What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-09 compared with 2022-02-24 · 88 added, 55 removed, 240 unchanged (37% of the section changed)

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In addition, we have a number of drugs in development, including:

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

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

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

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

• Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness, atopic dermatitis, and COVID-19 pneumonia;

• VTR-297, a small molecule histone deacetylase (HDAC) inhibitor for the treatment of hematologic malignancies and with potential use as a treatment for several oncology indications;

• Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and BPO-27 for the treatment of secretory diarrhea disorders, including cholera;

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

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

• Portfolio of Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) activators and inhibitors, including VSJ-110 for the treatment of dry eye and ocular inflammation and VPO-227 for the treatment of secretory diarrhea disorders, including cholera;

• VQW-765, a small molecule nicotinic acetylcholine receptor partial agonist, for the treatment of performance anxiety and psychiatric disorders;

• VHX-896, the active metabolite of iloperidone;

• Antisense oligonucleotide (ASO) molecules.

Operational Highlights

HETLIOZ ® (tasimelteon)

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

and MSN Laboratories Private Limited.

The litigation remains pending against the other defendants.

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

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

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

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

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

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

Fanapt ® (iloperidone)

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

• We are continuing to pursue regulatory approvals for HETLIOZ ® in the indications of insomnia and jet lag disorder.

• In December 2022, the U.S.

District Court for the District of Delaware delivered its decision for the consolidated HETLIOZ ® patent lawsuit against defendants Teva Pharmaceuticals USA, Inc.

(Teva) and Apotex Inc.

and Apotex Corp.

(Apotex), ruling in favor of the defendants.

We filed an appeal to the U.S.

Court of Appeals for the Federal Circuit where an oral argument is scheduled for March 14, 2023.

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

• In December 2022, we filed patent infringement lawsuits against each of Teva and Apotex in the U.S.

District Court for the District of New Jersey asserting that Teva and Apotex’s generic versions of HETLIOZ ® infringe U.S.

• We are continuing to conduct an open-label safety study for tradipitant in gastroparesis and approximately the first 400 patients enrolled in the study were locked in preparation for the Company’s planned New Drug Application (NDA) submission.

The study continues to enroll open label patients and we continue to receive requests from patients seeking access to tradipitant through the Expanded Access program, which has multiple patients who have taken tradipitant for more than one year.

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

We expect to submit this NDA to the FDA in the first half of 2023.

• The Phase III study of tradipitant in the treatment of motion sickness is over 75% enrolled.

Results are expected by mid-2023.

• In December 2022, we announced positive results in the Phase III clinical study of Fanapt ® in acute manic and mixed episodes associated with bipolar I disorder in adults.

We plan to submit a supplemental New Drug Application (sNDA) in the first half of 2023.

Early-Stage Programs

• In December 2022, we announced results in a Phase II clinical study of VQW-765 in the treatment of acute performance anxiety in social situations.

This is the first time that an alpha 7 nicotinic acetylcholine receptor (α7-nAChR) partial agonist has shown efficacy in a clinical study of performance anxiety.

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

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Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

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

on the terms of the respective underlying contracts.

Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts.

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

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The reserve for product returns for which the product may not be returned for a period of greater than one year from the balance sheet date is included as a component of other non-current liabilities in the Consolidated Balance Sheets.

Uncertainties related to variable consideration are generally resolved in the quarter subsequent to period end, with the exception of Medicaid rebates, which are dependent upon the timing of when states submit reimbursement claims, and product returns that are resolved during the product expiry period specified in the customer contract.

Uncertainties related to variable consideration are generally resolved in the quarter subsequent to period end, with the exception of Medicaid rebates, which are dependent upon the timing of when states submit reimbursement claims, Medicare inflationary rebates, and product returns that are resolved during the product expiry period specified in the customer contract.

We currently record sales allowances for the following:

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We expect that the specialty pharmacies and wholesalers will earn prompt payment discounts and, therefore, deduct the full amount of these discounts from total product sales when revenues are recognized.

Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors.

Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program as well as contracted rebate programs with other payors, including the new Medicare Part D inflationary rebate effective October 1, 2022.

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

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The provision for rebates and chargebacks of $92.1 million and $84.0 million for the years ended December 31, 2022 and 2021, respectively, and their ending balances at December 31, 2022 and 2021, primarily represent Medicaid rebates applicable to sales of Fanapt ® and, to a lesser extent, Medicaid rebates applicable to sales of HETLIOZ ® .

The provision for discounts, returns and other of $31.2 million and $28.0 million for the years ended December 31, 2021 and 2020, primarily represents wholesaler distribution fees applicable to sales of Fanapt ® and, to a lesser extent, estimated product returns of Fanapt ® , and co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ ® and Fanapt ® .

The provision for discounts, returns and other of $30.6 million and $31.2 million for the years ended December 31, 2022 and 2021, represents wholesaler distribution fees applicable to sales of Fanapt ® and estimated product returns of Fanapt ® , and co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ ® and Fanapt ® .

The ending balances of discounts, returns and other as of December 31, 2022 and 2021 primarily represent estimated product returns of Fanapt ® and wholesaler distribution fees applicable to sales of Fanapt ® .

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

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

subsequent to FDA approval, manufacturing and milestone payments made under license agreements are capitalized.

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

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In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high.

Intangible assets.

Intangible assets and impairment of long-lived assets.

Our intangible assets consist of capitalized license costs for products approved by the FDA.

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When we determine that the carrying value of our intangible assets may not be recoverable based upon the existence of one or more of the indicators of impairment, we measure any impairment based on the amount that carrying value exceeds fair value.

No impairments have been recognized on our intangible assets.

We filed several Hatch-Waxman lawsuits in the U.S.

District Court for the District of Delaware (Delaware District Court) against Teva Pharmaceuticals USA, Inc.

(Teva), Apotex Inc.

(Apotex), MSN Pharmaceuticals, Inc.

and MSN Laboratories Private Limited (MSN) (collectively, the HETLIOZ ® Defendants) asserting infringement of patents covering HETLIOZ ® 20 mg capsules.

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

The consolidated lawsuits against the remaining HETLIOZ ® Defendants were tried in March 2022.

In December 2022, the Delaware District Court ruled that Teva and Apotex did not infringe U.S.

RE46,604, and that the asserted claims of U.S.

and 10,376,487 were invalid.

We have appealed the decision to the U.S.

Court of Appeals for the Federal Circuit.

We have also filed Hatch-Waxman lawsuits in U.S.

District Court for the District of New Jersey against each of Teva and Apotex and in the U.S.

District Court for the Southern District of Florida against Apotex, in each case, asserting infringement of a method of administration patent that was not litigated in the Delaware District Court.

This litigation does not affect the sale of HETLIOZ ® in the E.U.

and there is no generic litigation pending outside of the U.S.

with respect to HETLIOZ ® .

Furthermore, the litigation does not relate to the HETLIOZ LQ ® oral suspension formulation.

The unfavorable ruling by the Delaware District Court and subsequent developments related to the HETLIOZ ® patent litigation was determined to be a triggering event for potential impairment.

As a result, we performed an impairment review for our HETLIOZ ® asset group and determined, based upon our review of undiscounted cash flows, that the carrying value of our HETLIOZ ® asset group, inclusive of the intangible asset, is recoverable.

Accordingly, we did not record an intangible asset impairment charge during the year ended December 31, 2022.

Additionally, our expected cash flows continue to support our estimated useful economic life of the intangible asset through March 2035.

Income taxes.

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The analysis is highly dependent upon historical and projected taxable income.

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

Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities, which could be affected by the resolution of our HETLIOZ ® patent litigation, amongst other factors.

Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

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Results of Operations

We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to continue to successfully commercialize our products, any possible payments made or received pursuant to license agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals, and the impact of the COVID-19 pandemic.

In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of Abbreviated New Drug Applications (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.

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

The FDA has approved the ANDAs for Apotex and MSN, and 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.

Year ended December 31, 2022 compared to year ended December 31, 2021

Total revenues increased by $20.5 million, or 8%, to $268.7 million for the year ended December 31, 2021 compared to $248.2 million for the year ended December 31, 2020.

Total revenues decreased by $14.3 million, or 5%, to $254.4 million for the year ended December 31, 2022 compared to $268.7 million for the year ended December 31, 2021.

Revenues were as follows:

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Total net product sales $ 254,382 $ 268,682 $ (14,300) (5) %

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

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

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

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

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

HETLIOZ ® net product sales decreased by $13.9 million, or 8%, to $159.7 million for the year ended December 31, 2022 compared to $173.5 million for the year ended December 31, 2021.

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

The decrease in volume was due in part to continued reimbursement challenges for prescriptions for patients with Non-24.

Fanapt ® net product sales decreased by $0.4 million to $94.7 million for the year ended December 31, 2022 compared to $95.1 million for the year ended December 31, 2021.

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

Cost of goods sold.

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

Cost of goods sold decreased by $1.3 million, or 5%, to $24.3 million for the year ended December 31, 2022 compared to $25.6 million for the year ended December 31, 2021.

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

Third-party royalty costs were 10% and 5% of HETLIOZ ® net product sales in the U.S.

and Germany, respectively.

Third-party royalty costs were 5% of HETLIOZ ® net product sales in Germany and 6% of Fanapt ® net product sales.

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

will decrease to 5% in December 2022.

Third-party royalty costs on Fanapt ® net product sales decreased from 9% to 6% beginning January 2020.

In addition to third-party royalty costs, HETLIOZ ® and Fanapt ® cost of goods sold as a percentage of revenue depends upon our cost to manufacture inventory at normalized production levels with our third-party manufacturers.

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

We expect that, in the future, total Fanapt ® manufacturing costs included in cost of goods sold will continue to be less than 3% of Fanapt ® net product sales.

decreased from 10% to 5% in December 2022.

Research and development expenses.

Research and development expenses increased by $10.4 million, or 14%, to $85.8 million for the year ended December 31, 2022 compared to $75.4 million for the year ended December 31, 2021.

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

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

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

The increase was primarily due to an increase in clinical trial expenses associated with our Fanapt ® development program and our other development programs, which include a $3.0 million upfront fee expensed in the third quarter of 2022 in consideration for entering into a research and development agreement.

The following table summarizes the costs of our product development initiatives for the years ended December 31, 2022 and 2021.

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$ 12,084 $ 11,450

26,931 22,284

Tradipitant 25,232 23,460

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Selling, general and administrative expenses.

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

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

Selling, general and administrative expenses increased by $12.4 million, or 10%, to $136.5 million for the year ended December 31, 2022 compared to $124.0 million for the year ended December 31, 2021.

The increase in selling, general and administrative expenses was primarily the result of an increase in spending on ongoing litigation and other corporate activities as well as costs related to our sales force, partially offset by a decrease in spending on marketing activities for our commercial products.

Intangible asset amortization .

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Other income was $5.0 million for the year ended December 31, 2022 compared to $0.2 million for the year ended December 31, 2021.

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

Other income primarily consists of investment income on our marketable securities, which increased in 2022 as a result of higher yields on our marketable securities.

Provision for income taxes.

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

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

Our non-cancellable purchase commitments for agreements longer than one year are not material.

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

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Based on our current operating plans, which include costs and expenses in connection with our continued clinical development of tradipitant and our other products, U.S.

commercial activities for HETLIOZ ® and Fanapt ® , pursuit of market approval of HETLIOZ ® and Fanapt ® in other regions, and payments due upon achievement of milestones under our license agreements, we believe that our cash, cash equivalents and marketable securities and cash received from product sales will be

sufficient for at least the next 12 months.

commercial activities for HETLIOZ ® and Fanapt ® , pursuit of market approval of HETLIOZ ® and Fanapt ® in other regions and in other indications, and payments due upon achievement of milestones under our license agreements, we believe that our cash, cash equivalents and marketable securities and cash received from product sales will be sufficient for at least the next 12 months.

Our future cash requirements and the adequacy of our available funds will depend on many factors, primarily including our ability to generate revenue, the scope and costs of our commercial, manufacturing and process development activities, the magnitude of our discovery, preclinical and clinical development programs, and potential costs to acquire or license the rights to additional products.

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Operating Activities.

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

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

Cash flows provided by operating activities during the year ended December 31, 2022 were $32.0 million, a decrease of $32.2 million compared to $64.2 million during the year ended December 31, 2021.

The decrease reflects a decrease of $26.9 million in net income and a decrease of $8.7 million in non-cash charges primarily due to a decrease in the change in deferred tax assets and additional amortization of discounts on our marketable securities, partially offset by an increase of $3.3 million from the net change in operating assets and liabilities.

Investing Activities.

Cash flows used in investing activities during the year ended December 31, 2021 were $76.7 million, an increase of $35.2 million compared to cash used in investing activities of $41.5 million during the year ended December 31, 2020.

Investing activities reflect continued net reinvestment of available cash and cash equivalents in our portfolio of marketable securities.

Cash flows provided by investing activities during the year ended December 31, 2022 were $49.9 million, an increase of $126.6 million compared to cash used in investing activities of $76.7 million during the year ended December 31, 2021.

The change in investing activities reflects the timing of net reinvestment of available cash and cash equivalents in our portfolio of marketable securities.

Financing Activities.

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We do not currently hedge our foreign currency exchange rate risk.

Foreign currency has not had a material impact on our results of operations.

Foreign currency has not

had, nor do we believe that a decrease or increase in any foreign currency exchange rates would have, a material impact on our results of operations.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis