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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-11 · 60 added, 103 removed, 235 unchanged (41% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with 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).

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing in this annual report on Form 10-K (Annual Report).

This discussion and analysis generally addresses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

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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).

HETLIOZ ® is the first product approved by the U.S.

Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS.

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;

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

• Fanapt ® (iloperidone) for the treatment of bipolar disorder and Parkinson ’ s disease psychosis and a long acting injectable (LAI) formulation for the treatment of schizophrenia;

• Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor 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;

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

• VHX-896 (formerly P88), the active metabolite of iloperidone.

Operational Highlights

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

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

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

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

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

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

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

HETLIOZ ® (tasimelteon)

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

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

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

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

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

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

• In January 2022, we announced we have settled our HETLIOZ ® patent litigation against MSN Pharmaceuticals Inc.

and MSN Laboratories Private Limited.

The litigation remains pending against the other defendants.

• In November 2021, a HETLIOZ ® patient filed a federal lawsuit challenging the unlawfulness of Colorado Medicaid’s prior authorization criteria, which limited HETLIOZ ® coverage to totally blind patients.

In response to the lawsuit, Colorado changed its criteria to cover HETLIOZ ® for all Non-24 patients and to no longer restrict HETLIOZ ® coverage on the basis of vision status.

Since then, 10 additional states have revised their criteria to eliminate the restriction of HETLIOZ ® coverage to totally blind patients.

• In February 2022, we reported the results from the Phase III study (VP-VLY-686-3301) of tradipitant in gastroparesis.

The study did not meet its prespecified primary endpoint, but significant treatment effects were observed when adjusting for confounding factors.

We plan to complete the analysis of the data of this study and prepare for submission to regulatory authorities and scientific journals.

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.

• A Phase III clinical study of Fanapt ® in acute manic episodes in patients with bipolar disorder is now more than 50% enrolled and expected to complete enrollment by the end of 2022.

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

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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

Critical Accounting Policies and Estimates

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.

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A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements for the year ended December 31, 2021 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.

However, we believe that the following accounting policies are important to understanding and evaluating our reported financial results as they involve the most significant judgments and estimates used in the preparation of our consolidated financial statements, 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 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.

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for the commercialization of Fanapt ® in Israel.

Receivables are carried at

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transaction price net of allowance for credit losses.

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.

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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.

Where appropriate, our estimates of variable consideration included in the transaction price consider a range of possible outcomes.

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.

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.

Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based

on the terms of the respective underlying contracts.

If actual results in the future vary from our estimates, we adjust our estimate in the period identified, which would affect net product sales in the period such variances become known.

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.

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• Service fees:

We receive sales order management, data and distribution services from certain customers.

We receive sales order management, data and distribution services from certain customers, for which we are assessed fees.

These fees are based on contracted terms and are known amounts.

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There was no right of return asset as of December 31, 2021 or 2020.

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The following table summarizes sales discounts and allowance activity as of and for the years ended December 31, 2021, 2020 and 2019:

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

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

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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.

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Total net product sales $ 268,682 $ 248,168 $ 20,514 8 %

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HETLIOZ ® net product sales increased by $12.9 million, or 8%, to $173.5 million for the year ended December 31, 2021 compared to $160.7 million for the year ended December 31, 2020.

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

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

We have experienced an increase in the rate at which third-party payors refuse to cover or reimburse prescriptions written for HETLIOZ ® , which has contributed to the decrease in volume.

Fanapt ® net product sales increased by $7.7 million, or 9%, to $95.1 million for the year ended December 31, 2021 compared to $87.5 million for the year ended December 31, 2020.

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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 increased by $2.3 million, or 10%, to $25.6 million for the year ended December 31, 2021 compared to $23.4 million for the year ended December 31, 2020.

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

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and Germany, respectively.

Third-party royalty costs on HETLIOZ ® net product sales in the U.S.

will decrease to 5% in December 2022.

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.

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

Research and development expenses.

Research and development expenses increased by $19.8 million, or 36%, to $75.4 million for the year ended December 31, 2021 compared to $55.6 million for the year ended December 31, 2020.

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 increase was primarily due to an increase in clinical trial expenses associated with our HETLIOZ ® and Fanapt ® development programs.

The COVID-19 pandemic has impacted clinical research globally, including delays in our development programs.

While our clinical trials have since resumed patient enrollment, we may continue to experience disruptions that could adversely impact our supply chain, our ongoing and planned clinical trials, and other regulatory activities.

The following table summarizes the costs of our product development initiatives for the years ended December 31, 2021 and 2020.

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CFTR 3,180 3,938

VQW-765 2,548 1,111

Other 3,067 1,100

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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,

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

Selling, general and administrative expenses decreased by $16.5 million, or 12%, to $124.0 million for the year ended December 31, 2021 compared to $140.5 million for the year ended December 31,

The decrease was primarily the result of a decrease in spending on marketing activities for our commercial products, partially offset by increased spending on legal activities.

Intangible asset amortization .

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Other income was $0.2 million for the year ended December 31, 2021 compared to $4.4 million for the year ended December 31, 2020.

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

Other income primarily consists of investment income on our marketable securities, which decreased beginning in the second half of 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.

A provision for income taxes of $9.2 million and $8.3 million was recorded for the years ended December 31, 2021 and 2020, respectively.

Our income tax expense or benefit is determined by applying the statutory tax rates in jurisdictions where we operate to each period’s income before income taxes.

Adjustments are made for permanent differences in taxability or deductibility of pretax items as well as for other items, such as tax credits that are generated on our research and development activities.

See Note 14, Income Taxes, to the consolidated financial statements in Part II, Item 8 of this Annual Report for additional information.

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Corporate debt 186,023 140,617

Asset-backed securities — 48,401

Total marketable securities 380,742 306,709

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Deposits held with these institutions may exceed the amount of insurance provided on such deposits, but we do not anticipate any losses with respect to such deposits.

In the normal course of our business, we regularly enter into agreements with third-party vendors under fee service arrangements which generally may be terminated on 90 days’ notice without incurring additional charges, other than charges for work completed or materials procured but not paid for through the effective date of termination and other costs incurred by our contractors in closing out work in progress as of the effective date of termination.

Our non-cancellable purchase commitments for agreements longer than one year primarily relate to commitments for data services and are not material.

Various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase arrangements, are cancellable in nature or contain variable commitment terms within the agreement that are within our control.

We also have long-term contractual obligations related to our operating leases and license agreements.

Refer to Note 7, Leases , and Note 10, Commitments and Contingencies , respectively, to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information about these commitments.

We do not have any off-balance sheet arrangements.

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.

sufficient for at least the next 12 months.

Our future cash 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.

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

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

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

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

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

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Cash flows provided by operating activities during the year ended December 31, 2021 were $64.2 million, an increase of $12.4 million compared to $51.8 million during the year ended December 31, 2020.

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.

The increase reflects an increase of $9.8 million in net income and an increase of $4.2 million in non-cash charges primarily due to increased stock-based compensation expense, partially offset by a decrease of $1.6 million from the net change in operating assets and liabilities.

Investing Activities.

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Cash flows provided by financing activities during the year ended December 31, 2021 were $3.6 million, a decrease of $2.1 million compared to $5.6 million during the year ended December 31, 2020.

Financing activities include proceeds from exercises of common stock options.

Off-Balance Sheet Arrangements

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

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Contractual Obligations and Commitments

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.

Financing activities include proceeds from exercises of stock options.

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.

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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.

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.

government agency notes and have maturities of less than two years.

We do not believe that an increase in market rates would have any significant impact on the realized value of our cash equivalents and marketable securities.

We are also 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

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

We are exposed to foreign currency risk to the extent 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.

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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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 7. Management’s Discussion and Analysis