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Item 1A. Risk Factors

2023-02-09 compared with 2022-02-24 · 245 added, 152 removed, 690 unchanged (37% of the section changed)

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We are dependent on the commercial success of HETLIOZ ® and Fanapt ® .

We are substantially dependent upon the commercial success of HETLIOZ ® capsules for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and HETLIOZ ® capsules and oral suspension (HETLIOZ LQ TM ) for the treatment of nighttime sleep disturbances in Smith-Magenis Syndrome and Fanapt ® oral tablets for the treatment of schizophrenia.

In the U.S., HETLIOZ ® competes with a generic version of HETLIOZ ® and we could experience increased generic competition in the near term.

We are substantially dependent upon the commercial success of HETLIOZ ® capsules for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and HETLIOZ ® capsules and oral suspension (HETLIOZ LQ ® ) for the treatment of nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt ® oral tablets for the treatment of schizophrenia.

In January 2014, the U.S.

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In December 2020, the FDA approved our NDA and supplemental New Drug Application (sNDA) for HETLIOZ ® for the treatment of nighttime sleep disturbances in SMS in adults and children, respectively.

HETLIOZ ® capsules, for adults with SMS, were immediately available after approval and the HETLIOZ LQ TM liquid formulation, for children with SMS, became available in March 2021.

HETLIOZ ® capsules, for adults with SMS, were immediately available after approval and the HETLIOZ LQ ® liquid formulation, for children with SMS, became available in March 2021.

On December 13, 2022, the U.S.

District Court for the District of Delaware (the Delaware District Court) ruled in favor of certain generic drug companies in our patent litigation alleging that the companies’ generic versions of HETLIOZ ® capsules, for which they were seeking FDA approval, infringed our patents covering HETLIOZ ® .

We disagree with the ruling that certain claims of our patents are invalid or not infringed by the defendants and have appealed the decision to the U.S.

Court of Appeals for the Federal Circuit (Federal Circuit).

Teva Pharmaceuticals USA, Inc.

(Teva) has launched its generic version of HETLIOZ ® at risk in the U.S.

The FDA has approved Abbreviated New Drug Applications (ANDA) for generic versions of tasimelteon for Apotex Inc.

(Apotex) and MSN Pharmaceuticals Inc.

and MSN Laboratories Private Limited (MSN).

HETLIOZ ® could face even more competition from generic companies in the U.S.

in the near term in light of the patent litigation rulings against us.

Sales of generic versions of HETLIOZ ® could result in a significant reduction in the demand for HETLIOZ ® and/or the price at which we can sell it, which would have a material and adverse impact on our revenues and results of operations.

Unless and until our appeal is successful, we may reduce the amount we spend with the intention of retaining the capability to ramp-up promptly if we win upon appeal.

Our expansion and development of HETLIOZ ® outside the U.S.

is generally not subject to the adverse patent ruling in the U.S.

In the fourth quarter of 2014, we acquired the U.S.

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and abroad, in the near term will depend on, among other things, our ability to:

• defend our patents and intellectual property from generic competition, including the impact of and outcome of our pending appeal of the December 2022 Delaware District Court’s ruling and the litigation that we recently commenced in the New Jersey and Florida District Courts;

• properly price and obtain adequate coverage and reimbursement of these products by governmental authorities, private health insurers, managed care organizations and other third-party payors;

• gain broad acceptance of our products from physicians, health care payors, patients, pharmacists and the medical community;

• defend our patents and intellectual property from generic competition;

• minimize the impact of disruptions caused by the COVID-19 pandemic;

• minimize the impact of disruptions caused by public health crises;

• maintain commercial manufacturing arrangements with third-party manufacturers;

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If we fail to continue to develop sales, marketing and distribution capabilities, if sales efforts are not effective or if costs of developing sales, marketing and distribution capabilities exceed their cost effectiveness, our business, results of operations and financial condition could be materially adversely affected.

As a result of the decision in favor of generic drug companies in connection with our HETLIOZ ® patent litigation, we could face increased generic competition in the near term and our revenues and results of operations could be materially and adversely affected by the launch of one or more additional generic versions of HETLIOZ ® in the U.S.

Between April 2018 and March 2021, we filed numerous Hatch-Waxman lawsuits in the Delaware District Court against Teva, MSN and Apotex asserting that our patents would be infringed by their generic versions of HETLIOZ ® .

In January 2022, we entered into a license agreement with MSN and Impax Laboratories LLC (Impax), resolving the lawsuits against MSN.

A trial was held in March 2022 in the Delaware District Court to resolve the consolidated lawsuits against the remaining companies (the Defendants).

On December 13, 2022, following conclusion of the trial, the Delaware District Court issued its ruling in favor of the Defendants, finding that the Defendants’ use of a generic HETLIOZ ® , for which they were seeking FDA approval, did not infringe one of our HETLIOZ ® patents and the asserted claims of certain of our other HETLIOZ ® patents were invalid.

On December 14, 2022, we appealed the decision to the Federal Circuit and requested a stay of market entry by the Defendants while the appeal is pending.

On December 16, 2022, the Federal Circuit granted a temporary injunction to prohibit market entry by Teva and Apotex until the Federal Circuit entered its order on our motion for a stay pending appeal.

On December 28, 2022, the Federal Circuit denied our request for an injunction.

Our appeal is pending before the Federal Circuit.

Teva has since launched its generic version at risk.

The commercial launch of the generic version, and potential increased competition from additional generic entrants in the near term, could have a material and adverse impact on our revenues and our results of operations.

MSN and Impax may be permitted to launch a generic version of HETLIOZ ® under certain limited circumstances pursuant to the license agreement with us.

Further, although we are appealing the ruling of the Delaware District Court, and are pursuing additional remedies in other courts, including seeking injunctions against Apotex and Teva, we may not be successful in any such efforts, which will be costly and time-consuming to pursue.

Such efforts will also require considerable attention of management and could, even if ultimately successful, negatively impact our results of operations.

See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “ We are, have been, and may continue to be, involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful, and third parties may challenge the validity or enforceability of our patents and they may be successful ,” each of which is incorporated herein by reference, for additional information.

In addition, while we believe that HETLIOZ ® is difficult to manufacture and that building capacity to manufacture HETLIOZ ® is time-consuming and expensive, which may limit the amount of tasimelteon supply available to generic companies, we do not have direct visibility into the supply levels of any of the generic companies and we rely on our own experience together with information from third parties, which information may not be reliable.

The generic companies could potentially find or develop sources of qualified HETLIOZ ® supply that are not known to us and that are more efficient or inexpensive than our sources.

Furthermore, generic companies could potentially convince our suppliers or third-party manufacturers to prioritize supply to the generic companies ahead of any applicable contractual commitments to supply us.

Such circumstances could have a material and adverse impact on our revenues and results of operations directly in the U.S.

and potentially outside of the U.S.

as well if supply costs and availability are affected.

Future performance of HETLIOZ ® and Fanapt ® may be impacted by a number of factors including competing products or unanticipated safety issues.

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The degree of further market acceptance of any of our products, including with respect to new indications, or market acceptance of approved product candidates among physicians, patients, health care payors and the medical community will depend on a number of factors, including but not limited to:

• the impact and outcome of our pending patent litigation and appeals efforts;

• the commercialization and pricing of any generic version of HETLIOZ ® on the market;

• acceptable evidence of safety and efficacy;

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In the event of a withdrawal of either HETLIOZ ® or Fanapt ® from the market, our revenues would decline significantly and our business would be seriously harmed.

We are subject to uncertainty relating to pricing and reimbursement policies in the U.S.

which, if not favorable for our products, could hinder or prevent our products’ commercial success.

With the at risk launch of a generic version of HETLIOZ ® and further generic versions possible, it may not be viable for us to invest in market education to grow the U.S.

market and our ability to maintain current promotional efforts and attract favorable commercial terms in several aspects of our business will likely be adversely affected as we face increased generic competition.

We are subject to uncertainty relating to pricing and reimbursement policies in the U.S., including recent and future health reform measures, which, if not favorable for our products, could hinder or prevent our products’ commercial success.

Our ability to commercialize our products successfully depends in part on the coverage and reimbursement levels with governmental authorities, private health insurers and other third-party payors.

In determining whether to reimburse our products and at what level, third-party payors consider factors that include the efficacy, cost effectiveness and safety of our products, as well as the availability of other treatments including generic prescription drugs and over-the-counter alternatives.

We expect to continue to face increasing pressure to make unfavorable pricing modifications, such as discounts or rebates.

We expect to continue to face pressure to make unfavorable pricing modifications, such as discounts or rebates.

Negotiating favorable reimbursement can be a time consuming and expensive process, and there is no guarantee that we will be able to reach pricing terms with third-party payors at levels that are profitable to us.

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Our business may be materially adversely affected if our patients are not able to receive approval for reimbursement of our products from third-party payors on a broad, timely or satisfactory basis;

if reimbursement is subject to difficult reimbursement or coverage processes or prior authorization

requirements;

if reimbursement is subject to difficult reimbursement or coverage processes or prior authorization requirements;

or if reimbursement is not maintained at satisfactory levels.

In addition, our business could be adversely affected if third-party payors limit or reduce the indications for, or conditions under which, or the patient populations for whom, our products may be reimbursed.

Moreover, as discussed further below and above in in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform , changes in insurance coverage or reimbursement levels by third-party payors, or in the type of such coverage held by patients, as well as the impacts to healthcare access or administration (including, for example, limitations on medications or procedures deemed “non-essential,” reduced interaction between patients and physicians, and increased unemployment), due to the COVID-19 pandemic may materially harm our business and commercialization efforts.

We expect to experience pricing pressures in connection with the sale of our current and future products due to the healthcare reforms discussed below and above in in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform , as well as the trend toward initiatives aimed at reducing healthcare costs, the increasing influence of managed care, the scrutiny of pharmaceutical pricing, the ongoing debates on reducing government spending and additional legislative proposals.

Moreover, as discussed further below and above in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform , changes in insurance coverage or reimbursement levels by third-party payors, or in the type of such coverage held by patients may materially harm our business and commercialization efforts.

We expect to experience pricing pressures in connection with the sale of our current and future products due to the healthcare reforms discussed below and above in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform , as well as the trend toward initiatives aimed at reducing healthcare costs, the increasing influence of managed care, the scrutiny of pharmaceutical pricing, the ongoing debates on reducing government spending and additional legislative proposals.

There has been significant scrutiny of pharmaceutical pricing and the resulting costs of pharmaceutical products that could cause significant operational and reimbursement changes for the pharmaceutical industry.

There have been a number of federal and state efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices, price increases or other related costs.

For example, the Bipartisan Budget Act of 2018 contained various provisions that affect coverage and reimbursement of drugs, including an increase, which began in 2019, in the discount that manufacturers of Medicare Part D brand name drugs must provide to Medicare Part D beneficiaries during the coverage gap from 50% to 70%.

Healthcare reform efforts or any future legislation or regulatory actions aimed at controlling and reducing healthcare costs, including through measures designed to limit reimbursement, restrict access or impose unfavorable pricing modifications on pharmaceutical products, could impact our ability to obtain or maintain reimbursement for our products at satisfactory levels, or at all, which could materially harm our business and financial results.

We have experienced both an increase in the rate at which third-party payors refuse to cover or reimburse prescriptions written for HETLIOZ ® and in the number of patients who are unable to navigate the coverage or reimbursement processes established by these third-party payors.

Most significantly, in August 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law.

This statute marks the most significant action by Congress with respect to the pharmaceutical industry since adoption of the ACA in 2010.

Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap;

imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (beginning October 1, 2022);

and replaces the Medicare Part D coverage gap discount program with a new discounting program (beginning in 2025).

The IRA permits the Secretary of the Department of Health and Human Services (HHS) to implement many of these provisions through guidance, as opposed to regulation, for the initial years.

For that and other reasons, it is currently unclear how the IRA will be effectuated, and while the impact of the IRA on the pharmaceutical industry cannot yet be fully determined, it is likely to be significant.

on pharmaceutical products, could impact our ability to obtain or maintain reimbursement for our products at satisfactory levels, or at all, which could materially harm our business and financial results.

We have encountered third-party payors that refuse to cover or reimburse prescriptions written for HETLIOZ ® and patients who are unable to navigate the coverage or reimbursement processes established by these third-party payors.

If this trend continues, the commercial success of HETLIOZ ® may be limited, and our business and results of operations may be materially harmed.

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

Additionally, we are aware of an increasing number of patients who are experiencing difficulties navigating coverage processes established by third-party payors, making it difficult for them to fill a prescription for HETLIOZ ® .

Although currently there are no other FDA-approved products for the treatment of Non-24, the rate at which third-party payors have refused to allow patients access to HETLIOZ ® has continued to increase.

As a result, the revenue that we receive from HETLIOZ ® is significantly less than it would be if third-party payors were to remove or lessen these reimbursement challenges and hurdles and approve a greater percentage of the prescriptions written for HETLIOZ ® .

We have encountered third-party payors that refuse to cover or reimburse prescriptions written for HETLIOZ ® .

This rate may increase further as a result of the recent entry into the market of generic versions of HETLIOZ ® .

Additionally, we are aware of patients who are experiencing difficulties navigating coverage processes established by third-party payors, making it difficult for them to fill a prescription for HETLIOZ ® .

The revenue that we receive from HETLIOZ ® is significantly less than it would be if third-party payors were to remove or lessen these reimbursement challenges and hurdles and approve a greater percentage of the prescriptions written for HETLIOZ ® .

Our business may be materially adversely affected if this trend continues and large numbers of patients cannot fill their HETLIOZ ® prescriptions due to coverage or reimbursement challenges.

If the FDA does not accept our tradipitant NDA or sNDA filings for the treatment of gastroparesis and motion sickness;

If the FDA does not accept our tradipitant NDA or sNDA filings for the use of tradipitant for patients with gastroparesis and patients with motion sickness;

if the FDA determines that our clinical trial results for tradipitant for the treatment of gastroparesis or for the treatment of motion sickness do not demonstrate adequate safety and substantial evidence of efficacy;

or the FDA does not approve an applicable PDUFA date, continued development of tradipitant will be significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.

or if the FDA does not approve an applicable PDUFA date, continued development of tradipitant will be significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.

In February 2022, we announced results from our Phase III clinical study, VP-VLY-686-3301, evaluating the efficacy and safety of tradipitant in treating the symptoms of gastroparesis.

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When restricting the analysis in the group of patients that used no rescue medications at baseline and adjusting for poor compliance, we identified strong evidence of a drug effect across a number of symptoms and across the duration of the study, including a significant and meaningful effect at the prespecified primary endpoint of nausea change at week 12.

We plan to continue the analysis of the data of this study and prepare the results for submission to peer review journals as well as prepare the data for submission to regulatory authorities.

The FDA may not view this data as constituting substantial evidence of efficacy for tradipitant in any indication for the treatment of gastroparesis or its symptoms, for any length of treatment.

We are preparing for submission of an NDA for tradipitant for patients with gastroparesis.

We have also initiated a Phase III clinical study of tradipitant for the treatment of motion sickness.

Any adverse developments or

results or perceived adverse developments or results with respect to our regulatory submission or the tradipitant clinical programs in any or all indications will significantly harm our business and could cause the market price of our stock to decline.

Any adverse developments or results or perceived adverse developments or results with respect to our regulatory submission or the tradipitant clinical programs in any or all indications will significantly harm our business and could cause the market price of our stock to decline.

Examples of such adverse developments include, but are not limited to:

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The EAP is ongoing and a number of patients have initiated treatment.

Although this EAP is not intended for data collection, we will collect safety data from this cohort of expanded access patients and include this data in the NDA for tradipitant for the treatment of gastroparesis.

Although this EAP is not intended for data collection, we collect safety data from this cohort of expanded access patients and plan to include this data in the NDA for tradipitant for patients with gastroparesis.

The FDA may disregard such safety data when reviewing the NDA.

The lack of long-term (i.e., more than 12 weeks in humans) safety data would likely impact the FDA’s willingness to approve tradipitant for a chronic indication.

The lack of long-term (i.e., more than 12 weeks in humans) safety data would likely impact the FDA’s willingness to approve tradipitant for a chronic

However, because long-term safety data is not normally a requirement for short-term indications, and with a preclinical profile that has not precluded clinical development, we believe the package is complete for any NDA filing to treat patients for 12 weeks or less.

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Financial instability or a general decline in economic conditions in the U.S.

and other countries where we sell our products, including as a result of the COVID-19 pandemic, could adversely affect our operations.

and other countries caused by political instability and conflict and economic challenges caused by general health crises such as the COVID-19 pandemic have led to market disruptions, including significant volatility in commodity prices, credit and capital market instability and supply chain interruptions, which have caused record inflation globally and could adversely affect our operations.

Economic conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financing more difficult, costly and dilutive.

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Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our stock price and could require us to delay or abandon clinical development plans.

As discussed in the risk factor entitled " We are subject to uncertainty relating to pricing and reimbursement policies in the U.S.

which, if not favorable for our products, could hinder or prevent our products’ commercial success", sales of our products are dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations.

As discussed in the risk factor entitled “ We are subject to uncertainty relating to pricing and reimbursement policies in the U.S., including recent and future health reform measures, which, if not favorable for our products, could hinder or prevent our products’ commercial success ” , sales of our products are dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations.

In the event of economic decline, these organizations may be unable to satisfy their reimbursement obligations or may delay payment.

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During challenging and uncertain economic times and in tight credit markets, there may be a disruption or delay in the performance of our third-party contractors, suppliers or partners.

such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.

Global health crises and pandemics, such as the global outbreak of COVID-19, may adversely impact our business.

The current global pandemic caused by the spread of the novel coronavirus (COVID-19) has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures.

The extent to which the effects of shelter-in-place orders and our work-from-home policies may negatively impact productivity and disrupt our business will depend, in part, on the length and severity of the restrictions, the extent of which new strains of the virus, such as the Delta and Omicron variants, continue to develop and spread, and other limitations on our ability to conduct our business in the ordinary course.

If such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.

Global health crises and pandemics may adversely impact our business.

Global health crises and pandemics, such as the novel coronavirus (COVID-19), could lead to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures that may negatively impact productivity and disrupt our business.

Additionally, the COVID-19 pandemic has caused global supply chain disruptions that may have lasting impacts and consequences that are difficult to predict.

Our sales force has had physical access to healthcare providers curtailed, which may have a negative impact on our revenues.

While we have implemented marketing and sales strategies aimed at overcoming the disruptions caused by the pandemic, we cannot ensure that these methods will be effective.

Additionally, patients who might be currently using our products, or might otherwise be eligible to use our products, may be unable to meet with their healthcare providers, which may reduce the number of prescription refills or new patient starts, thereby adversely affecting our revenues.

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

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

While our clinical trials have since resumed patient enrollment, we may experience future disruptions as a result of the COVID-19 pandemic or other health crises that could adversely impact our sales activities, supply chain, our ongoing and planned clinical trials, and other regulatory activities, including:

• curtailment of our sales force or patient access to healthcare providers, which may reduce the number of prescription refills or new patient starts, thereby adversely affecting our revenues;

• interruption of, or delays in receiving, supplies of the active pharmaceutical ingredients that our contract manufacturing organizations use to manufacture our products and any related interruption of, or delays in receiving, supplies of our products from these organizations, due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

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• interruption or delays in the operations of regulatory agencies, which may impact review and approval timelines.

In addition, the trading prices for our common stock and other biopharmaceutical companies have been highly volatile as a result of the COVID-19 pandemic.

As a result, we may face difficulties raising capital through sales of our common stock or such sales may be on unfavorable terms.

The COVID-19 pandemic continues to rapidly evolve.

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and other countries to contain and treat the disease.

If the FDA does not approve our sNDA for HETLIOZ ® for the treatment of jet lag disorder or continued development of tasimelteon for the treatment of jet lag disorder is significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.

If the FDA does not approve our sNDAs for HETLIOZ ® for the treatment of jet lag disorder or insomnia or continued development of tasimelteon for the treatment of jet lag disorder is significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.

In December 2018, we announced that the FDA had accepted the HETLIOZ ® sNDA for the treatment of jet lag disorder.

We received a complete response letter (CRL) in August 2019 in which the FDA asserted that the measures of the

study were of unclear clinical significance and declined to approve our sNDA.

We met with the FDA to discuss the CRL in a Post Action meeting and we are determining our next steps.

Any additional adverse developments or results or perceived adverse developments or results with respect to our regulatory submission for jet lag disorder will significantly harm our business and could cause the market price of our stock to decline.

We received a complete response letter (CRL) in August 2019 in which the FDA asserted that the measures of the study were of unclear clinical significance and declined to approve our sNDA.

We met with the FDA to discuss the CRL in a Post Action meeting and in 2022 we requested the opportunity for a hearing with the FDA on the approvability of the jet lag disorder sNDA.

We filed a lawsuit against the FDA in September 2022 demanding that the FDA immediately publish in the Federal Register a notice of opportunity for a hearing on the jet lag disorder sNDA.

The FDA then published the notice in the Federal Register in October 2022.

We are undergoing discussions with the FDA on the timing of such hearing.

In November 2022, we announced that we were preparing for the submission of an sNDA for HETLIOZ ® in the treatment of insomnia.

Any additional adverse developments or results or perceived adverse developments or results with respect to our regulatory submission for jet lag disorder or insomnia will significantly harm our business and could cause the market price of our stock to decline.

Examples of such adverse developments include, but are not limited to:

• the FDA determining that additional clinical studies are required with respect to the jet lag disorder program;

• safety, efficacy or other concerns arising from clinical or non-clinical studies in the jet lag disorder program, or the manufacturing processes or facilities used for the jet lag disorder program;

• the FDA determining that the jet lag disorder program raises safety concerns or does not demonstrate substantial evidence of efficacy.

• the FDA determining that additional clinical studies are required with respect to the jet lag disorder or insomnia programs;

• safety, efficacy or other concerns arising from clinical or non-clinical studies in the jet lag disorder or insomnia programs, or the manufacturing processes or facilities used for the jet lag disorder program;

• the FDA determining that the jet lag disorder or insomnia programs raise safety concerns or does not demonstrate substantial evidence of efficacy.

If the FDA does not approve our sNDA for Fanapt ® for the treatment of bipolar I disorder, our business will be significantly harmed, and the market price of our stock could decline.

In December 2022, we announced Fanapt ® was effective in the treatment of acute manic and mixed episodes associated with bipolar I disorder in adults in a randomized double-blind placebo controlled Phase III study.

We intend to submit an sNDA for Fanapt ® for the treatment of acute manic and mixed episodes associated with bipolar I disorder in adults in 2023.

Any additional adverse developments or results or perceived adverse developments or results with respect to our regulatory submission for bipolar I disorder will significantly harm our business and could cause the market price of our stock to decline.

Examples of such adverse developments include, but are not limited to:

• the FDA determining that additional clinical studies are required with respect to the bipolar I disorder program;

• safety, efficacy or other concerns arising from clinical or non-clinical studies in the bipolar I disorder program, or the manufacturing processes or facilities used for the bipolar I disorder program;

• the FDA determining that the bipolar I disorder program raises safety concerns or does not demonstrate substantial evidence of efficacy.

We may enter into third-party collaborations from time to time in order to develop and commercialize our products.

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If we are unable to identify or enter into an agreement with any material third-party collaborator, our business, results of operations or financial condition could be adversely affected.

The at risk launch of a generic version of HETLIOZ ® and further generic competition may make it more difficult for us to identify or attract third-party collaborators and obtain favorable commercial terms in any such agreement or arrangement.

Any arrangements we do enter into may not be scientifically or commercially successful.

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The degree of market acceptance of any product will depend on a number of factors, including the demonstration of its safety and efficacy, its cost-effectiveness, its potential advantages over other therapies, the reimbursement policies of government and third-party payors with respect to such product, our ability to attract and maintain corporate partners, including pharmaceutical companies, to assist in commercializing our products, receipt of regulatory clearance of marketing claims for the uses that we are developing and the effectiveness of our marketing and distribution capabilities.

If our approved products fail to gain market acceptance or

do not become widely accepted by physicians, patients, third-party payors and other members of the medical community, it is unlikely that we will ever become profitable on a sustained basis or achieve significant revenues.

We rely on, and will continue to rely on, outsourcing arrangements for many of our activities, including preclinical and clinical development and supply of HETLIOZ ® , HETLIOZ LQ TM , Fanapt ® and our other products.

If our approved products fail to gain market acceptance or do not become widely accepted by physicians, patients, third-party payors and other members of the medical community, it is unlikely that we will ever become profitable on a sustained basis or achieve significant revenues.

Generic competition may also adversely affect our ability to grow our markets and obtain acceptance of our products in the marketplace.

We rely on outsourcing arrangements for a significant portion of our activities, including distribution, preclinical and clinical research and development, data collection and analysis and manufacturing.

We have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timely manner.

Disruptions to our HETLIOZ ® , HETLIOZ LQ TM or Fanapt ® supply chains could materially affect our level of success in commercializing these products, thereby reducing our future earnings and prospects.

A loss or disruption with any one of our manufacturers or suppliers could disrupt the supply of HETLIOZ ® , HETLIOZ LQ TM or Fanapt ® , possibly for a significant time period, and we may not have sufficient inventories to maintain supply before the manufacturer or supplier could be replaced or the disruption is resolved.

Disruptions to our HETLIOZ ® , HETLIOZ LQ ® or Fanapt ® supply chains could materially affect our level of success in commercializing these products, thereby reducing our future earnings and prospects.

A loss or disruption with any one of our manufacturers or suppliers could disrupt the supply of HETLIOZ ® , HETLIOZ LQ ® or Fanapt ® , possibly for a significant time period, and we may not have sufficient inventories to maintain supply before the manufacturer or supplier could be replaced or the disruption is resolved.

In addition, marketed drugs and their contract manufacturing organizations are subject to continual review, including review and approval by regulatory authorities of their manufacturing facilities and the manufacturing processes, which can result in delays in the regulatory approval process and/or commercialization.

Introducing a replacement or backup manufacturer or supplier for HETLIOZ ® , HETLIOZ LQ TM or Fanapt ® requires a lengthy regulatory and commercial process, including FDA approval of chemistry, manufacturing and controls (CMC) changes, and there can be no guarantee that we could obtain necessary regulatory approvals in a timely fashion or at all.

Introducing a replacement or backup manufacturer or supplier for HETLIOZ ® , HETLIOZ LQ ® or Fanapt ® requires a lengthy regulatory and commercial process, including FDA approval of chemistry, manufacturing and controls (CMC) changes, and there can be no guarantee that we could obtain necessary regulatory approvals in a timely fashion or at all.

In addition, it is difficult to identify and select qualified suppliers and manufacturers with the necessary technical capabilities, and establishing new supply and manufacturing sources involves a lengthy and technical engineering process.

Failure to comply with government regulations regarding the sale and marketing of our products could harm our business.

If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the U.S., we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

markets, our ability to commercialize our products successfully, and to attract commercialization partners for our products, should we choose to do so, depends in significant part on the availability of adequate financial coverage and reimbursement from third-party payors, including, in the U.S., governmental payors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers.

We participate in the Medicaid Drug Rebate Program.

Under the Medicaid Drug Rebate Program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having our drugs eligible for coverage under Medicaid and Medicare Part B.

We therefore participate in, and have drug price reporting, payment, and other compliance obligations under, these programs.

We participate in the Medicaid Drug Rebate Program (MDRP).

Under the MDRP, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having our drugs eligible for coverage under Medicaid and Medicare Part B.

Those rebates are based on pricing data that are reported by us on a monthly and quarterly basis to the Centers for Medicare & Medicaid Services (CMS).

Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service Act’s 340B drug pricing discount program (340B program), in order for the manufacturer’s drugs to be eligible for coverage under Medicaid and Medicare Part B.

The 340B program requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs.

The ceiling price can represent a significant discount and is based on the pricing data reporting to the Medicaid Drug Rebate Program.

The Patient Protection and Affordable Care Act (ACA) expanded the 340B program to include additional entity types:

certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by ACA.

The ACA exempts drugs designated under section 526 of the Federal Food, Drug and Cosmetic Act (FDC Act) as “orphan drugs” from the ceiling price requirements for these newly eligible entities.

The ACA also obligates the Health Resources and Services Administration to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340B program.

A final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities became effective on January 1, 2019.

Federal law also requires that for a drug manufacturer’s products to be eligible for coverage under the Medicaid and Medicare Part B programs and to be purchased by certain federal agencies and grantees, the manufacturer must participate in the Department of Veterans Affairs Federal Supply Schedule (FSS), pricing program, established by Section 603 of the Veterans Health Care Act of 1992.

Manufacturers that participate in the FSS pricing program must list their covered (innovator and authorized generic) drugs on an FSS contract and charge no more than Federal Ceiling Price (FCP), to the Department of Veterans Affairs, Department of Defense, Public Health Service, and Coast Guard when those agencies purchase from the FSS contract or a depot contract.

FCP is calculated based on non-federal average manufacturer price data, which manufacturers must

submit quarterly and annually.

If we become aware that our MDRP submissions for a prior period were incorrect or have changed as a result of recalculation of the pricing data, we must resubmit the corrected data for up to three years after those data originally were due.

Such restatements and recalculations increase our costs for complying with the laws and regulations governing the MDRP and the 340B program discussed below.

Pursuant to the IRA, certain figures we report under the MDRP will also be used to compute rebates under Medicare Part D triggered by price increases that outpace inflation.

If we fail to provide information timely or are found to have knowingly submitted false information to CMS, we may be subject to civil monetary penalties and other sanctions, including termination from the MDRP.

Federal law requires that any company that participates in the MDRP also participate in the Public Health Service Act’s 340B drug pricing discount program (340B program), in order for the manufacturer’s drugs to be eligible for coverage under Medicaid and Medicare Part B.

The 340B program is administered by the Health Resources and Services Administration (HRSA) and requires us to agree to charge statutorily defined covered entities no more than the 340B “ceiling price” for our covered drugs when used in an outpatient setting.

These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients.

The ACA expanded the 340B program to include additional entity types:

certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, but exempts drugs designated under section 526 of the Federal Food, Drug and Cosmetic Act as “orphan drugs” from the ceiling price requirements for these covered entities.

The 340B ceiling price is calculated using a statutory formula, which is based on pricing data we report under the MDRP and the rebate amount for the covered outpatient drug as calculated under the MDRP.

In general, products subject to Medicaid price reporting and rebate liability are also subject to the 340B ceiling price requirement.

We must report 340B ceiling prices to HRSA on a quarterly basis, and HRSA publishes them to 340B covered entities.

HRSA has finalized regulations regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities for 340B eligible drugs.

also finalized an administrative dispute resolution process through which 340B covered entities may pursue claims against participating manufacturers for overcharges.

In addition, legislation may be introduced that, if passed, would further expand the 340B program, such as adding further covered entities or requiring participating manufacturers to agree to provide 340B discounted pricing on drugs when used in an inpatient setting.

In order for products to be eligible for coverage under the Medicaid and Medicare Part B programs and to be purchased by certain federal agencies and grantees, we must also participate in the Department of Veterans Affairs Federal Supply Schedule (FSS), pricing program.

As a participant, we must list our covered (innovator and authorized generic) drugs on an FSS contract and charge no more than Federal Ceiling Price (FCP), to the Department of Veterans Affairs, Department of Defense, Public Health Service, and Coast Guard when those agencies purchase from the FSS contract or a depot contract.

FCP is calculated based on non-federal average manufacturer price data, which we are required to submit quarterly and annually.

In addition, because our products are available in the retail and specialty pharmacy setting, we are required to provide rebates to the Department of Defense for prescriptions dispensed to Tricare beneficiaries from Tricare retail network pharmacies under the Tricare Retail Refund Program.

To the extent we continue to choose to participate in these government healthcare programs for our current and future products, these and other requirements may affect our ability to profitably sell any product for which we obtain marketing approval.

If a manufacturer participating in the FSS program fails to provide timely information or is found to have knowingly submitted false information, the manufacturer may be subject to civil monetary penalties.

Individual states continue to consider and have enacted legislation to limit the growth of healthcare costs, including the cost of prescription drugs and combination products.

A number of states have either implemented or are considering implementation of drug price transparency legislation that may prevent or limit our ability to take price increases at certain rates or frequencies.

Requirements under such laws include advance notice of planned price increases, reporting price increase amounts and factors considered in taking such increases, wholesale acquisition cost information disclosure to prescribers, purchasers, and state agencies, and new product notice and reporting.

Such legislation could limit the price or payment for certain drugs, and a number of states are authorized to impose civil monetary penalties or pursue other enforcement mechanisms against manufacturers for the untimely, inaccurate, or incomplete reporting of drug pricing information or for otherwise failing to comply with drug price transparency requirements.

If we are found to have violated state law requirements, we may become subject to penalties or other enforcement mechanisms, which could have a material adverse effect on our business.

Pricing and rebate calculations vary among products and programs.

The calculations are complex and will often be subject to interpretation by us, governmental or regulatory agencies and the courts.

If we become aware that our reporting of pricing data for a prior quarter was incorrect, we will be obligated to resubmit the corrected data.

For the Medicaid Drug Rebate Program, corrected data must be submitted for a period not to exceed 12 quarters from the quarter in which the data originally were due.

Such restatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate Program and other governmental pricing programs.

We may be liable for errors associated with our submission of pricing data.

If we are found to have knowingly submitted false pricing data to the Medicaid program or the FSS pricing program, we may be liable for civil monetary penalties in the amount of up to $100,000 per item of false information, adjusted for inflation as applicable.

Our failure to submit pricing data to the Medicaid program or the FSS pricing program on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late, adjusted for inflation as applicable.

Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, which is the agreement under which we would participate in the Medicaid Drug Rebate Program.

If we are found to have knowingly submitted false pricing data to the Medicaid program or the FSS pricing program, or fail to submit pricing data on a timely basis, we may be subject to significant civil monetary penalties.

Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, which is the agreement under which we would participate in the MDRP.

In the event that CMS terminates our rebate agreement, our products may no longer be eligible for coverage under Medicaid or Medicare Part B.

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If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.

In addition, the requirements and penalties described above may affect our ability to profitably sell any product for which we obtain marketing approval.

We are subject to ongoing regulatory obligations and oversight of our products, and any failure by us to maintain compliance with applicable regulations may result in adverse consequences including the suspension of the manufacturing, marketing and sale of our respective products, the incurrence of significant additional expense and other limitations on our ability to commercialize our respective products.

We are subject to ongoing regulatory requirements and review, including periodic audits pertaining to the development, manufacture, labeling, packaging, adverse event reporting, distribution, storage, marketing, promotion, record keeping and export of our products.

Failure to comply with such regulatory requirements or the later discovery of previously unknown problems with the manufacture, distributions and storage of our products, or our third-party contract manufacturing facilities or processes by which we manufacture our products may result in restrictions on our ability to develop, manufacture, market, distribute or sell our products, including potential withdrawal of our products from the market.

Any such restriction could slow or stop production development or result in decreased sales, damage to our reputation or the initiation of lawsuits against us or our third-party contract manufacturers.

Any such restriction could slow or stop production development or result in decreased sales, damage to our reputation or the initiation of

lawsuits against us or our third-party contract manufacturers.

We may also be subject to additional sanctions, including, but not limited, to the following:

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Any of the above sanctions could have a material adverse impact on our revenues or our reputation, and cause us to incur significant additional expenses.

In addition, if our products face any safety or efficacy issues, including drug interaction problems, under the federal FDC Act, the FDA has broad authority to force us to take any number of actions, including, but not limited to, the following:

In addition, if our products face any safety or efficacy issues, including drug interaction problems, under the federal Food, Drug, and Cosmetic Act (FDCA), the FDA has broad authority to force us to take any number of actions, including, but not limited to, the following:

• Requiring us to conduct post-approval clinical studies to assess product efficacy or known risks or new signals of serious risks, or to evaluate unexpected serious risks;

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A product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling.

The FDA also regulates the content of promotional material, including, among other things, the presentation of efficacy information, the types of comparative claims that can be made to distinguish products from those with similar

indications, and the balance of risk information provided.

For drug products that are approved by the FDA under the FDA’s accelerated approval regulations, unless otherwise informed by the FDA, the sponsor must submit promotional materials at least 30 days prior to the intended time of initial dissemination of the promotional materials, which delays and may negatively impact a company’s ability to implement changes to its marketing materials, thereby negatively impacting revenues.

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HETLIOZ ® is available for distribution through a limited number of specialty pharmacies in the U.S.

A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions that often require a high level of patient education and ongoing management.

A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions that often require a

high level of patient education and ongoing management.

The use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:

• not provide us accurate or timely information regarding their inventories, the number of patients who are using HETLIOZ ® or complaints about HETLIOZ ® ;

• reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support HETLIOZ ® ;

• reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support HETLIOZ ® , particularly in light of the recent entry into the market of a generic version of HETLIOZ ® ;

• not devote the resources necessary to sell HETLIOZ ® in the volumes and within the time frames that we expect;

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See Part I, Item 1, Competition, for a discussion of the primary competitors for HETLIOZ ® and Fanapt ® .

Additionally, we may face competition from newly developed generic products.

In addition, we may face competition from newly developed generic products.

Under the Hatch-Waxman Act, newly approved drugs and indications may benefit from a statutory period of non-patent marketing exclusivity.

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If we are unsuccessful at challenging an ANDA filed pursuant to the Hatch-Waxman Act, cheaper generic versions of our products, which may be favored by insurers and third-party payors, may be launched commercially, which would significantly harm our business.

In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ ® in the U.S.

We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal.

However, Teva has launched its generic version of HETLIOZ ® at risk in the U.S.

The FDA has approved ANDAs for Apotex and MSN and other potential competitors may be successful in obtaining ANDA approval and launching generic versions as well.

To obtain an ANDA approval for a generic drug, the generic company needs to show, among other things, that its version of the product is bioequivalent to the Reference Listed Drug (RLD).

This usually requires the generic company to conduct bioequivalence studies comparing its product to the RLD, and to retain sufficient samples of the RLD used in testing

after a study is complete.

This usually requires the generic company to conduct bioequivalence studies comparing its product to the RLD, and to retain sufficient samples of the RLD used in testing after a study is complete.

In recent years, U.S.

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Any delay or failure to obtain regulatory approvals for our products will result in increased costs, could diminish competitive advantages that we may attain and would adversely affect the marketing and sale of our products.

Other than HETLIOZ ® and HETLIOZ LQ TM in the U.S.

Other than HETLIOZ ® and HETLIOZ LQ ® in the U.S.

and HETLIOZ ® in the countries in Europe covered by the centralized marketing authorization by the EC, and Fanapt ® in the U.S., Mexico and Israel, we have not received, and may never receive, regulatory approval to market any of our products in any jurisdiction.

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Our ability to enroll patients in, and the commencement and rate of completion of, clinical trials for our products may be affected by many factors, including:

• the impact of global health crises, including the COVID-19 pandemic;

• the size and nature of the patient population;

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• the study endpoints that rely on subjective patient reported outcomes;

• the impact of global health crises;

• governmental or regulatory delays and changes in regulatory requirements and guidelines.

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As of December 31, 2022, we had an accumulated deficit of $157.9 million and we cannot estimate with precision the extent of our future income or loss.

We may not succeed in gaining additional market acceptance of HETLIOZ ® and Fanapt ® in the U.S.

We may not succeed in maintaining or gaining additional market acceptance of HETLIOZ ® and Fanapt ® in the U.S.

and we may not succeed in commercializing HETLIOZ ® or Fanapt ® outside of the U.S.

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We have recorded deferred tax assets based on our assessment that we will be able to realize the benefits of our net operating losses and other favorable tax attributes.

Realization of deferred tax assets involve significant judgments and estimates, which are subject to change and ultimately depends on generating sufficient taxable income of the appropriate character during the appropriate periods.

Realization of deferred tax assets involves significant judgments and estimates, which are subject to change and ultimately depends on generating sufficient taxable income of the appropriate character during the appropriate periods.

Changes in circumstances may affect the likelihood of such realization, which in turn may trigger the need for additional valuation allowance against our deferred tax assets and adversely affect our net income and financial condition.

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Transactions involving our common stock, even those outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change.

A limitation on our ability to utilize some or all of our NOLs or credits could have a material adverse effect on our results of operations and cash flows.

A limitation on our ability to utilize some or all of our net operating losses (NOLs) or credits could have a material adverse effect on our results of operations and cash flows.

Ownership changes occurred in the years ended December 31, 2014 and 2008.

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• our level of success in commercializing HETLIOZ ® and Fanapt ® , as well as other products that may be approved, globally;

• outcomes of ongoing and potential patent litigation;

• outcomes of ongoing and potential patent litigation, including the outcome of our pending appeal of the December 2022 Delaware District Court’s ruling;

• costs of developing and maintaining sales, marketing and distribution channels and our ability to sell our products;

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The sale of additional equity or debt securities, if convertible, could result in dilution to our stockholders and may also result in a lower price for our common stock.

The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that could restrict our operations.

The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that could restrict our operations, including potentially limiting our ability to license product rights or enter into product development collaborations.

However, we may not be able to raise additional funds on acceptable terms, or at all.

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Even if we locate an alternative provider, it is likely that this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider.

In addition, any provider that we retain will be subject to current Good Laboratory Practices as set forth in 21 Code of Federal Regulations (C.F.R.) Part 58 and Good Clinical Practices as set forth in 21 C.F.R.

In addition, any provider that we retain will be subject to current Good Laboratory Practices as set forth in 21 Code of Federal

Regulations (C.F.R.) Part 58 and Good Clinical Practices as set forth in 21 C.F.R.

Part 50, 54, and 312, and similar international standards and we do not have control over compliance with these regulations by these providers.

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Our inability to adequately establish, supervise and conduct (either ourselves or through third parties) all aspects of the formulation and manufacturing processes would have a material adverse effect on our ability to develop and commercialize our products.

In addition, if we are not able to continue to operate our business relationships in a manner that is sufficiently profitable for us and our suppliers, certain members of our supply chain could compete with us through supply to competitors, such as generic drug companies, through breach of our agreements or otherwise.

We have agreements in place with Patheon Pharmaceuticals Inc.

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In May 2016, we entered into a manufacturing agreement with Patheon for the manufacture of commercial supplies of Fanapt ® tablets at Patheon’s Mississauga, Ontario, Canada manufacturing site.

Additionally, in December 2020, we entered into a non-exclusive third-party manufacturing agreement for the manufacture of commercial

supplies of HETLIOZ LQ TM .

Additionally, in December 2020, we entered into a non-exclusive third-party manufacturing agreement for the manufacture of commercial supplies of HETLIOZ LQ ® .

We do not have exclusive long-term agreements with any other third-party manufacturers of our products.

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Moreover, we currently do not have any agreements for the commercial production of these materials.

If the manufacturers are unable to obtain these materials for our clinical trials, including due to supply chain issues caused by the COVID-19 pandemic, product testing, potential regulatory approval of our products and commercial scale manufacturing could be delayed, significantly affecting our ability to further develop and commercialize our products.

If we or our manufacturers are unable to purchase these materials for our products, there would be a shortage in supply or the commercial launch of such products would be delayed, which would materially and adversely affect our ability to generate revenues from the sale of such products.

If the manufacturers are unable to obtain these materials for our clinical trials, including due to supply chain issues caused by global health crises, product testing, potential regulatory approval of our products and commercial scale manufacturing could be delayed, significantly affecting our ability to further develop and commercialize our products.

If we or our manufacturers are

unable to purchase these materials for our products, there would be a shortage in supply or the commercial launch of such products would be delayed, which would materially and adversely affect our ability to generate revenues from the sale of such products.

If we cannot identify, or enter into licensing arrangements for, new products, our ability to develop a diverse product portfolio will be limited.

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vary by Member State.

For the public systems, reimbursement is determined by law and/or by guidelines established by the responsible national authority.

For the public systems,

reimbursement is determined by law and/or by guidelines established by the responsible national authority.

As elsewhere, inclusion in reimbursement catalogues focuses on the medical usefulness, need, quality and economic benefits to patients and the health care system.

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In the U.S., there have been and continue to be a number of legislative initiatives to contain healthcare costs.

For example, in March 2010, the ACA was passed, which substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the U.S.

pharmaceutical industry.

The ACA, among other things, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations, establishes annual fees and taxes on manufacturers of certain branded prescription drugs, and creates a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as efforts by the former Trump administration to repeal or replace certain aspects of the ACA.

While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing or delaying penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance, delaying the implementation of certain ACA-mandated fees, and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D.

Further, in December 2018, a Texas District Court judge ruled that the ACA is unconstitutional in its entirety because the individual mandate was repealed by Congress.

In July 2021, the U.S Supreme Court ruled that the states and individuals that brought the lawsuit did not have standing to challenge the ACA, and therefore, the Court did not reach the merits of the lawsuit.

Accordingly, we continue to evaluate the effect that the ACA has on our business.

At the federal level, the former Trump administration supported legislative proposals and issued certain Executive Orders seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs.

The Department of Health and Human Services (HHS), has solicited feedback on some of these measures and implemented others under its existing authority.

The FDA also released a final rule in September 2020 providing guidance for states to build and submit importation plans for drugs from Canada.

Further, in November 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Medicare Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law.

The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers.

These modifications to the safe harbors are being challenged in court and HHS has delayed their implementation until January 1, 2023;

however, the rule may be repealed through legislative action before such time.

In July 2021, President Biden issued an executive order pertaining to drug pricing, which expressed support for legislation allowing direct negotiation in Medicare Part D and inflationary rebates and directed various executive branch agencies to take actions to lower drug prices and promote generic competition.

In response to President Biden’s executive order, in September 2021, HHS issued a Comprehensive Plan for Addressing High Drug Prices that identified potential legislative policies and administrative tools that Congress and the agency can pursue in order to make drug prices more affordable and equitable, improve and promote competition throughout the prescription drug industry, and foster scientific innovation.

Several pending or proposed legislative efforts incorporate these drug pricing reforms in addition to inflationary rebates on Part B and Part D drugs that would be payable on commercial and governmental program utilization, policies aimed at redesigning the Medicare Part D benefit and adopting drug price transparency measures.

Drug manufacturers who are unwilling to negotiate with Medicare would be subject to additional excise taxes.

Additionally, the plan would impose tax penalties on drug manufacturers that increase the prices of drug products faster than the rate of inflation.

If elements of these prescription drug pricing plans become law, our pricing strategy and commercial prospects may be adversely affected.

Additionally, in December 2020, CMS issued a final rule that materially modifies current Medicaid Drug Rebate Program regulations by, among other things, broadening the definitions for “line extension” and “new formulation”, the key term within the line extension definition.

A “line extension” drug may be subject to a higher Medicaid rebate, thereby reducing the amount the manufacturer is paid with respect to such product.

These new definitions became effective on January 1, 2022.

Other legislative changes have been proposed and adopted since the ACA was enacted.

These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments to providers of up to 2% per fiscal year that started in 2013 and will stay in effect through 2024 unless additional congressional action is taken, the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several types of providers

and increased the statute of limitations period for the government to recover overpayments to providers from three to five years and the American Rescue Plan Act of 2021, which will eliminate the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, for single source and innovator multiple source drugs, beginning January 1, 2024.

These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

Further, there have been several recent U.S.

congressional inquiries and proposed state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products.

Additionally, there has been increasing legislative and enforcement interest in the U.S.

with respect to specialty drug pricing practices.

Specifically, there have been several recent U.S.

Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could result in more rigorous coverage criteria and/or limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products and additional downward pricing pressures.

Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private third-party payors.

Most significantly, in August 2022, President Biden signed the IRA into law.

This statute marks the most significant action by Congress with respect to the pharmaceutical industry since adoption of the ACA in 2010.

Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap;

imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (beginning October 1, 2022);

and replaces the Medicare Part D coverage gap discount program with a new discounting program (beginning in 2025).

The IRA permits the Secretary of the HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years.

Healthcare reforms are discussed above in Part I, Item 1 under the heading Pharmaceutical Coverage, Pricing and Reimbursement and Healthcare Reform and in the risk factor entitled “ We are subject to uncertainty relating to pricing and reimbursement policies in the U.S., including recent and future health reform measures, which, if not favorable for our products, could hinder or prevent our products’ commercial success.

These healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price for any approved product and/or the level of reimbursement physicians receive for administering any approved product which could affect our business strategy or commercial prospects.

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laws, rules, regulations and standards are not successful, or are perceived to be unsuccessful, it could adversely affect our business.

In July 2020, the European Court of

Justice (ECJ) invalidated the E.U.-U.S.

In July 2020, the European Court of Justice (ECJ) invalidated the E.U.-U.S.

Privacy Shield, which had enabled the transfer of personal data from the E.U.

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Our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable and/or not infringed.

In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ ® in the U.S.

We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal.

Alternatively, our competitors may seek approval to market their own products similar to or otherwise competitive with our products.

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The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the U.S.

Such challenges may result in loss of

exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products.

Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products.

In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.

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In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace and challenges to validity of patents in certain foreign jurisdictions are common as well.

Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter.

Grounds for a validity challenge could be an alleged failure to meet any of

several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter.

Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the U.S.

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We have been and continue to be involved in number of lawsuits with a variety of generic drug manufacturers who have filed ANDAs relating to certain of our patents.

We have been successful in asserting that these third parties have infringed certain of our patents, but we may not be successful in such lawsuits in the future.

In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ ® in the U.S.

We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal.

However, we may not be successful in this lawsuit and other such lawsuits in the future.

Please see Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report, which is incorporated herein by reference, for additional information.

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new chemical entity (NCE) patent (the primary patent covering the product as a new composition of matter) received the full five-year patent term extension under the Hatch-Waxman Act and so, assuming that we continue to have rights under our license agreement with respect to this product, this patent in the U.S.

will expire in December 2022.

expired in December 2022.

We also own HETLIOZ ® U.S.

method of treatment patents (directed to the approved method of treatment as described in the HETLIOZ ® label approved by the FDA), which expire normally between 2033 and 2035, and two drug substance patents that expire in 2035.

Additionally, the U.S.

Patent and Trademark Office has issued a drug formulation patent for HETLIOZ LQ TM that will expire in 2040.

Patent and Trademark Office has issued a drug formulation patent for HETLIOZ LQ ® that will expire in 2040.

The Fanapt ® U.S.

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This patent, which was listed in the Orange Book in January 2015, is set to expire in 2027.

Please see the risk factor entitled “ We are, have been, and may continue to be, involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful, and third parties may challenge the validity or enforceability of our patents and they may be successful ,” and Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report, which is incorporated herein by reference, for additional information.

Eight additional U.S.

patents directed to methods of treating patients with Fanapt ® , which are set to expire between 2025 and 2031, were issued to us in 2015.

under certain conditions), beginning on the date of such European regulatory approval, regardless of when the European NCE patent covering such product expires.

In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of ANDAs for generic versions of HETLIOZ ® in the U.S.

provides that companies that receive regulatory approval for a new medicinal product will have a 10-year period of regulatory data protection and market protection for that product (with the possibility of a further one-year extension under certain conditions), beginning on the date of such European regulatory approval, regardless of when the European NCE patent covering such product expires.

A generic version of the approved drug that refers to the approved drug’s regulatory data may not be marketed or sold in Europe during such market protection period.

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Moreover, the applicable time period or the scope of patent protection afforded could be less than we request.

If we fail to receive such extensions or exclusive rights, our ability to prevent competitors from manufacturing, marketing and selling generic versions of our products will be materially impaired.

If we fail to

receive such extensions or exclusive rights, our ability to prevent competitors from manufacturing, marketing and selling generic versions of our products will be materially impaired.

Generic company competitors have received FDA approval of generic versions of HETLIOZ ® in the U.S.

We are pursuing an appeal of the December 2022 Delaware District Court decision that declared as invalid claims of a group of patents that protect our exclusivity in the U.S.

The FDCA, as amended by the Drug Price Competition and Patent Term Restoration Act of 1984, as amended, or the Hatch-Waxman Amendments, permits the FDA to approve ANDAs for generic versions of brand name drugs like HETLIOZ ® .

We refer to the process of generic drug applications as the “ANDA process.” The ANDA process permits competitor companies to obtain marketing approval for a drug product with the same active ingredient, dosage form, strength, route of administration, and labeling as the approved brand name drug, but without having to conduct and submit clinical studies to establish the safety and efficacy of the proposed generic product.

In place of such clinical studies, an ANDA applicant needs to submit data demonstrating that its product is bioequivalent to the brand name product, usually based on pharmacokinetic studies.

As an alternate path to FDA approval for modifications of products previously approved by the FDA, an applicant may submit an NDA, under Section 505(b)(2) of the FDCA (enacted as part of the Hatch-Waxman Amendments).

This statutory provision permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference from the owner of the data.

The Hatch-Waxman Amendments permit the applicant to rely upon the FDA findings of safety and effectiveness of a drug that has obtained FDA approval based on preclinical or clinical studies conducted by others.

In addition to relying on FDA prior findings of safety and effectiveness for a referenced drug product, the FDA may require companies to perform additional preclinical or clinical studies to support approval of the modification to the referenced product.

If an application for a generic version of a branded product or a Section 505(b)(2) application relies on a prior FDA finding of safety and effectiveness of a previously-approved product including an alternative strength thereof, the applicant is required to certify to the FDA concerning any patents listed for the referenced product in the Orange Book.

Specifically, the applicant must certify in the application that:

there is no patent information listed for the reference drug;

the listed patent has expired for the reference drug;

the listed patent for the reference drug has not expired, but will expire on a particular date and approval is sought after patent expiration;

the listed patent for the reference drug is invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the product for which the ANDA or 505(b)(2) NDA is submitted.

The Hatch-Waxman Amendments require an applicant for a drug product that relies, in whole or in part, on the FDA’s prior approval of HETLIOZ ® , to notify us of its application, a “paragraph IV” notice, if the applicant is seeking to market its product prior to the expiration of the patents that both claim HETLIOZ ® and are listed in the Orange Book.

A bona fide paragraph IV notice may not be given under the Hatch-Waxman Amendments until after the generic company receives from the FDA an acknowledgement letter stating that its ANDA is sufficiently complete to permit a substantive review.

The paragraph IV notice is required to contain a detailed factual and legal statement explaining the basis for the applicant’s opinion that the proposed product does not infringe our patents, that the relevant patents are invalid, or both.

After receipt of a valid notice, the branded product manufacturer has the option of bringing a patent infringement suit in federal district court against any generic company seeking approval for its product within 45 days from the date of receipt of each notice.

If such a suit is commenced within this 45-day period, the Hatch-Waxman Amendments provide for a 30-month stay on FDA’s ability to give final approval to the proposed generic product, which period begins on the date the paragraph IV notice is received.

Generally, during a period of time in which generic applications may be submitted for a branded product based on a product’s regulatory exclusivity status, if no patents are listed in the Orange Book before the date on which a complete ANDA application for a product (excluding an amendment or supplement to the application) is submitted, an ANDA application could be approved by FDA without regard to a stay.

For products entitled to five-year exclusivity status, the Hatch-Waxman Amendments provide that an ANDA application may be submitted after four years following FDA approval of the branded product if it contains a certification of patent invalidity or non-infringement to a patent listed in the Orange Book.

In such a case, the 30-month stay runs from the end of the five-year exclusivity period.

Statutory stays may be shortened or lengthened if either party fails to cooperate in the litigation and it may be terminated if the court decides the case in less than 30 months.

If the litigation is resolved in favor of the ANDA applicant before the expiration of the 30-month period, the stay will be

immediately lifted and the FDA’s review of the application may be completed.

Such litigation is often time-consuming and costly, and may result in generic competition if such patents are not upheld or if the generic competitor is found not to infringe such patents.

Between April 2018 and March 2021, we filed numerous Hatch-Waxman lawsuits in the Delaware District Court against Teva, MSN and Apotex asserting that U.S.

RE46,604 ('604 Patent) , 9,060,995, 9,539,234, 9,549,913, 9,730,910 (‘910 Patent), 9,844,241, 10,071,977, 10,149,829 (‘829 Patent), 10,376,487 (‘487 Patent), 10,449,176, 10,610,510, 10,610,511, 10,829,465, and 10,611,744 would be infringed by their generic versions of HETLIOZ ® , for which they were seeking FDA approval.

In January 2022, we entered into a license agreement with MSN and Impax resolving the lawsuits against MSN.

The license agreement 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 Defendants went to trial in March 2022.

On December 13, 2022, the Delaware District Court ruled that Teva and Apotex did not infringe the ‘604 Patent, and that the asserted claims of the ‘604 Patent, ‘910 Patent, ‘829 Patent and ‘487 Patent were invalid.

On December 14, 2022, we appealed the Delaware District Court’s decision to the Federal Circuit and requested an injunction prohibiting market entry by Teva and Apotex while the appeal is pending.

On December 28, 2022, the Federal Circuit denied our request for an injunction, and Teva has since launched a generic version of HETLIOZ ® at risk.

While we are pursuing additional remedies beyond our pending appeal of the Delaware District Court’s decision, we cannot be certain of the success, timing or efforts involved in connection with these efforts.

If any of the generic manufacturers has adequate supply available and is successful, such generic competition in the short term could have a material and adverse impact on our revenues and our stock price.

We may also face challenges to the validity of our patents through a procedure known as inter partes review.

Inter partes review is a trial proceeding conducted through the Patent Trial and Appeal Board, of the U.S.

Patent and Trademark Office.

Such a proceeding could be introduced against us within the statutory one-year window triggered by service of a complaint for infringement related to an ANDA filing or at any time by an entity not served with a complaint.

Such proceedings may review the patentability of one or more claims in a patent on specified substantive grounds such as allegations that a claim is obvious on the basis of certain prior art.

We intend to continue to vigorously enforce our intellectual property rights relating to HETLIOZ ® , but we cannot predict the outcome of the pending lawsuits, our appeal, or any subsequently filed lawsuits or inter partes review.

See Note 16, Legal Matters, to the consolidated financial statements in Part II, Item 8 of this Annual Report and the risk factor entitled “ We are, have been, and may continue to be, involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful, and third parties may challenge the validity or enforceability of our patents and they may be successful, ” each of which is incorporated herein by reference, for additional information.

Any significant degree of generic market entry would limit our U.S.

sales, which would have a significant adverse impact on our business and results of operations.

In addition, even if a competitor’s effort to introduce a generic product is ultimately unsuccessful, the perception that such development is in progress and/or news related to such progress could materially affect the perceived value of our company and our stock price.

For example, our stock price suffered a significant decline following our announcement of the Delaware District Court’s ruling in favor of the Defendants.

We may not be successful in the development of products for our own account.

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The realization of any of the risks described in these risk factors or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock.

Between January 1, 2021 and December 31, 2021, the high and low

sale prices of our common stock as reported on The Nasdaq Global Market varied between $13.14 and $21.86.

Between January 1, 2022 and December 31, 2022, the high and low sale prices of our common stock as reported on The Nasdaq Global Market varied between $6.73 and $16.93.

Additionally, market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been very volatile.

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• our level of success in executing our commercialization strategies;

• publicity regarding actual or potential litigation involving us and the outcome of any such litigation;

• publicity regarding actual or potential testing or trial results relating to products under development by us or our competitors;

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• developments concerning any collaboration or other strategic transaction we may undertake;

• publicity regarding actual or potential litigation involving us;

• announcements of patent issuances or denials, technological innovations or new commercial products by us or our competitors;

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Any such litigation can result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business results of operations and financial condition.

For example, our stock price suffered a significant decline following our announcement of the Delaware District Court’s ruling in favor of the Defendants.

As a result of these factors, holders of our common stock might be unable to sell their shares at or above the price they paid for such shares.

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Sales by these stockholders of a substantial number of shares, or the expectation of such sales, could cause a significant reduction in the market price of our common stock.

In addition to our outstanding common stock, as of December 31, 2021, there were a total of 5,485,888 shares of our common stock that we have registered and are obligated to issue upon the exercise of currently outstanding options and

settlement of restricted stock unit awards granted under our 2006 and 2016 Equity Incentive Plans.

In addition to our outstanding common stock, as of December 31, 2022, there were a total of 6,147,756 shares of our common stock that we have registered and are obligated to issue upon the exercise of currently outstanding options and settlement of restricted stock unit awards granted under our 2006 and 2016 Equity Incentive Plans.

Upon the exercise of these options or settlement of the shares underlying these restricted stock units, as the case may be, in accordance with their respective terms, these shares may be resold freely, subject to restrictions imposed on our affiliates under Rule 144.

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For example, the loss of clinical trial data from ongoing or future clinical trials for any of our product candidates could result in delays in regulatory approval efforts and significantly increase costs to recover or reproduce the data.

information security systems are also subject to laws and regulations requiring that we take measures to protect the privacy and security of certain information we gather and use in our business.

Our information security systems are also subject to laws and regulations requiring that we take measures to protect the privacy and security of certain information we gather and use in our business.

For example, HIPAA and its implementing regulations impose, among other requirements, certain regulatory and contractual requirements regarding the privacy and security of personal health information.

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

What changed 10-K

Item 1A. Risk Factors