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Item 7. Management’s Discussion and Analysis

2021-02-11 compared with 2020-02-26 · 125 added, 115 removed, 213 unchanged (53% of the section changed)

MANAGEMENT’S 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 in this annual report on Form 10-K (Annual Report).

You should read the following discussion and analysis of our financial condition and results of operations together with Part II, Item 6, Selected Consolidated Financial Data, and our consolidated financial statements and related notes appearing in this annual report on Form 10-K (Annual Report).

This discussion and analysis generally addresses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report include historical information and other information with respect to our plans and strategy for our business and contain forward-looking statements that involve risks, uncertainties and assumptions.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the “Risk Factors” section of this report and elsewhere in this Annual Report.

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 Part I, Item 1A, Risk Factors, and elsewhere in this Annual Report.

Vanda Pharmaceuticals Inc.

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We are committed to the use of technologies that support sound science, including genetics and genomics, in drug discovery, clinical trials and the commercial positioning of our products.

Our commercial portfolio is currently comprised of two products, HETLIOZ ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and Fanapt ® for the treatment of schizophrenia.

HETLIOZ ® is the first treatment for Non-24 approved by the FDA.

Our 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 treatment for patients with Non-24 and SMS approved by the U.S.

Food and Drug Administration (FDA).

In addition, we have a number of drugs in development, including:

HETLIOZ ® (tasimelteon) for the treatment of jet lag disorder, Smith-Magenis Syndrome (SMS), pediatric Non-24 and delayed sleep phase disorder (DSPD);

Fanapt ® (iloperidone) for the treatment of bipolar disorder and a long acting injectable (LAI) formulation program for the treatment of schizophrenia;

Tradipitant (VLY-686), a small molecule neurokinin-1 receptor (NK-1R) antagonist, for the treatment of atopic dermatitis, gastroparesis and motion sickness;

• HETLIOZ ® (tasimelteon) for the treatment of jet lag disorder, pediatric Non-24, delayed sleep phase disorder (DSPD) and 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;

• VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, with potential use for the treatment of psychiatric disorders.

Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors for the treatment of dry eye and ocular inflammation and for the treatment of secretory diarrhea disorders, including cholera.

Operational Highlights

Results from the EPIONE study of tradipitant in the treatment of pruritus in atopic dermatitis were reported today.

We will reassess EPIONE 2 and determine next steps.

Enrollment in the Phase III study of tradipitant in gastroparesis (VP-VLY-686-3301) is ongoing.

We expect to complete the Phase III program of tradipitant in motion sickness and file an NDA with the FDA in 2020.

We continue to engage with the FDA over the requirement of a nine-month dog toxicity study.

We submitted an sNDA for HETLIOZ ® in SMS, including data for a liquid formulation, and expect regulatory action by the FDA in 2020.

We continue to pursue approval for HETLIOZ ® in the treatment of jet lag disorder.

A clinical program for HETLIOZ ® in DSPD is ongoing.

A Phase III study of Fanapt ® in bipolar disorder is ongoing.

Vanda is encouraged by the strength of its commercial performance during the fourth quarter of 2020.

Vanda continues to implement marketing and sales strategies aimed at supporting growth and minimizing the impact of disruptions caused by the COVID-19 pandemic, including the Fanapt ® for schizophrenia direct-to-consumer campaign, which was launched in 2020.

Vanda is continuing its activities to support and facilitate the treatment of individuals in the U.S.

living with SMS, and is committed to its awareness campaign and the support of patients suffering with Non-24.

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• The gastroparesis Phase III clinical study (VP-VLY-686-3301) is ongoing.

The study has a target enrollment of 200 randomized patients and is expected to complete enrollment in the first half of 2021, with a New Drug Application (NDA) filing projected in the second half of 2021.

• The COVID-19 pneumonia Phase III clinical study (ODYSSEY VLY-686-3501) is ongoing.

HETLIOZ ® (tasimelteon)

• In December 2020, the FDA approved HETLIOZ ® capsule and liquid formulations for the treatment of adults and children, respectively, with nighttime sleep disturbances in SMS.

HETLIOZ ® capsules, for adults with SMS, were immediately available after approval and HETLIOZ LQ TM oral suspension, for children with SMS, is expected to be available in the first quarter of 2021.

SMS is estimated to affect 1/15,000-25,000 births in the U.S.

HETLIOZ ® is the first and only FDA approved medication for patients with SMS.

• A Phase III clinical study for HETLIOZ ® in DSPD is expected to be initiated in the first quarter of 2021.

• A clinical development program for HETLIOZ ® in ASD is expected to be initiated in the first quarter of 2021.

Fanapt ® (iloperidone)

• Development of the LAI formulation of Fanapt ® is ongoing.

• A clinical program for Fanapt ® in PDP is expected to begin in the first quarter of 2021.

Since we began operations, we have devoted substantially all of our resources to the in-licensing, clinical development and commercialization of our products.

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and Europe, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products.

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 Risk Factors reported in Item 1A of Part I of this Annual Report.

As described in Part I, Item 3, Legal Proceedings , of this Annual Report, we have initiated lawsuits to enforce our patent rights against certain generic pharmaceutical companies.

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 that are detailed in Part I, Item 1A, Risk Factors, of this Annual Report.

Critical Accounting Policies

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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.

In accordance with Accounting Standards Codification (ASC) 842, Leases , effective January 1, 2019, we determine if an arrangement contains a lease at inception.

Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from that lease.

For leases with a term greater than 12 months, ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

The lease term includes the option to extend the lease when it is reasonably certain we will exercise that option.

We do not combine lease and non-lease elements for office leases.

For existing leases as of January 1, 2019, executory costs are excluded from lease expense, which is consistent with our accounting under ASC 840, Leases .

For all leases entered into after January 1, 2019, executory costs are allocated between lease and non-lease elements based upon their relative stand-alone prices.

When available, we use the rate implicit in the lease to discount lease payments to present value;

however, most of our leases do not provide a readily determinable implicit rate.

Therefore, we use our incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.

Our incremental borrowing rate is derived from information available at the lease commencement date in determining the present value of lease payments.

Since we do not have outstanding debt that could provide an indication of the appropriate discount rate we used publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.

In making this estimation we considered market comparable data on companies with similar credit rating, secured contracts and contract length terms.

We use the lease term to determine the incremental borrowing rate.

Net Product Sales .

Revenue from net product sales .

Our net product sales consist of sales of HETLIOZ ® and sales of Fanapt ® .

In accordance with ASC Subtopic 606 Revenue from Contracts with Customers (ASC 606), which we adopted January 1, 2018, we account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

In accordance with ASC 606 Revenue from Contracts with Customers (ASC 606), we account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We recognize revenue when control of the product is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer.

Sales taxes, value add taxes, and usage-based taxes are excluded from revenues.

HETLIOZ ® is available in the U.S.

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Fanapt ® is available in the U.S.

for distribution through a limited number of wholesalers and is

available in retail pharmacies.

for distribution through a limited number of wholesalers and is available in retail pharmacies.

We invoice and record revenue when 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.

Revenues and accounts receivable are concentrated with these customers.

Outside the U.S., we commercially launched HETLIOZ ® in Germany in August 2016.

We have also entered into a distribution agreement with Megapharm Ltd.

Outside the U.S., we sell HETLIOZ ® in Germany and have a distribution agreement with Megapharm Ltd.

for the commercialization of Fanapt ® in Israel.

The Company evaluates outstanding receivables to assess collectability.

In performing this evaluation, the Company analyzes economic conditions, the aging of receivables and customer specific risks.

Receivables are carried at

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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.

The transaction price is determined based upon the consideration to which we will be entitled in exchange for transferring product to the customer.

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The reserve for product returns for which the product may not be returned for a period of greater than one year from the balance sheet date is included as a component of other non-current liabilities in the Consolidated Balance Sheets.

Uncertainties related to variable consideration are generally resolved in the quarter subsequent to period end, with the exception of Medicaid rebates, which are dependent upon the timing of when states submit reimbursement claims, and product returns which are resolved during the product expiry period specified in the customer contract.

Uncertainties related to variable consideration are generally resolved in the quarter subsequent to period end, with the exception of Medicaid rebates, which are dependent upon the timing of when states submit reimbursement claims, and product returns that are resolved during the product expiry period specified in the customer contract.

We currently record sales allowances for the following:

• Prompt-pay:

Specialty pharmacies and wholesalers are offered discounts for prompt payment.

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The allowance for rebates is based on statutory or contracted discount rates and estimated patient utilization.

• Chargebacks:

Chargebacks are discounts that occur when contracted indirect customers purchase directly from specialty pharmacies and wholesalers.

Contracted indirect customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price.

Contracted indirect customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price.

The specialty pharmacy or wholesaler, in turn, charges back the difference between the price initially paid by the specialty pharmacy or wholesaler and the discounted price paid to the specialty pharmacy or wholesaler by the contracted customer.

• Medicare Part D coverage gap:

Medicare Part D prescription drug benefit mandates manufacturers to fund approximately 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients through 2018.

Public Law No.

115-123, also known as the Bipartisan Budget Act of 2018 enacted on February 9, 2018 increased the manufacturer discount from 50% to 70% effective in 2019 for applicable drugs.

The Medicare Part D prescription drug benefit requires manufacturers to fund approximately 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients for applicable drugs.

We account for the Medicare Part D coverage gap using a point of sale model.

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There was no right of return asset as of December 31, 2020 or 2019.

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The following table summarizes sales discounts and allowance activity as of and for the years ended December 31, 2020, 2019 and 2018:

(in thousands)

(in thousands) Rebates &

Chargebacks Discounts,

and Other Total

Balances at December 31, 2017 20,229 $ 7,357 $ 27,586

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Balances at December 31, 2020 $ 26,870 $ 8,873 $ 35,743

The provision for rebates and chargebacks of $59.4 million and $59.3 million for the years ended December 31, 2019 and 2018 , respectively, primarily represents Medicaid rebates applicable to sales of Fanapt ® and HETLIOZ ® .

The provision for discounts, returns and other of $26.9 million and $23.8 million for the years ended December 31, 2019 and 2018 , primarily represents wholesaler distribution fees applicable to sales of Fanapt ® and, to a lesser extent, estimated product returns of Fanapt ® , as well as co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ ® and Fanapt ® .

The provision for rebates and chargebacks of $70.6 million and $59.4 million for the years ended December 31, 2020 and 2019, respectively, and their ending balances at December 31, 2020 and 2019, primarily represent Medicaid rebates applicable to sales of Fanapt ® and, to a lesser extent, Medicaid rebates applicable to sales of HETLIOZ ® .

The provision for discounts, returns and other of $28.0 million and $26.9 million for the years ended December 31, 2020 and 2019, primarily represents wholesaler distribution fees applicable to sales of Fanapt ® and, to a lesser extent, estimated product returns of Fanapt ® , and co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ ® and Fanapt ® .

The ending balances of discounts, returns and other as of December 31, 2020 and 2019 primarily represent estimated product returns of Fanapt ® and wholesaler distribution fees applicable to sales of Fanapt ® .

Stock-based compensation.

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Costs related to the acquisition of intellectual property are expensed as incurred if the underlying technology is developed in connection with our research and development efforts and has no alternative future use.

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Clinical trials are inherently complex, often involve multiple service providers, and can include payments made to investigator physicians at study sites.

Because billing for services often lags delivery of service by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses.

Our assessments include, but are not

Our assessments include, but are not limited to:

(i) an evaluation by the project manager of the work that has been completed during the period, (ii) measurement of progress prepared internally and/or provided by the third-party service provider, (iii) analyses of data that justify the progress, and (iv) management’s judgment.

In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimates the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high.

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.

Intangible assets.

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We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Factors we consider important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, a significant adverse change in legal or regulatory factors that could affect the value or patent life including our ability to defend and enforce patent claims and other intellectual property rights and significant negative industry or economic trends.

Factors we consider important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, a significant adverse change in legal or regulatory factors that could affect the value or patent life including our ability to defend and enforce patent claims and other intellectual property rights and significant negative industry or economic trends.

When we determine that the carrying value of our intangible assets may not be recoverable based upon the existence of one or more of the indicators of impairment, we measure any impairment based on the amount that carrying value exceeds fair value.

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are realizable in future periods.

A valuation allowance has been retained against certain U.S.

federal tax attributes with short carryforward periods and District of Columbia state deferred tax assets as of December 31, 2019.

A full valuation allowance was recorded against all net U.S.

deferred tax assets as of December 31, 2018.

A valuation allowance has been retained against certain District of Columbia state deferred tax assets as of December 31, 2020 and 2019.

Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

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Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Part II of this Annual Report for information on recent accounting pronouncements.

See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report for information on recent accounting pronouncements.

Results of Operations

We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to successfully commercialize our products, any possible payments made or received pursuant to license or collaboration agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals.

Since our inception, we have incurred significant losses resulting in an accumulated deficit of $220.7 million as of December 31, 2019 .

Our total stockholders’ equity was $410.9 million as of December 31, 2019 .

We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to continue to successfully commercialize our products, any possible payments made or received pursuant to license agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals, and the impact of the COVID-19 pandemic.

Year ended December 31, 2020 compared to year ended December 31, 2019

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Year Ended December 31,

(in thousands)

HETLIOZ ® product sales, net

Fanapt ® product sales, net

(in thousands) 2020 2019 Net

Change Percent

HETLIOZ ® net product sales

$ 160,686 $ 142,980 $ 17,706 12 %

Fanapt ® net product sales

87,482 84,208 3,274 4 %

Total net product sales $ 248,168 $ 227,188 $ 20,980 9 %

HETLIOZ ® product sales, net increased by $27.1 million , or 23% , to $143.0 million for the year ended December 31, 2019 compared to $115.8 million for the year ended December 31, 2018 .

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HETLIOZ ® net product sales increased by $17.7 million, or 12%, to $160.7 million for the year ended December 31, 2020 compared to $143.0 million for the year ended December 31, 2019.

The increase to net product sales was attributable to an increase in volume and an increase in price net of deductions.

Fanapt ® product sales, net increased by $6.9 million , or 9% , to $84.2 million for the year ended December 31, 2019 compared to $77.3 million for the year ended December 31, 2018 .

The increase to net product sales was attributable to an increase in price net of deductions.

Fanapt ® net product sales increased by $3.3 million, or 4%, to $87.5 million for the year ended December 31, 2020 compared to $84.2 million for the year ended December 31, 2019.

The increase to net product sales was attributable to an increase in price net of deductions partially offset by a decrease in volume.

Cost of goods sold.

Cost of goods sold increased by $4.0 million , or 19% , to $24.5 million for the year ended December 31, 2019 compared to $20.5 million for the year ended December 31, 2018 .

Cost of goods sold decreased by $1.1 million, or 5%, to $23.4 million for the year ended December 31, 2020 compared to $24.5 million for the year ended December 31, 2019.

Cost of goods sold includes third-party manufacturing costs of product sold, third-party royalty costs and distribution and other costs.

Third party royalty costs were 10% and 5% of net product sales of HETLIOZ ® in the U.S.

and Germany, respectively, and 9% of net product sales of Fanapt ® .

Third party royalty costs on net product sales of Fanapt ® will decrease to 6% beginning January 2020.

Third-party royalty costs were 10% and 5% of HETLIOZ ® net product sales in the U.S.

and Germany, respectively.

Third-party royalty costs on Fanapt ® net product sales decreased from 9% to 6% beginning January 2020.

In addition to third-party royalty costs, HETLIOZ ® and Fanapt ® cost of goods sold as a percentage of revenue depends upon our cost to manufacture inventory at normalized production levels with our third-party manufacturers.

We expect that, in the future, total HETLIOZ ® manufacturing costs included in cost of goods sold will continue to be less than 2% of our net HETLIOZ ® product sales.

We expect that, in the future, total U.S.

Fanapt ® manufacturing costs included in cost of goods sold will continue to be less than 3% of our net U.S.

Fanapt ® product sales.

We expect that, in the future, total HETLIOZ ® manufacturing costs included in cost of goods sold will continue to be less than 2% of our HETLIOZ ® net product sales.

We expect that, in the future, total Fanapt ® manufacturing costs included in cost of goods sold will continue to be less than 3% of our Fanapt ® net product sales.

Research and development expenses.

Research and development expenses increased by $6.9 million, or 14%, to $55.6 million for the year ended December 31, 2020 compared to $48.6 million for the year ended December 31, 2019.

The increase was primarily due to an increase in clinical trial expenses associated with the tradipitant and Fanapt programs as well as an increase in indirect project costs including stock-based compensation expense, partially offset by a decrease in expenses associated with the HETLIOZ ® clinical programs.

The increase was primarily due to an increase in clinical trial expenses associated with our Fanapt ® and COVID-19 therapeutic development programs.

The COVID-19 pandemic has impacted clinical research globally, including our previously reported clinical trials.

While certain of our programs have resumed patient enrollment, other programs remain on hold.

The following table summarizes the costs of our product development initiatives for the years ended December 31, 2020 and 2019.

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Direct project costs (1)

$ 9,518 $ 8,672

Tradipitant 23,540 21,290

VTR-297 1,487 1,609

CFTR 3,938 4,511

Other 2,211 668

Total direct project costs 48,363 42,266

Indirect project costs (1)

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Other indirect overhead 3,410 3,176

Total indirect project costs 7,214 6,383

Total research and development expense $ 55,577 $ 48,649

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Selling, general and administrative expenses increased by $10.8 million, or 8%, to $140.5 million for the year ended December 31, 2020 compared to $129.7 million for the year ended December 31,

The increase was primarily the result of higher spend on legal and corporate related activities, including personnel costs, and Non-24 direct to consumer marketing.

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The increase was primarily the result of increased spending on marketing activities for our commercial products, including the Fanapt ® for schizophrenia direct-to-consumer campaign, partially offset by decreased spending on legal activities.

Intangible asset amortization .

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Other income was $4.4 million for the year ended December 31, 2020 compared to $6.2 million for the year ended December 31, 2019.

Other income primarily relates to investment income on our marketable securities.

Other income primarily consists of investment income, which decreased in 2020 as a result of lower yields on our marketable securities.

Provision for income taxes.

An income tax benefit of $86.5 million was recorded for the year ended December 31, 2019 and a provision for income taxes of $0.1 million was recorded for the year ended December 31, 2018 .

The income tax benefit for 2019 was primarily due to the reduction of the tax valuation allowance against substantially all of its deferred tax assets in the U.S.

A provision for income taxes of $8.3 million was recorded for the year ended December 31, 2020 and an income tax benefit of $86.5 million was recorded for the year ended December 31, 2019.

The income tax benefit for the year ended December 31, 2019 was primarily due to the reduction of the tax valuation allowance against substantially all of its deferred tax assets in the U.S.

Tax expense associated with U.S.

income before income taxes for the years ended December 31, 2019 and 2018 was offset by a corresponding tax benefit for the reduction of the valuation allowance recorded against tax attributes that were utilized in those periods.

income before income taxes for the year ended December 31, 2019 was offset by a corresponding tax benefit for the reduction of the valuation allowance recorded against tax attributes that were utilized in those periods.

Income tax expense was recorded related to certain U.S.

state and foreign jurisdictions for the years ended December 31, 2019 and 2018.

state and foreign jurisdictions for the year ended December 31, 2019.

See Note 15, Income Taxes, to the consolidated financial statements in Part II, Item 8 of this Annual Report for additional information.

Liquidity and Capital Resources

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Our liquidity resources as of December 31, 2020 and 2019 are summarized as follows:

(in thousands)

December 31, 2019

December 31, 2018

(in thousands) December 31, 2020 December 31, 2019

Cash and cash equivalents $ 61,031 $ 45,072

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Total cash, cash equivalents and marketable securities $ 367,740 $ 312,129

As of December 31, 2019 , we maintained all of our Cash in two financial institutions.

As of December 31, 2020, we maintained all of our cash, cash equivalents and marketable securities in two 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.

We expect to incur substantial costs and expenses throughout 2020 and beyond in connection with our continued clinical development of tradipitant and our other products, U.S.

commercial activities for HETLIOZ ® and Fanapt ® , the European commercial launch activities for HETLIOZ ® and payments due upon achievement of milestones under our license agreements.

Additionally, we continue to pursue market approval of HETLIOZ ® and Fanapt ® in other regions.

The actual costs to advance tradipitant and our research and development projects and commercial activities for HETLIOZ ® and Fanapt ® are difficult to estimate and may vary significantly.

We believe that our existing funds will be sufficient to meet our operating plans for at least the next twelve months.

Based on our current operating plans, which include costs and expenses in connection with our continued clinical development of tradipitant and our other products, U.S.

commercial activities for HETLIOZ ® and Fanapt ® , pursuit of market approval of HETLIOZ ® and Fanapt ® in other regions, and payments due upon achievement of milestones under our license agreements, we believe that our cash, cash equivalents and marketable securities and cash received from product sales will be sufficient for at least the next 12 months.

Our future capital requirements and the adequacy of our available funds will depend on many factors, primarily including our ability to generate revenue, the scope and costs of our commercial, manufacturing and process development activities, the magnitude of our discovery, preclinical and clinical development programs, and potential costs to acquire or license the rights to additional products.

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We may also seek capital through collaborations or partnerships with other companies.

The issuance of debt could require us to grant liens on certain of our assets that may limit our flexibility and debt securities may be convertible

into common stock.

The issuance of debt could require us to grant liens on certain of our assets that may limit our flexibility and debt securities may be convertible into common stock.

If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders.

These financings also may significantly dilute the ownership of our existing stockholders.

If we are unable to obtain additional financing, we may be required to reduce the scope of our future activities which could harm our business, financial condition and operating results.

If we are unable to obtain additional financing, we may be

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required to reduce the scope of our future activities which could harm our business, financial condition and operating results.

There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all.

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Year Ended December 31,

(in thousands)

(in thousands) 2020 2019 Net Change

Net cash provided by (used in):

Operating activities:

Net income $ 23,337 $ 115,553 $ (92,216)

Non-cash charges 24,121 (72,731) 96,852

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Investing activities:

Acquisition of intangible asset

Purchases of property and equipment (1,795) (1,019) (776)

Net purchases of marketable securities

Net purchases, sales and maturities of marketable securities (39,704) (67,290) 27,586

Investing activities (41,499) (68,309) 26,810

Financing activities:

Net proceeds from offering of common stock

Proceeds from exercise of employee stock options and other

Proceeds from the exercise of stock options 5,634 6,264 (630)

Financing activities 5,634 6,264 (630)

Effect of exchange rate changes on cash, cash equivalents and restricted cash 53 (1) 54

Net increase (decrease) in cash, cash equivalents and restricted cash

Net change in cash, cash equivalents and restricted cash $ 15,963 $ (16,099) $ 32,062

Operating Activities.

Cash flows provided by operating activities during the year ended December 31, 2020 were $51.8 million, an increase of $5.8 million compared to $45.9 million during the year ended December 31, 2019.

The increase reflects an increase of $90.3 million in net income and $10.9 million from the net change in operating assets and liabilities, partially offset by a decrease of $85.3 million in non-cash charges primarily due to the reduction of our tax valuation allowance against substantially all of our deferred tax assets in the U.S.

The increase of $10.9 million from the net change in operating assets and liabilities primarily relates to a decrease in accounts receivable attributable to the timing of shipments and payments and an increase in accounts payable and other liabilities attributable to the timing of activities and payments.

The increase reflects an increase of $96.9 million in non-cash charges primarily due to the absence of the reduction of our tax valuation allowance against substantially all of our deferred tax assets in the U.S.

and $1.2 million from the net change in operating assets and liabilities, partially offset by a decrease of $92.2 million in net income.

Investing Activities.

Cash flows used in investing activities during the year ended December 31, 2019 were $68.3 million , a decrease of $41.4 million compared to $109.7 million during the year ended December 31, 2018 .

Cash flows used in investing activities during the year ended December 31, 2020 were $41.5 million, an increase of $26.8 million compared to cash used in investing activities of $68.3 million during the year ended December 31, 2019.

Investing activities reflect continued net reinvestment of available cash and cash equivalents in our portfolio of marketable securities.

Additionally, during the year ended December 31, 2018 , we paid $25.0 million upon achievement of a HETLIOZ ® milestone obligation.

Financing Activities.

Cash flows provided by financing activities during the year ended December 31, 2020 were $5.6 million, a decrease of $0.6 million compared to $6.3 million during the year ended December 31, 2019.

During the year ended December 31, 2018 , we received net cash proceeds of $100.9 million from a public offering of common stock.

Financing activities include proceeds from exercises of common stock options.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

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Contractual Obligations and Commitments

1 unchanged sentence

Cash payments due by year (4)

(in thousands)

(in thousands) Total 2021 2022 2023 2024 2025 Thereafter

Operating leases (1) $ 18,032 $ 2,290 $ 2,611 $ 2,462 $ 2,488 $ 2,557 $ 5,624

Milestone obligation (2) 350 350 — — — — —

Purchase commitments (3) 1,447 966 481 — — — —

Total non-cancellable long-term contractual cash obligations $ 19,829 $ 3,606 $ 3,092 $ 2,462 $ 2,488 $ 2,557 $ 5,624

(1) Operating leases include the minimum lease payments for our operating lease liabilities.

This table does not include obligations under short-term lease agreements, variable payments for building maintenance and other services and executory costs associated with our operating lease agreements.

Purchase commitments include noncancellable purchase commitments for agreements longer than one year and primarily relate to commitments for media and data services.

This table does not include various other long-term agreements entered into for services with other third party vendors, such as inventory purchase commitments, due to the cancelable nature of the services or variable terms within the agreement.

Additionally, this table does not include rebates, chargebacks or discounts recorded as liabilities at the time that product sales are recognized as revenue.

(2) This table includes a probable future $350,000 milestone obligation under our license agreement with University of California San Francisco due upon the conclusion of a Phase I study.

This table does not include potential future milestone obligations under our license agreements for which we have not deemed it probable that the milestone event will occur as of December 31, 2020.

See Part I, Item 1, Business , of this Annual Report, for a description of our licensing arrangements and remaining milestone obligations.

See Part I, Item 1, Business - License Agreements , of this Annual Report, for a description of our licensing arrangements and remaining milestone obligations.

(3) Purchase commitments include non-cancellable purchase commitments for agreements longer than one year and primarily relate to commitments for data services.

This table does not include various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase commitments, due to the cancellable nature of the services or variable terms within the agreement.

Additionally, this table does not include rebates, chargebacks or discounts recorded as liabilities at the time that product sales are recognized as revenue.

(4) This table does not include liabilities related to uncertain tax positions taken as of December 31, 2020.

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Concentrations of Credit Risk

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.

Our marketable securities consist of commercial paper, corporate notes, asset-backed securities and U.S.

We deposit our cash with financial institutions that we consider to be of high credit quality and purchase marketable securities that are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S.

Our marketable securities consist of commercial paper, corporate notes and U.S.

government agency notes.

6 unchanged sentences

The functional currency of our international subsidiaries is the local currency.

We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our subsidiaries’ respective functional currencies.

We are exposed to foreign currency risk to the extent

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that we enter into transactions denominated in currencies other than our subsidiaries’ respective functional currencies.

We are also exposed to unfavorable fluctuations of the U.S.

dollar, which is our reporting currency, against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S.

dollars for inclusion in our

consolidated financial statements.

dollars for inclusion in our consolidated financial statements.

We do not currently hedge our foreign currency exchange rate risk.

2 unchanged sentences

Inflation has not had a material impact on our results of operations.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related financial statement schedules required to be filed are listed in the Index to Consolidated Financial Statements and are incorporated in Part IV, Item 15 of this Annual Report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis