. Given the range of potential
indications for tasimelteon, we may pursue one or more
partnerships for the development and commercialization of
tasimelteon worldwide.
|
Since we began our operations in March 2003, we have devoted
substantially all of our resources to the in-licensing and
clinical development of our compounds. Our ability to generate
additional revenues largely depends on Novartis ability to
successfully commercialize
Fanapttm
in the U.S. and to successfully develop and commercialize
Fanapttm
in Canada and upon our ability, alone or with others, to
complete the development of our products or product candidates,
and to obtain the regulatory approvals for and manufacture,
market and sell our compounds. The results of our operations
will vary significantly from
year-to-year
and quarter-to- quarter and depend on a number of factors,
including risks related to our business, risks related to our
industry, and other risks which are detailed in Item 1A of
Part I of this annual report on
Form 10-K,
entitled Risk Factors.
We completed our initial public offering in April 2006. The
offering totaled 5,964,188 shares of common stock at a
public offering price of $10.00, resulting in net proceeds to
the Company of approximately $53.3 million, after deducting
underwriters discounts and commissions as well as offering
expenses. Upon completion of the initial public offering, all
shares of the Companys Series A preferred stock and
Series B preferred stock were converted into an aggregate
of 15,794,632 shares of common stock.
In January 2007 we completed our follow-on offering, consisting
of 4,370,000 shares of common stock at a public offering
price of $27.29 per share, resulting in net proceeds to the
Company of approximately $111.3 million after deducting
underwriting discounts and commissions and offering expenses.
Our activities will necessitate significant uses of working
capital throughout 2010 and beyond. However, for the immediate
future, we expect to continue to operate on a reduced spending
plan with our fixed overhead costs expected to be approximately
$10.0 million to $12.0 million per year.
Fanapttm. We
have developed
Fanapttm,
and will continue to develop it outside the U.S. and
Canada, to treat schizophrenia. On May 6, 2009, the FDA
granted U.S. marketing approval of
Fanapttm
for the acute treatment of schizophrenia in adults. On
October 12, 2009, we entered into an amended and restated
sublicense agreement with Novartis relating to
Fanapttm.
We had originally entered into a sublicense agreement with
Novartis on June 4, 2004 pursuant to which we obtained
certain worldwide exclusive licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Except for two post-approval
studies started by us prior to the execution date of the amended
and restated sublicense agreement, both of which were
substantially completed by December 31, 2009, Novartis is
responsible for the further clinical development activities in
the U.S. and Canada, including the development of a
long-acting injectable (or depot) formulation of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada. Novartis launched
Fanapttm
in the U.S. on January 11, 2010.
For the year ended December 31, 2009 we incurred
approximately $9.5 million in research and development
costs directly attributable to our development of
Fanapttm.
As a result of the FDAs approval of the NDA for
Fanapttm,
we met an additional milestone under the original sublicense
agreement which required
44
us to make a license payment of $12.0 million to Novartis.
The $12.0 million was capitalized and will be amortized
over the remaining life of the U.S. patent for
Fanapttm.
Tasimelteon. Tasimelteon is our product under
development to treat sleep and mood disorders. Tasimelteon is a
melatonin receptor agonist that works by adjusting the human
body clock or circadian rhythm. Tasimelteon has
successfully completed a Phase III trial for the treatment
of transient insomnia in November 2006. In June 2008, we
announced positive top-line results from the Phase III
trial of tasimelteon in chronic primary insomnia. The trial was
a randomized, double-blind, and placebo-controlled study with
324 patients. The trial measured time to fall asleep and
sleep maintenance, as well as
next-day
performance. On January 19, 2010, the FDA granted orphan
designation status for tasimelteon in the CRSD, Non-24-Hour
Sleep/Wake Disorder in blind individuals without light
perception. 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, waiver of FDA user fees, tax credits, and up
to seven years of market exclusivity upon marketing approval. We
will continue to explore the path to an NDA for tasimelteon.
Tasimelteon is also ready for Phase II trials for the
treatment of depression.
For the year ended December 31, 2009, we incurred
approximately $2.5 million in direct research and
development costs directly attributable to our development of
tasimelteon.
Revenues. Our revenues are derived primarily
from our amended and restated sublicense agreement with Novartis
and include an up-front payment, product sales and future
milestone and royalty payments. Revenue is considered both
realizable and earned when each one of the following four
conditions is met: (1) persuasive evidence of an
arrangement exists, (2) the arrangement fee is fixed or
determinable, (3) delivery or performance has occurred and
(4) collectability is reasonably assured. Revenue from the
$200.0 million upfront payment will be recognized ratably
on a straight-line basis from the date the amended and restated
sublicense agreement became effective (November 27,
2009) through the expected life of the U.S. patent for
Fanapttm
(May 15, 2017). Approximately $2.6 million of the
$200.0 million upfront payment was recognized as revenue
for the year ended December 31, 2009. Revenue related to
product sales is recognized upon delivery to Novartis. For the
year ended December 31, 2009, we recognized approximately
$2.0 million in product revenue related to the sale of
inventory to Novartis. We will recognize revenue from
Fanapttm
royalties and commercial and development milestones from
Novartis when realizable and earned.
Research and development expenses. Our
research and development expenses consist primarily of fees for
services provided by third parties in connection with our
clinical trials, costs of contract manufacturing services,
milestone license fees, costs of materials used in clinical
trials and research and development, cost for regulatory
consultants and filings, depreciation of capital resources used
to develop our compounds, related facilities costs, and
salaries, other employee-related costs and stock-based
compensation for the research and development personnel. We
expense research and development costs as they are incurred for
compounds in the development stage, including certain payments
under our license agreements. Prior to FDA approval, all
Fanapttm
manufacturing-related and milestone costs were included in
research and development expenses. Post FDA approval of
Fanapttm,
manufacturing and milestone costs related to this product are
being capitalized. Costs related to the acquisition of
intellectual property have been expensed as incurred since the
underlying technology associated with these acquisitions were
made in connection with the Companys research and
development efforts and have no alternative future use.
Milestone payments are accrued in accordance with the FASB
guidance on accounting for contingencies which states that
milestone payments be accrued when it is deemed probable that
the milestone event will be achieved. We believe that
significant investment in product development is a competitive
necessity and plan to continue these investments in order to
realize the potential of our products and product candidates and
pharmacogenetics and pharmacogenomics expertise. For the year
ended December 31, 2009, we incurred research and
development expenses in the aggregate of approximately
$13.9 million, including stock-based compensation expenses
of approximately $2.0 million. We expect our research and
development expenses to increase as we continue to develop our
products and product candidates. We also expect to incur
licensing costs in the future that could be substantial, as we
continue our efforts to develop our products and product
candidates and to evaluate potential in-license product
candidates.
45
The following table summarizes our product development
initiatives for the years ended December 31, 2009 to
December 31, 2007. Included in the following table are the
research and development expenses recognized in connection with
the clinical development of
Fanapttm
and tasimelteon. Included in Other product
candidates are the costs directly related to research
initiatives for all other product candidates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Direct project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fanapttm
|
|
$
|
9,532,000
|
|
|
$
|
8,485,000
|
|
|
$
|
20,668,000
|
|
Tasimelteon
|
|
|
2,548,000
|
|
|
|
11,344,000
|
|
|
|
18,947,000
|
|
Other product candidates
|
|
|
120,000
|
|
|
|
2,180,000
|
|
|
|
5,499,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct product costs
|
|
|
12,200,000
|
|
|
|
22,009,000
|
|
|
|
45,114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
620,000
|
|
|
|
683,000
|
|
|
|
495,000
|
|
Depreciation
|
|
|
234,000
|
|
|
|
330,000
|
|
|
|
423,000
|
|
Other indirect overhead costs
|
|
|
820,000
|
|
|
|
913,000
|
|
|
|
1,203,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect expenses
|
|
|
1,674,000
|
|
|
|
1,926,000
|
|
|
|
2,121,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
13,874,000
|
|
|
$
|
23,935,000
|
|
|
$
|
47,235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Many of our research and development costs are not attributable
to any individual project because we share resources across
several development projects. We record direct costs, including
personnel costs and related benefits and stock-based
compensation, on a
project-by-project
basis. We record indirect costs that support a number of our
research and development activities in the aggregate. |
General and administrative expenses. General
and administrative expenses consist primarily of salaries, other
employee-related costs and stock-based compensation for
personnel, serving executive, business development, marketing,
finance, accounting, information technology and human resource
functions, facility costs not otherwise included in research and
development expenses, insurance costs and professional fees for
legal, accounting and other professional services. General and
administrative expenses also include third party expenses
incurred to support business development, marketing and other
business activities related to
Fanapttm.
For the year ended December 31, 2009, we incurred general
and administrative expenses in the aggregate of approximately
$23.7 million, including stock-based compensation expenses
of approximately $8.7 million.
Interest and other income, net. Interest
income consists of interest earned on our cash and cash
equivalents, marketable securities and restricted cash.
Critical
accounting policies
The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of our financial
statements, as well as the reported revenues and expenses during
the reported periods. We base our estimates on historical
experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are described in the notes
to our audited consolidated financial statements for the year
ended December 31, 2009 included in this annual report on
Form 10-K.
However, we believe that the following accounting policies are
important to understanding and evaluating our reported financial
results, and we have accordingly included them in this
discussion.
Inventory. We value our inventories at the
lower of cost or net realizable value. We analyze our inventory
levels quarterly and write down inventory that has become
obsolete, or has a cost basis in excess of
46
its expected net realizable value and inventory quantities in
excess of expected requirements. Expired inventory is disposed
of and the related costs are written off to cost of sales. Prior
to FDA approval, all
Fanapttm
manufacturing-related costs were included in research and
development expenses. Subsequent to FDA approval of
Fanapttm,
manufacturing costs related to this product are capitalized.
Pursuant to the amended and restated sublicense agreement with
Novartis, we have sold the majority of our finished product to
Novartis and plan to sell the remainder in early 2010.
Intangible asset, net. Costs incurred for
products or product candidates not yet approved by the FDA and
for which no alternative future use exists are recorded as
expense. In the event a product or product candidate has been
approved by the FDA or an alternative future use exists for a
product or product candidate, patent and license costs are
capitalized and amortized over the expected patent life of the
related product or product candidate. Milestone payments to our
partners are recognized when it is deemed probable that the
milestone event will occur.
As a result of the FDAs approval of the NDA for
Fanapttm,
we met a milestone under our original sublicense agreement with
Novartis which required us to make a payment of
$12.0 million to Novartis. The $12.0 million is being
amortized on a straight line basis over the remaining life of
the U.S. patent for
Fanapttm,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that extends patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is our best estimate of the life of the
patent; if, however, the Hatch-Waxman or pediatric extensions
are not granted, the intangible asset will be amortized over a
shorter period. Amortization of the intangible asset is recorded
as a component of cost of goods sold.
The carrying values of intangible assets are periodically
reviewed to determine if the facts and circumstances suggest
that a potential impairment may have occurred. We had no
impairments of our intangible assets for the year ended
December 31, 2009.
Accrued expenses. As part of the process of
preparing financial statements, we are required to estimate
accrued expenses. The estimation of accrued expenses involves
identifying services that have been performed on our 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 expenses include
professional service fees, such as lawyers and accountants,
contract service fees, such as those 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, fees for marketing and other
commercialization activities, and severance-related costs due to
our workforce reduction that took place in December of 2008.
Pursuant to our assessment of the services that have been
performed on clinical trials and other contracts, we recognize
these expenses as the services are provided. Our assessments
include, but are not limited to: (1) an evaluation by the
project manager of the work that has been completed during the
period, (2) measurement of progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment. In the event that we do not
identify certain costs that have begun to be incurred or we
under- or over-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.
Revenue Recognition. Our revenues are derived
primarily from our amended and restated sublicense agreement
with Novartis and include an up-front payment, product revenue
and future milestone and royalty revenues. Revenue is considered
both realizable and earned when each one of the following four
conditions is met: (1) persuasive evidence of an
arrangement exists, (2) the arrangement fee is fixed or
determinable, (3) delivery or performance has occurred and
(4) collectability is reasonably assured. Pursuant to the
amended and restated sublicense agreement, Novartis has the
right to commercialize and develop
Fanapttm
in the U.S. and Canada. Under the amended and restated
sublicense agreement, we received an upfront payment of
$200.0 million in December of 2009. Pursuant to the amended
and restated sublicense agreement, we and Novartis established a
Joint Steering Committee (JSC) following the effective date of
the amended and restated sublicense agreement. We expect to have
an active role on the JSC and concluded that the JSC constitutes
a deliverable under the amended and restated sublicense
agreement and that revenue related to the upfront payment will
be recognized ratably over the term of the JSC; however, the
delivery or performance has no
47
term as the exact length of the JSC is undefined. As a result,
we deem the performance period of the JSC to be the life of the
U.S. patent of
Fanapttm,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that provides patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is our best estimate of the life of the
patent. Revenue will be recognized ratably from the date the
amended and restated sublicense agreement became effective
(November 27, 2009) through the expected life of the
U.S. patent for
Fanapttm
(May 15, 2017). We will recognize revenue related to
Fanapttm
royalties and commercial and development milestones as they are
realizable and earned, and product revenue upon delivery of our
products to Novartis.
Stock-based compensation. We adopted the FASB
guidance on share based payments January 1, 2006 using the
modified prospective transition method of implementation and
adopted the accelerated attribution method.
We currently 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 historical volatility of the common stock of
comparable entities and other factors due to the lack of
historic information of our publicly traded common stock. The
expected term of options granted is based on the transition
approach provided by FASB guidance as the options meet the
plain vanilla criteria required by this method. The
risk-free interest rates are based on the U.S. Treasury
yield for a period consistent with the expected term of the
option in effect at the time of the grant. We have not paid
dividends to our stockholders since our inception and do not
plan to pay dividends in the foreseeable future. The stock-based
compensation expense for a period is also affected by expected
forfeiture rate for the respective option grants. If our
estimates of the fair value of these equity instruments or
expected forfeitures are too high or too low, it would have the
effect of overstating or understating expenses.
Total stock-based compensation expense, related to all of our
stock-based awards for the years ended December 31, 2009,
2008 and 2007, was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Research and development
|
|
$
|
2,028,000
|
|
|
$
|
1,748,000
|
|
|
$
|
4,259,000
|
|
General and administrative
|
|
|
8,738,000
|
|
|
|
11,667,000
|
|
|
|
15,228,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
10,766,000
|
|
|
$
|
13,415,000
|
|
|
$
|
19,487,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per basic and diluted share of
common stock
|
|
$
|
0.40
|
|
|
$
|
0.50
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since we had a net operating loss carryforward as of
December 31, 2009, no excess tax benefits for the tax
deductions related to stock-based awards were recognized in the
consolidated statements of operations. Additionally, no
incremental tax benefits were recognized from stock options
exercised in 2009 or 2008 which would have resulted in a
reclassification to reduce net cash used in operating activities
with an offsetting increase in net cash provided by financing
activities.
Recent
Accounting Pronouncements
In September 2009, the FASB issued new accounting guidance
related to the revenue recognition of multiple element
arrangements. The new guidance states that if vendor-specific
objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, companies will be required
to develop a best estimate of the selling price to separate
deliverables and allocate arrangement consideration using the
relative selling price method. The accounting guidance will be
applied prospectively and will become effective during the first
quarter of 2011. Early adoption is allowed. We will adopt this
guidance beginning January 1, 2011 and we do not expect
this accounting guidance to materially impact our financial
statements.
48
In January 2010, the FASB issued new accounting guidance related
to the disclosure requirements for fair value measurements and
provides clarification for existing disclosures requirements.
More specifically, this update will require (a) an entity
to disclose separately the amounts of significant transfers in
and out of Levels 1 and 2 fair value measurements and to
describe the reasons for the transfers; and (b) information
about purchases, sales, issuances and settlements to be
presented separately (i.e. present the activity on a gross basis
rather than net) in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3
inputs). This guidance clarifies existing disclosure
requirements for the level of disaggregation used for classes of
assets and liabilities measured at fair value and requires
disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair
value measurements using Level 2 and Level 3 inputs.
The new disclosures and clarifications of existing disclosure
are effective for fiscal years beginning after December 15,
2009, except for the disclosure requirements for related to the
purchases, sales, issuances and settlements in the rollforward
activity of Level 3 fair value measurements. Those
disclosure requirements are effective for fiscal years ending
after December 31, 2010. We do not believe the adoption of
this guidance will have a material impact to our consolidated
financial statements.
Results
of operations
We have a limited history of operations. We anticipate that our
results of operations will fluctuate for the foreseeable future
due to several factors, including any possible payments made or
received pursuant to licensing or collaboration agreements,
progress of our research and development efforts, and the timing
and outcome of clinical trials and related possible regulatory
approvals. On October 12, 2009, we entered into an amended
and restated sublicense agreement with Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million. of which we
recognized $2.6 million as revenue in 2009. The remaining
amounts will be recognized ratably over the U.S. patent
life of
Fanapttm
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that provides patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is our best estimate of the life of the
patent. In addition, we recognized $2.0 million of product
revenue in 2009 for product sold to Novartis. We will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada.
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Research and development expenses. Research
and development expenses decreased by approximately
$10.1 million, or 42.0%, to approximately
$13.9 million for the year ended December 31, 2009
compared to approximately $23.9 million for the year ended
December 31, 2008.
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Research and Development Expenses
|
|
2009
|
|
|
2008
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
42,000
|
|
|
$
|
7,441,000
|
|
Contract research and development, consulting, materials and
other direct costs
|
|
|
7,735,000
|
|
|
|
8,731,000
|
|
Salaries, benefits and related costs
|
|
|
2,395,000
|
|
|
|
4,089,000
|
|
Stock-based compensation
|
|
|
2,028,000
|
|
|
|
1,748,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
12,200,000
|
|
|
|
22,009,000
|
|
Indirect project costs
|
|
|
1,674,000
|
|
|
|
1,926,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,874,000
|
|
|
$
|
23,935,000
|
|
|
|
|
|
|
|
|
|
|
49
Direct costs decreased by approximately $9.8 million
primarily as a result of lower clinical trial and manufacturing
expenses and lower salary and benefit expenses due to a reduced
workforce. Clinical trials expense decreased by approximately
$7.4 million primarily due to the Phase III clinical
trial for tasimelteon in chronic primary insomnia being
completed in 2008. Contract research and development,
consulting, materials and other direct costs decreased by
approximately $1.0 million primarily as a result of lower
manufacturing costs for tasimelteon, and
Fanapttm
manufacturing expenses being capitalized post FDA approval.
General and administrative expenses. General
and administrative expenses decreased by approximately
$5.2 million, or 17.9%, to approximately $23.7 million
for the year ended December 31, 2009 from approximately
$28.9 million for the year ended December 31, 2008.
The following table analyzes the components of our general and
administrative expenses for the years ended December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
General and Administrative Expenses
|
|
2009
|
|
|
2008
|
|
|
Salaries, benefits and related costs
|
|
$
|
2,686,000
|
|
|
$
|
4,946,000
|
|
Stock-based compensation
|
|
|
8,738,000
|
|
|
|
11,667,000
|
|
Marketing, legal, accounting and other professional services
|
|
|
9,951,000
|
|
|
|
9,450,000
|
|
Other expenses
|
|
|
2,349,000
|
|
|
|
2,847,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,724,000
|
|
|
$
|
28,910,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs decreased by approximately
$2.3 million for the year ended December 31, 2009 as a
result of a workforce reduction that took place in December
2008. Stock-based compensation expense decreased by
approximately $2.9 million as a result of the full vesting
of non-qualified options issued at a higher fair market value.
Marketing, legal, accounting and other professional services
increased by $501,000 for the year ended December 31, 2009
as a result of higher legal, consulting and financial advisor
fees related to the Novartis agreement, netted with lower
marketing expenses relating to
Fanapttm.
Other income, net. Net other income for the
year ended December 31, 2009 was approximately
$0.1 million compared to approximately $1.8 million
for the year ended December 31, 2008. Interest income
decreased by approximately $1.7 million due to lower
average cash and marketable securities balances for the year
combined with a lower rate of return on investments.
The following table analyzes the components of our other income,
net amounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest income
|
|
$
|
89,000
|
|
|
$
|
1,781,000
|
|
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Research and development expenses. Research
and development expenses decreased by approximately
$23.3 million, or 49%, to approximately $23.9 million
for the year ended December 31, 2008 compared to
approximately $47.2 million for the year ended
December 31, 2007.
50
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Research and Development Expenses
|
|
2008
|
|
|
2007
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
7,441,000
|
|
|
$
|
14,595,000
|
|
Contract research and development, consulting, materials and
other direct costs
|
|
|
8,731,000
|
|
|
|
16,253,000
|
|
Milestone license fees
|
|
|
|
|
|
|
6,000,000
|
|
Salaries, benefits and related costs
|
|
|
4,089,000
|
|
|
|
4,007,000
|
|
Stock-based compensation
|
|
|
1,748,000
|
|
|
|
4,259,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
22,009,000
|
|
|
|
45,114,000
|
|
Indirect project costs
|
|
|
1,926,000
|
|
|
|
2,121,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,935,000
|
|
|
$
|
47,235,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased by approximately $23.1 million
primarily as a result of the absence of any milestone license
payments in 2008, lower expenses related to the NDA for
Fanapttm
and lower clinical trial and manufacturing expenses and by
decreases in stock-based compensation expense. Clinical trials
expense decreased by approximately $7.2 million primarily
due to the costs incurred in 2007 in our Phase III trial of
Fanapttm
in schizophrenia and in our tasimelteon clinical pharmacology
trials that were completed in 2007. The clinical trial costs
incurred in 2008 related primarily to our Phase III trial
of tasimelteon in primary insomnia that we initiated during the
third quarter of 2007. Contract research and development,
consulting, materials and other direct costs decreased by
approximately $7.5 million primarily as a result of
decreased development costs incurred in connection with the
lower manufacturing costs for the
Fanapttm
and tasimelteon programs offset by the increase in consulting
fees incurred with the engagement of the regulatory consultant
to assist us in our efforts to obtain FDA approval of the
Fanapttm
NDA. Prior to FDA approval of our products, manufacturing
related costs were included in research and development expense.
There were no milestone license fees incurred in 2008.
Stock-based compensation expense decreased by approximately
$2.5 million as a result of the lower fair value of options
granted during 2008 compared to options granted in prior periods
and the reversal of cumulative amortization of deferred
stock-based compensation related to the cancellation of unvested
options in connection with the workforce reduction in December
2008.
General and administrative expenses. General
and administrative expenses decreased by approximately
$3.9 million, or 12%, to approximately $28.9 million
for the year ended December 31, 2008 from approximately
$32.8 million for the year ended December 31, 2007.
The following table analyzes the components of our general and
administrative expenses for the years ended December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
General and Administrative Expenses
|
|
2008
|
|
|
2007
|
|
|
Salaries, benefits and related costs
|
|
$
|
4,946,000
|
|
|
$
|
3,263,000
|
|
Stock-based compensation
|
|
|
11,667,000
|
|
|
|
15,228,000
|
|
Marketing and related consulting services
|
|
|
5,731,000
|
|
|
|
8,047,000
|
|
Legal and other professional expenses
|
|
|
3,719,000
|
|
|
|
3,142,000
|
|
Other expenses
|
|
|
2,847,000
|
|
|
|
3,124,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,910,000
|
|
|
$
|
32,804,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased by approximately
$1.7 million for the year ended December 31, 2008 due
to a severance accrual of $1.0 million related to the
workforce reduction in
51
December 2008. Stock-based compensation expense decreased
by approximately $3.6 million as a result of the reversal
of cumulative amortization of deferred stock-based compensation
related to the cancellation of unvested options in connection
with the workforce reduction in December 2008 and to the lower
fair value of options granted during 2008 compared to options
granted in prior periods. Marketing and related consulting
services decreased by approximately $2.3 million due to the
decrease in our market research and other pre-commercial launch
activities following receipt of the not-approvable letter from
the FDA regarding the NDA for
Fanapttm.
Legal and other professional expenses increased by approximately
$577,000 due primarily to a higher level of consulting activity
in 2008 in support of business development activities. Other
expenses decreased by approximately $277,000 primarily due to
lower accounting fees than those incurred in 2007 to initially
bring the Company in compliance with Sarbanes-Oxley.
Other income, net. Net other income for the
year ended December 31, 2008 was approximately
$1.8 million compared to approximately $6.0 million
for the year ended December 31, 2007. Interest income
decreased by approximately $4.1 million due to lower
average cash and marketable securities balances for the year and
lower short-term interest rates which generated substantially
lower interest income than in 2007. Other income for the year
ended December 31, 2007 included approximately $71,000 in
revenue recognized from a grant from the Economic Development
Board in Singapore. We do not expect to receive similar grants
in the future.
The following table analyzes the components of our other income,
net amounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Interest income
|
|
$
|
1,781,000
|
|
|
$
|
5,907,000
|
|
Other income
|
|
|
|
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
1,781,000
|
|
|
$
|
5,978,000
|
|
|
|
|
|
|
|
|
|
|
Intangible
Asset, Net
The intangible asset consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Fanapttm
|
|
|
8 years
|
|
|
$
|
12,000,000
|
|
|
$
|
983,000
|
|
|
$
|
11,017,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000,000
|
|
|
$
|
983,000
|
|
|
$
|
11,017,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 6, 2009, we announced that the FDA had approved the
NDA for
Fanapttm.
As a result of the FDAs approval of the NDA, we met a
milestone under our original sublicense agreement with Novartis
which required us to make a payment of $12.0 million to
Novartis. The $12.0 million was capitalized and will be
amortized over the remaining life of the U.S. patent for
Fanapttm,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that provides patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is our best estimate of the life of the
patent; if, however, the Hatch-Waxman or pediatric extensions
are not granted, the intangible asset will be amortized over a
shorter period.
Intangible assets are amortized over their estimated useful
economic life using the straight line method. Amortization
expense was approximately $983,000 for the year ended
December 31, 2009. We capitalized and began amortizing the
asset immediately following the FDA approval of the NDA for
Fanapttm.
52
The following table summarizes our intangible asset amortization
schedule as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2014
|
|
|
Intangible asset
|
|
$
|
11,017,000
|
|
|
$
|
1,495,000
|
|
|
$
|
1,495,000
|
|
|
$
|
1,495,000
|
|
|
$
|
1,495,000
|
|
|
$
|
1,495,000
|
|
|
$
|
3,542,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
Inventory consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
1,095,000
|
|
Work-in-process
|
|
|
|
|
Finished goods
|
|
|
1,304,000
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
2,399,000
|
|
|
|
|
|
|
Pursuant to the amended and restated sublicense agreement with
Novartis, Novartis is obligated to purchase all
Fanapttm
inventory, subject to such inventory meeting certain
requirements. We sold the majority of our finished product to
Novartis in 2009 and plan to sell the remainder in early 2010.
Revenue
Recognition
Revenue consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
Revenue Deferred
|
|
|
Total
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for licensing agreement
|
|
$
|
2,569,000
|
|
|
$
|
197,431,000
|
|
|
$
|
200,000,000
|
|
Product revenue
|
|
|
1,979,000
|
|
|
|
|
|
|
|
1,979,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,548,000
|
|
|
$
|
197,431,000
|
|
|
$
|
201,979,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We entered into an amended and restated sublicense agreement
with Novartis on October 12, 2009, pursuant to which
Novartis has the right to commercialize and develop
Fanapttm
in the U.S. and Canada. Under the amended and restated
sublicense agreement, we received an upfront payment of
$200.0 million in December of 2009. Revenue will be
recognized ratably from the date the amended and restated
sublicense agreement became effective (November 27,
2009) through the expected life of the U.S. patent for
Fanapttm
(May 15, 2017). This includes the Hatch-Waxman extension
that provides patent protection for drug compounds for a period
of up to five years to compensate for time spent in development
and a six-month pediatric term extension. This term is our best
estimate of the life of the patent. For the year ended
December 31, 2009, we recognized approximately
$2.6 million of revenue under the amended and restated
sublicense agreement, deferring approximately
$197.4 million. We recognize product revenue upon delivery
of our products to Novartis.
Liquidity
and capital resources
As of December 31, 2009, our total cash and cash
equivalents and marketable securities were approximately
$205.3 million compared to approximately $46.5 million
at December 31, 2008. Our cash and cash equivalents are
deposits in operating accounts and highly liquid investments
with an original maturity of 90 days or less at date of
purchase and consist of time deposits, investments in money
market funds with commercial banks and financial institutions,
and commercial paper of high-quality corporate issuers. As of
December 31, 2009, we also held a non-current deposit of
$430,000 that is used to collateralize a letter of credit issued
for our current office lease in Rockville, Maryland which
expires in 2016.
53
As of December 31, 2009 and 2008 our liquidity resources
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
205,295,000
|
|
|
$
|
39,079,000
|
|
U.S. Treasury and government agencies
|
|
|
|
|
|
|
2,000,000
|
|
U.S. corporate debt
|
|
|
|
|
|
|
5,252,000
|
|
U.S. asset-backed securities
|
|
|
|
|
|
|
127,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, short-term
|
|
|
|
|
|
|
7,379,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
205,295,000
|
|
|
$
|
46,458,000
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, we maintained all of our cash,
cash equivalents and marketable securities in three 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 September 2006, the FASB issued guidance on fair value
measurements which defines fair value, establishes a framework
for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. In February 2008, the
FASB agreed to delay the effective date of this guidance for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after
November 15, 2008. We have adopted the provisions of the
guidance as of January 1, 2008 and January 1, 2009,
for financial assets and liabilities and non financial assets
and liabilities, respectively. Although the adoption of this
guidance did not materially impact our financial condition,
results of operations, or cash flow, we are now required to
provide additional disclosures as part of our financial
statements.
FASB 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
|
As December 31, 2009, we did not hold any assets or
liabilities that are required to be measured at fair value on a
recurring basis.
As of December 31, 2008, we held certain assets that are
required to be measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Description :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
7,379,000
|
|
|
$
|
2,000,000
|
|
|
$
|
5,379,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,379,000
|
|
|
$
|
2,000,000
|
|
|
$
|
5,379,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our activities will necessitate significant uses of working
capital throughout 2010 and beyond. However, for the immediate
future, we expect to continue to operate on a reduced spending
plan. We are currently concentrating our efforts on supporting
Novartis commercial launch of
Fanapttm
in the U.S. In addition, we intend to engage in discussions
with several foreign regulatory agencies to review their filing
requirements
54
with respect to
Fanapttm.
We also plan to continue the clinical, regulatory and commercial
evaluation of tasimelteon, including exploring the path to a NDA
for tasimelteon.
Cash
flow
The following table summarizes our cash flows for the years
ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net cash provided by (used in) Operating activities
|
|
$
|
169,336,000
|
|
|
$
|
(45,955,000
|
)
|
|
$
|
(51,641,000
|
)
|
Investing activities
|
|
|
(4,739,000
|
)
|
|
|
43,088,000
|
|
|
|
(48,760,000
|
)
|
Financing activities
|
|
|
1,619,000
|
|
|
|
|
|
|
|
111,403,000
|
|
Effect of foreign currency translation
|
|
|
|
|
|
|
17,000
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
166,216,000
|
|
|
$
|
(2,850,000
|
)
|
|
$
|
11,001,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Net cash provided by operations was approximately
$169.3 million for the year ended December 31, 2009
and $46.0 million was used in operations for the year ended
December 31, 2008. The net loss for the year ended
December 31, 2009 of approximately $35.9 million was
offset primarily by non-cash charges for depreciation and
amortization of approximately $1.6 million, stock-based
compensation of approximately $11.2 million, increases in
prepaid expenses of $0.8 million, increases in accounts
receivable of $3.2 million, increases in accrued expenses
and accounts payable of approximately $1.3 million,
increases in inventory of $2.4 million and increases in
deferred revenue of $197.4 million and $0.1 million of
changes in other working capital. Net cash used by investing
activities for the year ended December 31, 2009 was
approximately $4.7 million and consisted of the acquisition
of an intangible asset of $12.0 million and net maturities
and sales of marketable securities of approximately
$7.3 million. Net cash provided from financing activities
resulted from the exercise of employees stock options for the
year ended December 31, 2009 was $1.6 million.
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Net cash used in operations was approximately $46.0 million
for the year ended December 31, 2008 and $51.6 million
for the year ended December 31, 2007. The net loss for the
year ended December 31, 2008 of approximately
$51.1 million was offset primarily by non-cash charges for
depreciation and amortization of approximately $531,000,
stock-based compensation of approximately $13.4 million,
and decreases in accrued expenses and accounts payable of
approximately $9.4 million, principally related to clinical
trial expenses. Net cash provided by investing activities for
the year ended December 31, 2008 was approximately
$43.1 million and consisted primarily of net maturities and
sales of marketable securities of approximately
$44.0 million. There was no net cash provided by financing
activities for the year ended December 31, 2008.
Contractual
obligations and commitments
Operating leases. Our commitments under
operating leases shown below consist of payments relating to our
real estate leases for our current headquarters located in
Rockville, Maryland, which expires in 2016.
The following table summarizes our long-term contractual cash
obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2014
|
|
|
Operating leases
|
|
$
|
4,988,000
|
|
|
$
|
706,000
|
|
|
$
|
727,000
|
|
|
$
|
749,000
|
|
|
$
|
771,000
|
|
|
$
|
795,000
|
|
|
$
|
1,240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payments. On December 16, 2008,
we committed to a plan of termination that resulted in a work
force reduction of 17 employees, including two officers, in
order to reduce operating costs. We commenced notification of
employees affected by the workforce reduction on
December 17, 2008.
55
The following table summarizes the activity in the year ended
December 31, 2009 for the liability for the cash portion of
severance costs related to the workforce reduction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
Beginning Balance
|
|
|
Charge
|
|
|
Cash Paid
|
|
|
Ending Balance
|
|
|
Workforce Reduction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research Development
|
|
$
|
571,000
|
|
|
$
|
|
|
|
$
|
571,000
|
|
|
$
|
|
|
General & Administrative
|
|
|
1,041,000
|
|
|
|
|
|
|
|
1,041,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,612,000
|
|
|
$
|
|
|
|
$
|
1,612,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees. We had engaged a regulatory
consultant to us assist in our efforts to obtain FDA approval of
the
Fanapttm
NDA. We had committed to initial consulting expenses in the
aggregate amount of $2.0 million pursuant to this
engagement, which was expensed in 2008. In addition, we retained
the services of the consultant on a monthly basis at a retainer
fee of $0.25 million per month effective as of
January 1, 2009. We became obligated to pay the consultant
a success fee of $6.0 million as a result of the approval
by the FDA of the NDA for
Fanapttm.
This fee, which was fully expensed in May 2009 and offset by the
aggregate amount of all monthly retainer fees previously paid to
the consultant, was paid in monthly $1.0 million
increments, with the last payment occurring in October 2009. In
addition to these fees, we reimbursed the consultant for its
ordinary and necessary business expenses incurred in connection
with its engagement.
We also engaged financial advisors and consultants to advise us
in connection with our business development activities. Pursuant
to our agreements with these advisors and consultants, we became
obligated to pay aggregate fees of approximately
$3.5 million following the effective date of the amended
and restated sublicense agreement with Novartis. Of the
$3.5 million, $2.0 million was paid by
December 31, 2009 and the remaining balance was paid in
early 2010.
Other contracts. We have entered into
agreements with clinical supply manufacturing organizations and
other outside contractors who will be responsible for additional
services supporting our ongoing clinical development processes.
These contractual obligations are not reflected in the table
above because we may terminate them on no more than 60 days
notice without incurring additional charges (other than charges
for work completed but not paid for through the effective date
of termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination).
Pursuant to the amended and restated sublicense agreement with
Novartis, except for two post-approval studies started by us
prior to the execution date of the amended and restated
sublicense agreement, both of which were substantially completed
by December 31, 2009, Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot) formulation of
Fanapttm.
The cash obligation with respect to the study which we expect to
complete in the second quarter of 2010 is approximately $462,000.
License agreements. In February 2004 and June
2004, we entered into separate licensing agreements with BMS and
Novartis, respectively, for the exclusive rights to develop and
commercialize tasimelteon and
Fanapttm.
On October 12, 2009, we entered into an amended and
restated sublicense agreement with Novartis. We are obligated to
make (in the case of tasimelteon and, in the case of
Fanapttm
in the U.S. and Canada, are entitled to receive) payments
under the conditions in the agreements upon the achievement of
specified clinical, regulatory and commercial milestones. If the
products are successfully commercialized we will be required to
pay certain royalties (and in the case of
Fanapttm
in the U.S. and Canada, will be entitled to receive) based
on net sales for each of the licensed products. Please see the
notes to the consolidated financial statements included with
this report for a more detailed description of these license
agreements.
As a result of the successful commencement of the Phase III
clinical study of tasimelteon in March 2006, we met the first
milestone specified in our licensing agreement with BMS and
subsequently paid a license fee of $1.0 million.
56
As a result of the acceptance by FDA of the NDA for
Fanapttm
in October 2007, we met a milestone under our original
sublicense agreement with Novartis and subsequently paid a
$5.0 million milestone fee. As a result of the FDAs
approval of the NDA for
Fanapttm,
we met an additional milestone under the original sublicense
agreement with Novartis which required us to make a payment of
$12.0 million to Novartis. The $12.0 million was
capitalized and will be amortized over the remaining life of the
U.S. patent for
Fanapttm,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that provides patent protection for
drug compounds for a period of up to five years to compensate
for time spent in development and a six-month pediatric term
extension. This term is the Companys best estimate of the
life of the patent; if, however, the Hatch-Waxman or pediatric
extensions are not granted, the intangible asset will be
amortized over a shorter period. No amounts were recorded as
liabilities relating to the license agreements included in the
consolidated financial statements as of December 31, 2009,
since the amounts, timing and likelihood of these payments are
unknown and will depend on the successful outcome of future
clinical trials, regulatory filings, favorable regulatory
approvals, growth in product sales and other factors.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Except for two post-approval
studies started by us prior to the execution date of the amended
and restated sublicense agreement, both of which were
substantially completed by December 31, 2009, Novartis is
responsible for the further clinical development activities in
the U.S. and Canada, including the development of a
long-acting injectable (or depot) formulation of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million and will be
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. We will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, we will no longer be
required to make any future milestone payments with respect to
sales of
Fanapttm
or any royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. We retain exclusive rights to
Fanapttm
outside the U.S. and Canada and we will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada.
|
|
ITEM 7A.
|
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
rates
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.
Effects
of inflation
Our most liquid assets are cash and cash equivalents and
marketable securities. Because of their liquidity, these assets
are not directly affected by inflation. We also believe that we
have intangible assets in the value of our intellectual
property. In accordance with generally accepted accounting
principles, we have not capitalized the value of this
intellectual property on our balance sheet. Due to the nature of
this intellectual property, we believe that these intangible
assets are not affected by inflation. Because we intend to
retain and continue to use our equipment, furniture and fixtures
and leasehold improvements, we believe that the incremental
inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation
affects our expenses, such as those for employee compensation
and contract services, which could increase our level of
expenses and the rate at which we use our resources.
57
Marketable
securities
We deposit our cash with financial institutions that we consider
to be of high credit quality and purchase marketable securities
which are generally investment grade, liquid, short-term fixed
income securities and money-market instruments denominated in
U.S. dollars.
Off-balance
sheet arrangements
We have no off-balance sheet arrangements, as defined in
Item 303(a)(4) of the Securities and Exchange
Commissions
Regulation S-K.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The consolidated financial statements and related financial
statement schedules required to be filed are indexed on
page 61 and are incorporated herein.
|
|
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 the our
management, including the Chief Executive Officer and Acting
Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of December 31, 2009. Based upon
that evaluation, our Chief Executive Officer and Acting Chief
Financial Officer concluded that our disclosure controls and
procedures are effective as of December 31, 2009, the end
of the period covered by this 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
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Acting Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosures.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining an adequate system of internal control over
financial reporting, as defined in the Exchange Act
Rule 13a-15(f).
Management conducted an assessment of the Companys
internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control
Integrated Framework. Based on the assessment, management
concluded that, as of December 31, 2009, the Companys
internal control over financial reporting is effective.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) during the fourth quarter of 2009 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2009 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
on page 62 of this
Form 10-K.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
58
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 2009, under
the captions Election of Directors, Executive
Officers, Corporate Governance, and
Section 16(a) Beneficial Ownership Reporting
Compliance and is incorporated herein by reference
pursuant to General Instruction G(3) to
Form 10-K.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 2009, under
the captions Corporate Governance and
Executive Compensation, and is incorporated herein
by reference pursuant to General Instruction G(3) to
Form 10-K,
except that information required by Item 407(e)(5) of
Regulation S-K
will be deemed furnished in this
Form 10-K
and will not be deemed incorporated by reference into any filing
under the Securities Act of 1933 or the Securities Exchange Act
of 1934, 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
|
In addition to the information set forth under the caption
Securities Authorized for Issuance Under Equity
Compensation Plans in Part II of this annual report
on
Form 10-K,
information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 2009, under
the caption Security Ownership by Certain Beneficial
Owners and Management and is incorporated herein by
reference pursuant to General Instruction G(3) to
Form 10-K.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 2009, under
the caption Corporate Governance and is incorporated
herein by reference pursuant to General Instruction G(3) to
Form 10-K.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 2009, under
the caption Ratification of Selection of Independent
Registered Public Accounting Firm and is incorporated
herein by reference pursuant to General Instruction G(3) to
Form 10-K.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES
|
The consolidated financial statements filed as part of this
annual report on
Form 10-K
are listed and indexed at page 61. 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 listed in the Exhibit Index immediately
preceding the Exhibits are filed as part of this annual report
on
Form 10-K.
59
Signatures
Pursuant to the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this annual report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, in Rockville, Maryland, on March 15, 2010.
VANDA PHARMACEUTICALS INC.
|
|
|
|
By:
|
/s/ MIHAEL
H. POLYMEROPOULOS, M.D.
|
Mihael H. Polymeropoulos, M.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
annual report on
Form 10-K
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ MIHAEL
H.
POLYMEROPOULOS, M.D.
Mihael
H.
Polymeropoulos, M.D.
|
|
President and Chief Executive Officer and Director (principal
executive officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ STEPHANIE
R. IRISH
Stephanie
R. Irish
|
|
Acting Chief Financial Officer and Treasurer (principal
financial and accounting officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ ARGERIS
N. KARABELAS,
Ph.D.
Argeris
N. Karabelas,
Ph.D.
|
|
Chairman of the Board and Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ RICHARD
W. DUGAN
Richard
W. Dugan
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ BRIAN
K.
HALAK, Ph.D.
Brian
K. Halak, Ph.D.
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ HOWARD
PIEN
Howard
Pien
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ H.
THOMAS WATKINS
H.
Thomas Watkins
|
|
Director
|
|
March 15, 2010
|
60
Vanda
Pharmaceuticals Inc.
Index to
consolidated financial statements
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
62
|
|
Consolidated financial statements
|
|
|
63
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
61
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Vanda Pharmaceuticals Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of changes in
stockholders equity, and of cash flows present fairly, in
all material respects, the financial position of Vanda
Pharmaceuticals Inc. and Subsidiary (collectively, the Company)
at December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009, 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, 2009, based on criteria
established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is
responsible for these 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 Managements Report on
Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements and on the Companys internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. 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.
A companys 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 companys
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
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Baltimore, Maryland
March 15, 2010
62
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
205,295,488
|
|
|
$
|
39,079,304
|
|
Marketable securities
|
|
|
|
|
|
|
7,378,798
|
|
Accounts receivable
|
|
|
3,163,898
|
|
|
|
|
|
Inventory
|
|
|
2,398,517
|
|
|
|
|
|
Prepaid expenses, deposits and other current assets
|
|
|
2,092,581
|
|
|
|
1,287,400
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
212,950,484
|
|
|
|
47,745,502
|
|
Property and equipment, net
|
|
|
1,316,302
|
|
|
|
1,758,111
|
|
Intangible asset, net
|
|
|
11,017,065
|
|
|
|
|
|
Restricted cash
|
|
|
430,230
|
|
|
|
430,230
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
225,714,081
|
|
|
$
|
49,933,843
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,423,877
|
|
|
$
|
512,382
|
|
Accrued liabilities
|
|
|
2,321,301
|
|
|
|
2,898,417
|
|
Deferred revenues, current portion
|
|
|
26,788,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,534,169
|
|
|
|
3,410,799
|
|
Deferred rent
|
|
|
506,852
|
|
|
|
502,770
|
|
Deferred revenues, noncurrent portion
|
|
|
170,642,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
202,683,223
|
|
|
|
3,913,569
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
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, 27,568,595 and 26,653,478 shares issued and
outstanding at December 31, 2009 and 2008, respectively
|
|
|
27,569
|
|
|
|
26,653
|
|
Additional paid-in capital
|
|
|
283,836,642
|
|
|
|
270,988,157
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(20,029
|
)
|
Accumulated deficit
|
|
|
(260,833,353
|
)
|
|
|
(224,974,507
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
23,030,858
|
|
|
|
46,020,274
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
225,714,081
|
|
|
$
|
49,933,843
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreement
|
|
$
|
2,568,807
|
|
|
$
|
|
|
|
$
|
|
|
Product sales
|
|
|
1,978,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,547,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales licensing agreement
|
|
|
982,935
|
|
|
|
|
|
|
|
|
|
Cost of sales product
|
|
|
1,914,690
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
13,873,961
|
|
|
|
23,935,541
|
|
|
|
47,234,867
|
|
General and administrative
|
|
|
23,724,101
|
|
|
|
28,909,580
|
|
|
|
32,803,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
40,495,687
|
|
|
|
52,845,121
|
|
|
|
80,038,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(35,947,943
|
)
|
|
|
(52,845,121
|
)
|
|
|
(80,038,375
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
89,097
|
|
|
|
1,780,880
|
|
|
|
5,907,219
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
71,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
89,097
|
|
|
|
1,780,880
|
|
|
|
5,978,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(35,858,846
|
)
|
|
|
(51,064,241
|
)
|
|
|
(74,059,811
|
)
|
Tax provision
|
|
|
|
|
|
|
|
|
|
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(35,858,846
|
)
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of basic and diluted net loss per
share attributable to common stockholders
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at December 31, 2006
|
|
|
22,128,534
|
|
|
$
|
22,129
|
|
|
$
|
126,578,588
|
|
|
$
|
(3,269
|
)
|
|
$
|
(99,840,576
|
)
|
|
|
|
|
|
$
|
26,756,872
|
|
Issuance of common stock from exercised stock options
|
|
|
154,194
|
|
|
|
154
|
|
|
|
148,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,640
|
|
Follow-on offering of common stock, net of issuance costs
|
|
|
4,370,000
|
|
|
|
4,370
|
|
|
|
111,250,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,254,850
|
|
Employee and non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
19,622,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,622,814
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,069,690
|
)
|
|
|
(74,069,690
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,940
|
)
|
|
|
|
|
|
|
(12,940
|
)
|
|
|
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,385
|
|
|
|
|
|
|
|
28,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(74,054,245
|
)
|
|
|
(74,054,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
26,652,728
|
|
|
|
26,653
|
|
|
|
257,600,368
|
|
|
|
12,176
|
|
|
|
(173,910,266
|
)
|
|
|
|
|
|
|
83,728,931
|
|
Issuance of common stock from restricted stock units
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
13,387,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,387,789
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,064,241
|
)
|
|
|
(51,064,241
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,220
|
|
|
|
|
|
|
|
16,220
|
|
|
|
|
|
Net unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,425
|
)
|
|
|
|
|
|
|
(48,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,096,446
|
)
|
|
|
(51,096,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
26,653,478
|
|
|
|
26,653
|
|
|
|
270,988,157
|
|
|
|
(20,029
|
)
|
|
|
(224,974,507
|
)
|
|
|
|
|
|
|
46,020,274
|
|
Issuance of common stock from exercised stock options and
restricted stock units
|
|
|
915,117
|
|
|
|
916
|
|
|
|
1,618,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,619,174
|
|
Employee and non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
11,230,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,230,227
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,858,846
|
)
|
|
|
(35,858,846
|
)
|
|
|
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,029
|
|
|
|
|
|
|
|
20,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(35,838,817
|
)
|
|
|
(35,838,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
27,568,595
|
|
|
$
|
27,569
|
|
|
$
|
283,836,642
|
|
|
$
|
|
|
|
$
|
(260,833,353
|
)
|
|
|
|
|
|
$
|
23,030,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(35,858,846
|
)
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
441,809
|
|
|
|
530,805
|
|
|
|
571,586
|
|
Employee and non-employee stock-based compensation
|
|
|
11,230,227
|
|
|
|
13,387,789
|
|
|
|
19,622,814
|
|
(Loss) gain on disposal of assets
|
|
|
|
|
|
|
(174
|
)
|
|
|
28,713
|
|
Amortization of discounts and premiums on marketable securities
|
|
|
138,095
|
|
|
|
(235,162
|
)
|
|
|
(1,571,905
|
)
|
Amortization of intangible asset
|
|
|
982,935
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(805,181
|
)
|
|
|
495,200
|
|
|
|
168,987
|
|
Accounts receivable
|
|
|
(3,163,898
|
)
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
Inventory
|
|
|
(2,398,517
|
)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,911,495
|
|
|
|
(2,475,697
|
)
|
|
|
204,029
|
|
Accrued expenses
|
|
|
(577,116
|
)
|
|
|
(6,892,577
|
)
|
|
|
3,465,028
|
|
Other liabilities
|
|
|
4,082
|
|
|
|
148,728
|
|
|
|
86,644
|
|
Deferred revenue
|
|
|
197,431,193
|
|
|
|
|
|
|
|
(147,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
169,336,278
|
|
|
|
(45,955,329
|
)
|
|
|
(51,641,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible asset
|
|
|
(12,000,000
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
(943,659
|
)
|
|
|
(279,433
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
200,179
|
|
Purchases of marketable securities
|
|
|
(11,365,815
|
)
|
|
|
(14,786,080
|
)
|
|
|
(138,953,879
|
)
|
Proceeds from sale of marketable securities
|
|
|
126,547
|
|
|
|
11,258,094
|
|
|
|
3,577,859
|
|
Maturities of marketable securities
|
|
|
18,500,000
|
|
|
|
47,560,000
|
|
|
|
86,695,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,739,268
|
)
|
|
|
43,088,355
|
|
|
|
(48,760,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,619,174
|
|
|
|
|
|
|
|
148,640
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
111,254,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,619,174
|
|
|
|
|
|
|
|
111,403,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
|
|
|
|
|
|
|
16,745
|
|
|
|
(1,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
166,216,184
|
|
|
|
(2,850,229
|
)
|
|
|
11,000,638
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
39,079,304
|
|
|
|
41,929,533
|
|
|
|
30,928,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
205,295,488
|
|
|
$
|
39,079,304
|
|
|
$
|
41,929,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial Statements
|
|
1.
|
Business
organization and presentation
|
Business
organization
Vanda Pharmaceuticals Inc. (Vanda or the Company) is a
biopharmaceutical company focused on the development and
commercialization of clinical-stage products for various central
nervous system disorders. Vanda commenced its operations in
2003. The Companys lead product,
Fanapttm,
which Novartis Pharma AG (Novartis) began marketing in the
U.S. in the first quarter of 2010, is a compound for the
treatment of schizophrenia. On May 6, 2009, the United
States Food and Drug Administration (FDA) granted
U.S. marketing approval of
Fanapttm
for the acute treatment of schizophrenia in adults. On
October 12, 2009, Vanda entered into an amended and
restated sublicense agreement with Novartis. Vanda had
originally entered into a sublicense agreement with Novartis on
June 4, 2004 pursuant to which Vanda obtained certain
worldwide exclusive licenses from Novartis relating to
Fanapttm.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Except for two post-approval
studies started by Vanda prior to the execution date of the
amended and restated sublicense agreement, both of which were
substantially completed by December 31, 2009, Novartis is
responsible for the further clinical development activities in
the U.S. and Canada, including the development of a
long-acting injectable (or depot) formulation of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, Vanda
received an upfront payment of $200.0 million at the end of
2009 and will be eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. Vanda will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, Vanda will no longer
be required to make any future milestone payments with respect
to sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. Vanda retains exclusive rights to
Fanapttm
outside the U.S. and Canada and Vanda will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option,
Vanda will enter into good faith discussions with Novartis
relating to the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada.
Tasimelteon is a compound for the treatment of sleep and mood
disorders including Circadian Rhythm Sleep Disorders (CRSD). The
compound binds selectively to the brains melatonin
receptors, which are thought to govern the bodys natural
sleep/wake cycle. Compounds that bind selectively to these
receptors are thought to be able to help treat sleep disorders,
and additionally are believed to offer potential benefits in
mood disorders. In November 2006, Vanda announced positive
top-line results from the Phase III trial of tasimelteon in
transient insomnia. In June 2008, the Company announced positive
top-line results from the Phase III trial of tasimelteon in
chronic primary insomnia. On January 19, 2010, the FDA
granted orphan designation status for tasimelteon in Non-24 Hour
Sleep/Wake Disorder in blind individuals without light
perception. 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, waiver of FDA user fees, tax credits, and up
to seven years of market exclusivity upon marketing approval.
Tasimelteon is also ready for Phase II trials for the
treatment of depression.
Basis
of presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The consolidated
financial statements include the accounts of the Company and its
wholly-owned Singapore subsidiary that ceased operations during
2007. All inter-company balances and transactions have been
eliminated.
67
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Development-Stage
Company
The Company was a development-stage company as defined by the
FASB guidelines for Accounting and Reporting by Development
Stage Enterprises. During 2009, the Company entered into the
amended and restated sublicense agreement with Novartis,
recognized more than $4 million in revenue and considers
that its planned principal operations have started.
|
|
2.
|
Summary
of significant accounting policies
|
Use of
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
Cash
and cash equivalents
For purposes of the consolidated balance sheets and consolidated
statements of cash flows, cash equivalents represent
highly-liquid investments with a maturity date of three months
or less at the date of purchase.
Marketable
securities
The Company classifies all of its marketable securities as
available-for-sale
securities. The Companys investment policy requires the
selection of high-quality issuers, with bond ratings of AAA to
A1+/P1.
Available-for-sale
securities are carried at fair market value, with unrealized
gains and losses reported as a component of stockholders
equity in accumulated other comprehensive income/loss. Interest
and dividend income is recorded when earned and included in
interest income. Premiums and discounts on marketable securities
are amortized and accreted, respectively, to maturity and
included in interest income. The Company uses the specific
identification method in computing realized gains and losses on
the sale of investments, which would be included in the
consolidated statements of operations when generated. Marketable
securities with a maturity of more than one year as of the
balance sheet date are classified as long-term securities.
Inventory
The Company values inventories at the lower of cost or net
realizable value. The Company analyzes its inventory levels
quarterly and writes down inventory that has become obsolete, or
has a cost basis in excess of its expected net realizable value
and inventory quantities in excess of expected requirements.
Expired inventory is disposed of and the related costs are
written off to cost of sales. Prior to FDA approval, all
Fanapttm
manufacturing-related costs were included in research and
development expenses. Subsequent to FDA approval of
Fanapttm,
manufacturing costs related to this product are capitalized.
Pursuant to the amended and restated sublicense agreement with
Novartis, the Company has sold the majority of our finished
product to Novartis and plans to sell the remainder in early
2010.
Accounts
Receivable
The Companys accounts receivable balance is derived from
amounts due from the amended and restated sublicense agreement
with Novartis. The Company has not established an allowance for
doubtful accounts as the Company believes the receivables are
fully collectible.
68
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Intangible
asset, net
Costs incurred for products or product candidates not yet
approved by the FDA and for which no alternative future use
exists are recorded as expense. In the event a product or
product candidate has been approved by the FDA or an alternative
future use exists for a product or product candidate, license
costs are capitalized and amortized over the expected patent
life of the related product or product candidate. Milestone
payments to the Companys partners are recognized when it
is deemed probable that the milestone event will occur.
As a result of the FDAs approval of the NDA for
Fanapttm,
the Company met a milestone under its original sublicense
agreement with Novartis which required the Company to make a
payment of $12.0 million to Novartis. The
$12.0 million is being amortized on a straight line basis
over the remaining life of the U.S. patent for
Fanapttm,
which the Company expects to last until May 15, 2017. This
includes the Hatch-Waxman extension that extends patent
protection for drug compounds for a period of up to five years
to compensate for time spent in development and a six-month
pediatric term extension. This term is the Companys best
estimate of the life of the patent; if, however, the
Hatch-Waxman or pediatric extensions are not granted, the
intangible asset will be amortized over a shorter period.
Amortization of the intangible asset is recorded as a component
of cost of goods sold.
The carrying values of intangible assets are periodically
reviewed to determine if the facts and circumstances suggest
that a potential impairment may have occurred. The Company had
no impairments of its intangible assets for the year ended
December 31, 2009.
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
what the Company believes to be highly-rated financial
institutions. At December 31, 2009, the Company maintained
all of its cash, cash equivalents and marketable securities in
three 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.
Fair
value of financial instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, marketable
securities, restricted cash, and accounts payable, approximate
their fair values due to their short maturities.
Property
and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is provided on a straight-line basis over the
estimated useful lives of the assets. Amortization of leasehold
improvements is provided on a straight-line basis over the
shorter of their estimated useful life or the lease term. The
costs of additions and improvements are capitalized, and repairs
and maintenance costs are charged to operations in the period
incurred.
Upon retirement or disposition of property and equipment, the
cost and accumulated depreciation and amortization are removed
from the accounts and any resulting gain or loss is reflected in
the statement of operations for that period.
69
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Revenue
Recognition
The Companys revenues are derived primarily from the
amended and restated sublicense agreement with Novartis and
include an up-front payment, product sales and future milestone
and royalty payments. Revenue is considered both realizable and
earned when each one of the following four conditions is met:
(1) persuasive evidence of an arrangement exists,
(2) the arrangement fee is fixed or determinable,
(3) delivery or performance has occurred and
(4) collectability is reasonably assured. Pursuant to the
amended and restated sublicense agreement, Novartis has the
right to commercialize and develop
Fanapttm
in the U.S. and Canada. Under the amended and restated
sublicense agreement, the Company received an upfront payment of
$200.0 million in December of 2009. Pursuant to the amended
and restated sublicense agreement, the Company and Novartis
established a Joint Steering Committee (JSC) following the
effective date of the amended and restated sublicense agreement.
The Company expects to have an active role on the JSC and
concluded that the JSC constitutes a deliverable under the
amended and restated sublicense agreement and that revenue
related to the upfront payment will be recognized ratably over
the term of the JSC; however, the delivery or performance has no
term as the exact length of the JSC is undefined. As a result,
the Company deems the performance period of the JSC to be the
life of the U.S. patent of
Fanapttm,
which the Company expects to last until May 15, 2017. This
includes the Hatch-Waxman extension that provides patent
protection for drug compounds for a period of up to five years
to compensate for time spent in development and a six-month
pediatric term extension. This term is the Companys best
estimate of the life of the patent. Revenue will be recognized
ratably from the date the amended and restated sublicense
agreement became effective (November 27, 2009) through
the expected life of the U.S. patent for
Fanapttm
(May 15, 2017). Revenue related to product sales is
recognized upon delivery to Novartis. The Company will recognize
revenue from
Fanapttm
royalties and commercial and development milestones from
Novartis when realizable and earned.
Foreign
currency translation
The functional currency of the Companys wholly-owned
foreign subsidiary located in Singapore is the local currency.
Assets and liabilities of the Companys foreign subsidiary
are translated to U.S. dollars based on exchange rates at
the end of the reporting period. Income and expense items are
translated at weighted average exchange rates prevailing during
the reporting period. Translation adjustments are accumulated in
a separate component of stockholders equity. Transaction
gains or losses are included in the determination of operating
results. The wholly-owned Singapore subsidiary ceased operations
during 2007.
Comprehensive
income (loss)
FASB guidance on reporting comprehensive income requires a full
set of general-purpose financial statements to include the
reporting of comprehensive income. Comprehensive
loss is composed of two components, net loss and other
comprehensive income/(loss). For the year ended
December 31, 2009, other comprehensive income/(loss)
consists of unrealized gains/(losses) on marketable securities.
For the years ended December 31, 2008 and 2007, other
comprehensive income/(loss) consists of cumulative translation
adjustments due to the Companys foreign subsidiary and
unrealized gains/(losses) on marketable securities.
Accrued
expenses
Management is required to estimate accrued expenses as part of
the process of preparing financial statements. The estimation of
accrued expenses involves identifying services that have been
performed on the Companys 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 expenses include professional service fees,
such as lawyers and accountants, contract service fees, such as
those 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, fees for marketing and other
70
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
commercialization activities, and severance related costs due to
the Companys workforce reduction which occurred in the
fourth quarter of 2008. Pursuant to managements 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: (1) an evaluation by the project
manager of the work that has been completed during the period,
(2) measurement of progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment. In the event that the
Company does not identify certain costs that have begun to be
incurred or the Company under- or over-estimates the level of
services performed or the costs of such services, the
Companys reported expenses for such period would be too
low or too high.
Research
and development expenses
The Companys 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 license fees, costs of
materials used in clinical trials and research and development,
cost 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 the research and development
personnel. The Company expenses research and development costs
as they are incurred for compounds in the development stage,
including certain payments made under the license agreements.
Prior to FDA approval, all
Fanapttm
manufacturing-related and milestone costs were included in
research and development expenses. Post FDA approval of
Fanapttm,
manufacturing and milestone costs related to this product are
being capitalized. Costs related to the acquisitions of
intellectual property have been expensed as incurred since the
underlying technology associated with these acquisitions were
made in connection with the Companys research and
development efforts and have no alternative future use.
Milestone payments are accrued in accordance with the FASB
guidance on accounting for contingencies which states that
milestones payments be accrued when it is deemed probable that
the milestone event will be achieved.
General
and administrative expenses
General and administrative expenses consist primarily of
salaries, other employee related costs and stock-based
compensation for personnel serving executive, business
development, marketing, finance, accounting, information
technology and human resource functions, facility costs not
otherwise included in research and development expenses,
insurance costs and professional fees for legal, accounting and
other professional services. General and administrative expenses
also include third party expenses incurred to support business
development, marketing and other business activities related to
Fanapttm.
Accounting
for stock-based compensation
The Company accounts for its stock-based compensation expenses
in accordance with the FASB guidance on share-based payments
which was adopted on January 1, 2006. Accordingly,
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 generally recognizes the expense over
the awards vesting period.
For stock awards granted subsequent to 2006, the fair value of
these awards are amortized using the accelerated attribution
method. For stock awards granted prior to January 1, 2006,
expenses are amortized under the accelerated attribution method
for options that were modified after the original grant date and
under the straight-line attribution method for all other
options. As stock-based compensation expense recognized in the
consolidated statements of operations is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are required to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Pre-vesting
forfeitures on the options
71
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
granted during 2008, 2007 and 2006, were estimated to be
approximately 2% and was increased to 4% in 2009 based on the
Companys historical experience.
The weighted average grant date fair value of options granted
during the years ended December 31, 2009, 2008 and 2007 was
$7.54, $3.05 and $18.99 per share, respectively. As of
December 31, 2009, approximately $10.2 million of
total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average
period of 1.49 years.
Assumptions used in the Black-Scholes-Merton model for employee
and director options granted during the years ended
December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
68
|
%
|
Weighted average expected term (years)
|
|
|
6.03
|
|
|
|
6.18
|
|
|
|
6.25
|
|
Weighted average risk-free rate
|
|
|
2.81
|
%
|
|
|
3.27
|
%
|
|
|
4.10
|
%
|
Total stock-based compensation expense, related to all of the
Companys stock-based awards for the years ended
December 31, 2009, 2008 and 2007, was comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Research and development
|
|
$
|
2,028,337
|
|
|
$
|
1,747,863
|
|
|
$
|
4,259,315
|
|
General and administrative
|
|
|
8,737,913
|
|
|
|
11,667,598
|
|
|
|
15,227,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock-based compensation expense
|
|
$
|
10,766,250
|
|
|
$
|
13,415,461
|
|
|
$
|
19,486,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per basic and diluted share of
common stock
|
|
$
|
0.40
|
|
|
$
|
0.50
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the Company had a net operating loss carryforward as of
December 31, 2009, no excess tax benefits for the tax
deductions related to stock-based awards were recognized in the
consolidated statements of operations. Additionally, no
incremental tax benefits were recognized from stock options
exercised in 2009 or 2008 which would have resulted in a
reclassification to reduce net cash used in operating activities
with an offsetting increase in net cash provided by financing
activities.
Income
taxes
The Company accounts for income taxes under the liability method
in accordance with the FASB provisions on accounting for income
taxes, which requires companies to account for deferred income
taxes using the asset and liability method. Under the asset and
liability method, current income tax expense or benefit is the
amount of income taxes expected to be payable or refundable for
the current year. A deferred income tax asset or liability is
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Tax rate
changes are reflected in income during the period such changes
are enacted. Changes in ownership may limit the amount of net
operating loss carryforwards that can be utilized in the future
to offset taxable income.
72
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Segment
information
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
Recent
accounting pronouncements
In September 2009, the FASB issued new accounting guidance
related to the revenue recognition of multiple element
arrangements. The new guidance states that if vendor specific
objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, companies will be required
to develop a best estimate of the selling price to separate
deliverables and allocate arrangement consideration using the
relative selling price method. The accounting guidance will be
applied prospectively and will become effective during the first
quarter of 2011. Early adoption is allowed. The Company will
adopt this guidance beginning January 1, 2010 and does not
expect this accounting guidance to materially impact its
financial statements.
In January 2010, the FASB issued new accounting guidance related
to the disclosure requirements for fair value measurements and
provides clarification for existing disclosures requirements.
More specifically, this update will require (a) an entity
to disclose separately the amounts of significant transfers in
and out of Levels 1 and 2 fair value measurements and to
describe the reasons for the transfers; and (b) information
about purchases, sales, issuances and settlements to be
presented separately (i.e. present the activity on a gross basis
rather than net) in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3
inputs). This guidance clarifies existing disclosure
requirements for the level of disaggregation used for classes of
assets and liabilities measured at fair value and requires
disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair
value measurements using Level 2 and Level 3 inputs.
The new disclosures and clarifications of existing disclosure
are effective for fiscal years beginning after December 15,
2009, except for the disclosure requirements for related to the
purchases, sales, issuances and settlements in the rollforward
activity of Level 3 fair value measurements. Those
disclosure requirements are effective for fiscal years ending
after December 31, 2010. The Company does not believe the
adoption of this guidance will have a material impact to our
consolidated financial statements.
Certain
risks and uncertainties
The Companys products and product candidates 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 Companys products are concentrated in
rapidly-changing, highly-competitive markets, which are
characterized by rapid technological advances, changes in
customer requirements and evolving regulatory requirements and
industry standards. Any failure by the Company to anticipate or
to respond adequately to technological developments in its
industry, changes in customer requirements or changes in
regulatory requirements or industry standards or any significant
delays in the development or introduction of products or
services could have a material adverse effect on the
Companys 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 and product
candidates. The loss of these suppliers could delay the clinical
trials or prevent or delay commercialization of the products and
product candidates.
73
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Net loss attributable to common stockholders per share is
calculated in accordance with the FASB guidance on earnings per
share. Basic earnings per share (EPS) is calculated by dividing
the net loss attributable to common stockholders by the weighted
average number of common shares outstanding, reduced by the
weighted average unvested common shares subject to repurchase.
Diluted EPS is computed by dividing the net loss attributable to
common stockholders by the weighted average number of other
potential common stock outstanding for the period. Other
potential common stock include stock options, warrants and
restricted stock units but only to the extent that their
inclusion is dilutive.
The Company incurred a net loss in all periods presented,
causing inclusion of any potentially dilutive securities to have
an anti-dilutive affect, resulting in dilutive loss per share
attributable to common stockholders and basic loss per share
attributable to common stockholders being equivalent. The
Company did not have any common shares issued for nominal
consideration as defined under the FASB guidance, which would be
included in EPS calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(35,858,846
|
)
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
27,015,271
|
|
|
|
26,652,867
|
|
|
|
26,370,485
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
|
|
|
|
(2,741
|
)
|
|
|
(10,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding anti-dilutive securities not included in
diluted net loss per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
4,516,739
|
|
|
|
4,408,629
|
|
|
|
2,938,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company does not hold any
available-for-sale
marketable securities. The following is a summary of the
Companys
available-for-sale
marketable securities as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
1,992,452
|
|
|
$
|
7,408
|
|
|
$
|
|
|
|
$
|
1,999,860
|
|
U.S. corporate debt
|
|
|
5,279,828
|
|
|
|
2,336
|
|
|
|
(29,818
|
)
|
|
|
5,252,346
|
|
U.S. asset-based securities
|
|
|
126,547
|
|
|
|
45
|
|
|
|
|
|
|
|
126,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,398,827
|
|
|
$
|
9,789
|
|
|
$
|
(29,818
|
)
|
|
$
|
7,378,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Inventory, net consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
1,094,388
|
|
Work-in-process
|
|
|
|
|
Finished goods
|
|
|
1,304,129
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
2,398,517
|
|
|
|
|
|
|
|
|
6.
|
Prepaid
expenses, deposits and other current assets
|
The following is a summary of the Companys prepaid
expenses, deposits and other current assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current deposits with vendors
|
|
$
|
150,000
|
|
|
$
|
210,000
|
|
Prepaid insurance
|
|
|
283,839
|
|
|
|
282,391
|
|
Other prepaid expenses and vendor advances
|
|
|
1,657,521
|
|
|
|
326,201
|
|
Accrued interest income
|
|
|
1,221
|
|
|
|
53,378
|
|
Other receivables
|
|
|
|
|
|
|
415,430
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses, deposits and other current assets
|
|
$
|
2,092,581
|
|
|
$
|
1,287,400
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and equipment
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2009
|
|
|
2008
|
|
|
Laboratory equipment
|
|
|
5
|
|
|
$
|
1,348,098
|
|
|
$
|
1,348,098
|
|
Computer equipment
|
|
|
3
|
|
|
|
763,894
|
|
|
|
776,921
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
705,784
|
|
|
|
705,784
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
844,158
|
|
|
|
844,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,661,934
|
|
|
|
3,674,961
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(2,345,632
|
)
|
|
|
(1,916,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,316,302
|
|
|
$
|
1,758,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2009, 2008 and 2007 was $441,809, $530,805 and
$571,586.
75
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The intangible asset consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Life (years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Fanapttm
|
|
|
8 years
|
|
|
$
|
12,000,000
|
|
|
$
|
982,935
|
|
|
$
|
11,017,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000,000
|
|
|
$
|
982,935
|
|
|
$
|
11,017,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 6, 2009, the Company announced that the FDA had
approved the NDA for
Fanapttm.
As a result of the FDAs approval of the NDA for
Fanapttm,
the Company met a milestone under its original sublicense
agreement with Novartis which required the Company to make a
license payment of $12.0 million to Novartis. The
$12.0 million is being amortized on a straight line basis
over the remaining life of the U.S. patent for
Fanapttm,
which the Company expects to last until May 15, 2017. This
includes the Hatch-Waxman extension that provides patent
protection for drug compounds for a period of up to five years
to compensate for time spent in development and a six-month
pediatric term extension. This term is the Companys best
estimate of the life of the patent; if, however, the
Hatch-Waxman or pediatric extensions are not granted, the
intangible asset will be amortized over a shorter period.
Intangible assets are amortized over their estimated useful
economic life using the straight line method. Amortization
expense was approximately $983,000 for the year ended
December 31, 2009. The Company capitalized and began
amortizing the asset immediately following the FDA approval of
the NDA for
Fanapttm.
The following table summarizes our intangible asset amortization
schedule as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2014
|
|
|
Intangible asset
|
|
$
|
11,017,065
|
|
|
$
|
1,494,881
|
|
|
$
|
1,494,881
|
|
|
$
|
1,494,881
|
|
|
$
|
1,494,881
|
|
|
$
|
1,494,881
|
|
|
$
|
3,542,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued research and development expenses
|
|
$
|
1,033,339
|
|
|
$
|
925,124
|
|
Accrued consulting and other professional fees
|
|
|
1,076,111
|
|
|
|
233,829
|
|
Employee benefits
|
|
|
106,126
|
|
|
|
126,816
|
|
Other accrued expenses
|
|
|
105,725
|
|
|
|
|
|
Accrued severance
|
|
|
|
|
|
|
1,612,648
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
2,321,301
|
|
|
$
|
2,898,417
|
|
|
|
|
|
|
|
|
|
|
76
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Companys revenue consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
|
|
|
|
Recognized
|
|
|
Deferred
|
|
|
Total
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for licensing agreement
|
|
$
|
2,568,807
|
|
|
$
|
197,431,193
|
|
|
$
|
200,000,000
|
|
Product sales
|
|
|
1,978,937
|
|
|
|
|
|
|
|
1,978,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,547,744
|
|
|
$
|
197,431,193
|
|
|
$
|
201,978,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanda entered into an agreement with Novartis on
October 12, 2009, pursuant to which Novartis has the right
to commercialize and develop
Fanapttm
in the U.S. and Canada. Under the amended and restated
sublicense agreement, Vanda received an upfront payment of
$200.0 million in December of 2009. Revenue will be
recognized ratably from the date the amended and restated
sublicense agreement became effective (November 27,
2009) through the expected life of the U.S. patent for
Fanapttm
(May 15, 2017). This includes the Hatch-Waxman extension
that provides patent protection for drug compounds for a period
of up to five years to compensate for time spent in development
and a six-month pediatric term extension. This term is the
Companys best estimate of the life of the patent. For the
year ended December 31, 2009, the Company recognized
approximately $2.6 million of revenue related to the $200.0
million upfront payment received pursuant to the amended and
restated sublicense agreement, deferring approximately
$197.4 million. Vanda recognized approximately
$2.0 million of product revenue for the year ended
December 31, 2009 related to inventory sold to Novartis.
Vanda recognizes product revenue upon delivery of our products
to Novartis.
|
|
11.
|
Commitments
and Contingencies
|
Operating
leases
The Company has commitments totaling approximately
$5.0 million under operating real estate leases for its
headquarters located in Rockville, Maryland, which expires in
2016.
|
|
|
|
|
2010
|
|
$
|
705,994
|
|
2011
|
|
|
726,992
|
|
2012
|
|
|
748,807
|
|
2013
|
|
|
771,440
|
|
2014
|
|
|
794,619
|
|
Thereafter
|
|
|
1,239,785
|
|
|
|
|
|
|
|
|
$
|
4,987,637
|
|
|
|
|
|
|
Severance
payments
On December 16, 2008, the Company committed to a plan of
termination that resulted in a work force reduction of
17 employees, including two officers, in order to reduce
operating costs. The Company commenced notification of employees
affected by the workforce reduction on December 17, 2008.
The
77
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
following table summarizes the activity in year ended
December 31, 2009 for the liability for the cash portion of
severance costs related to the workforce reduction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Beginning Balance
|
|
|
Charge
|
|
|
Cash Paid
|
|
|
Ending Balance
|
|
|
Workforce Reduction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research Development
|
|
$
|
571,391
|
|
|
$
|
|
|
|
$
|
571,391
|
|
|
$
|
|
|
General & Administrative
|
|
|
1,041,257
|
|
|
|
|
|
|
|
1,041,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,612,648
|
|
|
$
|
|
|
|
$
|
1,612,648
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
fees
The Company engaged a regulatory consultant to assist in the
Companys efforts to obtain FDA approval of the
Fanapttm
NDA. The Company committed to initial consulting expenses in the
aggregate amount of $2.0 million pursuant to this
engagement, which was expensed in 2008. In addition, the Company
retained the services of the consultant on a monthly basis at a
retainer fee of $0.25 million per month effective as of
January 1, 2009. The Company was obligated to pay the
consultant a success fee of $6.0 million as a result of the
approval by the FDA of its NDA for
Fanapttm.
This fee, which was fully expensed in May 2009 and offset by the
aggregate amount of all monthly retainer fees previously paid to
the consultant was paid monthly in $1.0 million increments
with the last payment occurring in October 2009. In addition to
these fees, the Company reimbursed the consultant for its
ordinary and necessary business expenses incurred in connection
with its engagement.
The Company also engaged financial advisors and consultants to
advise it in connection with our business development
activities. Pursuant to the Companys agreements with these
advisors and consultants, Vanda became obligated to pay
aggregate fees of approximately $3.5 million following the
effective date of the amended and restated sublicense agreement
with Novartis at the end of 2009. Of the $3.5 million,
$2.0 million was paid by December 31, 2009 and the
remaining balance was paid in early 2010.
Guarantees
and indemnifications
The Company has entered into a number of standard intellectual
property indemnification agreements in the ordinary course of
its business. Pursuant to these agreements, the Company
indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the
indemnified party, generally the Companys business
partners or customers, in connection with any U.S. patent
or any copyright or other intellectual property infringement
claim by any third party with respect to the Companys
products. The term of these indemnification agreements is
generally perpetual from the date of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited. Since inception, the Company has not incurred
costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company also indemnifies its
officers and directors for certain events or occurrences,
subject to certain limits. The Company believes that the fair
value of the indemnification agreements is minimal, and
accordingly the Company has not recognized any liabilities
relating to these agreements for the years ended
December 31, 2009 and 2008.
License
agreements
The Companys rights to develop and commercialize its
products are subject to the terms and conditions of licenses
granted to the Company by other pharmaceutical companies.
Fanapttm. The
Company acquired exclusive worldwide rights to patents and
patent applications for
Fanapttm,
previously known as iloperidone, in 2004 through a sublicense
agreement with Novartis. A
78
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
predecessor company of sanofi-aventis, Hoechst Marion Roussel,
Inc. (HMRI), discovered
Fanapttm
and completed early clinical work on the compound. In 1996,
following a review of its product portfolio, HMRI licensed its
rights to the
Fanapttm
patents and patent applications to Titan Pharmaceuticals, Inc.
(Titan) on an exclusive basis. In 1997, soon after it had
acquired its rights, Titan sublicensed its rights to
Fanapttm
on an exclusive basis to Novartis. In June 2004, the Company
acquired exclusive worldwide rights to these patents and patent
applications as well as certain Novartis patents and patent
applications to develop and commercialize
Fanapttm
through a sublicense agreement with Novartis. In partial
consideration for this sublicense, the Company paid Novartis an
initial license fee of $0.5 million and was obligated to
make future milestone payments to Novartis of less than
$100.0 million in the aggregate (the majority of which were
tied to sales milestones), as well as royalty payments to
Novartis at a rate which, as a percentage of net sales, was in
the mid-twenties. In November 2007, the Company met a milestone
under this sublicense agreement relating to the acceptance of
its filing of the NDA for
Fanapttm
for the treatment of schizophrenia and made a corresponding
payment of $5.0 million to Novartis. As a result of the
FDAs approval of the NDA for
Fanapttm
in May 2009, the Company met an additional milestone under this
sublicense agreement which required the Company to make a
payment of $12.0 million to Novartis.
On October 12, 2009, Vanda entered into an amended and
restated sublicense agreement with Novartis which amended and
restated the June 2004 sublicense agreement with Novartis.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapttm
in the U.S. and Canada. Novartis began selling
Fanapttm
in the U.S. during the first quarter of 2010. Except for
two post-approval studies started by Vanda prior to the
execution date of the amended and restated sublicense agreement,
both of which were substantially completed by December 31,
2009, Novartis is responsible for the further clinical
development activities in the U.S. and Canada, including
the development of a long-acting injectable (or depot)
formulation of
Fanapttm.
Pursuant to the amended and restated sublicense agreement, Vanda
received an upfront payment of $200.0 million and Vanda
will be eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapttm
in the U.S. and Canada. Vanda will also receive royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapttm
in the U.S. and Canada. In addition, Vanda will no longer
be required to make any future milestone payments with respect
to sales of
Fanapttm
or any future royalty payments with respect to sales of
Fanapttm
in the U.S. and Canada. Vanda retains exclusive rights to
Fanapttm
outside the U.S. and Canada and Vanda will have exclusive
rights to use any of Novartis data for
Fanapttm
for developing and commercializing
Fanapttm
outside the U.S. and Canada. At Novartis option,
Vanda will enter into good faith discussions with Novartis
relating to the co-commercialization of
Fanapttm
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapttm
outside of the U.S. and Canada.
Vanda may lose its rights to develop and commercialize
Fanapttm
outside the U.S. and Canada if it fails to comply with
certain requirements in the amended and restated sublicense
agreement regarding its financial condition, or if Vanda fails
to comply with certain diligence obligations regarding its
development or commercialization activities or if Vanda
otherwise breaches the amended and restated sublicense agreement
and fails to cure such breach. Vandas rights to develop
and commercialize
Fanapttm
outside the U.S. and Canada may be impaired if it does not
cure breaches by Novartis of similar obligations contained its
sublicense agreement with Titan for
Fanapttm.
Vanda is not aware of any such breach by Novartis. In addition,
if Novartis breaches the amended and restated sublicense
agreement with respect to its commercialization activities in
the U.S. or Canada, Vanda may terminate Novartis
commercialization rights in the applicable country and Vanda
would no longer receive royalty payments from Novartis in
connection with such country in the event of such termination.
Tasimelteon. In February 2004, the Company
entered into a license agreement with Bristol-Myers Squibb (BMS)
under which the Company received an exclusive worldwide license
under certain patents and patent applications, and other
licenses to intellectual property, to develop and commercialize
tasimelteon. In
79
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
partial consideration for the license, the Company paid BMS an
initial license fee of $0.5 million. The Company is also
obligated to make future milestone payments to BMS of less than
$40.0 million in the aggregate (the majority of which are
tied to sales milestones) as well as royalty payments based on
the net sales of tasimelteon at a rate which, as a percentage of
net sales, is in the low teens. The Company made a milestone
payment to BMS of $1.0 million under this license agreement
in 2006 relating to the initiation of its first Phase III
clinical trial for tasimelteon. The Company is also obligated
under this agreement to pay BMS a percentage of any sublicense
fees, upfront payments and milestone and other payments
(excluding royalties) that the Company receives from a third
party in connection with any sublicensing arrangement, at a rate
which is in the mid-twenties. The Company has agreed with BMS in
the license agreement for tasimelteon to use commercially
reasonable efforts to develop and commercialize tasimelteon and
to meet certain milestones in initiating and completing certain
clinical work.
BMS holds certain rights with respect to tasimelteon in the
license agreement. If the Company has not agreed to one or more
partnering arrangements to develop and commercialize tasimelteon
in certain significant markets with one or more third parties by
a certain date, BMS has the option to exclusively develop and
commercialize tasimelteon on its own on pre-determined financial
terms, including milestone and royalty payments.
Either party may terminate the tasimelteon license agreement
under certain circumstances, including a material breach of the
agreement by the other. In the event that BMS has not exercised
its option to reacquire the rights to tasimelteon and the
Company terminates the license, or if BMS terminates the license
due to the Companys breach, all rights licensed and
developed by the Company under this agreement will revert or
otherwise be licensed back to BMS on an exclusive basis.
Future license payments. No amounts were
recorded as liabilities nor were any contractual obligations
relating to the license agreements included in the consolidated
financial statements as of December 31, 2009, since the
amounts, timing and likelihood of these future payments are
unknown and will depend on the successful outcome of future
clinical trials, regulatory filings, favorable FDA regulatory
approvals, growth in product sales and other factors.
Research
and development and marketing agreements
In the course of its business the Company regularly enters into
agreements with clinical organizations to provide services
relating to clinical development and clinical manufacturing
activities under fee service arrangements. The Companys
current agreements for clinical services may be terminated on no
more than 60 days notice without incurring additional
charges, other than charges for work completed but not paid for
through the effective date of termination and other costs
incurred by the Companys contractors in closing out work
in progress as of the effective date of termination.
Pursuant to the amended and restated sublicense agreement with
Novartis, except for two post-approval studies started by Vanda
prior to the execution date of the amended and restated
sublicense agreement, both of which were substantially completed
by December 31, 2009, Novartis is responsible for the
further clinical development activities in the U.S. and
Canada, including the development of a long-acting injectable
(or depot) formulation of
Fanapttm.
The cash obligation with respect to the study which we expect to
complete in the second quarter of 2010 is approximately $462,000.
|
|
12.
|
Singapore
research facility
|
In May 2007, the Company initiated a plan to move its operations
out of Singapore to consolidate its discovery research
activities in its Rockville, Maryland facility. The
consolidation was significantly completed by the end of 2007,
and substantially all expenses of the move, including employee
severance, loss on the sale of fixed assets and other related
costs were recorded in the consolidated financial statements as
of
80
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
December 31, 2007. Total expenses relating to the
consolidation of the discovery research activities were not
material to the Companys consolidated financial
statements. The Company recorded a final cumulative translation
adjustment of $16,220 as of December 31, 2008.
In 2004 the Companys subsidiary in Singapore entered into
an agreement with the Economic Development Board of Singapore
(EDB) to provide a grant for a development project. During 2005,
the Company received a payment from the EDB that was recorded as
deferred grant revenue since under certain conditions the EDB
could have reclaimed these funds. On September 19, 2007 the
Company agreed with the EDB to pay back 50% of the grant and the
remaining 50%, or $71,345, was recognized as other income during
the year ended December 31, 2007.
The tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current federal tax expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Current state tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Current foreign expense
|
|
|
|
|
|
|
|
|
|
|
9,879
|
|
Deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax asset (liability)
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
60,817,648
|
|
|
$
|
48,781,358
|
|
Start-up
costs
|
|
|
21,343,210
|
|
|
|
21,234,523
|
|
Stock-based compensation
|
|
|
14,854,312
|
|
|
|
15,324,695
|
|
Licensing agreements
|
|
|
2,878,808
|
|
|
|
2,925,575
|
|
Research and development credit
|
|
|
5,706,893
|
|
|
|
5,455,721
|
|
Depreciation and amortization
|
|
|
23,037
|
|
|
|
(10,179
|
)
|
Amortization of warrants
|
|
|
|
|
|
|
12,422
|
|
Accrued and deferred expenses
|
|
|
153,088
|
|
|
|
263,343
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
105,776,996
|
|
|
|
93,987,458
|
|
Deferred tax asset valuation allowance
|
|
|
(105,776,996
|
)
|
|
|
(93,987,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Based on the Companys limited operating history and
managements expectation of future profitability,
management believes that the Companys deferred tax assets
do not meet the criteria that they will be more likely than not
realized. Accordingly, a valuation allowance for the entire
deferred tax asset amount has been recorded.
81
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The effective tax rate differs from the U.S. federal
statutory tax rate of 34% due to the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes
|
|
|
4.4
|
%
|
|
|
5.4
|
%
|
Change in valuation allowance
|
|
|
(32.9
|
)%
|
|
|
(41.1
|
)%
|
Research and development credit
|
|
|
0.7
|
%
|
|
|
1.9
|
%
|
Meals, entertainment and other non-deductable items
|
|
|
(6.2
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, the Company had
U.S. federal and state net operating loss carryforwards of
approximately $155.8 million and $123.7 million,
respectively available to reduce future taxable income, which
will begin to expire in 2023. At December 31, 2009 and
2008, the Company had approximately $5.7 million and
$5.5 million of research and development credit,
respectively which will begin to expire in 2023.
The federal net operating loss carryforwards and research and
development credits may be used to reduce the Companys
U.S. federal income taxes otherwise payable.
Section 382 of the Internal Revenue Code of 1986, as
amended (the Code), imposes an annual limit on the
ability of a corporation that undergoes an ownership
change to utilize its tax attributes including net
operating loss carryforwards and research and development
credits to reduce its tax liability. The Company has determined
that it has had ownership changes and, as a result, the ability
to utilize its tax attributes to offset future tax liabilities
in any particular year may be limited. The extent of the
limitation on utilization of the Companys tax attributes
cannot be determined at this time due to issues in the
application of certain section 382 provisions. The Company
is in the process of submitting a private letter ruling
(PLR) request to the Internal Revenue Service to
clarify the application of these provisions. Upon resolution of
the PLR process, the Company will provide additional information
on any limitations that will be applied to its tax attributes.
The Company also has net operating loss carryforwards in a
variety of states in which it operates. The Companys
ability to utilize its state net operating losses may also be
limited by section 382 or similar provisions. The extent of
these limitations also cannot be determined at this time.
The Company reviewed its tax liability relating to the receipt
of the $200.0 million upfront payment from Novartis in late
2009. Generally, under the Code, an accrual basis taxpayer is
required to include in taxable income certain cash payments in
the year received. Revenue Procedure
2004-34,
however, allows taxpayers a limited deferral beyond the taxable
year of receipt for certain advance payments. For federal income
tax purposes, the Company will avail itself of the provisions of
this Revenue Procedure to defer recognition of income on the
upfront payment from Novartis. As a result, only a portion of
the $200.0 million upfront payment from Novartis that was
received in 2009 is expected to be included in taxable income
for the tax year ended December 31, 2009. Any of the income
from the $200.0 million payment that was not recognized in
2009 will be recognized in taxable income for the year ending
December 31, 2010 and is expected to create income tax
liabilities for the Company.
The Company adopted the FASB tax guidance for uncertain tax
positions on January 1, 2007. The Company had no
unrecognized tax benefits as of January 1, 2007 and
provides a full valuation allowance on the net deferred tax
asset recognized in the consolidated financial statements. As a
result, the adoption of the FASB effective January 1, 2007
had no effect on the Companys financial position as of
such date, or on net oper