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, 2010
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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. þ
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
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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
As of June 30, 2010, the aggregate market value of the
Common Stock held by non-affiliates of the registrant was
$181,889,829, based on the closing price of the
registrants Common Stock, as reported by the NASDAQ Global
Market. 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 4, 2011 was
28,103,441.
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
Specified portions of the registrants proxy statement with
respect to the registrants 2011 Annual Meeting of
Stockholders, which is to be filed pursuant to
Regulation 14A within 120 days after the end of the
registrants fiscal year ended December 31, 2010, are
incorporated by reference into Part III of this
Form 10-K.
Vanda
Pharmaceuticals Inc.
Form 10-K
Table of Contents
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Page
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Cautionary Note Regarding Forward-Looking
Statements
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2
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Business
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3
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Risk Factors
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19
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Unresolved Staff Comments
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40
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Properties
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40
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Legal Proceedings
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40
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(Removed and Reserved)
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40
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Part II
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Market for Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
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40
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Selected Consolidated Financial Data
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43
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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44
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Qualitative and Quantitative Disclosures about Market Risk
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58
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Financial Statements and Supplementary Data
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58
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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58
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Controls and Procedures
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58
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Other Information
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59
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Part III
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Directors, Executive Officers and Corporate Governance
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59
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Executive Compensation
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59
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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Certain Relationships and Related Transactions, and Director
Independence
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59
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Principal Accountant Fees and Services
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60
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Part IV
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Exhibits and Financial Statements Schedules
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60
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61
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87
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1
PART I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this report are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may
appear throughout this report, including without limitation, the
following sections: Item 1 Business,
Item 1A Risk Factors, and Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Words such as, but
not limited to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, or the negative of these terms and similar
expressions or words, identify forward-looking statements.
Forward-looking statements are based upon current expectations
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
Fanapt®
receives;
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our ability to successfully commercialize
Fanapt®
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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limitations on our ability to utilize some or all of our prior
net operating losses and research and development credits;
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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
2
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.
Overview
Vanda Pharmaceuticals Inc. (We, Vanda or the Company) is a
biopharmaceutical company focused on the development and
commercialization of 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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Fanapt®
(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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapt®
in the U.S. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
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 microsphere long
-acting injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed us that the patent had
been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 26, 2024.
Subsequently, on October 28, 2010, the PTO informed us that
it had granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 24, 2024. We
continue to explore the regulatory path and commercial
opportunity for
Fanapt®
oral formulation outside of the U.S. and Canada. On
November 1, 2010, the Therapeutic Goods Administration of
Australias Department of Health and Ageing, accepted for
evaluation our application for marketing approval of the oral
formulation of
Fanapy®.
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Tasimelteon, 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 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. 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 U.S. Food and
Drug Administration (FDA) granted orphan drug designation status
for tasimelteon in a specific CRSD, Non-24-Hour Sleep/Wake
Disorder (N24HSWD) 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
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credits, waiver of FDA user fees, and up to seven years of
market exclusivity upon marketing approval. On February 23,
2011, the European Commission (EC) designated tasimelteon as an
orphan medicinal product for the same indication. We initiated
two clinical trials to pursue FDA approval of tasimelteon for
the treatment of N24HSWD in blind individuals without light
perception in the third quarter of 2010. The first trial is a
randomized, double-blind, placebo-controlled study with a
planned enrollment of approximately 160 patients with
N24HSWD. The trial has a six month treatment period and includes
measures of both nighttime and daytime sleep, as well as
laboratory measures of the synchronization between the internal
body clock and the
24-hour
environmental light/dark cycle. We also initiated a one-year
safety study of tasimelteon for the treatment of N24HSWD. This
trial is an open-label safety study with a planned enrollment of
approximately 140 patients with N24HSWD. We plan to conduct
additional clinical trials over the next one to two years to
support the use of tasimelteon as a circadian regulator and the
submission of a New Drug Application (NDA) to the FDA and a
marketing authorization application to the European Medicines
Agency (EMA). On January 6, 2011, an
end-of-Phase
II meeting was held with the FDA to discuss the development plan
for tasimelteon in the treatment of N24HSWD. 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
Fanapt®
within the U.S. and Canada as our partnered product and we
refer to
Fanapt®
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.
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
Fanapt®
in the U.S. and to successfully develop and commercialize
Fanapt®
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 2011 and beyond. We are currently
concentrating our efforts on supporting Novartis
commercial launch of
Fanapt®
in the U.S. and our two on-going clinical trials for
tasimelteon. In addition, we have engaged in discussions with
several foreign regulatory agencies to review their filing
requirements with respect to
Fanapt®.
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.
Fanapt®
and tasimelteon both target large prescription markets with
significant unmet medical needs. We believe that
Fanapt®
may address some of the shortcomings of other currently
available drugs, based on its observed safety profile and the
extended release injectable formulation for
Fanapt®
that Novartis plans to develop further. Approved drugs in both
the sleep and mood disorders markets have
sub-optimal
safety and
4
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
Fanapt®
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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapt®
in the U.S. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
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, N24HSWD 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. On February 23, 2011, the EC designated
tasimelteon as an orphan medicinal product for the same
indication. We initiated two clinical trials to pursue FDA
approval of tasimelteon for the treatment of N24HSWD in blind
individuals without light perception in the third quarter of
2010. We plan to conduct additional clinical trials over the
next one to two years to support the use of tasimelteon as a
circadian regulator and the submission of a NDA to the FDA and a
marketing authorization application to the EMA. On
January 6, 2011, an
end-of-Phase
II meeting was held with the FDA to discuss the development plan
for tasimelteon in the treatment of N24HSWD. 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
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada, or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
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 the acquisition of additional clinical-stage compounds.
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5
Development
programs
We have the following products and partnered products in
clinical development:
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Product or product candidate
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Target indications
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Clinical status
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Fanapt®
(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; Launched in
the U.S. by Novartis in January 2010
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Fanapt®
(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 Two Phase III trials for N24HSWD in blind individuals
without light perception initiated in the third quarter of 2010
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Depression
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Ready for Phase II trial
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Fanapt®
Fanapt®
is a compound for the treatment of schizophrenia. On May 6,
2009, the FDA granted U.S. marketing approval of
Fanapt®
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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapt®
in the U.S. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
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
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currently comprise approximately 90% of schizophrenia
prescriptions. Currently approved atypical antipsychotics
include, in addition to
Fanapt®,
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®
Relprevvtm,
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,
Latuda®
(lurasidone) by Dainippon Sumitomo Pharma, and generic clozapine
Pursuant to the amended and restated sublicense agreement,
Novartis is responsible for the further clinical development of
the long-acting injectable or depot formulation of
Fanapt®.
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
$1.5 billion in 2010, according to Alkermes Company press
releases.
Intellectual
property
Fanapt®
and its metabolites, formulations, genetic markers and uses are
covered by a total of ninteen patent and patent application
families worldwide. The primary new chemical entity patent
covering
Fanapt®
expires normally in 2011 in the U.S. and expired in 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
Fanapt®
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
Fanapt®
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
Fanapt®
will be exclusive until May 2017 in the U.S. and for at
least 10 years from approval in Europe. Additionally, on
February 23, 2010, the PTO issued a notice of allowance for
our patent application for the microsphere long-acting
injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed us that the patent has
been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 26, 2024.
Subsequently, on October 28, 2010, the PTO informed us that
it has granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 24, 2024. Several
other patent applications covering metabolites, uses,
formulations and genetic markers relating to
Fanapt®
extend beyond 2020.
We acquired worldwide, exclusive rights to the new chemical
entity patent covering
Fanapt®
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
Fanapt®.
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,
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N24HSWD 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. On February 23,
2011, the EC designated tasimelteon as an orphan medicinal
product for the same indication. We initiated two clinical
trials to pursue FDA approval of tasimelteon for the treatment
of N24HSWD in blind individuals without light perception in the
third quarter of 2010. We plan to conduct additional clinical
trials over the next one to two years to support the use of
tasimelteon as a circadian regulator and the submission of a NDA
to the FDA and a marketing authorization application to the EMA.
On January 6, 2011, an
end-of-Phase
II meeting was held with the FDA to discuss the development plan
for tasimelteon in the treatment of N24HSWD. Tasimelteon is also
ready for Phase II trials for the treatment of depression.
Therapeutic
opportunity
Sleep disorders are segmented into three major categories:
primary insomnia, secondary insomnia and CRSDs. 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 include transient disorders such as jet
lag and chronic disorders such as shift work sleep disorder and
N24HSWD. Based on market research we have conducted with LEK
Consulting we believe 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,
Ambien®
(zolpidem) by sanofi-aventis(including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc.,
Sonata®
(zaleplon) by King Pharmaceuticals, Inc. and
Silenor®
(doxepin) by Somaxon 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 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
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, a
compound with a mechanism of action similar to tasimelteon.
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
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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 CRSDs, 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 CRSDs 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 initiated two clinical trials to pursue FDA approval of
tasimelteon for the treatment of N24HSWD in blind individuals
without light perception in the third quarter of 2010. The first
trial is a randomized, double-blind, placebo-controlled study
with a planned enrollment of approximately 160 patients
with N24HSWD. The trial has a six month treatment period and
includes measures of both nighttime and daytime sleep, as well
as laboratory measures of the synchronization between the
internal body clock and the
24-hour
environmental light/dark cycle. We also initiated a one-year
safety study of tasimelteon for the treatment of N24HSWD. This
trial is an open-label safety study with a planned enrollment of
approximately 140 patients with N24HSWD. We plan to conduct
additional clinical trials over the next one to two years to
support the use of tasimelteon as a circadian regulator and the
submission of a NDA to the FDA and a marketing authorization
application to the EMA.
9
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) by 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 and II
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, genetic markers and uses are
covered by a total of six 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
Fanapt®,
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.
Fanapt®
We acquired exclusive worldwide rights to patents and patent
applications for
Fanapt®
through a sublicense agreement with Novartis. A predecessor
company of sanofi-aventis, Hoechst Marion Roussel, Inc. (HMRI),
discovered
Fanapt®
and completed early clinical work on the compound. In 1996,
following a review of its product portfolio, HMRI licensed its
rights to the
Fanapt®
patents and patent applications to Titan Pharmaceuticals, Inc.
(Titan) on an exclusive basis. In 1997, soon after it had
acquired its rights, Titan sublicensed its rights to
Fanapt®
on an exclusive basis to Novartis. In June 2004, we acquired
exclusive worldwide rights to these patents and patent
applications as well as certain Novartis patents and patent
applications to develop and commercialize
Fanapt®
through a sublicense agreement with Novartis. In 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 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
Fanapt®
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
Fanapt®
10
in May 2009, 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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. Novartis began selling
Fanapt®
in the U.S. during the first quarter of 2010. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada.
We may lose our rights to develop and commercialize
Fanapt®
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
Fanapt®
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
Fanapt®.
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.
The license agreement with BMS was amended on April 15,
2010 to, among other things, extend the deadline by which we
must enter into a development and commercialization agreement
with a third party for tasimelteon until the earliest of:
(i) the date mutually agreed upon by BMS and us following
the provision by us to BMS of a full written report of the
Phase III clinical studies on which we intend to rely for
filing for marketing authorization for tasimelteon in its first
major market country (Phase III report); (ii) the date
of the acceptance by a regulatory authority of the filing by us
for marketing authorization for tasimelteon in a major market
country following the provision by us to BMS of the
Phase III report; or (iii) May 31, 2013.
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If we have not entered into such a development and
commercialization agreement with respect to certain major market
countries by the foregoing deadline, then BMS will have the
option to exclusively develop and commercialize tasimelteon on
its own in those countries not covered by such an agreement on
pre-determined financial terms, including milestone and royalty
payments. In addition to the foregoing, pursuant to the
April 15, 2010 amendment, our deadline for filing a NDA for
tasimelteon was extended until June 1, 2013.
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
Fanapt®
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
12
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.
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.
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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. 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 NDA, 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
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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 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.
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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 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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. Novartis began selling
Fanapt®
in the U.S. during the first quarter of 2010. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We receive royalties, which, as a
percentage of net sales, are in the low double-digits, on net
sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make
16
any future milestone payments with respect to sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
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.
Fanapt®
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
Fanapt®
is owned by sanofi-aventis, and other patents and patent
applications relating to
Fanapt®
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
Fanapt®
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
Fanapt®
expires normally in 2011 in the U.S. and expired in 2010 in
most of the major markets in Europe. 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.
Fanapt®
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
Fanapt®
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
Fanapt®
will be exclusive until May 2017 in the U.S. and for at
least 10 years from approval in Europe. Additionally, on
February 23, 2010, the PTO issued a notice of allowance for
our patent application for the microsphere long-acting
injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed us that the patent had
been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 26, 2024.
Subsequently, on October 28, 2010, the PTO informed us that
it had granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 24, 2024. Several
other patent applications covering metabolites, uses,
formulations and genetic markers relating to
Fanapt®
extend beyond 2020.
Aside from the new chemical entity patents covering
Fanapt®
and tasimelteon, as of December 31, 2010 we had one pending
provisional patent applications in the U.S., fifteen
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.
17
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.
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
Fanapt®
and tasimelteon are as follows:
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For
Fanapt®
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®
Relprevvtm,
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,
Latuda®
(lurasidone) by Dainippon Sumitomo Pharma, and generic
clozapine, as well as the typical antipsychotics haloperidol,
chlorpromazine, thioridazine, and sulpiride (all of which are
generic).
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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.,
Sonata®
(zaleplon) by King Pharmaceuticals, Inc.,
Silenor®
(doxepin) by Somaxon Pharmaceuticals, Inc., generic compounds
such as zolpidem, trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
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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.,
Effexor®
(venlafaxine) by Wyeth,
Pristiq®
(desvenlafaxine) by Pfizer, as well as other compounds such as
Wellbutrin®
(buproprion) by GSK,
Cymbalta®
(duloxetine) by Eli Lilly, Viibryd (vilazodone HCL) by Clinical
Data Inc. 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, 2010, we had 28 full-time
employees. Of these employees, 19 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. The
information contained in, or that can be accessed through, our
website is not part of this report and should not be considered
part of this report.
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.
19
Risks
related to our business and industry
Novartis
began selling, marketing and distributing our first approved
product,
Fanapt®,
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
Fanapt®
and the sales of this product by Novartis in the U.S. and
Canada. The ability of
Fanapt®
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
Fanapt®
or obtain health care coverage that covers
Fanapt®
in the current uncertain economic climate
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acceptance of, and ongoing satisfaction, with
Fanapt®
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
Fanapt®
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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
Fanapt®
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
Fanapt®
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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
Fanapt®
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Novartis ability to successfully develop and commercialize
a long-acting injectable (or depot) formulation of
Fanapt®
in the U.S. and Canada
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Novartis ability to expand the indications for which
Fanapt®
can be marketed in the U.S.
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Novartis ability to obtain regulatory approval in Canada
for
Fanapt®
and our ability to obtain regulatory approval for
Fanapt®
in countries outside the U.S. and Canada
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our ability to successfully develop and commercialize
Fanapt®,
including a long-acting injectable (or depot) formulation of
Fanapt®,
outside of the U.S. and Canada
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the unfavorable outcome of any potential litigation relating to
Fanapt®
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We entered into an amended and restated sublicense agreement
with Novartis to commercialize
Fanapt®
in the U.S. and Canada and to further develop and
commercialize a long-acting injectable (or depot) formulation of
Fanapt®
in the U.S. and Canada. As such, we will not be involved in
the marketing or sales efforts for
Fanapt®
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 are eligible for additional payments
totaling up to $265.0 million upon Novartis
achievement of certain commercial and development milestones for
Fanapt®
in the U.S. and Canada, which may or may not be achieved or
met. We also receive royalties, which, as a percentage of net
sales, are in the low double-digits, on net sales of
Fanapt®
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
Fanapt®
or the depot formulation of
Fanapt®.
If Novartis fails to successfully commercialize
Fanapt®
in the U.S., fails to develop and commercialize
Fanapt®
in Canada or further develop a long-acting injectable (or depot)
formulation of
Fanapt®,
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
Fanapt®
in the U.S. or Canada, we will receive limited revenues
from them. Although we have
20
developed and continue to develop additional products and
product candidates for commercial introduction, we expect to be
substantially dependent on sales from
Fanapt®
for the foreseeable future. For reasons outside of our control,
including those mentioned above, sales of
Fanapt®
may not meet our expectations. Any significant negative
developments relating to
Fanapt®,
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
Fanapt®
in May 2009 and the positive results of our completed trials for
Fanapt®
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
Fanapt®
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
Fanapt®
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.
23
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 2011 and beyond. As of December 31,
2010, our total cash and cash equivalents and marketable
securities were approximately $198.0 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
Fanapt®
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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24
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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
Fanapt®
in connection with our amended and restated sublicense agreement
with Novartis. However, if
Fanapt®
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, we may not be able to raise
additional funds on acceptable terms, or at all. If we are
unable to secure sufficient capital to fund our planned
activities, we may not be able to continue operations, or we may
have to enter into partnerships or other collaboration
agreements that could require us to share commercial rights to
our products to a greater extent or at earlier stages in the
drug development process than is currently intended. These
partnerships or collaborations, if consummated prior 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 been engaged in identifying and developing compounds
since March 2003, which has required, and will continue to
require, significant research and development expenditures.
As of December 31, 2010, we had accumulated net losses of
$253.6 million, and we cannot estimate with precision the
extent of our future losses. Our ability to generate revenue and
achieve profitability largely depends on Novartis and our
ability to sell
Fanapt®.
Although Novartis launched
Fanapt®
in the U.S. in the first quarter of 2010, it is too early
to determine whether or not
Fanapt®
will be a commercial success.
Fanapt®
may not be as commercially successful as we expect, Novartis may
not succeed in gaining market acceptance of
Fanapt®
in the U.S. or developing and commercializing
Fanapt®
in Canada, and we may not succeed in commercializing
Fanapt®
outside of the U.S. and Canada. In addition, we may not
succeed in 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
Fanapt®
in the U.S. and Canada and achieve certain product
development and sales milestones
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our ability to successfully commercialize
Fanapt®
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.
Our
ability to use net operating loss carryforwards and tax credit
carryforwards to offset future taxable income may be limited as
a result of transactions involving our common
stock.
In general, under Section 382 of the Internal Revenue Code
of 1986, as amended (Code), a corporation that undergoes an
ownership change is subject to limitations on its
ability to utilize its pre-change net operating losses, or NOLs,
and certain other tax assets to offset future taxable income. In
general, an ownership change occurs if the aggregate stock
ownership of certain stockholders increases by more than
50 percentage points over such stockholders lowest
percentage ownership during the testing period (generally three
years). Transactions involving our common stock, even those
outside our control, such as purchases or sales by investors,
within the testing period could result in an ownership change. A
limitation on our ability to utilize some or all of our NOLs
could have a material adverse effect on our results of
operations and cash flows.
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 contract research organizations,
third-party vendors and investigators for pre-clinical testing
and clinical trials
26
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.
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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.
Fanapt®
(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
Fanapt®
(and our other compounds, if and when approved) do not achieve
significant market
28
acceptance, our business, results of operations and financial
condition would be materially adversely affected. We believe the
primary competitors for
Fanapt®
and tasimelteon are as follows:
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For
Fanapt®
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®,
Relprevvtm
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,
Latuda®
(lurasidone) by Dainippon Sumitomo Pharma, and generic
clozapine, as well as the typical antipsychotics haloperidol,
chlorpromazine, thioridazine, and sulpiride (all of which are
generic).
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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. ,
Sonata®
(zaleplon) by King Pharmaceuticals, Inc.,
Silenor®
(doxepin) by Somaxon Pharmaceuticals, Inc., generic compounds
such as zolpidem, trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
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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.,
Effexor®
(venlafaxine) by Wyeth,
Pristiq®
(desvenlafaxine) by Pfizer, as well as other compounds such as
Wellbutrin®
(buproprion) by GSK,
Cymbalta®
(duloxetine) by Eli Lilly, Viibryd (vilazodone HCL) by Clinical
Data Inc. 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
Fanapt®,
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
Fanapt®
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
Fanapt®
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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29
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.
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
30
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.
The Patient Protection and Affordable Care Act of 2010, as
amended by the Health Care and Education Reconciliation Act of
2010, or PPACA, is a sweeping measure intended to expand
healthcare coverage within the U.S., primarily through the
imposition of health insurance mandates on employers and
individuals and expansion of the Medicaid program, and the
establishment of health care exchanges. Several provisions of
the new law, which have varying effective dates, may affect us,
and will likely increase certain of our costs. For example, an
increase in the Medicaid rebate rate from 15.1% to 23.1% is
effective as of January 1, 2010, and the volume of rebated
drugs has been expanded to include beneficiaries in Medicaid
managed care organizations, effective as of March 23, 2010.
The PPACA also imposes an annual fee on pharmaceutical
manufacturers beginning in 2011, based on the
manufacturers sale of branded pharmaceuticals and
biologics (excluding orphan drugs); expands the 340B drug
discount program (excluding orphan drugs) including the creation
of new penalties for non-compliance; and includes a 50% discount
on brand name drugs for Medicare
31
Part D participants in the coverage gap, or doughnut
hole. The law also revises the definition of average
manufacturer price for reporting purposes (effective
October 1, 2010), which could increase the amount of the
Companys Medicaid drug rebates to states, once the
provision is effective. Substantial new provisions affecting
compliance also have been added, which may require us to modify
our business practices with health care practitioners.
The reforms imposed by the new law will significantly impact the
pharmaceutical industry; however, the full effects of the PPACA
cannot be known until these provisions are implemented and the
Centers for Medicare & Medicaid Services and other
federal and state agencies issue applicable regulations or
guidance. Moreover, in the coming years, additional changes
could be made to governmental healthcare programs that could
significantly impact the success of our products or product
candidates. We will continue to evaluate the PPACA, as amended,
the implementation of regulations or guidance related to various
provisions of the PPACA by federal agencies, as well as trends
and changes that may be encouraged by the legislation and that
may potentially impact on our business over time. These
developments could, however, have a material adverse effect on
our business, financial condition and results of operations.
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 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
32
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).
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.
33
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
Fanapt®
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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.
Fanapt®
(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
34
further sublicense from Novartis. The sublicense with Novartis
was amended and restated in October of 2009 to provide Novartis
with exclusive rights to commercialize
Fanapt®
in the U.S. and Canada and further develop and
commercialize a long-acting injectable or depot formulation of
Fanapt®
in the U.S. and Canada. We retained exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada. We may lose our rights to
develop and commercialize
Fanapt®
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
Fanapt®
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. We are not currently aware
of any such breach by Novartis. Our loss of rights in
Fanapt®
to Novartis would have a material adverse effect on our
business, financial condition and results of operations. 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, 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, 2010, we
had one pending provisional patent applications in the U.S.,
fifteen 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
35
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
Fanapt®
under the Hatch-Waxman Act. On February 23, 2010, the PTO
issued a notice of allowance for our patent application for the
microsphere long-acting injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed us that the patent had
been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 26, 2024.
Subsequently, on October 28, 2010, the PTO informed us that
it had granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 24, 2024. 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
Fanapt®,
since the European new chemical entity patent for
Fanapt®
will expire prior to the end of this
10-year
period of market exclusivity.
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.
36
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.
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, 2009 and December 31, 2010, the high and
low sale prices of our common stock as reported on the NASDAQ
Global Market varied between $12.62 and $6.04. 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:
|
|
|
|
|
publicity regarding actual or potential testing or trial results
relating to products under development by us or our competitors
|
|
|
|
the outcome of regulatory review relating to products under
development by us or our competitors
|
|
|
|
regulatory developments in the U.S. and foreign countries
|
|
|
|
developments concerning any collaboration or other strategic
transaction we may undertake
|
|
|
|
announcements of patent issuances or denials, technological
innovations or new commercial products by us or our competitors
|
|
|
|
termination or delay of development or commercialization
program(s) by our partners
|
|
|
|
safety issues with our products or those of our competitors
|
|
|
|
our partners ability to successfully commercialize our
partnered products
|
37
|
|
|
|
|
our ability to successfully execute our commercialization
strategies
|
|
|
|
announcements of technological innovations or new therapeutic
products or methods by us or others
|
|
|
|
actual or anticipated variations in our quarterly operating
results
|
|
|
|
changes in estimates of our financial results or recommendations
by securities analysts or failure to meet such financial
expectations
|
|
|
|
changes in government regulations or policies or patent decisions
|
|
|
|
changes in patent legislation or adverse changes to patent law
|
|
|
|
additions or departures of key personnel or members of our board
of directors
|
|
|
|
publicity regarding actual or potential transactions involving
us or
|
|
|
|
economic and other external factors beyond our control
|
As a result of these factors, holders of our common stock might
be unable to sell their shares at or above the price they paid
for such shares.
If
there are substantial sales of our common stock, our stock price
could decline.
A small number of institutional investors and private equity
funds hold a significant number of shares of our common stock.
Sales by these stockholders of a substantial number of shares,
or the expectation of such sales, could cause a significant
reduction in the market price of our common stock.
In addition to our outstanding common stock, as of
December 31, 2010, there were a total of
4,365,107 shares of common stock that we have registered
and that we are obligated to issue upon the exercise of
currently outstanding options and vesting of restricted stock
unit awards granted under our Second Amended and Restated
Management Equity Plan and 2006 Equity Incentive Plan. Upon the
exercise of these options or settlement of these restricted
stock units, as the case may be, in accordance with their
respective terms, these shares may be resold freely, subject to
restrictions imposed on our affiliates under Rule 144. If
significant sales of these shares occur in short periods of
time, these sales could reduce the market price of our common
stock. Any reduction in the trading price of our common stock
could impede our ability to raise capital on attractive terms.
If
securities or industry analysts do not publish research or
reports or publish unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We currently have research
coverage by securities and industry analysts. If one or more of
the analysts who covers the Company downgrades our stock, our
stock price would likely decline. If one or more of these
analysts ceases coverage of our Company or fails to regularly
publish reports on us, interest in the purchase of our stock
could decrease, which could cause our stock price or trading
volume to decline.
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:
|
|
|
|
|
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
|
38
|
|
|
|
|
perceived uncertainties as to future direction may result in the
loss of potential acquisitions, collaborations or in-licensing
opportunities, and may make it more difficult to attract and
retain qualified personnel and business partners and
|
|
|
|
if individuals are elected to a board of directors with a
specific agenda, it may adversely affect our ability to
effectively and timely implement our strategic plan and create
additional value for our stockholders
|
These actions could cause our stock price to experience periods
of volatility.
Anti-takeover
provisions in our charter and bylaws, and 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:
|
|
|
|
|
authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt
|
|
|
|
do not provide for cumulative voting in the election of
directors, which would allow holders of less than a majority of
the stock to elect some directors
|
|
|
|
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election
|
|
|
|
require that directors only be removed from office for cause
|
|
|
|
provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office
|
|
|
|
limit who may call special meetings of stockholders
|
|
|
|
prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders
|
|
|
|
establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings
|
Moreover, 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
39
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
Fanapt®,
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 facility is suitable and
adequate to meet the Companys anticipated needs.
|
|
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, 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
|
|
40
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
High
|
|
|
Low
|
|
|
First quarter 2010
|
|
$
|
12.62
|
|
|
$
|
9.97
|
|
Second quarter 2010
|
|
$
|
11.80
|
|
|
$
|
6.59
|
|
Third quarter 2010
|
|
$
|
7.81
|
|
|
$
|
6.04
|
|
Fourth quarter 2010
|
|
$
|
10.32
|
|
|
$
|
6.43
|
|
As of March 4, 2011, there were 12 holders of record of our
common stock.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table provides certain information regarding our
equity compensation plans in effect as of December 31, 2010:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Issuance Under Equity
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
4,365,107
|
|
|
$
|
11.98
|
|
|
|
2,376,472
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,365,107
|
|
|
$
|
11.98
|
|
|
|
2,376,472
|
|
|
|
|
(a) |
|
Includes 4,005,544 shares issuable upon exercise of
outstanding options and 359,563 shares issuable upon
settlement of RSUs under the 2006 Equity Incentive Plan and
Second Amended and Restated Management Equity Plan. |
|
(b) |
|
Does not take into account RSUs, which have no exercise price. |
|
(c) |
|
On January 1 of each year, the number of shares reserved under
the Incentive Plan is automatically increased by 4% of the total
number of shares of Common Stock that are outstanding at that
time, or, if less, by 1,500,000 shares (or such lesser
number as may be approved by the Companys Board of
Directors). |
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.
41
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
NASDAQ 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.
42
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The consolidated statements of operations data for the years
ended December 31, 2010, 2009 and 2008 and the consolidated
balance sheet data as of December 31, 2010 and 2009 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, 2007 and 2006, and the consolidated
balance sheet data as of December 31, 2008, 2007 and 2006
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,
|
|
(In thousands, except for share and per share
amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statements of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
35,709
|
|
|
$
|
4,548
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,891
|
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,338
|
|
|
|
13,874
|
|
|
|
23,936
|
|
|
|
47,235
|
|
|
|
52,071
|
|
General and administrative
|
|
|
10,147
|
|
|
|
23,724
|
|
|
|
28,909
|
|
|
|
32,803
|
|
|
|
13,637
|
|
Intangible asset amortization
|
|
|
1,495
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,871
|
|
|
|
40,496
|
|
|
|
52,845
|
|
|
|
80,038
|
|
|
|
65,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8,838
|
|
|
|
(35,948
|
)
|
|
|
(52,845
|
)
|
|
|
(80,038
|
)
|
|
|
(65,708
|
)
|
Interest income
|
|
|
431
|
|
|
|
89
|
|
|
|
1,781
|
|
|
|
5,978
|
|
|
|
2,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax provision
|
|
|
9,269
|
|
|
|
(35,859
|
)
|
|
|
(51,064
|
)
|
|
|
(74,060
|
)
|
|
|
(63,511
|
)
|
Tax provision
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
7,192
|
|
|
|
(35,859
|
)
|
|
|
(51,064
|
)
|
|
|
(74,070
|
)
|
|
|
(63,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of net income (loss) per shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,916,388
|
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,534,617
|
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,559
|
|
|
$
|
205,295
|
|
|
$
|
39,079
|
|
|
$
|
41,930
|
|
|
$
|
30,929
|
|
Marketable securities
|
|
|
155,478
|
|
|
|
|
|
|
|
7,379
|
|
|
|
51,223
|
|
|
|
942
|
|
Working capital
|
|
|
169,546
|
|
|
|
181,417
|
|
|
|
44,335
|
|
|
|
74,178
|
|
|
|
24,714
|
|
Total assets
|
|
|
213,101
|
|
|
|
225,714
|
|
|
|
49,934
|
|
|
|
96,861
|
|
|
|
36,260
|
|
Total liabilities
|
|
|
175,370
|
|
|
|
202,683
|
|
|
|
3,914
|
|
|
|
13,132
|
|
|
|
9,503
|
|
Accumulated deficit
|
|
|
(253,641
|
)
|
|
|
(260,833
|
)
|
|
|
(224,974
|
)
|
|
|
(173,910
|
)
|
|
|
(99,840
|
)
|
Total stockholders equity
|
|
|
37,731
|
|
|
|
23,031
|
|
|
|
46,020
|
|
|
|
83,729
|
|
|
|
26,757
|
|
43
|
|
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 risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of
certain factors, including but not limited to those set forth
under the Risk Factors section of this report and
elsewhere in this annual report on
Form 10-K.
Overview
We are a biopharmaceutical company focused on the development
and commercialization of 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:
|
|
|
|
|
Fanapt®
(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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. On January 11, 2010, Novartis
launched
Fanapt®
in the U.S. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and we have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
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 microsphere long
-acting injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed us that the patent had
been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 26, 2024.
Subsequently, on October 28, 2010, the PTO informed us that
it had granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 24, 2024. We
continue to explore the regulatory path and commercial
opportunity for
Fanapt®
oral formulation outside of the U.S. and Canada. On
November 1, 2010, the Therapeutic Goods Administration of
Australias Department of Health and Ageing, accepted for
evaluation our application for marketing approval of the
Fanapt®
oral formulation.
|
For the year ended December 31, 2010 we incurred
$2.7 million in research and development costs directly
attributable to our development of
Fanapt®.
As a result of the approval by the U.S. Food and Drug
Administration (FDA) of the new drug application (NDA) for
Fanapt®
in May 2009, we met a milestone under the original sublicense
agreement which required us to make a milestone 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
Fanapt®,
which we expect to last until May 15, 2017. This includes
the
44
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.
|
|
|
|
|
Tasimelteon, 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. 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. 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 a specific CRSD,
Non-24-Hour Sleep/Wake Disorder (N24HSWD) 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,
tax credits, and up to seven years of market exclusivity upon
marketing approval. On February 23, 2011, the European
Commission (EC) designated tasimelteon as an orphan medicinal
product for the same indication. We initiated two clinical
trials to pursue FDA approval of tasimelteon for the treatment
of N24HSWD in blind individuals without light perception in the
third quarter of 2010. The first trial is a randomized,
double-blind, placebo-controlled study with a planned enrollment
of approximately 160 patients with N24HSWD. The trial has a
six month treatment period and includes measures of both
nighttime and daytime sleep, as well as laboratory measures of
the synchronization between the internal body clock and the
24-hour
environmental light/dark cycle. We also initiated a one-year
safety study of tasimelteon for the treatment of N24HSWD. This
trial is an open-label safety study with a planned enrollment of
approximately 140 patients with N24HSWD. We plan to conduct
additional clinical trials over the next one to two years to
support the use of tasimelteon as a circadian regulator and the
submission of a NDA to the FDA and a marketing authorization
application to the European Medicines Agency (EMA). On
January 6, 2011, an
end-of-Phase II
meeting was held with the FDA to discuss the development plan
for tasimelteon in the treatment of N24HSWD. Tasimelteon is also
ready for the 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. For
the year ended December 31, 2010, we incurred
$8.3 million in direct research and development costs
directly attributable to our development of tasimelteon.
|
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
Fanapt®
in the U.S. and to successfully develop and commercialize
Fanapt®
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.
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
Fanapt®,
which we expect to last until May 15, 2017. This includes
the Hatch-Waxman extension that extends
45
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. We recognize revenue from
Fanapt®
royalties and commercial and development milestones from
Novartis when realizable and product revenue upon delivery of
our products to Novartis. Revenue also consists of
$0.5 million of grant income for qualified research and
development investments under the Internal Revenue
Services Therapeutic Discovery Project Credit Program
which was received in the fourth quarter of 2010.
Research and development expenses. Our
research and development expenses consist primarily of fees paid
to third-party professional service providers in connection with
the services they provide for our clinical trials, costs of
contract manufacturing services, costs of materials used in
clinical trials and research and development, costs for
regulatory consultants and filings, depreciation of capital
resources used to develop our products, all related facilities
costs, and salaries, benefits and stock-based compensation
expenses related to our research and development personnel. We
expense research and development costs as incurred for compounds
in the development stage, including certain payments made under
our license agreements prior to FDA approval. Prior to FDA
approval , all
Fanapt®
manufacturing-related and milestone costs were included in
research and development expenses. Subsequent to FDA approval of
Fanapt®,
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, 2010, we incurred research and
development expenses in the aggregate of $12.3 million,
including stock-based compensation expenses of
$2.5 million. We expect our research and development
expenses to increase as we continue to develop our products and
product candidates. We expect to incur licensing costs in the
future that could be substantial, as we continue our efforts to
develop our products, product candidates and partnered products
and to evaluate potential in-license product candidates or
compounds.
The following table summarizes our product development
initiatives for the years ended December 31, 2010, 2009 and
2008. Included in this table are the research and development
expenses recognized in connection with the clinical development
of
Fanapt®
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,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Direct project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fanapt®
|
|
$
|
2,708
|
|
|
$
|
9,532
|
|
|
$
|
8,485
|
|
Tasimelteon
|
|
|
8,329
|
|
|
|
2,548
|
|
|
|
11,344
|
|
Other product candidates
|
|
|
|
|
|
|
120
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct product costs
|
|
|
11,037
|
|
|
|
12,200
|
|
|
|
22,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
609
|
|
|
|
620
|
|
|
|
683
|
|
Depreciation
|
|
|
184
|
|
|
|
234
|
|
|
|
330
|
|
Other indirect overhead costs
|
|
|
508
|
|
|
|
820
|
|
|
|
913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect expenses
|
|
|
1,301
|
|
|
|
1,674
|
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
12,338
|
|
|
$
|
13,874
|
|
|
$
|
23,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
46
|
|
|
|
|
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
related costs for personnel, including stock-based compensation,
serving executive, finance, accounting, information technology,
marketing, and human resource functions. Other costs include
facility costs not otherwise included in research and
development expenses and 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
Fanapt®.
For the year ended December 31, 2010, we incurred general
and administrative expenses in the aggregate of
$10.1 million, including stock-based compensation expenses
of $2.3 million.
Other income. Other income consists of
interest income 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, 2010 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.
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
Fanapt®
in May 2009, 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
Fanapt®,
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 intangible asset amortization.
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, 2010.
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
47
manufacturers in conjunction with the production of clinical
materials, and fees for marketing and other commercialization
activities. 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 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
Fanapt®,
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. We recognize revenue related to
Fanapt®
royalties and commercial and development milestones as they are
realizable and earned, and product revenue upon delivery of our
products to Novartis. Our revenues are also derived from grant
income which is recognized when it is received.
Stock-based compensation. 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 (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
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 employee stock-based compensation expense, related to all
of our stock-based awards for the years ended December 31,
2010, 2009 and 2008, was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Research and development
|
|
$
|
2,536
|
|
|
$
|
2,028
|
|
|
$
|
1,748
|
|
General and administrative
|
|
|
2,271
|
|
|
|
8,738
|
|
|
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,807
|
|
|
$
|
10,766
|
|
|
$
|
13,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, $2.9 million in incremental
tax benefits were recognized from stock options exercised in
2010, 2009 and 2008, which 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
On a periodic basis, we evaluate the realizability of our
deferred tax assets and liabilities and will adjust such amounts
in light of changing facts and circumstances, including but not
limited to future projections of taxable income, the reversal of
deferred tax liabilities, tax legislation, rulings by relevant
tax authorities and tax planning strategies. Settlement of
filing positions that may be challenged by tax authorities could
impact our income taxes in the year of resolution.
48
In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the period in
which those temporary differences becomes deductible or the NOLs
and credit carryforwards can be utilized. When considering the
reversal of the valuation allowance, we consider the level of
past and future taxable income, the reversal of deferred tax
liabilities, the utilization of the carryforwards and other
factors. Revisions to the estimated net realizable value of the
deferred tax asset could cause our provision for income taxes to
vary significantly from period to period.
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 became effective during the first
quarter of 2011. We adopted this guidance beginning
January 1, 2011 and we do not expect this accounting
guidance to materially impact our 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. 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, the timing and
outcome of clinical trials and related possible regulatory
approvals and our and our partners ability to successfully
commercialize our products, product candidates and partnered
products. On October 12, 2009, we entered into an amended
and restated sublicense agreement with Novartis relating to
Fanapt®.
Pursuant to the amended and restated sublicense agreement, we
received an upfront payment of $200.0 million of which we
recognized $26.8 million in 2010. The remaining amounts
will be recognized ratably over the U.S. patent life of
Fanapt®,
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. In addition, we recognized $5.3 million of
product revenue in 2010 for product sold to Novartis. We are
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. We received royalties of
$3.1 million in 2010, which, as a percentage of net sales,
are in the low double-digits, on net sales of
Fanapt®
in the U.S. and Canada. We also received grant income of
$0.5 million for qualified research and development
investments under the Internal Revenue Services
Therapeutic Discovery Project Credit Program in the fourth
quarter of 2010.
49
Year
ended December 31, 2010 compared to year ended
December 31, 2009
Revenues. Revenues were $35.7 million for
the year ended December 31, 2010 compared to revenues of
$4.5 million for the year ended December 31, 2009.
Revenues for the year ended December 31, 2010 included
$26.8 million recognized from Novartis related to
straight-line recognition of up-front license fees,
$5.3 million for
Fanapt®
product sales to Novartis, $3.1 million in royalty revenue
based on 2010 sales of
Fanapt®
and grant income of $0.5 million for qualified research and
development investments under the Internal Revenue
Services Therapeutic Discovery Project Credit Program
which was received in the fourth quarter of 2010. Novartis
launched
Fanapt®
in January 2010.
Cost of sales. Cost of sales were
$2.9 million for inventory sold to Novartis for the year
ended December 31, 2010 compared to cost of sales of
$1.9 million for the year ended December 31, 2009.
Intangible asset amortization. Intangible
asset amortization for the year ended December 31, 2010 was
$1.5 million compared to $1.0 million for the year
ended December 31, 2009. The amortization is the result of
the capitalized intangible asset related to the
$12.0 million milestone payment to Novartis in May 2009.
Research and development expenses. Research
and development expenses decreased by $1.5 million, or
11.1%, to $12.3 million for the year ended
December 31, 2010 compared to $13.9 million for the
year ended December 31, 2009.
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Research and Development Expenses (In thousands)
|
|
2010
|
|
|
2009
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
2,542
|
|
|
$
|
42
|
|
Contract research and development manufacturing, consulting,
materials and other direct costs
|
|
|
2,976
|
|
|
|
7,735
|
|
Salaries, benefits and related costs
|
|
|
2,983
|
|
|
|
2,395
|
|
Stock-based compensation
|
|
|
2,536
|
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
11,037
|
|
|
|
12,200
|
|
Indirect project costs
|
|
|
1,301
|
|
|
|
1,674
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,338
|
|
|
$
|
13,874
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased by $1.2 million primarily as a
result of lower manufacturing costs offset by higher clinical
trial, salary and benefit expenses and stock-based compensation
expenses. Clinical trials expense increased by $2.5 million
primarily due to the costs associated with two Phase III
clinical trials for tasimelteon in N24HSWD in blind individuals
without light perception, which were initiated in the third
quarter of 2010. Contract research and development
manufacturing, consulting, materials and other direct costs
decreased by $4.8 million primarily as a result of lower
regulatory consulting expenses for
Fanapt®
in 2010 offset by increased manufacturing costs for tasimelteon
in 2010.
General and administrative expenses. General
and administrative expenses decreased by $13.6 million, or
57.2%, to $10.1 million for the year ended
December 31, 2010 from $23.7 million for the year
ended December 31, 2009.
50
The following table discloses the components of our general and
administrative expenses for the years ended December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
General and Administrative Expenses (In thousands)
|
|
2010
|
|
|
2009
|
|
|
Salaries, benefits and related costs
|
|
$
|
1,745
|
|
|
$
|
2,686
|
|
Stock-based compensation
|
|
|
2,271
|
|
|
|
8,738
|
|
Marketing, legal, accounting and other professional services
|
|
|
3,611
|
|
|
|
9,951
|
|
Other expenses
|
|
|
2,520
|
|
|
|
2,349
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,147
|
|
|
$
|
23,724
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs decreased by
$0.9 million for the year ended December 31, 2010 as a
result of executive departures in 2010. Stock-based compensation
expense decreased by $6.5 million as a result of the
reversal of expense relating to unvested options forfeited as a
result of executive departures in 2010 and the subsequent
reduced expense for existing employees. Marketing, legal,
accounting and other professional services decreased by
$6.3 million for the year ended December 31, 2010
primarily due to the legal, consulting and financial advisor
fees incurred during the year ended December 31, 2009
related to the Companys evaluation of potential strategic
transactions, including the Novartis agreement.
Interest Income. Interest income increased
$0.3 million to $0.4 million for the year ended
December 31, 2010 from $0.1 million for the year ended
December 31, 2009, due to a higher average cash and
marketable securities balances for the year combined with a
lower rate of return on investments.
Tax Provision. The provision for income taxes
of $2.1 million in 2010 is a result of generating pre-tax
income of $9.3 million in 2010 compared to a pre-tax loss
of $35.9 million in 2009. Our effective tax rate of 22.4%
for 2010 was favorably impacted by the utilization of deferred
tax assets, primarily net operating loss carryforwards, which
were previously reduced by a valuation allowance. In addition,
our tax rate was favorably impacted by the receipt of the orphan
drug credit, offset by nondeductible stock option expense, and a
higher effective state tax rate.
We previously submitted a PLR request and a supplemental
information letter to the IRS to clarify the application of
certain section 382 change of ownership rules.
Section 382 of the Code imposes an annual limitation 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. On November 15, 2010,
we received a PLR from the IRS. The PLR is generally consistent
with our previously stated tax position that we are able to
offset a portion of our 2010 taxable income with our full net
operating loss carryforwards.
See footnote 11, Income Taxes, of our consolidated
financial statements for further details on our effective tax
rate and related change in our valuation allowance.
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Research and development expenses. Research
and development expenses decreased by $10.1 million, or
42.0%, to $13.9 million for the year ended
December 31, 2009 compared to $23.9 million for the
year ended December 31, 2008.
51
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 (In thousands)
|
|
2009
|
|
|
2008
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
42
|
|
|
$
|
7,441
|
|
Contract research and development manufacturing, consulting,
materials and other direct costs
|
|
|
7,735
|
|
|
|
8,731
|
|
Salaries, benefits and related costs
|
|
|
2,395
|
|
|
|
4,089
|
|
Stock-based compensation
|
|
|
2,028
|
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
12,200
|
|
|
|
22,009
|
|
Indirect project costs
|
|
|
1,674
|
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,874
|
|
|
$
|
23,935
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased by $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 $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 manufacturing, consulting, materials
and other direct costs decreased by $1.0 million primarily
as a result of lower manufacturing costs for tasimelteon, and
Fanapt®
manufacturing expenses being capitalized post FDA approval.
General and administrative expenses. General
and administrative expenses decreased by $5.2 million, or
17.9%, to $23.7 million for the year ended
December 31, 2009 from $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 (In thousands)
|
|
2009
|
|
|
2008
|
|
|
Salaries, benefits and related costs
|
|
$
|
2,686
|
|
|
$
|
4,946
|
|
Stock-based compensation
|
|
|
8,738
|
|
|
|
11,667
|
|
Marketing, legal, accounting and other professional services
|
|
|
9,951
|
|
|
|
9,450
|
|
Other expenses
|
|
|
2,349
|
|
|
|
2,847
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,724
|
|
|
$
|
28,910
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs decreased by
$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
$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 $0.5 million for the year ended
December 31, 2009 as a result of higher legal, consulting
and financial advisor fees related to the Novartis agreement,
offset by lower marketing expenses relating to
Fanapt®.
Interest income. Interest income decreased by
$1.7 million to $0.1 million for the year ended
December 31, 2009 from $1.8 million for the year ended
December 31, 2008 due to lower average cash and marketable
securities balances for the year combined with a lower rate of
return on investments.
52
Intangible
Asset, Net
The intangible asset consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31, 2010
|
|
|
Useful
|
|
Gross
|
|
|
|
Net
|
|
|
Life
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
(In thousands)
|
|
(years)
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Fanapt®
|
|
|
8 years
|
|
|
$
|
12,000
|
|
|
$
|
2,478
|
|
|
$
|
9,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000
|
|
|
$
|
2,478
|
|
|
$
|
9,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 6, 2009, we announced that the FDA had approved the
NDA for
Fanapt®.
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
Fanapt®,
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 $1.5 million for the year ended
December 31, 2010. We capitalized and began amortizing the
asset immediately following the FDA approval of the NDA for
Fanapt®.
The following table summarizes our intangible asset amortization
schedule as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense by Period
|
(In thousands)
|
|
Total
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
After 2015
|
|
Intangible asset
|
|
$
|
9,522
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
2,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Revenue
|
|
|
December 31, 2010
|
|
(In thousands)
|
|
Deferred Revenue
|
|
|
Recognized
|
|
|
Deferred Revenue
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreement
|
|
$
|
197,431
|
|
|
$
|
26,789
|
|
|
$
|
170,642
|
|
Royalty revenue
|
|
|
|
|
|
|
3,141
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
5,290
|
|
|
|
|
|
Grant revenue
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,431
|
|
|
$
|
35,709
|
|
|
$
|
170,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Fanapt®
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
Fanapt®,
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. For the year ended December 31, 2010, we
recognized $26.8 million of revenue under the amended and
restated sublicense agreement. We recognize royalty revenue when
it is realizable and earned and product revenue upon delivery of
our products to Novartis. Our revenues are also derived from
grant income which is recognized when it is received.
53
Liquidity
and capital resources
As of December 31, 2010, our total cash and cash
equivalents and marketable securities were $198.0 million
compared to $205.3 million at December 31, 2009. Our
cash and cash equivalents are deposits in operating accounts and
highly liquid investments with an original maturity of
90 days or less at date of purchase and consist of time
deposits, investments in money market funds with commercial
banks and financial institutions, and commercial paper of
high-quality corporate issuers. Our marketable securities
consist of investments in government sponsored enterprises and
commercial paper. As of December 31, 2010, we also held a
non-current deposit of $0.4 million that is used to
collateralize a letter of credit issued for our current office
lease in Rockville, Maryland which expires in 2016.
As of December 31, 2010 and 2009 our liquidity resources
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,559
|
|
|
$
|
205,295
|
|
U.S. Treasury and government agencies
|
|
|
45,455
|
|
|
|
|
|
U.S. corporate debt
|
|
|
110,023
|
|
|
|
|
|
Marketable securities, short-term
|
|
|
155,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
198,037
|
|
|
$
|
205,295
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, we maintained all of our cash and
cash equivalents 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.
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 of December 31, 2010, 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
|
|
(In thousands)
|
|
December 31, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Description:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
155,478
|
|
|
$
|
45,455
|
|
|
$
|
110,023
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,478
|
|
|
$
|
45,455
|
|
|
$
|
110,023
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
We believe that our current existing cash and cash equivalents
and marketable securities are sufficient to meet our working
capital and capital expenditure needs to execute our current
planned business plan. However, the amounts of expenditures that
will be needed to carry out our business plan are subject to
numerous uncertainties, which may adversely affect our liquidity
and capital resources. We previously submitted a private letter
ruling (PLR) request and a supplemental information letter to
the IRS to clarify the
54
application of certain section 382 change of ownership
rules. Section 382 of the Code imposes an annual limitation
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. On
November 15, 2010, we received a PLR from the IRS. The PLR
is generally consistent with our previously stated tax position
that we are able to offset a portion of our 2010 taxable income
with the Companys full net operating loss carryforwards.
Total net operating loss carryforwards were $123.7 million
as of December 31, 2008. As of December 31, 2009,
total net operating loss carryforwards were $155.8 million.
We believe that the PLR received from the IRS clarifies certain
tax rules regarding the use of these net operating loss
carryforwards and will support our position that our
December 31, 2009 net operating loss carryforwards can
be fully utilized beginning in 2010.
We entered into an amended and restated sublicense agreement in
2009 with Novartis to commercialize
Fanapt®
in the U.S. and Canada. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We will recognize the
$200.0 million upfront payment 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
Fanapt®,
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. We also receive royalties, which, as a percentage of
net sales, are in the low double digits, on net sales of
Fanapt®
in the U.S. and Canada. During the year ended
December 31, 2010, we recorded $26.8 million in
licensing revenue, product revenue of $5.3 million from
product sold to Novartis and $3.1 million in royalty
revenue. We recognize product revenue on the sale of the
existing
Fanapt®
product to Novartis upon delivery to Novartis and royalty
revenue when realizable and earned. Other than participation in
the Joint Steering Committee (JSC) established following the
effective date of the amended and restated sublicense agreement
with Novartis, we have no control over the progress of
Novartis commercial plans. We cannot forecast with any
degree of certainty the achievement of milestones and royalties
under this agreement.
We expect to continue to incur substantial expenses relating to
our research and development efforts, as we focus on clinical
trials and manufacturing required for the development of our
active product candidates. We initiated two clinical trials to
pursue FDA approval of tasimelteon for the treatment of N24HSWD
in blind individuals without light perception beginning in the
third quarter of 2010. The first trial is a randomized,
double-blind, placebo-controlled study with a planned enrollment
of approximately 160 patients with N24HSWD. The trial has a
six month treatment period and includes measures of both
nighttime and daytime sleep, as well as laboratory measures of
the synchronization between the internal body clock and the
24-hour
environmental light/dark cycle. The second trial is a one-year
safety study of tasimelteon for the treatment of N24HSWD. This
trial is an open-label safety study with a planned enrollment of
approximately 140 patients with N24HSWD. The duration and
cost of clinical trials are a function of numerous factors such
as the number of patients to be enrolled in the trial, the
amount of time it takes to enroll them, the length of time they
must be treated and observed, and the number of clinical sites
and countries for the trial. In addition, orphan clinical trials
create an additional challenge due to the limited number of
available patients afflicted with the disease.
We must receive regulatory approval to launch any of our
products commercially. In order to receive such approval, the
appropriate regulatory agency must conclude that our clinical
data establish safety and efficacy and that our products and the
manufacturing facilities meet all applicable regulatory
requirements. We cannot be certain that we will establish
sufficient safety and efficacy data to receive regulatory
approval for any of our drugs or that our drugs and the
manufacturing facilities will meet all applicable regulatory
requirements.
Because of the uncertainties discussed above, the costs to
advance our research and development projects are difficult to
estimate and may vary significantly. We expect that our existing
funds, primarily consisting of the upfront payment received
under the Novartis contract and investment income will be
sufficient to fund our planned operations. Our future capital
requirements and the adequacy of our available funds will depend
on many factors, primarily including the scope and costs of our
clinical development programs, the scope and
55
costs of our manufacturing and process development activities,
the magnitude of our discovery and preclinical development
programs and the level of our pre-commercial launch activities.
There can be no assurance that any additional financing required
in the future will be available on acceptable terms, if at all.
Cash
flow
The following table summarizes our cash flows for the years
ended December 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net cash provided by (used in) Operating activities
|
|
$
|
(10,898
|
)
|
|
$
|
169,336
|
|
|
$
|
(45,955
|
)
|
Investing activities
|
|
|
(155,622
|
)
|
|
|
(4,739
|
)
|
|
|
43,088
|
|
Financing activities
|
|
|
3,784
|
|
|
|
1,619
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
(162,736
|
)
|
|
$
|
166,216
|
|
|
$
|
(2,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2010 compared to year ended
December 31, 2009
Net cash used in operations was $10.9 million for the year
ended December 31, 2010 and $169.3 million was
provided by operations for the year ended December 31,
2009. Adjustments to reconcile net income to net cash used in
operating activities included non-cash charges for depreciation
and amortization of $2.0 million, stock-based compensation
of $5.0 million, increases in deferred tax benefits of
$1.8 million and increases in excess tax benefits from the
exercise of stock options of $2.9 million, decreases in
prepaid expenses and other assets, accounts receivable, and
inventory of $5.3 million, increases in accrued expenses
and accounts payable of $2.8 million, increases in accrued
taxes payable of $3.9 million and increases in deferred
revenue of $26.8 million. Net cash used by investing
activities for the year ended December 31, 2010 was
$155.6 million and consisted of net maturities and
purchases of marketable securities of $155.7 million and
the proceeds from the sale of property and equipment of
$0.1 million. Net cash provided from financing activities
for the year ended December 31, 2010 was $3.8 million
and consisted of $0.9 million from the exercise of stock
options and $2.9 million in excess tax benefits related to
stock based compensation.
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Net cash provided by operations was $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
$35.9 million was offset primarily by non-cash charges for
depreciation and amortization of $1.6 million, stock-based
compensation of $11.2 million, increases in prepaid
expenses and other assets of $0.8 million, increases in
accounts receivable of $3.2 million, increases in accrued
expenses and accounts payable of $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 $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 $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.
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.
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.
56
The following table summarizes our long-term contractual cash
obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
(In thousands)
|
|
Total
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
After 2015
|
|
Operating leases
|
|
$
|
4,282
|
|
|
$
|
727
|
|
|
$
|
749
|
|
|
$
|
771
|
|
|
$
|
795
|
|
|
$
|
818
|
|
|
$
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contracts. We have entered into
agreements for tasimelteon 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).
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
Fanapt®.
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
Fanapt®
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
Fanapt®
in the U.S. and Canada, will be entitled to receive) based
on net sales for each of the licensed products.
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.
As a result of the acceptance by the FDA of the NDA for
Fanapt®
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
Fanapt®
in May 2009, we met an additional milestone under the original
sublicense agreement with Novartis which required us to make a
milestone 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
Fanapt®,
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, 2010,
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
Fanapt®
in the U.S. and Canada. 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
Fanapt®.
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
Fanapt®
in the U.S. and Canada. We also receive royalties, which,
as a percentage of net sales, are in the low double-digits, on
net sales of
Fanapt®
in the U.S. and Canada. In addition, we are no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. We retain exclusive rights to
Fanapt®
outside the U.S. and Canada and have exclusive rights to
use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option, we
will enter into good faith discussions with Novartis relating to
the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada.
57
|
|
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.
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.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The consolidated financial statements and related financial
statement schedules required to be filed are indexed on
page 62 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 our
management, including the Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of December 31, 2010. Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective as of December 31, 2010, 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 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
58
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, 2010, the Companys internal
control over financial reporting is effective.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2010 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
on page 63 of this annual report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal controls over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) during the fourth quarter of 2010 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. In the
fourth quarter of 2010, the Company hired a new Chief Financial
Officer.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
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, 2010, 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, 2010, 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,
the 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, 2010, 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
59
December 31, 2010, 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, 2010, 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 62. 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.
60
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 10, 2011.
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 10, 2011
|
|
|
|
|
|
/s/ JAMES
P. KELLY
James
P. Kelly
|
|
Chief Financial Officer and Treasurer (principal financial
officer and principal accounting officer)
|
|
March 10, 2011
|
|
|
|
|
|
/s/ HOWARD
PIEN
Howard
Pien
|
|
Chairman of the Board and Director
|
|
March 10, 2011
|
|
|
|
|
|
/s/ RICHARD
W. DUGAN
Richard
W. Dugan
|
|
Director
|
|
March 10, 2011
|
|
|
|
|
|
/s/ STEVEN
K. GALSON, M.D.
Steven
K. Galson, M.D.
|
|
Director
|
|
March 10, 2011
|
|
|
|
|
|
/s/ ARGERIS
N. KARABELAS,
Ph.D.
Argeris
N. Karabelas,
Ph.D.
|
|
Director
|
|
March 10, 2011
|
|
|
|
|
|
/s/ VINCENT
J. MILANO
Vincent
J. Milano
|
|
Director
|
|
March 10, 2011
|
|
|
|
|
|
/s/ H.
THOMAS WATKINS
H.
Thomas Watkins
|
|
Director
|
|
March 10, 2011
|
61
Vanda
Pharmaceuticals Inc.
Index to
consolidated financial statements
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
63
|
|
Consolidated financial statements
|
|
|
64
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
62
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, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010, 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, 2010, 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 10, 2011
63
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands, except for share amounts)
|
|
2010
|
|
|
2009
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,559
|
|
|
$
|
205,295
|
|
Marketable securities
|
|
|
155,478
|
|
|
|
|
|
Accounts receivable
|
|
|
511
|
|
|
|
3,164
|
|
Inventory
|
|
|
|
|
|
|
2,399
|
|
Prepaid expenses, deposits and other current assets
|
|
|
1,843
|
|
|
|
2,093
|
|
Deferred tax, current portion
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
200,573
|
|
|
|
212,951
|
|
Property and equipment, net
|
|
|
937
|
|
|
|
1,316
|
|
Intangible asset, net
|
|
|
9,522
|
|
|
|
11,017
|
|
Deferred tax, noncurrent portion
|
|
|
1,639
|
|
|
|
|
|
Restricted cash
|
|
|
430
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
213,101
|
|
|
$
|
225,714
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
648
|
|
|
$
|
2,424
|
|
Accrued liabilities
|
|
|
1,324
|
|
|
|
2,321
|
|
Accrued income taxes
|
|
|
2,266
|
|
|
|
|
|
Deferred revenues, current portion
|
|
|
26,789
|
|
|
|
26,789
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,027
|
|
|
|
31,534
|
|
Deferred rent
|
|
|
490
|
|
|
|
507
|
|
Deferred revenues, noncurrent portion
|
|
|
143,853
|
|
|
|
170,642
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
175,370
|
|
|
|
202,683
|
|
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, 28,041,379 and 27,568,595 shares issued and
outstanding at December 31, 2010 and 2009, respectively
|
|
|
28
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
291,342
|
|
|
|
283,836
|
|
Accumulated other comprehensive income
|
|
|
2
|
|
|
|
|
|
Accumulated deficit
|
|
|
(253,641
|
)
|
|
|
(260,833
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
37,731
|
|
|
|
23,031
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
213,101
|
|
|
$
|
225,714
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except for share amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreement
|
|
$
|
26,789
|
|
|
$
|
2,569
|
|
|
$
|
|
|
Royalty revenue
|
|
|
3,141
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
5,290
|
|
|
|
1,979
|
|
|
|
|
|
Grant revenue
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
35,709
|
|
|
|
4,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales product
|
|
|
2,891
|
|
|
|
1,915
|
|
|
|
|
|
Research and development
|
|
|
12,338
|
|
|
|
13,874
|
|
|
|
23,935
|
|
General and administrative
|
|
|
10,147
|
|
|
|
23,724
|
|
|
|
28,910
|
|
Intangible asset amortization
|
|
|
1,495
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,871
|
|
|
|
40,496
|
|
|
|
52,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8,838
|
|
|
|
(35,948
|
)
|
|
|
(52,845
|
)
|
Interest income
|
|
|
431
|
|
|
|
89
|
|
|
|
1,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax provision
|
|
|
9,269
|
|
|
|
(35,859
|
)
|
|
|
(51,064
|
)
|
Tax provision
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,192
|
|
|
$
|
(35,859
|
)
|
|
$
|
(51,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,916,388
|
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,534,617
|
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
(In thousands, except for share amounts)
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balances at December 31, 2007
|
|
|
26,652,728
|
|
|
$
|
27
|
|
|
$
|
257,600
|
|
|
$
|
12
|
|
|
$
|
(173,910
|
)
|
|
|
|
|
|
$
|
83,729
|
|
Issuance of common stock from restricted stock units
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
13,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,388
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,064
|
)
|
|
|
(51,064
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
Net unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,097
|
)
|
|
|
(51,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
26,653,478
|
|
|
|
27
|
|
|
|
270,988
|
|
|
|
(21
|
)
|
|
|
(224,974
|
)
|
|
|
|
|
|
|
46,020
|
|
Issuance of common stock from exercised stock options and
restricted stock units
|
|
|
915,117
|
|
|
|
1
|
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,619
|
|
Employee and non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
11,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,230
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,859
|
)
|
|
|
(35,859
|
)
|
|
|
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(35,838
|
)
|
|
|
(35,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
27,568,595
|
|
|
|
28
|
|
|
|
283,836
|
|
|
|
|
|
|
|
(260,833
|
)
|
|
|
|
|
|
|
23,031
|
|
Issuance of common stock from exercised stock options and
restricted stock units
|
|
|
472,784
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
Employee and non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,982
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,632
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,192
|
|
|
|
7,192
|
|
|
|
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,194
|
|
|
|
7,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
28,041,379
|
|
|
$
|
28
|
|
|
$
|
291,342
|
|
|
$
|
2
|
|
|
$
|
(253,641
|
)
|
|
|
|
|
|
$
|
37,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
Vanda
Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,192
|
|
|
$
|
(35,859
|
)
|
|
$
|
(51,064
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
336
|
|
|
|
442
|
|
|
|
531
|
|
Employee and non-employee stock-based compensation
|
|
|
4,982
|
|
|
|
11,230
|
|
|
|
13,388
|
|
Loss on disposal of assets
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
Amortization of discounts and premiums on marketable securities
|
|
|
212
|
|
|
|
138
|
|
|
|
(235
|
)
|
Amortization of intangible asset
|
|
|
1,495
|
|
|
|
983
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(1,821
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
(2,892
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
250
|
|
|
|
(805
|
)
|
|
|
645
|
|
Accounts receivable
|
|
|
2,653
|
|
|
|
(3,164
|
)
|
|
|
|
|
Inventory
|
|
|
2,399
|
|
|
|
(2,399
|
)
|
|
|
|
|
Accounts payable
|
|
|
(1,776
|
)
|
|
|
1,911
|
|
|
|
(2,476
|
)
|
Accrued liabilities
|
|
|
(997
|
)
|
|
|
(577
|
)
|
|
|
(6,893
|
)
|
Accrued income taxes
|
|
|
3,898
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
(17
|
)
|
|
|
5
|
|
|
|
149
|
|
Deferred revenue
|
|
|
(26,789
|
)
|
|
|
197,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(10,898
|
)
|
|
|
169,336
|
|
|
|
(45,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible asset
|
|
|
|
|
|
|
(12,000
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
|
|
|
|
(944
|
)
|
Proceeds from sale of property and equipment
|
|
|
66
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(202,438
|
)
|
|
|
(11,366
|
)
|
|
|
(14,786
|
)
|
Proceeds from sale of marketable securities
|
|
|
|
|
|
|
127
|
|
|
|
11,258
|
|
Maturities of marketable securities
|
|
|
46,750
|
|
|
|
18,500
|
|
|
|
47,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(155,622
|
)
|
|
|
(4,739
|
)
|
|
|
43,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
2,892
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
892
|
|
|
|
1,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,784
|
|
|
|
1,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(162,736
|
)
|
|
|
166,216
|
|
|
|
(2,851
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
205,295
|
|
|
|
39,079
|
|
|
|
41,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
42,559
|
|
|
$
|
205,295
|
|
|
$
|
39,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
Vanda
Pharmaceuticals Inc.
|
|
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 products for central nervous system
disorders. Vanda commenced its operations in 2003. The
Companys lead product,
Fanapt®
(iloperidone), 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 U.S. Food and Drug Administration (FDA) granted
U.S. marketing approval of
Fanapt®
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
Fanapt®.
Pursuant to the amended and restated sublicense agreement,
Novartis has exclusive commercialization rights to all
formulations of
Fanapt®
in the U.S. and Canada. 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
Fanapt®.
Pursuant to the amended and restated sublicense agreement, Vanda
received an upfront payment of $200.0 million at the end of
2009 and is eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. Vanda also receives royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapt®
in the U.S. and Canada. In addition, Vanda is no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. Vanda retains exclusive rights to
Fanapt®
outside the U.S. and Canada and Vanda has exclusive rights
to use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option,
Vanda will enter into good faith discussions with Novartis
relating to the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
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 Vandas patent application for the
microsphere long -acting injectable (or depot) formulation of
Fanapt®.
On August 3, 2010, the PTO informed Vanda that the patent
had been issued with a patent term adjustment of 605 days,
extending the patent expiration date to June 26, 2024.
Subsequently, on October 28, 2010, the PTO informed Vanda
that it had granted an additional patent term adjustment of
59 days, making the total extension 664 days and
making the patent expiration date August 24, 2024. Vanda
continues to explore the regulatory path and commercial
opportunity for
Fanapt®
oral formulation outside of the U.S. and Canada. On
November 1, 2010, the Therapeutic Goods Administration of
Australias Department of Health and Ageing, accepted for
evaluation Vandas application for marketing approval for
the
Fanapt®
oral formulation.
Tasimelteon is an oral compound in development for the treatment
of sleep and mood disorders including Circadian Rhythm Sleep
Disorders (CRSD). On January 19, 2010, the FDA granted
orphan drug designation status for tasimelteon in a specific
CRSD, Non-24 Hour Sleep/Wake Disorder (N24HSWD) 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. On February 23, 2011, the European
Commission (EC) designated tasimelteon as an orphan medicinal
product for the same indication. Vanda initiated two clinical
trials to pursue FDA approval of tasimelteon for the treatment
of N24HSWD in blind individuals without light perception in the
third quarter of 2010. The first trial is a randomized,
double-blind, placebo-controlled study with a planned enrollment
of approximately 160 patients with N24HSWD. The trial has a
six month treatment period and includes measures of both
nighttime and daytime sleep, as well as laboratory measures of
the synchronization between the internal body clock and the
24-hour
environmental light/dark cycle. Vanda also
68
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
initiated a one-year safety study of tasimelteon for the
treatment of N24HSWD. This trial is an open-label safety study
with a planned enrollment of approximately 140 patients
with N24HSWD. Vanda plans to conduct additional clinical trials
over the next one to two years to support the use of tasimelteon
as a circadian regulator and the submission of a new drug
application (NDA) to the FDA and a marketing authorization
application to the European Medicines Agency (EMA). On
January 6, 2011, an
end-of-Phase II
meeting was held with the FDA to discuss the development plan
for tasimelteon in the treatment of N24HSWD. Tasimelteon is also
ready for Phase II trials for the treatment of depression.
Given the range of potential indications for tasimelteon, Vanda
may pursue one or more partnerships for the development and
commercialization of tasimelteon worldwide.
Throughout this annual report on
Form 10-K,
Vanda refers to
Fanapt®
within the U.S. and Canada as its partnered product and
Vanda refers to
Fanapt®
outside the U.S. and Canada and tasimelteon as its
products. All other compounds are referred to as Vandas
product candidates. In addition, Vanda refers to its partnered
products, products and product candidates collectively as its
compounds. Moreover, Vanda refers to drug products generally as
drugs or products.
Basis
of presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. All intercompany
accounts and transactions have been eliminated in consolidation.
|
|
2.
|
Summary
of significant accounting policies
|
Use of
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
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
69
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
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
Fanapt®
manufacturing-related costs were included in research and
development expenses. Subsequent to FDA approval of
Fanapt®,
manufacturing costs related to this product are capitalized.
Pursuant to the amended and restated sublicense agreement with
Novartis, the Company sold its entire stock of finished product
and the remainder of its raw materials to Novartis in the first
six months of 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 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
Fanapt®
in May 2009, 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
Fanapt®,
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 intangible
asset amortization.
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, 2010.
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.
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
70
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
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
Fanapt®
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
Fanapt®,
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
Fanapt®
(May 15, 2017). Revenue related to product sales is
recognized upon delivery to Novartis. The Company will recognize
revenue from
Fanapt®
royalties and commercial and development milestones from
Novartis when realizable and earned. Our revenues are also
derived from grant income which is recognized when it is
received.
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, 2010, 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.
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
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.
71
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
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
Fanapt®
manufacturing-related and milestone costs were included in
research and development expenses. Subsequent to FDA approval of
Fanapt®,
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
Fanapt®.
Employee
stock-based compensation
The fair value of stock options granted is amortized using the
accelerated attribution method. The fair value of restricted
stock units (RSUs) awarded is amortized using the straight line
method. As stock-based compensation expense recognized in the
consolidated statements of operations is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are required to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Pre-vesting
forfeitures on the options granted prior to 2009 were estimated
to be approximately 2%. The forfeiture rate was increased to 4%
in 2009 based on the Companys historical experience.
Total employee stock-based compensation expense recognized for
the years ended December 31, 2010, 2009 and 2008, was
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except for share amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Research and development
|
|
$
|
2,536
|
|
|
$
|
2,028
|
|
|
$
|
1,748
|
|
General and administrative
|
|
|
2,271
|
|
|
|
8,738
|
|
|
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense
|
|
$
|
4,807
|
|
|
$
|
10,766
|
|
|
$
|
13,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, $9.6 million of total
unrecognized compensation costs related to non-vested awards are
expected to be recognized over a weighted average period of
1.51 years. The total excess income tax benefit related to
options exercises and the vesting of RSUs recognized in the
consolidated statement of changes in stockholders equity
for the stock-based compensation arrangements was
$1.6 million and $0 for the year ended December 31,
2010 and 2009, respectively.
72
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The fair value of each option award is estimated on the date of
grant using the Black-Scholes-Merton option pricing model that
uses the assumptions noted in the following table. Expected
volatility rates are based on historical volatility of the
common stock of comparable entities and other factors due to the
lack of historic information of the Companys 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 guidance. The risk-free interest rates are based on the
U.S. Treasury yield for a period consistent with the
expected term of the option in effect at the time of the grant.
The Company has not paid dividends to its stockholders since its
inception (other than a dividend of preferred share purchase
rights which was declared on September 25, 2008) and
does not plan to pay dividends in the foreseeable future.
Assumptions used in the Black-Scholes-Merton option pricing
model for employee and director stock options granted during the
years ended December 31, 2010, 2009 and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
68
|
%
|
Weighted average expected term (years)
|
|
|
6.03
|
|
|
|
6.03
|
|
|
|
6.18
|
|
Weighted average risk-free rate
|
|
|
2.32
|
%
|
|
|
2.81
|
%
|
|
|
3.27
|
%
|
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.
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 became effective during the first
quarter of 2011. Early adoption was allowed. The Company adopted
this guidance beginning January 1, 2011 and does not expect
this accounting guidance to materially impact its financial
statements.
73
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
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 its
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.
Net income (loss) is calculated in accordance with FASB guidance
on earnings per share. Basic earnings per share (EPS) is
calculated by dividing the net income (loss) by the weighted
average number of shares of common stock outstanding, reduced by
the weighted average unvested shares of common stock subject to
repurchase. Diluted EPS is computed by dividing the net income
(loss) by the weighted average number of other potential common
stock outstanding for the period. Other potential common stock
includes stock options, warrants and RSUs, but only to the
extent that their inclusion is dilutive.
74
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The following schedule presents the calculation of basic and
diluted net income (loss) per share of common stock for the
years ended December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except for share and per share
amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,192
|
|
|
$
|
(35,859
|
)
|
|
$
|
(51,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding, basic
|
|
|
27,916,388
|
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
Stock options and restricted stock units related to the issuance
of common stock
|
|
|
618,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding, diluted
|
|
|
28,534,617
|
|
|
|
27,015,271
|
|
|
|
26,650,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
(1.33
|
)
|
|
$
|
(1.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities not included in diluted net income
(loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock and restricted stock units
|
|
|
3,017,096
|
|
|
|
4,516,739
|
|
|
|
4,408,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company incurred a net loss for the years ended
December 31, 2009 and 2008, causing inclusion of any
potentially dilutive securities to have an anti-dilutive affect,
resulting in dilutive loss per share and basic loss per share
attributable to common stockholders being equivalent.
The following is a summary of the Companys
available-for-sale
marketable securities as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
45,466
|
|
|
$
|
|
|
|
$
|
(11
|
)
|
|
$
|
45,455
|
|
U.S. corporate debt
|
|
|
110,010
|
|
|
|
27
|
|
|
|
(14
|
)
|
|
|
110,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
155,476
|
|
|
$
|
27
|
|
|
$
|
(25
|
)
|
|
$
|
155,478
|
|
As of December 31, 2009, the Company did not hold any
available-for-sale
marketable securities.
75
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
|
|
5.
|
Prepaid
expenses, deposits and other current assets
|
The following is a summary of the Companys prepaid
expenses, deposits and other current assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Current deposits with vendors
|
|
$
|
|
|
|
$
|
150
|
|
Prepaid insurance
|
|
|
244
|
|
|
|
284
|
|
Other prepaid expenses and vendor advances
|
|
|
966
|
|
|
|
1,658
|
|
Accrued interest income
|
|
|
633
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses, deposits and other current assets
|
|
$
|
1,843
|
|
|
$
|
2,093
|
|
|
|
6.
|
Property
and equipment
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
(In thousands)
|
|
(Years)
|
|
|
2010
|
|
|
2009
|
|
|
Laboratory equipment
|
|
|
5
|
|
|
$
|
1,282
|
|
|
$
|
1,348
|
|
Computer equipment
|
|
|
3
|
|
|
|
764
|
|
|
|
764
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
706
|
|
|
|
706
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
844
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,596
|
|
|
|
3,662
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(2,659
|
)
|
|
|
(2,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
937
|
|
|
$
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2010, 2009 and 2008 was $0.3 million,
$0.4 million and $0.5 million, respectively.
The intangible asset consists of the following as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Life (years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
(In thousands)
|
|
|
Fanapt®
|
|
|
8 years
|
|
|
$
|
12,000
|
|
|
$
|
2,478
|
|
|
$
|
9,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000
|
|
|
$
|
2,478
|
|
|
$
|
9,522
|
|
The intangible asset consists of the following as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful Life
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
(In thousands)
|
|
(years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Fanapt®
|
|
|
8 years
|
|
|
$
|
12,000
|
|
|
$
|
983
|
|
|
$
|
11,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,000
|
|
|
$
|
983
|
|
|
$
|
11,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 6, 2009, the Company announced that the FDA had
approved the NDA for
Fanapt®.
As a result of the FDAs approval of the NDA for
Fanapt®,
the Company met a milestone under its original sublicense
76
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
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
Fanapt®,
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 $1.5 million and $1.0 million for the
years ended December 31, 2010 and 2009, respectively. The
Company capitalized and began amortizing the asset immediately
following the FDA approval of the NDA for
Fanapt®.
The following table summarizes our intangible asset amortization
schedule as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense by Period
|
|
(In thousands)
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
After 2015
|
|
|
Intangible asset
|
|
$
|
9,522
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
1,495
|
|
|
$
|
2,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Accrued research and development expenses
|
|
$
|
1,061
|
|
|
$
|
1,033
|
|
Accrued consulting and other professional fees
|
|
|
201
|
|
|
|
1,076
|
|
Employee benefits
|
|
|
62
|
|
|
|
106
|
|
Other accrued expenses
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
1,324
|
|
|
$
|
2,321
|
|
The Companys revenue consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Revenue
|
|
|
December 31, 2010
|
|
(In thousands)
|
|
Deferred Revenue
|
|
|
Recognized
|
|
|
Deferred Revenue
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreement
|
|
$
|
197,431
|
|
|
$
|
26,789
|
|
|
$
|
170,642
|
|
Royalty revenue
|
|
|
|
|
|
|
3,141
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
5,290
|
|
|
|
|
|
Grant revenue
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,431
|
|
|
$
|
35,709
|
|
|
$
|
170,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanda 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
Fanapt®
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
Fanapt®
(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
77
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
pediatric term extension. This term is the Companys best
estimate of the life of the patent. For the year ended
December 31, 2010, the Company recognized
$26.8 million of revenue for the licensing agreement. Vanda
recognized $5.3 million for product sold to Novartis for
the year ended December 31, 2010. Vanda recognizes product
revenue upon delivery of its products to Novartis. Vanda
recognized royalty revenue of $3.1 million for the year
ended December 31, 2010. Royalty revenue is based on a
percentage of the quarterly net sales of
Fanapt®
sold in the U.S. and Canada by Novartis and is recorded
when reliably measurable and earned. Revenue also consists of
$0.5 million of grant income for qualified research and
development investments under the Internal Revenue
Services Therapeutic Discovery Project Credit Program
which was received in the fourth quarter of 2010.
|
|
10.
|
Commitments
and Contingencies
|
Operating
leases
The Company has commitments totaling $4.3 million under
operating real estate leases for its headquarters located in
Rockville, Maryland, which expires in 2016.
|
|
|
|
|
(In thousands)
|
|
|
|
|
2011
|
|
$
|
727
|
|
2012
|
|
|
749
|
|
2013
|
|
|
771
|
|
2014
|
|
|
795
|
|
2015
|
|
|
818
|
|
After 2015
|
|
|
422
|
|
|
|
|
|
|
|
|
$
|
4,282
|
|
|
|
|
|
|
Rent expense under operating leases was $1.0 million in
2010, 2009 and 2008, respectively.
Guarantees
and indemnifications
The Company has entered into a number of standard intellectual
property indemnification agreements in the ordinary course of
its business. Pursuant to these agreements, the Company
indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the
indemnified party, generally the 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 as of December 31, 2010 and
2009.
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.
Fanapt®. The
Company acquired exclusive worldwide rights to patents and
patent applications for
Fanapt®,
previously known as iloperidone, in 2004 through a sublicense
agreement with Novartis. A predecessor company of
sanofi-aventis, Hoechst Marion Roussel, Inc. (HMRI), discovered
Fanapt®
and
78
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
completed early clinical work on the compound. In 1996,
following a review of its product portfolio, HMRI licensed its
rights to the
Fanapt®
patents and patent applications to Titan Pharmaceuticals, Inc.
(Titan) on an exclusive basis. In 1997, soon after it had
acquired its rights, Titan sublicensed its rights to
Fanapt®
on an exclusive basis to Novartis. In June 2004, the Company
acquired exclusive worldwide rights to these patents and patent
applications as well as certain Novartis patents and patent
applications to develop and commercialize
Fanapt®
through a sublicense agreement with Novartis. In 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
Fanapt®
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
Fanapt®
in May 2009, the Company met an additional milestone under this
sublicense agreement which required the Company to make a
milestone 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
Fanapt®
in the U.S. and Canada. Novartis began selling
Fanapt®
in the U.S. during the first quarter of 2010. 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
Fanapt®.
Pursuant to the amended and restated sublicense agreement, Vanda
received an upfront payment of $200.0 million and Vanda is
eligible for additional payments totaling up to
$265.0 million upon the achievement of certain commercial
and development milestones for
Fanapt®
in the U.S. and Canada. Vanda also receives royalties,
which, as a percentage of net sales, are in the low
double-digits, on net sales of
Fanapt®
in the U.S. and Canada. In addition, Vanda is no longer
required to make any future milestone payments with respect to
sales of
Fanapt®
or any future royalty payments with respect to sales of
Fanapt®
in the U.S. and Canada. Vanda retains exclusive rights to
Fanapt®
outside the U.S. and Canada and Vanda has exclusive rights
to use any of Novartis data for
Fanapt®
for developing and commercializing
Fanapt®
outside the U.S. and Canada. At Novartis option,
Vanda will enter into good faith discussions with Novartis
relating to the co-commercialization of
Fanapt®
outside of the U.S. and Canada or, alternatively, Novartis
will receive a royalty on net sales of
Fanapt®
outside of the U.S. and Canada.
Vanda may lose its rights to develop and commercialize
Fanapt®
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
Fanapt®
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
Fanapt®.
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 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
79
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
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.
The license agreement with BMS was amended on April 15,
2010 to, among other things, extend the deadline by which the
Company must enter into a development and commercialization
agreement with a third party for tasimelteon until the earliest
of: (i) the date mutually agreed upon by the Company and
BMS following the provision by the Company to BMS of a full
written report of the Phase III clinical studies on which
the Company intends to rely for filing for marketing
authorization for tasimelteon in its first major market country
(Phase III report); (ii) the date of the acceptance by
a regulatory authority of the filing by the Company for
marketing authorization for tasimelteon in a major market
country following the provision by the Company to BMS of the
Phase III report; or (iii) May 31, 2013.
If the Company has not entered into such a development and
commercialization agreement with respect to certain major market
countries by the foregoing deadline, then BMS will have the
option to exclusively develop and commercialize tasimelteon on
its own in those countries not covered by such an agreement on
pre-determined financial terms, including milestone and royalty
payments. In addition to the foregoing, pursuant to the
April 15, 2010 amendment, Vandas deadline for filing
a NDA for tasimelteon was extended until June 1, 2013.
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, 2010, 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. The Company
has transitioned all outstanding manufacturing purchase orders
for the raw material supply of
Fanapt®
to Novartis.
80
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The provision (benefit) for income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,413
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,821
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
2,077
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Deferred tax asset (liability)
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
60,818
|
|
Start-up
costs
|
|
|
19,683
|
|
|
|
21,343
|
|
Stock-based compensation
|
|
|
13,987
|
|
|
|
14,854
|
|
Licensing agreements
|
|
|
(1,481
|
)
|
|
|
2,879
|
|
Research and development and orphan drug credits
|
|
|
5,594
|
|
|
|
5,707
|
|
Depreciation and amortization
|
|
|
49
|
|
|
|
23
|
|
Deferred revenue
|
|
|
67,310
|
|
|
|
|
|
Accrued and deferred expenses
|
|
|
140
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
105,282
|
|
|
|
105,777
|
|
Deferred tax asset valuation allowance
|
|
|
(103,461
|
)
|
|
|
(105,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,821
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax asset as of December 31, 2010
represents the amount the Company believes is more likely than
not to be realized in the foreseeable future.
A reconciliation between the Companys statutory tax rate
and effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal tax at statutory rate
|
|
|
35.0
|
%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes
|
|
|
11.0
|
%
|
|
|
(4.4
|
)%
|
|
|
(5.4
|
)%
|
Change in valuation allowance
|
|
|
(25.0
|
)%
|
|
|
32.9
|
%
|
|
|
41.1
|
%
|
Research and development credit
|
|
|
(2.7
|
)%
|
|
|
(0.7
|
)%
|
|
|
(1.9
|
)%
|
Stock options
|
|
|
22.7
|
%
|
|
|
3.2
|
%
|
|
|
|
|
Orphan drug credit
|
|
|
(21.1
|
)%
|
|
|
|
|
|
|
|
|
Section 162(m) limitation
|
|
|
2.5
|
%
|
|
|
0.7
|
%
|
|
|
|
|
Meals, entertainment and other non-deductible items
|
|
|
|
|
|
|
2.3
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
22.4
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Company previously submitted a private letter ruling (PLR)
request and a supplemental information letter to the IRS to
clarify the application of certain section 382 change of
ownership rules. Section 382 of the Code imposes an annual
limitation 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. On
November 15, 2010, the Company received a PLR from the IRS.
The PLR is generally consistent with the Companys
previously stated tax position that the Company is able to
offset a portion of our 2010 taxable income with the
Companys full net operating loss carryforwards. Total net
operating loss carryforwards were $123.7 million as of
December 31, 2008. As of December 31, 2009, total net
operating loss carryforwards were $155.8 million. The
Company believes that the PLR received from the IRS clarifies
certain tax rules regarding the use of these net operating loss
carryforwards and will support the Companys position that
its December 31, 2009 net operating loss carryforwards
can be fully utilized beginning in 2010.
As of December 31, 2009, the Company had
$155.8 million and $5.7 million of federal and state
net operating losses and research and development credits,
respectively. During the year ended December 31, 2010, the
Company utilized all of its federal and state net operating
losses and a portion of its research and development credits. At
December 31, 2010, the Company had research and development
credits and orphan drug credits remaining of $2.6 million
and $3.0 million, respectively. These credits have various
expiration dates, the oldest of which will begin to expire in
2024.
The Companys income tax returns have not been under
examination by any federal or state tax jurisdictions. Since the
Company has generated net operating losses from inception
through December 31, 2009, all income tax returns filed by
the Company are subject to examination by the taxing
jurisdictions.
The Company adopted
ASC 740-10
on December 31, 2008. As of December 31, 2009 and
2010, the Company has no known uncertain tax positions.
The valuation allowance activity on deferred tax assets was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance At
|
|
|
Additions Charged
|
|
|
Reductions Credited
|
|
|
|
|
|
|
Beginning of
|
|
|
To Income Tax
|
|
|
To Income Tax
|
|
|
Balance At End
|
|
(In thousands)
|
|
Period
|
|
|
Expense
|
|
|
Expense
|
|
|
Of Period
|
|
|
Calendar year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
71,623
|
|
|
$
|
22,364
|
|
|
$
|
|
|
|
$
|
93,987
|
|
December 31, 2009
|
|
$
|
93,987
|
|
|
$
|
11,790
|
|
|
$
|
|
|
|
$
|
105,777
|
|
December 31, 2010
|
|
$
|
105,777
|
|
|
$
|
67,336
|
|
|
$
|
69,652
|
|
|
$
|
103,461
|
|
|
|
12.
|
Fair
Value Measurements
|
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 of December 31, 2010, the Company held certain assets
that are required to be measured at fair value on a recurring
basis.
82
Vanda
Pharmaceuticals Inc.
Notes to
the Consolidated Financial
Statements (Continued)