Vanda Pharmaceuticals(VNDA) - 2021 Q4 - Annual Report

Part I Business Vanda Pharmaceuticals is a global biopharmaceutical company commercializing HETLIOZ® and Fanapt®, which generated $268.7 million in 2021 net sales - Vanda's business model is centered on developing and commercializing innovative therapies, with a current commercial portfolio of two products: HETLIOZ® and Fanapt®[25][27] - The company's strategy includes maximizing commercial success of its products, entering strategic partnerships, pursuing clinical development of its pipeline (including tradipitant), applying pharmacogenetics, and expanding its product portfolio[28] - Revenues are highly concentrated, with five major customers (specialty pharmacies and wholesalers) representing 91% of total revenues for the year ended December 31, 2021[85] 2021 Net Product Sales | Product | Indication(s) | 2021 Net Sales (in millions) | | :--- | :--- | :--- | | HETLIOZ® | Non-24, SMS | $173.5 | | Fanapt® | Schizophrenia | $95.1 | Commercialized Products Vanda's commercial portfolio includes HETLIOZ® for Non-24 and SMS, and Fanapt® for schizophrenia, generating $173.5 million and $95.1 million respectively in 2021 - HETLIOZ® was approved in the U.S. in January 2014 for Non-24 and in December 2020 for SMS, also approved in the E.U. for Non-24 in totally blind adults[30][31][33] - Fanapt® was approved in the U.S. in May 2009 for acute treatment of schizophrenia and in May 2016 for maintenance treatment, with Vanda reacquiring U.S. and Canadian commercial rights from Novartis in late 2014[34] Research and Development Vanda's R&D pipeline focuses on expanding commercial product indications and developing new therapies, including HETLIOZ®, Fanapt®, and tradipitant, despite a recent Phase III setback for tradipitant - The FDA issued a complete response letter (CRL) for the HETLIOZ® sNDA for jet lag disorder, citing unclear clinical significance of the sleep measures, with Vanda determining its next steps[37] - The Phase III study of tradipitant for gastroparesis did not meet its primary endpoint on nausea severity at week 12, but the company identified a drug effect in a sub-group analysis and plans to submit data to regulatory authorities[45] - The FDA requires a nine-month non-rodent chronic toxicity study for tradipitant to treat patients beyond 12 weeks, currently limiting its development for chronic indications[46] - A Phase III study of tradipitant for motion sickness commenced in Q4 2021 after the FDA agreed the program design was adequate to support an NDA[48] License Agreements Vanda's product rights stem from license agreements, including HETLIOZ® (BMS), Fanapt® (Novartis/Sanofi), and tradipitant (Eli Lilly), involving tiered royalties and potential milestone payments - For HETLIOZ®, Vanda pays BMS a 10% royalty on U.S. net sales, decreasing to 5% in December 2022 and ending in April 2024[62] - For Fanapt®, Vanda is obligated to pay Sanofi a 6% royalty on U.S. net sales through November 2026[63] - For tradipitant, Vanda has remaining milestone obligations to Lilly of up to $97.0 million ($2.0 million on filing, $15.0 million on approval, $80.0 million on sales) plus tiered royalties[65] Patents and Proprietary Rights Vanda protects its intellectual property through patents and regulatory exclusivity, with HETLIOZ® method of treatment patents extending to 2035 and Fanapt® patents to 2031, actively defending its portfolio - The U.S. NCE patent for HETLIOZ® expires in December 2022, but Vanda holds 15 U.S. method of treatment patents expiring between 2033-2035 and a formulation patent for HETLIOZ LQ™ expiring in 2040[75][271] - The NCE patent for Fanapt® has expired, but the product is protected by multiple U.S. method of treatment patents, with expiration dates extending to December 2031[76] - The NCE patent for tradipitant expires in June 2024 in the U.S., subject to potential Hatch-Waxman extension[77][78] Government Regulation and Pharmaceutical Pricing Vanda operates under extensive FDA and foreign regulations covering drug development, approval, and marketing, facing complex fraud and abuse laws, and significant pricing and reimbursement pressures from government programs and healthcare reforms - The company must navigate a complex FDA approval process, including preclinical studies and three phases of clinical trials, to demonstrate safety and efficacy before marketing a new drug[93][94][100] - Vanda is subject to numerous fraud and abuse laws, including the Anti-Kickback Statute and the False Claims Act, which constrain business arrangements and marketing practices, with violations leading to significant civil and criminal penalties[129][130][132] - Sales depend heavily on coverage and reimbursement from third-party payors, with the company facing cost-containment pressures and healthcare reforms like the ACA increasing rebate liabilities and introducing new fees[144][146] - In Europe, Vanda is subject to the GDPR for data privacy and faces strict government price controls, which can delay commercial launches and impact profitability[141][143][249] Risk Factors Vanda faces significant risks including dependence on HETLIOZ® and Fanapt® commercial success, increasing payor denials, clinical and regulatory uncertainties for pipeline products, supply chain disruptions, intense competition, and ongoing litigation - The company is substantially dependent on the commercial success of its two products, HETLIOZ® and Fanapt®[164] - A key risk is the increasing rate at which third-party payors refuse to cover or reimburse prescriptions for HETLIOZ®, which could limit its commercial success[173] - There is significant uncertainty regarding the FDA's acceptance and approval of tradipitant for gastroparesis, especially after the Phase III study did not meet its primary endpoint[174] - The company is, has been, and may continue to be involved in expensive and time-consuming patent infringement lawsuits to protect its products from generic competition[269][270] - The COVID-19 pandemic poses ongoing risks, potentially disrupting sales activities, clinical trial enrollment and operations, and supply chains[180][181][182] Properties Vanda leases its principal executive offices in Washington, D.C. (43,462 sq. ft.) and London, England (2,880 sq. ft.), which management deems adequate for near-term needs - The company's principal executive offices are leased, consisting of 43,462 sq. ft. in Washington, D.C. and 2,880 sq. ft. in London, England[303] Legal Proceedings Vanda is involved in ongoing patent infringement litigation against generic manufacturers for Fanapt® and HETLIOZ®, a qui tam action, and a securities class action lawsuit - The company is engaged in Hatch-Waxman patent litigation against several generic drug manufacturers regarding both Fanapt® and HETLIOZ®[486][488] - A qui tam action filed by a former employee, alleging violations of the False Claims Act related to the marketing of Fanapt® and HETLIOZ®, is ongoing after the court denied the company's motion to dismiss in March 2021[488] - A securities class action lawsuit is pending, alleging false and misleading statements between November 2015 and February 2019, with the company's motion to dismiss partially denied in March 2021[488] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Vanda's common stock trades on The Nasdaq Global Market under 'VNDA', with no history or current intention of paying cash dividends - The company's common stock is listed on The Nasdaq Global Market under the trading symbol 'VNDA'[307] - Vanda has never paid cash dividends and does not plan to pay them in the foreseeable future[308] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, total revenues grew 8% to $268.7 million, driving net income to $33.2 million, supported by revenue growth and reduced SG&A despite increased R&D, with strong liquidity of $432.8 million Results of Operations In 2021, total net product sales increased 8% to $268.7 million, driven by HETLIOZ® and Fanapt® growth, while R&D expenses rose 36% and SG&A decreased 12%, leading to a 55% increase in income from operations Financial Performance Comparison (2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Product Sales | $268.7 | $248.2 | +$20.5 | +8% | | HETLIOZ® Net Sales | $173.5 | $160.7 | +$12.8 | +8% | | Fanapt® Net Sales | $95.1 | $87.5 | +$7.6 | +9% | | R&D Expenses | $75.4 | $55.6 | +$19.8 | +36% | | SG&A Expenses | $124.0 | $140.5 | -$16.5 | -12% | | Income from Operations | $42.2 | $27.2 | +$15.0 | +55% | | Net Income | $33.2 | $23.3 | +$9.9 | +42% | Liquidity and Capital Resources Vanda maintained a strong liquidity position with $432.8 million in cash, cash equivalents, and marketable securities as of December 31, 2021, generating $64.2 million in operating cash flow, sufficient to fund operations for at least the next 12 months Cash and Marketable Securities | (in thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $52,071 | $61,031 | | Marketable securities | $380,742 | $306,709 | | Total | $432,813 | $367,740 | Cash Flow Summary (Year Ended Dec 31) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $64,214 | $51,775 | | Net cash used in investing activities | ($76,696) | ($41,499) | | Net cash provided by financing activities | $3,550 | $5,634 | - The company believes its current capital resources are sufficient to fund operations for at least the next 12 months[344] Qualitative and Quantitative Disclosures about Market Risk Vanda's primary market risks are interest rate fluctuations on investments and foreign currency exchange rates from international operations, neither of which are currently hedged or deemed materially impactful - Market risk is confined to cash, cash equivalents, and marketable securities, which are subject to interest rate risk[350] - The company is exposed to foreign currency exchange rate risk from its international subsidiaries but does not currently hedge this risk[352] Financial Statements and Supplementary Data This section presents Vanda's audited consolidated financial statements for FY2021, including an unqualified audit opinion from PricewaterhouseCoopers LLP, which identified Medicaid Rebates for Fanapt® as a Critical Audit Matter Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified audit opinion on Vanda's FY2021 financial statements and internal controls, identifying 'Medicaid Rebates for Fanapt®' as a Critical Audit Matter due to estimation uncertainty - The audit firm issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[379] - A Critical Audit Matter was identified concerning the estimation of Medicaid Rebates for Fanapt®, due to the high degree of judgment required for assumptions like payor mix and invoice lag[386] Consolidated Financial Statements As of December 31, 2021, Vanda reported total assets of $593.8 million, total liabilities of $88.9 million, and net income of $33.2 million for the year Key Financial Data (as of Dec 31, 2021) | Metric | Amount (in thousands) | | :--- | :--- | | Balance Sheet: | | | Total Assets | $593,792 | | Total Liabilities | $88,864 | | Total Stockholders' Equity | $504,928 | | Income Statement (FY 2021): | | | Total Revenues | $268,682 | | Income from Operations | $42,165 | | Net Income | $33,152 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, including $115.1 million in 2021 revenue allowances, future milestone and royalty obligations, $74.9 million in net deferred tax assets, and ongoing legal matters - Product revenue allowances, including rebates and chargebacks, are a significant estimate, with the provision for these allowances related to 2021 sales totaling $115.1 million[325] - The company has potential future milestone payments of up to $97.0 million for tradipitant and $44.9 million for its CFTR portfolio, in addition to ongoing royalty obligations for its commercial products[457][458] - As of Dec 31, 2021, the company had net deferred tax assets of $74.9 million, supported by $35.5 million in NOL carryforwards and $39.9 million in R&D and orphan drug credit carryforwards[479] Controls and Procedures As of December 31, 2021, Vanda's management, including the CEO and CFO, concluded that both disclosure controls and internal control over financial reporting were effective, a conclusion affirmed by PricewaterhouseCoopers LLP - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[355] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2021, which was also audited by PricewaterhouseCoopers LLP[356] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10-14, covering directors, executive compensation, and related matters, is incorporated by reference from the forthcoming 2022 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees and Services (Item 14) is incorporated by reference from the forthcoming 2022 Proxy Statement[362][363][364][365][366] Part IV Exhibits and Financial Statement Schedules This section provides an index of consolidated financial statements and a comprehensive list of all exhibits filed with the Annual Report, including material contracts and certifications - This section provides an index of the consolidated financial statements and a comprehensive list of all exhibits filed with the 10-K report[368][489]