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, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 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
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001
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The Nasdaq Stock Market LLC
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(NASDAQ Global Market)
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Rights to Purchase Series A Junior Participating Preferred Stock
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The Nasdaq Stock Market LLC
(NASDAQ Global Market)
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Securities registered pursuant to Section 12(g) of the
Exchange Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Securities Exchange Act of
1934). Yes o No þ
The aggregate market value of the 17,756,198 shares of
Common Stock held by non-affiliates of the registrant was
$58,417,891 as of the last business day of the registrants
most recently completed second quarter based on the closing
price of the registrants Common Stock on such date. Shares
of Common Stock held by each executive officer, director and
stockholders known by the registrant to own 10% or more of the
outstanding stock based on public filings and other information
known to the registrant have been excluded since such persons
may be deemed affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares of the registrants Common Stock, par
value $0.001 per share, outstanding as of March 11, 2009
was 26,653,478.
The exhibit index as required by Item 601(a) of
Regulation S-K
is included in Item 15 of Part IV of this report.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2009
Annual Meeting of Stockholders to be filed within 120 days
after the end of the registrants fiscal year ended
December 31, 2008, are incorporated by reference in
Part III of this annual report on
Form 10-K.
Vanda
Pharmaceuticals Inc.
Form 10-K
Table of Contents
1
PART I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this report are forward-looking
statements under the securities laws. Words such as, but
not limited to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, and similar expressions or words, identify
forward-looking statements. Forward-looking statements are based
upon current expectations that involve risks, changes in
circumstances, assumptions and uncertainties. Vanda
Pharmaceuticals Inc. (We, 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 expectations regarding trends with respect to our costs and
expenses;
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our inability to obtain the capital necessary to fund our
research and development activities;
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our failure to identify or obtain rights to new 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 Part 1 of
this annual report on
Form 10-K,
entitled Risk Factors, which contains a more
complete discussion of the risks and uncertainties associated
with our business. In addition to the risks described above and
in Item 1A of this report, other unknown or unpredictable
factors also could affect our results. There can be no assurance
that the actual results or developments anticipated by us will
be realized or, even if substantially realized, that they will
have the expected consequences to, or effects on, us. Therefore
no assurance can be given that the outcomes stated in such
forward-looking statements and estimates will be achieved.
2
Overview
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 two 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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Iloperidone, a compound for the treatment of schizophrenia. On
November 27, 2007, the United States Food and Drug
Administration (FDA) accepted a New Drug Application (NDA) for
iloperidone for the treatment of schizophrenia. In July 2008, we
announced that the FDA had determined that our NDA was not
approvable and indicated, among other things, that we would have
to conduct additional studies and submit that data before the
FDA would approve iloperidone for commercial sale for the
treatment of schizophrenia. In September 2008, we met with the
FDA to discuss the FDAs determination. The FDA asked us to
provide a complete response to the not-approvable letter, which
we submitted on November 6, 2008. The FDA accepted our
complete response for review and has set a new target action
date of May 6, 2009. There are no guarantees that the FDA
will provide its response by May 6, 2009, nor can there be
any assurances that any such response will be favorable. Pending
the FDAs reply to our complete response, we have suspended
all non-essential iloperidone-related activities.
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Tasimelteon, a compound for the treatment of sleep and mood
disorders, including Circadian Rhythm Sleep Disorders (CRSD). In
November 2006, Vanda announced positive top-line results from
the Phase III trial of tasimelteon in transient insomnia.
In June 2008, the Company announced positive top-line results
from the Phase III trial of tasimelteon in chronic primary
insomnia. We will have to conduct additional trials prior to our
filing of an NDA for tasimelteon. Tasimelteon is also ready for
Phase II trials for the treatment of depression. Pending a
response from the FDA with respect to our NDA for iloperidone,
Vanda is concentrating its efforts on the design and evaluation
of clinical development options for tasimelteon.
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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 iloperidone with our own
sales force
and/or
commercial partners in the United States and to seek partners
for commercialization of the compound outside of the United
States. Given the range of potential indications for
tasimelteon, we intend to pursue one or more partnerships for
the development and commercialization of tasimelteon worldwide.
On November 3, 2008, we received written notice from
Novartis that the license agreement related to VSF-173, a
compound for the treatment of excessive sleepiness that we had
been developing, had terminated in accordance with its terms as
a result of our failure to satisfy a specific development
milestone within the time period specified in the license
agreement. As a result, we no longer hold any rights with
respect to VSF-173 and Novartis has a non-exclusive worldwide
license to all information and intellectual property generated
by or on behalf of Vanda related to its development of VSF-173.
We are currently evaluating any options that we may have with
respect to VSF-173, which may include the possibility of
entering into a new license agreement or other arrangement with
Novartis to allow us to resume our development of VSF-173;
however, there can be no assurance that we will be able to enter
into such an agreement or arrangement on acceptable terms, or at
all.
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
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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 two product candidates target large prescription markets
with significant unmet medical needs. Sales of antipsychotic
drugs were approximately $20 billion in 2007, according to
Health Market Prognosis 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 iloperidone may address some of the shortcomings of
currently available drugs, based on its observed safety profile
and the extended release injectable formulation for iloperidone
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 sub-optimal safety and efficacy
profiles. We believe tasimelteon may represent a breakthrough in
each of these markets, based on the compounds demonstrated
efficacy and safety to date and its novel mechanism of action.
Our
strategy
Our goal is to create a leading biopharmaceutical company
focused on developing and commercializing products that address
critical unmet medical needs through the application of our drug
development expertise and our pharmacogenetics and
pharmacogenomics expertise. The key elements of our strategy to
accomplish this goal are to:
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Pursue the clinical development and regulatory approval of
our current product candidates. On
November 27, 2007, the FDA accepted the NDA for iloperidone
for the treatment of schizophrenia. In July 2008, we announced
that the FDA had determined that our NDA was not approvable. On
November 6, 2008, we submitted a complete response to the
not-approvable letter. The FDA has accepted the complete
response for review and has set a new target action date of
May 6, 2009. Pending the FDAs reply to our complete
response, we have suspended all non-essential
iloperidone-related activities. We have successfully completed a
Phase III trial of tasimelteon in transient insomnia and
announced positive top-line results in November 2006. In
addition, we have successfully completed a Phase III trial
of tasimelteon in chronic primary insomnia and announced
positive top-line results in June 2008. We will need to conduct
additional Phase III trials of tasimelteon in chronic sleep
disorders prior to filing an NDA for this compound. Tasimelteon
is also ready for Phase II trials for the treatment of
depression.
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Develop a focused commercialization capability in the United
States. Because we believe that the number of
physicians that would generate the majority of prescriptions in
the United States for schizophrenia is relatively small, we
believe that we can cost-effectively develop our own sales force
to market and sell iloperidone in the United States.
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Enter into partnerships to extend our commercial
reach. We intend to seek commercial partners for
iloperidone outside the United States and, even if we are able
to develop our own sales force to market and sell iloperidone in
the United States, we may decide to commercialize iloperidone in
the United States with a partner, rather than on our own. In
addition, given the range of potential indications for
tasimelteon, we intend to pursue one or more partnerships for
the development and commercialization of tasimelteon worldwide.
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Apply our pharmacogenetics and pharmacogenomics expertise to
differentiate our products. 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.
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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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Iloperidone (Oral)
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Schizophrenia
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Pending FDA decision; PDUFA date May 6, 2009
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Iloperidone (Injectible)
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Schizophrenia
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Ready for Phase II trial
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Tasimelteon
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Sleep Disorders, including CRSD
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Phase III trial for transient insomnia completed in 2006
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Phase III trial for chronic primary insomnia completed in
2008
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Depression
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Ready for Phase II trial
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Iloperidone
We are developing iloperidone, a compound for the treatment of
schizophrenia. The FDA accepted our NDA for iloperidone for the
treatment of schizophrenia on November 27, 2007. The
application included data from 35 clinical trials and more than
3,000 patients treated with iloperidone and also contains
pharmacogenetic data aimed to further improve the benefit/risk
profile of iloperidone in the treatment of patients with
schizophrenia. In July 2008, we announced that the FDA had
determined that our NDA for iloperidone was not approvable and
indicated, among other things, that we would have to conduct
additional studies and submit that data before the FDA would
approve iloperidone for commercial sale for the treatment of
schizophrenia. In September 2008, we met with the FDA to discuss
the FDAs determination. The FDA asked us to provide a
complete response to the not-approvable letter, which we
submitted on November 6, 2008. The FDA accepted our
complete response for review and has set a new target action
date of May 6, 2009. There are no guarantees that the FDA
will provide its response by May 6, 2009, nor can there be
any assurances that any such response will be favorable. Pending
the FDAs reply to our complete response, we have suspended
all non-essential iloperidone-related activities.
Therapeutic
opportunity
Schizophrenia is a chronic, debilitating mental disorder
characterized by hallucinations, delusions, racing thoughts and
other psychotic symptoms (collectively referred to as
positive symptoms), as well as moodiness, anhedonia
(inability to feel pleasure), loss of interest, eating
disturbances and withdrawal (collectively referred to as
negative symptoms), and additionally attention and
memory deficits (collectively referred to as cognitive
symptoms). Schizophrenia develops in late adolescence or
early adulthood in approximately 1% of the worlds
population. Most schizophrenia patients today are treated with
drugs known as atypical antipsychotics, which were
first approved in the U.S. in the late 1980s. These
antipsychotics have been named atypical for their
ability to treat a broader range of negative symptoms than the
first-generation typical antipsychotics, which were
introduced in the 1950s and are now generic. Atypical
antipsychotics are generally regarded as having improved side
effect profiles and efficacy relative to typical antipsychotics
and currently comprise approximately 90% of schizophrenia
prescriptions. The global market for atypical antipsychotics was
in excess of $20 billion in 2007, 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),
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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 of different atypical
antipsychotics as they attempt to balance side effects and
symptom management in each patient. In addition, the 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 iloperidone
Iloperidone may offer several advantages over existing
therapies. However, the definitive profile of the efficacy and
safety of iloperidone will be determined by the final label
approved by the FDA. Iloperidone is currently under review by
the FDA for the treatment of schizophrenia, with a PDUFA target
action date of May 6, 2009. Therefore, the following should
not be considered a discussion of the definitive clinical
profile of iloperidone.
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Efficacy and safety. In a complete program of
Phase II and Phase III trials comprising more than
3,000 patients, iloperidone 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, iloperidone is associated with a
prolongation of the hearts QTc interval, but in no
instance did any patient taking iloperidone 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 iloperidone may
result in improved patient compliance with their treatment
regimen.
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Extended-release injectable formulation. Prior
to our voluntary suspension of all nonessential
iloperidone-related activities pending the FDAs reply to
our complete response to the not-approvable letter, we were
developing an extended-release injectable formulation for
iloperidone, 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. If the FDA approves the
oral formulation of iloperidone, we intend to resume the
development of the injectable formulation and 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
$1.1 billion in 2007, according to Alkermes Company press
releases. We believe that our four-week formulation for
iloperidone 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
iloperidone 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 iloperidones
efficacy. Based on the results of our most recent
Phase III trial, as well as analyses of prior clinical data
for iloperidone, we have determined that certain patients may be
more likely to respond to iloperidone 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 iloperidone, given the unpredictable efficacy and
serious side effects currently associated with atypical
antipsychotics, and be more likely to prescribe iloperidone as a
result.
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Pharmacogenetic evaluation of iloperidones
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 iloperidone in their blood and may experience longer
QTc intervals while taking iloperidone. We estimate that this
genetic attribute is found in approximately
25-30% of
schizophrenia patients, comprised of poor metabolizers
(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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Intellectual
property
Iloperidone and its metabolites, formulations, genetic markers
and uses are covered by a total of twenty-two patent and patent
application families worldwide. The primary new chemical entity
patent covering iloperidone expires normally in 2011 in the
United States and 2010 in most of the major markets in Europe.
In the United States, the United States Drug Price Competition
and Patent Term Restoration act of 1984, more commonly known as
the Hatch-Waxman Act provides for an extension of
new chemical entity patents for a period of up to five years
following the expiration of the patent covering that compound to
compensate for time spent in development. We believe that
iloperidone 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 iloperidone 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 iloperidone will be exclusive until 2016 in the
United States and until 2015 in Europe. Additionally, the patent
application covering the depot formulation for iloperidone, if
it is granted, will expire normally in 2022. Several other
patent applications covering metabolites, uses, formulations and
genetic markers relating to iloperidone 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
iloperidone 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 iloperidone will likely expire prior to the end of such
10-year
period. No generic versions of iloperidone 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 iloperidone 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 iloperidone.
Tasimelteon
Tasimelteon is an oral compound in development for sleep and
mood disorders, including Circadian Rhythm Sleep Disorders
(CRSD). The compound binds selectively to the brains
melatonin receptors, which are thought to govern the bodys
natural sleep/wake cycle. Compounds that bind selectively to
these receptors are thought to be able to help treat sleep
disorders, and additionally are believed to offer potential
benefits in mood disorders. We announced positive top-line
results from our Phase III trial of tasimelteon in
transient
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insomnia in November 2006. In June 2008, the Company announced
positive top-line results from the Phase III trial of
tasimelteon in chronic primary insomnia. Tasimelteon is also
ready for Phase II trials 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 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 generic zolpidem, zolpidem tartrate (Ambien
CR®,
sanofi-aventis), eszopiclone
(Lunesta®,
Sepracor, Inc.) and zaleplon
(Sonata®,
King Pharmaceuticals, Inc.). Hypnotics work by acting upon a set
of brain receptors known as GABA receptors, which are separate
and distinct from the melatonin receptors to which tasimelteon
binds. Several drugs in development, including indiplon
(Neurocrine Biosciences), also utilize a mechanism of action
involving binding to GABA receptors. Members of the
benzodiazapine class of sedatives are also approved for
insomnia, but their usage has declined due to an inferior safety
profile compared to hypnotics. Anecdotal evidence also suggests
that sedative antidepressants, such as trazodone and doxepin,
are prescribed off-label for insomnia. 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 tasimelteon. There are no
FDA-approved treatments for insomnia specifically related to
Circadian Rhythm Sleep Disorders.
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
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would be an attractive new alternative because it would address
the underlying cause of the sleeplessness, rather than merely
addressing its symptoms.
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Potential
advantages of tasimelteon
We believe that tasimelteon may offer efficacy similar to the
most efficacious of the approved sleep drugs, and that it may
provide significant benefits to patients beyond those offered by
the approved drugs. We believe that tasimelteon is unlikely to
be scheduled as a controlled substance by the DEA because
Rozeremtm,
which has a similar mechanism of action to tasimelteon, was
shown not to have potential for abuse and was not classified as
a Schedule IV controlled substance by the DEA. However,
despite the fact that the drugs have a similar mechanism of
action, our Phase III results have demonstrated that
tasimelteon may offer superior sleep maintenance to
Rozeremtm.
Tasimelteon also appears to be safe and well-tolerated, with no
significant side effects or effects on
next-day
performance. For patients with circadian rhythm disorders,
tasimelteon may be able to align the patients sleep/wake
cycle with his or her lifestyle, something we believe no
approved sleep therapy has demonstrated. For example, in our
Phase II trial of tasimelteon in transient insomnia with 37
healthy participants, tasimelteon induced a statistically
significant (p<0.025) shift in circadian rhythm of up to
five hours on the first night.
Overview
of Phase III clinical trials
In November 2006, we reported positive top-line results in a
randomized, double-blind, multi-center, placebo-controlled
Phase III trial that enrolled 412 adults in a sleep
laboratory setting using a phase-advance, first-night assessment
model of induced transient insomnia. The trial examined
tasimelteon dosed 30 minutes before bedtime at 20, 50 and 100
milligrams versus placebo.
Tasimelteon achieved significant results in multiple endpoints,
demonstrating a benefit in both sleep onset, or time to fall
asleep, and sleep maintenance, or ability to stay asleep. Based
on these trial results, we believe that tasimelteon will compare
favorably to efficacy achieved by currently approved insomnia
drugs, not only for circadian rhythm sleep disorders but also
for other types of insomnia. The Phase III trial also
demonstrated that tasimelteon was safe and well-tolerated, with
no significant side effects versus placebo and no impairment of
next-day
performance or mood.
In June 2008, we reported positive top-line results in a
randomized, double-blind, placebo-controlled Phase III
trail in chronic primary insomnia that enrolled
324 patients. The trial examined tasimelteon at 20 and 50
milligrams versus placebo over a period of 35 days. The
trial measured time to fall asleep and sleep maintenance, as
well as
next-day
performance. We will need to conduct additional Phase III
trials of tasimelteon for the treatment of chronic sleep
disorders to receive FDA approval of tasimelteon for the
treatment of insomnia.
Potential
indication for depression
We believe that tasimelteon may also be effective in treating
depression. Agomelatine, another drug that acts on the
brains melatonin receptors, has demonstrated efficacy and
safety in the treatment of depression that compared favorably to
an approved antidepressant,
Paxil®
(paroxetine, GSK), in a Phase III trial. While the precise
mechanism for the effect of drugs like tasimelteon, agomelatine
and
Rozeremtm,
which act on the brains melatonin receptors, is currently
unknown, it is possible that, by improving sleep, these drugs
could improve mood, since depressed patients are likely to have
sleep disorders. It is also possible that mood disorders such as
depression have an association with circadian rhythm
misalignments.
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 2007, according to IMS.
We believe that tasimelteon will be differentiated from approved
antidepressants in several ways. In the Phase III trial of
agomelatine described above, agomelatine showed significantly
improved mood in two weeks, versus four weeks for
Paxil®.
Consequently, tasimelteon may, with its similar properties to
agomelatine,
9
offer a more rapid onset of action than approved
antidepressants. We believe that tasimelteon should also have an
improved side effect profile when compared to approved products
because we believe that it should not have the sexual side
effects, weight gain, and sleep disruption associated with these
products.
Tasimelteon is ready for Phase II trials in depression. It
has demonstrated an antidepressant effect in animal models and
has completed several Phase I trials, including one with four
weeks of exposure, showing none of the serious side effects
associated with the approved antidepressants.
Intellectual
property
Tasimelteon and its formulations and uses are covered by a total
of eleven patent and patent application families worldwide. The
primary new chemical entity patent covering tasimelteon expires
normally in 2017 in the United States and in most European
markets. We believe that, like iloperidone, tasimelteon 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 tasimelteon will qualify for
such an extension, which would extend European patent protection
for tasimelteon until 2022. Several other patent applications
covering uses of tasimelteon will, if granted, provide exclusive
rights for these uses until 2026. Our rights to the new chemical
entity patent covering tasimelteon and related intellectual
property have been acquired through a license with BMS. Please
see License agreements below for a discussion of
this license.
License
agreements
Our rights to develop and commercialize our clinical-stage
product candidates are subject to the terms and conditions of
licenses granted to us by other pharmaceutical companies.
Iloperidone
We acquired exclusive worldwide rights to patents for
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 iloperidone 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 iloperidone 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
iloperidone 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.
Tasimelteon
In February 2004, we entered into a license agreement with BMS
under which we received an exclusive worldwide license under
certain patents and patent applications, and other licenses to
intellectual property, to
10
develop and commercialize tasimelteon. 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 tasimelteon at a rate which, as a
percentage of net sales, is in the low teens. We made a
milestone payment to BMS of $1,000,000 under this license
agreement in 2006 relating to the initiation of our first
Phase III clinical trial for tasimelteon. We are also
obligated under this agreement to pay BMS a percentage of any
sublicense fees, upfront payments and milestone and other
payments (excluding royalties) that we receive from a third
party in connection with any sublicensing arrangement, at a rate
which is in the mid-twenties. We have agreed with BMS in our
license agreement for tasimelteon to use our commercially
reasonable efforts to develop and commercialize tasimelteon and
to meet certain milestones in initiating and completing certain
clinical work.
BMS holds certain rights with respect to tasimelteon in the
license agreement. If we have not agreed to one or more
partnering arrangements to develop and commercialize tasimelteon
in certain significant markets with one or more third parties
after the completion of the Phase III program, BMS has the
option to exclusively develop and commercialize tasimelteon on
its own on pre-determined financial terms, including milestone
and royalty payments.
Either party may terminate the tasimelteon license agreement
under certain circumstances, including a material breach of the
agreement by the other. In the event that BMS has not exercised
its option to reacquire the rights to tasimelteon and we
terminate our license, or if BMS terminates our license due to
our breach, all rights licensed and developed by us under this
agreement will revert or otherwise be licensed back to BMS on an
exclusive basis.
Government
regulation
Government authorities in the 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
FDA
approval process
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.
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
12
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
which is not subsequently withdrawn or reversed by the FDA.
The testing and approval process requires substantial time,
effort and financial resources, and each may take several years
to complete. The FDA may not grant approval on a timely basis,
or at all. We may encounter difficulties or unanticipated costs
in our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products.
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, 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.
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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.
On September 27, 2007, the Food and Drug Administration
Amendments Act, or the FDAAA, was enacted into law, amending
both the FDC Act and the Public Health Service Act. The FDAAA
makes a number of substantive and incremental changes to the
review and approval processes in ways that could make it more
difficult or costly to obtain approval for new pharmaceutical
products, or to produce, market and distribute existing
pharmaceutical products. Most significantly, the law changes the
FDAs handling of postmarked drug product safety issues by
giving the FDA authority to require post approval studies or
clinical trials, to request that safety information be provided
in labeling, or to require an NDA applicant to submit and
execute a Risk Evaluation and Mitigation Strategy, or REMS.
The FDAAA also reauthorized the authority of the FDA to collect
user fees to fund the FDAs review activities and made
certain changes to the user fee provisions to permit the use of
user fee revenue to fund FDAs drug safety activities and
the review of Direct-to-Consumer advertisements.
In addition, new government requirements may be established that
could delay or prevent regulatory approval of our products under
development.
The
Hatch-Waxman Act
In seeking approval for a drug through an NDA, applicants are
required to list with the FDA each patent with claims that cover
the applicants product. Upon approval of a drug, each of
the patents listed in the application for the drug is then
published in the FDAs Approved Drug Products with
Therapeutic Equivalence Evaluations, commonly known as the
Orange Book. Drugs listed in the Orange Book can, in turn be
cited by potential competitors in support of approval of an
abbreviated new drug application, or ANDA. An ANDA provides for
marketing of a drug product that has the same active ingredients
in the same strengths and dosage form as the listed drug and has
been shown through bioequivalence testing to be therapeutically
equivalent to the listed drug. ANDA applicants are not required
to conduct or submit results of pre-clinical or clinical tests
to prove the safety or effectiveness of their drug product,
other than the requirement for bioequivalence testing. Drugs
approved in this way are commonly referred to as generic
equivalents to the listed drug, and can often be
substituted by pharmacists under prescriptions written for the
original listed drug.
The ANDA applicant is required to certify to the FDA concerning
any patents listed for the approved product in the FDAs
Orange Book. Specifically, the applicant must certify that: (i)
the required patent information has not been filed; (ii) the
listed patent has expired; (iii) the listed patent has not
expired, but will expire on a particular date and approval is
sought after patent expiration; or (iv) the listed patent is
invalid or will not be infringed by the new product. A
certification that the new product will not infringe the already
approved products listed patents or that such patents are
invalid is called a Paragraph IV certification. If the applicant
does not challenge the listed patents, the ANDA application will
not be approved until all the listed patents claiming the
referenced product have expired.
If the ANDA applicant has provided a Paragraph IV certification
to the FDA, the applicant must also send notice of the Paragraph
IV certification to the NDA and patent holders once the ANDA has
been accepted for filing by the FDA. The NDA and patent holders
may then initiate a patent infringement lawsuit in response to
the notice of the Paragraph IV certification. The filing of a
patent infringement lawsuit within 45 days of the receipt of a
Paragraph IV certification automatically prevents the FDA from
approving the
14
ANDA until the earlier of 30 months, expiration of the patent,
settlement of the lawsuit or a decision in the infringement case
that is favorable to the ANDA applicant.
The ANDA application also will not be approved until any
non-patent exclusivity, such as exclusivity for obtaining
approval of a new chemical entity, listed in the Orange Book for
the referenced product has expired. Federal law provides a
period of five years following approval of a drug containing no
previously approved active ingredients, during which ANDAs for
generic versions of those drugs cannot be submitted unless the
submission contains a Paragraph IV challenge to a listed patent,
in which case the submission may be made four years following
the original product approval. Federal law provides for a period
of three years of exclusivity following approval of a listed
drug that contains previously approved active ingredients but is
approved in a new dosage form, route of administration or
combination, or for a new use, the approval of which was
required to be supported by new clinical trials conducted by or
for the sponsor, during which FDA cannot grant effective
approval of an ANDA based on that listed drug.
Foreign
regulation
Whether or not we obtain FDA approval for a product, 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.
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
15
adopted, the adoption of such proposals could have a material
adverse effect on our business, financial condition and
profitability.
Marketing
and sales
We have suspended all pre-launch commercial activities relating
to iloperidone pending the outcome of the FDAs review of
our complete response. We are uncertain at this time when or if
we expect to start marketing iloperidone commercially. The time
it takes to receive cash inflows from the sale of iloperidone 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 and do not plan to continue to develop these
capabilities internally, or enter into partnering arrangements
to the extent that we believe large sales and marketing forces
will be necessary at this time. However, because we believe that
the number of physicians that would generate the majority of
prescriptions for iloperidone in the United States is relatively
small, we believe that we can cost-effectively develop our own
sales force to market and sell iloperidone in the United States.
We intend to seek commercial partners for iloperidone outside
the United States and, even if we are able to develop our own
sales force to market and sell iloperidone in the United States,
we may decide to commercialize iloperidone in the United States
with a partner, rather than on our own. In addition, given the
range of potential indications for tasimelteon, we intend to
pursue one or more partnerships for the development and
commercialization of tasimelteon worldwide.
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 two 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. BMS owns the new
chemical entity patent for tasimelteon. For both 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 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
tasimelteon expires in 2017 in the United States and 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
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 and for tasimelteon until 2022. 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 and for tasimelteon until 2022.
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 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.
16
Aside from the new chemical entity patents covering our current
late-stage compounds, as of December 31, 2008 we had
twenty-two pending provisional patent applications in the United
States, five U.S. national stage applications under U.S.C.
371 and five 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. 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.
We believe the primary competitors for each of our product
candidates are as follows:
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For iloperidone 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 tasimelteon in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic
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compounds such as zolpidem, trazodone and doxepin, and
over-the-counter remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia (or for which an NDA has been
recently filed) include indiplon (Neurocrine Biosciences, Inc.)
and low-dose doxepin
(Silenortm)
by Somaxon Pharmaceuticals, Inc.
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For tasimelteon in the treatment of depression, antidepressants
such as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK,
Cymbalta®
(duloxetine) by Eli Lilly, and Valdoxan (agomelatine) by
Novartis and Les Laboratories Servier.
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Our ability to compete successfully will depend in part on our
ability to utilize our pharmacogenetics and pharmacogenomics and
drug development expertise to identify, develop, secure rights
to and obtain regulatory approvals for promising pharmaceutical
compounds before others are able to develop competitive
products. Our ability to compete successfully will also depend
on our ability to attract and retain skilled and experienced
personnel. Additionally, our ability to compete may be affected
because insurers and other third-party payors in some cases seek
to encourage the use of cheaper, generic products, which could
make our products less attractive.
Employees
On December 16, 2008, we committed to a plan of termination
that resulted in a work force reduction of 17 employees,
including two officers, in order to reduce operating costs. We
commenced notification of employees affected by the workforce
reduction on December 17, 2008. As of December 31,
2008, we employed 24 full-time employees. This represents
approximately a 55% decrease from the 53 employees we had
on August 1, 2008.
Of the 24 full-time employees we had as of
December 31, 2008, 15 were primarily engaged in research
and development activities. None of our employees are
represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
Corporate
information
We were incorporated in Delaware in 2002. Our principal
executive offices are located at 9605 Medical Center Drive,
Suite 300, Rockville, Maryland, 20850 and our telephone
number is
(240) 599-4500.
Our website address is www.vandapharma.com.
Available
Information
Vanda Pharmaceuticals Inc. files annual, quarterly, and current
reports, proxy statements, and other documents with the
Securities and Exchange Commission (SEC) under the Securities
Exchange Act of 1934 (the Exchange Act). The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information
regarding issuers, including us, that file electronically with
the SEC. The public can obtain any documents that we file with
the SEC at www.sec.gov.
We also make available free of charge on our Internet website at
www.vandapharma.com our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and, if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
Our code of ethics, other corporate policies and procedures, and
the charters of our Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee are available through
our Internet website at www.vandapharma.com.
18
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
If we
fail to obtain approval for and commercialize our most advanced
product candidate, iloperidone, we may have to curtail our
product development programs and our business would be
materially harmed.
We have invested a significant portion of our time, financial
resources and collaboration efforts in the development of our
most advanced product candidate, iloperidone, a compound for the
treatment of schizophrenia. Our near-term ability to generate
revenues and our future success, in large part, depends on the
development and commercialization of iloperidone.
In November 2007, we announced that the FDA had accepted our New
Drug Application (NDA) for iloperidone in schizophrenia. On
July 25, 2008, we received a letter from the FDA stating
that our NDA for iloperidone in schizophrenia was not
approvable. The FDA indicated that it would require an
additional clinical trial comparing iloperidone to placebo and
including an active comparator such as olanzapine
(Zyprexa®,
Eli Lilly and Company) or risperidone
(Risperdal®,
Ortho-McNeil-Janssen Pharmaceuticals, Inc.) in patients with
schizophrenia to further demonstrate the compounds
efficacy. The FDA also stated that it would require us to obtain
additional safety data for patients at a dose range of 20 to
24 mg/day of iloperidone. On September 10, 2008, we
met with the FDA to discuss the FDAs position. The FDA
asked us to provide a complete response to the not-approvable
letter, which we submitted on November 6, 2008. The FDA
accepted the complete response for review and has set a new
target action date of May 6, 2009. If we are unable to
satisfactorily demonstrate efficacy compared to placebo as well
as an active comparator, if the FDA disagrees with our
characterization approach or does not agree that we have
demonstrated adequate efficacy for iloperidone, if we fail to
resolve questions raised in the FDAs correspondence
regarding the iloperidone NDA or if we otherwise fail to meet
FDA requirements for the NDA or obtain FDA approval for, and
successfully commercialize, iloperidone, we may never realize
revenue from this product and we may have to curtail our other
product development programs. As a result, our business would be
materially harmed.
Our
success is dependent on the success of our two product
candidates in clinical development: iloperidone and tasimelteon.
If either of these product candidates is 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 either 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.
19
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 either 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.
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 trials 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
requirements 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 shown to be safe or effective
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the FDA may interpret data from pre-clinical and clinical trials
in different ways than we 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 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 accepted by the FDA, we may fail to obtain
regulatory approval for our product candidates.
Moreover, if and when our products do obtain marketing approval,
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 future 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.
In November 2007, we announced that the FDA had accepted the NDA
for iloperidone in schizophrenia. In July 2008, we announced
that the FDA had determined that our NDA was not approvable and
indicated, among other things, that we would have to conduct
additional studies and submit that data before the FDA would
approve iloperidone for commercial sale for the treatment of
schizophrenia. Performance and completion of additional clinical
studies will require years of testing and, even if positive
results are achieved, may not result in the FDAs approval
of iloperidone. In September 2008, we met with the FDA to
discuss the FDAs determination. The FDA asked us to
provide a complete response to the not-approvable letter, which
we submitted on November 6, 2008. The FDA has accepted the
complete response for review and has set a new target action
date of May 6, 2009. We have no assurances that the
response we receive from the FDA will be favorable. An
unfavorable response may have a materially harmful effect on our
business.
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 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 trials,
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.
21
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, iloperidone 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 iloperidones 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 iloperidone 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.
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 and commercialization efforts, 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.
Our activities will necessitate significant uses of working
capital for the foreseeable future. Our capital requirements
will depend on many factors, including the success of our
research and development efforts, the satisfaction of certain
regulatory requirements, payments received under contractual
agreements with other parties, if any, and the status of
competitive products. However, given the recent decision by the
FDA with respect to the NDA for iloperidone, and that any
additional study or studies required by the FDA in order to
obtain approval of iloperidone would require significant capital
in excess of our currently available resources,
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we are now operating under a reduced spending plan and believe
that, if we continue to operate under our reduced spending plan,
our existing cash, cash equivalents and marketable securities
will be sufficient to fund operations at least through 2010. In
budgeting for our activities, we have relied on a number of
assumptions, including assumptions that we will not conduct any
additional clinical trials for either of the oral or injectable
formulations of iloperidone, that we will not engage in any
further commercial activities related to iloperidone, that we
will not engage in further in-licensing activities, that we will
not receive any proceeds from potential partnerships, that we
will not conduct additional trials for tasimelteon, that we will
be able to retain our key personnel, that we will continue to
seek FDA approval of iloperidone, that we will continue to
evaluate clinical and pre-clinical compounds for potential
development, and that we will not incur any significant
contingent liabilities.
We may need to raise additional funds if one or more of our
assumptions proves to be incorrect or if we choose to resume our
commercialization efforts with respect to iloperidone, expand
our product development efforts, conduct additional clinical
trials for one or more of our product candidates or seek to
acquire additional product candidates, and we may 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. However, we may not be able to raise additional
funds on acceptable terms, or at all. Given the current global
economic climate, we may have more difficulty raising funds than
we would during a period of economic stability. 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 is currently intended. These
collaborations, if consummated prior to proof-of-efficacy or
safety of a given product candidate, could impair our ability to
realize value from that product candidate.
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 if we receive FDA approval of our iloperidone NDA
and resume commercial planning and activities or we otherwise
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, 2008, we have accumulated net losses of
approximately $225.0 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
23
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 costs. In addition, if the
facilities of such manufacturers do not pass a pre-approval
plant inspection, the FDA will not grant approval of our
products.
Our manufacturing strategy presents the following additional
risks:
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because most of our third-party manufacturers and formulators
are located outside of the 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
24
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 iloperidone in the treatment of schizophrenia, the atypical
antipsychotics 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 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 tasimelteon in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
CR (zolpidem) by sanofi-aventis,
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as zolpidem, trazodone and doxepin, and over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia (or for which an NDA has been
recently filed) include indiplon (Neurocrine Biosciences, Inc.)
low-dose doxepin
(Silenortm)
by Somaxon Pharmaceuticals, Inc. and
Intermezza®
(zolpidem tartarate sublingual lozenge) by Transcept
Pharmaceuticals, Inc.
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For tasimelteon in the treatment of depression, generic
antidepressants such as paroxetine, sertraline, fluoxetine and
buproprion,
Lexapro®
(escitalopram) by Lundbeck A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Cymbalta®
(duloxetine) by Eli Lilly and Valdoxan (agomelatine) by Novartis
and Les Laboratories Servier.
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Additionally, our ability to compete may be affected because
insurers and other third-party payors in some cases seek to
encourage the use of cheaper, generic products, which could make
our 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
following regulatory approval, if any, 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
25
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 upon
regulatory approval of any of our product candidates, if any,
and we may experience difficulties in managing this
growth.
As of December 31, 2008, we had 24 full-time
employees. While we have currently suspended our commercial
activities and are operating under a reduced spending plan, if
we resume our commercial activities, 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 iloperidone
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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
26
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 product liability insurance, our aggregate
coverage limit under this insurance is $5,000,000, 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 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.
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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, then-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 some new drug
applicants to submit risk evaluation and minimization strategies
to monitor and address potential safety issues for products upon
approval, grant the FDA the authority to impose risk management
measures for marketed products and to mandate labeling changes
in certain circumstances, and establish new requirements for
disclosing the results of clinical trials. Companies that
violate the 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 two
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 tasimelteon, these terms and conditions include
an option in favor of the licensor to reacquire rights to
commercialize and develop these product candidates in certain
circumstances.
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
iloperidone 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
iloperidone commercially following regulatory approval, and the
time it takes for us to receive regulatory approval following
our
28
submission of an NDA or equivalent foreign filing. We may also
lose our rights to develop and commercialize iloperidone 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 iloperidone 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.
Tasimelteon is based in part on patents that we have licensed on
an exclusive basis and other intellectual property licensed from
Bristol-Myers Squibb Company (BMS). BMS holds certain rights
with respect to tasimelteon in the license agreement. If we have
not agreed to one or more partnering arrangements to develop and
commercialize tasimelteon in certain significant markets with
one or more third parties after the completion of the
Phase III program, BMS has the option to exclusively
develop and commercialize tasimelteon on its own on
pre-determined financial terms, including milestone and royalty
payments. BMS may terminate our license if we fail to meet
certain milestones or if we otherwise breach our royalty or
other obligations in the agreement. In the event that we
terminate our license, or if BMS terminates our license due to
our breach, all of our rights to tasimelteon (including any
intellectual property we develop with respect to tasimelteon)
will revert back to BMS or otherwise be licensed back to BMS on
an exclusive basis. Any termination or reversion of our rights
to develop or commercialize tasimelteon, including any
reacquisition by BMS of our rights, may have a material adverse
effect on our business
If our
efforts to protect the proprietary nature of the intellectual
property related to our 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,
2008 we had twenty-two pending provisional patent applications
in the United States, five U.S. national stage applications
under U.S.C. 371 and five 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
29
exclusive rights to iloperidones United States new
chemical entity patent (the primary patent covering the
compound as a new composition of matter) until 2016 and to
tasimelteons United States new chemical entity patent
until 2022. 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 iloperidones European new
chemical entity patents until 2015 and to tasimelteons
European new chemical entity patents until 2022. Additionally, a
directive in the 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 in Europe during such
market exclusivity 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. 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
30
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.
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
December 31, 2007 and December 31, 2008, the high and
low sale prices of our common stock as reported on the NASDAQ
Global Market varied between $7.13 and $0.45. The following
factors, in addition to the other risk factors described in this
section, may also have a significant impact on the market price
of our common stock:
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publicity regarding actual or potential testing or trial results
relating to products under development by us or our competitors
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the outcome of regulatory review relating to products under
development by us or our competitors
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regulatory developments in the 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 institutional investors and private equity
funds hold a significant number of shares of our common stock.
Sales by these stockholders of a substantial number of shares,
or the expectation of such sales, could cause a significant
reduction in the market price of our common stock. Additionally,
a small number of early investors in our company have rights,
subject to certain conditions, to require us to file
registration statements to permit the resale of their shares in
the public market or to include their shares in registration
statements that we may file for ourselves or other stockholders.
In addition to our outstanding common stock, as of
December 31, 2008, there were a total of
4,453,629 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.
31
If we
fail to maintain the requirements for continued listing on the
NASDAQ Global Market, our common stock could be delisted from
trading, which would adversely affect the liquidity of our
common stock and our ability to raise additional
capital.
Our common stock is currently listed for quotation on the NASDAQ
Global Market. We are required to meet specified financial
requirements in order to maintain our listing on the NASDAQ
Global Market. One such requirement is that we maintain a
minimum closing bid price of at least $1.00 per share for our
common stock. Our common stock has recently closed at prices
below the minimum bid requirement. If the closing bid price of a
share of the Companys common stock were to fall below
$1.00 for a period of thirty (30) consecutive business
days, the Company would receive a deficiency notice from NASDAQ
advising us that we have 180 calendar days to regain compliance
by maintaining a minimum closing bid price of at least $1.00 for
a minimum of ten consecutive business days. Under certain
circumstances, NASDAQ could require that the minimum closing bid
price exceed $1.00 for more than ten consecutive days before
determining that a company complies with its continued listing
standards. On October 16, 2008, NASDAQ announced that,
effective as of such date and through Friday, January 16,
2009, it has suspended the enforcement of the rules requiring a
minimum $1.00 closing bid price. NASDAQ has extended its
suspension of the rules requiring a minimum $1.00 closing bid
price. These rules will be reinstated on Monday, April 20,
2009. If in the future, we fail to satisfy the NASDAQ Global
Markets continued listing requirements, our common stock
could be delisted from the NASDAQ Global Market, in which case
we may transfer to the NASDAQ Capital Market, which generally
has lower financial requirements for initial listing or, if we
fail to meet its listing requirements, the over-the-counter
bulletin board. There are many factors that may adversely affect
our minimum bid price, including those described in Item 1A
Risk Factors of Part I of this annual report on
Form 10-K,
which contains a more complete discussion of those factors and
other risks. Many of these factors are outside of our control.
As a result, we may not be able to sustain compliance with the
minimum bid price rule in the long term. Any potential delisting
of our common stock from the NASDAQ Global Market would make it
more difficult for our stockholders to sell our stock in the
public market and would likely result in decreased liquidity and
increased volatility for our common stock.
If
securities or industry analysts do not publish research or
reports or publish unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts
who covers the Company downgrades our stock, our stock price
would likely decline. If one or more of these analysts ceases to
cover us or fails to publish regular reports on us, interest in
the purchase of our stock could decrease, which could cause our
stock price or trading volume to decline.
Anti-takeover
provisions in our charter and bylaws, and in Delaware law, and
our rights plan could prevent or delay a change in control of
our company.
We are a Delaware corporation and the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting
us from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes
an interested stockholder, even if a change of control would be
beneficial to our existing stockholders. In addition, our
amended and restated certificate of incorporation and bylaws may
discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
amended and restated certificate of incorporation and bylaws:
|
|
|
|
|
authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt
|
|
|
|
do not provide for cumulative voting in the election of
directors, which would allow holders of less than a majority of
the stock to elect some directors
|
32
|
|
|
|
|
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election
|
|
|
|
require that directors only be removed from office for cause
|
|
|
|
provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office
|
|
|
|
limit who may call special meetings of stockholders
|
|
|
|
prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders
|
|
|
|
establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings
|
Moreover, on September 25, 2008, our board of directors
adopted a rights agreement, the provisions of which could result
in significant dilution of the proportionate ownership of a
potential acquirer and, accordingly, could discourage, delay or
prevent a change in our management or control over us.
We may
lose some or all of the value of some of our marketable
securities.
We engage one or more third parties to manage some of our cash
consistent with an investment policy that allows a range of
investments and maturities. The investments are intended to
preserve principal while providing liquidity adequate to meet
projected cash requirements. Risks of principal loss are
intended to be minimized through diversified short and medium
term investments of high quality, but the investments are not,
in every case, guaranteed or fully insured. In light of recent
changes in the credit market, some high quality short-term
investment securities, similar to the types of securities that
we invest in, have suffered illiquidity or events of default.
From time to time, we may suffer losses on our marketable
securities, which could have a material adverse impact on our
operations.
Unstable
market conditions may have serious adverse consequences on our
business.
The recent economic downturn and market instability has made the
business climate more volatile and more costly. Our general
business strategy may be adversely affected by unpredictable and
unstable market conditions. If the current equity and credit
markets deteriorate further, or do not improve, it may make any
necessary debt or equity financing more difficult, more costly,
and more dilutive. While we believe we have adequate capital
resources to meet current working capital and capital
expenditure requirements, a lingering economic downturn or
significant increase in our expenses could require additional
financing on less than attractive rates or on terms that are
excessively dilutive to existing stockholders. Failure to secure
any necessary financing in a timely manner and on favorable
terms could have a material adverse effect on our stock price
and could require us to delay or abandon clinical development
plans.
There is a risk that one or more of our current service
providers, manufacturers and other partners may encounter
difficulties during challenging economic times, which would
directly affect our ability to attain our operating goals on
schedule and on budget.
One of
our stockholders has notified us that it intends to nominate a
competing slate of directors for election at this years
annual meeting of stockholders and to propose resolutions to our
stockholders relating to our bylaws and the ongoing operations
of our company.
On February 13, 2009, we received two letters from one of
our stockholders, Tang Capital Partners, LP (TCP), stating its
intent to, among other things, nominate two directors to stand
for election at our 2009 annual meeting of stockholders and
submit proposals at the annual meeting to amend our bylaws and
request that our board of directors take action to liquidate the
Company. TCP seeks to replace two directors, our current Chief
Executive Officer and the Chairman of our board.
33
TCP has also notified us that it intends to propose a series of
amendments to our bylaws which, if approved by the affirmative
vote of at least 80% of the voting power of all of the
outstanding shares of capital stock of the Company entitled to
vote generally in the election of directors, would require
unanimous approval of the members of the board of directors for
a number of critical operating matters, including raising
capital, executing material contracts, and hiring certain key
employees. If the proposed bylaw amendments are approved, it
will be very difficult for us to implement our current strategy
and further the development of our compounds because, not
withstanding a consensus on the board, any one director, whether
nominated by the board, TCP or any other stockholder, will have
a veto on these and other critical operating matters.
In addition, TCP has requested that our board of directors take
action to liquidate the Company and distribute the remaining
cash to our stockholders. If we fail to take such action, TCP or
other stockholders may attempt to compel a liquidation of the
Company through litigation or some other means. Such litigation
could result in substantial costs and divert managements
attention and resources, which could harm our business,
operating results and financial conditions.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Our current headquarters are located in Rockville, Maryland,
consisting of approximately 27,000 square feet of office
and laboratory space. Our lease for this facility expires in
2016.
Management believes that the leased facilities are suitable and
adequate to meet the Companys anticipated needs.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The Company is not a party to any material pending legal
proceedings, and management is not aware of any contemplated
proceedings by any governmental authority against the Company.
|
|
ITEM 4.
|
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.
|
|
|
|
|
|
|
|
|
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
|
|
34
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
High
|
|
|
Low
|
|
|
First quarter 2008
|
|
$
|
7.13
|
|
|
$
|
2.70
|
|
Second quarter 2008
|
|
$
|
6.59
|
|
|
$
|
2.98
|
|
Third quarter 2008
|
|
$
|
4.03
|
|
|
$
|
0.76
|
|
Fourth quarter 2008
|
|
$
|
1.02
|
|
|
$
|
0.45
|
|
As of March 11, 2009, there were 27 holders of record of
our common stock.
Dividends
The Company has not paid dividends to its shareholders (other
than a dividend of preferred share purchase rights which was
declared on September 25, 2008) since its inception
and does not plan to pay dividends in the foreseeable future.
The Company currently intends to retain earnings, if any, to
finance the growth of the Company.
35
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.
36
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The consolidated statements of operations data for the years
ended December 31, 2008, 2007 and 2006 and the consolidated
balance sheet data as of December 31, 2008 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 years
ended December 31, 2005, 2004 and for the period from
March 13, 2003 (inception) to December 31, 2003 and
the consolidated balance sheet data as of December 31,
2006, 2005, 2004 and 2003 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
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statements of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,980
|
|
|
$
|
47,565
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
23,935,541
|
|
|
|
47,234,867
|
|
|
|
52,070,776
|
|
|
|
16,890,615
|
|
|
|
7,442,983
|
|
|
|
2,010,532
|
|
General and administrative
|
|
|
28,909,580
|
|
|
|
32,803,508
|
|
|
|
13,637,664
|
|
|
|
7,396,038
|
|
|
|
2,119,394
|
|
|
|
1,052,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,845,121
|
|
|
|
80,038,375
|
|
|
|
65,708,440
|
|
|
|
24,286,653
|
|
|
|
9,562,377
|
|
|
|
3,063,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(52,845,121
|
)
|
|
|
(80,038,375
|
)
|
|
|
(65,708,440
|
)
|
|
|
(24,286,653
|
)
|
|
|
(9,528,397
|
)
|
|
|
(3,015,626
|
)
|
Total other income, net
|
|
|
1,780,880
|
|
|
|
5,978,564
|
|
|
|
2,197,821
|
|
|
|
410,001
|
|
|
|
59,060
|
|
|
|
44,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(51,064,241
|
)
|
|
|
(74,059,811
|
)
|
|
|
(63,510,619
|
)
|
|
|
(23,876,652
|
)
|
|
|
(9,469,337
|
)
|
|
|
(2,970,821
|
)
|
Tax provision
|
|
|
|
|
|
|
9,879
|
|
|
|
549
|
|
|
|
7,649
|
|
|
|
4,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(51,064,241
|
)
|
|
|
(74,069,690
|
)
|
|
|
(63,511,168
|
)
|
|
|
(23,884,301
|
)
|
|
|
(9,474,286
|
)
|
|
|
(2,970,821
|
)
|
Beneficial conversion feature-deemed dividend to preferred
stockholders(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(57,370,924
|
)
|
|
$
|
(9,474,286
|
)
|
|
$
|
(2,970,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
$
|
(3,374.33
|
)
|
|
$
|
(3,137.18
|
)
|
|
$
|
(983.72
|
)
|
Shares used in calculation of basic and diluted net loss per
shares attributable to common stockholders
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
17,002
|
|
|
|
3,020
|
|
|
|
3,020
|
|
|
|
|
(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. |
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,079,304
|
|
|
$
|
41,929,533
|
|
|
$
|
30,928,895
|
|
|
$
|
21,012,815
|
|
|
$
|
16,259,770
|
|
|
$
|
7,165,722
|
|
Marketable securities
|
|
|
7,378,798
|
|
|
|
51,223,291
|
|
|
|
941,981
|
|
|
|
10,141,189
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
44,334,703
|
|
|
|
74,177,567
|
|
|
|
24,714,285
|
|
|
|
28,308,434
|
|
|
|
14,827,621
|
|
|
|
6,204,248
|
|
Total assets
|
|
|
49,933,843
|
|
|
|
96,860,780
|
|
|
|
36,260,276
|
|
|
|
35,752,770
|
|
|
|
17,752,241
|
|
|
|
8,385,913
|
|
Total liabilities
|
|
|
3,913,569
|
|
|
|
13,131,849
|
|
|
|
9,503,404
|
|
|
|
5,087,963
|
|
|
|
1,808,654
|
|
|
|
1,378,880
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,795,187
|
|
|
|
28,308,564
|
|
|
|
9,963,541
|
|
Deficit accumulated during the development stage
|
|
|
(224,974,507
|
)
|
|
|
(173,910,266
|
)
|
|
|
(99,840,576
|
)
|
|
|
(36,329,408
|
)
|
|
|
(12,445,107
|
)
|
|
|
(2,970,821
|
)
|
Total stockholders equity
|
|
|
46,020,274
|
|
|
|
83,728,931
|
|
|
|
26,756,872
|
|
|
|
30,664,807
|
|
|
|
15,943,587
|
|
|
|
7,007,033
|
|
38
|
|
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 two product candidates in clinical
development. Our lead product candidate, iloperidone, is a
compound for the treatment of schizophrenia. On
November 27, 2007, the United States Food and Drug
Administration (FDA) accepted our New Drug Application (NDA) for
iloperidone in schizophrenia. In July 2008, we announced that
the FDA had determined that our NDA was not approvable and
indicated, among other things, that we would have to conduct
additional studies and submit that data before the FDA would
approve iloperidone for commercial sale for the treatment of
schizophrenia. In September 2008, we met with the FDA to discuss
the FDAs determination. The FDA asked us to provide a
complete response to the not-approvable letter, which we
submitted on November 6, 2008. The FDA accepted the
complete response for review and has set a new target action
date of May 6, 2009. There are no guarantees that the FDA
will provide its response by May 6, 2009, nor can there be
any assurances that any such response will be favorable. Pending
the FDAs reply to our complete response, we have suspended
all non-essential iloperidone-related activities. Our second
product candidate, tasimelteon 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
tasimelteon in transient insomnia. In June 2008, the Company
announced positive top-line results from the Phase III
trial of tasimelteon in chronic primary insomnia. Tasimelteon is
also ready for Phase II trials for the treatment of
depression.
We will have to conduct additional Phase III trials for
tasimelteon in chronic sleep disorders prior to our filing of an
NDA for tasimelteon. Assuming successful outcomes of our
clinical trials and approval by the FDA, we expect to
commercialize iloperidone with our own sales force
and/or
commercial partners in the United States, and to seek partners
for commercialization of the compound outside of the United
States. Given the range of potential indications for
tasimelteon, we intend to pursue one or more partnerships for
the development and commercialization of tasimelteon worldwide.
We are a development stage enterprise and have accumulated net
losses of approximately $225.0 million since the inception
of our operations through December 31, 2008. 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, iloperidone, 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 Part I 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.
39
In January 2007 we completed our follow-on offering, consisting
of 4,370,000 shares of common stock at a public offering
price of $27.29 per share, resulting in net proceeds to the
Company of approximately $111.3 million after deducting
underwriting discounts and commissions and offering expenses.
Our activities will necessitate significant uses of working
capital for the foreseeable future. Our capital requirements
will depend on many factors, including the success of our
research and development efforts, the satisfaction of certain
regulatory requirements, payments received under contractual
agreements with other parties, if any, and the status of
competitive products. However, given the receipt of the
not-approvable letter from the FDA with respect to the NDA for
iloperidone, and that any additional studies required by the FDA
prior to its approval of iloperidone would require significant
capital in excess of our currently available resources, we are
now operating under a reduced spending plan. On
December 16, 2008, we committed to a plan of termination
that resulted in a work force reduction of 17 employees,
including two officers, in order to reduce operating costs. As
of December 31, 2008, the Company employed
24 full-time employees. This represents approximately a 55%
decrease from the 53 employees the Company had on
August 1, 2008. We believe that, if we continue to operate
under our reduced spending plan, our existing cash, cash
equivalents and marketable securities will be sufficient to fund
operations at least through the second quarter 2010. In
budgeting for our activities, we have relied on a number of
assumptions, including assumptions that we will not conduct any
additional clinical trials for either of the oral or injectable
formulations of iloperidone, that we will not engage in any
further commercial activities related to iloperidone, that we
will not engage in further in-licensing activities, that we will
not receive any proceeds from potential partnerships, that we
will not conduct additional trials for tasimelteon, that we will
be able to retain our key personnel, that we will continue to
seek FDA approval of iloperidone, that we will continue to
evaluate clinical and pre-clinical compounds for potential
development, and that we will not incur any significant
contingent liabilities.
We may need to raise additional funds if one or more of our
assumptions proves to be incorrect or if we choose to resume our
commercialization efforts with respect to iloperidone, expand
our product development efforts, conduct additional clinical
trials for one or more of our product candidates or seek to
acquire additional product candidates, and we may 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. However, we may not be able to raise additional
funds on acceptable terms, or at all. Given the current global
economic climate, we may have more difficulty raising funds than
we would during a period of economic stability. 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 is currently intended. These
collaborations, if consummated prior to proof-of-efficacy or
safety of a given product candidate, could impair our ability to
realize value from that product candidate.
Iloperidone. Iloperidone is our product
candidate under development to treat schizophrenia. We submitted
an NDA for iloperidone for the treatment of schizophrenia to the
FDA on September 27, 2007 and on November 27, 2007,
the FDA accepted our NDA. The application included data from 35
clinical trials and more than 3,000 patients treated with
iloperidone and also contained pharmacogenetic data aimed to
further improve the benefit/risk profile of iloperidone in the
treatment of patients with schizophrenia. In July 2008, we
announced that the FDA had determined that our NDA was not
approvable and indicated, among other things, that we would have
to conduct additional studies and submit that data before the
FDA would approve iloperidone for commercial sale for the
treatment of schizophrenia. Performance and completion of these
additional studies will require years of testing and, even if
positive results are achieved, may not result in the FDAs
approval of iloperidone. In September 2008, we met with the FDA
to discuss the FDAs determination. The FDA asked us to
provide a complete response to the not-approvable letter, which
we submitted on November 6, 2008. The FDA accepted the
complete response for review and has set a new target action
date of May 6, 2009. There are no guarantees that the FDA
will provide its response by May 6, 2009, nor can there
40
be any assurances that any such response will be favorable.
Pending the FDAs reply to our complete response, we have
suspended all non-essential iloperidone-related activities.
From inception to December 31, 2008 we incurred
approximately $74.5 million in research and development
costs directly attributable to our development of iloperidone,
including a $5.0 million milestone license fee paid to
Novartis in 2007 upon the acceptance of our NDA.
We are also developing a 4-week injectable formulation for
iloperidone, 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 if and when, we receive following FDA
approval of the oral dose formulation for iloperidone. If the
FDA approves the oral formulation of iloperidone, we intend to
resume the development of the injectable formulation and we
believe we will need to conduct additional trials with this
formulation to be able to file for FDA approval.
Tasimelteon. Tasimelteon is our product
candidate under development to treat sleep and mood disorders.
Tasimelteon is a melatonin receptor agonist that works by
adjusting the human body clock of circadian rhythm.
Tasimelteon has successfully completed a Phase III trial
for the treatment of transient insomnia in November 2006. In
June 2008, we announced positive top-line results from the
Phase III trial of tasimelteon in chronic primary insomnia.
The trial was a randomized, double-blind, and placebo-controlled
study with 324 patients. The trial measured time to fall
asleep and sleep maintenance, as well as
next-day
performance. We will have to conduct additional trials prior to
our filing of an NDA for tasimelteon to treat sleep disorders.
Tasimelteon is also ready for Phase II trials for the
treatment of depression.
From inception to December 31, 2008, we incurred
approximately $51.3 million in direct research and
development costs directly attributable to our development of
tasimelteon, including a $1.0 million milestone license fee
paid to BMS in 2006 upon the initiation of our Phase III
program.
VSF-173. On November 3, 2008, we received
written notice from Novartis that our license agreement with
respect to VSF-173 had terminated in accordance with its terms
as a result of our failure to satisfy a specific development
milestone within the time period specified in the license
agreement. As a result, we no longer have any rights with
respect to VSF-173 and Novartis has a non-exclusive worldwide
license to all information and intellectual property generated
by us or on our behalf related to our development of VSF-173. We
are currently evaluating any options that we may have with
respect to VSF-173, which may include the possibility of
entering into a new license agreement or other arrangement with
Novartis to allow us to resume our development of VSF-173;
however, there can be no assurance that we will be able to enter
into such an agreement or arrangement on acceptable terms, or at
all.
From inception to December 31, 2008, we incurred
approximately $6.7 million in 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. Our
research and development expenses consist primarily of fees paid
to third-party professional service providers in connection with
the services they provide for our clinical trials, costs of
contract manufacturing services, costs of materials used in
clinical trials and research and development, costs for
regulatory consultants and filings, depreciation of capital
resources used to develop our
41
products, all related facilities costs, and salaries, benefits
and stock-based compensation expenses related to our research
and development personnel. We expense research and development
costs as incurred, 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, 2008, we
incurred research and development expenses in the aggregate of
approximately $150.0 million, including stock-based
compensation expenses of approximately $7.5 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 years ended December 31, 2008 to
December 31, 2004 and the period from March 13, 2003
(inception) to December 31, 2003 and for the period from
March 13, 2003 (inception) to December 31, 2008.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
March 13,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2003
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(inception) to
|
|
|
(Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(2)
|
|
|
2008
|
|
|
Direct project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iloperidone
|
|
$
|
8,485,000
|
|
|
$
|
20,668,000
|
|
|
$
|
36,455,000
|
|
|
$
|
7,798,000
|
|
|
$
|
1,123,000
|
|
|
$
|
|
|
|
$
|
74,529,000
|
|
tasimelteon
|
|
|
11,344,000
|
|
|
|
18,947,000
|
|
|
|
11,665,000
|
|
|
|
6,133,000
|
|
|
|
3,221,000
|
|
|
|
|
|
|
|
51,310,000
|
|
VSF-173
|
|
|
737,000
|
|
|
|
3,404,000
|
|
|
|
1,058,000
|
|
|
|
943,000
|
|
|
|
568,000
|
|
|
|
|
|
|
|
6,710,000
|
|
Other product candidates
|
|
|
1,443,000
|
|
|
|
2,095,000
|
|
|
|
1,098,000
|
|
|
|
899,000
|
|
|
|
1,037,000
|
|
|
|
|
|
|
|
6,572,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct product costs
|
|
|
22,009,000
|
|
|
|
45,114,000
|
|
|
|
50,276,000
|
|
|
|
15,773,000
|
|
|
|
5,949,000
|
|
|
|
|
|
|
|
139,121,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect project costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility(3)
|
|
|
683,000
|
|
|
|
495,000
|
|
|
|
578,000
|
|
|
|
247,000
|
|
|
|
259,000
|
|
|
|
|
|
|
|
2,262,000
|
|
Depreciation
|
|
|
330,000
|
|
|
|
423,000
|
|
|
|
474,000
|
|
|
|
375,000
|
|
|
|
345,000
|
|
|
|
69,000
|
|
|
|
2,016,000
|
|
Other indirect overhead costs
|
|
|
913,000
|
|
|
|
1,203,000
|
|
|
|
743,000
|
|
|
|
496,000
|
|
|
|
890,000
|
|
|
|
1,941,000
|
|
|
|
6,186,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect expenses
|
|
|
1,926,000
|
|
|
|
2,121,000
|
|
|
|
1,795,000
|
|
|
|
1,118,000
|
|
|
|
1,494,000
|
|
|
|
2,010,000
|
|
|
|
10,464,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
23,935,000
|
|
|
$
|
47,235,000
|
|
|
$
|
52,071,000
|
|
|
$
|
16,891,000
|
|
|
$
|
7,443,000
|
|
|
$
|
2,010,000
|
|
|
$
|
149,585,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Many of our research and development costs are not attributable
to any individual project because we share resources across
several development projects. We record direct costs, including
personnel costs and related benefits and stock-based
compensation, on a
project-by-project
basis. We record indirect costs that support a number of our
research and development activities in the aggregate. |
|
(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 our general and
administrative expenses to decrease in 2009 as we operate under
a reduced spending plan pending a response from the FDA to our
complete response to the not-approvable letter related to
iloperidone. From inception through December 31, 2008, we
incurred general and
42
administrative expenses in the aggregate of approximately
$85.9 million, including stock-based compensation expenses
of approximately $36.6 million.
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, 2008 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 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
43
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, 2008,
2007, 2006 and recognized for the period from March 13,
2003 (inception) to December 31, 2008, was comprised of the
following:
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|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13,
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
Research and development
|
|
$
|
1,748,000
|
|
|
$
|
4,259,000
|
|
|
$
|
742,000
|
|
|
$
|
7,540,000
|
|
General and administrative
|
|
|
11,667,000
|
|
|
|
15,228,000
|
|
|
|
5,350,000
|
|
|
|
36,635,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
13,415,000
|
|
|
$
|
19,487,000
|
|
|
$
|
6,092,000
|
|
|
$
|
44,175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), a
revision of SFAS No. 141, Business
Combinations. The revision is intended to simplify
existing guidance and converge rulemaking under
U.S. generally accepted accounting principles with
international accounting standards. This statement applies
prospectively to business combinations where the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early
adoption is prohibited. The implementation of this standard will
not have a material impact on our consolidated financial
position and results of operations.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP
EITF 03-6-1).
FSP
EITF 03-6-1
clarified that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders.
Awards of this nature are considered participating securities
and the two-class method of computing basic and diluted earnings
per share must be applied. FSP
EITF 03-6-1
is effective for fiscal years beginning after December 15,
2008. The implementation of this standard will not have a
material impact on our consolidated financial position and
results of operations.
In November 2008, the FASB ratified EITF Issue
No. 08-6,
Equity method Investment Accounting Considerations
(EITF 08-6).
EITF 08-6
addresses a number of matters associated with the impact of
SFAS No. 141R and SFAS No. 160 on the
accounting for equity method investments including initial
recognition and measurement and subsequent measurement issues.
EITF 08-6
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2008 and interim periods within those
fiscal years. The implementation of this standard will not have
a material impact on our consolidated financial position and
results of operations.
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,
2008, we had a deficit accumulated during the development stage
of approximately $225.0 million. We anticipate incurring
additional losses for the foreseeable future, and these losses
may be incurred at increasing rates.
44
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Research and development expenses. Research
and development expenses decreased by approximately
$23.3 million, or 49%, to approximately $23.9 million
for the year ended December 31, 2008 compared to
approximately $47.2 million for the year ended
December 31, 2007.
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Research and Development Expenses
|
|
2008
|
|
|
2007
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
7,441,000
|
|
|
$
|
14,595,000
|
|
Contract research and development, consulting, materials and
other direct costs
|
|
|
8,731,000
|
|
|
|
16,253,000
|
|
Milestone license fees
|
|
|
|
|
|
|
6,000,000
|
|
Salaries, benefits and related costs
|
|
|
4,089,000
|
|
|
|
4,007,000
|
|
Stock-based compensation
|
|
|
1,748,000
|
|
|
|
4,259,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
22,009,000
|
|
|
|
45,114,000
|
|
Indirect project costs
|
|
|
1,926,000
|
|
|
|
2,121,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,935,000
|
|
|
$
|
47,235,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased by approximately $23.1 million
primarily as a result of the absence of any milestone license
payments in 2008, lower expenses relating to our NDA for
iloperidone and lower clinical trial and manufacturing expenses
and by decreases in stock-based compensation expense. Clinical
trials expense decreased by approximately $7.2 million
primarily due to the costs incurred in 2007 in our
Phase III trial of iloperidone in schizophrenia and in our
tasimelteon clinical pharmacology trials that were completed in
2007. The clinical trial costs incurred in 2008 relate primarily
to our Phase III trial of tasimelteon in primary insomnia
that we initiated during the third quarter of 2007. Contract
research and development, consulting, materials and other direct
costs decreased by approximately $7.5 million primarily as
a result of decreased development costs incurred in connection
with the lower manufacturing costs for the iloperidone and
tasimelteon programs netted with the increase in consulting fees
incurred with the engagement of the regulatory consultant to
assist us in our efforts to obtain FDA approval of the
iloperidone NDA. Prior to FDA approval of our products,
manufacturing related costs are included in research and
development expense. There were no milestone license fees
incurred in 2008. Stock-based compensation expense decreased by
approximately $2.5 million as a result of the lower fair
value of options granted during 2008 compared to options granted
in prior periods and the reversal of cumulative amortization of
deferred stock-based compensation related to the cancellation of
unvested options in connection with the workforce reduction in
December 2008.
General and administrative expenses. General
and administrative expenses decreased related to approximately
$3.9 million, or 12%, to approximately $28.9 million
for the year ended December 31, 2008 from approximately
$32.8 million for the year ended December 31, 2007.
45
The following table analyzes the components of our general and
administrative expenses for the years ended December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
General and Administrative Expenses
|
|
2008
|
|
|
2007
|
|
|
Salaries, benefits and related costs
|
|
$
|
4,946,000
|
|
|
$
|
3,263,000
|
|
Stock-based compensation
|
|
|
11,667,000
|
|
|
|
15,228,000
|
|
Marketing and related consulting services
|
|
|
5,731,000
|
|
|
|
8,047,000
|
|
Legal and other professional expenses
|
|
|
3,719,000
|
|
|
|
3,142,000
|
|
Other expenses
|
|
|
2,847,000
|
|
|
|
3,124,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,910,000
|
|
|
$
|
32,804,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased by approximately
$1.7 million for the year ended December 31, 2008 due
to a severance accrual of $1.0 million relating to the
workforce reduction in December 2008. Stock-based compensation
expense decreased by approximately $3.6 million as a result
of the reversal of cumulative amortization of deferred
stock-based compensation related to the cancellation of unvested
options in connection with the workforce reduction in December
2008 and to the lower fair value of options granted during 2008
compared to options granted in prior periods. Marketing and
related consulting services decreased by approximately
$2.3 million due to the decrease in our market research and
other pre-commercial launch activities following receipt of the
not-approvable letter from the FDA regarding the Companys
NDA for iloperidone. Legal and other professional expenses
increased by approximately $577,000 due primarily to a higher
level of consulting activity in 2008 in support of business
development activities. Other expenses decreased approximately
$277,000 primarily due to lower accounting fees relating to
compliance with the Sarbanes-Oxley Act (Sarbanes-Oxley). The
2007 accounting fees for Sarbanes-Oxley were higher due to the
first year implementation for the Company to be compliant with
Sarbanes-Oxley.
Other income, net. Net other income for the
year ended December 31, 2008 was approximately
$1.8 million compared to approximately $6.0 million
for the year ended December 31, 2007. Interest income
decreased by approximately $4.1 million due to lower
average cash and marketable securities balances for the year and
lower short-term interest rates which generated substantially
lower interest income than in 2007. Other income for the year
ended December 31, 2007 includes approximately $71,000 in
revenue recognized from a grant from the Economic Development
Board in Singapore. We do not expect to receive similar grants
in the future.
The following table analyzes the components of our other income,
net amounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Interest income
|
|
$
|
1,781,000
|
|
|
$
|
5,907,000
|
|
Other income
|
|
|
|
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
1,781,000
|
|
|
$
|
5,978,000
|
|
|
|
|
|
|
|
|
|
|
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 9.3%, 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.
46
The following table discloses the components of research and
development expenses reflecting all of our project expenses for
the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Research and Development Expenses
|
|
2007
|
|
|
2006
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
14,595,000
|
|
|
$
|
36,249,000
|
|
Contract research and development, consulting, materials and
other costs
|
|
|
16,253,000
|
|
|
|
8,958,000
|
|
Milestone license fees
|
|
|
6,000,000
|
|
|
|
1,000,000
|
|
Salaries, benefits and related costs
|
|
|
4,007,000
|
|
|
|
3,327,000
|
|
Stock-based compensation
|
|
|
4,259,000
|
|
|
|
742,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
45,114,000
|
|
|
|
50,276,000
|
|
Indirect project costs
|
|
|
2,121,000
|
|
|
|
1,795,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,235,000
|
|
|
$
|
52,071,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased by approximately $5.2 million
primarily as a result of lower clinical trial expenses for the
Companys iloperidone and tasimelteon Phase III trials
that were primarily completed in 2006, offset by increase in
clinical manufacturing activities for both iloperidone and
tasimelteon 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
iloperidone in schizophrenia and in our Phase III trial of
tasimelteon 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 tasimelteon in
chronic insomnia that we initiated during the fourth quarter of
2007, and to the completion of our Phase III trial of
iloperidone 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 iloperidone and tasimelteon 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 iloperidone 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
iloperidone and tasimelteon. 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 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.
The following table analyzes the components of our general and
administrative expenses for the years ended December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
General and Administrative Expenses
|
|
2007
|
|
|
2006
|
|
|
Salaries, benefits and related costs
|
|
$
|
3,263,000
|
|
|
$
|
2,609,000
|
|
Stock-based compensation
|
|
|
15,228,000
|
|
|
|
5,350,000
|
|
Marketing and related consulting services
|
|
|
8,047,000
|
|
|
|
1,187,000
|
|
Legal and other professional expenses
|
|
|
3,142,000
|
|
|
|
1,760,000
|
|
Other expenses
|
|
|
3,124,000
|
|
|
|
2,732,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,804,000
|
|
|
$
|
13,638,000
|
|
|
|
|
|
|
|
|
|
|
47
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 iloperidone, tasimelteon 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 in the
year ended December 31, 2007 was approximately
$6.0 million compared to net other income of approximately
$2.2 million in the year ended December 31, 2006.
Interest income increased by approximately $3.7 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. Other income
for the year ended December 31, 2007 includes approximately
$71,000 in revenue recognized from a grant from the Economic
Development Board in Singapore. We do not expect to receive
similar grants in the future.
Our other income, net for the years ended December 31, 2007
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Interest income
|
|
$
|
5,907,000
|
|
|
$
|
2,203,000
|
|
Interest expense
|
|
|
|
|
|
|
(5,000
|
)
|
Other income
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
5,978,000
|
|
|
$
|
2,198,000
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and capital resources
We have funded our operations through December 31, 2008
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, 2008, our total cash and cash equivalents
and marketable securities were approximately $46.5 million,
compared to approximately $93.2 million at
December 31, 2007. 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.
48
As of December 31, 2008 and 2007 our liquidity resources
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,079,000
|
|
|
$
|
41,930,000
|
|
U.S. Treasury and government agencies
|
|
|
2,000,000
|
|
|
|
3,980,000
|
|
U.S. corporate debt
|
|
|
5,252,000
|
|
|
|
33,339,000
|
|
U.S. asset-backed securities
|
|
|
127,000
|
|
|
|
5,925,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, short-term
|
|
|
7,379,000
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,458,000
|
|
|
$
|
93,153,000
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we maintained all of our cash,
cash equivalents and marketable securities in three financial
institutions. Deposits held with these institutions may exceed
the amount of insurance provided on such deposits, but we do not
anticipate any losses with respect to such deposits.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. In February 2008, the
FASB agreed to delay the effective date of 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. The Company has adopted the provisions
of SFAS 157 as of January 1, 2008, for financial
instruments. Although the adoption of SFAS 157 did not
materially impact its financial condition, results of
operations, or cash flow, the Company is now required to provide
additional disclosures as part of its financial statements.
Under FAS No. 159, entities are permitted to choose to
measure many financial instruments and certain other items at
fair value. The Company did not elect the fair value measurement
option under FAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
including an amendment to FAS 115 (SFAS 159),
for any of its financial assets or liabilities.
SFAS 157 establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These
tiers include:
|
|
|
|
|
Level 1 defined as observable inputs such as
quoted prices in active markets
|
|
|
|
Level 2 defined as inputs other than quoted
prices in active markets that are either directly or indirectly
observable
|
|
|
|
Level 3 defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity
to develop its own assumptions
|
49
As of December 31, 2008, the Company held certain assets
that are required to be measured at fair value on a recurring
basis. The Company currently does not have non-financial assets
and non-financial liabilities that are required to be measured
at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Description :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
7,378,798
|
|
|
$
|
1,999,860
|
|
|
$
|
5,378,938
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,378,798
|
|
|
$
|
1,999,860
|
|
|
$
|
5,378,938
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our activities will necessitate significant uses of working
capital throughout 2009 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 through the second quarter of
2010, and after that time we will require additional capital. In
budgeting for our activities, we have relied on a number of
assumptions, including assumptions that we will not conduct any
additional clinical trials for either the oral or injectable
formulations of iloperidone, that we will not engage in any
further commercial activities related to iloperidone, that we
will not engage in further in-licensing activities, that we will
not receive any proceeds from potential partnerships, that we
will not conduct additional trials for tasimelteon, that we will
be able to retain our key personnel, that we will continue to
seek FDA approval of iloperidone, that we will continue to
evaluate clinical and pre-clinical compounds for potential
development, and that we will not incur any significant
contingent liabilities.
We may need to raise additional funds if one or more of our
assumptions proves to be incorrect or if we choose to resume our
commercialization efforts with respect to iloperidone, expand
our product development efforts, conduct additional clinical
trials for one or more of our product candidates or seek to
acquire additional product candidates, and we may decide to
raise additional funds even before they are needed if the
conditions for raising capital are favorable. However, we may
not be able to raise additional funds on acceptable terms, or at
all. If we are unable to secure sufficient capital to fund our
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 is currently intended. These
collaborations, if consummated prior to proof-of-efficacy or
safety of a given product candidate, could impair our ability to
realize value from that product candidate.
Cash
flow
The following table summarizes our cash flows for the years
ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash (used in) provided by Operating activities
|
|
$
|
(45,955,000
|
)
|
|
$
|
(51,641,000
|
)
|
|
$
|
(51,620,000
|
)
|
Investing activities
|
|
|
43,088,000
|
|
|
|
(48,760,000
|
)
|
|
|
8,221,000
|
|
Financing activities
|
|
|
|
|
|
|
111,403,000
|
|
|
|
53,315,000
|
|
Effect of foreign currency translation
|
|
|
17,000
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
(2,850,000
|
)
|
|
$
|
11,001,000
|
|
|
$
|
9,916,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Net cash used in operations was approximately $46.0 million
for the year ended December 31, 2008 and $51.6 million
for the year ended December 31, 2007. The net loss for the
year ended December 31, 2008 of approximately
$51.1 million was offset primarily by non-cash charges for
depreciation and amortization of approximately $531,000,
stock-based compensation of approximately $13.4 million,
and decreases in accrued expenses and accounts payable of
approximately $9.4 million, principally related to clinical
trial expenses. Net cash provided by investing activities for
the year ended December 31, 2008 was approximately
$43.1 million and consisted primarily of net maturities and
sales of marketable securities of approximately
$44.0 million. There was no net cash provided by financing
activities for the year ended December 31, 2008.
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, 2007 and 2006. 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 iloperidone, 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.
Contractual
obligations and commitments
The following table summarizes our long-term contractual cash
obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
Severance payments
|
|
$
|
1,613,000
|
|
|
$
|
1,597,000
|
|
|
$
|
16,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
5,673,000
|
|
|
|
685,000
|
|
|
|
706,000
|
|
|
|
727,000
|
|
|
|
749,000
|
|
|
|
771,000
|
|
|
|
2,035,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,286,000
|
|
|
$
|
2,282,000
|
|
|
$
|
722,000
|
|
|
$
|
727,000
|
|
|
$
|
749,000
|
|
|
$
|
771,000
|
|
|
$
|
2,035,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payments. On December 16, 2008,
we committed to a plan of termination that resulted in a work
force reduction of 17 employees, including two officers, in
order to reduce operating costs. We commenced notification of
employees affected by the workforce reduction on
December 17, 2008. As of December 31, 2008, we
employed 24 full-time employees. This represents
approximately a 55% decrease from the 53 employees we had
on August 1, 2008.
Operating leases. Our commitments under
operating leases shown above consist of payments relating to our
real estate leases for our current headquarters located in
Rockville, Maryland, expiring in 2016.
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 iloperidone and tasimelteon,
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).
Consulting fees. We have engaged a regulatory
consultant to assist us in our efforts to obtain FDA approval of
the iloperidone NDA. We have committed to initial consulting
expenses in the aggregate amount of $2.0 million pursuant
to this engagement, which was expensed in 2008. In addition, we
retained the
51
services of the consultant on a monthly basis at a retainer fee
of $250,000 per month effective as of January 1, 2009. In
the event that the iloperidone NDA is approved by the FDA, we
will be obligated to pay the consultant a success fee of
$6.0 million, which amount will be offset by the aggregate
amount of all monthly retainer fees previously paid to the
consultant (Success Fee). In addition to these fees, we are
obligated to reimburse the consultant for its ordinary and
necessary business expenses incurred in connection with its
engagement. We may terminate the engagement at any time;
however, we will remain obligated to pay any remaining Success
Fee if the iloperidone NDA is approved by the FDA following such
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 two 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 tasimelteon 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. On November 3, 2008, we received written
notice from Novartis that the license agreement related to
VSF-173 had terminated in accordance with its terms as a result
of our failure to satisfy a specific development milestone
within the time period specified in the license agreement. As a
result, we no longer hold any rights with respect to VSF-173 and
Novartis has a non-exclusive worldwide license to all
information and intellectual property generated by or on behalf
of Vanda related to its development of VSF-173. As a result of
the acceptance by FDA of our NDA for iloperidone 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, 2008, 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,
Item 1A of Part I 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.
52
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. We are monitoring one corporate note affected
by the current credit crisis. The note is expected to mature in
May 2009 and we expect minimal loses, if any.
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 57 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 Acting 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, 2008. Based upon
that evaluation, the Companys Chief Executive Officer and
Acting Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective as of
December 31, 2008, 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 Acting Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosures.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining 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 Acting 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
53
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, the
Companys management concluded that the Companys
internal control over financial reporting was effective as of
December 31, 2008.
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 2008 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting, other
than the termination of the employment of our former Chief
Financial Officer in connection with our workforce reduction,
which we commenced in December 2008. We instituted certain
changes to our key controls to mitigate segregation of duties
issues related to a reduced accounting and finance department.
However, the changes did not materially affect our internal
control over financial reporting as of December 31, 2008.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2008 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
on page 58 of this
Form 10-K.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required under this item will be contained in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 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 filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 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 filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 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 filed with the SEC within 120 days after
the end of the fiscal year ended
54
December 31, 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 filed with the SEC within 120 days after
the end of the fiscal year ended December 31, 2008, under
the caption Ratification of Selection of Independent
Registered Public Accounting Firm and is incorporated
herein by reference pursuant to General Instruction G(3) to
Form 10-K.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES
The consolidated financial statements filed as part of this
annual report on
Form 10-K
are listed and indexed at page 57. 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.
55
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, 2009.
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, 2009
|
|
|
|
|
|
/s/ STEPHANIE
R. IRISH
Stephanie
R. Irish
|
|
Acting Chief Financial Officer and Treasurer (principal
financial and accounting officer)
|
|
March 13, 2009
|
|
|
|
|
|
/s/ ARGERIS
N. KARABELAS, Ph.D.
Argeris
N. Karabelas, Ph.D.
|
|
Chairman of the Board and Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ RICHARD
W. DUGAN
Richard
W. Dugan
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ BRIAN
K. HALAK, Ph.D.
Brian
K. Halak, Ph.D.
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ HOWARD
PIEN
Howard
Pien
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ DAVID
RAMSAY
David
Ramsay
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ H.
THOMAS WATKINS
H.
Thomas Watkins
|
|
Director
|
|
March 13, 2009
|
56
Vanda
Pharmaceuticals Inc.
Index to
consolidated financial statements
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
58
|
|
Consolidated financial statements
|
|
|
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
65
|
|
|
|
|
66
|
|
57
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, of changes in
stockholders equity, and of cash flows present fairly, in
all material respects, the financial position of Vanda
Pharmaceuticals Inc. and Subsidiary (collectively, the Company)
(a development stage enterprise) at December 31, 2008 and
2007, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2008 and for the period from March 13,
2003 (date of inception) to December 31, 2008, 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, 2008, 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 were integrated audits in 2008 and 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.
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.
Baltimore, Maryland
March 13, 2009
58
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,079,304
|
|
|
$
|
41,929,533
|
|
Marketable securities
|
|
|
7,378,798
|
|
|
|
43,243,960
|
|
Prepaid expenses and other current assets
|
|
|
1,287,400
|
|
|
|
1,781,881
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
47,745,502
|
|
|
|
86,955,374
|
|
Marketable securities, long-term
|
|
|
|
|
|
|
7,979,331
|
|
Property and equipment, net
|
|
|
1,758,111
|
|
|
|
1,345,845
|
|
Deposits
|
|
|
|
|
|
|
150,000
|
|
Restricted cash
|
|
|
430,230
|
|
|
|
430,230
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
49,933,843
|
|
|
$
|
96,860,780
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
512,382
|
|
|
$
|
2,988,069
|
|
Accrued liabilities
|
|
|
2,898,417
|
|
|
|
9,789,738
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,410,799
|
|
|
|
12,777,807
|
|
Deferred rent
|
|
|
502,770
|
|
|
|
354,042
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,913,569
|
|
|
|
13,131,849
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 20,000,000 shares
authorized and none issued and outstanding at December 31,
2008 and 2007
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 150,000,000 shares
authorized, 26,653,478 and 26,652,728 shares issued and
outstanding at December 31, 2008 and 2007, respectively
|
|
|
26,653
|
|
|
|
26,653
|
|
Additional paid-in capital
|
|
|
270,988,157
|
|
|
|
257,600,368
|
|
Accumulated other comprehensive income (loss)
|
|
|
(20,029
|
)
|
|
|
12,176
|
|
Deficit accumulated during the development stage
|
|
|
(224,974,507
|
)
|
|
|
(173,910,266
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
46,020,274
|
|
|
|
83,728,931
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
49,933,843
|
|
|
$
|
96,860,780
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
Revenues from services
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
81,545
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
23,935,541
|
|
|
|
47,234,867
|
|
|
|
52,070,776
|
|
|
|
149,585,314
|
|
General and administrative
|
|
|
28,909,580
|
|
|
|
32,803,508
|
|
|
|
13,637,664
|
|
|
|
85,918,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,845,121
|
|
|
|
80,038,375
|
|
|
|
65,708,440
|
|
|
|
235,504,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(52,845,121
|
)
|
|
|
(80,038,375
|
)
|
|
|
(65,708,440
|
)
|
|
|
(235,422,612
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,780,880
|
|
|
|
5,907,219
|
|
|
|
2,202,654
|
|
|
|
10,479,669
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(4,833
|
)
|
|
|
(80,485
|
)
|
Other income, net
|
|
|
|
|
|
|
71,345
|
|
|
|
|
|
|
|
71,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1,780,880
|
|
|
|
5,978,564
|
|
|
|
2,197,821
|
|
|
|
10,471,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision
|
|
|
(51,064,241
|
)
|
|
|
(74,059,811
|
)
|
|
|
(63,510,619
|
)
|
|
|
(224,951,481
|
)
|
Tax provision
|
|
|
|
|
|
|
9,879
|
|
|
|
549
|
|
|
|
23,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(51,064,241
|
)
|
|
|
(74,069,690
|
)
|
|
|
(63,511,168
|
)
|
|
|
(224,974,507
|
)
|
Beneficial conversion feature deemed dividend to
preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,486,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(258,461,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of basic and diluted net loss per
share attributable to common stockholders
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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.
61
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 gain 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.
62
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.
63
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, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
26,652,728
|
|
|
$
|
26,653
|
|
|
$
|
257,600,368
|
|
|
$
|
|
|
|
$
|
12,176
|
|
|
$
|
(173,910,266
|
)
|
|
$
|
|
|
|
$
|
83,728,931
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
|
|
|
|
13,415,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,415,460
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,671
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,064,241
|
)
|
|
|
(51,064,241
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,220
|
|
|
|
|
|
|
|
16,220
|
|
|
|
|
|
Net unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,425
|
)
|
|
|
|
|
|
|
(48,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,096,446
|
)
|
|
|
(51,096,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
26,653,478
|
|
|
$
|
26,653
|
|
|
$
|
270,988,157
|
|
|
$
|
|
|
|
$
|
(20,029
|
)
|
|
$
|
(224,974,507
|
)
|
|
|
|
|
|
$
|
46,020,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
$
|
(224,974,507
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities Depreciation and amortization
|
|
|
530,805
|
|
|
|
571,586
|
|
|
|
575,372
|
|
|
|
2,499,661
|
|
Stock-based compensation
|
|
|
13,387,789
|
|
|
|
19,622,814
|
|
|
|
6,131,827
|
|
|
|
44,323,312
|
|
(Loss) gain on disposal of assets
|
|
|
(174
|
)
|
|
|
28,713
|
|
|
|
29,528
|
|
|
|
57,458
|
|
Accretion of discount on investments
|
|
|
(235,162
|
)
|
|
|
(1,571,905
|
)
|
|
|
(378,739
|
)
|
|
|
(2,227,320
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
495,200
|
|
|
|
168,987
|
|
|
|
270,745
|
|
|
|
(1,287,400
|
)
|
Deposits
|
|
|
150,000
|
|
|
|
|
|
|
|
690,000
|
|
|
|
|
|
Accounts payable
|
|
|
(2,475,697
|
)
|
|
|
204,029
|
|
|
|
526,711
|
|
|
|
512,382
|
|
Accrued expenses
|
|
|
(6,892,577
|
)
|
|
|
3,465,028
|
|
|
|
3,811,373
|
|
|
|
2,898,417
|
|
Deferred grant revenue
|
|
|
|
|
|
|
(147,464
|
)
|
|
|
|
|
|
|
|
|
Deferred rent and other liabilities
|
|
|
148,728
|
|
|
|
86,644
|
|
|
|
234,833
|
|
|
|
502,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(45,955,329
|
)
|
|
|
(51,641,258
|
)
|
|
|
(51,619,518
|
)
|
|
|
(177,695,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(943,659
|
)
|
|
|
(279,433
|
)
|
|
|
(1,354,156
|
)
|
|
|
(4,381,391
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
200,179
|
|
|
|
|
|
|
|
200,179
|
|
Purchases of marketable securities
|
|
|
(14,786,080
|
)
|
|
|
(138,953,879
|
)
|
|
|
(102,232,608
|
)
|
|
|
(267,818,742
|
)
|
Proceeds from sale of marketable securities
|
|
|
11,258,094
|
|
|
|
3,577,859
|
|
|
|
82,137,888
|
|
|
|
96,973,843
|
|
Maturities of marketable securities
|
|
|
47,560,000
|
|
|
|
86,695,000
|
|
|
|
29,670,000
|
|
|
|
165,675,000
|
|
Investments in restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(430,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
43,088,355
|
|
|
|
(48,760,274
|
)
|
|
|
8,221,124
|
|
|
|
(9,781,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515,147
|
|
Principal payments on obligations under capital lease
|
|
|
|
|
|
|
|
|
|
|
(1,540
|
)
|
|
|
(91,796
|
)
|
Principal payments on note payable
|
|
|
|
|
|
|
|
|
|
|
(141,074
|
)
|
|
|
(515,147
|
)
|
Proceeds from the issuance of preferred stock, net of issuance
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,795,187
|
|
Proceeds from exercise of stock options and warrants
|
|
|
|
|
|
|
148,640
|
|
|
|
127,115
|
|
|
|
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
|
|
|
|
226,599,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
16,745
|
|
|
|
(1,320
|
)
|
|
|
22
|
|
|
|
(43,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(2,850,229
|
)
|
|
|
11,000,638
|
|
|
|
9,916,080
|
|
|
|
39,079,304
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
41,929,533
|
|
|
|
30,928,895
|
|
|
|
21,012,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
39,079,304
|
|
|
$
|
41,929,533
|
|
|
$
|
30,928,895
|
|
|
$
|
39,079,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,994
|
|
|
$
|
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.
65
|
|
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 two product candidates in
clinical development for various central nervous system
disorders. Vanda commenced its operations in 2003. The
Companys lead product candidate, iloperidone, is a
compound for the treatment of schizophrenia. The Company
submitted a New Drug Application (NDA) for iloperidone in
schizophrenia to the United States Food and Drug Administration
(FDA) on September 27, 2007. On November 27, 2007, the
FDA accepted the NDA for iloperidone in schizophrenia. In July
2008, the Company announced that the FDA had determined that
Vandas NDA was not approvable and indicated, among other
things, that the Company would have to conduct additional
studies and submit that data before the FDA would approve
iloperidone for commercial sale for the treatment of
schizophrenia. In September 2008, the Company met with the FDA
to discuss the FDAs determination. The FDA asked the
Company to provide a complete response to the not-approvable
letter, which the Company submitted on November 6, 2008.
The FDA accepted the complete response for review and has set a
new target action date of May 6, 2009. Pending the
FDAs reply to the Companys complete response, the
Company has suspended all non-essential iloperidone-related
activities. The Companys second product candidate,
tasimelteon, 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 tasimelteon in
transient insomnia. In June 2008, the Company announced positive
top-line results from the Phase III trial of tasimelteon in
chronic primary insomnia. Tasimelteon is also ready for
Phase II trials for the treatment of depression. The
Companys rights to a third product candidate, VSF-173, a
compound for the treatment of excessive sleepiness, were
terminated as a result of the Companys failure to satisfy
a specific development milestone within the time period
specified in the license agreement pursuant to which the Company
was granted such rights.
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 2009 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 through the second quarter of 2010, and after
that time Vanda will require additional capital. In budgeting
for its activities, the Company has relied on a number of
assumptions, including assumptions that the Company will not
conduct any additional clinical trials for either the oral or
injectable formulations of iloperidone, that it will not engage
in any further commercial activities related to iloperidone,
that it will not engage in further in-licensing activities, that
it will not receive any proceeds from potential partnerships,
that it will not conduct additional trials for tasimelteon, that
it will be able to retain its key personnel, that we will
continue to seek FDA approval of iloperidone, that it will
continue to evaluate clinical and pre-clinical compounds for
potential development, and that it will not incur any
significant contingent liabilities.
66
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
The Company may need to raise additional funds if one or more of
its assumptions proves to be incorrect or if it chooses to
resume its commercialization efforts with respect to
iloperidone, expand its product development efforts, conduct
additional clinical trials for one or more of its product
candidates or seek to acquire additional product candidates, and
the Company may 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 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
67
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
equivalents and marketable securities with highly-rated
financial institutions and does not hold any investment
securities as of December 31, 2008 that have been affected
by the recent credit crisis. At December 31, 2008, the
Company maintained all of its cash, cash equivalents and
marketable securities in three financial institutions. Deposits
held with these institutions may exceed the amount of insurance
provided on such deposits. Generally, these deposits may be
redeemed upon demand, and the Company believes there is minimal
risk of losses on such balances.
Fair
value of financial instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, marketable
securities, restricted cash, and accounts payable, approximate
their fair values due to their short maturities.
Property
and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is provided on a straight-line basis over the
estimated useful lives of the assets. Amortization of leasehold
improvements is provided on a straight-line basis over the
shorter of their estimated useful life or the lease term. The
costs of additions and improvements are capitalized, and repairs
and maintenance costs are charged to operations in the period
incurred.
Upon retirement or disposition of property and equipment, the
cost and accumulated depreciation and amortization are removed
from the accounts and any resulting gain or loss is reflected in
the statement of operations for that period.
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. The wholly-owned Singapore subsidiary ceased operations
during 2007.
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, 2008, 2007 and 2006, other comprehensive
income/(loss) consists of cumulative translation adjustments due
to the Companys foreign subsidiary and unrealized
gains/(losses) on marketable securities.
Accrued
expenses
Management is required to estimate accrued expenses as part of
the process of preparing financial statements. The estimation of
accrued expenses involves identifying services that have been
performed on the Companys behalf, and then estimating the
level of service performed and the associated cost incurred for
such services as of each balance sheet date in the financial
statements. Accrued expenses include professional service fees,
such as lawyers and accountants, contract service fees, such as
those under contracts with clinical monitors, data management
organizations and investigators in conjunction with clinical
trials, fees to contract manufacturers in conjunction with the
production of clinical materials, fees for marketing and other
68
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
commercialization activities, and severance related costs due to
the Companys workforce reduction. Pursuant to
managements assessment of the services that have been
performed on clinical trials and other contracts, the Company
recognizes these expenses as the services are provided. Such
management assessments include, but are not limited to:
(1) an evaluation by the project manager of the work that
has been completed during the period, (2) measurement of
progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment.
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 iloperidone.
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
69
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
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, 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 2008, 2007 and 2006, the fair value
of these awards are amortized using the accelerated attribution
method. For stock awards granted prior to January 1, 2006,
expenses are amortized under the accelerated attribution method
for options that were modified after the original grant date and
under the straight-line attribution method for all other
options. As stock-based compensation expense recognized in the
consolidated statements of operations is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. 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
2008, 2007 and 2006, 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, 2008 and
December 31, 2007 was $3.05 per share and $18.99 per share,
respectively. As of December 31, 2008, approximately
$9.8 million of total unrecognized compensation costs
related to non-vested awards is expected to be recognized over a
weighted average period of 1.17 years.
Assumptions used in the Black-Scholes-Merton model for employee
and director options granted during the years ended
December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
73
|
%
|
Weighted average expected term (years)
|
|
|
6.18
|
|
|
|
6.25
|
|
|
|
6.14
|
|
Weighted average risk-free rate
|
|
|
3.27
|
%
|
|
|
4.10
|
%
|
|
|
4.66
|
%
|
70
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, 2008, 2007
and 2006 and for the period from March 13, 2003 (inception)
to December 31, 2008 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
Research and development
|
|
$
|
1,747,863
|
|
|
$
|
4,259,315
|
|
|
$
|
742,048
|
|
|
$
|
7,540,189
|
|
General and administrative
|
|
|
11,667,598
|
|
|
|
15,227,529
|
|
|
|
5,350,291
|
|
|
|
36,635,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
13,415,461
|
|
|
$
|
19,486,844
|
|
|
$
|
6,092,339
|
|
|
$
|
44,175,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per basic and diluted share of
common stock
|
|
$
|
0.50
|
|
|
$
|
0.74
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the Company had a net operating loss carryforward as of
December 31, 2008, 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 2008 or 2007 which would have resulted in a
reclassification to reduce net cash used in operating activities
with an offsetting increase in net cash provided by financing
activities.
Income
taxes
The Company accounts for income taxes under the liability method
in accordance with the 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, 2008, 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 2005 through 2008.
Segment
information
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
71
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
Recent
accounting pronouncements
In December 2007, the FASB issued SFAS No. 141(R), a
revision of SFAS No. 141, Business
Combinations. The revision is intended to simplify
existing guidance and converge rulemaking under
U.S. generally accepted accounting principles with
international accounting standards. This statement applies
prospectively to business combinations where the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early
adoption is prohibited. The implementation of this standard will
not have a material impact on our consolidated financial
position and results of operations.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP
EITF 03-6-1).
FSP
EITF 03-6-1
clarified that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders.
Awards of this nature are considered participating securities
and the two-class method of computing basic and diluted earnings
per share must be applied. FSP
EITF 03-6-1
is effective for fiscal years beginning after December 15,
2008. The implementation of this standard will not have a
material impact on our consolidated financial position and
results of operations.
In November 2008, the FASB ratified EITF Issue
No. 08-6,
Equity method Investment Accounting Considerations
(EITF 08-6).
EITF 08-6
addresses a number of matters associated with the impact of
SFAS No. 141R and SFAS No. 160 on the
accounting for equity method investments including initial
recognition and measurement and subsequent measurement issues.
EITF 08-6
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2008 and interim periods within those
fiscal years. The implementation of this standard will not have
a material impact on our consolidated financial position and
results of operations.
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.
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 stock options, warrants and
restricted stock units but only to the extent that their
inclusion is dilutive.
72
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(51,064,241
|
)
|
|
$
|
(74,069,690
|
)
|
|
$
|
(63,511,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
26,652,867
|
|
|
|
26,370,485
|
|
|
|
16,040,425
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
(2,741
|
)
|
|
|
(10,308
|
)
|
|
|
(38,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
26,650,126
|
|
|
|
26,360,177
|
|
|
|
16,001,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(1.92
|
)
|
|
$
|
(2.81
|
)
|
|
$
|
(3.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding anti-dilutive securities not included in
diluted net loss per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
4,453,629
|
|
|
|
2,938,160
|
|
|
|
1,706,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys
available-for-sale marketable securities as of December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
1,992,452
|
|
|
$
|
7,408
|
|
|
$
|
|
|
|
$
|
1,999,860
|
|
U.S. corporate debt
|
|
|
5,279,828
|
|
|
|
2,336
|
|
|
|
(29,818
|
)
|
|
|
5,252,346
|
|
U.S. asset-based securities
|
|
|
126,547
|
|
|
|
45
|
|
|
|
|
|
|
|
126,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,398,827
|
|
|
$
|
9,789
|
|
|
$
|
(29,818
|
)
|
|
$
|
7,378,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Fair
Value Measurements
|
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. In February 2008, the
FASB agreed to delay the effective date of 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. The Company has adopted the provisions
of SFAS 157 as of January 1, 2008, for financial
instruments. Although the adoption of SFAS 157 did not
materially impact its financial condition, results of
operations, or cash flow, the Company is now required to provide
additional disclosures as part of its financial statements.
Under FAS No. 159, entities are permitted to choose to
measure many financial instruments and certain other items at
fair value. The Company did not elect the fair value measurement
option under FAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
including an amendment to FAS 115 (SFAS 159),
for any of its financial assets or liabilities.
SFAS 157 establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These
tiers include:
|
|
|
|
|
Level 1 defined as observable inputs such as
quoted prices in active markets
|
|
|
|
Level 2 defined as inputs other than quoted
prices in active markets that are either directly or indirectly
observable
|
|
|
|
Level 3 defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity
to develop its own assumptions
|
As of December 31, 2008, the Company held certain assets
that are required to be measured at fair value on a recurring
basis. The Company currently does not have non-financial assets
and non-financial liabilities that are required to be measured
at fair value on a recurring basis.
74
Vanda
Pharmaceuticals Inc.
(A development stage enterprise)
Notes to the Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Description :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
7,378,798
|
|
|
$
|
1,999,860
|
|
|
$
|
5,378,938
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,378,798
|
|
|
$
|
1,999,860
|
|
|
$
|
5,378,938
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Prepaid
expenses and other current assets
|
The following is a summary of the Companys prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current deposits with vendors
|
|
$
|
210,000
|
|
|
$
|
455,000
|
|
Prepaid insurance
|
|
|
282,391
|
|
|
|
395,203
|
|
Prepaid research and development expenses
|
|
|
221,690
|
|
|
|
175,955
|
|
Accrued interest income
|
|
|
53,378
|
|
|
|
|