NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business Organization and Presentation
Business Organization
Vanda Pharmaceuticals Inc. (the Company) is a global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. The Company commenced its operations in 2003 and operates in one reporting segment.
The Company’s commercial portfolio is currently comprised of two products, HETLIOZ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the United States Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, the Company has a number of drugs in development, including:
•HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, pediatric Non-24, delayed sleep phase disorder (DSPD) and sleep disturbances in autism spectrum disorder (ASD);
•Fanapt® (iloperidone) for the treatment of bipolar disorder and Parkinson's disease psychosis (PDP) and a long acting injectable (LAI) formulation for the treatment of schizophrenia;
•Tradipitant (VLY-686), a small molecule neurokinin-1 receptor (NK-1R) antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis and COVID-19 pneumonia;
•VTR-297, a small molecule histone deacetylase (HDAC) inhibitor for the treatment of hematologic malignancies and with potential use as a treatment for several oncology indications;
•Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and BPO-27 for the treatment of secretory diarrhea disorders, including cholera; and
•VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, with potential use for the treatment of psychiatric disorders.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements includes the accounts of Vanda Pharmaceuticals Inc. and its wholly-owned subsidiaries and have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in the Company's annual report on Form 10-K (Annual Report) for the fiscal year ended December 31, 2020. The financial information as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet data as of December 31, 2020 was derived from audited financial statements but does not include all disclosures required by GAAP. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or any future year or period.
2. Summary of Significant Accounting Policies
There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
For purposes of the Condensed Consolidated Balance Sheets and Condensed 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. Cash and cash equivalents include investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Restricted cash relates primarily to amounts held as collateral for letters of credit for leases for office space at the Company’s Washington, D.C. headquarters.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total end of period cash, cash equivalents and restricted cash reported within the Condensed Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
March 31,
2020
|
Cash and cash equivalents
|
$
|
72,132
|
|
|
$
|
64,950
|
|
Restricted cash included in:
|
|
|
|
Prepaid expenses and other current assets
|
57
|
|
|
—
|
|
Non-current inventory and other
|
522
|
|
|
577
|
|
Total cash, cash equivalents and restricted cash
|
$
|
72,711
|
|
|
$
|
65,527
|
|
Revenue from Net Product Sales
The Company’s net product sales consist of sales of HETLIOZ® and Fanapt®. Net sales by product for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(in thousands)
|
March 31,
2021
|
|
March 31,
2020
|
|
|
|
|
HETLIOZ® net product sales
|
$
|
39,343
|
|
|
$
|
35,336
|
|
|
|
|
|
Fanapt® net product sales
|
23,326
|
|
|
22,664
|
|
|
|
|
|
Total net product sales
|
$
|
62,669
|
|
|
$
|
58,000
|
|
|
|
|
|
Major Customers
HETLIOZ® is available in the United States (U.S.) for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. The Company invoices and records revenue when its customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse, which is the point at which control is transferred to the customer. There were five major customers that each accounted for more than 10% of total revenues and, as a group, represented 92% of total revenues for the three months ended March 31, 2021. There were five major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 88% of total accounts receivable at March 31, 2021. Receivables are carried at transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and incorporating current conditions and forward-looking estimates.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The adoption of this standard on January 1, 2021 did not have a material impact on the Company's condensed consolidated financial statements.
3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of March 31, 2021, which all have contractual maturities of less than two years:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Market
Value
|
(in thousands)
|
|
|
|
U.S. Treasury and government agencies
|
$
|
145,508
|
|
|
$
|
86
|
|
|
$
|
(2)
|
|
|
$
|
145,592
|
|
Corporate debt
|
160,316
|
|
|
127
|
|
|
(5)
|
|
|
160,438
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
$
|
305,824
|
|
|
$
|
213
|
|
|
$
|
(7)
|
|
|
$
|
306,030
|
|
The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2020, which all have contractual maturities of less than two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Market
Value
|
(in thousands)
|
|
|
|
U.S. Treasury and government agencies
|
$
|
165,966
|
|
|
$
|
129
|
|
|
$
|
(3)
|
|
|
$
|
166,092
|
|
Corporate debt
|
140,538
|
|
|
87
|
|
|
(8)
|
|
|
140,617
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
$
|
306,504
|
|
|
$
|
216
|
|
|
$
|
(11)
|
|
|
$
|
306,709
|
|
4. Fair Value Measurements
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•Level 1 — defined as observable inputs such as quoted prices in active markets
•Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
•Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
The Company's assets classified in Level 1 and Level 2 as of March 31, 2021 and December 31, 2020 consist of cash equivalents and available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of Level 2 instruments is also determined using a market approach based upon quoted prices for similar assets in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities include certificates of deposit, commercial paper, corporate notes and asset-backed securities that use as their basis readily observable market parameters.
The Company held certain assets that are required to be measured at fair value on a recurring basis as of March 31, 2021, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of March 31, 2021 Using
|
|
Total Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
145,592
|
|
|
$
|
145,592
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
160,438
|
|
|
—
|
|
|
160,438
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
306,030
|
|
|
$
|
145,592
|
|
|
$
|
160,438
|
|
|
$
|
—
|
|
The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2020, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2020 Using
|
|
Total Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
U.S. Treasury and government agencies
|
$
|
166,092
|
|
|
$
|
166,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt
|
140,617
|
|
|
—
|
|
|
140,617
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
306,709
|
|
|
$
|
166,092
|
|
|
$
|
140,617
|
|
|
$
|
—
|
|
Total assets measured at fair value as of March 31, 2021 and December 31, 2020 include no cash equivalents.
The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, accounts receivable, restricted cash, accounts payable and accrued liabilities, product revenue allowances, and milestone obligations under license agreements, the carrying values of which materially approximate their fair values.
5. Inventory
Inventory consisted of the following as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31, 2020
|
Current assets
|
|
|
|
Work-in-process
|
$
|
207
|
|
|
$
|
66
|
|
Finished goods
|
1,154
|
|
|
1,214
|
|
Total inventory, current
|
$
|
1,361
|
|
|
$
|
1,280
|
|
Non-Current assets
|
|
|
|
Raw materials
|
$
|
742
|
|
|
$
|
744
|
|
Work-in-process
|
3,905
|
|
|
4,045
|
|
Finished goods
|
303
|
|
|
302
|
|
Total inventory, non-current
|
4,950
|
|
|
5,091
|
|
Total inventory
|
$
|
6,311
|
|
|
$
|
6,371
|
|
6. Intangible Assets
HETLIOZ®. In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ®. As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $8.0 million to BMS. The $8.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents.
In April 2018, the Company met its final milestone under its license agreement with BMS when cumulative worldwide sales of HETLIOZ® reached $250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $25.0 million in 2018. The $25.0 million, which was capitalized as an intangible asset in the first quarter of 2015, was determined to be additional consideration for the acquisition of the HETLIOZ® intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents.
The following is a summary of the Company’s intangible assets as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
(in thousands)
|
Estimated
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ®
|
July 2035
|
|
$
|
33,000
|
|
|
$
|
11,811
|
|
|
$
|
21,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Company’s intangible assets as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(in thousands)
|
Estimated
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
HETLIOZ®
|
July 2035
|
|
$
|
33,000
|
|
|
$
|
11,441
|
|
|
$
|
21,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2021 and December 31, 2020, the Company also had $27.9 million of fully amortized intangible assets related to Fanapt®.
Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense was $0.4 million for each of the three months ended March 31, 2021 and 2020. The following is a summary of the future intangible asset amortization schedule as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
HETLIOZ®
|
$
|
21,189
|
|
|
$
|
1,109
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
1,478
|
|
|
$
|
14,168
|
|
7. Accounts Payable and Accrued Liabilities
The following is a summary of the Company’s accounts payable and accrued liabilities as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31, 2020
|
Research and development expenses
|
$
|
7,231
|
|
|
$
|
6,173
|
|
Royalties payable
|
5,318
|
|
|
5,817
|
|
Consulting and other professional fees
|
5,164
|
|
|
5,052
|
|
Compensation and employee benefits
|
4,113
|
|
|
10,951
|
|
Operating lease liabilities
|
2,126
|
|
|
2,117
|
|
Milestone obligations under license agreements
|
350
|
|
|
350
|
|
Accounts payable and other accrued liabilities
|
1,803
|
|
|
1,049
|
|
Total accounts payable and accrued liabilities
|
$
|
26,105
|
|
|
$
|
31,509
|
|
8. Commitments and Contingencies
Guarantees and Indemnifications
The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual from the date of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain conditions.
License Agreements
The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies.
HETLIOZ®. In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ®. As of March 31, 2021, the Company has paid BMS $37.5 million in upfront fees and milestone obligations, including $33.0 million of regulatory approval and commercial milestones capitalized as intangible assets (see Note 6, Intangible Assets). The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ® net sales to BMS in any territory where the Company commercializes HETLIOZ® for a
period equal to the greater of 10 years following the first commercial sale in the territory or the expiry of the new chemical entity (NCE) patent in that territory. During the period prior to the expiry of the NCE patent in a territory, the Company is obligated to pay a 10% royalty on net sales in that territory. The royalty rate is decreased by half for countries in which no NCE patent existed or for the remainder of the 10 years after the expiry of the NCE patent. The Company is also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments and milestone and other payments (excluding royalties) that it receives from a third party in connection with any sublicensing arrangement, at a rate which is in the mid-twenties. The Company is obligated to use its commercially reasonable efforts to develop and commercialize HETLIOZ®.
Fanapt®. Pursuant to the terms of a settlement agreement with Novartis Pharma AG (Novartis), Novartis transferred all U.S. and Canadian rights in the Fanapt® franchise to the Company on December 31, 2014. The Company paid directly to Sanofi S.A (Sanofi) a fixed royalty of 3% of net sales through December 2019 related to manufacturing know-how. The Company is also obligated to pay Sanofi a fixed royalty on Fanapt® net sales equal to 6% on Sanofi know-how not related to manufacturing under certain conditions for a period of up to 10 years in markets where the NCE patent has expired or was not issued. The Company is obligated to pay this 6% royalty on net sales in the U.S. through November 2026.
Tradipitant. In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1R antagonist, tradipitant, for all human indications. Lilly is eligible to receive future payments based upon achievement of specified development, regulatory approval and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. As of March 31, 2021, the Company has paid Lilly $3.0 million in upfront fees and development milestones. As of March 31, 2021, remaining milestone obligations include a $2.0 million development milestone due upon the filing of the first marketing authorization for tradipitant in either the U.S. or European Union (E.U.), $10.0 million and $5.0 million for the first approval of a marketing authorization for tradipitant in the U.S. and E.U., respectively, and up to $80.0 million for sales milestones. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.
Portfolio of CFTR activators and inhibitors. In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which the Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including current pre-investigational new drug development work. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as single-digit royalties on net sales. As of March 31, 2021, the Company has paid UCSF $1.2 million in upfront fees and development milestones. As of March 31, 2021, remaining milestone obligations include $12.2 million for development milestones and $33.0 million for future regulatory approval and sales milestones. Included in the $12.2 million of development milestones is a $350,000 milestone due upon the conclusion of a Phase I study for each licensed product but not to exceed $1.1 million in total for the CFTR portfolio. In the fourth quarter of 2020, the Company determined the $350,000 milestone to be probable and recorded it as research and development expense in the Condensed Consolidated Statements of Operations. The milestone obligation was accrued as a current liability in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020.
VQW-765. In connection with a settlement agreement with Novartis relating to Fanapt®, the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens.
Purchase Commitments
In the course of its business, the Company regularly enters into agreements with clinical organizations to provide services relating to clinical development and clinical manufacturing activities under fee service arrangements. The Company’s current agreements for clinical, marketing, and other services may be terminated on generally 90 days’ notice without incurring additional charges, other than charges for work completed but not paid for through the effective date of termination and other costs incurred by the Company’s contractors in closing out work in progress as of the effective date of termination.
9. Accumulated Other Comprehensive Income
The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31, 2020
|
Foreign currency translation
|
$
|
34
|
|
|
$
|
81
|
|
Unrealized gain on marketable securities
|
158
|
|
|
158
|
|
Accumulated other comprehensive income
|
$
|
192
|
|
|
$
|
239
|
|
10. Stock-Based Compensation
As of March 31, 2021, there were 6,009,475 shares subject to outstanding options and restricted stock units (RSUs) under the 2006 Equity Incentive Plan (2006 Plan) and the Amended and Restated 2016 Equity Incentive Plan (2016 Plan, and together with the 2006 Plan, Plans). The 2006 Plan expired by its terms in April 2016, and the Company adopted the 2016 Plan. Outstanding options under the 2006 Plan remain in effect and the terms of the 2006 Plan continue to apply, but no additional awards can be granted under the 2006 Plan. In June 2016, the Company’s stockholders approved the 2016 Plan. The 2016 Plan has been amended and restated three times to increase the number of shares reserved for issuance, among other administrative changes. Each of the amendments and restatements of the 2016 Plan was approved by the Company's stockholders. There is a total of 8,790,000 shares of common stock authorized for issuance under the 2016 Plan, 2,533,396 shares of which remained available for future grant as of March 31, 2021.
Stock Options
The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have 10-year contractual terms. Service option awards granted to employees and new directors upon their election vest and become exercisable over four years, with the first 25% of the shares subject to service option awards vesting on the first anniversary of the grant date and the remaining 75% of the shares subject to the service option awards in 36 equal monthly installments thereafter. Subsequent annual service option awards granted to directors vest and become exercisable in full on the first anniversary of the grant date. Certain service option awards granted to employees and executive officers provide for partial acceleration of vesting if the employee or executive officer is subject to an involuntary termination, and full acceleration of vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control of the Company. Service option awards granted to directors provide for accelerated vesting if there is a change in control of the Company or if the director's service terminates as a result of the director's death or total and permanent disability.
As of March 31, 2021, $11.7 million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.6 years. No option awards are classified as a liability as of March 31, 2021.
A summary of option activity under the Plans for the three months ended March 31, 2021 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for share and per share amounts)
|
Number of
Shares
|
|
Weighted Average
Exercise Price at
Grant Date
|
|
Weighted Average
Remaining Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2020
|
3,606,818
|
|
|
$
|
12.24
|
|
|
5.76
|
|
$
|
8,511
|
|
Granted
|
658,500
|
|
|
20.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
(10,000)
|
|
|
18.30
|
|
|
|
|
|
Exercised
|
(209,330)
|
|
|
8.83
|
|
|
|
|
1,609
|
|
Outstanding at March 31, 2021
|
4,045,988
|
|
|
13.71
|
|
|
6.32
|
|
11,958
|
|
Exercisable at March 31, 2021
|
2,542,322
|
|
|
11.88
|
|
|
4.66
|
|
9,964
|
|
Vested and expected to vest at March 31, 2021
|
3,751,436
|
|
|
13.38
|
|
|
6.07
|
|
11,689
|
|
The weighted average grant-date fair value of options granted was $8.95 and $5.73 per share for the three months ended March 31, 2021 and 2020, respectively. Proceeds from the exercise of stock options amounted to $1.8 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively.
Restricted Stock Units
An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that are subject to terms and conditions established by the compensation committee of the board of directors. Service RSUs granted to employees vest in four equal annual installments provided that the employee remains employed with the Company. Certain service RSUs granted to employees and executive officers provide for accelerated vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control. Annual service RSUs granted to directors vest on the first anniversary of the grant date and provide for accelerated vesting if there is a change in control of the Company.
As of March 31, 2021, $31.5 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 2.0 years. No RSUs are classified as a liability as of March 31, 2021.
A summary of RSU activity under the Plans for the three months ended March 31, 2021 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Underlying RSUs
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at December 31, 2020
|
1,639,563
|
|
|
$
|
15.26
|
|
Granted
|
832,305
|
|
|
19.62
|
|
Forfeited
|
(22,589)
|
|
|
15.30
|
|
Vested
|
(485,792)
|
|
|
16.13
|
|
Unvested at March 31, 2021
|
1,963,487
|
|
|
16.89
|
|
The grant date fair value for the 485,792 shares underlying RSUs that vested during the three months ended March 31, 2021 was $7.8 million.
Stock-Based Compensation Expense
Stock-based compensation expense recognized for the three months ended March 31, 2021 and 2020 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(in thousands)
|
March 31,
2021
|
|
March 31,
2020
|
|
|
|
|
Research and development
|
$
|
1,120
|
|
|
$
|
1,111
|
|
|
|
|
|
Selling, general and administrative
|
2,789
|
|
|
2,833
|
|
|
|
|
|
Total stock-based compensation expense
|
$
|
3,909
|
|
|
$
|
3,944
|
|
|
|
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. Expected volatility rates are based on the historical volatility of the Company’s publicly traded common stock and other factors. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has never paid cash dividends to its stockholders and does not plan to pay dividends in the foreseeable future. Assumptions used in the Black-Scholes-Merton option pricing model for employee and director stock options granted during the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2021
|
|
March 31, 2020
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Weighted average expected volatility
|
46
|
%
|
|
52
|
%
|
Weighted average expected term (years)
|
5.98
|
|
6.09
|
Weighted average risk-free rate
|
0.73
|
%
|
|
1.37
|
%
|
11. Income Taxes
For the three months ended March 31, 2021 and 2020, the Company recorded income tax expense of $1.8 million and $0.8 million, respectively. The income tax expense for the three months ended March 31, 2021 and 2020 was primarily driven by the estimated effective tax rate for the year, as well as discrete income tax benefit of $0.3 million and discrete income tax expense of $0.4 million, respectively.
12. Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive.
The following table presents the calculation of basic and diluted net income per share of common stock for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(in thousands, except for share and per share amounts)
|
March 31,
2021
|
|
March 31,
2020
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
8,650
|
|
|
$
|
486
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
55,145,789
|
|
|
53,806,317
|
|
|
|
|
|
Effect of dilutive securities
|
1,359,298
|
|
|
1,063,829
|
|
|
|
|
|
Weighted average shares outstanding, diluted
|
56,505,087
|
|
|
54,870,146
|
|
|
|
|
|
Net income per share, basic and diluted:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.16
|
|
|
$
|
0.01
|
|
|
|
|
|
Diluted
|
$
|
0.15
|
|
|
$
|
0.01
|
|
|
|
|
|
Antidilutive securities excluded from calculations of diluted net income per share
|
2,137,110
|
|
|
3,095,224
|
|
|
|
|
|
13. Legal Matters
Fanapt®. In 2014 and 2015 Roxane Laboratories, Inc. (Roxane) and its affiliates, West-Ward Pharmaceuticals International Limited and West-Ward Pharmaceuticals Corp (West-Ward), Inventia Healthcare Pvt. Ltd. (Inventia), Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp. (Apotex) (collectively, the Fanapt® Defendants) each submitted an Abbreviated New Drug Applications (ANDA) to the FDA seeking approval to market generic versions of Fanapt® prior to the expiration of certain of the Company’s patents covering Fanapt®, including U.S. Patent No. 8,586,610 (‘610 Patent) and U.S. Patent No. 9,138,432 (‘432 Patent). In response, the Company filed separate lawsuits in 2014 and 2015 against each of the Fanapt® Defendants in the U.S. District Court for the District of Delaware (Delaware District Court) for patent infringement.
In August 2016, the Delaware District Court ruled in the Company’s favor, permanently enjoining Roxane from manufacturing, using, selling, offering to sell, distributing or importing any generic iloperidone product described in Roxane’s ANDA until the expiration of the ‘610 Patent in November 2027, or May 2028 if the Company obtains pediatric exclusivity. This ruling was affirmed on appeal by the Federal Circuit Court of Appeals in April 2018. West-Ward, having replaced Roxane as defendant following the acquisition of Roxane by West-Ward’s parent company, Hikma Pharmaceuticals PLC (Hikma), petitioned the U.S. Supreme Court for a writ of certiorari, which was denied in January 2020. The Company’s lawsuit against Hikma regarding the ‘432 Patent remains pending.
The Company entered into separate license agreements with each of Taro, Apotex and Lupin resolving these lawsuits in October 2016, December 2016 and July 2020, respectively. The license agreements grant Taro, Apotex and Lupin non-exclusive licenses to manufacture and commercialize a version of Fanapt® in the U.S. effective as of the expiration of the ‘610 Patent or earlier under certain limited circumstances. The Company entered into a confidential stipulation with Inventia regarding any potential launch of its generic versions of Fanapt®, but the Company’s lawsuit against Inventia regarding the ‘610 and ‘432 Patents remains pending.
HETLIOZ®. Between April 2018 and February 2021, the Company filed numerous patent infringement lawsuits in the Delaware District Court against Teva Pharmaceuticals USA, Inc. (Teva), MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN) and Apotex (collectively with Teva and MSN, the HETLIOZ® Defendants) after having received multiple Paragraph IV certification notice letters from each of the HETLIOZ® Defendants alleging that the Company’s patents covering HETLIOZ®, U.S. Patent Nos. RE46,604, 9,060,995, 9,539,234, 9,549,913, 9,730,910, 9,844,241, 10,071,977, 10,149,829, 10,376,487, 10,449,176, 10,610,510, 10,610,511, and 10,829,465, were invalid, unenforceable and/or would not be infringed by the manufacture, use or sale of their generic versions of HETLIOZ®, as described in the ANDAs submitted to the FDA by each of the HETLIOZ® Defendants. In March 2021, the Company filed an additional patent infringement lawsuit against the HETLIOZ® Defendants asserting U.S. Patent No. 10,611,744. The Company intends to file a motion to consolidate this lawsuit with the previously consolidated lawsuits, which are scheduled for trial in March 2022.
Other Matters. In February 2019, a qui tam action filed against the Company was unsealed by order of the U.S. District Court for the District of Columbia (DC District Court). The qui tam action, which was filed under seal in March 2017, was brought by a former Company employee on behalf of the U.S., 28 states and the District of Columbia (collectively, the Plaintiff States) and the policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the Federal False Claims Act and related state laws. The complaint alleged that the Company violated these laws through the promotion and marketing of its products Fanapt® and HETLIOZ® and sought, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs. By virtue of the DC District Court having unsealed the original complaint, the Company learned that in January 2019, the U.S. Department of Justice (the DOJ), as well as the Plaintiff States, elected not to intervene in the qui tam action at that time. In May 2019, the plaintiff filed an amended complaint under seal repeating the same allegations and seeking the same relief. According to a filing unsealed in June 2019, the DOJ reaffirmed its decision not to intervene and incorporated its prior filing, indicating that neither the DOJ nor the Plaintiff States were intervening regarding the original complaint. Although the DOJ and the Plaintiff States have elected not to intervene, the plaintiff may litigate this action and the DOJ and the Plaintiff States may later seek to intervene in the action. In August 2019, the Company filed a motion to dismiss, and in October 2019 the plaintiff filed a reply. In May 2020, the DC District Court dismissed the plaintiff’s complaint in its entirety, without prejudice. In June 2020, the plaintiff filed a second amended complaint with similar allegations and seeking the same relief. In July 2020, the Company filed another motion to dismiss and in October 2020 the plaintiff filed a reply. The DC District Court denied the Company's motion to dismiss in March 2021. In April 2021, the Company filed its answer to the plaintiff’s second amended complaint. The Company intends to continue to vigorously defend itself in the case.
In February 2019, a securities class action, Gordon v. Vanda Pharmaceuticals Inc., was filed in the U.S. District Court for the Eastern District of New York naming the Company and certain of its officers as defendants. An amended complaint was filed in July 2019. The amended complaint, filed on behalf of a purported stockholder, asserts claims on behalf of a putative class of all persons who purchased the Company’s publicly traded securities between November 4, 2015 and February 11, 2019, for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that the defendants made false and misleading statements and/or omissions regarding Fanapt®, HETLIOZ® and the Company’s interactions with the FDA regarding tradipitant between November 3, 2015 and February 11, 2019. In March 2020, the Company filed a motion to dismiss the complaint. In March 2021, the motion to dismiss was granted in part and denied in part. In April 2021, the Company filed its answer to the amended complaint. The Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, this lawsuit is subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.
In July 2019, a shareholder derivative complaint, Samuel Williams v. Mihael Polymeropoulos, et al., was filed in the U.S. District Court for the Eastern District of New York naming certain current and former Company directors and officers as defendants. In September 2019, a shareholder derivative complaint, Michael Bavaro v. Mihael Polymeropoulos, et al., was filed in the Delaware District Court naming certain current and former Company directors and officers as defendants. In October 2019, the Company filed a motion to transfer the Bavaro case to the Eastern District of New York, where the Gordon and Williams cases are pending. In March 2020, the Delaware District Court transferred the Bavaro case to the Eastern District of New York, consolidating the Williams and Bavaro cases, and the plaintiffs filed a consolidated complaint in April 2020. These complaints, filed on behalf of purported stockholders, derivatively on behalf of the Company, assert claims for alleged breach of fiduciary duties by certain of the Company’s current and former directors and officers. In April 2021, the parties to the consolidated case reached a settlement to resolve all of the claims asserted in the consolidated complaint for the Williams and Bavaro cases, with no admission of wrongdoing by any defendant. The terms of the settlement will be presented to the Court for final approval, but based on the terms that will be presented, the Company does not expect the settlement to have a material impact to its business, results of operation or financial condition.
In July 2017, the Committee for Medicinal Products for Human Use (CHMP) issued a negative opinion recommending against approval of Fanaptum® (oral iloperidone tablets) for the treatment of schizophrenia in adult patients in the E.U. The CHMP was of the opinion that the benefits of Fanaptum® did not outweigh its risks and recommended against marketing authorization. In March 2018, the Company filed an application seeking annulment of the EMA’s negative opinion and the subsequent European Commission decision refusing marketing authorization of Fanaptum® in the E.U. General Court. In December 2019, the General Court issued its judgment dismissing the action, leaving the EMA opinion and Commission decision intact. In February 2020, the Company filed an appeal of this judgment with the Court of Justice of the E.U.