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, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 000-51863
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
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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Securities registered pursuant to Section 12(g) of the
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
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 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 o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the 23,614,084 shares of
Common Stock held by non-affiliates of the registrant (based on
the closing price of the registrants Common Stock on the
last business day of the registrants most recently
completed second fiscal quarter) was $478,421,342.
The number of shares of the registrants Common Stock, par
value $0.001 per share, outstanding as of March 7, 2008 was
26,652,728.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2008
Annual Meeting of Stockholders to be held on May 8, 2008,
which Proxy Statement is to be filed within 120 days after
the end of the registrants fiscal year ended
December 31, 2007, are incorporated by reference in
Part III of this annual report on
Form 10-K.
Vanda
Pharmaceuticals Inc.
Form 10-K
Table of Contents
1
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this report are forward-looking
statements under the securities laws. Words such as, but
not limited to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, and similar expressions or words, identify
forward-looking statements. Forward-looking statements are based
upon current expectations that involve risks, changes in
circumstances, assumptions and uncertainties. Vanda
Pharmaceuticals Inc. (Vanda or the Company) is at an early stage
of development and may not ever have any products that generate
significant revenue. 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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delays in the completion of our clinical trials;
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a failure of our product candidates to be demonstrably safe and
effective;
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our failure to obtain regulatory approval for our products or to
comply with ongoing regulatory requirements;
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a lack of acceptance of our product candidates in the
marketplace, or a failure to become or remain profitable;
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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 product
candidates;
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our failure to develop or obtain sales, marketing and
distribution resources and expertise or to otherwise manage our
growth;
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a loss of any of our key scientists or management personnel;
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losses incurred from product liability claims made against
us; and
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a loss of rights to develop and commercialize our products 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 this annual report
on
Form 10-K,
entitled Risk Factors, which contains a more
complete discussion of the risks and uncertainties associated
with our business. In addition to the risks described above and
in Item 1A of this report, other unknown or unpredictable
factors also could affect our results. There can be no assurance
that the actual results or developments anticipated by us will
be realized or, even if substantially realized, that they will
have the expected consequences to, or effects on, us. Therefore,
no assurance can be given that the outcomes stated in such
forward-looking statements and estimates will be achieved.
2
Overview
We are a biopharmaceutical company focused on the development
and commercialization of clinical-stage drug candidates for
central nervous system disorders, with exclusive worldwide
commercial rights to three product candidates in clinical
development. We believe that each of our product candidates 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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Fiaptatm
(iloperidone), a compound for the treatment of schizophrenia and
bipolar disorder. On November 27, 2007 the United States
Food and Drug Administration (FDA) accepted a New Drug
Application (NDA) for
Fiaptatm
for the treatment of schizophrenia. Acceptance of the NDA
confirms that the application is sufficiently complete for FDA
review. We expect a decision on the application on the
Prescription Drug User Fee Act (PDUFA) action date of or about
July 27, 2008, although the FDA may not meet, or may
extend, the PDUFA action date.
Fiaptatm
is also ready to begin Phase III trials for the treatment
of bipolar disorder. We also plan to develop further an extended
release injectable formulation for
Fiaptatm
to address the patient compliance issues typically associated
with antipsychotic therapies.
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VEC-162, a compound for the treatment of sleep and mood
disorders. VEC-162 has demonstrated positive top-line results
from a Phase III trial in transient insomnia. In November
2007 we initiated, and in February 2008 we completed, enrollment
in a Phase III trial of VEC-162 for the treatment of
chronic primary insomnia. We expect to complete the trial and to
report its top-line results in June 2008. We will have to
conduct additional trials prior to our filing of an NDA for
VEC-162. VEC-162 is also ready for Phase II trials for the
treatment of depression.
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VSF-173, a compound for the treatment of excessive sleepiness.
VSF-173 is in a Phase II program. On October 30, 2007
we reported the top-line results of our first Phase II
clinical trial of VSF-173 for the treatment of excessive
sleepiness. We will have to conduct additional Phase II
trials for this product candidate in order to further its
development.
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We hold exclusive, worldwide rights to the above compounds and,
assuming successful outcomes of our clinical trials and approval
by the FDA, we expect to commercialize
Fiaptatm
and VSF-173 with our own sales force in the U.S., and to seek
partners for commercialization of these compounds outside of the
United States. Given the large size of the prescribing
physician base for sleep and mood disorders, we plan to partner
with a global pharmaceutical company for the development and
commercialization of VEC-162 worldwide, although we have not yet
identified such a partner.
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 AG (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.
Our three product candidates target large prescription markets
with significant unmet medical needs. Sales of antipsychotic
drugs were approximately $15 billion in 2006, according to
World Review Analyst by IMS, a leading pharmaceutical market
research company. These sales were achieved despite the safety
concerns, moderate efficacy and poor patient compliance that are
associated with these drugs. We believe that
Fiaptatm
may address some of the shortcomings of currently available
drugs, based on its observed safety profile and the extended
release injectable formulation for
Fiaptatm
that we plan to develop further. According to IMS, in 2006,
sales of insomnia drugs generated more than $4 billion in
worldwide sales and worldwide sales of anti-depressants exceeded
$19 billion. However, approved drugs in both the sleep and
mood disorders markets have
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sub-optimal safety and efficacy profiles. We believe VEC-162 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. The treatment of excessive sleepiness
is a rapidly growing market which generated worldwide sales of
approximately $800 million in 2006. Few drugs exist to
treat this condition, and each of the available drugs has
limitations. We believe that VSF-173 may represent a safe and
effective alternative treatment in this growing market.
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 current product candidates. On
November 27, 2007 the FDA officially accepted the NDA for
FiaptaTM
for the treatment of schizophrenia. We have also successfully
completed a Phase III trial of VEC-162, although we will
need to conduct additional Phase III trials of VEC-162 in
chronic sleep disorders prior to filing an NDA for this
compound. In November 2007 we initiated, and in February 2008 we
completed, enrollment in a Phase III trial of VEC-162 in
chronic primary insomnia. We have committed, and will continue
to commit, substantial resources towards completing the
development of, and obtaining regulatory approvals for, our
product candidates.
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Develop a focused commercialization capability in the United
States. Because we believe that the number of
physicians accounting for the majority of prescriptions in the
U.S. for schizophrenia and excessive sleepiness is
relatively small, we believe that we can cost-effectively
develop our own sales force to market and sell
FiaptaTM
and VSF-173.
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Enter into partnerships to extend our commercial
reach. Given the large number of physicians
treating sleep and mood disorders, we intend to enter into a
global partnership with a large pharmaceutical company to
market, distribute and sell VEC-162. Additionally, we intend to
seek commercial partners for
FiaptaTM
and VSF-173 outside of the United States.
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Apply our pharmacogenetics and pharmacogenomics expertise to
differentiate our products. We believe that our
pharmacogenetics and pharmacogenomics expertise will yield new
insights into our product candidates. These insights may enable
us to target our products to certain patient populations and to
identify unexpected conditions for our product candidates to
treat. We believe this expertise will enable us to differentiate
and extend the lifecycle of each of our product candidates. Our
expertise may allow us to develop companion diagnostic tests to
help physicians identify patient populations that will realize
greater benefits from our compounds. Our NDA for
FiaptaTM
contains pharmacogenetic data aimed to further improve the
benefit/risk profile of
FiaptaTM
in the treatment of patients with schizophrenia.
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Expand our product portfolio through the identification and
acquisition of additional compounds. We intend to
continue to draw upon our clinical development expertise and
pharmacogenetics and pharmacogenomics expertise to identify and
pursue additional clinical-stage compounds.
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Development
programs
We have the following product candidates in clinical development:
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Product Candidate
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Target Indications
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Clinical Status
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Fiaptatm
(Oral)
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Schizophrenia
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NDA accepted by the FDA in November 2007
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Bipolar Disorder
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Ready for Phase III trial
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Fiaptatm
(Injectible)
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Schizophrenia
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Ready for Phase II trial
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VEC-162
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Insomnia
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Phase III trial for transient insomnia completed in 2006
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Phase III trial for chronic insomnia initiated in November
2007
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Depression
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Ready for Phase II trial
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VSF-173
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Excessive Sleepiness
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Initial Phase II trial completed in 2007
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Fiaptatm
We are developing
Fiaptatm
(iloperidone), a compound for the treatment of schizophrenia and
bipolar disorder. The FDA accepted our NDA for
Fiaptatm
for the treatment of schizophrenia on November 27, 2007 and
we expect the decision on our NDA on the Prescription Drug User
Fee Act (PDUFA) action date of or about July 27, 2008,
although the FDA may not meet, or may extend, the PDUFA action
date. The application includes data from 35 clinical trials and
more than 3,000 patients treated with
Fiaptatm
and also contains pharmacogenetic data aimed to further improve
the benefit/risk profile of
Fiaptatm
in the treatment of patients with schizophrenia.
Therapeutic
opportunity
Schizophrenia is a chronic, debilitating mental disorder
characterized by hallucinations, delusions, racing thoughts and
other psychotic symptoms (collectively referred to as
positive symptoms), as well as moodiness, anhedonia
(inability to feel pleasure), loss of interest, eating
disturbances and withdrawal (collectively referred to as
negative symptoms), and additionally attention and
memory deficits (collectively referred to as cognitive
symptoms). Schizophrenia develops in late adolescence or
early adulthood in approximately 1% of the worlds
population. Most schizophrenia patients today are treated with
drugs known as atypical antipsychotics, which were
first approved in the U.S. in the late 1980s. These
antipsychotics have been named atypical for their
ability to treat a broader range of negative symptoms than the
first-generation typical antipsychotics, which were
introduced in the 1950s and are now generic. Atypical
antipsychotics are generally regarded as having improved side
effect profiles and efficacy relative to typical antipsychotics
and currently comprise 90% of schizophrenia prescriptions. The
global market for atypical antipsychotics was in excess of
$15 billion in 2006, according to IMS. Currently approved
atypical antipsychotics include olanzapine
(Zyprexa®)
by Eli Lilly and Company, risperidone
(Risperdal®)
and paliperidone
(Invega®),
each by
Ortho-McNeil-Janssen
Pharmaceuticals, Inc., quetiapine
(Seroquel®)
by AstraZeneca, aripiprazole
(Abilify®)
by Bristol-Myers Squibb (BMS), ziprasidone
(Geodon®)
by Pfizer, and generic clozapine.
Limitations
of current treatments
The treatment of schizophrenia remains challenging because
currently approved antipsychotics, even atypical antipsychotics,
often induce serious side effects and offer only modest and
occasional efficacy. Side effects include weight gain, diabetes,
extrapyramidal symptoms (involuntary bodily movements),
hyperprolactinemia (an elevated secretion of the hormone
prolactin which can lead to sexual dysfunction and breast
development and milk secretion in women and men), increased
somnolence (sleepiness) and cognition difficulties. The
side-effect profile and modest efficacy of currently available
antipsychotics result in poor patient compliance with prescribed
drug regimens. Consequently, there remains a high degree of
dissatisfaction with atypical antipsychotics among physicians
and patients. Research by LEK Consulting LLC (LEK Consulting), a
leading consulting firm, supports this, showing that physicians
employ a
trial-and-error
approach of prescribing a series
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of different atypical antipsychotics as they attempt to balance
side effects and symptom management in each patient. In
addition, the recent Clinical Antipsychotic Trials of
Interventional Effectiveness (CATIE) study, conducted by the
National Institute of Mental Health and reported in The New
England Journal of Medicine, found that 74% of patients
taking antipsychotics discontinued treatment within
18 months. The average time to discontinuation for these
patients in the CATIE study was approximately 6 months.
Potential
advantages of
Fiaptatm
Fiaptatm
may offer several advantages over existing therapies.
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Efficacy and safety. In a complete program of
Phase II and Phase III trials comprising more than
3,000 patients,
Fiaptatm
showed efficacy equivalent to other atypical antipsychotics, as
well as a reduced risk of the side effects most associated with
atypical antipsychotics, including low weight gain, no induction
of diabetes, low extrapyramidal symptoms, including no akathisia
(inability to sit still), no hyperprolactinemia, low incidence
of sleepiness and low negative effects on cognition relative to
placebo. Like other atypical antipsychotics,
Fiaptatm
is associated with a prolongation of the hearts QTc
interval, but in no instance did any patient taking
Fiaptatm
in the controlled portion of a clinical trial have an interval
exceeding a 500-millisecond threshold that the FDA has
identified as being of particular concern. Two patients
experienced a prolongation of 500 milliseconds or more during
the open-label extension of one trial. We believe that the
safety profile of
Fiaptatm
may result in improved patient compliance with their treatment
regimen.
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Extended-release injectable formulation. We
are developing an extended-release injectable formulation for
Fiaptatm,
which is administered once every four weeks and which we believe
will be a compelling complement to our 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. We believe we will need to
conduct additional trials with this formulation to be able to
file for FDA approval. The commercial potential for our
extended-release injectable formulation has been demonstrated by
the success of the injectable formulation for risperidone,
Risperdal®
Consta®,
which achieved worldwide sales of approximately
$900 million in 2006, according to IMS. We believe that our
four-week formulation for
Fiaptatm
will be an attractive alternative to
Risperdal®
Consta®,
which is required to be injected once every two weeks.
Additionally, and unlike
Risperdal®
Consta®,
we do not believe that the injectable formulation for
Fiaptatm
will require oral titration, which would result in simplified
dosing.
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Additionally, we plan to continue to apply our pharmacogenetics
and pharmacogenomics expertise to develop tools that may allow
physicians to avoid the
trial-and-error
approach to prescribing antipsychotic medications for their
patients.
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Pharmacogenetic evaluation of
Fiaptatms
efficacy. Based on the results of our most recent
Phase III trial, as well as analyses of prior clinical data
for
Fiaptatm,
we have determined that certain patients may be more likely to
respond to
Fiaptatm
and to enjoy better treatment results relative to the general
schizophrenia patient population. These patients have a common
mutation of a gene, linked to central nervous system function,
that is estimated to occur in approximately 70% of schizophrenia
patients. We developed a genetic test which we used in our
recently completed Phase III trial and confirmed this
correlation. According to market research conducted by LEK
Consulting, physicians treating schizophrenia patients would
enthusiastically welcome a genetic test that would enable them
to identify likely responders to
Fiaptatm,
given the unpredictable efficacy and serious side effects
currently associated with atypical antipsychotics, and be more
likely to prescribe
Fiaptatm
as a result.
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Pharmacogenetic evaluation of
Fiaptatms
safety. Based on the results of our most recent
Phase III trial, and other pharmacogenetic analysis, we
have discovered that patients with an uncommon mutation of a
well understood gene affecting drug metabolism experience higher
levels of
Fiaptatm
in their blood and may experience longer QTc intervals while
taking
Fiaptatm.
We estimate that this genetic attribute is found in
approximately
25-30% of
schizophrenia patients, comprised of poor metabolizers
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(approximately 5-10% of schizophrenia patients) and intermediate
metabolizers (approximately 20% of schizophrenia patients). We
believe that certain physicians may choose to test patients for
this mutation if they have a concern about QTc interval
prolongation with respect to a particular patient.
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Potential
indication for bipolar disorder
In addition to schizophrenia, we believe
Fiaptatm
may be effective in treating bipolar disorder. All of the
approved atypical antipsychotics have received approval for
bipolar disorder subsequent to commercializing for the treatment
of schizophrenia. Approximately 20% of antipsychotic
prescriptions are for the treatment of bipolar disorder,
according to LEK Consulting.
Fiaptatm
is ready for an initial Phase III trial in bipolar disorder.
Intellectual
property
Fiaptatm
and its metabolites, formulations, genetic markers and uses are
covered by a total of nineteen patent and patent application
families worldwide. The primary new chemical entity patent
covering
Fiaptatm
expires normally in 2011 in the United States and 2010 in most
of the major markets in Europe. In the United States, the
Hatch-Waxman Act of 1984 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
Fiaptatm
will qualify for the full five-year patent term extension. In
Europe, similar legislative enactments provide for five-year
extensions of new chemical entity patents through the granting
of Supplementary Protection Certificates, and we believe that
Fiaptatm
will qualify for this extension as well. Consequently, assuming
that we are granted all available extensions by the FDA and
European regulatory authorities and that we receive regulatory
approval, we expect that our rights to commercialize
Fiaptatm
will be exclusive until 2016 in the United States and until 2015
in Europe. Additionally, the patent application covering the
depot formulation for
Fiaptatm,
if it is granted, will expire normally in 2022. Several other
patent applications covering metabolites, uses, formulations and
genetic markers relating to
Fiaptatm
extend beyond 2020. Pursuant to a European Union directive, we
may also acquire market exclusivity (sometimes referred to as,
data exclusivity) in most European Union countries
for
Fiaptatm
for a period of 10 years from the date of its regulatory
approval in Europe (with the possibility for a further one-year
extension), even though the European patents covering
Fiaptatm
will likely expire prior to the end of such
10-year
period. No generic versions of
Fiaptatm
would be permitted to be marketed or sold during this
10-year
period in most European countries.
We acquired worldwide, exclusive rights to the new chemical
entity patent covering
Fiaptatm
and certain related intellectual property from Novartis under a
sublicense agreement we entered into in 2004. Please see
License agreements below for a more complete
description of the rights we acquired from Novartis with respect
to
Fiaptatm.
VEC-162
VEC-162 is an oral compound in development for sleep and mood
disorders. 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 VEC-162 in transient
insomnia in November 2006. In February 2008 we completed an
enrollment of our Phase III trial of VEC-162 in chronic
insomnia and we expect to announce top-line results of this
trial in June 2008. VEC-162 is also ready to commence a
Phase II trial for the treatment of depression.
Therapeutic
opportunity
Industry sources estimate that of the 73 million
U.S. adults who suffer from some form of insomnia, only
approximately 11 million currently receive treatment. Sleep
disorders are segmented into three major categories: primary
insomnia, secondary insomnia and circadian rhythm sleep
disorders. Insomnia is a
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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). Circadian rhythm sleep disorders result 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 circadian rhythm
sleep disorders include transient disorders such as jet lag and
chronic disorders such as shift work sleep disorder. Market
research we have conducted with LEK Consulting indicates that
circadian rhythm sleep disorders represent a significant portion
of the market for sleep disorders. In 2006, the sleep disorder
drug market generated approximately $4.5 billion in
worldwide sales, according to IMS.
There are a number of drugs approved and prescribed for patients
with sleep disorders. The most commonly prescribed drugs are
hypnotics, such as zolpidem
(Ambien®,
sanofi-aventis), eszopiclone
(Lunesta®,
Sepracor, Inc.) and zaleplon
(Sonata®,
King Pharmaceuticals, Inc.). Hypnotics work by acting upon a set
of brain receptors known as GABA receptors, which are separate
and distinct from the melatonin receptors to which VEC-162
binds. Several drugs in development, including indiplon
(Neurocrine Biosciences), also utilize a mechanism of action
involving binding to GABA receptors. Members of the
benzodiazapine class of sedatives are also approved for
insomnia, but their usage has declined due to an inferior safety
profile compared to hypnotics. Anecdotal evidence also suggests
that sedative antidepressants, such as trazodone and doxepin,
are prescribed off-label for insomnia. The FDA approved drugs
for treatment of insomnia also include ramelteon
(Rozeremtm,
Takeda Pharmaceuticals Company Limited), a compound with a
mechanism of action similar to VEC-162.
Limitations
of current treatments
We believe that each of the drugs used to treat insomnia has
inherent limitations that leave patients underserved. The key
limitations include the potential for abuse, significant side
effects, and a failure to address the underlying causes of
sleeplessness:
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Many of the products prescribed commonly for sleep disorders,
including
Ambien®,
Lunesta®,
and
Sonata®,
are classified as Schedule IV controlled substances by the
United States Drug Enforcement Administration (DEA) due to their
potential for abuse, tolerance and withdrawal symptoms. Drugs
that are classified as Schedule IV controlled substances
are subject to restrictions on how such drugs are prescribed and
dispensed.
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Many drugs approved for and used in sleep disorders also induce
a number of nuisance side effects beyond the more serious abuse
and addiction effects associated with most approved products.
These side effects include
next-day
grogginess, memory loss, unpleasant taste, dry mouth and
hormonal changes.
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We believe that none of the drugs used and approved for sleep,
other than
Rozeremtm,
work through the bodys natural sleep/wake cycle, which is
governed by melatonin. We believe that, for patients whose sleep
disruption is due to a misalignment of this sleep/wake cycle and
these patients need to sleep (as is the case in circadian
rhythm sleep disorders), 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 VEC-162
We believe that VEC-162 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 VEC-162 is unlikely to be
scheduled as a controlled substance by the DEA because
Rozeremtm,
which has a similar mechanism of action to VEC-162, 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
VEC-162 may offer superior sleep
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maintenance to
Rozeremtm.
VEC-162 also appears to be safe and well-tolerated, with no
significant side effects or effects on
next-day
performance. For patients with circadian rhythm disorders,
VEC-162 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 VEC-162 in transient insomnia with 37
healthy participants, VEC-162 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 VEC-162
dosed 30 minutes before bedtime at 20, 50 and 100 milligrams
versus placebo.
VEC-162 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 VEC-162 will compare
favorably to efficacy achieved by currently approved insomnia
drugs, not only for circadian rhythm sleep disorders but also
for other types of insomnia. The Phase III trial also
demonstrated that VEC-162 was safe and well-tolerated, with no
significant side effects versus placebo and no impairment of
next-day
performance or mood.
In November 2007 we initiated, and in February 2008 we
completed, the enrollment for a Phase III clinical trial to
evaluate the safety and efficacy of VEC-162 for the treatment of
chronic primary insomnia. The trial is a randomized,
double-blind, placebo-controlled study with 324 patients.
The trial examines
VEC-162 at
20 and 50 milligrams versus placebo over a period of
35 days. The trial measures time to fall asleep and sleep
maintenance, as well as
next-day
performance. We expect to report the top-line results of this
trial in June 2008. We will need to conduct additional
Phase III trials of VEC-162 for the treatment of chronic
sleep disorders to receive FDA approval of VEC-162 for the
treatment of insomnia.
Potential
indication for depression
We believe that VEC-162 may also be effective in treating
depression. Agomelatine, another drug that acts on the
brains melatonin receptors, has demonstrated efficacy and
safety in the treatment of depression that compared favorably to
an approved antidepressant,
Paxil®
(paroxetine, GSK), in a Phase III trial. While the precise
mechanism for the effect of drugs like VEC-162, 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.
Of the approximately 29 million adults in the United States
who suffer from some form of depression, over 11 million
are currently treated with a prescription antidepressant
medication. Sales of antidepressants exceeded $19 billion
globally in 2006, according to IMS.
We believe that VEC-162 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, VEC-162 may, with its similar properties to
agomelatine, offer a more rapid onset of action than approved
antidepressants. We believe that VEC-162 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.
VEC-162 is ready for Phase II trials in depression. It has
demonstrated an antidepressant effect in animal models and has
completed several Phase I trials, including one with four weeks
of exposure, showing none of the serious side effects associated
with the approved antidepressants.
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Intellectual
property
VEC-162 and its formulations and uses are covered by a total of
twelve patent and patent application families worldwide. The
primary new chemical entity patent covering VEC-162 expires
normally in 2017 in the United States and in most European
markets. We believe that, like
Fiaptatm,
VEC-162 will meet the various criteria of the Hatch-Waxman Act
and will receive five additional years of patent protection in
the United States, which would extend its patent protection in
the United States until 2022. In Europe, similar legislative
enactments provide for five-year extensions of European new
chemical entity patents through the granting of Supplementary
Protection Certificates, and we believe that VEC-162 will
qualify for such an extension, which would extend European
patent protection for VEC-162 until 2022. Several other patent
applications covering uses of VEC-162 will, if granted, provide
exclusive rights for these uses until 2026.
Our rights to the new chemical entity patent covering VEC-162
and related intellectual property have been acquired through a
license with BMS. Please see License agreements
below for a discussion of this license.
VSF-173
VSF-173 is an oral compound that has demonstrated effects on
animal sleep/wake patterns and gene expression suggestive of a
stimulant effect. In a recently completed Phase II trial of
VSF-173 in excessive sleepiness, the compound demonstrated
improvement compared to placebo on the Maintenance of
Wakefulness Test (MWT) and dose-dependent, statistically
significant improvements versus placebo on a number of secondary
endpoints taken in the recovery sleep period after dosing,
including number of awakenings, and sleep efficiency and wake
after sleep onset in the first third of the recovery sleep
period. We will have to conduct additional Phase II trials
of VSF-173 in order to further its development. Excessive
sleepiness is a rapidly growing market which generated worldwide
sales of approximately $800 million in 2006 according to
IMS and is currently treated primarily by
Provigil®
(Cephalon).
Pharmacogenetics
and pharmacogenomics expertise
Our expertise in pharmacogenetics and pharmacogenomics provides
us with access to high quality, patent-protected clinical
compounds that have been discovered and developed by other
pharmaceutical firms. We can capitalize on the discovery and
early development efforts of other firms by acquiring compounds
with clinical safety and possibly efficacy data that we believe
can benefit from our extensive pharmacogenetics and
pharmacogenomics expertise.
Pharmacogenetics and pharmacogenomics start from the premise
that a given drug will not just affect the target/receptor for
which it was initially developed, but will in fact interact with
many systems within the body. Proof of this comes from two
different sources. We know, for instance, that most drugs have
side effects. These typically result from a drugs
interaction not just with its intended receptor in its intended
organ system, but also with either that receptor outside the
intended organ system or with other receptors entirely. There
are many examples of drugs that were developed initially for one
indication but were then shown to be effective for another. One
example of this is
Viagra®
(sildenafil, Pfizer), which was developed initially for
hypertension (high blood pressure) but proved more effective for
erectile dysfunction. Being compound-focused enables us to
forego costly drug discovery work and start with compounds
already known to be safe and to interact with at least one
biological system.
Starting with safe compounds, ones that have completed at least
Phase I safety trials, we use our pharmacogenetics and
pharmacogenomics expertise to understand the disease or diseases
for which the drug has the optimal biological (and clinical)
effect. We have used this expertise to identify potential points
of differentiation for
Fiaptatm
and VSF-173. Beyond these two compounds, we have already
identified a number of unexpected signaling pathways
attributable to known compounds using these techniques, and we
have filed a number of patent applications based on these
findings. For each compound, we may choose to confirm our
findings in animal studies. Compounds clearing this hurdle will
be ready for Phase II trials.
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Compounds that we would most likely consider attractive
candidates for applying our expertise would meet the following
criteria:
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were initially developed by an established biopharmaceutical
company
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have already completed Phase I trials
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are free of significant formulation issues
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have potential for strong patent protection through composition
of matter patents, new doses or new formulations
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License
agreements
Our rights to develop and commercialize our clinical-stage
product candidates are subject to the terms and conditions of
licenses granted to us by other pharmaceutical companies.
Fiaptatm
We acquired exclusive worldwide rights to patents for
Fiaptatm
(iloperidone) through a sublicense agreement with Novartis. A
predecessor company of sanofi-aventis, Hoechst Marion Roussel,
Inc. (HMRI), discovered iloperidone and completed early clinical
work on the compound. In 1996, following a review of its product
portfolio, HMRI licensed its rights to the iloperidone patents
to Titan Pharmaceuticals, Inc. (Titan) on an exclusive basis. In
1997, soon after it had acquired its rights, Titan sublicensed
its rights to iloperidone on an exclusive basis to Novartis. In
June 2004 we acquired exclusive worldwide rights to these
patents to develop and commercialize iloperidone through a
sublicense agreement with Novartis. In partial consideration for
this sublicense, we paid Novartis an initial license fee of
$500,000 and are obligated to make future milestone payments to
Novartis of less than $100 million in the aggregate (the
majority of which are tied to sales milestones), as well as
royalty payments to Novartis at a rate which, as a percentage of
net sales, is in the mid-twenties. In November 2007 we met a
milestone under this license agreement relating to the
acceptance of our filing of the NDA for
Fiaptatm
for the treatment of schizophrenia and made a license payment of
$5 million to Novartis.
Our rights with respect to the patents to develop and
commercialize
Fiaptatm
may terminate, in whole or in part, if we fail to meet certain
development or commercialization milestones relating to the time
it takes for us to launch
Fiaptatm
commercially following regulatory approval, and the time it
takes for us to receive regulatory approval following our
submission of an NDA or equivalent foreign filing. Additionally,
our rights may terminate in whole or in part if we do not meet
certain other obligations under our sublicense agreement to make
royalty and milestone payments, if we fail to comply with
requirements in our sublicense agreement regarding our financial
condition, or if we do not abide by certain restrictions in our
sublicense agreement regarding other development activities.
VEC-162
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 VEC-162. In
partial consideration for the license, we paid BMS an initial
license fee of $500,000. We are also obligated to make future
milestone payments to BMS of less than $40 million in the
aggregate (the majority of which are tied to sales milestones)
as well as royalty payments based on the net sales of VEC-162 at
a rate which, as a percentage of net sales, is in the low teens.
We made a milestone payment to BMS of $1,000,000 under this
license agreement in 2006 relating to the initiation of our
first Phase III clinical trial for VEC-162. 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 VEC-162 to use our commercially reasonable
efforts to develop and commercialize VEC-162 and to meet certain
milestones in initiating and completing certain clinical work.
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BMS holds certain rights with respect to VEC-162 in the license
agreement. If we have not agreed to one or more partnering
arrangements to develop and commercialize VEC-162 in certain
significant markets with one or more third parties after the
completion of the Phase III program, BMS has the option to
exclusively develop and commercialize VEC-162 on its own on
pre-determined financial terms, including milestone and royalty
payments. If we seek a co-promotion agreement for VEC-162, BMS
has a right of first negotiation to enter into such an agreement
with us.
Either party may terminate the VEC-162 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 VEC-162 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.
VSF-173
In June 2004 we entered into a license agreement with Novartis
under which we received an exclusive worldwide license to
develop and commercialize VSF-173. In consideration for the
license, we paid Novartis an initial license fee of $500,000. We
are also obligated to make future milestone payments to Novartis
of less than $50 million in the aggregate (the majority of
which are tied to sales milestones) and royalty payments at
rates which, as a percentage of net sales, range from the
low-to-mid teens. In March 2007 we met our first milestone under
this license agreement relating to the initiation of the
Phase II clinical trial for VSF-173, and recorded a license
fee expense of $1,000,000.
Novartis has the right to co-develop and exclusively
commercialize VSF-173 on its own after the completion of
Phase II and Phase III programs in exchange for
certain milestones and royalty payments. In the event that
Novartis chooses not to exercise either of these options and we
decide to enter into a partnering arrangement to commercialize
VSF-173, Novartis has a right of first refusal to negotiate such
an agreement with us, as well as a right to submit a last
matching counteroffer regarding such an agreement. In addition,
the rights with respect to VSF-173 may terminate, in whole or in
part, if we fail to meet certain development and
commercialization milestones described in the license agreement
relating to the time it takes us to complete the development
work on VSF-173. These rights may also terminate in whole or in
part if we fail to make royalty or milestone payments or if we
do not comply with requirements in the license agreement
regarding our financial condition. In the event of an early
termination of the license agreement, all rights licensed and
developed by us under this agreement may revert back to Novartis.
Government
regulation
Government authorities in the United States, 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
product candidates. All of our products 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
In the United States, 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.
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The steps required before a drug may be marketed in the United
States 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 product 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 product 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
product. Violation of the FDAs cGLP regulations can, in
some cases, lead to invalidation of the studies, requiring these
studies to be replicated. In the United States, 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 United States. An IND becomes
effective 30 days after receipt by the FDA unless before
that time the FDA raises concerns or questions about issues such
as the proposed clinical trials outlined in the IND. In that
case, the IND sponsor and the FDA must resolve any outstanding
FDA concerns or questions before clinical trials can proceed. If
these concerns or questions are unresolved, the FDA may not
allow the clinical trials to commence.
Pilot studies generally are conducted in a limited patient
population, approximately three to 25 subjects, to determine
whether the product candidate warrants further clinical trials
based on preliminary indications of efficacy. These pilot
studies may be performed in the United States after an IND has
become effective or outside of the United States prior to the
filing of an IND in the United States in accordance with
government regulations and institutional procedures.
Clinical trials involve the administration of the
investigational product candidate 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 product candidates
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 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 United States 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 product candidate 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 product 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 candidate.
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
product, to the FDA, in the form of an NDA, requesting approval
to market the product 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 product is safe and effective for its intended use.
Before approving an NDA, the FDA will inspect the facility or
facilities where the product 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.
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.
Furthermore, the FDA may prevent a drug developer from marketing
a product 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 product.
After approval, some types of changes to the approved product,
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 with in countries outside the United States.
If the FDA approves the new drug application, the drug becomes
available for physicians to prescribe in the United States.
After approval, we will 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 will also be 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,
14
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 products 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 compound 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 drug and its
acceptance in the medical community.
We use, and will continue to use, third-party manufacturers to
produce our products 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. Also, new
government requirements may be established that could delay or
prevent regulatory approval of our products under development.
Foreign
regulation
Whether or not we obtain FDA approval for a product, we must
obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing of the product in those countries. The
approval process varies from country to country, and the time
may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement also vary greatly
from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States
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 products 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 United States. We face the risk that
the resulting prices would be insufficient to generate an
acceptable return to us or our collaborators.
Third-party
reimbursement and pricing controls
In the United States 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 to
go through the process of seeking reimbursement from Medicare
and private payors. Our products may not be considered
cost-effective, and coverage and reimbursement may not be
available or sufficient to allow us to sell our products 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 products.
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In many foreign markets, including the countries in the European
Union and Japan, pricing of pharmaceutical products is subject
to governmental control. In the United States, 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
We expect to increase our pre-launch commercial activities
relating to
Fiaptatm,
and we expect to start marketing
Fiaptatm
commercially in early 2009. However, the time it takes to
receive cash inflows from the sale of
Fiaptatm
is highly dependent on facts and circumstances that we may not
be able to control and are subject to a number of risks. We
currently have limited sales, marketing or distribution
capabilities. However, we plan to continue developing these
capabilities internally to the extent that it is practical to do
so, and enter into partnering arrangements to the extent that we
believe large sales and marketing forces will be necessary. More
specifically, in the United States, we expect to build our own
sales force to market
Fiaptatm
and VSF-173
directly to psychiatrists and other target physicians. Because
we believe that the number of physicians that would generate the
majority of prescriptions for
Fiaptatm
and VSF-173 is relatively small, we believe that we can
cost-effectively develop our own sales force to market and sell
Fiaptatm
and VSF-173. Outside of the U.S., we intend to find commercial
partners for
Fiaptatm
and VSF-173. We will seek a global commercial partner for
VEC-162.
Patents
and proprietary rights; Hatch-Waxman protection
We will be able to protect our products from unauthorized use by
third parties only to the extent that our products are covered
by valid and enforceable patents, either licensed in from third
parties or generated internally, that give us sufficient
proprietary rights. Accordingly, patents and other proprietary
rights are essential elements of our business.
Our three current compounds in clinical development are covered
by new chemical entity and other patents. These patents cover
the active portions of our compounds and provide patent
protection for all formulations containing these active
portions. The new chemical entity patent for iloperidone is
owned by sanofi-aventis, and other patents and patent
applications relating to iloperidone are owned by Novartis.
Novartis also owns the new chemical entity patent for VSF-173
and BMS owns the new chemical entity patent for VEC-162. For all
three compounds we have obtained exclusive worldwide rights to
develop and commercialize the compounds covered by these patents
through license and sublicense arrangements. 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 the three compounds.
The new chemical entity patent covering iloperidone expires
normally in 2011 in the United States and in 2010 in most
European markets. The new chemical entity patent covering
VEC-162 expires in 2017 in the United States and most European
markets. The new chemical entity patent covering VSF-173 expires
in 2014 in the United States and in 2012 in most European
markets. Additionally, for each of our late-stage compounds, an
additional period of exclusivity in the United States of up to
five years following the expiration of the patent covering that
compound may be obtained pursuant to the United States Drug
Price Competition and Patent Term Restoration Act of 1984, more
commonly known as the Hatch-Waxman Act. Assuming we
gain such a five-year extension and that we continue to have our
intellectual property rights under our sublicense and license
agreements, we would have exclusive new chemical entity patent
rights in the U.S. for iloperidone until 2016, for VEC-162
until 2022 and for VSF-173 until 2019. In Europe, similar
legislative enactments may allow us to obtain five-year
extensions of the European new chemical entity patents covering
our product candidates through the granting of Supplementary
Protection Certificates, which would allow us to have exclusive
European new chemical entity patent rights for iloperidone until
2015, for VEC-162 until 2022 and for VSF-173 until 2017.
Additionally, a directive in the European Union allows companies
who receive European regulatory approval for a new compound to
have a
10-year
period of market exclusivity in most
16
European countries for that compound (with the possibility of a
further one-year extension), beginning on the date of such
European regulatory approval, regardless of when the European
new chemical entity patent covering such compound expires. No
generic version of an approved drug may be marketed or sold in
most European countries during this
10-year
period. This directive may be of particular importance with
respect to iloperidone, since the European new chemical entity
patent for iloperidone will likely expire prior to the end of
this 10-year
period of market exclusivity.
Aside from the new chemical entity patents covering our current
late-stage compounds, as of December 31, 2007 we had twenty
one pending provisional patent applications in the United
States, two U.S. national stage applications under U.S.C.
371 and eight pending Patent Cooperation Treaty applications.
The claims in these various patents and patent applications are
directed to compositions of matter, including claims covering
other product candidates, pharmaceutical compositions, genetic
markers, and methods of use.
For proprietary know-how that is not appropriate for patent
protection, processes for which patents are difficult to enforce
and any other elements of our discovery process that involve
proprietary know-how and technology that is not covered by
patent applications, we 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 and expect to continue to depend on a small
number of third-party manufacturers to produce sufficient
quantities of our product candidates for use in our clinical
studies and in preparation of the commercial launch of
Fiaptatm.
We are not obligated to obtain our product candidates from any
particular third-party manufacturer and we believe that we would
be able to obtain our product candidates from a number of
third-party manufacturers at comparable cost.
If any of our product candidates are approved for commercial
use, 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 drug products 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. If
approved, our product candidates will compete with numerous
therapeutic treatments offered by these competitors. While we
believe that our product candidates 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 product
candidates or technologies obsolete or noncompetitive.
17
We believe the primary competitors for each of our product
candidates are as follows:
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For
Fiaptatm
in the treatment of schizophrenia, the atypical antipsychotics
Risperdal®
(risperidone), including the depot formulation
Risperdal®
Consta®,
and
Invega®
(paliperidone), each by
Ortho-McNeil-Janssen
Pharmaceuticals, Inc.,
Zyprexa®
(olanzapine) by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
Abilify®
(aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd.,
Geodon®
(ziprasidone) by Pfizer Inc., and generic clozapine, as well as
the typical antipsychotics haloperidol, chlorpromazine,
thioridazine, and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials (or for which an NDA has been recently filed) for the
treatment of schizophrenia include bifeprunox (Solvay
S.A./Lundbeck A/S), and asenapine (Schering-Plough Corporation)
and pimavanserin (Acadia Pharmaceuticals).
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For VEC-162 in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as trazodone and doxepin, and over-the-counter remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia (or for which an NDA has been
recently filed) include indiplon (Neurocrine Biosciences, Inc.)
and low-dose doxepin
(Silenortm)
by Somaxon Pharmaceuticals, Inc.
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For VEC-162 in the treatment of depression, antidepressants such
as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK and
Cymbalta®
(duloxetine) by Eli Lilly. In addition to the approved products,
compounds in Phase III trials for depression include
agomelatine (Novartis and Les Laboratories Servier).
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For VSF-173 in the treatment of excessive sleepiness,
Provigil®
(modafinil) and
Nuvigil®
(armodafinil) by Cephalon Inc., and
Xyrem®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
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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 products less attractive.
Employees
As of December 31, 2007 we had 50 full-time employees,
29 of whom were primarily engaged in research and development
activities. None of our employees are represented by a labor
union. We have not experienced any work stoppages and consider
our employee relations to be good.
Corporate
information
We were incorporated in Delaware in 2002. Our principal
executive offices are located at 9605 Medical Center Drive,
Suite 300, Rockville, Maryland, 20850 and our telephone
number is
(240) 599-4500.
Our website address is www.vandapharma.com.
Available
Information
Vanda Pharmaceuticals Inc. files annual, quarterly, and current
reports, proxy statements, and other documents with the
Securities and Exchange Commission (SEC) under the Securities
Exchange Act of 1934 (the Exchange Act). The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information
regarding
18
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.
Risks
related to our business and industry
Our
success is dependent on the success of our three product
candidates in clinical development:
Fiaptatm
(iloperiodone), VEC-162 and VSF-173. If any of these product
candidates are determined to be unsafe or ineffective in humans,
whether in clinical trials or commercially, our business will be
materially harmed.
Despite the positive results of our completed trials, we are
uncertain whether any of our current product candidates in
clinical development will ultimately prove to be effective and
safe in humans. Frequently, product candidates 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 any of our product
candidates, whether in clinical trials or commercially, may
reveal that the product candidate is ineffective, unacceptably
toxic, has other undesirable side effects or is otherwise not
fit for further use. If we are unable to discover and develop
products that are safe and effective, our business will be
materially harmed.
Any
failure or delay in completing clinical trials for our product
candidates could severely harm our business.
Pre-clinical studies and clinical trials required to demonstrate
the safety and efficacy of our product candidates are
time-consuming and expensive and together take several years to
complete. The completion of clinical trials for our product
candidates may be delayed by many factors, including:
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our 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 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 product candidates during clinical trials
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unforeseen safety issues or side effects
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governmental or regulatory delays and changes in regulatory
requirements and guidelines
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If we fail to complete successfully one or more clinical trials
for any of our product candidates, we may not receive the
regulatory approvals needed to market that product candidate.
Therefore, any failure or delay in commencing or completing
these clinical trials would harm our business materially.
19
We
face heavy government regulation, and FDA regulatory approval of
our products is uncertain.
The research, testing, manufacturing and marketing of drug
products such as those that we are developing are subject to
extensive regulation by federal, state and local government
authorities, including the FDA. To obtain regulatory approval of
a product, we must demonstrate to the satisfaction of the
applicable regulatory agency that, among other things, the
product is safe and effective for its intended use. In addition,
we must show that the manufacturing facilities used to produce
the products are in compliance with current Good Manufacturing
Practices regulations, or cGMP.
The process of obtaining FDA and other required regulatory
approvals and clearances will require us to expend substantial
time and capital. Despite the time and expense expended,
regulatory approval is never guaranteed. The number of
pre-clinical and clinical tests that will be required for FDA
approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for, and the
regulations applicable to that particular drug candidate. The
FDA can delay, limit or deny approval of a drug candidate for
many reasons, including that:
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a drug candidate may not be safe or effective
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the FDA may interpret data from pre-clinical and clinical
testing in different ways than we do
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the FDA may not approve our manufacturing process
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the FDA may change their approval policies or adopt new
regulations
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the FDA may not meet, or may extend, the PDUFA action date with
respect to a particular NDA
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For example, if certain of our methods for analyzing our trial
data are not approved by the FDA, we may fail to obtain
regulatory approval for our product candidates.
Moreover, if and when our products do obtain such approval or
clearances, the marketing, distribution and manufacture of such
products would remain subject to extensive ongoing regulatory
requirements. Failure to comply with applicable regulatory
requirements could result in:
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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 approvals
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withdrawal of approvals
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criminal prosecution
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Any delay or failure by us to obtain regulatory approvals for
our product candidates could diminish competitive advantages
that we may attain and would adversely affect the marketing of
our products. We have not received regulatory approval to market
any of our product candidates in any jurisdiction.
Even if we do receive regulatory approval for our drug
candidates, the FDA may impose limitations on the indicated uses
for which our products may be marketed, subsequently withdraw
approval or take other actions against us or our products that
are adverse to our business. The FDA generally approves products
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 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
20
of hazardous substances used in connection with our discovery,
research and development work. In addition, we cannot predict
the extent of government regulations or the impact of new
governmental regulations that might significantly harm the
discovery, development, production and marketing of our
products. We 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 products in foreign
jurisdictions, but we may not obtain any such
approvals.
We intend to market our products outside the United States with
one or more commercial partners. In order to market our products
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 testing,
and the time required to obtain approval may differ from that
required to obtain FDA approval. We have no experience with
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 products in any market.
The failure to obtain these approvals could harm our business
materially.
Our
product candidates 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 product candidates 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 from commercializing our product candidates and
generating revenues from their sale. For example, like many
other drugs in its class,
Fiaptatm
is associated with a prolongation of the hearts QTc
interval, which is a measurement of specific electrical activity
in the heart as captured on an electrocardiogram, corrected for
heart rate. A QTc interval that is significantly prolonged may
result in an abnormal heart rhythm with adverse consequences
including fainting, dizziness, loss of consciousness and death.
No patient in the controlled portion of any of
Fiaptatms
clinical trials was observed to have an interval that exceeded a
500-millisecond threshold of particular concern to the FDA. Two
patients experienced a prolongation of 500 milliseconds or more
during the open-label extension of one trial. We will continue
to assess the side-effect profile of
Fiaptatm
and our other product candidates in our ongoing clinical
development program.
In addition, if any of our product candidates receive marketing
approval and we or others later identify undesirable side
effects caused by the product, we 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 product
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we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product
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our reputation may suffer
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Any of these events could prevent us from achieving or
maintaining market acceptance of the affected product or could
substantially increase the costs and expenses of commercializing
the product candidate, which in turn could delay or prevent us
from generating significant revenues from its sale.
21
Our
product candidates may never achieve market acceptance even if
we obtain regulatory approvals.
Even if we receive regulatory approvals for the sale of our
product candidates, the commercial success of these products
will depend, among other things, on their acceptance by
physicians, patients, third-party payors and other members of
the medical community as a therapeutic and cost-effective
alternative to competing products and treatments. The degree of
market acceptance of any of our product candidates 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 the product
candidate, and the effectiveness of our marketing and
distribution capabilities. If our product candidates fail to
gain market acceptance, we may be unable to earn sufficient
revenue to continue our business. If our product candidates 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, we may be unable to continue operations
or we may be forced to share our rights to commercialize our
product candidates with third parties on terms that may not be
attractive to us.
Based on our current operating plans, we believe that our
existing cash, cash equivalents and marketable securities, will
be sufficient to meet our anticipated operating needs into the
fourth quarter of 2008. If
Fiaptatm
is approved by the FDA on the expected PDUFA action date of or
about July 27, 2008, the Company intends to pursue
additional financing, in part to fund additional marketing and
product launch costs. The Company believes that it would be able
to raise sufficient capital to fund the product launch and
operations into 2009. However, if the Company cannot obtain
additional financing, management has the ability and intent to
implement a reduced spending plan to fund operations at least
through the first quarter of 2009. In budgeting for our
activities, we have relied on a number of assumptions, including
assumptions that we will continue to expend funds in preparation
of a commercial launch of
Fiaptatm,
that we will complete our Phase III clinical trial of
VEC-162 for the treatment of chronic insomnia in accordance with
our expectations, that we will not engage in further
in-licensing activities, that we will not receive any proceeds
from potential partnerships, that we will not expend funds on
the bipolar indication for
Fiaptatm,
that we will not conduct additional trials for the injectable
formulation for
Fiaptatm,
that we will not conduct additional trials for VSF-173, that we
will continue to evaluate pre-clinical compounds for potential
development, that we will be able to continue the manufacturing
of our product candidates at commercially reasonable prices,
that we will be able to retain our key personnel, and that we
will not incur any significant contingent liabilities. We may
need to raise additional funds more quickly if one or more of
our assumptions proves to be incorrect, if we choose to expand
our product development efforts more rapidly than presently
anticipated, or if we seek to acquire additional product
candidates. We may also decide to raise additional funds even
before they are needed if the conditions for raising capital are
favorable.
In our capital-raising efforts, we may seek to sell additional
equity or debt securities or to obtain a bank credit facility.
The sale of additional equity or debt securities, if
convertible, could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased fixed
obligations and could also result in covenants that would
restrict our operations.
We cannot assure you that additional capital will be available
when we need it on terms that are acceptable to us, or at all.
The unavailability of financing may require us to delay, scale
back or eliminate expenditures for our research, development and
marketing activities necessary to commercialize our potential
biopharmaceutical products. If we are unable to secure
sufficient capital to fund our research and development
activities, we may not be able to continue operations or we may
have to enter into 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
we currently intend. Collaborations that are consummated by us
prior to proof-of-efficacy and safety of a product candidate
could impair our ability to realize value from that product
candidate.
22
We
have incurred operating losses in each year since our inception
and expect to continue to incur substantial and increasing
losses for the foreseeable future.
We have a limited operating history. We have not generated any
revenue from product sales to date and we cannot estimate with
precision the extent of our future losses. We do not currently
have any products that have been approved for commercial sale
and we may never generate revenue from selling products or
achieve profitability. We expect to continue to incur
substantial and increasing losses for the foreseeable future,
particularly as we increase our research, clinical development
and administrative activities. As a result, we are uncertain
when or if we will achieve profitability and, if so, whether we
will be able to sustain it. We have been engaged in identifying
and developing compounds and product candidates since March
2003. As of December 31, 2007, we have accumulated net
losses of approximately $173.9 million. Our ability to
achieve revenue and profitability is dependent on our ability to
complete the development of our product candidates, obtain
necessary regulatory approvals, and have our products
manufactured and marketed. We cannot assure you that we will be
profitable even if we successfully commercialize our products.
Failure to become and remain profitable may adversely affect the
market price of our common stock and our ability to raise
capital and continue operations.
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.
We are dependent on contract research organizations, third-party
vendors and investigators for pre-clinical testing and clinical
trials related to our drug discovery and development efforts and
we will likely continue to depend on them to assist in our
future discovery and development efforts. These parties are not
our employees and we cannot control the amount or timing of
resources that they devote to our programs. 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 and commercialization of our product candidates.
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. Their failure to
meet their obligations could adversely affect clinical
development of our 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.
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 product candidates could be delayed.
We
rely on a limited number of manufacturers for our 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.
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 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 product candidates in a
timely manner from these third parties could delay clinical
trials and prevent us from developing our product candidates in
a cost-effective manner or on a timely basis. In addition,
manufacturers of our 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 product candidates could be interrupted,
resulting in delays and additional
23
costs. In addition, if the facilities of such manufacturers do
not pass a pre-approval plant inspection, the FDA will not grant
pre-market approval of our products.
Our manufacturing strategy presents the following additional
risks:
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the manufacturing process for VSF-173 has not been tested in
quantities needed for continued clinical trials or commercial
sales, and delays in
scale-up to
commercial quantities of VEC-162 and VSF-173 could delay
clinical trials, regulatory submissions and commercialization of
these product candidates
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because most of our third-party manufacturers and formulators
are located outside of the United States, there may be
difficulties in importing our compounds or their components into
the United States 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 compounds, our
manufacturers may not be able to successfully manufacture our
compounds in a cost-effective
and/or
timely manner
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Materials
necessary to manufacture our product candidates may not be
available on commercially reasonable terms, or at all, which may
delay the development, regulatory approval and commercialization
of our product candidates.
We rely on our manufacturers to purchase from third-party
suppliers the materials necessary to produce our product
candidates for our clinical trials. Suppliers may not sell these
materials to our manufacturers at the times we 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
our manufacturers. Moreover, we currently do not have any
agreements for the commercial production of these materials. If
our manufacturers are unable to obtain these materials for our
clinical trials, product testing and potential regulatory
approval of our product candidates could be delayed,
significantly affecting our ability to develop our product
candidates. If we or our manufacturers are unable to purchase
these materials after regulatory approval has been obtained for
our product candidates, the commercial launch of our product
candidates would be delayed or there would be a shortage in
supply, which would materially affect our ability to generate
revenues from the sale of our product candidates.
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 ability to demonstrate and
maintain a competitive advantage with respect to our product
candidates and our ability to identify and develop additional
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
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undertaking pre-clinical testing and clinical trials
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obtaining FDA and other regulatory approvals of products
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manufacturing and marketing products
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These companies may invest heavily and quickly to discover and
develop novel products that could make our product candidates
obsolete. Accordingly, our competitors may succeed in obtaining
patent protection, receiving FDA approval or commercializing
superior products or other competing products before we do.
We believe the primary competitors for each of our product
candidates are as follows:
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For
FiaptaTM
in the treatment of schizophrenia, the atypical antipsychotics
Risperdal®
(risperidone), including the depot formulation
Risperdal®
Consta®,
and
Invega®
(paliperidone), each by
Ortho-McNeil-Janssen
Pharmaceuticals, Inc.,
Zyprexa®
(olanzapine) by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
Abilify®
(aripiprazole) by Bristol-Myers Squibb Company/Otsuka
Pharmaceutical Co., Ltd.,
Geodon®
(ziprasidone) by Pfizer Inc., and generic clozapine, as well as
the
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typical antipsychotics haloperidol, chlorpromazine,
thioridazine, and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials (or for which an NDA has been recently filed) for the
treatment of schizophrenia include bifeprunox (Solvay
S.A./Lundbeck A/S), and asenapine (Schering-Plough Corporation)
and pimavanserin (Acadia Pharmaceuticals).
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For VEC-162 in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as trazodone and doxepin, and over-the-counter remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia (or for which an NDA has been
recently filed) include indiplon (Neurocrine Biosciences, Inc.)
and low-dose doxepin
(Silenortm)
by Somaxon Pharmaceuticals, Inc.
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For VEC-162 in the treatment of depression, antidepressants such
as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK and
Cymbalta®
(duloxetine) by Eli Lilly. In addition to the approved products,
compounds in Phase III trials for depression include
agomelatine (Novartis and Les Laboratories Servier).
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For VSF-173 in the treatment of excessive sleepiness,
Provigil®
(modafinil) and
Nuvigil®
(armodafinil) by Cephalon Inc., and
Xyrem®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
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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 products less attractive.
We
have no experience selling, marketing or distributing products
and no internal capability to do so.
At present, we have limited marketing and sales personnel. In
order for us to commercialize any of our product candidates, 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 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 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 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 product
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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
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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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We
will need to increase the size of our organization, and we may
experience difficulties in managing our growth.
As of December 31, 2007, we had 50 full-time
employees. We will need to expand our managerial, operational,
financial and other resources in order for us to manage and fund
our operations, continue our development activities and
commercialize our product candidates. Our current personnel,
systems and facilities are not adequate to support this future
growth. To manage our growth, we must:
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manage our clinical trials effectively
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manage our internal development efforts effectively
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improve our operational, financial, accounting and management
controls, reporting systems and procedures
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build marketing and sales organizations in order to
commercialize
Fiaptatm
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attract and retain sufficient numbers of talented employees
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We may be unable to successfully implement these tasks on a
larger scale and, accordingly, may not achieve our development
and commercialization goals.
If we
cannot identify, or enter into licensing arrangements for, new
product candidates, our ability to develop a diverse product
portfolio may 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, we may not be able to develop
a diverse portfolio of products and our business may be harmed.
Additionally, it may take substantial human and financial
resources to secure commercial rights to promising product
candidates. Moreover, if other firms develop pharmacogenetics
and pharmacogenomics capabilities, we may face increased
competition in identifying and acquiring additional product
candidates.
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 product
candidates.
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.
Product
liability lawsuits could divert our resources, result in
substantial liabilities and reduce the commercial potential of
our products.
The risk that we may be sued on product liability claims is
inherent in the development of pharmaceutical products. For
example, we face a risk of product liability exposure related to
the testing of our product candidates in clinical trials and
will face even greater risks upon any commercialization by us of
our product candidates. 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 may be forced to limit or
forego further commercialization of one or more of our products.
Although we maintain general liability and product liability
insurance, our aggregate coverage limit under this insurance is
$10,000,000, 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. In
addition, product liability insurance is becoming increasingly
expensive, and we may not be able to obtain or maintain
sufficient insurance coverage at an acceptable cost or otherwise
to protect against potential product liability claims, which
could prevent or inhibit the commercial production and sale of
our products.
Legislative
or regulatory reform of the healthcare system in the U.S. and
foreign jurisdictions may affect our ability to sell our
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
26
affect our ability to set prices for our products which we
believe are fair, and our ability to generate revenues and
achieve and maintain profitability.
Specifically, in both the United States 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 ability to sell our products profitably.
In the United States, the Medicare Prescription Drug Improvement
and Modernization Act of 2003 reforms the way Medicare will
cover and reimburse for pharmaceutical products. This
legislation could decrease the coverage and price that we may
receive for our 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 to
go through the process of seeking reimbursement from Medicare
and private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. Further federal and state proposals and
healthcare reforms are likely which could limit the prices that
can be charged for the drugs we develop and may further limit
our commercial opportunity. Our results of operations could be
materially adversely affected by the Medicare prescription drug
coverage legislation, by the possible effect of this legislation
on amounts that private insurers will pay and by other
healthcare reforms that may be enacted or adopted in the future.
In some foreign countries, including major markets in the
European Union and Japan, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take nine to twelve months or longer after the receipt of
regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate 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.
Recently
enacted legislation may make it more difficult and costly for us
to obtain regulatory approval of our product candidates and to
produce, to market and to distribute our existing
products.
On September 27, 2007, President Bush signed into law the
Food and Drug Administration Amendments Act of 2007 or the
FDAAA. The FDAAA grants a variety of new powers to the FDA, many
of which are aimed at assuring drug safety and monitoring the
safety of drug products after approval. The recently enacted
amendments would among other things, require all new drug
applicants to submit risk evaluation and minimization plans 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. Under the FDAAA,
companies that violate the new 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 new requirements and other
changes that the FDAAA imposes may make it more difficult, and
likely more costly, to obtain approval of new pharmaceutical
products and to produce, market and distribute existing
products. Our ability to commercialize approved products
successfully may be hindered, and our business may be harmed as
a result.
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 existing
three 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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any intellectual property infringement lawsuit in which we may
become involved
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regulatory developments affecting our product candidates or
those of our competitors
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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 candidates are
subject in part to the terms and conditions of licenses or
sublicenses granted to us by other pharmaceutical companies.
With respect to VEC-162 and VSF-173, these terms and conditions
include options in favor of these pharmaceutical companies to
reacquire rights to commercialize and develop these product
candidates in certain circumstances.
Fiaptatm
(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 have acquired
exclusive rights to this and other intellectual property through
a further sublicense from Novartis. Our rights with respect to
the intellectual property to develop and commercialize
Fiaptatm
may terminate, in whole or in part, if we fail to meet certain
milestones contained in our sublicense agreement with Novartis
relating to the time it takes for us to launch
Fiaptatm
commercially following regulatory approval, and the time it
takes for us to receive regulatory approval following our
submission of an NDA or equivalent foreign filing. We may also
lose our rights to develop and commercialize
Fiaptatm
if we fail to pay royalties to Novartis, if we fail to comply
with certain requirements in the sublicense agreement regarding
our financial condition, or if we fail to comply with certain
restrictions regarding our other development activities.
Finally, our rights to develop and commercialize
Fiaptatm
may be impaired if we do not cure breaches by Novartis and Titan
of similar obligations contained in these sublicense and license
agreements, although we are not aware of any such breach by
Titan or Novartis. In the event of an early termination of our
sublicense agreement, all rights licensed and developed by us
under this agreement may be extinguished, which would have a
material adverse effect on our business.
VEC-162 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
VEC-162 in
the license agreement. If we have not agreed to one or more
partnering arrangements to develop and commercialize VEC-162 in
certain significant markets with one or more third parties after
the completion of the Phase III program, BMS has the option
to exclusively develop and commercialize VEC-162 on its own on
pre-determined financial terms, including milestone and royalty
payments. If we seek a co-promotion agreement for VEC-162, BMS
has a right of first negotiation to enter into such an agreement
with us. 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 VEC-162 (including any
intellectual property we develop with respect to VEC-162) 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 VEC-162, including any reacquisition by
BMS of our rights, may have a material adverse effect on our
business.
VSF-173 is based in part on patents and other intellectual
property that we have licensed on an exclusive basis from
Novartis. Novartis has the option to reacquire rights to
co-develop and exclusively commercialize VSF-173 following the
completion of the Phase II trials, and an additional option
to reacquire co-development rights and exclusive
commercialization rights following the completion of the
Phase III clinical trials, subject
28
in each case to Novartis payment of pre-determined
royalties and other payments to us. In the event that Novartis
chooses not to exercise either of these options and we decide to
enter into a partnering arrangement to help us commercialize
VSF-173, Novartis has a right of first refusal to negotiate such
an agreement with us, as well as a right to submit a last
matching counteroffer regarding such an agreement. In addition,
our rights with respect to VSF-173 may terminate, in whole or in
part, if we fail to meet certain development and
commercialization milestones described in our license agreement
relating to the time it takes us to complete our development
work on VSF-173. These rights may also terminate in whole or in
part if we fail to make royalty or milestone payments or if we
do not comply with requirements in our license agreement
regarding our financial condition. In the event of an early
termination of our license agreement, all rights licensed and
developed by us under this agreement may revert back to
Novartis. Any termination or reversion of our rights to develop
or commercialize VSF-173, including any reacquisition by
Novartis 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 products 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 product candidates, we rely upon intellectual
property we own relating to our products, including patents,
patent applications and trade secrets. As of December 31,
2007 we had twenty one pending provisional patent applications
in the United States, two U.S. national stage
applications under U.S.C. 371 and eight pending Patent
Cooperation Treaty applications, which permit the pursuit of
patents outside of the U.S., relating to our product candidates
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 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 United
States. As a result, we may encounter significant problems in
protecting and defending our intellectual property both in the
United States and abroad. If we are unable to protect or defend
the intellectual property related to our technologies, we will
not be able to establish or maintain a competitive advantage in
our market.
If we
do not obtain protection under the Hatch-Waxman Act and similar
foreign legislation to extend our patents and to obtain market
exclusivity for our product candidates, 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 protection for drug compounds for a period of up to five
years to compensate for time spent in development. Assuming we
gain a five-year extension for each of our current product
candidates in clinical development, and that we continue to have
rights under our sublicense and license agreements with respect
to these product candidates, we would have exclusive rights to
Fiaptatms
United States new chemical entity patent (the
primary patent covering the compound as a new composition of
matter) until 2016, to VEC-162s United States new chemical
entity patent until 2022 and to VSF-173s United States new
chemical entity patent until 2019. In Europe, similar
legislative enactments allow patent protection in the European
Union to be extended for up to five years through the grant of a
Supplementary Protection Certificate. Assuming we gain such a
five-year extension for each of our current product candidates
in clinical development, and that we continue to have rights
under our sublicense and license agreements with respect to
these product candidates, we would have exclusive rights to
Fiaptatms
European new chemical entity patents until 2015, to
VEC-162s European new chemical entity patents until 2022
and to VSF-173s European new chemical entity patents until
2017. Additionally, a directive in the
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European Union provides that companies who 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 during such market
exclusivity period. This directive may be of particular
importance with respect to
Fiaptatm,
since the European new chemical entity patent for
Fiaptatm
will likely 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 to prevent competitors from
manufacturing, marketing and selling generic versions of our
products will be materially harmed.
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 product candidates. 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 product candidates. 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 product
candidates.
In addition, in the future we could be required to initiate
litigation to enforce our proprietary rights against
infringement by third parties. Prosecution of these claims to
enforce our rights against others could divert substantial
financial and employee resources from our business. If we fail
to enforce our proprietary rights against others, our business
will be harmed.
If we
use hazardous and biological materials in a manner that causes
injury or violates applicable law, we may be liable for
damages.
Our research and development activities involve the controlled
use of potentially hazardous substances, including toxic
chemical and biological materials. We could be held liable for
any contamination, injury or other damages resulting from these
hazardous substances. 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
$2,000,000, 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.
30
Risks
related to our common stock
Our
stock price has been volatile and may be volatile in the future,
and purchasers of our common stock could incur substantial
losses.
The stock market has from time to time experienced significant
price and volume fluctuations, and the market prices of the
securities of life sciences companies without product revenues,
such as ours, have historically been highly volatile. Between
March 1, 2007 and March 1, 2008, the high and low sale
prices of our common stock as reported on the NASDAQ Global
Market varied between $25.58 and $4.09. The following factors,
in addition to the other risk factors described in this section,
may also have a significant impact on the market price of our
common stock:
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publicity regarding actual or potential testing or trial results
or the outcome of regulatory review relating to products under
development by us or our competitors
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regulatory developments in the United States and foreign
countries
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developments concerning any collaboration or other strategic
transaction we may undertake
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announcements of patent issuances or denials, technological
innovations or new commercial products by us or our competitors
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actual or anticipated variations in our quarterly operating
results
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changes in estimates of our financial results or recommendations
by securities analysts
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additions or departures of key personnel or members of our board
of directors
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publicity regarding actual or potential transactions involving
the Company
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economic and other external factors beyond our control
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As a result of these factors, holders of our common stock might
be unable to sell their shares at or above the price they paid
for such shares.
If
there are substantial sales of our common stock, our stock price
could decline.
A small number of early investors in our company who held our
stock prior to the sale of shares in our initial public offering
continue to hold a substantial number of shares of our common
stock. Additionally, a small number of institutional investors
and private equity funds continue to hold a significant number
of shares of our common stock. Sales by these stockholders of a
substantial number of shares, or the expectation of such sales,
could cause a significant reduction in the market price of our
common stock. Additionally, the holders of a substantial number
of shares of our common stock have rights, subject to certain
conditions, to require us to file registration statements to
permit the resale of these shares in the public market or to
include their shares in registration statements that we may file
for ourselves or other stockholders.
In addition to our outstanding common stock, as of
December 31, 2007 there were a total of
2,938,610 shares of common stock that we have registered
and that we are obligated to issue upon the exercise of
currently outstanding options granted under our Second Amended
and Restated Management Equity Plan and 2006 Equity Incentive
Plan. Upon the exercise of these options in accordance with
their respective terms, these shares may be resold freely,
subject to restrictions imposed on our affiliates under
Rule 144. If significant sales of these shares occur in
short periods of time, these sales could reduce the market price
of our common stock. Any reduction in the trading price of our
common stock could impede our ability to raise capital on
attractive terms.
If
securities or industry analysts do not publish research or
reports or publish unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts
who covers the Company
31
downgrades our stock, our stock price would likely decline. If
one or more of these analysts ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our
stock could decrease, which could cause our stock price or
trading volume to decline.
Anti-takeover
provisions in our charter and bylaws, and in Delaware law, 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
|
|
|
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.
In September 2007, we sublet a portion of our previous
headquarters in Rockville, Maryland for the remaining term of
the lease expiring in June 2008.
Management believes that the leased facilities are 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.
32
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
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 since our
initial public offering on April 12, 2006.
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
High
|
|
|
Low
|
|
|
April 12, 2006 June 30, 2006
|
|
$
|
11.35
|
|
|
$
|
7.21
|
|
Third quarter 2006
|
|
$
|
10.10
|
|
|
$
|
8.02
|
|
Fourth quarter 2006
|
|
$
|
28.67
|
|
|
$
|
8.95
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
High
|
|
|
Low
|
|
|
First quarter 2007
|
|
$
|
32.00
|
|
|
$
|
21.69
|
|
Second quarter 2007
|
|
$
|
24.31
|
|
|
$
|
18.75
|
|
Third quarter 2007
|
|
$
|
21.50
|
|
|
$
|
13.23
|
|
Fourth quarter 2007
|
|
$
|
19.40
|
|
|
$
|
6.49
|
|
As of March 7, 2008, there were 29 holders of record of our
common stock.
Dividends
The Company has not paid dividends to its shareholders 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.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth information regarding securities
authorized for issuance under our existing equity compensation
plans as of December 31, 2007. The figures set forth in the
following table opposite the row Equity compensation plans
approved by security holders aggregate securities issued
under our Second Amended and Restated Management Equity Plan and
2006 Equity Incentive Plan, both of which plans have been
approved by our stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants or Rights
|
|
|
Warrants and Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
2,938,610
|
|
|
$
|
16.39
|
|
|
|
**616,506
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,938,610
|
|
|
$
|
16.39
|
|
|
|
**616,506
|
|
|
|
|
** |
|
Does not include 1,066,109 additional shares authorized for
issuance under the 2006 Equity Incentive Plan effective as of
January 1, 2008, as a result of the automatic annual
increase in the number of shares authorized for issuance
thereunder. |
33
Market
Price of and Dividends on the Registrants Common Equity
and Related Stockholder Matters
The following graph shows the cumulative total return, assuming
the investment of $100 on April 12, 2006 (the date of the
initial public offering) on an investment in each of the
Companys common stock, the NASDAQ Composite Index and the
Amex Biotechnology Index (in either case, assuming reinvestment
of dividends). The comparisons in the table are required by the
SEC and are not intended to forecast or be indicative of
possible future performance of the Companys common stock.
We have not paid dividends to our stockholders since the
inception 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.
Use of
Proceeds from Registered Securities
We registered shares of our common stock in connection with our
initial public offering under the Securities Act. Our
Registration Statement on
Form S-1
(Reg.
No. 333-130759)
in connection with our initial public offering was declared
effective by the SEC on April 12, 2006. The offering was
consummated on April 18, 2006 with respect to
5,750,000 shares of our common stock, and on April 25,
2006 with respect to 214,188 shares pursuant to the
exercise by the underwriters of their over-allotment option.
We have used all of the proceeds of our initial public offering
for research and development expenses, including for our
clinical trials for
Fiaptatm
and VEC-162, for the generation and submission of an NDA for
Fiaptatm,
for payments under the license agreements, for clinical
manufacturing expenses relating to the development of our
product candidates and for general corporate expenses. This use
of proceeds is not materially different from the use of proceeds
described in the final prospectuses for our initial public
offering.
We also registered shares of our common stock in connection with
our follow-on offering under the Securities Act. Our
Registration Statement on
Form S-1
(Reg.
No. 333-139485
and
No. 333-140081)
in connection with our follow-on offering was declared effective
by the SEC on January 18, 2007. The offering was
consummated on January 24, 2007 with respect to all
4,370,000 shares of our common stock that were offered,
including 570,000 of such shares that were offered pursuant to
the exercise by the underwriters of their over-allotment option.
We have used a portion of, and intend to continue to use, the
proceeds of our follow-on offering for research and development
expenses, including for our clinical trials for
Fiaptatm
and VEC-162, for the
34
generation and submission of an NDA for
Fiaptatm,
for payments under the license agreements, for clinical
manufacturing expenses relating to the development of our
product candidates and for general corporate expenses. The
unused net proceeds from the follow-on offering are invested in
investment grade securities. This use of proceeds is not
materially different from the use of proceeds described in the
final prospectuses for our follow-on offering. The amount and
timing of our actual expenditures may vary significantly
depending on numerous factors, such as the progress of our
product development and commercialization efforts and the amount
of cash used by our operations.
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The consolidated statements of operations data for the years
ended December 31, 2005, 2006 and 2007 and the consolidated
balance sheet data as of December 31, 2006 and 2007 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 period
from March 13, 2003 (inception) to December 31, 2003
and for the year ended December 31, 2004 and the
consolidated balance sheet data as of December 31, 2003,
2004 and 2005 are each derived from our audited consolidated
financial statements not included herein. Our historical results
for any prior period are not necessarily indicative of results
to be expected in any future period.
The following data should be read together with our consolidated
financial statements and accompanying notes and the section
entitled Managements discussion and analysis of
financial condition and results of operations included in
this annual report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Statements of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
47,565
|
|
|
$
|
33,980
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,010,532
|
|
|
|
7,442,983
|
|
|
|
16,890,615
|
|
|
|
52,070,776
|
|
|
|
47,234,867
|
|
General and administrative
|
|
|
1,052,659
|
|
|
|
2,119,394
|
|
|
|
7,396,038
|
|
|
|
13,637,664
|
|
|
|
32,803,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,063,191
|
|
|
|
9,562,377
|
|
|
|
24,286,653
|
|
|
|
65,708,440
|
|
|
|
80,038,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,015,626
|
)
|
|
|
(9,528,397
|
)
|
|
|
(24,286,653
|
)
|
|
|
(65,708,440
|
)
|
|
|
(80,038,375
|
)
|
Total other income, net
|
|
|
44,805
|
|
|
|
59,060
|
|
|
|
410,001
|
|
|
|
2,197,821
|
|
|
|
5,978,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(2,970,821
|
)
|
|
|
(9,469,337
|
)
|
|
|
(23,876,652
|
)
|
|
|
(63,510,619
|
)
|
|
|
(74,059,811
|
)
|
Tax provision
|
|
|
|
|
|
|
4,949
|
|
|
|
7,649
|
|
|
|
549
|
|
|
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,970,821
|
)
|
|
|
(9,474,286
|
)
|
|
|
(23,884,301
|
)
|
|
|
(63,511,168
|
)
|
|
|
(74,069,690
|
)
|
Beneficial conversion feature deemed dividend to
preferred stockholders(1)
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(2,970,821
|
)
|
|
$
|
(9,474,286
|
)
|
|
$
|
(57,370,924
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(74,069,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$
|
(983.72
|
)
|
|
$
|
(3,137.18
|
)
|
|
$
|
(3,374.33
|
)
|
|
$
|
(3.97
|
)
|
|
$
|
(2.81
|
)
|
Shares used in calculation of basic and diluted net loss per
shares attributable to common stockholders
|
|
|
3,020
|
|
|
|
3,020
|
|
|
|
17,002
|
|
|
|
16,001,815
|
|
|
|
26,360,177
|
|
|
|
|
(1) |
|
In September and December of 2005, we completed the sale of an
additional 27,235,783 shares of Series B preferred
stock for net proceeds of approximately $33.5 million.
After evaluating the fair value of the common stock obtainable
upon conversion by the stockholders, we determined that the
issuance of the Series B preferred stock sold in 2005
resulted in a beneficial conversion feature which was fully
accreted in 2005 and is recorded as a deemed dividend to
preferred stockholders of approximately $33.5 million for
the year ended December 31, 2005. |
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,165,722
|
|
|
$
|
16,259,770
|
|
|
$
|
21,012,815
|
|
|
$
|
30,928,895
|
|
|
$
|
41,929,533
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
10,141,189
|
|
|
|
941,981
|
|
|
|
51,223,291
|
|
Working capital
|
|
|
6,204,248
|
|
|
|
14,827,621
|
|
|
|
28,308,434
|
|
|
|
24,714,285
|
|
|
|
74,177,567
|
|
Total assets
|
|
|
8,385,913
|
|
|
|
17,752,241
|
|
|
|
35,752,770
|
|
|
|
36,260,276
|
|
|
|
96,860,780
|
|
Total liabilities
|
|
|
1,378,880
|
|
|
|
1,808,654
|
|
|
|
5,087,963
|
|
|
|
9,503,404
|
|
|
|
13,131,849
|
|
Convertible preferred stock
|
|
|
9,963,541
|
|
|
|
28,308,564
|
|
|
|
61,795,187
|
|
|
|
|
|
|
|
|
|
Deficit accumulated during the development stage
|
|
|
(2,970,821
|
)
|
|
|
(12,445,107
|
)
|
|
|
(36,329,408
|
)
|
|
|
(99,840,576
|
)
|
|
|
(173,910,266
|
)
|
Total stockholders equity
|
|
|
7,007,033
|
|
|
|
15,943,587
|
|
|
|
30,664,807
|
|
|
|
26,756,872
|
|
|
|
83,728,931
|
|
36
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis of our
financial condition and results of operations together with
Selected Consolidated Financial Data and our
consolidated financial statements and related notes appearing at
the end of this annual report on
Form 10-K.
Some of the information contained in this discussion and
analysis or set forth elsewhere in this annual report on
Form 10-K
include historical information and other information with
respect to our plans and strategy for our business and contain
forward-looking statements that involve risk, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of
certain factors, including but not limited to those set forth
under the Risk factors section of this report and
elsewhere in this annual report on
Form 10-K.
Overview
We are a biopharmaceutical company focused on the development
and commercialization of clinical-stage product candidates for
central nervous system disorders, with exclusive worldwide
commercial rights to three product candidates in clinical
development for various central nervous system disorders. Our
lead product candidate,
Fiaptatm
(iloperidone), is a compound for the treatment of schizophrenia
and bipolar disorder. On November 27, 2007 the United
States Food and Drug Administration (FDA) accepted our New Drug
Application (NDA) for
Fiaptatm
in schizophrenia. Our second product candidate, VEC-162, is a
compound for the treatment of sleep and mood disorders. In
November 2006 we announced positive top-line results from our
Phase III trial of VEC-162 in transient insomnia. In
November 2007 we initiated, and in February 2008 we completed,
an enrollment in a Phase III trial of VEC-162 in chronic
primary insomnia. VEC-162 is also ready for Phase II trials
for the treatment of depression. Our third product candidate,
VSF-173, is a compound for the treatment of excessive sleepiness
and is currently in a Phase II program.
We expect a decision from the FDA on the NDA for
Fiaptatm
in schizophrenia on or about July 27, 2008, its PDUFA
action date, although the FDA may not meet, or may extend, the
PDUFA action date. We will have to conduct additional
Phase III trials for VEC-162 in chronic sleep disorders
prior to our filing of an NDA for VEC-162. We will have to
conduct additional Phase II trials for VSF-173 in order to
further its development. Assuming successful outcomes of our
clinical trials and approval by the FDA, we expect to
commercialize
Fiaptatm
and VSF-173 with our own sales force in the U.S. and
through a partnership in
non-U.S. markets,
and expect to commercialize VEC-162 through a partnership with a
global pharmaceutical company, although we have not yet
identified such a global partner.
We are a development stage enterprise and have accumulated net
losses of approximately $173.9 million since the inception
of our operations through December 31, 2007. We have no
product revenues to date and have no approved products for sale.
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 product candidates. Our future
operating results will depend largely on our ability to
successfully develop and commercialize our lead product
candidate,
Fiaptatm,
and on the progress of other product candidates currently in our
research and development pipeline. 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 this report, entitled
Risk Factors.
We completed our initial public offering in April 2006. The
offering totaled 5,964,188 shares of common stock at a
public offering price of $10.00, resulting in net proceeds to
the Company of approximately $53.3 million, after deducting
underwriters discounts and commissions as well as offering
expenses. Upon completion of the initial public offering, all
shares of the Companys Series A preferred stock and
Series B preferred stock were converted into an aggregate
of 15,794,632 shares of common stock.
In January 2007 we completed our follow-on offering, consisting
of 4,370,000 shares of common stock at a public offering
price of $27.29 per share, resulting in net proceeds to the
Company of approximately $111.3 million after deducting
underwriting discounts and commissions and offering expenses.
37
Based on our current operating plans, we believe that our
existing cash, cash equivalents and marketable securities will
be sufficient to meet our anticipated operating needs into the
fourth quarter of 2008. If
Fiaptatm
is approved by the FDA on the expected PDUFA action date of or
about July 27, 2008, the Company intends to pursue
additional financing, in part to fund additional marketing and
product launch costs. The Company believes that it would be able
to raise sufficient capital to fund the product launch and
operations into 2009. However, if the Company cannot obtain
additional financing, management has the ability and intent to
implement a reduced spending plan to fund operations at least
through the first quarter of 2009. In budgeting for our
activities, we have relied on a number of assumptions, including
assumptions that we will continue to expend funds in preparation
of a commercial launch of
Fiaptatm,
that we will conduct our Phase III trial of VEC-162 for the
treatment of chronic primary insomnia in accordance with our
expectations, that we will not engage in further in-licensing
activities, that we will not receive any proceeds from potential
partnerships, that we will not expend funds on the bipolar
indication for
Fiaptatm,
that we will not conduct additional trials for the injectable
formulation for
Fiaptatm,
that we will not conduct additional trials for VSF-173, that we
will continue to evaluate clinical and pre-clinical compounds
for potential development, that we will be able to continue the
manufacturing of our product candidates at commercially
reasonable prices, that we will be able to retain our key
personnel, and that we will not incur any significant contingent
liabilities. We may need to raise additional funds more quickly
if one or more of our assumptions proves to be incorrect, if we
choose to expand our product development efforts more rapidly
than presently anticipated, or if we seek to acquire additional
product candidates. We may also decide to raise additional funds
even before they are needed if the conditions for raising
capital are favorable.
In our capital-raising efforts, we may seek to sell additional
equity or debt securities or obtain a bank credit facility. The
sale of additional equity or debt securities, if convertible,
could result in dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and
could also result in covenants that would restrict our
operations.
We cannot assure you that additional capital will be available
when we need it on terms that are acceptable to us, or at all.
The unavailability of financing may require us to delay, scale
back or eliminate expenditures for our research, development and
marketing activities necessary to commercialize our potential
biopharmaceutical products. If we are unable to secure
sufficient capital to fund our research and development
activities, we may not be able to continue operations or we may
have to enter into 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
we currently intend. Collaborations that are consummated by us
prior to proof-of-efficacy and safety of a product candidate
could impair our ability to realize value from that product
candidate. In the absence of our ability to raise additional
capital resources, we are prepared and have the ability to
curtail the existing operating needs and commitments to have the
operating funds through the first quarter of 2009.
Fiaptatm. Fiaptatm
is our product candidate under development to treat
schizophrenia and bipolar disorder. We submitted an NDA for
Fiaptatm
for the treatment of schizophrenia to the FDA on
September 27, 2007 and on November 27, 2007 the FDA
accepted our NDA. We continue to work closely with the FDA
throughout their review process and anticipate a decision on our
NDA on its PDUFA action date of or about July 27, 2008,
although the FDA may not meet, or may extend, the PDUFA action
date. The application includes data from 35 clinical trials and
more than 3,000 patients treated with
Fiaptatm
and also contains pharmacogenetic data aimed to further improve
the benefit/risk profile of
Fiaptatm
in the treatment of patients with schizophrenia.
From inception to December 31, 2007 we incurred
approximately $66.0 million in research and development
costs directly attributable to our development of
Fiaptatm,
including a $5.0 million milestone license fee paid to
Novartis in 2007 upon the acceptance of our NDA.
We expect to increase our pre-launch commercial activities
relating to
Fiaptatm,
and we expect to start marketing
Fiaptatm
commercially in early 2009. However, the time it takes to
receive cash inflows from the sale of
Fiaptatm
is highly dependent on facts and circumstances that we may not
be able to control and are subject to a number of risks. For
example, delays in the approval process and subsequent
commercial launch
38
of
Fiaptatm
following our filing may occur if the FDA fails to attend to our
filing in a timely manner or requires further data to approve
Fiaptatm.
Please see Item 1A Risk Factors of this annual
report on
Form 10-K
for a more detailed discussion of these and other risks.
We are also developing a 4-week injectable formulation for
Fiaptatm,
for which we already have early Phase II data from a study
previously conducted by Novartis. We have completed essential
manufacturing activities and intend to conduct additional
clinical trials following FDA approval of the oral dose
formulation for
Fiaptatm.
VEC-162. VEC-162 is our product candidate
under development to treat sleep and mood disorders. VEC-162 is
a melatonin receptor agonist that works by adjusting the human
body clock of circadian rhythm. VEC-162 has
successfully completed a Phase III trial for the treatment
of transient insomnia in November 2006. In November 2007 we
initiated and in February 2008 completed an enrollment in a
Phase III trial of VEC-162 to evaluate the safety and
efficacy of VEC-162 in chronic primary insomnia. The trial is a
randomized, double-blind, and placebo-controlled study with
324 patients. The trial measures time to fall asleep and
sleep maintenance, as well as
next-day
performance. We expect to complete the study and to report its
top-line results in June 2008. We will have to conduct
additional trials prior to our filing of an NDA for VEC-162 to
treat sleep disorders. VEC-162 is also ready for Phase II
trials for the treatment of depression.
From inception to December 31, 2007, we incurred
approximately $40.0 million in direct research and
development costs directly attributable to our development of
VEC-162, including a $1.0 million milestone license fee
paid to BMS in 2006 upon the initiation of our Phase III
program.
VSF-173. VSF-173 is an oral compound that has
demonstrated effects on animal sleep/wake patterns and gene
expression suggestive of a stimulant effect. In a recently
completed Phase II trial of VSF-173 in excessive
sleepiness, the compound demonstrated improvement compared to
placebo on the Maintenance of Wakefulness Test (MWT), though not
statistically significant, and dose-dependent, statistically
significant improvements versus placebo on a number of secondary
endpoints taken in the recovery sleep period after dosing,
including number of awakenings, and sleep efficiency and wake
after sleep onset in the first third of the recovery sleep
period. VSF-173 was also demonstrated to be safe and
well-tolerated. We will have to conduct additional Phase II
trials of VSF-173 in order to further its development.
Excessive sleepiness is a common symptom that can significantly
impair a persons ability to function. The effects of
excessive sleepiness range from mild sleepiness to unrecognized
episodes of microsleeps and uncontrollable sleep
attacks. Excessive sleepiness is a symptom of many disorders,
including obstructive sleep apnea, narcolepsy, shift worker
sleep disorder, Parkinsons disease and Alzheimers
disease.
From inception to December 31, 2007, we incurred
approximately $6.0 million in direct research and
development costs directly attributable to our development of
VSF-173, including a milestone license fee of $1.0 million
paid to Novartis upon the initiation of our first Phase II
clinical trial in March of 2007.
Revenues. We generated some revenue during the
period from March 13, 2003 (inception) to December 31,
2003 and during the year ended December 31, 2004 under
research and development contracts that were derived principally
from consulting agreements we entered into during our
start-up
phase to defray research costs. We completed our obligations
during those periods under these agreements and no longer seek
such arrangements.
We have not generated any other operating revenue since our
inception. Any revenue that we may receive in the near future is
expected to consist primarily of license fees, milestone
payments and research and development reimbursement payments to
be received from potential partners. If our development efforts
result in clinical success, regulatory approval and successful
commercialization of our products, we could generate revenue
from sales of our products and from receipt of royalties on
sales of licensed products.
Research and development expenses. The
Companys 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, 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
39
personnel. We expense research and development costs as
incurred, including payments made to date under our license
agreements. 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
product candidates and pharmacogenetics and pharmacogenomics
expertise. From inception through December, 31, 2007 we incurred
research and development expenses in the aggregate of
approximately $125.6 million, including stock-based
compensation expenses of approximately $5.8 million. We
expect our research and development expenses to increase as we
continue to develop our product candidates. We also expect to
incur licensing costs in the future that could be substantial,
as we continue our efforts to develop our product candidates and
to evaluate potential in-license product candidates.
The following table summarizes our product development
initiatives for the period from March 13, 2003 (inception)
to December 31, 2003 and for the years ended
December 31, 2004 to December 31, 2007 and for the
period from March 13, 2003 (inception) to December 31,
2007. Included in the following table are the research and
development expenses recognized in connection with our product
candidates in clinical development. Included in Other
product candidates are the costs directly related to
research initiatives for all other product candidates.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
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|
|
March 13,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
(Inception) to
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2003(2)
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
Direct project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiaptatm
(iloperidone)
|
|
|
|
|
|
$
|
1,123,000
|
|
|
$
|
7,798,000
|
|
|
$
|
36,455,000
|
|
|
$
|
20,668,000
|
|
|
$
|
66,044,000
|
|
VEC-162
|
|
|
|
|
|
|
3,221,000
|
|
|
|
6,133,000
|
|
|
|
11,665,000
|
|
|
|
18,947,000
|
|
|
|
39,966,000
|
|
VSF-173
|
|
|
|
|
|
|
568,000
|
|
|
|
943,000
|
|
|
|
1,058,000
|
|
|
|
3,404,000
|
|
|
|
5,973,000
|
|
Other product candidates
|
|
|
|
|
|
|
1,037,000
|
|
|
|
899,000
|
|
|
|
1,098,000
|
|
|
|
2,095,000
|
|
|
|
5,129,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct product costs
|
|
$
|
|
|
|
|
5,949,000
|
|
|
|
15,773,000
|
|
|
|
50,276,000
|
|
|
|
45,114,000
|
|
|
|
117,112,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility(3)
|
|
|
|
|
|
|
259,000
|
|
|
|
247,000
|
|
|
|
578,000
|
|
|
|
495,000
|
|
|
|
1,579,000
|
|
Depreciation
|
|
|
69,000
|
|
|
|
345,000
|
|
|
|
375,000
|
|
|
|
474,000
|
|
|
|
423,000
|
|
|
|
1,686,000
|
|
Other indirect overhead costs
|
|
|
1,941,000
|
|
|
|
890,000
|
|
|
|
496,000
|
|
|
|
743,000
|
|
|
|
1,203,000
|
|
|
|
5,273,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect expenses
|
|
|
2,010,000
|
|
|
|
1,494,000
|
|
|
|
1,118,000
|
|
|
|
1,795,000
|
|
|
|
2,121,000
|
|
|
|
8,538,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
2,010,000
|
|
|
$
|
7,443,000
|
|
|
$
|
16,891,000
|
|
|
$
|
52,071,000
|
|
|
$
|
47,235,000
|
|
|
$
|
125,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
(1) |
|
Many of our research and development costs are not attributable
to any individual project because we share resources across
several development projects. We record direct costs, including
personnel costs and related benefits and stock-based
compensation, on a
project-by-project
basis. We record indirect costs that support a number of our
research and development activities in the aggregate. |
|
(2) |
|
In 2003, there were no active development programs in process
for our product candidates listed in the table. |
|
(3) |
|
In 2003, all facility-related costs were allocated to general
and administrative expenses. |
General and administrative expenses. General
and administrative expenses consist primarily of salaries and
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. We expect that our general and
administrative expenses will continue to increase as we support
our discovery and research development efforts, for our
commercial development activities and fulfill our reporting and
other regulatory obligations applicable to public companies.
From inception through
40
December 31, 2007, we incurred general and administrative
expenses in the aggregate of approximately $57.0 million,
including stock-based compensation expenses of approximately
$25.0 million.
Beneficial conversion feature. In September
2005 we completed the sale of an additional
15,040,654 shares of Series B preferred stock for
proceeds of approximately $18.5 million. After evaluating
the fair value of our common stock obtainable upon conversion by
the stockholders, we determined that the issuance of the
Series B preferred stock sold in September 2005 resulted in
a beneficial conversion feature calculated in accordance with
EITF Issue
No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios, as interpreted by EITF Issue
No. 00-27,
Application of Issue
No. 98-5
to Certain Convertible Instruments, of approximately
$18.5 million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the year ended December 31, 2005. Likewise, in December
2005, we completed the sale of an additional
12,195,129 shares of Series B preferred stock for
additional proceeds of approximately $15.0 million. After
evaluating the fair value of our common stock obtainable upon
conversion by the stockholders, we determined that the issuance
of the Series B preferred stock sold in December 2005
resulted in a beneficial conversion feature calculated in
accordance with EITF Issue
No. 98-5,
as interpreted by EITF Issue
No. 00-27,
approximately $15.0 million of which was fully accreted in
December 2005 and is recorded as a deemed dividend to preferred
stockholders for the year ended December 31, 2005.
Interest and other income, net. Interest
income consists of interest earned on our cash and cash
equivalents, marketable securities and restricted cash. Interest
expense consists of interest incurred on equipment debt.
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, 2007 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.
Accrued expenses. As part of the process of
preparing financial statements we are required to estimate
accrued expenses. The estimation of accrued expenses involves
identifying services that have been performed on our behalf, and
then estimating the level of service performed and the
associated cost incurred for such services as of each balance
sheet date in the financial statements. Accrued expenses include
professional service fees, such as lawyers and accountants,
contract service fees, such as those under contracts with
clinical monitors, data management organizations and
investigators in conjunction with clinical trials, fees to
contract manufacturers in conjunction with the production of
clinical materials, 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.
Stock-based compensation. We adopted Statement
of Financial Accounting Standards No. 123(R), Share
Based Payment, (SFAS 123(R)) on January 1, 2006
using the modified prospective transition method of
implementation and adopted the accelerated attribution method.
Prior to January 1, 2006 we followed APB
41
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations, in accounting for our
stock-based compensation plans, rather than the alternative fair
value accounting method provided for under
SFAS No. 123, Accounting for 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 the Companys publicly traded
common stock. The expected term of options granted is based on
the transition approach provided by Staff Accounting Bulletin
(SAB) No. 107 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 the inception and do not
plan to pay dividends in the foreseeable future. The stock-based
compensation expense for a period is also affected by expected
forfeiture rate for the respective option grants. If our
estimates of the fair value of these equity instruments or
expected forfeitures are too high or too low, it would have the
effect of overstating or understating expenses.
Total stock-based compensation expense, related to all of the
Companys stock-based awards, recognized under
SFAS 123(R) for the years ended December 31, 2007 and
2006, under APB 25 for the year ended December 31, 2005,
and recognized for the period from March 13, 2003
(inception) to December 31, 2007, was comprised of the
following:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
Research and development
|
|
$
|
789,000
|
|
|
$
|
742,000
|
|
|
$
|
4,259,000
|
|
|
$
|
5,792,000
|
|
General and administrative
|
|
|
4,313,000
|
|
|
|
5,350,000
|
|
|
|
15,228,000
|
|
|
|
24,968,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,102,000
|
|
|
$
|
6,092,000
|
|
|
$
|
19,487,000
|
|
|
$
|
30,760,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (SFAS 157), which addresses
how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure
purposes under generally accepted accounting principles.
SFAS 157 outlines a common definition of fair value and the
new standard intends to make the measurement of fair value more
consistent and comparable and improve disclosures about those
measures. We will need to adopt SFAS 157 for financial
statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the FASB agreed to
delay the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after
November 15, 2008. This pronouncement is not expected to
have significant impact on our results of operations and
financial condition.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this standard the
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis (the fair value option). SFAS 159 is effective for
fiscal years beginning after November 15, 2007. This
pronouncement is not expected to have significant impact on our
results of operations and financial condition.
42
In June 2007, the Emerging Issues Task Force issued EITF
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3),
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. We will be
required to adopt
EITF 07-3
for the year beginning after December 15, 2007. This
pronouncement is not expected to have significant impact on our
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141
(revised 2007) (SFAS 141R), Business Combinations
and SFAS No. 160 (SFAS 160),
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51. SFAS 141R will change how
business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of
equity. SFAS 141R and SFAS 160 will be applied to
acquisitions that close in years beginning after
December 15, 2008. Early adoption is not permitted. These
pronouncements are not expected to have significant impact on
our results of operations and financial condition.
In December 2007, the FASB ratified EITF Issue
07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
The consensus prohibits the equity method of accounting for
collaborative arrangements under APB 18, The Equity Method of
Accounting for Investments in Common Stock, unless a legal
entity exists. Payments between the collaborative partners will
be evaluated and reported in the income statement based on
applicable GAAP. Absent specific GAAP, the participants to the
arrangement will apply other existing GAAP by analogy or apply a
reasonable and rational accounting policy consistently. The
guidance in
EITF 07-1
is effective for periods that begin after December 15, 2008
and will apply to arrangements in existence as of the effective
date. The effect of the new consensus will be accounted for as a
change in accounting principle through retrospective
application. We are currently evaluating the impact of
EITF 07-1
on our results of operations and financial condition.
Results
of operations
We have a limited history of operations. We anticipate that our
results of operations will fluctuate for the foreseeable future
due to several factors, including any possible payments made or
received pursuant to licensing or collaboration agreements,
progress of our research and development efforts, and the timing
and outcome of clinical trials and related possible regulatory
approvals. Our limited operating history makes predictions of
future operations difficult or impossible. Since our inception,
we have incurred significant losses. As of December 31,
2007, we had a deficit accumulated during the development stage
of approximately $173.9 million. We anticipate incurring
additional losses for the foreseeable future, and these losses
may be incurred at increasing rates.
Year
ended December 31, 2007 compared to year ended
December 31, 2006
Research and development expenses. Research
and development expenses decreased by approximately
$4.8 million, or 9%, to approximately $47.2 million
for the year ended December 31, 2007 compared to
approximately $52.1 million for the year ended
December 31, 2006.
43
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Research and Development Expenses
|
|
2006
|
|
|
2007
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
36,249,000
|
|
|
$
|
14,595,000
|
|
Contract research and development, consulting, materials and
other direct costs
|
|
|
8,958,000
|
|
|
|
16,253,000
|
|
Milestone license fees
|
|
|
1,000,000
|
|
|
|
6,000,000
|
|
Salaries, benefits and related costs
|
|
|
3,327,000
|
|
|
|
4,007,000
|
|
Stock-based compensation
|
|
|
742,000
|
|
|
|
4,259,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
50,276,000
|
|
|
|
45,114,000
|
|
Indirect project costs
|
|
|
1,795,000
|
|
|
|
2,121,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,071,000
|
|
|
$
|
47,235,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased by approximately $5.2 million
primarily as a result of lower clinical trial expenses for the
Companys
Fiaptatm
and VEC-162 Phase III trials that were primarily completed
in 2006, offset by increase in clinical manufacturing activities
for both
Fiaptatm
and VEC-162 and by increases in milestone license fees and
stock-based compensation expense. Clinical trials expense
decreased by approximately $21.7 million primarily due to
the costs incurred in 2006 in our Phase III trial of
Fiaptatm
in schizophrenia and in our Phase III trial of VEC-162 in
transient insomnia that were completed primarily in 2006. The
clinical trial costs incurred in 2007 relate primarily to our
Phase II trial of VSF-173 in excessive sleepiness, to our
Phase III trial of VEC-162 in chronic insomnia that we
initiated during the fourth quarter of 2007, and to the
completion of our Phase III trial of
Fiaptatm
in schizophrenia. Contract research and development, consulting,
materials and other direct costs increased by approximately
$7.3 million primarily as a result of increased NDA related
expenses and development costs incurred in connection with the
manufacturing of clinical supply materials for our
Fiaptatm
and VEC-162 programs. Prior to FDA approval of our products,
manufacturing related costs are included in research and
development expense. Milestone license fees increased by
$5.0 million due to the milestone license fee payment to
Novartis during 2007 upon the acceptance of our NDA filing for
Fiaptatm
during 2007. Salaries, benefits and related costs increased
approximately $680,000 for the year ended December 31, 2007
due to an increase in personnel to support the development and
clinical trial activities for
Fiaptatm
and VEC-162. Stock-based compensation expense increased by
approximately $3.5 million as a result of the higher fair
value of options granted during 2007 compared to options granted
in prior periods.
General and administrative expenses. General
and administrative expenses increased by approximately
$19.2 million, or 141%, to approximately $32.8 million
for the year ended December 31, 2007 from approximately
$13.6 million for the year ended December 31, 2006.
44
The following table analyzes the components of our general and
administrative expenses for the years ended December 31,
2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
General and Administrative Expenses
|
|
2006
|
|
|
2007
|
|
|
Salaries, benefits and related costs
|
|
$
|
2,609,000
|
|
|
$
|
3,263,000
|
|
Stock-based compensation
|
|
|
5,350,000
|
|
|
|
15,228,000
|
|
Marketing and related consulting services
|
|
|
1,187,000
|
|
|
|
8,047,000
|
|
Legal and other professional expenses
|
|
|
1,760,000
|
|
|
|
3,142,000
|
|
Other expenses
|
|
|
2,732,000
|
|
|
|
3,124,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,638,000
|
|
|
$
|
32,804,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased by approximately
$654,000 for the year ended December 31, 2007 due to an
increase in personnel as we continued to develop the
administrative, market research, business development and other
functions required to support the development and clinical trial
activities for
Fiaptatm,
VEC-162 and our other product candidates. Stock-based
compensation expense increased by approximately
$9.9 million as a result of the higher fair value of
options granted during 2007 compared to options granted in prior
periods. Marketing and related consulting services increased by
approximately $6.9 million due to the increase in our
market research and other pre-commercial launch activities.
Legal and other professional expenses increased by approximately
$1.4 million due primarily to an increase in legal,
accounting and other professional expenses associated with being
a public company as well as due to a higher level of consulting
activity in 2007 in support of business development activities.
Other expenses increased approximately $392,000 primarily due to
increased insurance costs.
Other income, net. Net other income for the
year ended December 31, 2007 was approximately
$6.0 million compared to approximately $2.2 million
for the year ended December 31, 2006. Interest income
increased by approximately $3.8 million due to higher
average cash and marketable securities balances for the year and
higher short-term interest rates which generated substantially
higher interest income than in 2006.
The following table analyzes the components of our other income,
net amounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Interest income
|
|
$
|
2,203,000
|
|
|
$
|
5,907,000
|
|
Interest expense
|
|
|
(5,000
|
)
|
|
|
|
|
Other income
|
|
|
|
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
2,198,000
|
|
|
$
|
5,978,000
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006 compared to year ended
December 31, 2005
Research and development expenses. Research
and development expenses increased by approximately
$35.2 million, or 208%, to approximately $52.1 million
for the year ended December 31, 2006 compared to
approximately $16.9 million for the year ended
December 31, 2005.
45
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Research and Development Expenses
|
|
2005
|
|
|
2006
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
6,275,000
|
|
|
$
|
36,249,000
|
|
Contract research and development, consulting, materials and
other costs
|
|
|
6,747,000
|
|
|
|
8,958,000
|
|
Milestone license fees
|
|
|
|
|
|
|
1,000,000
|
|
Salaries, benefits and related costs
|
|
|
1,962,000
|
|
|
|
3,327,000
|
|
Stock-based compensation
|
|
|
789,000
|
|
|
|
742,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
15,773,000
|
|
|
|
50,276,000
|
|
Indirect project costs
|
|
|
1,118,000
|
|
|
|
1,795,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,891,000
|
|
|
$
|
52,071,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs increased approximately $34.5 million
primarily as a result of clinical development activities for
Fiaptatm
and VEC-162. Clinical trials expense increased approximately
$30.0 million for the year ended December 31, 2006,
mostly due to the cost incurred in our Phase III
Fiaptatm
and VEC-162 clinical trials that were conducted and completed
primarily in 2006. Contract research and development,
consulting, materials and other costs increased approximately
$2.2 million for the year ended December 31, 2006,
primarily as a result of increased regulatory and
manufacturing-related development costs incurred in connection
with the manufacturing of clinical supply materials for the
Fiaptatm
and the VEC-162 clinical trial programs. Prior to FDA approval
of our products, manufacturing-related costs are included in
research and development expense. Milestone license fees in 2006
represent a $1.0 million milestone payment under our
license agreement for VEC-162 with Bristol-Myers Squibb Company.
Salaries, benefits and related costs increased approximately
$1.4 million for the year ended December 31, 2006 due
to an increase in personnel to support the development and
clinical trial activities for
Fiaptatm
and VEC-162. The stock-based compensation expense decreased
approximately $47,000 primarily as the 2005 amounts reflect
expenses incurred due to modifications of stock option awards
made in 2005. Indirect project costs also increased by
approximately $677,000 for the year ended December 31, 2006
due primarily to the increase in the rent expense resulting from
our move to the new facility.
General and administrative expenses. General
and administrative expenses increased approximately
$6.2 million, or 84%, to approximately $13.6 million
for the year ended December 31, 2006 from approximately
$7.4 million for the year ended December 31, 2005.
The following table analyzes the components of our general and
administrative expenses for the years ended December 31,
2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
General and Administrative Expenses
|
|
2005
|
|
|
2006
|
|
|
Salaries, benefits and related costs
|
|
$
|
1,411,000
|
|
|
$
|
2,609,000
|
|
Stock-based compensation
|
|
|
4,313,000
|
|
|
|
5,350,000
|
|
Marketing and related consulting services
|
|
|
279,000
|
|
|
|
1,187,000
|
|
Legal and other professional expenses
|
|
|
620,000
|
|
|
|
1,760,000
|
|
Other expenses
|
|
|
773,000
|
|
|
|
2,732,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,396,000
|
|
|
$
|
13,638,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased approximately
$1.2 million for the year ended December 31, 2006 due
to an increase in personnel as we continued to develop the
administrative, business development and
46
other functions required to support the development and clinical
trial activities for
Fiaptatm,
VEC-162 and our other product candidates. Stock-based
compensation expense increased by approximately
$1.0 million as a result of the higher fair value of
options granted during 2006 compared to options granted in prior
periods. Marketing and related consulting services increased by
approximately $0.9 million due to the increase in our
market research activities. Legal and other professional
expenses increased by approximately $1.1 million for the
year ended December 31, 2006 due primarily to an increase
in legal, accounting and other professional expenses associated
with being a public company. Other expenses increased
approximately $2.0 million for the year ended
December 31, 2006, due to an increase in facilities
expenses of approximately $473,000, which includes expenses
relating to abandonment of our former office facilities of
approximately $232,000, an increase in insurance expenses of
approximately $700,000, primarily due to an increase in
directors and officers and clinical trial insurance,
and an increase in other general and administrative expenses.
Interest income, net. Net interest income in
the year ended December 31, 2006 was approximately
$2.2 million compared to net interest income of
approximately $410,000 in the year ended December 31, 2005.
Interest income was higher in 2006 due to higher average cash
and marketable securities balances for the year and higher
short-term interest rates which generated substantially higher
interest income than it did in 2005.
Our interest income and expense for the years ended
December 31, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Interest income
|
|
$
|
436,000
|
|
|
$
|
2,203,000
|
|
Interest expense
|
|
|
(26,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
410,000
|
|
|
$
|
2,198,000
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and capital resources
We have funded our operations through December 31, 2007
principally with the net proceeds from private preferred stock
offerings totaling approximately $62.0 million, with net
proceeds from our April 2006 initial public offering of
approximately $53.3 and with net proceeds from our January 2007
follow-on offering of approximately $111.3 million.
At December 31, 2007, our total cash and cash equivalents
and marketable securities were approximately $93.2 million,
compared to approximately $31.9 million at
December 31, 2006. 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.
47
As of December 31, 2006 and 2007 our liquidity resources
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,929,000
|
|
|
$
|
41,930,000
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
|
|
|
|
|
3,980,000
|
|
U.S. corporate debt
|
|
|
942,000
|
|
|
|
33,339,000
|
|
U.S. asset-backed securities
|
|
|
|
|
|
|
5,925,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, short-term
|
|
|
942,000
|
|
|
|
43,244,000
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
|
|
|
|
|
2,002,000
|
|
U.S. corporate debt
|
|
|
|
|
|
|
1,970,000
|
|
U.S. asset-backed securities
|
|
|
|
|
|
|
4,007,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, long-term
|
|
|
|
|
|
|
7,979,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,871,000
|
|
|
$
|
93,153,000
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we maintained all of our cash,
cash equivalents and marketable securities in three financial
institutions. Deposits held with these institutions may exceed
the amount of insurance provided on such deposits, but we do not
anticipate any losses with respect to such deposits.
Our activities will necessitate significant uses of working
capital throughout 2008 and beyond. Based on our current
operating plans, we believe that our existing cash, cash
equivalents and marketable securities will be sufficient to meet
our anticipated operating needs into the fourth quarter of 2008.
If
Fiaptatm
is approved by the FDA on the expected PDUFA action date of or
about July 27, 2008, the Company intends to pursue
additional financing, in part to fund additional marketing and
product launch costs. The Company believes that it would be able
to raise sufficient capital to fund the product launch and
operations into 2009. However, if the Company cannot obtain
additional financing, management has the ability and intent to
implement a reduced spending plan to fund operations at least
through the first quarter of 2009. In budgeting for our
activities, we have relied on a number of assumptions, including
assumptions that we will continue to expend funds in preparation
of a commercial launch of
Fiaptatm,
that we will conduct our VEC-162 Phase III trial in chronic
primary insomnia in accordance with our expectations, that we
will not engage in further in-licensing activities, that we will
not receive any proceeds from potential partnerships, that we
will not expend funds on the bipolar indication for
Fiaptatm,
that we will not conduct additional trials for the injectable
formulation for
Fiaptatm,
that we will not conduct additional trials for VSF-173, that we
will continue to evaluate clinical and pre-clinical compounds
for potential development, that we will be able to continue the
manufacturing of our product candidates at commercially
reasonable prices, that we will be able to retain our key
personnel, and that we will not incur any significant contingent
liabilities. We may need to raise additional funds more quickly
if one or more of our assumptions proves to be incorrect or if
we choose to expand our product development efforts more rapidly
than presently anticipated or seek to acquire additional product
candidates, and we may also decide to raise additional funds
even before they are needed if the conditions for raising
capital are favorable.
We may seek to sell additional equity or debt securities or
obtain a bank credit facility. The sale of additional equity or
debt securities, if convertible, could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants
that would restrict our operations.
We cannot assure you that additional funds will be available
when we need them on terms that are acceptable to us, or at all.
The unavailability of financing may require us to delay, scale
back or eliminate expenditures for our research, development and
marketing activities necessary to commercialize our potential
biopharmaceutical products. If we are unable to secure
sufficient capital to fund our research and development
activities, we may not be able to continue operations or we may
have to enter into 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
we currently intend. Collaborations that are consummated by us
prior to proof-of-efficacy and safety of a product
48
candidate could impair our ability to realize value from that
product candidate. In the absence of our ability to raise
additional capital resources, we are also prepared and have the
ability to curtail our existing operating needs and commitments
to have the operating funds through the first quarter of 2009.
Cash
flow
The following table summarizes our cash flows for the years
ended December 31, 2005, 2006 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Net cash (used in) provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(17,714,000
|
)
|
|
$
|
(51,620,000
|
)
|
|
$
|
(51,641,000
|
)
|
Investing activities
|
|
|
(10,818,000
|
)
|
|
|
8,221,000
|
|
|
|
(48,760,000
|
)
|
Financing activities
|
|
|
33,294,000
|
|
|
|
53,315,000
|
|
|
|
111,403,000
|
|
Effect of foreign currency translation
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
4,753,000
|
|
|
$
|
9,916,000
|
|
|
$
|
11,001,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007 compared to year ended
December 31, 2006
Net cash used in operations was approximately $51.6 million
for both of the years ended December 31, 2006 and 2007. The
net loss for the year ended December 31, 2007 of
approximately $74.1 million was offset primarily by
non-cash charges for depreciation and amortization of
approximately $572,000, stock-based compensation of
approximately $19.6 million, and an increase in accrued
expenses and accounts payable of approximately
$3.7 million, principally related to clinical trial
expenses and expenses incurred in preparation of the commercial
launch of
Fiaptatm,
and other net changes in working capital. Net cash used in
investing activities for the year ended December 31, 2007
was approximately $48.8 million and consisted primarily of
net purchases of marketable securities of approximately
$48.7 million. Net cash provided by financing activities
for the year ended December 31, 2007 was approximately
$111.4 million, consisting primarily of net proceeds from
our January 2007 follow-on offering of approximately
$111.3 million.
Year
ended December 31, 2006 compared to year ended
December 31, 2005
Net cash used in operations was approximately $51.6 million
and approximately $17.7 million for the years ended
December 31, 2006 and 2005, respectively. The net loss for
the year ended December 31, 2006 of approximately
$63.5 million was offset primarily by non-cash charges for
depreciation and amortization of approximately $575,000,
non-cash stock-based compensation of approximately
$6.1 million, an increase in accrued expenses of
approximately $3.8 million, principally related to clinical
trial expenses, and other net changes in working capital. Net
cash provided by investing activities for the year ended
December 31, 2006 was approximately $8.2 million and
consisted primarily of net proceeds from sales and maturities of
marketable securities of approximately $9.6 million and
purchases of property and equipment of approximately
$1.4 million. Net cash provided by financing activities for
the year ended December 31, 2006 was approximately
$53.3 million, consisting primarily of net proceeds from
the initial public offering of our common stock of
$53.3 million.
Contractual
obligations and commitments
The following table summarizes our long-term contractual cash
obligations as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2012
|
|
Operating leases
|
|
$
|
6,335,000
|
|
|
$
|
662,000
|
|
|
$
|
685,000
|
|
|
$
|
706,000
|
|
|
$
|
727,000
|
|
|
$
|
749,000
|
|
|
$
|
2,806,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Operating leases. Our commitments under
operating leases shown above consist of payments relating to our
real estate leases for our current and former headquarters
located in Rockville, Maryland, expiring in 2016 and 2008,
respectively.
Clinical research organization contracts and other
contracts. We have entered into agreements with
clinical research organizations responsible for conducting and
monitoring our clinical trials for
Fiaptatm
and VEC-162, and have also entered into agreements with clinical
supply manufacturing organizations and other outside contractors
who will be responsible for additional services supporting our
ongoing clinical development processes. These contractual
obligations are not reflected in the table above because we may
terminate them on no more than 60 days notice without
incurring additional charges (other than charges for work
completed but not paid for through the effective date of
termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination).
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 our three compounds in clinical development. We
are obligated to make 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 based on net sales for each of the licensed products.
Please see the notes to the consolidated financial statements
included with this report for a more detailed description of
these license agreements.
As a result of the successful commencement of the Phase III
clinical study of VEC-162 in March 2006, we met the first
milestone specified in our licensing agreement with BMS and
subsequently paid a license fee of $1,000,000. During March
2007, we met our first milestone under the license agreement
with Novartis for VSF-173 relating to the initiation of the
Phase II clinical trial and subsequently paid a license fee
of $1,000,000. As a result of the acceptance by FDA of our NDA
for
Fiaptatm
in October 2007, we met a milestone under our license agreement
with Novartis and subsequently paid a $5,000,000 milestone
license fee. No amounts were recorded as liabilities relating to
the license agreements included in the consolidated financial
statements as of December 31, 2007, 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 FDA regulatory approvals, growth
in product sales and other factors. For a more detailed
description of the risks associated with the outcome of such
clinical trials, regulatory filings, FDA approvals and product
sales, please see the section Risk Factors of this
annual report on
Form 10-K.
ITEM 7A. QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign
exchange
We currently incur a portion of our operating expenses in
currencies other than U.S. Dollars, the reporting currency
for our consolidated financial statements, and we have
determined that such operating expenses have not been
significant to date. As a result, we have not been impacted
materially by changes in exchange rates and do not expect to be
impacted materially for the foreseeable future. However, if
operating expenses incurred outside of the United States
increase, our results of operations could be adversely impacted
by changes in exchange rates. We do not currently hedge foreign
currency fluctuations and do not intend to do so for the
foreseeable future.
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.
50
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.
Off-balance
sheet arrangements
We have no off-balance sheet arrangements, as defined in
Item 303(a)(4) of the Securities and Exchange
Commissions Regulation S-K.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The consolidated financial statements and related financial
statement schedules required to be filed are indexed on
page 55 and are incorporated herein.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of the
Companys management, including the Chief Executive Officer
and Chief Financial Officer, the Company evaluated the
effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of December 31, 2007. Based upon
that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of
December 31, 2007, the end of the period covered by this
annual report, to ensure that the information required to be
disclosed by the Company in the reports that it files or submits
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 adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f),
for the Company. Under the supervision and with the
participation of management, including the Companys Chief
Executive Officer and Chief Financial Officer, an evaluation of
the effectiveness of the Companys internal control over
financial reporting was conducted based on the framework in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation,
51
the Companys management concluded that the Companys
internal control over financial reporting was effective as of
December 31, 2007.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2007 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
on page 56 of this
Form 10-K.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) during the fourth quarter of 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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 held May 8, 2008, 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 held May 8, 2008, under the captions
Corporate Governance and Executive
Compensation, and is incorporated herein by reference
pursuant to General Instruction G(3) to
Form 10-K,
except that information required by Item 407(e)(5) of
Regulation S-K
will be deemed furnished in this
Form 10-K
and will not be deemed incorporated by reference into any filing
under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that we specifically incorporate
it by reference into such filing.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
In addition to the information set forth under the caption
Securities Authorized for Issuance Under Equity
Compensation Plans in Part II of this annual report
on
Form 10-K,
information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 2008, 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 held May 8, 2008, under the caption
Corporate Governance and is incorporated herein by
reference pursuant to General Instruction G(3) to
Form 10-K.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 2008, under the caption
Ratification of Selection of Independent
52
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 55. 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.
53
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 13, 2008.
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 13, 2008
|
|
|
|
|
|
/s/ STEVEN
A. SHALLCROSS
Steven
A. Shallcross
|
|
Senior Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ ARGERIS
N. KARABELAS, Ph.D.
Argeris
N. Karabelas, Ph.D.
|
|
Chairman of the Board and Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ RICHARD
W. DUGAN
Richard
W. Dugan
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ BRIAN
K. HALAK, Ph.D.
Brian
K. Halak, Ph.D.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ HOWARD
PIEN
Howard
Pien
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ DAVID
RAMSAY
David
Ramsay
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ H.
THOMAS WATKINS
H.
Thomas Watkins
|
|
Director
|
|
March 13, 2008
|
54
Vanda
Pharmaceuticals Inc.
Index to
consolidated financial statements
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
62
|
|
|
|
|
63
|
|
55
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Vanda Pharmaceuticals Inc. (a development stage enterprise)
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
stockholders equity, and cash flows present fairly, in all
material respects, the financial position of Vanda
Pharmaceuticals Inc. and its subsidiary (a development stage
enterprise) at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007 and,
cumulatively for the period from March 13, 2003 (date of
inception) to December 31, 2007, 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, 2007, 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 audits which was an integrated audit in 2007. 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.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for stock-based compensation in 2006.
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
McLean, Virginia
March 13, 2008
56
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,929,533
|
|
|
$
|
30,928,895
|
|
Marketable securities
|
|
|
43,243,960
|
|
|
|
941,981
|
|
Prepaid expenses and other current assets
|
|
|
1,781,881
|
|
|
|
1,949,466
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
86,955,374
|
|
|
|
33,820,342
|
|
Marketable securities, long-term
|
|
|
7,979,331
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,345,845
|
|
|
|
1,859,704
|
|
Deposits
|
|
|
150,000
|
|
|
|
150,000
|
|
Restricted cash
|
|
|
430,230
|
|
|
|
430,230
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
96,860,780
|
|
|
$
|
36,260,276
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,988,069
|
|
|
$
|
2,783,249
|
|
Accrued liabilities
|
|
|
9,789,738
|
|
|
|
6,322,808
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,777,807
|
|
|
|
9,106,057
|
|
Deferred grant revenue
|
|
|
|
|
|
|
129,950
|
|
Deferred rent and other long-term liabilities
|
|
|
354,042
|
|
|
|
267,397
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,131,849
|
|
|
|
9,503,404
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 20,000,000 shares
authorized and none issued and outstanding at December 31,
2007 and 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 150,000,000 shares
authorized, 26,652,728 and 22,128,534 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
26,653
|
|
|
|
22,129
|
|
Additional paid-in capital
|
|
|
257,600,368
|
|
|
|
126,578,588
|
|
Accumulated other comprehensive income (loss)
|
|
|
12,176
|
|
|
|
(3,269
|
)
|
Deficit accumulated during the development stage
|
|
|
(173,910,266
|
)
|
|
|
(99,840,576
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
83,728,931
|
|
|
|
26,756,872
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
96,860,780
|
|
|
$
|
36,260,276
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Revenues from services
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
81,545
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
47,234,867
|
|
|
|
52,070,776
|
|
|
|
16,890,615
|
|
|
|
125,649,773
|
|
General and administrative
|
|
|
32,803,508
|
|
|
|
13,637,664
|
|
|
|
7,396,038
|
|
|
|
57,009,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80,038,375
|
|
|
|
65,708,440
|
|
|
|
24,286,653
|
|
|
|
182,659,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(80,038,375
|
)
|
|
|
(65,708,440
|
)
|
|
|
(24,286,653
|
)
|
|
|
(182,577,491
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,907,219
|
|
|
|
2,202,654
|
|
|
|
435,537
|
|
|
|
8,698,789
|
|
Interest expense
|
|
|
|
|
|
|
(4,833
|
)
|
|
|
(25,629
|
)
|
|
|
(80,485
|
)
|
Other income, net
|
|
|
71,345
|
|
|
|
|
|
|
|
93
|
|
|
|
71,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
5,978,564
|
|
|
|
2,197,821
|
|
|
|
410,001
|
|
|
|
8,690,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(74,059,811
|
)
|
|
|
(63,510,619
|
)
|
|
|
(23,876,652
|
)
|
|
|
(173,887,240
|
)
|
Tax provision
|
|
|
9,879
|
|
|
|
549
|
|
|
|
7,649
|
|
|
|
23,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(74,069,690
|
)
|
|
|
(63,511,168
|
)
|
|
|
(23,884,301
|
)
|
|
|
(173,910,266
|
)
|
Beneficial conversion feature deemed dividend to
preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(57,370,924
|
)
|
|
$
|
(207,396,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
$
|
(3,374.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of basic and diluted net loss per
share attributable to common stockholders
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
17,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
During the
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Compensation
|
|
|
Loss
|
|
|
Stage
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at March 13, 2003 (Inception)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of Series A preferred stock, net of issuance costs
of $36,459
|
|
|
10,000,000
|
|
|
|
9,963,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,963,541
|
|
Issuance of Class A common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,020
|
|
|
|
3
|
|
|
|
3,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,573
|
|
Issuance of Series B preferred stock, net of issuance costs
of $154,982
|
|
|
|
|
|
|
|
|
|
|
15,040,654
|
|
|
|
18,345,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,345,023
|
|
Deferred compensation associated with stock options grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,130
|
|
|
|
(281,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,196
|
|
Expense related to accelerated unvested stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,937
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,445,107
|
)
|
|
|
(12,445,107
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,576
|
)
|
|
|
|
|
|
|
(2,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,447,683
|
)
|
|
|
(12,447,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
10,000,000
|
|
|
$
|
9,963,541
|
|
|
|
15,040,654
|
|
|
$
|
18,345,023
|
|
|
|
3,020
|
|
|
$
|
3
|
|
|
$
|
340,637
|
|
|
$
|
(257,934
|
)
|
|
$
|
(2,576
|
)
|
|
$
|
(12,445,107
|
)
|
|
|
|
|
|
$
|
15,943,587
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
During the
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common stock
|
|
|
Paid-in
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Compensation
|
|
|
Loss
|
|
|
Stage
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at December 31, 2004
|
|
|
10,000,000
|
|
|
$
|
9,963,541
|
|
|
|
15,040,654
|
|
|
$
|
18,345,023
|
|
|
|
3,020
|
|
|
$
|
3
|
|
|
$
|
340,637
|
|
|
$
|
(257,934
|
)
|
|
$
|
(2,576
|
)
|
|
$
|
(12,445,107
|
)
|
|
$
|
|
|
|
$
|
15,943,587
|
|
Issuance of Series B preferred stock net of issuance costs
of $13,391
|
|
|
|
|
|
|
|
|
|
|
27,235,783
|
|
|
|
33,486,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,486,623
|
|
Issuance of common stock from exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,925
|
|
|
|
96
|
|
|
|
31,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,754
|
|
Deferred compensation associated with stock options grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,788,385
|
|
|
|
(18,788,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation associated with remeasurement of unvested
stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,702,625
|
|
|
|
(1,702,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense related to remeasurement of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,119,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,119,676
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,982,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,982,501
|
|
Beneficial conversion feature deemed dividend on
issuance of Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,486,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,486,623
|
|
Beneficial conversion feature accretion of
beneficial conversion feature for Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,884,301
|
)
|
|
|
(23,884,301
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,711
|
)
|
|
|
|
|
|
|
(17,711
|
)
|
|
|
|
|
Net unrealized gains on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,678
|
|
|
|
|
|
|
|
2,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23,899,334
|
)
|
|
|
(23,899,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
10,000,000
|
|
|
$
|
9,963,541
|
|
|
|
42,276,437
|
|
|
$
|
51,831,646
|
|
|
|
98,945
|
|
|
$
|
99
|
|
|
$
|
23,982,981
|
|
|
$
|
(18,766,443
|
)
|
|
$
|
(17,609
|
)
|
|
$
|
(36,329,408
|
)
|
|
|
|
|
|
$
|
30,664,807
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
During the
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common stock
|
|
|
Paid-in
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Stage
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at December 31, 2005
|
|
|
10,000,000
|
|
|
$
|
9,963,541
|
|
|
|
42,276,437
|
|
|
$
|
51,831,646
|
|
|
|
98,945
|
|
|
$
|
99
|
|
|
$
|
23,982,981
|
|
|
$
|
(18,766,443
|
)
|
|
$
|
(17,609
|
)
|
|
$
|
(36,329,408
|
)
|
|
$
|
|
|
|
$
|
30,664,807
|
|
Elimination of deferred stock-based compensation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,766,443
|
)
|
|
|
18,766,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,964,188
|
|
|
|
5,964
|
|
|
|
53,323,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,329,951
|
|
Conversion of preferred stock upon initial public offering
|
|
|
(10,000,000
|
)
|
|
|
(9,963,541
|
)
|
|
|
(42,276,437
|
)
|
|
|
(51,831,646
|
)
|
|
|
15,794,632
|
|
|
|
15,795
|
|
|
|
61,779,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,233
|
|
|
|
223
|
|
|
|
78,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,524
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,536
|
|
|
|
48
|
|
|
|
48,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,591
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092,339
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,488
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,511,168
|
)
|
|
|
(63,511,168
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,007
|
|
|
|
|
|
|
|
17,007
|
|
|
|
|
|
Net unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,667
|
)
|
|
|
|
|
|
|
(2,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(63,496,828
|
)
|
|
|
(63,496,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,128,534
|
|
|
|
22,129
|
|
|
|
126,578,588
|
|
|
|
|
|
|
|
(3,269
|
)
|
|
|
(99,840,576
|
)
|
|
|
|
|
|
|
26,756,872
|
|
Issuance of common stock from exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,194
|
|
|
|
154
|
|
|
|
148,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,640
|
|
Follow-on offering of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,370,000
|
|
|
|
4,370
|
|
|
|
111,250,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,254,850
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,486,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,486,844
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,970
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,069,690
|
)
|
|
|
(74,069,690
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,940
|
)
|
|
|
|
|
|
|
(12,940
|
)
|
|
|
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,385
|
|
|
|
|
|
|
|
28,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(74,054,245
|
)
|
|
|
(74,054,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
26,652,728
|
|
|
$
|
26,653
|
|
|
$
|
257,600,368
|
|
|
$
|
|
|
|
$
|
12,176
|
|
|
$
|
(173,910,266
|
)
|
|
|
|
|
|
$
|
83,728,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(23,884,301
|
)
|
|
$
|
(173,910,266
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
571,586
|
|
|
|
575,372
|
|
|
|
423,828
|
|
|
|
1,968,855
|
|
Stock-based compensation
|
|
|
19,622,814
|
|
|
|
6,131,827
|
|
|
|
5,102,177
|
|
|
|
30,935,523
|
|
Loss on disposal of assets
|
|
|
28,713
|
|
|
|
29,528
|
|
|
|
|
|
|
|
58,241
|
|
Accretion of discount on investments
|
|
|
(1,571,905
|
)
|
|
|
(378,739
|
)
|
|
|
(42,335
|
)
|
|
|
(1,992,980
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
168,987
|
|
|
|
270,745
|
|
|
|
(2,027,544
|
)
|
|
|
(1,777,948
|
)
|
Deposits
|
|
|
|
|
|
|
690,000
|
|
|
|
(790,000
|
)
|
|
|
(150,000
|
)
|
Accounts payable
|
|
|
204,029
|
|
|
|
526,711
|
|
|
|
1,514,868
|
|
|
|
2,988,016
|
|
Accrued expenses
|
|
|
3,465,028
|
|
|
|
3,811,373
|
|
|
|
1,860,539
|
|
|
|
9,782,861
|
|
Deferred grant revenue
|
|
|
(147,464
|
)
|
|
|
|
|
|
|
129,950
|
|
|
|
|
|
Deferred rent and other liabilities
|
|
|
86,644
|
|
|
|
234,833
|
|
|
|
(1,356
|
)
|
|
|
354,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(51,641,258
|
)
|
|
|
(51,619,518
|
)
|
|
|
(17,714,174
|
)
|
|
|
(131,743,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(279,433
|
)
|
|
|
(1,354,156
|
)
|
|
|
(291,978
|
)
|
|
|
(3,438,200
|
)
|
Proceeds from sale of property and equipment
|
|
|
200,179
|
|
|
|
|
|
|
|
|
|
|
|
200,179
|
|
Purchases of marketable securities
|
|
|
(138,953,879
|
)
|
|
|
(102,232,608
|
)
|
|
|
(11,846,176
|
)
|
|
|
(253,032,662
|
)
|
Proceeds from sale of marketable securities
|
|
|
3,577,859
|
|
|
|
82,137,888
|
|
|
|
|
|
|
|
85,715,747
|
|
Maturities of marketable securities
|
|
|
86,695,000
|
|
|
|
29,670,000
|
|
|
|
1,750,000
|
|
|
|
118,115,000
|
|
Investments in restricted cash
|
|
|
|
|
|
|
|
|
|
|
(430,230
|
)
|
|
|
(430,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(48,760,274
|
)
|
|
|
8,221,124
|
|
|
|
(10,818,384
|
)
|
|
|
(52,870,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515,147
|
|
Principal payments on obligations under capital lease
|
|
|
|
|
|
|
(1,540
|
)
|
|
|
(51,569
|
)
|
|
|
(91,796
|
)
|
Principal payments on note payable
|
|
|
|
|
|
|
(141,074
|
)
|
|
|
(172,617
|
)
|
|
|
(515,147
|
)
|
Proceeds from the issuance of preferred stock, net of issuance
costs
|
|
|
|
|
|
|
|
|
|
|
33,486,623
|
|
|
|
61,795,187
|
|
Proceeds from exercise of stock options and warrants
|
|
|
148,640
|
|
|
|
127,115
|
|
|
|
31,754
|
|
|
|
307,509
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
111,254,850
|
|
|
|
53,329,951
|
|
|
|
|
|
|
|
164,588,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
111,403,490
|
|
|
|
53,314,452
|
|
|
|
33,294,191
|
|
|
|
226,599,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
(1,320
|
)
|
|
|
22
|
|
|
|
(8,588
|
)
|
|
|
(56,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
11,000,638
|
|
|
|
9,916,080
|
|
|
|
4,753,045
|
|
|
|
41,929,533
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
30,928,895
|
|
|
|
21,012,815
|
|
|
|
16,259,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
41,929,533
|
|
|
$
|
30,928,895
|
|
|
$
|
21,012,815
|
|
|
$
|
41,929,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
|
|
|
$
|
5,994
|
|
|
$
|
25,043
|
|
|
$
|
76,612
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired through obligation under capital lease
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95,305
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
|
|
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 small molecule therapeutics, with exclusive
worldwide commercial rights to three product candidates in
clinical development for various central nervous system
disorders. The Company commenced its operations in 2003. The
Companys lead product candidate,
Fiaptatm
(iloperidone), is a compound for the treatment of schizophrenia
and bipolar disorder. On November 27, 2007 the United
States Food and Drug Administration (FDA) accepted the New Drug
Application (NDA) for
Fiaptatm
in schizophrenia. The second product candidate, VEC-162, is a
compound for the treatment of sleep and mood disorders. In
November 2006 Vanda announced positive top-line results from the
Phase III trial of VEC-162 in transient insomnia. In
November 2007 the Company initiated and in February 2008
completed an enrollment in a Phase III trial of VEC-162 in
chronic primary insomnia. VEC-162 is also ready for
Phase II trials for the treatment of depression. The third
product candidate, VSF-173, is a compound for the treatment of
excessive sleepiness in the Phase II program.
Capital
resources
Since its inception, the Company has devoted substantially all
of its efforts to business planning, research and development,
market research, recruiting management and technical staff,
acquiring operating assets and raising capital. Accordingly, the
Company is considered to be in the development stage as defined
in Statement of Financial Accounting Standards (SFAS)
No. 7, Accounting and Reporting by Development Stage
Enterprises.
The Companys activities will necessitate significant uses
of working capital throughout 2008 and beyond. Additionally, the
Companys capital requirements will depend on many factors,
including the success of the Companys research and
development efforts, payments received under contractual
agreements with other parties, if any, and the status of
competitive products. The Company plans to continue financing
its operations with cash received from financing activities.
Based on its current operating plans, the Company believes that
its existing cash, cash equivalents and marketable securities
will be sufficient to meet the Companys anticipated
operating needs into the fourth quarter of 2008. If
Fiaptatm
is approved by the FDA on the expected PDUFA action date of or
about July 27, 2008, the Company intends to pursue
additional financing, in part to fund additional marketing and
product launch costs. The Company believes that it would be able
to raise sufficient capital to fund the product launch and
operations into 2009. However, if the Company cannot obtain
additional financing, management has the ability and intent to
implement a reduced spending plan to fund operations at least
through the first quarter of 2009. In budgeting for its
activities, the Company has relied on a number of assumptions,
including assumptions that the Company will continue to expend
funds in preparation of a commercial launch of
Fiaptatm,
that it will conduct its VEC-162 Phase III trial in chronic
primary insomnia in accordance with the Companys
expectations, that it will not engage in further in-licensing
activities, that it will not receive any proceeds from potential
partnerships, that it will not expend funds on the bipolar
indication for
Fiaptatm,
that it will not conduct additional trials for the injectable
formulation for
Fiaptatm,
that it will not conduct additional trials for VSF-173, that it
will continue to evaluate clinical and pre-clinical compounds
for potential development, that it will be able to continue the
manufacturing of its product candidates at commercially
reasonable prices, that it will be able to retain its key
personnel, and that it will not incur any significant contingent
liabilities. The Company may need to raise additional funds more
quickly if one or more of its assumptions proves to be incorrect
or if it chooses to expand its product development efforts more
rapidly than presently anticipated or seek to acquire additional
product candidates, and the Company may also decide to raise
additional funds even before they are needed if the conditions
for raising capital are favorable. However, the Company may not
be able to raise additional funds
63
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
on acceptable terms, or at all. If the Company is unable to
secure sufficient capital to fund its research and development
activities, the Company may not be able to continue operations,
or the Company may have to enter into collaboration agreements
that could require the Company to share commercial rights to its
products to a greater extent or at earlier stages in the drug
development process than is currently intended. These
collaborations, if consummated prior to proof-of-efficacy or
safety of a given product candidate, could impair the
Companys ability to realize value from that product
candidate.
Basis
of presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The consolidated
financial statements include the accounts of the Company and its
wholly-owned Singapore subsidiary that ceased operations during
2007. All inter-company balances and transactions have been
eliminated.
|
|
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.
Concentrations
of credit risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash, cash equivalents and marketable securities. The Company
places its cash, cash equivalents and marketable securities with
highly-rated financial institutions and does not hold any
investment securities as of December 31, 2007 that have
been affected by the recent credit crisis. At December 31,
2007, 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
64
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
deposits. Generally, these deposits may be redeemed upon demand,
and the Company believes there is minimal risk of losses on such
balances.
Fair
value of financial instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, marketable
securities, restricted cash, and accounts payable, approximate
their fair values due to their short maturities.
Property
and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is provided on a straight-line basis over the
estimated useful lives of the assets. Amortization of leasehold
improvements is provided on a straight-line basis over the
shorter of their estimated useful life or the lease term. The
costs of additions and improvements are capitalized, and repairs
and maintenance costs are charged to operations in the period
incurred.
Upon retirement or disposition of property and equipment, the
cost and accumulated depreciation and amortization are removed
from the accounts and any resulting gain or loss is reflected in
the statement of operations for that period.
Foreign
currency translation
The functional currency of the Companys wholly-owned
foreign subsidiary located in Singapore is the local currency.
Assets and liabilities of the Companys foreign subsidiary
are translated to United States dollars based on exchange rates
at the end of the reporting period. Income and expense items are
translated at weighted average exchange rates prevailing during
the reporting period. Translation adjustments are accumulated in
a separate component of stockholders equity. Translation
gains or losses are included in the determination of operating
results.
Comprehensive
income (loss)
SFAS No. 130, Reporting Comprehensive Income,
requires a full set of general-purpose financial statements
to include the reporting of comprehensive income.
Comprehensive loss is composed of two components, net loss and
other comprehensive income/(loss). For the years ended
December 31, 2007, 2006 and 2005, other comprehensive
income/(loss) consists of cumulative translation adjustments due
to foreign currency and unrealized gains/(losses) on marketable
securities.
Accrued
expenses
Management is required to estimate accrued expenses as part of
the process of preparing financial statements. The estimation of
accrued expenses involves identifying services that have been
performed on the Companys behalf, and then estimating the
level of service performed and the associated cost incurred for
such services as of each balance sheet date in the financial
statements. Accrued expenses include professional service fees,
such as lawyers and accountants, contract service fees, such as
those under contracts with clinical monitors, data management
organizations and investigators in conjunction with clinical
trials, fees to contract manufacturers in conjunction with the
production of clinical materials, and fees for marketing and
other commercialization activities. 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
65
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment.
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,
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, including payments made
to date under the license agreements. Manufacturing-related
costs are also included in research and development expenses as
the Company does not yet have FDA approval for any of its
product candidates. 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
SFAS No. 5, Accounting for Contingencies, 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
our product candidate
Fiaptatm,
in anticipation of its commercial launch.
Accounting
for stock-based compensation
The Company accounts for the stock-based compensation expenses
in accordance with the Financial Accounting Standards Board
(FASB) revised SFAS No. 123, Share-Based Payment
(SFAS 123(R)) adopted on January 1, 2006.
Accordingly, compensation costs for all stock-based awards to
employees and directors are measured based on the grant date
fair value of those awards and recognized over the period during
which the employee or director is required to perform service in
exchange for the award. The Company generally recognizes the
expense over the awards vesting period.
Prior to January 1, 2006, the Company accounted for
stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and FASB Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option Plan or Award Plans
(FIN 28). Under APB 25, the stock-based compensation
expense was recognized over the vesting period of the option to
the extent that the fair value of the stock exceeded the
exercise price of the stock at the date of grant.
The Company adopted SFAS 123(R) using the modified
prospective transition method. The valuation provisions of
SFAS 123(R) apply to new stock-based awards and to
stock-based awards that were outstanding at the effective date
and subsequently modified or cancelled. Estimated compensation
expense for stock-based awards outstanding at the effective date
have been recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes
under FASB Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123). In accordance with the
modified prospective transition method,
66
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
the Companys consolidated financial statements for prior
periods were not restated to reflect, and do not include, the
impact of SFAS 123(R).
For stock awards granted in 2006 and 2007, the fair value of
these awards are amortized using the accelerated attribution
method. For stock awards granted prior to January 1, 2006,
expenses are amortized under the accelerated attribution method
for options that were modified after the original grant date and
under the straight-line attribution method for all other
options. As stock-based compensation expense recognized in the
consolidated statements of operations is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures 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 during
2006 and 2007 were estimated to be approximately 2% based on the
Companys historical experience. In the pro forma
information required under SFAS 123 for the periods prior
to January 1, 2006, the Company accounted for forfeitures
as they occurred. At no time was the cumulative expense
recognized less than the fair value of the vested options. The
cumulative effect adjustment of adopting the change in
estimating forfeitures was not considered material to the
Companys financial statements for periods prior to
January 1, 2006 upon implementation of SFAS 123(R).
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 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 Staff Accounting Bulletin (SAB)
No. 107 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 and does not plan to pay
dividends in the foreseeable future.
The weighted average grant date fair value of options granted
during the years ended December 31, 2007 and
December 31, 2006 was $18.99 per share and $13.71 per
share, respectively. As of December 31, 2007, approximately
$25.8 million of total unrecognized compensation costs
related to non-vested awards is expected to be recognized over a
weighted average period of 1.39 years.
Assumptions used in the Black-Scholes-Merton model for employee
and director options granted during the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
68
|
%
|
|
|
73
|
%
|
Weighted average expected term (years)
|
|
|
6.25
|
|
|
|
6.14
|
|
Weighted average risk-free rate
|
|
|
4.10
|
%
|
|
|
4.66
|
%
|
67
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
Total stock-based compensation expense, related to the
Companys stock-based awards to employees and directors,
recognized during the years ended December 31, 2007, 2006
and 2005 and for the period from March 13, 2003 (inception)
to December 31, 2007 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Research and development
|
|
$
|
4,259,315
|
|
|
$
|
742,048
|
|
|
$
|
788,877
|
|
|
$
|
5,792,326
|
|
General and administrative
|
|
|
15,227,529
|
|
|
|
5,350,291
|
|
|
|
4,313,300
|
|
|
|
24,967,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
19,486,844
|
|
|
$
|
6,092,339
|
|
|
$
|
5,102,177
|
|
|
$
|
30,760,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per basic and diluted share of
common stock
|
|
$
|
0.74
|
|
|
$
|
0.38
|
|
|
$
|
300.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the Company had a net operating loss carryforward as of
December 31, 2007, no excess tax benefits for the tax
deductions related to stock-based awards were recognized in the
consolidated statements of operations. Additionally, no
incremental tax benefits were recognized from stock options
exercised in 2007 or 2006 which would have resulted in a
reclassification to reduce net cash used in operating activities
with an offsetting increase in net cash provided by financing
activities.
Pro forma
information under SFAS 123 for periods prior to
January 1, 2006
Through fiscal year 2005, the Company accounted for stock-based
awards to employees using the intrinsic value method in
accordance with APB 25 and related interpretations and provided
the required pro forma disclosures of SFAS 123. The
intrinsic value method under APB 25 calculates the compensation
expense as the difference between the fair value of the common
stock on the date such options were granted and their exercise
price. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under
SFAS 123, the Companys net loss and basic and diluted
net loss attributable to common stockholders per share would
have been changed to the following pro forma amounts:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(57,370,924
|
)
|
Add: Stock based employee compensation expense included in net
loss
|
|
|
5,102,177
|
|
Less: Stock-based employee compensation expense determined under
SFAS 123
|
|
|
(5,167,246
|
)
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$
|
(57,435,993
|
)
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
Basic and diluted, net loss attributable to common stockholders
as reported
|
|
$
|
(3,374.33
|
)
|
|
|
|
|
|
Pro forma basic and diluted, net loss attributable to common
stockholders
|
|
$
|
(3,378.15
|
)
|
|
|
|
|
|
68
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
The weighted average fair value of an option granted during the
year ended December 31, 2005 was $14.89. The fair value of
each option grant is estimated on the date of the grant using
the Black-Scholes-Merton option pricing model with the following
assumptions:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
67%-68
|
%
|
Weighted average expected term (years)
|
|
|
5
|
|
Weighted average risk-free rate
|
|
|
4.00
|
%
|
Income
taxes
The Company accounts for income taxes under the liability method
in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109), 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.
On January 1, 2007, the Company adopted the provisions of
Financial Accounting Standards Board Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes. The adoption of FIN No. 48 did not
have a material effect on the Companys financial position
or results of operations.
The Company recognizes interest and penalties accrued related to
unrecognized tax benefits as a component of the income tax
provision. For the year ended December 31, 2007, there have
been no interest and penalties recorded as a component of the
income tax provision. The Companys open tax years under
FIN 48 are 2003 through 2007.
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 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (SFAS 157), which addresses
how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure
purposes under generally accepted accounting principles (GAAP).
SFAS 157 outlines a common definition of fair value to be
used throughout GAAP and the new standard intends to make the
measurement of fair value more consistent and comparable and
improve disclosures about those measures. Companies will need to
adopt SFAS 157 for financial statements issued for fiscal
years beginning after November 15, 2007. In February 2008,
the FASB agreed to delay the effective date of SFAS 157 for
all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008. This
69
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
pronouncement is not expected to have significant impact on the
Companys results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this standard the
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis (the fair value option). SFAS 159 is effective for
fiscal years beginning after November 15, 2007. This
pronouncement is not expected to have significant impact on the
Companys results of operations and financial condition.
In June 2007, the Emerging Issues Task Force issued EITF
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3),
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. We will be
required to adopt
EITF 07-3
for the year beginning after December 15, 2007. This
pronouncement is not expected to have significant impact on the
Companys results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141
(revised 2007) Business Combinations
(SFAS 141R) and SFAS No. 160
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51 (SFAS 160). SFAS 141R
will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of
equity. SFAS 141R and SFAS 160 will be applied to
acquisitions that close in years beginning after
December 15, 2008. Early adoption is not permitted. These
pronouncements are not expected to have significant impact on
the Companys results of operations and financial condition.
In December 2007, the FASB ratified EITF Issue
07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
The consensus prohibits the equity method of accounting for
collaborative arrangements under APB 18, The Equity Method of
Accounting for Investments in Common Stock, unless a legal
entity exists. Payments between the collaborative partners will
be evaluated and reported in the income statement based on
applicable GAAP. Absent specific GAAP, the participants to the
arrangement will apply other existing GAAP by analogy or apply a
reasonable and rational accounting policy consistently. The
guidance in Issue
07-1 is
effective for periods that begin after December 15, 2008
and will apply to arrangements in existence as of the effective
date. The effect of the new consensus will be accounted for as a
change in accounting principle through retrospective
application. The Company is currently evaluating the impact of
EITF 07-1
on its results of operations and financial condition.
Certain
risks and uncertainties
The Companys 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.
70
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
The Company depends on single source suppliers for critical raw
materials for manufacturing, as well as other components
required for the administration of its product candidates. The
loss of these suppliers could delay the clinical trials or
prevent or delay commercialization of the product candidates.
Net loss attributable to common stockholders per share is
calculated in accordance with SFAS No. 128,
Earnings per Share, and Staff Accounting Bulletin (SAB)
No. 98. Basic earnings per share (EPS) is calculated by
dividing the net loss attributable to common stockholders by the
weighted average number of common shares outstanding, reduced by
the weighted average unvested common shares subject to
repurchase.
Diluted EPS is computed by dividing the net loss attributable to
common stockholders by the weighted average number of other
potential common stock outstanding for the period. Other
potential common stock include Series A and B preferred
stock, stock options and warrants but only to the extent that
their inclusion is dilutive. The Company incurred a net loss in
all periods presented, causing inclusion of any potentially
dilutive securities to have an anti-dilutive affect, resulting
in dilutive loss per share attributable to common stockholders
and basic loss per share attributable to common stockholders
being equivalent. The Company did not have any common shares
issued for nominal consideration as defined under the terms of
SAB No. 98, which would be included in EPS
calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(23,884,301
|
)
|
Beneficial conversion feature deemed dividend to
preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(57,370,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
26,370,485
|
|
|
|
16,040,425
|
|
|
|
30,346
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
(10,308
|
)
|
|
|
(38,610
|
)
|
|
|
(13,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
17,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
$
|
(3,374.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding anti-dilutive securities not included
in diluted net loss per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A and B convertible preferred stock(1)
|
|
|
|
|
|
|
|
|
|
|
15,794,632
|
|
Options to purchase common stock
|
|
|
2,938,610
|
|
|
|
1,706,732
|
|
|
|
1,532,542
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
50,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,938,610
|
|
|
|
1,706,732
|
|
|
|
17,377,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Common stock equivalents assuming conversion upon the initial
public offering |
71
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
The following is a summary of the Companys
available-for-sale marketable securities as of December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
3,980,732
|
|
|
$
|
|
|
|
$
|
(897
|
)
|
|
$
|
3,979,835
|
|
U.S. corporate debt
|
|
|
33,301,950
|
|
|
|
48,247
|
|
|
|
(11,417
|
)
|
|
|
33,338,780
|
|
U.S. asset-based securities
|
|
|
5,920,992
|
|
|
|
4,353
|
|
|
|
|
|
|
|
5,925,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,203,674
|
|
|
$
|
52,600
|
|
|
$
|
(12,314
|
)
|
|
$
|
43,243,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
1,999,104
|
|
|
$
|
2,844
|
|
|
$
|
|
|
|
$
|
2,001,948
|
|
U.S. corporate debt
|
|
|
1,988,637
|
|
|
|
|
|
|
|
(18,597
|
)
|
|
|
1,970,040
|
|
U.S. asset-based securities
|
|
|
4,003,480
|
|
|
|
3,863
|
|
|
|
|
|
|
|
4,007,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,991,221
|
|
|
$
|
6,707
|
|
|
$
|
(18,597
|
)
|
|
$
|
7,979,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys
available-for-sale marketable securities as of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair Market
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate debt
|
|
$
|
941,970
|
|
|
$
|
36
|
|
|
$
|
(25
|
)
|
|
$
|
941,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
941,970
|
|
|
$
|
36
|
|
|
$
|
(25
|
)
|
|
$
|
941,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Prepaid
expenses and other current assets
|
The following is a summary of the Companys prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deposits with vendors
|
|
$
|
455,000
|
|
|
$
|
820,000
|
|
Prepaid insurance
|
|
|
395,203
|
|
|
|
337,332
|
|
Prepaid research and development expenses
|
|
|
175,955
|
|
|
|
185,229
|
|
Accrued interest income
|
|
|
603,556
|
|
|
|
97,575
|
|
Other prepaid expenses
|
|
|
146,771
|
|
|
|
332,400
|
|
Prepaid public offering costs
|
|
|
|
|
|
|
69,064
|
|
Other receivables
|
|
|
5,396
|
|
|
|
107,866
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
1,781,881
|
|
|
$
|
1,949,466
|
|
|
|
|
|
|
|
|
|
|
72
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
|
|
6.
|
Property
and equipment
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory equipment
|
|
|
5
|
|
|
$
|
1,281,877
|
|
|
$
|
1,675,375
|
|
Computer equipment
|
|
|
3
|
|
|
|
758,776
|
|
|
|
741,404
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
187,317
|
|
|
|
169,549
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
505,684
|
|
|
|
736,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,733,654
|
|
|
|
3,322,846
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(1,387,809
|
)
|
|
|
(1,463,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,345,845
|
|
|
$
|
1,859,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2007, 2006 and 2005 was $571,586, $575,372 and
$423,828. Depreciation and amortization expense for the period
from March 13, 2003 (inception) to December 31, 2007
was $1,968,855.
During 2005, in conjunction with the lease of the office and
laboratory space building in Rockville, MD, the Company provided
the landlord with a letter of credit, which was collateralized
with a restricted cash deposit in the amount of $430,230. The
deposit is recorded as non-current restricted cash at
December 31, 2007 since the letter of credit is required
until the lease expires in 2016.
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued research and development expenses
|
|
$
|
7,151,360
|
|
|
$
|
4,552,050
|
|
Bonus accrual
|
|
|
957,035
|
|
|
|
1,084,512
|
|
Accrued consulting and other professional fees
|
|
|
1,307,650
|
|
|
|
329,177
|
|
Employee benefits
|
|
|
168,275
|
|
|
|
78,656
|
|
Lease abandonment
|
|
|
84,617
|
|
|
|
232,388
|
|
Other accrued expenses
|
|
|
120,801
|
|
|
|
46,025
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
9,789,738
|
|
|
$
|
6,322,808
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Singapore
research facility
|
In May 2007, the Company initiated a plan to move its operations
out of Singapore to consolidate its discovery research
activities in its Rockville, Maryland facility. The
consolidation was completed by the end of 2007, and all expenses
of the move, including employee severance, loss on the sale of
fixed assets and other related costs were recorded in the
consolidated financial statements as of December 31, 2007.
Total expenses relating to the consolidation of the discovery
research activities were not material to the Companys
consolidated financial statements.
73
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
In 2004 the Companys subsidiary in Singapore entered into
an agreement with the Economic Development Board of Singapore
(EDB) to provide a grant for a development project. During 2005,
the Company received a payment from the EDB that was recorded as
deferred grant revenue since under certain conditions the EDB
could have reclaimed these funds. On September 19, 2007 the
Company agreed with the EDB to pay back 50% of the grant and the
remaining 50%, or $71,345, was recognized as other income during
the year ended December 31, 2007.
Operating
leases
In 2003, the Company entered into a five-year non-cancelable
operating lease agreement for office and laboratory space. In
January 2006 the Company vacated and in September 2007 sublet
the office space for the remaining term of the lease that
expires in June 2008.
In August 2005, the Company entered into a ten-year, six-month
non-cancelable operating lease agreement for office and
laboratory space at a new office complex in Rockville, Maryland,
which is renewable for an additional five-year period at the end
of the original term. The lease expires in June 2016. The lease
includes a rent abatement and scheduled base rent increases over
the term of the lease. The total amount of the base rent
payments and rent abatement will be charged to expense on a
straight-line method over the term of the lease. In conjunction
with a letter of credit, the Company collateralized the
operating lease with a restricted cash deposit in the amount of
$430,230, which is recorded as non-current restricted cash at
December 31, 2007.
During the second quarter of 2007, the Company exercised an
option to lease additional space in its current headquarters in
Rockville, Maryland and the additional commitment is reflected
in the following schedule of future minimum lease payments for
non-cancelable operating leases as of December 31, 2007:
|
|
|
|
|
2008
|
|
|
662,174
|
|
2009
|
|
|
685,270
|
|
2010
|
|
|
705,994
|
|
2011
|
|
|
726,992
|
|
2012
|
|
|
748,807
|
|
Thereafter
|
|
|
2,805,843
|
|
|
|
|
|
|
|
|
$
|
6,335,080
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2007, 2006
and 2005 was $899,824, $902,729 and $299,224. Rent expense for
the period from March 13, 2003 (inception) to
December 31, 2007 was $2,560,192.
License
agreements
In June 2004 the Company acquired exclusive rights to develop
and commercialize
Fiaptatm
through a sublicense agreement with Novartis AG (Novartis). In
consideration for this license, the Company paid Novartis an
initial license fee of $500,000, which was immediately expensed
to research and development expenses. The Company is obligated
to make future milestone payments to Novartis of less than
$100 million in the aggregate (the majority of which are
tied to sales milestones), as well as royalty payments to
Novartis which, as a percentage of net sales, is in the
mid-twenties. The Companys rights with respect to the
patents to develop and commercialize
Fiaptatm
may terminate, in whole or in part, if we fail to meet certain
development or commercialization milestones relating to the time
it takes for us to launch
Fiaptatm
commercially following
74
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the consolidated financial
statements (Continued)
regulatory approval, and the time it takes for us to receive
regulatory approval following our submission of an NDA or
equivalent foreign filing. Additionally, our rights may
terminate in whole or in part if we do not meet certain other
obligations under our sublicense agreement to make royalty and
milestone payments, if we fail to comply with requirements in
our sublicense agreement regarding our financial condition, or
if we do not abide by certain restrictions in our sublicense
agreement regarding other development activities.
In February 2004 the Company entered into a license agreement
with Bristol-Myers Squibb Company (BMS) under which the Company
received an exclusive worldwide license under certain patents
and patent applications to develop and commercialize VEC-162. In
partial consideration for the license, the Company paid BMS an
initial license fee of $500,000, which was immediately expensed
to research and development expenses. The Company is obligated
to make future milestone payments to BMS of less than
$40 million in the aggregate (the majority of which are
tied to sales milestones) as well as royalty payments based on
the net sales of VEC-162 at a rate which, as a percentage of net
sales, is in the low teens. The Company is also obligated under
this agreement to pay BMS a royalty on certain payments
(excluding royalties) that the Company receives from a third
party in connection with any sublicensing arrangement, at a rate
in the mid-twenties. If the Company has not agreed to one or
more partnering arrangements to develop and commercialize
VEC-162 in certain significant markets with one or more third
parties after the completion of the Phase III program, BMS
has the option to exclusively develop and commercialize VEC-162
o