Vanda Pharmaceuticals Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES 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 Exchange Act of 1934 (Exchange Act)) as of December 31, 2021. 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, 2021, the end of the period covered by this annual report on Form 10- K (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. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of our internal control over financial reporting based on the original framework established in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2021, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this Annual Report. Changes in Internal Control over Financial Reporting 68 Table of Contents There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information required under this item will be contained in our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information required under this item will be contained in our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required under this item will be contained in our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required under this item will be contained in our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required under this item will be contained in our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference pursuant to General Instruction G (3) to Form 10-K. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The consolidated financial statements filed as part of this annual report on Form 10-K are listed in the Index to Consolidated Financial Statements. Certain schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. The Exhibits are listed in the Exhibit Index. 69 Table of Contents Signatures 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 24, 2022 By: /s/ Mihael H. Polymeropoulos, M.D. Mihael H. Polymeropoulos, M.D. President, Chief Executive Officer and Chairman of the Board of Directors 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, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) February 24, 2022 Mihael H. Polymeropoulos, M.D. /s/ Kevin Moran Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 24, 2022 Kevin Moran /s/ H. Thomas Watkins Lead Independent Director February 24, 2022 H. Thomas Watkins /s/ Anne Sempowski Ward Director February 24, 2022 Anne Sempowski Ward /s/ Phaedra Chrousos Director February 24, 2022 Phaedra Chrousos /s/ Richard W. Dugan Director February 24, 2022 Richard W. Dugan /s/ Stephen Ray Mitchell Director February 24, 2022 Stephen Ray Mitchell 70 Table of Contents Vanda Pharmaceuticals Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm ( PCAOB ID 238 ) 72 Consolidated Balance Sheets at December 31, 2021 and 2020 74 Consolidated Statements of Operations for the years ended December 31, 2021 , 2020 and 2019 75 Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 , 2020 and 2019 76 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021 , 2020 and 2019 77 Consolidated Statements of Cash Flows for the years ended December 31, 2021 , 2020 and 2019 78 Notes to the Consolidated Financial Statements 79 71 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Vanda Pharmaceuticals Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Vanda Pharmaceuticals Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, 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, 2021, 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 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; 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. 72 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters 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 $40.0 million as of December 31, 2021, of which a significant amount relates to allowances for Medicaid Rebates for Fanapt ® . The principal considerations for our determination that performing procedures relating to Medicaid Rebates for Fanapt ® 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 allowances for Medicaid Rebates for Fanapt ® , 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 for Fanapt ® 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 Baltimore, Maryland February 24, 2022 We have served as the Company’s auditor since 2003. 73 Table of Contents VANDA PHARMACEUTICALS INC. CONSOLIDATED BALANCE SHEETS (in thousands, except for share and per share amounts) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 52,071 $ 61,031 Marketable securities 380,742 306,709 Accounts receivable, net 32,467 30,036 Inventory 1,025 1,280 Prepaid expenses and other current assets 11,996 10,089 Total current assets 478,301 409,145 Property and equipment, net 3,113 4,136 Operating lease right-of-use assets 9,272 10,459 Intangible assets, net 20,081 21,559 Deferred tax assets 74,878 81,516 Non-current inventory and other 8,147 6,641 Total assets $ 593,792 $ 533,456 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 34,438 $ 31,509 Product revenue allowances 39,981 34,427 Total current liabilities 74,419 65,936 Operating lease non-current liabilities 10,055 11,497 Other non-current liabilities 4,390 2,757 Total liabilities 88,864 80,190 Commitments and contingencies (Notes 10 and 16) Stockholders’ equity: Preferred stock, $ 0.001 par value; 20,000,000 shares authorized, and no shares issued or outstanding at December 31, 2021 and 2020, respectively — — Common stock, $ 0.001 par value; 150,000,000 shares authorized; 55,900,855 and 54,865,092 shares issued and outstanding at December 31, 2021 and 2020, respectively 56 55 Additional paid-in capital 669,223 650,300 Accumulated other comprehensive income (loss) ( 175 ) 239 Accumulated deficit ( 164,176 ) ( 197,328 ) Total stockholders’ equity 504,928 453,266 Total liabilities and stockholders’ equity $ 593,792 $ 533,456 The accompanying notes are an integral part of these consolidated financial statements. 74 Table of Contents VANDA PHARMACEUTICALS INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (in thousands, except for share and per share amounts) 2021 2020 2019 Revenues: Net product sales $ 268,682 $ 248,168 $ 227,188 Total revenues 268,682 248,168 227,188 Operating expenses: Cost of goods sold excluding amortization 25,629 23,364 24,488 Research and development 75,363 55,577 48,649 Selling, general and administrative 124,047 140,510 129,736 Intangible asset amortization 1,478 1,478 1,505 Total operating expenses 226,517 220,929 204,378 Income from operations 42,165 27,239 22,810 Other income 199 4,416 6,218 Income before income taxes 42,364 31,655 29,028 Provision (benefit) for income taxes 9,212 8,318 ( 86,525 ) Net income $ 33,152 $ 23,337 $ 115,553 Net income per share: Basic $ 0.60 $ 0.43 $ 2.17 Diluted $ 0.58 $ 0.42 $ 2.11 Weighted average shares outstanding: Basic 55,548,122 54,427,683 53,137,562 Diluted 56,921,836 55,190,802 54,847,060 The accompanying notes are an integral part of these consolidated financial statements. 75 Table of Contents VANDA PHARMACEUTICALS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (in thousands) 2021 2020 2019 Net income $ 33,152 $ 23,337 $ 115,553 Other comprehensive income (loss): Net foreign currency translation gain (loss) ( 49 ) 68 6 Change in net unrealized gain (loss) on marketable securities ( 472 ) ( 102 ) 313 Tax benefit (provision) on other comprehensive income (loss) 107 24 ( 71 ) Other comprehensive income (loss), net of tax ( 414 ) ( 10 ) 248 Comprehensive income $ 32,738 $ 23,327 $ 115,801 The accompanying notes are an integral part of these consolidated financial statements. 76 Table of Contents VANDA PHARMACEUTICALS INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total (in thousands, except for share amounts) Shares Par Value Balances at December 31, 2018 52,477,593 $ 52 $ 611,587 $ 1 $ ( 336,218 ) $ 275,422 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 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 Issuance of common stock from the exercise of stock options and settlement of restricted stock units 1,035,763 1 3,549 — — 3,550 Stock-based compensation expense — — 15,374 — — 15,374 Net income — — — — 33,152 33,152 Other comprehensive loss, net of tax — — — ( 414 ) — ( 414 ) Balances at December 31, 2021 55,900,855 $ 56 $ 669,223 $ ( 175 ) $ ( 164,176 ) $ 504,928 The accompanying notes are an integral part of these consolidated financial statements. 77 Table of Contents VANDA PHARMACEUTICALS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2021 2020 2019 Cash flows from operating activities Net income $ 33,152 $ 23,337 $ 115,553 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,363 1,386 1,387 Stock-based compensation 15,374 13,360 13,458 Amortization of premiums and accretion of discounts on marketable securities 1,649 179 ( 3,099 ) Gain on sale of marketable securities ( 12 ) ( 229 ) — Intangible asset amortization 1,478 1,478 1,505 Deferred income taxes 6,745 6,189 ( 87,767 ) Other non-cash adjustments, net 1,728 1,758 1,785 Changes in operating assets and liabilities: Accounts receivable ( 2,469 ) ( 3,767 ) 2,342 Prepaid expenses and other assets ( 1,247 ) 4,068 ( 2,764 ) Inventory ( 2,233 ) ( 2,876 ) ( 722 ) Accounts payable and other liabilities 3,040 3,759 3,508 Product revenue allowances 5,646 3,133 761 Net cash provided by operating activities 64,214 51,775 45,947 Cash flows from investing activities Purchases of property and equipment ( 552 ) ( 1,795 ) ( 1,019 ) Purchases of marketable securities ( 420,461 ) ( 346,622 ) ( 394,517 ) Sales and maturities of marketable securities 344,317 306,918 327,227 Net cash used in investing activities ( 76,696 ) ( 41,499 ) ( 68,309 ) Cash flows from financing activities Proceeds from exercise of stock options 3,550 5,634 6,264 Net cash provided by financing activities 3,550 5,634 6,264 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 91 ) 53 ( 1 ) Net change in cash, cash equivalents and restricted cash ( 9,023 ) 15,963 ( 16,099 ) Cash, cash equivalents and restricted cash Beginning of year 61,613 45,650 61,749 End of year $ 52,590 $ 61,613 $ 45,650 The accompanying notes are an integral part of these consolidated financial statements. 78 Table of Contents VANDA PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business Organization and Presentation Business Organization Vanda Pharmaceuticals Inc. (the Company) is a global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients. The Company commenced its operations in 2003 and operates in one reporting segment. The Company’s commercial portfolio is currently comprised of two products, HETLIOZ ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt ® for the treatment of schizophrenia. HETLIOZ ® is the first product approved by the United States Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, the Company has a number of drugs in development, including: • HETLIOZ ® (tasimelteon) for the treatment of jet lag disorder, 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; • 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; and • VHX-896 (formerly P88), the active metabolite of iloperidone. 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 (GAAP). All intercompany accounts and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates. Cash, Cash Equivalents and Restricted Cash For purposes of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, cash equivalents represent highly-liquid investments with a maturity date of three months or less at the date of purchase. Cash and cash equivalents include investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Restricted cash relates primarily to amounts held as collateral for letters of credit for leases for office space at the Company’s Washington, D.C. headquarters. 79 Table of Contents 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: December 31, (in thousands) 2021 2020 Cash and cash equivalents $ 52,071 $ 61,031 Restricted cash included in: Prepaid expenses and other current assets — 57 Non-current inventory and other 519 525 Total cash, cash equivalents and restricted cash $ 52,590 $ 61,613 Marketable Securities The Company classifies all of its marketable securities as available-for-sale securities. 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 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. Premiums and discounts on marketable securities are amortized and accreted, respectively, to earliest call date and maturity, respectively, and included in other income. The Company uses the specific identification method in computing realized gains and losses on the sale of investments, which would be included in the Consolidated Statements of Operations when generated. All available-for-sale marketable securities are available for use in current operations and are classified as current. Inventory 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 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 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 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. The useful life estimate for Fanapt ® was based on the market participant methodology prescribed by Accounting Standards Codification (ASC) 805, and therefore does not reflect the impact of additional Fanapt ® patents solely owned by the Company with varying expiration dates, the latest of which is December 2031. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. 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 80 Table of Contents 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. Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of operations for that period. Leases The Company determines if an arrangement contains a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from that lease. For leases with a term greater than 12 months, ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes the option to extend the lease when it is reasonably certain the Company will exercise that option. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. In the case the implicit rate is not available, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including publicly available data for instruments with similar characteristics, to determine the present value of lease payments. The Company does not combine lease and non-lease elements for office leases. For existing office leases as of the adoption date of ASC 842, Leases , on 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 The Company’s management is required to estimate accrued liabilities as part of the process of preparing financial statements. The estimation of accrued liabilities involves identifying services that have been performed on the Company’s behalf, and then estimating the level of service performed and the associated cost incurred for such services as of each balance sheet date in the financial statements. Accrued liabilities include research and development expenses, such as accrued costs under contracts with clinical monitors, data management organizations and investigators in conjunction with clinical trials, fees to contract manufacturers in conjunction with the production of clinical materials, consulting and professional fees, such as lawyers and fees for marketing and other commercialization activities, accrued compensation and employee benefits, such as accrued bonus, royalties payable under licensing agreements, and other accrued fees. Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, the Company recognizes these expenses as the services are provided. Revenue from Net Product Sales 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. The Company’s net product sales consist of sales of HETLIOZ ® and Fanapt ® . Net sales by product for the years ended December 31, 2021, 2020 and 2019 were as follows: Year Ended December 31, ( in thousands ) 2021 2020 2019 HETLIOZ ® net product sales $ 173,536 $ 160,686 $ 142,980 Fanapt ® net product sales 95,146 87,482 84,208 Total net product sales $ 268,682 $ 248,168 $ 227,188 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 OptumRx (a subsidiary of 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. 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. Outside the U.S., the Company sells HETLIOZ ® in Germany and has a distribution agreement for the commercialization of Fanapt ® in Israel. 81 Table of Contents 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, 2021, 2020 and 2019: Year Ended December 31, Percent of Net Product Sales 2021 2020 2019 Distributor A 40 % 43 % 38 % Distributor B 18 % 19 % 23 % Distributor C 12 % 12 % 12 % Distributor D 10 % 11 % 12 % Distributor E 11 % 10 % 11 % The following table presents each major customer that represented more than 10% of accounts receivable, net, as of December 31, 2021 and 2020: December 31, Percent of Accounts Receivable, Net 2021 2020 Distributor A 31 % 22 % Distributor B * 13 % Distributor C 17 % 22 % Distributor D 16 % 20 % Distributor E 14 % 13 % *Represents less than 10% of respective balance. The transaction price is determined based upon the consideration to which the Company will be entitled in exchange for transferring product to the customer. The Company’s 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. Where appropriate, the Company’s 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 the Company has validated the insurance benefits. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. If actual results in the future vary from the Company’s estimates, it adjusts its estimates 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 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 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. The Company expects that the specialty pharmacies and wholesalers will earn prompt payment discounts and, therefore, deducts 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 82 Table of Contents 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. 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 when the Company has validated the insurance benefits. • Service Fees: The Company receives sales order management, data and distribution services from certain customers, for which it is assessed fees. These fees are based on contracted terms and are known amounts. The Company accrues 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 the Company’s third-party administrator. • Product Returns : 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. The Company does not expect returned goods to be resalable. There was no right of return asset as of December 31, 2021 or 2020. The following table summarizes activity for product returns as of and for the years ended December 31, 2021, 2020 and 2019, all of which relates to sales of Fanapt ® : (in thousands) Reserve for Product Returns 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 ) Balances at December 31, 2020 4,698 Additions 2,870 Credits/payments ( 3,017 ) Balances at December 31, 2021 $ 4,551 Cost of Goods Sold 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. 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 the Company’s research and development efforts and has no alternative future use. 83 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses consist of salaries, other employee-related costs and stock-based compensation, and facilities and third-party expenses. Selling, general and administrative expenses are associated with the activities of the corporate, finance, accounting, information technology, business development, commercial support, trade and distribution, sales, marketing, legal, medical affairs and human resource functions. Additionally, selling, general and administrative expenses included an estimate for the annual Affordable Care Act fee. 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. The Company recognizes the expense over the award’s vesting period. The fair value of stock options granted and restricted stock units (RSUs) awarded are amortized using the straight-line method. 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. Advertising Expense The Company expenses the costs of advertising, including branded promotional expenses, as incurred. Branded advertising expenses, recorded in selling, general and administrative expenses, were $ 6.7 million, $ 12.6 million and $ 3.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Foreign Currency The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s international subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies, including intercompany balances for which settlement is anticipated in the foreseeable future, are translated at exchange rates in effect at the balance sheet date. Foreign currency equity balances are translated at historical rates. 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). Transactions denominated in currencies other than functional currency are recorded based on exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in the Consolidated Balance Sheets related to these items will result in unrealized foreign currency transaction gains and losses based upon period-end exchange rates. The Company also records realized foreign currency transaction gains and losses upon settlement of the transactions. Foreign currency transaction gains and losses are included in other income and were not material for the years ended December 31, 2021, 2020 and 2019, respectively. Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carryforwards. Deferred tax assets are reduced by a 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. Tax rate changes are reflected in income during the period such changes are enacted. Changes in ownership may limit the amount of net operating loss (NOL) carryforwards that can be utilized in the future to offset taxable income. Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the 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. Interest and penalties related to income taxes are recognized as a component of income tax expense in the Consolidated Statements of Operations, and cumulative accrued interest and penalties are recognized within the related liability lines in the Consolidated Balance Sheets. 84 Table of Contents 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. There can be no assurance the products will receive the necessary clearance. If the Company is denied clearance or clearance is delayed, it may have a material adverse impact on the Company. The Company’s products are concentrated in rapidly changing, highly competitive markets, which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements or changes in regulatory requirements or industry standards or any significant delays in the development or introduction of products or services could have a material adverse effect on the Company’s business, operating results and future cash flows. The Company depends on single source suppliers for critical raw materials for manufacturing, as well as other components required for the administration of its products. The loss of these suppliers could delay the clinical trials or prevent or delay commercialization of the products. Concentrations of Credit Risk Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash, cash equivalents and marketable securities. The Company places its cash, cash equivalents and marketable securities with highly rated financial institutions. At December 31, 2021, the Company maintained all of its 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. Generally, these deposits may be redeemed upon demand, and the Company believes there is minimal risk of losses on such balances. Segment and Geographic Information The Company operates in one reporting segment and, accordingly, no segment disclosures are presented herein. Foreign sales were not material for each of the years ended December 31, 2021, 2020 and 2019. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The adoption of this standard on January 1, 2021 did not have a material impact on the Company’s consolidated financial statements. 3. Marketable Securities The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2021, which all have contractual maturities of less than two years: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value U.S. Treasury and government agencies $ 195,076 $ 1 $ ( 358 ) $ 194,719 Corporate debt 185,933 113 ( 23 ) 186,023 Total marketable securities $ 381,009 $ 114 $ ( 381 ) $ 380,742 85 Table of Contents 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) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value U.S. Treasury and government agencies $ 165,966 $ 129 $ ( 3 ) $ 166,092 Corporate debt 140,538 87 ( 8 ) 140,617 Total marketable securities $ 306,504 $ 216 $ ( 11 ) $ 306,709 4. Fair Value Measurements Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: • Level 1 — defined as observable inputs such as quoted prices in active markets • Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable • Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions The Company’s assets classified in Level 1 and Level 2 as of December 31, 2021 and 2020 consist of cash equivalents and available-for-sale marketable securities. The valuation of Level 1 instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of Level 2 instruments is also determined using a market approach based upon quoted prices for similar assets in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities include certificates of deposit, commercial paper, corporate notes and asset-backed securities that use as their basis readily observable market parameters. The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2021, as follows: Fair Value Measurement as of December 31, 2021 Using (in thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury and government agencies $ 194,719 $ 194,719 $ — $ — Corporate debt 186,023 — 186,023 — Total assets measured at fair value $ 380,742 $ 194,719 $ 186,023 $ — The Company held certain assets that are required to be measured at fair value on a recurring basis as of December 31, 2020, as follows: Fair Value Measurement as of December 31, 2020 Using (in thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury and government agencies $ 166,092 $ 166,092 $ — $ — Corporate debt 140,617 — 140,617 — Total assets measured at fair value $ 306,709 $ 166,092 $ 140,617 $ — Total assets measured at fair value as of December 31, 2021 and 2020 include no cash equivalents. The Company also has financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, accounts receivable, restricted cash, accounts payable and accrued liabilities, product revenue allowances, and milestone obligations under license agreements, the carrying values of which materially approximate their fair values. 86 Table of Contents 5. Inventory Inventory consisted of the following as of December 31, 2021 and 2020: (in thousands) December 31, 2021 December 31, 2020 Current assets Work-in-process $ 30 $ 66 Finished goods 995 1,214 Total inventory, current $ 1,025 $ 1,280 Non-Current assets Raw materials $ 2,143 $ 744 Work-in-process 3,934 4,045 Finished goods 1,150 302 Total inventory, non-current 7,227 5,091 Total inventory $ 8,252 $ 6,371 6. Property and Equipment The following is a summary of the Company’s property and equipment, at cost, as of December 31, 2021 and 2020: (in thousands) Estimated Useful Life (Years) December 31, 2021 December 31, 2020 Computer and other equipment 3 $ 5,481 $ 5,212 Furniture and fixtures 5 - 7 1,546 1,495 Leasehold improvements 5 - 11 5,463 5,457 Total property and equipment, gross 12,490 12,164 Accumulated depreciation and amortization ( 9,377 ) ( 8,028 ) Total property and equipment, net $ 3,113 $ 4,136 Depreciation expense was $ 1.4 million for each of the years ended December 31, 2021, 2020 and 2019. 7. Leases 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, 2021 and 2020. The Company also has short-term leases, including office space in Berlin, Germany. In June 2011, the Company entered into an operating lease agreement under which it leases 33,534 square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. in Washington, D.C. Subject to the prior rights of other tenants, the Company has the right to renew the lease for five years following its expiration in July 2028. As of December 31, 2021, the renewal period has not been included in the lease term. The Company has the right to sublease or assign all or a portion of the premises, subject to standard conditions. The lease may be terminated early by the Company or the landlord under certain circumstances. In June 2016, the Company entered into a sublease agreement under which it subleases an additional 9,928 square feet of office space for its headquarters at 2200 Pennsylvania Avenue, N.W. 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 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. 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. As of December 31, 2021, the renewal period has not been included in the lease term. 87 Table of Contents The following is a summary of the Company’s ROU assets and operating lease liabilities as of December 31, 2021 and 2020: (in thousands) Classification on the Balance Sheet December 31, 2021 December 31, 2020 Assets Operating lease assets Operating lease right-of-use assets $ 9,272 $ 10,459 Liabilities Operating lease current liabilities Accounts payable and accrued liabilities $ 2,311 $ 2,117 Operating lease non-current liabilities Operating lease non-current liabilities 10,055 11,497 Total lease liabilities $ 12,366 $ 13,614 Weighted average remaining lease term 6.2 7.1 Weighted average discount rate (1) 8.1 % 8.1 % (1) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019. For each of the years ended December 31, 2021, 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 $ 1.4 million, $ 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. Cash paid for amounts included in the measurement of operating lease liabilities is included in operating cash flows and was $ 2.3 million, $ 2.6 million and $ 2.5 million for the years ended December 31, 2021, 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, 2021: (in thousands) Operating Leases 2022 $ 2,608 2023 2,461 2024 2,488 2025 2,557 2026 2,366 Thereafter 3,258 Total minimum lease payments 15,738 Less: amount of lease payments representing interest ( 3,372 ) Present value of future minimum lease payments 12,366 Less: current obligations under leases ( 2,311 ) Operating lease non-current liabilities $ 10,055 8. Intangible Assets HETLIOZ ® . In January 2014, the Company announced that the FDA had approved the New Drug Application (NDA) for HETLIOZ ® . As a result of this approval, the Company met a milestone under its license agreement with Bristol-Myers Squibb (BMS) that required the Company to make a license payment of $ 8.0 million to BMS. The $ 8.0 million is being amortized on a straight-line basis over the estimated economic useful life of the related product patents. In April 2018, the Company met its final milestone under its license agreement with BMS when cumulative worldwide sales of HETLIOZ ® reached $ 250.0 million. As a result of the achievement of this milestone, the Company made a payment to BMS of $ 25.0 million in 2018. The $ 25.0 million, which was capitalized as an intangible asset in the first quarter of 2015, was 88 Table of Contents determined to be additional consideration for the acquisition of the HETLIOZ ® intangible asset and is being amortized on a straight-line basis over the estimated economic useful life of the related product patents. The following is a summary of the Company’s intangible assets as of December 31, 2021: December 31, 2021 (in thousands) Estimated Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount HETLIOZ ® July 2035 $ 33,000 $ 12,919 $ 20,081 The following is a summary of the Company’s intangible assets as of December 31, 2020: December 31, 2020 (in thousands) Estimated Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount HETLIOZ ® July 2035 $ 33,000 $ 11,441 $ 21,559 As of December 31, 2021 and 2020, the Company also had $ 27.9 million of fully amortized intangible assets related to Fanapt ® . Intangible assets are amortized over their estimated useful economic life using the straight-line method. Amortization expense for the years ended December 31, 2021, 2020 and 2019 was as follows: Year Ended December 31, (in thousands) 2021 2020 2019 HETLIOZ ® $ 1,478 $ 1,478 $ 1,505 The following is a summary of the future intangible asset amortization schedule as of December 31, 2021: (in thousands) Total 2022 2023 2024 2025 2026 Thereafter HETLIOZ ® $ 20,081 $ 1,478 $ 1,478 $ 1,478 $ 1,478 $ 1,478 $ 12,691 9. Accounts Payable and Accrued Liabilities The following is a summary of the Company’s accounts payable and accrued liabilities as of December 31, 2021 and 2020: (in thousands) December 31, 2021 December 31, 2020 Research and development expenses $ 10,082 $ 6,173 Consulting and other professional fees 8,732 5,052 Compensation and employee benefits 6,515 10,951 Royalties payable 5,873 5,817 Operating lease liabilities 2,311 2,117 Milestone obligations under license agreements — 350 Accounts payable and other accrued liabilities 925 1,049 Total accounts payable and accrued liabilities $ 34,438 $ 31,509 10. Commitments and Contingencies Guarantees and Indemnifications The Company has entered into a number of standard intellectual property indemnification agreements in the ordinary course of its business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual from the date of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Since inception, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain conditions. 89 Table of Contents License Agreements The Company’s rights to develop and commercialize its products are subject to the terms and conditions of licenses granted to the Company by other pharmaceutical companies. HETLIOZ ® . In February 2004, the Company entered into a license agreement with BMS under which it received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ ® . As of December 31, 2021, the Company has paid BMS $ 37.5 million in upfront fees and milestone obligations, including $ 33.0 million of regulatory approval and commercial milestones capitalized as intangible assets (see Note 8). The Company has no remaining milestone obligations to BMS. Additionally, the Company is obligated to make royalty payments on HETLIOZ ® net sales to BMS. The royalty period in each territory where the Company commercializes HETLIOZ ® is 10 years following the first commercial sale in the territory. In territories outside the U.S., the royalty is 5 % on net sales. In the U.S., the current royalty on net sales is 10 %. This royalty will drop to 5 % in December 2022 and will end in April 2024. The Company is also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments and milestone and other payments (excluding royalties) that it receives from a third party in connection with any sublicensing arrangement, at a rate which is in the mid-twenties . The Company is obligated to use its commercially reasonable efforts to develop and commercialize HETLIOZ ® . Fanapt ® . Pursuant to the terms of a settlement agreement with Novartis Pharma AG (Novartis), Novartis transferred all U.S. and Canadian rights in the Fanapt ® franchise to the Company on December 31, 2014. The Company paid directly to Sanofi S.A. (Sanofi) a fixed royalty of 3 % of net sales through December 2019 related to manufacturing know-how. The Company is also obligated to pay Sanofi a fixed royalty on Fanapt ® net sales equal to 6 % on Sanofi know-how not related to manufacturing under certain conditions for a period of up to 10 years in markets where the NCE patent has expired or was not issued. The Company is obligated to pay this 6 % royalty on net sales in the U.S. through November 2026. Tradipitant. In April 2012, the Company entered into a license agreement with Eli Lilly and Company (Lilly) pursuant to which the Company acquired an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1 receptor antagonist, tradipitant, for all human indications. Lilly is eligible to receive future payments based upon achievement of specified development, regulatory approval and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits . As of December 31, 2021, the Company has paid Lilly $ 3.0 million in upfront fees and development milestones. As of December 31, 2021, remaining milestone obligations include a $ 2.0 million development milestone due upon the filing of the first marketing authorization for tradipitant in either the U.S. or European Union (E.U.), $ 10.0 million and $ 5.0 million for the first approval of a marketing authorization for tradipitant in the U.S. and E.U., respectively, and up to $ 80.0 million for sales milestones. The Company is obligated to use its commercially reasonable efforts to develop and commercialize tradipitant. Portfolio of CFTR activators and inhibitors . In March 2017, the Company entered into a license agreement with the University of California San Francisco (UCSF), under which the Company acquired an exclusive worldwide license to develop and commercialize a portfolio of CFTR activators and inhibitors. Pursuant to the license agreement, the Company will develop and commercialize the CFTR activators and inhibitors and is responsible for all development costs under the license agreement, including current pre-investigational new drug development work. UCSF is eligible to receive future payments based upon achievement of specified development and commercialization milestones as well as single-digit royalties on net sales. As of December 31, 2021, the Company has paid UCSF $ 1.6 million in upfront fees and development milestones. As of December 31, 2021, remaining milestone obligations include $ 11.9 million for development milestones and $ 33.0 million for future regulatory approval and sales milestones. Included in the $ 11.9 million of development milestones are $ 1.1 million of milestone obligations due upon the conclusion of clinical studies for each licensed product but not to exceed $ 3.2 million in total for the CFTR portfolio. As a result of completion of the first clinical study initiated by the Company for VSJ-110, the Company made a $ 350,000 development milestone payment to UCSF in the fourth quarter of 2021. The likelihood of achieving this milestone was determined to be probable during 2020 and the obligation of $ 350,000 tied to such milestone was recorded as research and development expense in the consolidated Statements of Operations during the year ended December 31, 2020 and as a current liability in the Consolidated Balance Sheet as of December 31, 2020. VQW-765. In connection with a settlement agreement with Novartis relating to Fanapt ® , the Company received an exclusive worldwide license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize VQW-765, a Phase II alpha-7 nicotinic acetylcholine receptor partial agonist. Pursuant to the license agreement, the Company is obligated to use its commercially reasonable efforts to develop and commercialize VQW-765 and is responsible for all development costs. The Company has no milestone obligations; however, Novartis is eligible to receive tiered-royalties on net sales at percentage rates up to the mid-teens . 90 Table of Contents Purchase Commitments In the course of its business, the Company regularly enters 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 the Company’s contractors in closing out work in progress as of the effective date of termination. The Company’s 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 commitments, are cancellable in nature or contain variable commitment terms within the agreement. 11. Accumulated Other Comprehensive Income (Loss) The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows for the years ended December 31, 2021 and 2020: (in thousands) December 31, 2021 December 31, 2020 Foreign currency translation $ 32 $ 81 Unrealized gain on marketable securities ( 207 ) 158 Accumulated other comprehensive income (loss) $ ( 175 ) $ 239 12. Stock-Based Compensation As of December 31, 2021, there were 5,485,888 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 a number of times since to increase the number of shares reserved for issuance, among other administrative changes. Each of the amendments to the 2016 Plan was approved by the Company’s stockholders. There is a total of 10,790,000 shares of common stock authorized for issuance under the 2016 Plan, 4,716,342 shares of which remained available for future grant as of December 31, 2021. Stock Options The Company has granted option awards under the Plans with service conditions (service option awards) that are subject to terms and conditions established by the compensation committee of the board of directors. Service option awards have 10 -year contractual terms. Service option awards granted to employees and new directors upon their election vest and become exercisable over four years , with the first 25 % of the shares subject to service option awards vesting on the first anniversary of the grant date and the remaining 75 % of the shares subject to the service option awards in 36 equal monthly installments thereafter. Subsequent annual service option awards granted to directors vest and become exercisable in full on the first anniversary of the grant date. Certain service option awards granted to employees and executive officers provide for partial acceleration of vesting if the employee or executive officer is subject to an involuntary termination, and full acceleration of vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control of the Company. Service option awards granted to directors provide for accelerated vesting if there is a change in control of the Company or if the director’s service terminates as a result of the director’s death or total and permanent disability. As of December 31, 2021, $ 7.9 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, 2021. 91 Table of Contents A summary of option activity under the Plans for the year ended December 31, 2021 is as follows: (in thousands, except for share and per share amounts) Number of Shares Weighted Average Exercise Price at Grant Date Weighted Average Remaining Term (Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 3,606,818 $ 12.24 5.76 $ 8,511 Granted 708,500 20.20 Forfeited ( 128,285 ) 15.79 Expired ( 10,000 ) 18.30 Exercised ( 455,885 ) 7.79 4,124 Outstanding at December 31, 2021 3,721,148 14.16 5.77 11,327 Exercisable at December 31, 2021 2,616,440 12.69 4.56 10,045 Vested and expected to vest at December 31, 2021 3,604,678 14.03 5.67 11,215 The weighted average grant-date fair value of options granted was $ 8.91 , $ 5.53 and $ 10.19 per share for the years ended December 31, 2021, 2020 and 2019, respectively. The total intrinsic value of options exercised was $ 4.1 million, $ 2.9 million and $ 2.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Proceeds from the exercise of stock options amounted to $ 3.6 million, $ 5.6 million and $ 6.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Restricted Stock Units An RSU is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs under the Plans with service conditions (service RSUs) that are subject to terms and conditions established by the compensation committee of the board of directors. Service RSUs granted to employees vest in four equal annual installments provided that the employee remains employed with the Company. Certain service RSUs granted to employees and executive officers provide for accelerated vesting if the employee or executive officer is subject to an involuntary termination within 24 months after a change in control. Annual service RSUs granted to directors vest on the first anniversary of the grant date and provide for accelerated vesting if there is a change in control of the Company. As of December 31, 2021, $ 22.0 million of unrecognized compensation costs related to unvested service RSUs are expected to be recognized over a weighted average period of 1.7 years. No RSUs are classified as a liability as of December 31, 2021. A summary of RSU activity for the Plans for the year ended December 31, 2021 is as follows: Number of Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2020 1,639,563 $ 15.26 Granted 899,305 19.57 Forfeited ( 194,250 ) 15.54 Vested ( 579,878 ) 15.73 Unvested at December 31, 2021 1,764,740 17.27 The weighted average grant-date fair value of RSUs granted was $ 19.57 , $ 11.28 and $ 19.46 per share for the years ended December 31, 2021, 2020 and 2019, respectively. The total fair value of the RSUs that vested during the years ended December 31, 2021, 2020 and 2019 was $ 9.1 million, $ 9.6 million, and $ 7.7 million, respectively. Stock-Based Compensation Expense Stock-based compensation expense recognized for the years ended December 31, 2021, 2020 and 2019 comprised of the following: 92 Table of Contents Year Ended December 31, (in thousands) 2021 2020 2019 Research and development $ 3,955 $ 3,804 $ 3,207 Selling, general and administrative 11,419 9,556 10,251 Total stock-based compensation expense $ 15,374 $ 13,360 $ 13,458 The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. Expected volatility rates are based on the historical volatility of the Company’s publicly traded common stock and other factors. The expected terms are determined based on a combination of historical exercise data and hypothetical exercise data for unexercised stock options. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has never paid cash dividends to its stockholders and does not plan to pay dividends in the foreseeable future. Assumptions used in the Black-Scholes-Merton option pricing model for employee and director stock options granted during the years ended December 31, 2021, 2020 and 2019 were as follows: Year Ended December 31, 2021 2020 2019 Expected dividend yield — % — % — % Weighted average expected volatility 46 % 51 % 58 % Weighted average expected term (years) 5.98 6.07 5.95 Weighted average risk-free rate 0.75 % 1.14 % 2.26 % 13. Employee Benefit Plan The Company has a defined contribution plan under IRC Section 401(k). This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Currently, the Company matches fifty percent up to the first six percent of employee contributions. All matching contributions have been paid by the Company. The Company match vests over a 4 -year period and amounted to $ 1.0 million, $ 0.9 million and $ 0.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. 14. Income Taxes The following is a summary of the domestic and foreign components of income before income taxes for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, (in thousands) 2021 2020 2019 Domestic $ 42,221 $ 31,667 $ 28,794 Foreign 143 ( 12 ) 234 Total income before income taxes $ 42,364 $ 31,655 $ 29,028 The following is a summary of the provision (benefit) for income taxes for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, (in thousands) 2021 2020 2019 Current: Federal $ — $ — $ — State 2,200 2,061 1,161 Foreign 267 68 81 Deferred: Federal 6,604 6,076 ( 85,624 ) State 119 155 ( 2,127 ) Foreign 22 ( 42 ) ( 16 ) Provision (benefit) for income taxes $ 9,212 $ 8,318 $ ( 86,525 ) 93 Table of Contents The Company 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. The analysis depends on 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, the Company concluded that it was more likely than not that substantially all of its deferred tax assets in the U.S. are realizable in future periods. A valuation allowance was retained against certain District of Columbia state deferred tax assets as of December 31, 2021 and 2020. The following is reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, 2021 2020 2019 Federal tax at statutory rate 21.0 % 21.0 % 21.0 % State taxes 2.3 % 2.6 % 1.8 % Change in valuation allowance (1) ( 0.1 ) % ( 3.5 ) % ( 357.6 ) % Research and development credit (2) ( 6.5 ) % ( 5.4 ) % ( 10.9 ) % Orphan drug credit (2) ( 0.1 ) % ( 1.3 ) % 17.1 % Section 162(m) limitation 2.6 % 1.7 % 2.7 % Other tax rate changes ( 0.2 ) % 0.2 % ( 0.5 ) % Uncertain tax positions (2) 4.0 % 4.7 % 26.3 % Stock-based compensation ( 1.8 ) % 5.1 % ( 1.0 ) % Other items 0.5 % 1.2 % 3.0 % Effective tax rate 21.7 % 26.3 % ( 298.1 ) % (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. deferred tax assets in future years. (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. 94 Table of Contents 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, 2021 and 2020. (in thousands) December 31, 2021 December 31, 2020 Deferred tax assets: Net operating loss carryforwards $ 35,509 $ 43,623 Stock-based compensation 4,846 4,653 Accrued expenses 1,409 2,429 Allowance for returns and credit losses 1,142 1,169 Research and development and orphan drug credit carryforwards 39,975 37,737 Other 3,081 3,279 Total deferred tax assets 85,962 92,890 Deferred tax liabilities: Intangible assets ( 1,919 ) ( 1,911 ) Other ( 2,140 ) ( 2,412 ) Total deferred tax liabilities ( 4,059 ) ( 4,323 ) Deferred tax assets, net 81,903 88,567 Less: Valuation allowance 7,025 7,051 Net deferred tax assets $ 74,878 $ 81,516 The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2021, 2020 and 2019: (in thousands) Balance at Beginning of Year Additions Reductions Balance at End of Year Year Ended: December 31, 2021 $ 7,051 $ — $ ( 26 ) $ 7,025 December 31, 2020 8,155 — ( 1,104 ) 7,051 December 31, 2019 111,950 — ( 103,795 ) 8,155 The Company has NOL and other tax credit carryforwards in several jurisdictions. As of December 31, 2021, the Company has $ 27.2 million of deferred tax assets relating to U.S. federal NOL carryforwards, along with deferred tax assets of $ 15.5 million and $ 24.4 million related to U.S. federal research and development credits and orphan drug credits, respectively. These tax attributes will begin to expire in 2033 , 2024 and 2030 , respectively. In addition, the Company has $ 8.3 million of deferred tax assets relating to other U.S. NOL carryforwards, which primarily relate to the District of Columbia. NOLs for the District of Columbia will begin to expire in 2032 and state NOLs will begin to expire in 2029 . Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the 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. Interest and penalties related to income taxes are recognized as a component of income tax expense in the Consolidated Statements of Operations, and cumulative accrued interest and penalties are recognized within the related liability lines in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows: Year Ended December 31, (in thousands) 2021 2020 2019 Unrecognized tax benefits at the beginning of the year $ 11,233 $ 9,741 $ — Increases (decreases) related to prior year tax positions 122 ( 121 ) 8,223 Increases related to current year tax positions 1,580 1,613 1,518 Unrecognized tax benefits at the end of the year $ 12,935 $ 11,233 $ 9,741 The amount of uncertain tax benefits that, if recognized, would impact the effective tax rate is $ 12.9 million. Unrecognized tax benefits are not expected to change materially over the next 12 months. Income tax returns filed by the 95 Table of Contents Company for all periods are open to examination by tax jurisdictions. As of December 31, 2021, the Company is not under examination by any federal or state tax jurisdiction. Certain tax attributes of the Company, including NOLs and credits, would be subject to a limitation should an ownership change as defined under the Internal Revenue Code of 1986, as amended (IRC), Section 382, occur. The limitations resulting from a change in ownership could affect the Company’s ability to utilize its NOLs and credit carryforward (tax attributes). Ownership changes occurred in the years ending December 31, 2014 and December 31, 2008. The Company believes that the ownership changes in 2014 and 2008 will not impact its ability to utilize NOL and credit carryforwards; however, future ownership changes may cause the Company’s existing tax attributes to have additional limitations. 15. Earnings per Share Basic earnings per share (EPS) is calculated by dividing the net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing the net income by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and shares underlying RSUs, but only to the extent that their inclusion is dilutive. The following table presents the calculation of basic and diluted net income per share of common stock for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, (in thousands, except for share and per share amounts) 2021 2020 2019 Numerator: Net income $ 33,152 $ 23,337 $ 115,553 Denominator: Weighted average shares outstanding, basic 55,548,122 54,427,683 53,137,562 Effect of dilutive securities 1,373,714 763,119 1,709,498 Weighted average shares outstanding, diluted 56,921,836 55,190,802 54,847,060 Net income per share, basic and diluted: Basic $ 0.60 $ 0.43 $ 2.17 Diluted $ 0.58 $ 0.42 $ 2.11 Antidilutive securities excluded from calculations of diluted net income per share 2,176,944 3,407,409 1,932,024 16. Legal Matters Fanapt ® . In 2014 and 2015, Roxane Laboratories, Inc. (Roxane) and its affiliates, West-Ward Pharmaceuticals International Limited and West-Ward Pharmaceuticals Corp (West-Ward), Inventia Healthcare Pvt. Ltd. (Inventia), Lupin Ltd. and Lupin Pharmaceuticals, Inc. (Lupin), Taro Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. (Taro), and Apotex Inc. and Apotex Corp. (Apotex) (collectively, the Fanapt ® Defendants) each submitted an Abbreviated New Drug Applications (ANDA) to the FDA seeking approval to market generic versions of Fanapt ® prior to the expiration of certain of the Company’s patents covering Fanapt ® , including U.S. Patent No. 8,586,610 (‘610 Patent) and U.S. Patent No. 9,138,432 (‘432 Patent). In response, the Company filed separate lawsuits in 2014 and 2015 against each of the Fanapt ® Defendants in the U.S. District Court for the District of Delaware (Delaware District Court) for patent infringement. In August 2016, the Delaware District Court ruled in the Company’s favor, permanently enjoining Roxane from manufacturing, using, selling, offering to sell, distributing or importing any generic iloperidone product described in Roxane’s ANDA until the expiration of the ‘610 Patent in November 2027, or May 2028 if the Company obtains pediatric exclusivity. This ruling was affirmed on appeal by the Federal Circuit Court of Appeals in April 2018. West-Ward, having replaced Roxane as defendant following the acquisition of Roxane by West-Ward’s parent company, Hikma Pharmaceuticals PLC (Hikma), petitioned the U.S. Supreme Court for a writ of certiorari, which was denied in January 2020. The Company’s lawsuit against Hikma regarding the ‘432 Patent remains pending. The Company entered into separate license agreements with each of Taro, Apotex and Lupin resolving these lawsuits in October 2016, December 2016 and July 2020, respectively. The license agreements grant Taro, Apotex and Lupin non-exclusive licenses to manufacture and commercialize a version of Fanapt ® in the U.S. effective as of the expiration of the ‘610 Patent or earlier under certain limited circumstances. The Company entered into a confidential stipulation with Inventia 96 Table of Contents regarding any potential launch of its generic versions of Fanapt ® , but the Company’s lawsuit against Inventia regarding the ‘610 and ‘432 Patents remains pending. HETLIOZ ® . Between April 2018 and March 2021, the Company filed numerous Hatch-Waxman lawsuits in the Delaware District Court against Teva Pharmaceuticals USA, Inc. (Teva), MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (MSN) and Apotex (collectively the HETLIOZ ® Defendants) asserting that U.S. Patent Nos. RE46,604, 9,060,995, 9,539,234, 9,549,913, 9,730,910, 9,844,241, 10,071,977, 10,149,829, 10,376,487, 10,449,176, 10,610,510, 10,610,511, 10,829,465, and 10,611,744 will be infringed by the HETLIOZ ® Defendants’ generic versions of HETLIOZ ® , for which they are seeking FDA approval. In January 2022, the Company entered into a license agreement with MSN and Impax Laboratories LLC (Impax) resolving the lawsuits against MSN. The license agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice (the DOJ), grants MSN and Impax a non-exclusive license to manufacture and commercialize MSN’s version of HETLIOZ ® in the U.S. effective as of March 13, 2035, unless prior to that date the Company obtains pediatric exclusivity for HETLIOZ ® , in which case the license will be effective as of July 27, 2035. MSN and Impax may enter the market earlier under certain limited circumstances. The consolidated lawsuits against the remaining HETLIOZ ® Defendants are scheduled for trial in March 2022. Other Matters . In February 2019, a qui tam action filed against the Company was unsealed by order of the U.S. District Court for the District of Columbia (DC District Court). The qui tam action, which was filed under seal in March 2017, was brought by a former Company employee on behalf of the U.S., 28 states and the District of Columbia (collectively, the Plaintiff States) and the policyholders of certain insurance companies under the Federal False Claims Act and state law equivalents to the Federal False Claims Act and related state laws. The complaint alleged that the Company violated these laws through the promotion and marketing of its products Fanapt ® and HETLIOZ ® and sought, among other things, treble damages, civil penalties for each alleged false claim, and attorneys’ fees and costs. By virtue of the DC District Court having unsealed the original complaint, the Company learned that in January 2019, the DOJ, as well as the Plaintiff States, elected not to intervene in the qui tam action at that time. In May 2019, the plaintiff filed an amended complaint under seal repeating the same allegations and seeking the same relief. According to a filing unsealed in June 2019, the DOJ reaffirmed its decision not to intervene and incorporated its prior filing, indicating that neither the DOJ nor the Plaintiff States were intervening regarding the original complaint. Although the DOJ and the Plaintiff States have elected not to intervene, the plaintiff has continued to litigate this action and the DOJ and the Plaintiff States may later seek to intervene. In August 2019, the Company filed a motion to dismiss, and 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, which was denied by the DC District Court in March 2021. The Company filed its answer to the plaintiff’s second amended complaint in April 2021 and intends to continue to vigorously defend itself in the case. In February 2019, a securities class action, Gordon v. Vanda Pharmaceuticals Inc. , was filed in the U.S. District Court for the Eastern District of New York naming the Company and certain of its officers as defendants. An amended complaint was filed in July 2019. The amended complaint, filed on behalf of a purported stockholder, asserts claims on behalf of a putative class of all persons who purchased the Company’s publicly traded securities between November 4, 2015 and February 11, 2019, for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that the defendants made false and misleading statements and/or omissions regarding Fanapt ® , HETLIOZ ® and the Company’s interactions with the FDA regarding tradipitant between November 3, 2015 and February 11, 2019. In March 2020, the Company filed a motion to dismiss the complaint. In March 2021, the motion to dismiss was granted in part and denied in part. In April 2021, the Company filed its answer to the amended complaint. The Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit. The Company does not anticipate that this litigation will have a material adverse effect on its business, results of operations or financial condition. However, this lawsuit is subject to inherent uncertainties, the actual cost may be significant, and the Company may not prevail. The Company believes it is entitled to coverage under its relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient. 97 Table of Contents VANDA PHARMACEUTICALS INC. EXHIBIT INDEX Exhibit Number Description 3.1 Form of Amended and Restated Certificate of Incorporation of the registrant (filed as Exhibit 3.8 to Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on March 17, 2006 and incorporated herein by reference). 3.2 Fourth Amended and Restated Bylaws of the registrant, as amended and restated on December 17, 2015 (filed as Exhibit 3.1 to the registrant’s current report on Form 8-K (File No. 001-34186) on December 21, 2015 and incorporated herein by reference). 4.1 Specimen certificate representing the common stock of the registrant (filed as Exhibit 4.4 to Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on March 17, 2006, and incorporated herein by reference). 4.2* Description of Securities of the registrant 10.1# Amended and Restated License, Development and Commercialization Agreement, dated July 24, 2005, by and between Bristol-Myers Squibb Company and the registrant (relating to HETLIOZ®) (filed as Exhibit 10.3 to Amendment No. 1 to the registrant’s registration Statement on Form S-1 (File No. 333-130759) on February 16, 2006 and incorporated herein by reference). 10.2† Form of Indemnification Agreement entered into by directors and executive officers (filed as Exhibit 10.11 to the registrant’s registration statement on Form S-1 (File No. 333-130759) on December 29, 2005 and incorporated herein by reference). 10.3† 2006 Equity Incentive Plan, as amended (filed as Exhibit 10.17 to Amendment No. 2 to the registrant’s Registration Statement on Form S-1 (File No. 333-130759), as filed on March 17, 2006, and incorporated herein by reference). 10.4† 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). 10.5† Amendment to Amended and Restated Employment Agreement, dated December 16, 2010, by and between Mihael H. Polymeropoulos and the registrant (filed as Exhibit 10.39 to the registrant’s annual report on Form 10-K (File No. 001-34186) on March 10, 2011 and incorporated herein by reference). 10.6† Amended and Restated Tax Indemnity Agreement, dated December 16, 2010, by and between Mihael H. Polymeropoulos and the registrant (filed as Exhibit 10.41 to the registrant’s annual report on Form 10-K (File No. 001-34186) on March 10, 2011 and incorporated herein by reference). 10.7 Lease, effective as of July 25, 2011, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.42 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on November 7, 2011 and incorporated herein by reference). 10.8 Amendment to Amended and Restated License, Development and Commercialization Agreement, dated as of April 15, 2010, by and between Bristol-Myers Squibb Company and the registrant (filed as Exhibit 10.38 to the registrant’s current report on Form 8-K (File No. 001-34186) on April 19, 2010 and incorporated herein by reference). 10.9 Ninth Amendment to Amended and Restated License, Development and Commercialization Agreement, dated as of May 24, 2012, by and between Bristol-Myers Squibb Company and the registrant (filed as Exhibit 10.46 to the registrant’s current report on Form 8-K (File No. 001-34186) on May 30, 2012 and incorporated herein by reference). 10.10# License, Development and Commercialization Agreement, dated as of April 12, 2012, by and between Eli Lilly and Company and the registrant (filed as Exhibit 10.48 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on August 3, 2012 and incorporated herein by reference). 10.11 Tenth Amendment to Amended and Restated License, Development and Commercialization Agreement, dated as of April 25, 2013, by and between Bristol-Myers Squibb Company and the registrant (filed as Exhibit 10.50 to the registrant’s current report on Form 8-K (File No. 001-34186) on April 29, 2013 and incorporated herein by reference). 10.12 ‡ * Manufacturing Agreement, dated January 24, 2014, by and between Patheon Pharmaceuticals Inc. and the registrant (relating to HETLIOZ ® ). 98 Table of Contents Exhibit Number Description 10.13 First Amendment to Lease Agreement, dated March 18, 2014, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.54 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 8, 2014 and incorporated herein by reference). 10.14 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. 001-34186) on March 13, 2015 and incorporated herein by reference). 10.15# Asset Transfer Agreement, dated December 22, 2014, by and among Novartis Pharma AG, Novartis AG and the registrant (relating to Fanapt®) (filed as Exhibit 10.56 to the registrant’s annual report on Form 10-K/A (File No. 001-34186) on June 10, 2015 and incorporated herein by reference). 10.16# Sublicense Agreement, dated November 20, 1997, by and between Titan Pharmaceuticals, Inc. and Novartis Pharma AG (filed as Exhibit 10.30 to Titan Pharmaceutical Inc.’s registration statement on Form S-3 (File No. 333-42367) on December 16, 1997 and incorporated herein by reference). 10.17# Amendment No. 1 to Sublicense Agreement by and between Titan Pharmaceuticals, Inc. and Novartis Pharma AG, dated November 30, 1998 (filed as Exhibit 10.58 to the registrant’s annual report on Form 10-K (File No. 001-34186) on March 13, 2015 and incorporated herein by reference). 10.18# Amendment No. 2 to Sublicense Agreement, dated April 10, 2001, by and between Titan Pharmaceuticals, Inc. and Novartis Pharma AG (filed as Exhibit 10.59 to the registrant’s annual report on Form 10-K/A (File No. 001-34186) on June 10, 2015 and incorporated herein by reference). 10.19# Amendment No. 3 to Sublicense Agreement, dated June 4, 2004, by and between Titan Pharmaceuticals, Inc. and Novartis Pharma AG (filed as Exhibit 10.60 to the registrant’s annual report on Form 10-K (File No. 001-34186) on March 13, 2015 and incorporated herein by reference). 10.20 Stock Purchase Agreement, dated December 22, 2014, by and between Novartis AG and the registrant (filed as Exhibit 10.61 to the registrant’s annual report on Form 10-K (File No. 001-34186) on March 13, 2015 and incorporated herein by reference). 10.21# License Agreement, dated December 22, 2014, by and between Novartis Pharma AG and the registrant (relating to AQW051) (filed as Exhibit 10.62 to the registrant’s annual report on Form 10-K (File No. 001-34186) on March 13, 2015 and incorporated herein by reference). 10.22 Agreement, dated February 2, 2016, by and among Titan Pharmaceuticals, Inc., Aventisub LLC, the successor-in-interest to Aventisub II Inc. Sanofi-Aventis and the registrant (filed as Exhibit 10.1 to the registrant’s current report on Form 8-K (File No. 001-34186) on February 4, 2016 and incorporated herein by reference). 10.23† Vanda Pharmaceuticals Inc. Amended and Restated 2016 Equity Incentive Plan, as amended effective as of June 10, 2021 (filed as Exhibit 10.1 to the registrant’s registration statement on Form S-8 (File No. 333-256994) on June 10, 2021 and incorporated herein by reference). 10.24† Form of Notice of Stock Option Grant and Stock Option Agreement under Amended and Restated 2016 Equity Incentive Plan (filed as Exhibit 10.2 to the registrant’s registration statement on Form S-8 (File No. 333-218774) on June 15, 2017 and incorporated herein by reference). 10.25† Form of Restricted Stock Unit Award Agreement under Amended and Restated 2016 Equity Incentive Plan (filed as Exhibit 10.3 to the registrant’s registration statement on Form S-8 (File No. 333-218774) on June 15, 2017 and incorporated herein by reference). 10.26† UK Sub Plan under the Amended and Restated 2016 Equity Incentive Plan (filed as Exhibit 10.4 to the registrant’s registration statement on Form S-8 (File No. 333-218774) on June 15, 2017 and incorporated herein by reference). 10.27† Form of Stock Option Grant and Stock Option Agreement under the UK Sub Plan under the Amended and Restated 2016 Equity Incentive Plan (filed as Exhibit 10.5 to the registrant’s registration statement on Form S-8 (File No. 333-218774) on June 15, 2017 and incorporated herein by reference). 10.28† Form of Restricted Stock Unit Award Agreement under the UK Sub Plan under the Amended and Restated 2016 Equity Incentive Plan (filed as Exhibit 10.6 to the registrant’s registration statement on Form S-8 (File No. 333-218774) on June 15, 2017 and incorporated herein by reference). 10.29 ‡ * Manufacturing Agreement, dated May 6, 2016, by and between Patheon Pharmaceuticals Inc. and the registrant (relating to Fanapt ® ). 99 Table of Contents Exhibit Number Description 10.30 Second Amendment to Lease Agreement, dated June 20, 2016, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.43 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on July 28, 2016 and incorporated herein by reference). 10.31 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. 001-34186) on July 28, 2016 and incorporated herein by reference). 10.32# License Agreement, dated October 24, 2016, by and among Taro Pharmaceuticals USA, Inc., Taro Pharmaceuticals Industries Ltd. and the registrant (filed as Exhibit 10.45 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 17, 2017 and incorporated herein by reference). 10.33# License Agreement, dated December 7, 2016, by and between Apotex, Inc. and the registrant (filed as Exhibit 10.46 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 17, 2017 and incorporated herein by reference). 10.34 Third Amendment to Lease Agreement, dated March 28, 2018, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.38 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 2, 2018 and incorporated herein by reference). 10.35 Fourth Amendment to Lease Agreement, dated March 29, 2018, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.39 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 2, 2018 and incorporated herein by reference). 10.36† Amended and Restated Employment Agreement, dated April 30, 2018, by and between Gunther Birznieks and the registrant (filed as Exhibit 10.40 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on May 2, 2018 and incorporated herein by reference). 10.37† Employment Agreement, dated August 13, 2018, by and between Timothy Williams and the registrant (filed as Exhibit 10.41 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on November 7, 2018 and incorporated herein by reference). 10.38† Employment Agreement, dated August 5, 2019, by and between Joakim Wijkstrom and the registrant (filed as Exhibit 10.41 to the registrant’s quarterly report on Form 10-Q (File No. 001-34186) on November 7, 2019 and incorporated herein by reference). 10.39† Amended and Restated Employment Agreement, dated July 27, 2020, by and between Kevin Moran and the registrant (filed as Exhibit 10.1 to the registrant’s current report on Form 8-K (File No. 001-34186) on July 29, 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 (filed as Exhibit 10.40 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 10, 2021 and incorporated herein by reference). 10.41 Sixth Amendment to Lease Agreement, dated May 7, 2020, by and between Square 54 Office Owner LLC and the registrant (filed as Exhibit 10.41 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 10, 2021 and incorporated herein by reference). 21.1 List of Subsidiaries (filed as Exhibit 21.1 to the registrant’s annual report on Form 10-K (File No. 001-34186) on February 10, 2021 and incorporated herein by reference). 23.1* Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. 31.1* Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of the Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of the Chief Executive Officer and Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002. 101* The following financial information from this annual report on Form 10-K for the fiscal year ended December 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL) and furnished electronically herewith: (i) Consolidated Balance Sheets as of December 31, 2021 and 2020; (ii) Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019; and (vi) Notes to the Consolidated Financial Statements. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). 100 Table of Contents Exhibit Number Description † Indicates management contract or compensatory plan or arrangement. # Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. ‡ Portions of this exhibit have been omitted under rules of the Securities and Exchange Commission permitting the confidential treatment of select information. * Filed herewith. 101