What changed in this filing

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Item 9A. Controls and Procedures

2021-02-11 compared with 2020-02-26 · 389 added, 398 removed, 790 unchanged (50% of the section changed)

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Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (Exchange Act)) as of December 31, 2019 .

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of December 31, 2020.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of December 31, 2020, the end of the period covered by this Annual Report, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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OTHER INFORMATION

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required under this item will be contained in our Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019 , 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.

EXECUTIVE COMPENSATION

Information required under this item will be contained in our Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019 , under the captions “Corporate Governance” and “Compensation of Executive Officers,” 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, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such filing.

Information required under this item will be contained in our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2020 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, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such filing.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

PRINCIPAL ACCOUNTANT FEES AND SERVICES

EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

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The Exhibits are listed in the Exhibit Index.

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Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Vanda Pharmaceuticals Inc.

February 26, 2020

February 11, 2021 By:

/s/ Mihael H.

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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.

President and Chief Executive Officer and Director (principal executive officer)

February 26, 2020

President and Chief Executive Officer and Director (Principal Executive Officer) February 11, 2021

Polymeropoulos, M.D.

Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer)

February 26, 2020

Thomas Watkins

Chairman of the Board and

February 26, 2020

/s/ Kevin Moran Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 11, 2021

Thomas Watkins Chairman of the Board and

Director February 11, 2021

Thomas Watkins

/s/ Anne Sempowski Ward

February 26, 2020

/s/ Anne Sempowski Ward Director February 11, 2021

Anne Sempowski Ward

/s/ Phaedra Chrousos

February 26, 2020

/s/ Phaedra Chrousos Director February 11, 2021

Phaedra Chrousos

/s/ Richard W.

February 26, 2020

Dugan Director February 11, 2021

/s/ Stephen Ray Mitchell Director February 11, 2021

Stephen Ray Mitchell

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Vanda Pharmaceuticals Inc.

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Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018

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Notes to the Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

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We have audited the accompanying consolidated balance sheets of Vanda Pharmaceuticals Inc.

and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income (loss), of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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A company’s 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;

(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

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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 company’s assets that could have a material effect on the financial statements.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Medicaid rebates

As described in Note 2 to the consolidated financial statements, allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Medicaid Rebates for Fanapt ®

As described in Note 2 to the consolidated financial statements, the allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors.

Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid.

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

The Company has recorded product revenue allowances of $31.9 million as of December 31, 2019, of which a significant amount relates to allowances for Medicaid rebates.

The principal considerations for our determination that performing procedures relating to Medicaid rebates is a critical audit matter are there was significant judgment by management due to the significant measurement uncertainty involved in developing the allowances, as these allowances are based on assumptions developed for estimated patient utilization, primarily payor mix, invoice lag and inventory levels within the distribution channel.

This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s significant assumptions, related to the estimated patient utilization.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the allowances for Medicaid rebates, including controls over the assumptions used to estimate these rebates.

These procedures also included, among others, (i) developing an independent estimate of the Medicaid rebates by utilizing third-party information related to payor mix, as well as inventory levels within the distribution channel and the historical trends of the invoice lag;

(ii) comparing the independent estimate to management’s estimate;

and (iii) testing rebate claims processed by the Company, including evaluating those claims for consistency with the contractual and mandated terms of the Medicaid Drug Rebate Program.

Product Returns for Fanapt

As described in Note 2 to the consolidated financial statements, the Company generally offers direct customers a limited right to return as contractually defined with the customers.

The Company has recorded a reserve for product returns for Fanapt of $6.1 million as of December 31, 2019.

Management considers several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, historical return activity including activity for product sold for which the return period has past, prescription trends and other relevant factors.

Management does not expect returned goods to be resalable.

The principal considerations for our determination that performing procedures relating to the product returns for Fanapt is a critical audit matter are there was significant judgment by management due to the significant measurement uncertainty involved in developing the reserve, as the reserve is based on assumptions developed using return activity with limited historical information and inventory levels within the distribution channel.

This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures relating to these significant assumptions, and evaluating audit evidence relating to the reserve for product returns for Fanapt.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the reserve for product returns for Fanapt, including controls over the assumptions used to estimate this reserve.

These procedures also included, among others, (i) developing an independent estimate of the returns by utilizing information related to the historical return activity and the inventory in the distribution channel, (ii) comparing the independent estimate to management’s estimate;

and (iii) testing returns processed by the Company, including evaluating the returns for consistency with the contractual and mandated terms of the Company’s returns arrangements.

Valuation Allowance for Deferred Tax Assets

As described in Note 15 to the consolidated financial statements, the Company has recorded a valuation allowance on deferred tax assets of $8.2 million as of December 31, 2019.

For the year ended December 31, 2019, the Company recorded income tax benefit of $86.5 million.

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

Management assesses the need for a valuation allowance against its deferred tax asset each quarter through the review of all available positive and negative evidence.

Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized.

Management’s analysis depends on historical and projected taxable income.

Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities.

The principal considerations for our determination that performing procedures relating to the valuation allowance for deferred tax assets is a critical audit matter are there was significant judgment by management due to the significant measurement uncertainty involved in determining the realizability of the deferred tax assets, as realizability is based on historical taxable income and projected taxable income, specifically related to assumptions developed for projected revenue, commercial expenses and research and development activities.

This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures related to evaluating management’s judgments about the Company’s ability to realize deferred tax assets, including the evaluation of significant assumptions related to the realizability of deferred tax assets, and evaluating audit evidence relating to assumptions for projected revenue, commercial expenses and research and development activities.

The Company has recorded product revenue allowances of $34.4 million as of December 31, 2020, of which a significant amount relates to allowances for Fanapt ® Medicaid rebates.

The principal considerations for our determination that performing procedures relating to the Fanapt ® Medicaid rebates is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty involved in developing the allowances, as these allowances are based on assumptions developed for estimated patient utilization, primarily payor mix and invoice lag;

this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the estimated patient utilization assumption.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the valuation allowance for deferred tax assets, including controls over the assessment of the need for valuation allowances.

These procedures also included, among others, (i) testing management’s process for developing projected taxable income;

(ii) evaluating the appropriateness of the method for estimating projected taxable income;

(iii) testing the completeness, accuracy, and relevance of underlying data used in the estimate;

and (iv) evaluating the significant assumptions used by management to estimate projected revenue, commercial expenses and research and development activities.

Evaluating management’s assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the company, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

These procedures included testing the effectiveness of controls relating to the allowances for Fanapt ® Medicaid rebates, including controls over the assumptions used to estimate these rebates.

These procedures also included, among others, (i) developing an independent estimate of the Fanapt ® Medicaid rebates by utilizing third-party information related to patient utilization, as well as the historical trends of the invoice lag;

and (ii) comparing the independent estimate to management’s estimate.

Developing the independent estimate involved (i) testing the completeness and accuracy of the patient utilization data from third-party reports, and (ii) testing rebate claims processed by the Company, including evaluating those claims for consistency with the contractual and mandated terms of the Medicaid Drug Rebate Program.

/s/ PricewaterhouseCoopers LLP

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We have served as the Company’s auditor since 2003.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share amounts)

December 31, 2019

December 31, 2018

(in thousands, except for share and per share amounts) December 31, 2020 December 31, 2019

Current assets:

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Accounts receivable, net 30,036 26,367

Inventory 1,280 1,140

Prepaid expenses and other current assets 10,089 14,500

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Non-current inventory and other 6,641 3,851

Total assets $ 533,456 $ 483,748

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Product revenue allowances 34,427 31,915

Milestone obligations under license agreements

Total current liabilities 65,936 59,505

Operating lease non-current liabilities

11,497 12,455

Other non-current liabilities

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Preferred stock, $ 0.001 par value;

20,000,000 shares authorized, and no shares issued or outstanding

20,000,000 shares authorized, and no shares issued or outstanding at December 31, 2020 and 2019, respectively

Common stock, $ 0.001 par value;

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Additional paid-in capital

650,300 631,307

Accumulated other comprehensive income 239 249

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The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

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Total operating expenses 220,929 204,378 171,380

Income (loss) from operations

Income (loss) before income taxes

Income from operations 27,239 22,810 21,738

Other income 4,416 6,218 3,608

Income before income taxes 31,655 29,028 25,346

Provision (benefit) for income taxes 8,318 ( 86,525 ) 138

Net income (loss)

Net income (loss) per share:

Net income $ 23,337 $ 115,553 $ 25,208

Net income per share:

Basic $ 0.43 $ 2.17 $ 0.50

Diluted $ 0.42 $ 2.11 $ 0.48

Weighted average shares outstanding:

Basic 54,427,683 53,137,562 50,859,947

Diluted 55,190,802 54,847,060 53,045,257

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

(in thousands) 2020 2019 2018

Net income (loss)

Net income $ 23,337 $ 115,553 $ 25,208

Other comprehensive income (loss):

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Change in net unrealized gain (loss) on marketable securities ( 102 ) 313 57

Tax provision on other comprehensive income

Tax benefit (provision) on other comprehensive income 24 ( 71 ) —

Other comprehensive income (loss), net of tax ( 10 ) 248 35

Comprehensive income (loss)

Comprehensive income $ 23,327 $ 115,801 $ 25,243

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Paid-in Capital

Common Stock Additional

Paid-in Capital Accumulated Other

Comprehensive

Income (Loss)

(in thousands, except for share amounts)

Income (Loss) Accumulated

Deficit Total

(in thousands, except for share amounts) Shares Par Value

Balances at December 31, 2017 44,938,133 $ 45 $ 492,802 $ ( 34 ) $ ( 361,426 ) $ 131,387

Net proceeds from public offering of common stock

6,325,000 6 100,864 — — 100,870

Issuance of common stock from the exercise of stock options and settlement of restricted stock units

1,214,460 1 6,255 — — 6,256

Stock-based compensation expense — — 11,666 — — 11,666

Other comprehensive loss, net of tax

Net income — — — — 25,208 25,208

Other comprehensive income, net of tax — — — 35 — 35

Balances at December 31, 2018 52,477,593 52 611,587 1 ( 336,218 ) 275,422

Net proceeds from public offering of common stock

Issuance of common stock from the exercise of stock options and settlement of restricted stock units

1,072,019 2 6,262 — — 6,264

Stock-based compensation expense — — 13,458 — — 13,458

Net income — — — — 115,553 115,553

Other comprehensive income, net of tax

— — — 248 — 248

Balances at December 31, 2019 53,549,612 54 631,307 249 ( 220,665 ) 410,945

Issuance of common stock from the exercise of stock options and settlement of restricted stock units

1,315,480 1 5,633 — — 5,634

Stock-based compensation expense — — 13,360 — — 13,360

Other comprehensive income, net of tax

Net income — — — — 23,337 23,337

Other comprehensive loss, net of tax — — — ( 10 ) — ( 10 )

Balances at December 31, 2020 54,865,092 $ 55 $ 650,300 $ 239 $ ( 197,328 ) $ 453,266

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

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Cash flows from operating activities

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Net income $ 23,337 $ 115,553 $ 25,208

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of property and equipment 1,386 1,387 1,429

Stock-based compensation 13,360 13,458 11,666

Amortization of discounts and premiums on marketable securities

Amortization of premiums and accretion of discounts on marketable securities 179 ( 3,099 ) ( 2,221 )

Gain on sale of marketable securities ( 229 ) — —

Intangible asset amortization 1,478 1,505 1,527

Deferred income taxes

6,189 ( 87,767 ) —

Other non-cash adjustments, net

1,758 1,785 167

Changes in operating assets and liabilities:

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Prepaid expenses and other assets 4,068 ( 2,764 ) ( 4,258 )

Inventory ( 2,876 ) ( 722 ) 70

Accounts payable and other liabilities 3,759 3,508 ( 618 )

Product revenue allowances 3,133 761 8,223

Net cash provided by (used in) operating activities

Net cash provided by operating activities 51,775 45,947 29,986

Cash flows from investing activities

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Purchases of marketable securities ( 346,622 ) ( 394,517 ) ( 282,395 )

Maturities of marketable securities

Sales and maturities of marketable securities 306,918 327,227 198,103

Net cash used in investing activities ( 41,499 ) ( 68,309 ) ( 109,660 )

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Net proceeds from offering of common stock — — 100,870

Proceeds from exercise of employee stock options

Proceeds from exercise of stock options 5,634 6,264 6,256

Net cash provided by financing activities

5,634 6,264 107,126

Effect of exchange rate changes on cash, cash equivalents and restricted cash

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

53 ( 1 ) ( 38 )

Net change in cash, cash equivalents and restricted cash 15,963 ( 16,099 ) 27,414

Cash, cash equivalents and restricted cash

Beginning of year 45,650 61,749 34,335

End of year $ 61,613 $ 45,650 $ 61,749

The accompanying notes are an integral part of these consolidated financial statements.

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VANDA PHARMACEUTICALS INC.

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Vanda Pharmaceuticals Inc.

(the Company) is a leading 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) 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 Fanapt ® for the treatment of schizophrenia.

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

Food and Drug Administration (FDA).

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 treatment for patients with Non-24 and SMS approved by the United States Food and Drug Administration (FDA).

In addition, the Company has 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.

Basis of Presentation

The accompanying consolidated financial statements includes the accounts of Vanda Pharmaceuticals Inc.

and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.).

and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

All intercompany accounts and transactions have been eliminated in consolidation.

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (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.

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.

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headquarters.

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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total end of period cash, cash equivalents and restricted cash reported within the Consolidated Statement of Cash Flows:

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Total cash, cash equivalents and restricted cash

$ 61,613 $ 45,650

Marketable Securities

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The Company’s investment policy requires the selection of high-quality issuers.

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) .

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary.

If declines in the value of available for-sale securities are determined to be other-than-temporary, a loss is recorded in earnings in the current period.

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.

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value.

The Company also reviews its available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is the result of a change in creditworthiness or other factors.

If declines in the value of available for-sale securities are determined to be credit-related, a loss is recorded in earnings in the current period.

Interest and dividend income is recorded when earned and included in other income.

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Inventory, which is recorded at the lower of cost or net realizable value, includes the cost of third-party manufacturing and other direct and indirect costs and is valued using the first-in, first-out method.

The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life.

The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage.

The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized;

otherwise, such costs are expensed as research and development.

Inventory not expected to be sold within 12 months following the balance sheet date are classified as non-current.

Inventory levels are evaluated for the amount of inventory that would be sold within one year.

At certain times, the level of inventory can exceed the forecasted level of cost of goods sold for the next 12 months.

The Company classifies the estimate of such inventory as non-current.

Intangible Assets

Costs incurred for products not yet approved by the FDA and for which no alternative future use exists are recorded as expense.

Costs incurred for products not yet approved by the FDA and for which no alternative future use exists are recorded as research and development expense.

Obligations for milestone payments to other pharmaceutical companies that may result in a capitalized intangible asset are recognized when it is deemed probable that the milestone event will occur.

In the event a product has been approved by the FDA or an alternative future use exists for a product, patent and license costs are capitalized and amortized on a straight-line basis over the estimated useful economic life of the of the related product patents.

For intangible assets related to HETLIOZ ® , the estimated useful life is the estimated economic useful life of the related product patents, the latest of which expires in July 2035 .

For intangible assets related to HETLIOZ ® , the estimated useful life is through July 2035, which is the estimated economic useful life of the related product patents.

Intangible assets related Fanapt ® have been fully amortized on a straight-line basis to November 2016.

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Depreciation of most property and equipment is provided on a straight-line basis over the estimated useful lives of the assets.

Leasehold improvements are amortized using a straight-line basis over the lesser of the estimated useful lives of the assets or the terms of the related leases.

Leasehold improvements are amortized using a

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straight-line basis over the lesser of the estimated useful lives of the assets or the terms of the related leases.

The costs of additions and improvements are capitalized, and repairs and maintenance costs are charged to operations in the period incurred.

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The Company does 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 the Company's 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.

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

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

Accounts Payable and Accrued Liabilities

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

Revenue Recognition

In accordance with ASC Subtopic 606 Revenue from Contracts with Customers (ASC 606), which the Company adopted January 1, 2018, the Company accounts 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.

Revenue from Net Product Sales

In accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), which the Company adopted January 1, 2018, the Company accounts 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.

The Company recognizes revenue when control of the product is transferred to the customer in an amount that reflects the consideration the Company expects 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.

Results for reporting period ended December 31, 2017 were not adjusted and continue to be reported in accordance with historic accounting under ASC 605.

The impact to the Consolidated Statements of Operations if the Company had applied ASC 606 for the year ended December 31, 2017 is not material.

The Company’s net product sales consist of sales of HETLIOZ ® and Fanapt ® .

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( in thousands )

HETLIOZ ® product sales, net

Fanapt ® product sales, net

2020 2019 2018

HETLIOZ ® net product sales

$ 160,686 $ 142,980 $ 115,835

Fanapt ® net product sales

87,482 84,208 77,283

Total net product sales $ 248,168 $ 227,188 $ 193,118

HETLIOZ ® is available in the U.S.

for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies.

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.

Specialty pharmacy customers include Diplomat Pharmacy, Inc.

(a subsidiary of UnitedHealth Group) and Accredo (a subsidiary of Express Scripts).

(a subsidiary of

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UnitedHealth Group) and Accredo (a subsidiary of Express Scripts).

Fanapt ® is available in the U.S.

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

Wholesaler customers include Cardinal Health, Inc., AmerisourceBergen

Drug Corporation, and McKesson Corporation.

Wholesaler customers include Cardinal Health, Inc., AmerisourceBergen Drug Corporation, and McKesson Corporation.

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.

Revenues and accounts receivable are concentrated with these customers.

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.

Outside the U.S., the Company sells HETLIOZ ® in Germany and has a distribution agreement for the commercialization of Fanapt ® in Israel.

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.

The following table presents each major customer that represented more than 10% of total revenues for the years ended December 31, 2020, 2019 and 2018:

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Distributor E 10 % 11 % 12 %

Distributor F

The following table presents each major customer that represented more than 10% of accounts receivable, net, as of December 31, 2020 and 2019:

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Allowances for rebates, chargebacks and co-pay assistance are based upon the insurance benefits of the end customer, which are estimated using historical activity and, where available, actual and pending prescriptions for which the Company has validated the insurance benefits.

Reserves for variable consideration are classified as product revenue allowances on the consolidated balance sheets, with the exception of prompt-pay discounts which are classified as reductions of accounts receivable.

Reserves for variable consideration are classified as product revenue allowances on the Consolidated Balance Sheets, with the exception of prompt-pay discounts that are classified as reductions of accounts receivable.

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.

The Company currently records 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.

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• 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.

Vanda accounts for the Medicare Part D coverage gap using a point of sale model.

Estimates for expected Medicare Part D coverage gap are based in part on historical activity and, where available, actual and pending prescriptions for which the Company has validated the insurance benefits.

Estimates for expected Medicare Part D coverage gap are based in part on historical activity and, where available, actual and pending prescriptions when the Company has validated the insurance benefits.

• Service Fees:

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• Product Returns :

The Company generally offers direct customers a limited right to return as contractually defined with the customers.

The Company generally offers direct customers a limited right to return as contractually defined with its customers.

The Company considers several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, historical return activity, including activity for product sold for which the return period has past, prescription trends and other relevant factors.

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The following table summarizes activity for product returns as of and for the years ended December 31, 2020, 2019 and 2018, all of which relates to sales of Fanapt ® :

(in thousands)

Reserve for Product Returns

(in thousands) Reserve for Product Returns

Balances at December 31, 2017 $ 4,119

Additions 2,684

Credits/payments ( 1,616 )

Balances at December 31, 2018 5,187

Additions 3,138

Credits/payments ( 2,205 )

Balances at December 31, 2019 6,120

Additions 3,844

Credits/payments ( 5,266 )

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Cost of Goods Sold

Cost of goods sold includes royalties payable, the cost of inventory sold, manufacturing and supply chain costs and product shipping and handling costs related to sales of HETLIOZ ® and Fanapt ® to the Company’s distribution partners.

Cost of goods sold includes royalties payable, the cost of inventory sold, costs to write down inventory to net realizable value, manufacturing and supply chain costs and product shipping and handling costs related to sales of HETLIOZ ® and Fanapt ® to the Company’s distribution partners.

Research and Development Expenses

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 payments, costs of materials used in clinical trials and research and development, costs for regulatory consultants and filings, depreciation of capital resources used to develop products, related facilities costs, and salaries, other employee-related costs and stock-based compensation for research and development personnel.

The Company expenses research and development costs as they are incurred for products in the

development stage, including manufacturing costs and milestone payments made under license agreements prior to FDA approval.

Upon and subsequent to FDA approval, manufacturing and milestone payments related to license agreements are capitalized.

The Company expenses research and development costs as they are incurred for products in the development stage, including manufacturing costs and milestone payments made under license agreements prior to FDA approval.

Upon and subsequent to FDA approval, manufacturing and milestone payments related to license agreements are

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Milestone payments are accrued when it is deemed probable that the milestone event will be achieved.

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Revenues and expenses denominated in foreign currencies are translated at average exchange rates for the respective periods.

Foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss) .

Foreign currency translation adjustments are recorded in accumulated other comprehensive income.

Transactions denominated in currencies other than subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise.

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The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement.

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Certain Risks and Uncertainties

The outbreak of the novel coronavirus known as COVID-19 has resulted in government-imposed quarantines, travel restrictions and other public health safety measures.

As this pandemic endures, the extent to which COVID-19 may impact the Company's business, financial condition and results of operations is uncertain and will depend on many factors outside of the Company's control.

The Company’s products under development require approval from the FDA or other international regulatory agencies prior to commercial sales.

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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.

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 Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.

In August 2018, the U.S.

Securities and Exchange Commission (SEC) adopted the final rule under SEC Release No.

33-10532, Disclosure Update and Simplification.

This final rule amends certain disclosure requirements that are redundant, duplicative, overlapping, outdated or superseded.

In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements.

Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement.

The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed.

This final rule is effective for the Company for all filings made on or after November 5, 2018.

The SEC staff clarified that the first presentation of the changes in shareholders' equity may be included in the first Form 10-Q for the quarter that begins after the effective date of the amendments.

The adoption of the final rule did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the impairment model for most financial assets and certain other financial instruments.

The standard will require the use of a forward-looking “expected loss” model for instruments measured at amortized cost that generally will result in the earlier recognition of allowances for losses.

The adoption of this standard on January 1, 2021 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changed the impairment model for most financial assets and certain other financial instruments.

The standard requires the use of a forward-looking “expected loss” model for instruments measured at amortized cost that generally will result in the earlier recognition of allowances for losses.

The standard is effective for years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2019.

The adoption of this standard is not expected to have a material impact on the Company's consolidated financial results.

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842), which was further clarified by ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases - Targeted Improvements, issued in July

ASC 842 supersedes existing lease guidance, including ASC 840 Leases.

The new leasing standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The new leasing standard requires that lessees will need to recognize an ROU asset and a lease liability for virtually all of their leases, and allows companies to make a policy election as to whether short term leases will be recognized under the requirements of the new standard.

The Company elected to exclude short-term leases in the application of the new standard.

The lease liability is equal to the present value of lease payments.

The ROU asset is based on the liability subject to certain adjustments.

For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance.

Operating leases will result in straight-line expense, similar to accounting for operating leases under ASC 840, while finance leases will result in a front-loaded expense pattern, similar to accounting for capital leases under ASC 840.

The Company adopted the new leasing standard in the first quarter of 2019, using a modified retrospective transition.

There was no impact to the opening balance of retained earnings as of the effective date of January 1, 2019 as a result of adoption.

Prior period financial statements were not recast.

The Company elected the package of transition provisions available for expired or existing contracts, which allowed it to carryforward its historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

The adoption of the new leasing standard on January 1, 2019 resulted in the recognition of $ 15.8 million of operating lease liabilities, $ 2.2 million of which were classified as current liabilities, with corresponding ROU assets of $ 12.2 million , net of lease prepayments and the balance of deferred lease incentives.

The Company does not have any financing leases.

The adoption of this standard on January 1, 2020 did not have a material impact on the Company's consolidated financial results.

Marketable Securities

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:

(in thousands)

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(in thousands) Amortized

Treasury and government agencies $ 165,966 $ 129 $ ( 3 ) $ 166,092

Corporate debt 140,538 87 ( 8 ) 140,617

Asset-backed securities

Total marketable securities $ 306,504 $ 216 $ ( 11 ) $ 306,709

The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2018 , which all have contract maturities of less than one year :

(in thousands)

The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2019, which all have contractual maturities of less than two years:

(in thousands) Amortized

Treasury and government agencies $ 88,535 $ 68 $ ( 2 ) $ 88,601

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Asset-backed securities 48,355 49 ( 3 ) 48,401

Total marketable securities, current

Total marketable securities $ 266,750 $ 313 $ ( 6 ) $ 267,057

Fair Value Measurements

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• Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions

Marketable securities classified in Level 1 and Level 2 as of December 31, 2019 and 2018 consist of cash equivalents and available-for-sale marketable securities.

The Company's assets classified in Level 1 and Level 2 as of December 31, 2020 and 2019 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 investments classified in Level 2

also is 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.

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.

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Fair Value Measurement as of December 31, 2020 Using

(in thousands)

Total Fair Value

Quoted Prices in

(in thousands) Total Fair Value Quoted Prices in

Active Markets for

Identical Assets

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

Treasury and government agencies $ 166,092 $ 166,092 $ — $ —

Corporate debt 140,617 — 140,617 —

Asset-backed securities

Total assets measured at fair value $ 306,709 $ 166,092 $ 140,617 $ —

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Fair Value Measurement as of December 31, 2019 Using

(in thousands)

Total Fair Value

Quoted Prices in

(in thousands) Total Fair Value Quoted Prices in

Active Markets for

Identical Assets

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

Treasury and government agencies $ 88,601 $ 88,601 $ — $ —

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Total assets measured at fair value $ 274,027 $ 88,601 $ 185,426 $ —

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Total assets measured at fair value as of December 31, 2020 include no cash equivalents.

Total assets measured at fair value as of December 31, 2019 include $ 7.0 million of 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.

The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life.

The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage.

Inventory levels are evaluated for the amount of inventory that would be sold within one year.

At certain times, the level of inventory can exceed the forecasted level of cost of goods sold for the next twelve months.

The Company classifies the estimate of such inventory as non-current.

Inventory consisted of the following as of December 31, 2020 and 2019:

(in thousands)

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

Current assets

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Total inventory, non-current 5,091 2,824

Total inventory $ 6,371 $ 3,964

Property and Equipment

The following is a summary of the Company’s property and equipment, at cost, as of December 31, 2020 and 2019:

(in thousands)

December 31, 2019

December 31, 2018

(in thousands) Estimated

(Years) December 31, 2020 December 31, 2019

Computer and other equipment 3 $ 5,212 $ 4,398

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Total property and equipment, net $ 4,136 $ 3,864

Depreciation expense was $ 1.4 million , $ 1.4 million and $ 1.2 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Depreciation expense was $ 1.4 million for each of the years ended December 31, 2020, 2019 and 2018.

The Company's long-term leases primarily include operating leases and subleases for office space in Washington, D.C.

and London, England.

The Company recognized ROU assets and lease liabilities related to fixed payments for these long-term operating leases in its Consolidated Balance Sheet as of December 31, 2019 .

The Company recognized ROU assets and lease liabilities related to fixed payments for these long-term operating leases in its Consolidated Balance Sheet as of December 31, 2020 and 2019.

The Company also has short-term leases, including office space in Berlin, Germany.

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in Washington, D.C.

The sublease term began in January 2017 and ends in July 2026, but may be terminated earlier by either party under certain circumstances.

The sublease term began in

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January 2017 and ends in July 2026 but may be terminated earlier by either party under certain circumstances.

The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions.

In May 2016, the Company entered into an operating lease agreement under which it leases 2,880 square feet of office space in London, England.

The Company has the right to renew the lease for five years following its expiration in 2021.

As of December 31, 2019 , the renewal period has not been included in the lease term.

The following is a summary of the Company’s ROU assets and operating lease liabilities as of December 31, 2019 :

(in thousands)

Classification on the Balance Sheet

December 31, 2019

Operating lease assets

Operating lease right-of-use assets

Operating lease current liabilities

Accounts payable and accrued liabilities

Operating lease non-current liabilities

In November 2020, the Company extended the non-cancellable portion of the lease term from 2021 to 2023 and has the option to renew the lease for an additional three years following its expiration.

The following is a summary of the Company’s ROU assets and operating lease liabilities as of December 31, 2020 and 2019:

(in thousands) Classification on the Balance Sheet December 31, 2020 December 31, 2019

Operating lease assets Operating lease right-of-use assets $ 10,459 $ 11,180

Operating lease current liabilities Accounts payable and accrued liabilities $ 2,117 $ 2,147

Operating lease non-current liabilities Operating lease non-current liabilities 11,497 12,455

Total lease liabilities $ 13,614 $ 14,602

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(1) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

For the year ended December 31, 2019 , the Company recognized operating lease cost of $ 2.3 million and short-term operating lease cost of $ 0.4 million .

The Company also recognized $ 1.4 million of expense related to non-lease elements, such as building maintenance services and utilities, and executory costs associated with the operating leases.

For each of the years ended December 31, 2020 and 2019, the Company recognized operating lease cost of $ 2.3 million and short-term operating lease cost of $ 0.4 million.

The Company also recognized $ 1.5 million and $ 1.4 million, respectively, of expense related to non-lease elements, such as building maintenance services and utilities, and executory costs associated with the operating leases.

For existing leases as of January 1, 2019, executory costs are excluded from operating lease expense, which is consistent with the Company's accounting under ASC 840.

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.

For the years ended December 31, 2018 and 2017 , the Company recognized $ 3.6 million and $ 3.2 million of rent expense, respectively, inclusive of lease expense, non-lease elements, and executory costs for short and long-term operating leases.

Cash paid for amounts included in the measurement of operating lease liabilities is included in operating cash flows and was $ 2.5 million for the year ended December 31, 2019 .

For the year ended December 31, 2018, the Company recognized $ 3.6 million of rent expense, inclusive of lease expense, non-lease elements, and executory costs for short and long-term operating leases.

Cash paid for amounts included in the measurement of operating lease liabilities is included in operating cash flows and was $ 2.6 million and $ 2.5 million for the years ended December 31, 2020 and 2019, respectively.

The table below reconciles the Company's future cash obligations to operating lease liabilities recorded on the balance sheet as of December 31, 2020:

(in thousands)

Operating Leases

(in thousands) Operating Leases

Thereafter 5,624

Total minimum lease payments 18,032

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Operating lease non-current liabilities $ 11,497

At December 31, 2018, future minimum payments under noncancellable operating leases under ASC 840 were as follows:

Cash Payments Due by Year

(in thousands)

Operating leases

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Intangible Assets

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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, the latest of which expires in July 2035 .

In April 2018, the Company met its final milestone under its license agreement when cumulative worldwide sales of HETLIOZ ® reached $ 250.0 million .

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 latest of which expires in July 2035 .

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 estimated economic useful life of both the $ 8.0 million and the $ 25.0 million intangible assets were changed from February 2035 to July 2035 based on the July 2035 expiration date of U.S.

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Patent and Trademark Office in August 2019.

The estimated economic useful life of these intangible assets were

previously changed from May 2034 to February 2035 based on the February 2035 expiration date of U.S.

patent number 10,071,977 ('977 Patent) issued by the U.S.

Patent and Trademark Office in September 2018.

The following is a summary of the Company’s intangible assets as of December 31, 2020:

December 31, 2020

(in thousands)

(in thousands) Estimated

Useful Life Gross

Amount Accumulated

Amortization Net

July 2035 $ 33,000 $ 11,441 $ 21,559

The following is a summary of the Company’s intangible assets as of December 31, 2019:

December 31, 2019

(in thousands)

February 2035

(in thousands) Estimated

Useful Life Gross

Amount Accumulated

Amortization Net

July 2035 $ 33,000 $ 9,963 $ 23,037

As of December 31, 2020 and 2019, the Company also had $ 27.9 million of fully amortized intangible assets related to Fanapt ® .

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(in thousands) 2020 2019 2018

$ 1,478 $ 1,505 $ 1,527

The following is a summary of the future intangible asset amortization schedule as of December 31, 2020:

(in thousands)

(in thousands) Total 2021 2022 2023 2024 2025 Thereafter

$ 21,559 $ 1,478 $ 1,478 $ 1,478 $ 1,478 $ 1,478 $ 14,169

Accounts Payable and Accrued Liabilities

The following is a summary of the Company’s accounts payable and accrued liabilities as of December 31, 2020 and 2019:

(in thousands)

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

Compensation and employee benefits $ 10,951 $ 6,597

Royalties payable

Research and development expenses 6,173 5,893

Royalties payable 5,817 5,904

Consulting and other professional fees 5,052 5,376

Operating lease liabilities 2,117 2,147

Milestone obligations under license agreements 350 —

Other 1,049 1,673

Total accounts payable and accrued liabilities $ 31,509 $ 27,590

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Commitments and Contingencies

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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.

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.

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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 ® .

To date, 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 8).

As of December 31, 2020, 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 8).

The Company has no remaining milestone obligations to BMS.

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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 has agreed with BMS in the license agreement for HETLIOZ ® to use its commercially reasonable efforts to develop and commercialize HETLIOZ ® .

Pursuant to the terms of a settlement agreement with Novartis, Novartis transferred all U.S.

The Company is obligated to use its commercially reasonable efforts to develop and commercialize HETLIOZ ® .

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 from November 16, 2016 through December 31, 2019 related to manufacturing know-how.

(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.

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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 .

To date, the Company has paid Lilly $ 3.0 million in upfront fees and development milestones, including a $ 2.0 million milestone payment in July 2018 as a result of enrolling the first subject into a Phase III study for tradipitant.

As of December 31, 2019 , remaining milestone obligations include a $ 2.0 million development milestone due upon the filing of the first marketing authorization for tradipitant either in the U.S.

As of December 31, 2020, the Company has paid Lilly $ 3.0 million in upfront fees and development milestones.

As of December 31, 2020, 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.

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The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant.

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.

Portfolio of CFTR activators and inhibitors .

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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.

To date, the Company has paid UCSF $ 1.2 million in upfront fees and development milestones, including an upfront license fee payment of $ 1.0 million in 2017 and a $ 0.2 million development milestone payment in the March 2019.

As of December 31, 2019 , 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 in 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.

As of December 31, 2020, the Company has paid UCSF $ 1.2 million in upfront fees and development milestones, including a $ 0.2 million development milestone payment in March 2019.

As of December 31, 2020, remaining milestone obligations include

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$ 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 accrued it as a current liability as of December 31, 2020.

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 and marketing 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.

Noncancellable long-term contractual cash obligations include noncancellable purchase commitments longer than one year and primarily relate to commitments for media and data services, of which $ 9.2 million , $ 1.0 million and $ 0.5 million are expected to be paid in 2020 , 2021 and 2022 , respectively.

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.

Public Offering of Common Stock

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The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows for the years ended December 31, 2020 and 2019:

(in thousands)

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

Foreign currency translation $ 81 $ 13

Unrealized gain (loss) on marketable securities

Unrealized gain on marketable securities 158 236

Accumulated other comprehensive income $ 239 $ 249

There were no reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2019 , 2018 and 2017 .

Stock-Based Compensation

As of December 31, 2019 , there were 6,144,430 shares that were subject to outstanding options and 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 on April 12, 2016, and the Company adopted the 2016 Plan.

Outstanding options and RSUs 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.

As of December 31, 2020, there were 5,246,381 shares subject to outstanding options and 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 twice to increase the number of shares reserved for issuance, among other administrative changes.

Both amendments and restatements of the 2016 Plan were approved by the Company's stockholders.

There are a total of 7,100,000 shares of common stock reserved for issuance under the 2016 Plan, 3,026,147 shares of which remained available for future grant as of December 31, 2019 .

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, 3,991,612 shares of which remained available for future grant as of December 31, 2020.

Stock Options

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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 to executives and directors provide for accelerated vesting if there is a change in control of the Company.

Certain service option awards to employees and executives provide for accelerated vesting if the respective employee’s or executive’s service is terminated by the Company for any reason other than cause or permanent disability.

Certain service option awards granted to employees and executive officers provide for partial

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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 December 31, 2020, $ 6.9 million of unrecognized compensation costs related to unvested service option awards are expected to be recognized over a weighted average period of 1.2 years.

No option awards are classified as a liability as of December 31, 2020.

The following is a summary of option activity for the 2006 Plan and the 2016 Plan for the years ended December 31, 2019 , 2018 , and 2017 :

2006 and 2016 Plans

A summary of option activity under the Plans for the years ended December 31, 2020, 2019, and 2018 is as follows:

(in thousands, except for share and per share amounts)

Weighted Average

Exercise Price at Grant Date

Weighted Average

Shares Weighted Average

Exercise Price at Grant Date Weighted Average

Remaining Term

(Years) Aggregate

Outstanding at December 31, 2017 4,719,784 $ 10.03 5.63 $ 24,421

Granted 567,500 19.22

Forfeited ( 232,527 ) 13.99

Exercised ( 685,715 ) 9.12 5,945

Outstanding at December 31, 2018 4,369,042 11.15 5.28 65,438

Granted 687,500 18.38

Forfeited ( 53 ) 7.94

Expired ( 15,000 ) 14.78

Exercised ( 546,344 ) 11.47 2,482

Outstanding at December 31, 2019 4,495,145 12.21 5.58 22,148

Granted 627,500 11.27

Forfeited ( 225,000 ) 18.83

Expired ( 557,604 ) 14.21

Exercised ( 733,223 ) 7.68 2,868

Outstanding at December 31, 2020 3,606,818 12.24 5.76 8,511

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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 vest in four equal annual installments provided that the employee remains employed with the Company.

Annual service RSUs granted to directors vest on the first anniversary of the grant date.

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 December 31, 2020, $ 18.3 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.6 years.

No RSUs are classified as a liability as of December 31, 2020.

The following is a summary of RSU activity for the 2006 Plan and the 2016 Plan for the years ended December 31, 2019 , 2018 , and 2017 :

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A summary of RSU activity for the Plans for the years ended December 31, 2020, 2019, and 2018 is as follows:

Shares Weighted

Grant Date Fair Value

Unvested at December 31, 2017 1,357,838 $ 12.72

Granted 714,086 18.93

Forfeited ( 229,603 ) 15.19

Vested ( 528,745 ) 12.69

Unvested at December 31, 2018 1,313,576 15.68

Granted 937,328 19.46

Forfeited ( 75,444 ) 18.93

Vested ( 526,175 ) 14.54

Unvested at December 31, 2019 1,649,285 18.04

Granted 832,162 11.28

Forfeited ( 260,127 ) 17.35

Vested ( 581,757 ) 16.54

Unvested at December 31, 2020 1,639,563 15.26

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Stock-Based Compensation Expense

Stock-based compensation expense recognized for the years ended December 31, 2019 , 2018 and 2017 was allocated as follows:

Stock-based compensation expense recognized for the years ended December 31, 2020, 2019 and 2018 comprised of the following:

Year Ended December 31,

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Year Ended December 31,

2020 2019 2018

Expected dividend yield — % — % — %

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Currently, the Company matches fifty percent up to the first six percent of employee contributions.

contributions have been paid by the Company.

All matching contributions have been paid by the Company.

The Company match vests over a 4 -year period and amounted to $ 0.9 million, $ 0.8 million and $ 0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The following is a summary of the domestic and foreign components of income (loss) before income taxes for the years ended December 31, 2019, 2018 and 2017:

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The following is a summary of the domestic and foreign components of income before income taxes for the years ended December 31, 2020, 2019 and 2018:

Year Ended December 31,

(in thousands) 2020 2019 2018

Total income (loss) before income taxes

Domestic $ 31,667 $ 28,794 $ 25,123

Foreign ( 12 ) 234 223

Total income before income taxes $ 31,655 $ 29,028 $ 25,346

The following is a summary of the provision (benefit) for income taxes for the years ended December 31, 2020, 2019 and 2018:

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(in thousands) 2020 2019 2018

Federal $ — $ — $ —

State 2,061 1,161 53

Foreign 68 81 99

Federal 6,076 ( 85,624 ) —

State 155 ( 2,127 ) —

Foreign ( 42 ) ( 16 ) ( 14 )

Provision (benefit) for income taxes $ 8,318 $ ( 86,525 ) $ 138

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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.

The income tax benefit for 2019 was primarily due to the reduction of the Company's 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.

Tax benefit associated with U.S.

loss before income taxes for the year ended December 31, 2017 was offset by a corresponding tax expense for the increase of the valuation allowance recorded against tax attributes that were generated in that period.

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

The following is reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2020, 2019 and 2018:

Year Ended December 31,

2020 2019 2018

Federal tax at statutory rate 21.0 % 21.0 % 21.0 %

Tax Cuts and Job Act (1)

Change in valuation allowance - U.S.

Tax Cuts and Jobs Act

Other change in valuation allowance (2)

State taxes 2.6 % 1.8 % 1.7 %

Change in valuation allowance (1) ( 3.5 ) % ( 357.6 ) % ( 16.4 ) %

Research and development credit (2) ( 5.4 ) % ( 10.9 ) % ( 9.1 ) %

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Stock-based compensation 5.1 % ( 1.0 ) % ( 3.9 ) %

Other items 1.2 % 3.0 % 1.6 %

Effective tax rate 26.3 % ( 298.1 ) % 0.5 %

Includes the effect of the Tax Cuts and Jobs Act, which primarily relates to the remeasurement of existing deferred taxes as a result of the change to the U.S.

federal tax rate.

(1) Reductions in 2020 valuation allowances are attributable to 2020 income before income taxes.

Reductions in 2019 valuation allowances include $ 7.5 million related to 2019 U.S.

income before income taxes, $ 10.7 related to adjustments for prior period credit carryforwards and uncertain tax positions and $ 85.6 million related to a change in beginning-of-the-year balances that resulted from a change in circumstances that caused a change in judgment about the realizability of U.S.

income before income taxes, $ 10.7 related to adjustments for prior period credit carryforwards and uncertain tax positions and $ 85.6 million related to a change in

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beginning-of-the-year balances that resulted from a change in circumstances that caused a change in judgment about the realizability of U.S.

deferred tax assets in future years.

Reductions in 2018 valuation allowances are attributable to 2018 income before income taxes.

2019 activity includes adjustments to prior year credit carryforwards.

(2) 2019 activity includes adjustments to prior year credit carryforwards and prior year tax positions.

As a result of the tax valuation allowance previously recorded against deferred tax assets in the U.S., these adjustments resulted in no change in tax expense.

(3) Includes adjustments to state deferred taxes based on changes to filing jurisdictions.

2019 activity includes adjustments to prior year tax positions.

As a result of the tax valuation allowance previously recorded against deferred tax assets in the U.S., these adjustments resulted in no change in tax expense.

The following is a summary of the components of the Company’s deferred tax assets (liabilities) and the related tax valuation allowance as of December 31, 2019 and 2018 :

(in thousands)

The following is a summary of the components of the Company’s net deferred tax assets and the related tax valuation allowance as of December 31, 2020 and 2019.

Certain prior period amounts in the table have been reclassified to conform to the current period presentation.

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

Deferred tax assets:

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Stock-based compensation 4,653 5,298

Accrued and deferred expenses

Allowance for returns and uncollectable receivables

Accrued expenses 2,429 1,266

Allowance for returns and credit losses 1,169 1,468

Research and development and orphan drug credit carryforwards 37,737 36,041

Other 3,279 4,572

Total deferred tax assets 92,890 100,679

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Intangible assets ( 1,911 ) ( 1,994 )

Other ( 2,412 ) ( 2,850 )

Total deferred tax liabilities ( 4,323 ) ( 4,844 )

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Valuation allowance 7,051 8,155

Net deferred tax assets (liabilities)

The Company’s net deferred tax liability of less than $ 0.1 million as of December 31, 2018 is included as a component of other non-current liabilities.

Net deferred tax assets $ 81,516 $ 87,680

The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2020, 2019 and 2018:

(in thousands)

(in thousands) Balance at

Additions Reductions Balance at

December 31, 2020 $ 8,155 $ — $ ( 1,104 ) $ 7,051

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The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement.

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A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

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Unrecognized tax benefits at the beginning of the year $ 9,741 $ — $ —

Increases related to prior year tax positions

Increases (decreases) related to prior year tax positions ( 121 ) 8,223 —

Increases related to current year tax positions 1,613 1,518 —

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however, future ownership changes may cause the Company’s existing tax attributes to have additional limitations.

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017.

The TCJA reduces the U.S.

federal corporate tax rate from 35% to 21% , requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings.

During the fourth quarter of 2018, the Company completed its accounting for the tax effects of the TCJA.

Effects of the TCJA resulted in no tax expense in 2018 or 2017 as they were fully offset by a change in the Company's tax valuation allowance.

Earnings per Share

Basic earnings per share (EPS) is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding.

Diluted EPS is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period.

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 (loss) per share of common stock for the years ended December 31, 2019 , 2018 and 2017 :

The following table presents the calculation of basic and diluted net income per share of common stock for the years ended December 31, 2020, 2019 and 2018:

Year Ended December 31,

(in thousands, except for share and per share amounts) 2020 2019 2018

Net income (loss)

Net income $ 23,337 $ 115,553 $ 25,208

Weighted average shares outstanding, basic 54,427,683 53,137,562 50,859,947

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Weighted average shares outstanding, diluted 55,190,802 54,847,060 53,045,257

Net income (loss) per share, basic and diluted:

Antidilutive securities excluded from calculations of diluted net income (loss) per share

The Company incurred a net loss for the year ended December 31, 2017 causing inclusion of any potentially dilutive securities to have an anti-dilutive effect, resulting in dilutive loss per share and basic loss per share attributable to common stockholders being equivalent.

Net income per share, basic and diluted:

Basic $ 0.43 $ 2.17 $ 0.50

Diluted $ 0.42 $ 2.11 $ 0.48

Antidilutive securities excluded from calculations of diluted net income per share 3,407,409 1,932,024 903,265

Legal Matters

The Company has been involved in litigation with Roxane Laboratories, Inc.

(Roxane) and its affiliates, West-Ward Pharmaceuticals International Limited and West-Ward Pharmaceuticals Corp (West-Ward), since the Company filed a lawsuit against Roxane in the U.S.

District Court for the District of Delaware (Delaware District Court) for patent infringement in June 2014.

The lawsuit was filed in response to Roxane’s submission to the U.S.

Food and Drug Administration (FDA) of an Abbreviated New Drug Application (ANDA) for a generic version of Fanapt ® prior to the expiration of certain of the Company’s patents covering Fanapt ® , including U.S.

8,586,610 (‘610 Patent).

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.

In April 2018, following an appeal by Roxane of the Delaware District Court’s decision to the Federal Circuit Court of Appeals (Federal Circuit), the Federal Circuit affirmed the Delaware District Court’s ruling.

In June 2018, West-Ward, having replaced Roxane as defendants following the acquisition of Roxane by West-Ward’s parent company, Hikma Pharmaceuticals PLC, petitioned the Federal Circuit for a rehearing en banc.

In August 2018, the Federal Circuit denied West-Ward's petition.

In January 2019, West-Ward filed a petition in the U.S.

Supreme Court for a writ of certiorari seeking reversal of the Federal Circuit’s decision.

In March 2019, the U.S.

Supreme Court invited the Solicitor General of the U.S.

to file a brief in the matter expressing the views of the U.S.

In January 2020, the U.S.

Supreme Court denied West-Ward's petition for writ of certiorari.

In 2015, the Company filed six separate patent infringement lawsuits in the Delaware District Court against Roxane, Inventia Healthcare Pvt.

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.

(Inventia), Lupin Ltd.

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and Apotex Corp.

(Apotex, and collectively with Roxane, Inventia, Lupin and Taro, the Fanapt ® Defendants).

These lawsuits were filed in response to the submission to the FDA by each of the Fanapt ® Defendants of ANDAs for generic versions of Fanapt ® prior to the expiration of the ‘610 Patent in November 2027 or the U.S.

9,138,432 in September 2025.

The Company entered into separate confidential stipulations with each of Inventia and Lupin regarding any potential launch of their generic versions of Fanapt ® .

The parties are scheduled to provide the court with a status report in March 2020 with respect to the remaining lawsuits against the other Fanapt ® Defendants.

In April and May 2018, the Company filed three separate patent infringement lawsuits in the Delaware District Court against Teva Pharmaceuticals USA, Inc.

(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.

8,586,610 (‘610 Patent) and U.S.

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

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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.

Between April 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 Paragraph IV certification notice letters (Paragraph IV Letters) from each of the HETLIOZ ® Defendants alleging that certain of the Company's patents covering HETLIOZ ® (collectively, the HETLIOZ ® Patents) 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, prior to the expiration of the latest to expire of the HETLIOZ ® Patents in 2034.

Each of the HETLIOZ ® Patents are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book).

In December 2018, the Company filed amended complaints against each of the HETLIOZ ® Defendants following the receipt of additional Paragraph IV Letters from Teva and Apotex concerning its Orange Book listed '977 Patent, which expires in 2035.

These lawsuits are scheduled for trial in October 2020.

In March 2019, April 2019, and May 2019, the Company filed three additional patent infringement lawsuits in the Delaware District Court against the HETLIOZ ® Defendants following the receipt of additional Paragraph IV Letters from each concerning its Orange Book listed U.S.

10,149,829, which expires in 2033.

These lawsuits have been consolidated with the other lawsuits against the HETLIOZ ® Defendants and are also scheduled for trial in October 2020.

In November and December 2019, the Company filed additional patent infringement lawsuits in the Delaware District Court against Apotex and Teva, respectively, for infringement of its Orange Book listed U.S.

10,376,487 ('487 Patent) following the receipt of additional Paragraph IV Letters from Apotex and Teva regarding the '487 Patent, which expires in July 2035.

Teva asserted a counterclaim for a declaratory judgment that the ‘487 Patent is invalid.

The Company answered Teva’s counterclaim by denying their allegation that the ‘487 Patent is invalid.

In January 2020, the Company filed two additional patent infringement lawsuits in the Delaware District Court against Teva and Apotex for infringement of its Orange Book-listed U.S.

10,449,176 (‘176 Patent) following the receipt of additional Paragraph IV Letters from Teva and Apotex regarding the ‘176 Patent, which expires in January 2033.

A trial date has not yet been scheduled for these lawsuits.

In January 2020, the Company received an additional Paragraph IV Letter from MSN concerning the '487 patent, in which MSN alleges that the ‘487 Patent is invalid, unenforceable and/or will not be infringed by the commercial manufacture, use, sale offer for sale, or importation of MSN's generic version of HETLIOZ ® as described in MSN's ANDA.

The Company intends to vigorously pursue a patent infringement lawsuit permanently enjoining MSN from infringing the claims of the ‘487 Patent.

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 (Paragraph IV Letters) from each of the HETLIOZ ® Defendants alleging that the Company’s patents covering HETLIOZ ® , U.S.

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.

These lawsuits have been consolidated and are schedule for trial in March 2022.

Other Matters .

In April 2018, the Company submitted a protocol amendment to the FDA, proposing a 52-week open-label extension (OLE) period for patients who had completed the tradipitant Phase II clinical study (2301) in gastroparesis.

In May 2018, based on feedback from the FDA, the Company amended the protocol limiting the duration of treatment in the 2301 study to a total of three months, while continuing to seek further dialogue with the FDA on extending the study duration to 52-weeks.

As a part of this negotiation process, in September 2018, the Company submitted a new follow-on 52-week OLE protocol to the FDA (2302) for patients who had completed the 2301 study.

While waiting for further feedback, the Company did not enroll any patients in any study beyond 12 weeks.

In December 2018, the FDA imposed a partial clinical hold (PCH) on

the two proposed studies, stating that the Company is required first to conduct additional chronic toxicity studies in canines, monkeys or minipigs before allowing patients access in any clinical protocol beyond 12 weeks.

At that time, the FDA informed the Company that the original PCH was not based on any safety or efficacy data related to tradipitant, but, rather.

that these additional toxicity studies were required by a guidance document.

Subsequently, the FDA has taken the position that an additional study was required in order for the FDA to have adequate toxicology data to undertake a risk analysis of tradipitant.

On February 5, 2019, the Company filed a lawsuit against the FDA in the U.S.

District Court for the District of Columbia (DC District Court), challenging the FDA’s legal authority to issue the PCH, and seeking an order to set it aside.

In February 2019, the FDA filed a Motion for Voluntary Remand to the Agency and for a Stay of the Case.

In March 2019, the DC District Court granted the FDA’s request for voluntary remand and returned the matter to the FDA for further consideration.

In April 2019, the FDA provided its remand response, in which it indicated that, upon review of scientific literature and tradipitant data, it believes that a PCH continues to be appropriate until the Company has adequate safety data from a nine-month non-rodent toxicity study.

In May 2019, the Company filed an amended complaint, and in July 2019, the Company filed a Motion for Summary Judgment based on its continuing belief after review of the FDA’s remand response that additional chronic toxicity studies are unjustified, and that it has provided the FDA with sufficient information regarding the safety of tradipitant to justify the continued study of tradipitant in patients beyond 12 weeks, in accordance with applicable law and FDA regulations.

The FDA filed a reply and cross-motion for summary judgment in October 2019 and an oral hearing was held on December 13, 2019.

On January 31, 2020, the Court granted the FDA's cross-motion for summary judgment and granted judgment in favor of the FDA on the Company's claims.

The Company is evaluating its options, including a potential appeal, and the Company intends to continue vigorously pursuing its interests in the matter.

In February 2019, a qui tam action filed against the Company was unsealed by order of the DC District Court.

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.

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In August 2019, the Company filed a motion to dismiss, and in October 2019 the plaintiff filed a reply.

The Company intends to vigorously defend itself in the case.

The Court will hear the Company's motion to dismiss on March 20, 2020.

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 will hear the Company's motion to dismiss on February 24, 2021.

The Company intends to continue to vigorously defend itself in the case.

In February 2019, a securities class action, Gordon v.

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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.

The Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit.

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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 vs.

In July 2019, a shareholder derivative complaint, Samuel Williams v.

Mihael Polymeropoulos, et al.

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Mihael Polymeropoulos, et al.

, was filed in the Delaware District Court naming certain current and former Company directors and officers as defendants.

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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 February 2020, the Delaware District Court issued an order staying the Bavaro case pending the resolution of the Williams case.

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.

The Company believes that it has meritorious defenses and intends to vigorously defend these lawsuits.

does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition.

However, these lawsuits are subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail.

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 2017, the 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.

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 European General Court.

General Court.

In December 2019, the General Court issued its judgment dismissing the action, leaving the EMA opinion and Commission decision intact.

The Company is considering its options to appeal the decision.

In February 2020, the Company filed an appeal of this judgment with the Court of Justice of the E.U.

Quarterly Financial Data (Unaudited)

The following is a summary of quarterly financial data for the years ended December 31, 2020 and 2019:

(in thousands, except for per share amounts)

(in thousands, except for per share amounts) First

Quarter Second

Quarter Third

Quarter Fourth

Year Ended December 31, 2020

Revenues $ 58,000 $ 62,207 $ 60,308 $ 67,653

Gross profit (1) 52,423 55,991 54,041 60,871

Income (loss) from operations ( 125 ) 9,171 7,742 10,451

Net income 486 8,714 5,947 8,190

Net income per share, basic $ 0.01 $ 0.16 $ 0.11 $ 0.15

Net income per share, diluted $ 0.01 $ 0.16 $ 0.11 $ 0.15

Year Ended December 31, 2019

Revenues $ 47,713 $ 59,060 $ 59,485 $ 60,930

Gross profit (1) 42,220 52,313 52,327 54,335

Income (loss) from operations ( 2,087 ) 9,895 10,759 4,243

Net income (loss) ( 612 ) 11,526 100,423 4,216

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Net income (loss) per share, diluted $ ( 0.01 ) $ 0.21 $ 1.84 $ 0.08

Year Ended December 31, 2018

Gross profit (1)

Income from operations

Net income per share, basic

Net income per share, diluted

(1) Gross profit includes revenues less cost of goods sold excluding amortization, and less intangible asset amortization.

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VANDA PHARMACEUTICALS INC.

EXHIBIT INDEX

Number Description

3.1 Form of Amended and Restated Certificate of Incorporation of the registrant (filed as Exhibit 3.8 to Amendment No.

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333-130759), as filed on March 17, 2006, and incorporated herein by reference).

Amended and Restated Employment Agreement, dated December 16, 2008, by and between Mihael H.

Polymeropoulos and the registrant (filed as Exhibit 10.34 to the registrant’s quarterly report on Form 10-Q (File No.

001-34186) on August 10, 2009 and incorporated herein by reference).

Employment Agreement, dated December 13, 2010, by and between James Kelly and the registrant (filed as Exhibit 10.38 to the registrant’s annual report on Form 10-K (File No.

001-34186) on March 10, 2011 and incorporated herein by reference).

10.4† Amendment to Amended and Restated Employment Agreement, dated December 16, 2010, by and between Mihael H.

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001-34186) on May 8, 2014 and incorporated herein by reference).

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Number Description

10.13 Settlement Agreement and Mutual General Release, dated December 22, 2014, by and among Novartis Pharma AG and the registrant (filed as Exhibit 10.55 to the registrant’s annual report on Form 10-K (File No.

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001-34186) on March 13, 2015 and incorporated herein by reference).

Employment Agreement, dated September 3, 2015, by and between Gian Piero Reverberi, Senior Vice President and General Manager Europe, and the registrant (filed as Exhibit 10.64 to the registrant’s quarterly report on Form 10-Q (File No.

001-34186) on November 4, 2015 and incorporated herein by reference).

10.21 Agreement, dated February 2, 2016, by and among Titan Pharmaceuticals, Inc., Aventisub LLC, the successor-in-interest to Aventisub II Inc.

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001-34186) on July 28, 2016 and incorporated herein by reference).

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Number Description

10.30 Sublease Agreement, dated June 22, 2016, by and between Hunton & Williams LLP and the registrant (filed as Exhibit 10.44 to the registrant’s quarterly report on Form 10-Q (File No.

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001-34186) on November 7, 2019 and incorporated herein by reference).

List of Subsidiaries (filed as Exhibit 21.1 to the registrant’s annual report on Form 10-K (File No.

001-34186) on February 17, 2017 and incorporated herein by reference).

10.39† Amended and Restated Employment Agreement, dated May 5, 2020, by and between Kevin Moran and the registrant (filed as Exhibit 10.42 to the registrant’s quarterly report on Form 10-Q (File No.

001-34186) on May 7, 2020 and incorporated herein by reference).

10.40* Fifth Amendment to Lease Agreement, dated April 11, 2019 , by and between Square 54 Office Owner LLC and the registrant.

10.41* Sixth Amendment to Lease Agreement, dated May 7, 2020, by and between Square 54 Office Owner LLC and the registrant.

21.1* List of Subsidiaries .

23.1* Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

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† Indicates management contract or compensatory plan.

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Number Description

# Confidential treatment has been granted with respect to certain provisions of this exhibit.

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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 9A. Controls and Procedures