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Item 7. Management’s Discussion and Analysis

2024-02-08 compared with 2023-02-09 · 130 added, 89 removed, 239 unchanged (48% of the section changed)

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We are committed to the use of technologies that support sound science, including genetics and genomics, in drug discovery, clinical trials and the commercial positioning of our products.

Our commercial portfolio is currently comprised of two products, HETLIOZ ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt ® for the treatment of schizophrenia.

Our commercial portfolio is currently comprised of three products, HETLIOZ ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and for the treatment of nighttime sleep disturbances in Smith-Magenis Syndrome (SMS), Fanapt ® for the treatment of schizophrenia and PONVORY ® , which we acquired the U.S.

and Canadian rights to on December 7, 2023, for the treatment of relapsing forms of multiple sclerosis (MS), to include clinically isolated syndrome, relapsing-remitting disease and active secondary progressive disease, in adults.

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

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

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

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

• 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 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;

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

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

• PONVORY (ponesimod) for the treatment of inflammatory/autoimmune disorders, including but not limited to ulcerative colitis, psoriasis, Crohn's disease, atopic dermatitis, eosinophilic esophagitis and alopecia areata;

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

• VHX-896, the active metabolite of iloperidone;

• Antisense oligonucleotide (ASO) molecules.

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

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

• Antisense oligonucleotide (ASO) molecules, including VCA-894A for the treatment of Charcot-Marie-Tooth Disease, Type 2S (CMT2S), caused by cryptic slice site variants within IGHMBP2.

Operational Highlights

• 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.

• The supplemental New Drug Application (sNDA) for HETLIOZ ® in the treatment of insomnia is under review by the FDA with a Prescription Drug User Fee Act (PDUFA) target action date of March 4, 2024.

We announced that on February 4, 2024, we received a notification from the FDA stating that the FDA had identified deficiencies that preclude discussion of labeling and postmarketing requirements/commitments at this time.

No deficiencies were disclosed by the FDA in the notification, and the FDA stated that the notification does not reflect a final decision on the information under review.

On February 6, 2024, we filed suit in the U.S.

District Court for the District of Columbia (D.C.

District Court) challenging the FDA’s conduct in reviewing the insomnia sNDA.

We are asking the D.C.

District Court to compel the FDA to adhere to the legally mandated 180-day review period for sNDAs and to declare as unlawful and void the regulations the FDA relies upon to issue complete response letters.

• We are also continuing to pursue FDA approval for HETLIOZ ® in the treatment of jet lag disorder.

We announced in January 2024 that the D.C.

District Court granted our motion for summary judgment on our claim against the FDA for unlawfully delaying a hearing on the approvability of our sNDA for HETLIOZ ® in the treatment of jet lag disorder.

District Court ordered the FDA to either finally resolve our jet lag sNDA or commence a hearing on the sNDA on or before March 5, 2024.

• In January 2024, we filed a petition for a writ of certiorari with the U.S.

Supreme Court to review the decision of the U.S.

Court of Appeals for the Federal Circuit (Federal Circuit) in our HETLIOZ ® Abbreviated New Drug Application (ANDA) litigation against Teva Pharmaceuticals USA, Inc.

(Teva), 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.

(collectively, Apotex).

Teva and Apotex have waived their opportunity to respond to our petition, which is now ripe for decision by the U.S.

Supreme Court.

• The article “Efficacy and Safety of Iloperidone in Bipolar Mania:

A Double-Blind, Placebo-Controlled Study” was published in January 2024 in the Journal of Clinical Psychiatry.

The findings of this pivotal study have been submitted to the FDA as part of our sNDA for Fanapt ® in the treatment of bipolar I disorder in adults.

• The sNDA for Fanapt ® in the treatment of bipolar I disorder in adults is under review by the FDA with a PDUFA target action date of April 2, 2024.

• We completed the acquisition of the U.S.

and Canadian rights to PONVORY ® from Janssen for $100.0 million in December 2023 and the transition is ongoing.

PONVORY ® is a once-daily oral selective sphingosine-1-phosphate receptor 1 modulator, approved by the FDA and Health Canada to treat adults with relapsing forms of multiple sclerosis, and is a potential therapeutic candidate for the treatment of a diverse group of inflammatory/autoimmune disorders ranging from psoriasis to ulcerative colitis.

• We announced in January 2024 that the U.S.

Patent and Trademark Office (USPTO) had issued a notice of allowance for its PONVORY ® patent application, 17/962,968, covering methods for reducing clinical management events before or during the treatment of multiple sclerosis and methods for reinstating treatment after missed doses.

When issued, the patent is anticipated to expire on October 10, 2042.

Upon issuance, we intend to list this patent in the FDA publication Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.

• The article “The Efficacy of Tradipitant in Patients with Diabetic and Idiopathic Gastroparesis in Phase III Randomized Placebo-Controlled Clinical Trial” was published in January 2024 in the Clinical Gastroenterology and Hepatology Journal .

The findings of this pivotal study as well as a previously reported positive placebo-controlled study in diabetic and idiopathic gastroparesis have been submitted to the FDA as part of our New Drug Application (NDA) for tradipitant in the treatment of symptoms of gastroparesis in adults.

• In December 2023, we announced that the NDA for tradipitant for the treatment of symptoms of gastroparesis was accepted for filing and is under review by the FDA with a PDUFA target action date of September 18, 2024.

• The second Phase III study of tradipitant in the treatment of motion sickness is over 50% enrolled.

In May 2023, we previously announced positive results from its first Phase III study of tradipitant in the treatment of motion sickness.

We plan to pursue FDA approval upon completion of the clinical development program.

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.

• In January 2024, we announced that the FDA had approved the Investigational New Drug (IND) application to evaluate VCA-894A for the treatment of a patient with Charcot-Marie-Tooth disease, axonal, type 2S (CMT2S), an inherited peripheral neuropathy for which there is no available treatment.

• In January 2024, we announced that the FDA had also approved the IND to evaluate VTR-297 for the treatment of onychomycosis, a fungal infection of the nail.

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

Our ability to generate meaningful product sales and achieve profitability largely depends on our level of success in commercializing HETLIOZ ® and Fanapt ® in the U.S.

and Europe, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products.

and Europe and PONVORY ® in the U.S and Canada, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products.

The results of our operations will vary significantly from year-to-year and quarter-to-quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks that are detailed in Part I, Item 1A, Risk Factors, of this Annual Report.

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for distribution through a limited number of wholesalers and is available in retail pharmacies.

PONVORY ® is available in the U.S.

for distribution primarily through specialty pharmacies.

We invoice and record revenue when customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse, which is the point at which control is transferred to the customer.

Revenues and accounts receivable are concentrated with these customers.

Outside the U.S., we sell HETLIOZ ® in Germany and have a distribution agreement with Megapharm Ltd.

for the commercialization of Fanapt ® in Israel.

Outside the U.S., we sell HETLIOZ ® in Germany and have a distribution agreement for the commercialization of Fanapt ® in Israel.

Receivables are carried at transaction price net of allowance for credit losses.

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Allowances for rebates, chargebacks and co-pay assistance are based upon the insurance benefits of the end customer, which are estimated using historical activity and, where available, actual and pending prescriptions for which we have validated the insurance benefits.

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

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

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

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

During the year ended December 31, 2023, we constrained the variable consideration for HETLIOZ ® net product sales.

The constrained revenue relates to the uncertainties of payor utilization, patient demand and chargeback and rebate amounts,

including Medicaid, and other reserves related to transactions that resulted in elevated levels of inventory at specialty pharmacy customers during 2023.

Reserves for variable consideration are classified as product revenue allowances on the Consolidated Balance Sheets, with the exception of prompt-pay discounts, which are classified as reductions of accounts receivable.

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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.

Due to transactions that resulted in increased inventory stocking at specialty pharmacy customers of HETLIOZ ® in 2023, the time it takes to resolve these uncertainties is expected to be longer than we have historically experienced.

We currently record sales allowances for the following:

• Prompt-pay:

Specialty pharmacies and wholesalers are offered discounts for prompt payment.

Specialty pharmacies and wholesalers are generally offered discounts for prompt payment.

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

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.

The allowance for rebates is based on statutory or contracted discount rates and estimated patient utilization.

The allowances for rebates are based on statutory or contracted discount rates and estimated patient utilization.

• Chargebacks:

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Estimates for expected Medicare Part D coverage gap are based in part on historical activity and, where available, actual and pending prescriptions when we have validated the insurance benefits.

Beginning January 1, 2025, the Medicare Part D coverage gap discount program will be replaced with a new discounting program under the Inflation Reduction Act.

• Service fees:

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We accrue service fees at the time of revenue recognition, resulting in a reduction of product sales and the recognition of an accrued liability, unless it is a payment for a distinct good or service from the customer in which case the fair value of those distinct goods or services are recorded as selling, general and administrative expense.

• Co-payment assistance:

Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance.

• Co-pay assistance:

Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance.

Co-pay assistance utilization is based on information provided by our third-party administrator.

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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.

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

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

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

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Intangible assets and impairment of long-lived assets.

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

Our intangible assets consist of capitalized license costs for products approved by the FDA or costs to acquire already commercialized products.

We amortize our intangible assets on a straight-line basis over the estimated useful economic life of the related product patents.

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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.

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.

As a result of the unfavorable events and subsequent developments in the fourth quarter of 2022 and second quarter of 2023 related to the HETLIOZ ® patent litigation (see Note 17, Legal Matters , to the consolidated financial statements included in Part II, Item 8 of this Annual Report) we performed impairment reviews 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 years ended December 31, 2023 and 2022.

The litigation and subsequent developments do 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.

Furthermore, the litigation and subsequent events do not relate to the HETLIOZ LQ ® oral suspension formulation.

Our expected cash flows continue to support our estimated useful economic life of the intangible asset through 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, which could be affected by the resolution of our HETLIOZ ® patent litigation, amongst other factors.

Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities, which could be affected by the HETLIOZ ® generic competition and our ability to obtain regulatory approval from the FDA for products or new indications in development, among 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.

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.

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, including activities related to recently acquired PONVORY ® , 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 status of existing and future potential litigation involving our products and intellectual property.

In December 2022, the U.S.

District Court for the District of Delaware (Delaware District Court) ruled in favor of Teva and Apotex in our patent litigation relating to their filing of ANDAs for generic versions of HETLIOZ ® in the U.S., and in May 2023, a three-judge panel of the Federal Circuit affirmed this ruling.

In August 2023, the Federal Circuit denied our request for a rehearing.

In January 2024, we filed a petition for a writ of certiorari with the U.S Supreme Court to review the Federal Circuit’s decision.

See Note 17, Legal Matters , to the consolidated financial statements in Part II, Item 8 of this Annual Report.

The FDA has approved ANDAs for Teva and Apotex, both of which have since launched their generic versions of HETLIOZ ® at risk in the U.S.

The FDA has also

approved the ANDA for MSN Pharmaceuticals, Inc.

and MSN Laboratories Private Limited (MSN), and HETLIOZ ® could face even more competition from other 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.

The license agreement that we entered into when we settled our litigation with MSN (MSN/Impax License Agreement) grants MSN and Impax Laboratories LLC (Impax) a non-exclusive license to manufacture and commercialize MSN’s generic version of HETLIOZ ® in the U.S.

effective as of March 13, 2035, unless prior to that date we obtain pediatric exclusivity for HETLIOZ ® , in which case the license will be effective as of July 27, 2035.

The MSN/Impax License Agreement also provides that MSN and Impax may launch a generic version of HETLIOZ ® earlier under certain limited circumstances.

In January 2023, MSN and its commercial partner, Amneal Pharmaceuticals, Inc., informed us of their belief that such circumstances had occurred and have since launched their generic version.

We disagree with this position and intend to aggressively defend our legal rights to exclusivity for HETLIOZ ® .

There is no guarantee, however, that we will be successful in our efforts.

Sales of generic versions of HETLIOZ ® have resulted in and could continue to result in a reduction in the demand for HETLIOZ ® and/or the price at which we can sell it and/or create volatility in net product sales in future periods, which could have a material impact on our revenues and results of operations.

Year ended December 31, 2023 compared to year ended December 31, 2022

Total revenues decreased by $61.7 million, or 24%, to $192.6 million for the year ended December 31, 2023 compared to $254.4 million for the year ended December 31, 2022.

Revenues were as follows:

Revenue from net product sales were as follows:

Year Ended December 31,

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90,873 94,727 (3,854) (4) %

PONVORY ® net product sales

1,600 — 1,600 N/A

Total net product sales $ 192,640 $ 254,382 $ (61,742) (24) %

HETLIOZ ® net product sales decreased by $59.5 million, or 37%, to $100.2 million for the year ended December 31, 2023 compared to $159.7 million for the year ended December 31, 2022.

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.

The decrease to net product sales was attributable to a decrease in price net of deductions and a decrease in volume.

Our HETLIOZ ® net product sales as reported for the three months ended March 31, 2023 reflected transactions that resulted in higher unit sales as compared to recent prior periods and a significant increase of inventory stocking at specialty pharmacy customers during 2023 and at December 31, 2023.

HETLIOZ ® net product sales during 2023 reflect lower unit sales as a result of generic competition.

HETLIOZ ® net product sales may continue to reflect lower unit sales as a result of continued reduction of the elevated inventory levels at specialty pharmacy customers.

Further, HETLIOZ ® net product sales will likely decline in future periods, potentially significantly, related to continued generic competition in the U.S.

Additionally, we constrained HETLIOZ ® net product sales for the year ended December 31, 2023 to an amount not probable of significant revenue reversal.

HETLIOZ ® net product sales could experience variability in future periods as the remaining uncertainties associated with variable consideration related to transactions in the early part of 2023 are resolved.

Fanapt ® net product sales decreased by $3.9 million to $90.9 million for the year ended December 31, 2023 compared to $94.7 million for the year ended December 31, 2022.

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 to net product sales was attributable to a decrease in volume.

In December 2023, we purchased the right to market and sell PONVORY ® in the U.S.

and Canadian markets from Actelion Pharmaceuticals Ltd.

(Janssen), a Johnson & Johnson Company.

PONVORY ® net product sales were $1.6 million for the year ended December 31, 2023, which reflects sales during the post-acquisition period.

Cost of goods sold.

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

decreased from 10% to 5% in December 2022.

decreased from 10% to 5% in December 2022 and are expected to end in the second quarter of 2024.

We evaluate the risk of excess inventory and product expiry by evaluating current and future product demand relative to product shelf life and build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance, patient usage, and generic competition.

Our inventory balance consisted of $7.2 million and $8.0 million of HETLIOZ ® product and $3.0 million and $3.4 million of Fanapt ® product as of December 31, 2023 and 2022, respectively.

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 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.

Research and development expenses decreased by $8.9 million, or 10%, to $76.8 million for the year ended December 31, 2023 compared to $85.8 million for the year ended December 31, 2022.

The decrease was primarily due to a decrease in clinical trial expenses associated with our Fanapt ® development program, partially offset by an increase in our tradipitant and VHX-896 development programs.

Expenses for our other development programs, which include expenses incurred on product discovery such as ASO, included 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, 2023 and 2022.

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Selling, general and administrative expenses.

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.

Selling, general and administrative expenses decreased by $23.6 million, or 17%, to $112.9 million for the year ended December 31, 2023 compared to $136.5 million for the year ended December 31, 2022.

The decrease in selling, general and administrative expenses was primarily the result of a decrease in spending on marketing, sales and commercial support activities for our commercial products.

Intangible asset amortization .

Intangible asset amortization was $1.5 million for each of the years ended December 31, 2022 and 2021.

Intangible asset amortization was $2.1 million for the year ended December 31, 2023 compared to $1.5 million for the year ended December 31, 2022.

Amortization expense increased in 2023 due to amortization on the intangible asset from the recently acquired rights to PONVORY ® in the U.S.

Other income .

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As of December 31, 2023, our total cash and cash equivalents and marketable securities were $388.3 million compared to $466.9 million at December 31, 2022.

Cash decreased in 2023 primarily due to our acquisition of the U.S.

and Canadian rights for PONVORY ® in December 2023.

Our cash and cash equivalents are deposits in operating accounts and highly liquid investments with an original maturity of 90 days or less at date of purchase and consist of investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers.

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

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

See Note 8, Leases , and Note 11, Commitments and Contingencies , respectively, to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information about these commitments.

We do not have any off-balance sheet arrangements.

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

commercial activities for HETLIOZ ® and Fanapt ® , pursuit of market approval of HETLIOZ ® and Fanapt ® in other regions and 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.

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

commercial activities for HETLIOZ ® , Fanapt ® and PONVORY ® , pursuit of regulatory 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.

16 unchanged sentences

Investing activities:

Asset acquisition

(100,665) — (100,665)

Purchases of property and equipment (383) (679) 296

8 unchanged sentences

Cash flows provided by operating activities during the year ended December 31, 2023 were $12.8 million, a decrease of $19.2 million compared to $32.0 million during the year ended December 31, 2022.

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.

The decrease reflects a decrease of $3.8 million in net income, a decrease of $8.6 million in non-cash charges primarily due to additional amortization of discounts on our marketable securities, and a decrease of $6.8 million from the net change in operating assets and liabilities.

Investing Activities.

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.

Cash flows used in investing activities during the year ended December 31, 2023 were $12.1 million, a decrease in cash of $62.0 million compared to cash provided by investing activities of $49.9 million during the year ended December 31, 2022.

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

and Canadian rights to PONVORY ® in 2023.

Financing Activities.

Cash flows provided by financing activities during the year ended December 31, 2022 were $0.7 million, a decrease of $2.8 million compared to $3.6 million during the year ended December 31, 2021.

Financing activities include proceeds from exercises of stock options.

Cash flows provided by financing activities during the year ended December 31, 2022 were $0.7 million.

There were no exercises of stock options during the year ended December 31, 2023.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

10 unchanged sentences

We are also exposed to unfavorable fluctuations of the U.S.

dollar, which is our reporting currency, against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S.

dollar, which is our reporting currency, against the currencies of

our operating subsidiaries when their respective financial statements are translated into U.S.

dollars for inclusion in our consolidated financial statements.

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

Foreign currency has not

had, 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.

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