Vanda Pharmaceuticals Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with Part II, Item 6, Selected Consolidated Financial Data, and our consolidated financial statements and related notes appearing in this annual report on Form 10-K (Annual Report). This discussion and analysis generally addresses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report include historical information and other information with respect to our plans and strategy for our business and contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under Part I, Item 1A, Risk Factors, and elsewhere in this Annual Report. Overview Vanda Pharmaceuticals Inc. (we, our or Vanda) 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. We strive to advance novel approaches to bring important, new medicines to market through responsible innovation. We are committed to the use of technologies that support sound science, including genetics and genomics, in drug discovery, clinical trials and the commercial positioning of our products. Our commercial portfolio is currently comprised of two products, HETLIOZ ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt ® for the treatment of schizophrenia. HETLIOZ ® is the first treatment for patients with Non-24 and SMS approved by the U.S. Food and Drug Administration (FDA). In addition, we have a number of drugs in development, including: • HETLIOZ ® (tasimelteon) for the treatment of jet lag disorder, 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; and • VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, with potential use for the treatment of psychiatric disorders. Operational Highlights Products Vanda is encouraged by the strength of its commercial performance during the fourth quarter of 2020. Vanda continues to implement marketing and sales strategies aimed at supporting growth and minimizing the impact of disruptions caused by the COVID-19 pandemic, including the Fanapt ® for schizophrenia direct-to-consumer campaign, which was launched in 2020. Vanda is continuing its activities to support and facilitate the treatment of individuals in the U.S. living with SMS, and is committed to its awareness campaign and the support of patients suffering with Non-24. 58 Table of C ontents Pipeline Tradipitant • The gastroparesis Phase III clinical study (VP-VLY-686-3301) is ongoing. The study has a target enrollment of 200 randomized patients and is expected to complete enrollment in the first half of 2021, with a New Drug Application (NDA) filing projected in the second half of 2021. • The COVID-19 pneumonia Phase III clinical study (ODYSSEY VLY-686-3501) is ongoing. HETLIOZ ® (tasimelteon) • In December 2020, the FDA approved HETLIOZ ® capsule and liquid formulations for the treatment of adults and children, respectively, with nighttime sleep disturbances in SMS. HETLIOZ ® capsules, for adults with SMS, were immediately available after approval and HETLIOZ LQ TM oral suspension, for children with SMS, is expected to be available in the first quarter of 2021. SMS is estimated to affect 1/15,000-25,000 births in the U.S. HETLIOZ ® is the first and only FDA approved medication for patients with SMS. • A Phase III clinical study for HETLIOZ ® in DSPD is expected to be initiated in the first quarter of 2021. • A clinical development program for HETLIOZ ® in ASD is expected to be initiated in the first quarter of 2021. Fanapt ® (iloperidone) • Development of the LAI formulation of Fanapt ® is ongoing. • A clinical program for Fanapt ® in PDP is expected to begin in the first quarter of 2021. Since we began operations, we have devoted substantially all of our resources to the in-licensing, clinical development and commercialization of our products. Our ability to generate meaningful product sales and achieve profitability largely depends on our level of success in commercializing HETLIOZ ® and Fanapt ® in the U.S. and Europe, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks that are detailed in Part I, Item 1A, Risk Factors, of this Annual Report. Critical Accounting Policies The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements for the year ended December 31, 2020 included in this Annual Report. However, we believe that the following accounting policies are important to understanding and evaluating our reported financial results, and we have accordingly included them in this discussion. Revenue from net product sales . Our net product sales consist of sales of HETLIOZ ® and sales of Fanapt ® . In accordance with ASC 606 Revenue from Contracts with Customers (ASC 606), we account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue when control of the product is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer. HETLIOZ ® is available in the U.S. for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt ® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. We invoice and record revenue when customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse, which is the point at which control is transferred to the customer. Revenues and accounts receivable are concentrated with these customers. Outside the U.S., we sell HETLIOZ ® in Germany and have a distribution agreement with Megapharm Ltd. for the commercialization of Fanapt ® in Israel. Receivables are carried at 59 Table of C ontents transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and incorporating current conditions and forward-looking estimates. The transaction price is determined based upon the consideration to which we will be entitled in exchange for transferring product to the customer. Our product sales are recorded net of applicable product revenue allowances for which reserves are established and include discounts, rebates, chargebacks, service fees, co-pay assistance and product returns that are applicable for various government and commercial payors. We estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method and update our estimate at each reporting date. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. 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 we have 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. 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 that are resolved during the product expiry period specified in the customer contract. We currently record sales allowances for the following: • Prompt-pay: Specialty pharmacies and wholesalers are offered discounts for prompt payment. We expect that the specialty pharmacies and wholesalers will earn prompt payment discounts and, therefore, deduct the full amount of these discounts from total product sales when revenues are recognized. • Rebates: 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. • 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 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: The Medicare Part D prescription drug benefit requires manufacturers to fund approximately 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients for applicable drugs. We account for the Medicare Part D coverage gap using a point of sale model. Estimates for expected Medicare Part D coverage gap are based in part on historical activity and, where available, actual and pending prescriptions when we have validated the insurance benefits. • Service fees: We receive sales order management, data and distribution services from certain customers. These fees are based on contracted terms and are known amounts. We accrue service fees at the time of revenue recognition, resulting in a reduction of product sales and the recognition of an accrued liability, unless it is a payment for a distinct good or service from the customer in which case the fair value of those distinct goods or services are recorded as selling, general and administrative expense. • Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Co-pay assistance utilization is based on information provided by our third-party administrator. • Product returns: We generally offer direct customers a limited right to return as contractually defined with our customers. We consider 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. We do not expect returned goods to be resalable. There was no right of return asset as of December 31, 2020 or 2019. 60 Table of C ontents The following table summarizes sales discounts and allowance activity as of and for the years ended December 31, 2020, 2019 and 2018: (in thousands) Rebates & Chargebacks Discounts, Returns and Other Total Balances at December 31, 2017 20,229 $ 7,357 $ 27,586 Provision related to current period sales 59,317 23,796 83,113 Adjustments for prior period sales 811 370 1,181 Credits/payments made (58,223) (21,823) (80,046) Balances at December 31, 2018 22,134 9,700 31,834 Provision related to current period sales 59,358 26,872 86,230 Adjustments for prior period sales (350) (399) (749) Credits/payments made (58,750) (26,022) (84,772) Balances at December 31, 2019 22,392 10,151 32,543 Provision related to current period sales 70,563 27,952 98,515 Adjustments for prior period sales (480) 1,327 847 Credits/payments made (65,605) (30,557) (96,162) Balances at December 31, 2020 $ 26,870 $ 8,873 $ 35,743 The provision for rebates and chargebacks of $70.6 million and $59.4 million for the years ended December 31, 2020 and 2019, respectively, and their ending balances at December 31, 2020 and 2019, primarily represent Medicaid rebates applicable to sales of Fanapt ® and, to a lesser extent, Medicaid rebates applicable to sales of HETLIOZ ® . The provision for discounts, returns and other of $28.0 million and $26.9 million for the years ended December 31, 2020 and 2019, primarily represents wholesaler distribution fees applicable to sales of Fanapt ® and, to a lesser extent, estimated product returns of Fanapt ® , and co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ ® and Fanapt ® . The ending balances of discounts, returns and other as of December 31, 2020 and 2019 primarily represent estimated product returns of Fanapt ® and wholesaler distribution fees applicable to sales of Fanapt ® . Stock-based compensation. Compensation costs for all stock-based awards to employees and directors are measured based on the grant date fair value of those awards and recognized over the period during which the employee or director is required to perform service in exchange for the award. We use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatility rates are based on the historical volatility of our publicly traded common stock and other factors. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. We have never paid cash dividends to our stockholders and do not plan to pay dividends in the foreseeable future. As stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. 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 for clinical trial use, milestone payments made under licensing agreements prior to regulatory approval, 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. We expense 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 made under license agreements are capitalized. Milestone payments are accrued when it is deemed probable that the milestone event will be achieved. Costs related to the acquisition of intellectual property are expensed as incurred if the underlying technology is developed in connection with our research and development efforts and has no alternative future use. 61 Table of C ontents Clinical trials are inherently complex, often involve multiple service providers, and can include payments made to investigator physicians at study sites. Because billing for services often lags delivery of service by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. Our assessments include, but are not limited to: (i) an evaluation by the project manager of the work that has been completed during the period, (ii) measurement of progress prepared internally and/or provided by the third-party service provider, (iii) analyses of data that justify the progress, and (iv) management’s judgment. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. Intangible assets. Our intangible assets consist of capitalized license costs for products approved by the FDA. We amortize our intangible assets on a straight-line basis over the estimated useful economic life of the related product patents. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, a significant adverse change in legal or regulatory factors that could affect the value or patent life including our ability to defend and enforce patent claims and other intellectual property rights and significant negative industry or economic trends. When we determine that the carrying value of our intangible assets may not be recoverable based upon the existence of one or more of the indicators of impairment, we measure any impairment based on the amount that carrying value exceeds fair value. No impairments have been recognized on our intangible assets. Income taxes. We assess the need for a valuation allowance against our 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. The analysis is highly dependent upon historical and projected taxable income. Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities. During 2019, after considering all available positive and negative evidence, including but not limited to cumulative income in recent periods, historical, current and future projected results and significant risks and uncertainties related to forecasts, we concluded that it was more likely than not that substantially all of our deferred tax assets in the U.S. are realizable in future periods. A valuation allowance has been retained against certain District of Columbia state deferred tax assets as of December 31, 2020 and 2019. Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. 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. Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report for information on recent accounting pronouncements. Results of Operations We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to continue to successfully commercialize our products, any possible payments made or received pursuant to license agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals, and the impact of the COVID-19 pandemic. Year ended December 31, 2020 compared to year ended December 31, 2019 Revenues . Total revenues increased by $21.0 million, or 9%, to $248.2 million for the year ended December 31, 2020 compared to $227.2 million for the year ended December 31, 2019. Revenues were as follows: Year Ended December 31, (in thousands) 2020 2019 Net Change Percent HETLIOZ ® net product sales $ 160,686 $ 142,980 $ 17,706 12 % Fanapt ® net product sales 87,482 84,208 3,274 4 % Total net product sales $ 248,168 $ 227,188 $ 20,980 9 % 62 Table of C ontents HETLIOZ ® net product sales increased by $17.7 million, or 12%, to $160.7 million for the year ended December 31, 2020 compared to $143.0 million for the year ended December 31, 2019. The increase to net product sales was attributable to an increase in volume and an increase in price net of deductions. Fanapt ® net product sales increased by $3.3 million, or 4%, to $87.5 million for the year ended December 31, 2020 compared to $84.2 million for the year ended December 31, 2019. The increase to net product sales was attributable to an increase in price net of deductions partially offset by a decrease in volume. Cost of goods sold. Cost of goods sold decreased by $1.1 million, or 5%, to $23.4 million for the year ended December 31, 2020 compared to $24.5 million for the year ended December 31, 2019. Cost of goods sold includes third-party manufacturing costs of product sold, third-party royalty costs and distribution and other costs. Third-party royalty costs were 10% and 5% of HETLIOZ ® net product sales in the U.S. and Germany, respectively. Third-party royalty costs on Fanapt ® net product sales decreased from 9% to 6% beginning January 2020. In addition to third-party royalty costs, HETLIOZ ® and Fanapt ® cost of goods sold as a percentage of revenue depends upon our cost to manufacture inventory at normalized production levels with our third-party manufacturers. We expect that, in the future, total HETLIOZ ® manufacturing costs included in cost of goods sold will continue to be less than 2% of our HETLIOZ ® net product sales. We expect that, in the future, total Fanapt ® manufacturing costs included in cost of goods sold will continue to be less than 3% of our Fanapt ® net product sales. Research and development expenses. Research and development expenses increased by $6.9 million, or 14%, to $55.6 million for the year ended December 31, 2020 compared to $48.6 million for the year ended December 31, 2019. The increase was primarily due to an increase in clinical trial expenses associated with our Fanapt ® and COVID-19 therapeutic development programs. The COVID-19 pandemic has impacted clinical research globally, including our previously reported clinical trials. While certain of our programs have resumed patient enrollment, other programs remain on hold. The following table summarizes the costs of our product development initiatives for the years ended December 31, 2020 and 2019. Year Ended December 31, (in thousands) 2020 2019 Direct project costs (1) HETLIOZ ® $ 9,518 $ 8,672 Fanapt ® 7,669 5,516 Tradipitant 23,540 21,290 VTR-297 1,487 1,609 CFTR 3,938 4,511 Other 2,211 668 Total direct project costs 48,363 42,266 Indirect project costs (1) Stock-based compensation 3,804 3,207 Other indirect overhead 3,410 3,176 Total indirect project costs 7,214 6,383 Total research and development expense $ 55,577 $ 48,649 (1) We record direct costs, including personnel costs and related benefits, on a project-by-project basis. Many of our research and development costs are not attributable to any individual project because we share resources across several development projects. We record indirect costs that support a number of our research and development activities in the aggregate, including stock-based compensation. We expect to incur significant research and development expenses as we continue to develop our products. In addition, we expect to incur licensing costs in the future that could be substantial, as we continue our efforts to expand our product pipeline. Selling, general and administrative expenses. Selling, general and administrative expenses increased by $10.8 million, or 8%, to $140.5 million for the year ended December 31, 2020 compared to $129.7 million for the year ended December 31, 63 Table of C ontents 2019. The increase was primarily the result of increased spending on marketing activities for our commercial products, including the Fanapt ® for schizophrenia direct-to-consumer campaign, partially offset by decreased spending on legal activities. Intangible asset amortization . Intangible asset amortization was $1.5 million for each of the years ended December 31, 2020 and 2019. Other income . Other income was $4.4 million for the year ended December 31, 2020 compared to $6.2 million for the year ended December 31, 2019. Other income primarily consists of investment income, which decreased in 2020 as a result of lower yields on our marketable securities. Provision for income taxes. A provision for income taxes of $8.3 million was recorded for the year ended December 31, 2020 and an income tax benefit of $86.5 million was recorded for the year ended December 31, 2019. The income tax benefit for the year ended December 31, 2019 was primarily due to the reduction of the tax valuation allowance against substantially all of its deferred tax assets in the U.S. Tax expense associated with U.S. income before income taxes for the year ended December 31, 2019 was offset by a corresponding tax benefit for the reduction of the valuation allowance recorded against tax attributes that were utilized in those periods. Income tax expense was recorded related to certain U.S. state and foreign jurisdictions for the year ended December 31, 2019. See Note 15, Income Taxes, to the consolidated financial statements in Part II, Item 8 of this Annual Report for additional information. Liquidity and Capital Resources As of December 31, 2020, our total cash and cash equivalents and marketable securities were $367.7 million compared to $312.1 million at December 31, 2019. Our cash and cash equivalents are deposits in operating accounts and highly liquid investments with an original maturity of 90 days or less at date of purchase and consist of investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Our marketable securities consist of investments in government sponsored and corporate enterprises and commercial paper. Our liquidity resources as of December 31, 2020 and 2019 are summarized as follows: (in thousands) December 31, 2020 December 31, 2019 Cash and cash equivalents $ 61,031 $ 45,072 Marketable securities: U.S. Treasury and government agencies 166,092 88,601 Corporate debt 140,617 130,055 Asset-backed securities — 48,401 Total marketable securities 306,709 267,057 Total cash, cash equivalents and marketable securities $ 367,740 $ 312,129 As of December 31, 2020, we maintained all of our cash, cash equivalents and marketable securities in two financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits, but we do not anticipate any losses with respect to such deposits. Based on our current operating plans, which include costs and expenses in connection with our continued clinical development of tradipitant and our other products, U.S. commercial activities for HETLIOZ ® and Fanapt ® , pursuit of market approval of HETLIOZ ® and Fanapt ® in other regions, and payments due upon achievement of milestones under our license agreements, we believe that our cash, cash equivalents and marketable securities and cash received from product sales will be sufficient for at least the next 12 months. Our future capital requirements and the adequacy of our available funds will depend on many factors, primarily including our ability to generate revenue, the scope and costs of our commercial, manufacturing and process development activities, the magnitude of our discovery, preclinical and clinical development programs, and potential costs to acquire or license the rights to additional products. We may need or desire to obtain additional capital to finance our operations through debt, equity or alternative financing arrangements. We may also seek capital through collaborations or partnerships with other companies. The issuance of debt could require us to grant liens on certain of our assets that may limit our flexibility and debt securities may be convertible into common stock. If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may significantly dilute the ownership of our existing stockholders. If we are unable to obtain additional financing, we may be 64 Table of C ontents required to reduce the scope of our future activities which could harm our business, financial condition and operating results. There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all. Cash Flow The following table summarizes our net cash flows from operating, investing and financing activities for the years ended December 31, 2020 and 2019: Year Ended December 31, (in thousands) 2020 2019 Net Change Net cash provided by (used in): Operating activities: Net income $ 23,337 $ 115,553 $ (92,216) Non-cash charges 24,121 (72,731) 96,852 Net change in operating assets and liabilities 4,317 3,125 1,192 Operating activities 51,775 45,947 5,828 Investing activities: Purchases of property and equipment (1,795) (1,019) (776) Net purchases, sales and maturities of marketable securities (39,704) (67,290) 27,586 Investing activities (41,499) (68,309) 26,810 Financing activities: Proceeds from the exercise of stock options 5,634 6,264 (630) Financing activities 5,634 6,264 (630) Effect of exchange rate changes on cash, cash equivalents and restricted cash 53 (1) 54 Net change in cash, cash equivalents and restricted cash $ 15,963 $ (16,099) $ 32,062 Operating Activities. Cash flows provided by operating activities during the year ended December 31, 2020 were $51.8 million, an increase of $5.8 million compared to $45.9 million during the year ended December 31, 2019. The increase reflects an increase of $96.9 million in non-cash charges primarily due to the absence of the reduction of our tax valuation allowance against substantially all of our deferred tax assets in the U.S. and $1.2 million from the net change in operating assets and liabilities, partially offset by a decrease of $92.2 million in net income. Investing Activities. Cash flows used in investing activities during the year ended December 31, 2020 were $41.5 million, an increase of $26.8 million compared to cash used in investing activities of $68.3 million during the year ended December 31, 2019. Investing activities reflect continued net reinvestment of available cash and cash equivalents in our portfolio of marketable securities. Financing Activities. Cash flows provided by financing activities during the year ended December 31, 2020 were $5.6 million, a decrease of $0.6 million compared to $6.3 million during the year ended December 31, 2019. Financing activities include proceeds from exercises of common stock options. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements, as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K. 65 Table of C ontents Contractual Obligations and Commitments The following is a summary of our non-cancellable long-term contractual cash obligations as of December 31, 2020: Cash payments due by year (4) (in thousands) Total 2021 2022 2023 2024 2025 Thereafter Operating leases (1) $ 18,032 $ 2,290 $ 2,611 $ 2,462 $ 2,488 $ 2,557 $ 5,624 Milestone obligation (2) 350 350 — — — — — Purchase commitments (3) 1,447 966 481 — — — — Total non-cancellable long-term contractual cash obligations $ 19,829 $ 3,606 $ 3,092 $ 2,462 $ 2,488 $ 2,557 $ 5,624 (1) Operating leases include the minimum lease payments for our operating lease liabilities. This table does not include obligations under short-term lease agreements, variable payments for building maintenance and other services and executory costs associated with our operating lease agreements. (2) This table includes a probable future $350,000 milestone obligation under our license agreement with University of California San Francisco due upon the conclusion of a Phase I study. This table does not include potential future milestone obligations under our license agreements for which we have not deemed it probable that the milestone event will occur as of December 31, 2020. See Part I, Item 1, Business - License Agreements , of this Annual Report, for a description of our licensing arrangements and remaining milestone obligations. (3) Purchase commitments include non-cancellable purchase commitments for agreements longer than one year and primarily relate to commitments for data services. This table does not include various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase commitments, due to the cancellable nature of the services or variable terms within the agreement. Additionally, this table does not include rebates, chargebacks or discounts recorded as liabilities at the time that product sales are recognized as revenue. (4) This table does not include liabilities related to uncertain tax positions taken as of December 31, 2020. Due to the uncertainties in the timing of potential tax audits, the timing associated with the resolution of these positions is also uncertain. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risks Our exposure to market risk is currently confined to our cash and cash equivalents, marketable securities and restricted cash. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents and marketable securities, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments. Concentrations of Credit Risk We deposit our cash with financial institutions that we consider to be of high credit quality and purchase marketable securities that are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S. dollars. Our marketable securities consist of commercial paper, corporate notes and U.S. government agency notes. Revenues and accounts receivable are concentrated with specialty pharmacies and wholesalers. There were 5 major customers that each accounted for more than 10% of total revenues and, as a group, represented 95% of total revenues for the year ended December 31, 2020. There were 5 major customers that each accounted for more than 10% of accounts receivable and, as a group, represented 90% of total accounts receivable at December 31, 2020. We mitigate our credit risk relating to accounts receivable from customers by performing ongoing credit evaluations. Foreign Currency Risk We are exposed to risks related to changes in foreign currency exchange rates relating to our foreign operations. The functional currency of our international subsidiaries is the local currency. We are exposed to foreign currency risk to the extent 66 Table of C ontents that we enter into transactions denominated in currencies other than our subsidiaries’ respective functional currencies. We are also exposed to unfavorable fluctuations of the U.S. dollar, which is our reporting currency, against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. We do not currently hedge our foreign currency exchange rate risk. Foreign currency has not had a material impact on our results of operations. Effects of inflation Inflation has not had a material impact on our results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and related financial statement schedules required to be filed are listed in the Index to Consolidated Financial Statements and are incorporated in Part IV, Item 15 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.