Vanda Pharmaceuticals(VNDA) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended September 30, 2022 ITEM 1 Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements of Vanda Pharmaceuticals Inc. for the quarter ended September 30, 2022, including balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows, along with accompanying notes detailing business organization, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets show the company's financial position as of September 30, 2022, compared to December 31, 2021, indicating an increase in total assets and stockholders' equity, primarily driven by growth in marketable securities and additional paid-in capital Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Total Assets | $621,788 | $593,792 | $27,996 | 4.7% | | Total Liabilities | $106,131 | $88,864 | $17,267 | 19.4% | | Total Stockholders' Equity | $515,657 | $504,928 | $10,729 | 2.1% | | Cash and cash equivalents | $49,397 | $52,071 | $(2,674) | -5.1% | | Marketable securities | $405,394 | $380,742 | $24,652 | 6.5% | | Accounts receivable, net | $29,352 | $32,467 | $(3,115) | -9.6% | | Total current assets | $507,106 | $478,301 | $28,805 | 6.0% | | Accounts payable and accrued liabilities | $50,125 | $34,438 | $15,687 | 45.6% | | Product revenue allowances | $42,498 | $39,981 | $2,517 | 6.3% | Condensed Consolidated Statements of Operations The Condensed Consolidated Statements of Operations show a decrease in net product sales and net income for both the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to lower revenues and increased research and development expenses Condensed Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (YoY) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (YoY) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Net product sales | $65,318 | $70,095 | $(4,777) (-6.8%) | $189,900 | $200,663 | $(10,763) (-5.4%) | | Total revenues | $65,318 | $70,095 | $(4,777) (-6.8%) | $189,900 | $200,663 | $(10,763) (-5.4%) | | Research and development | $24,857 | $19,653 | $5,204 (26.5%) | $67,316 | $56,032 | $11,284 (20.1%) | | Selling, general and administrative | $29,854 | $32,456 | $(2,602) (-8.0%) | $103,703 | $90,600 | $13,103 (14.5%) | | Income (loss) from operations | $3,908 | $10,819 | $(6,911) (-63.9%) | $(300) | $33,529 | $(33,829) (-100.9%) | | Net income (loss) | $3,270 | $7,771 | $(4,501) (-57.9%) | $(586) | $26,074 | $(26,660) (-102.2%) | | Basic EPS | $0.06 | $0.14 | $(0.08) (-57.1%) | $(0.01) | $0.47 | $(0.48) (-102.1%) | | Diluted EPS | $0.06 | $0.14 | $(0.08) (-57.1%) | $(0.01) | $0.46 | $(0.47) (-102.2%) | Condensed Consolidated Statements of Comprehensive Income (Loss) The Condensed Consolidated Statements of Comprehensive Income (Loss) show a decrease in comprehensive income for the three months ended September 30, 2022, and a shift to a comprehensive loss for the nine months ended September 30, 2022, primarily due to the net loss and increased unrealized losses on marketable securities Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (YoY) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (YoY) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Net income (loss) | $3,270 | $7,771 | $(4,501) (-57.9%) | $(586) | $26,074 | $(26,660) (-102.2%) | | Other comprehensive income (loss), net of tax | $(54) | $8 | $(62) (-775.0%) | $(1,310) | $(128) | $(1,182) (-923.4%) | | Comprehensive income (loss) | $3,216 | $7,779 | $(4,563) (-58.7%) | $(1,896) | $25,946 | $(27,842) (-107.3%) | Condensed Consolidated Statements of Changes in Stockholders' Equity The Condensed Consolidated Statements of Changes in Stockholders' Equity detail the movements in equity components, showing an increase in total stockholders' equity from December 31, 2021, to September 30, 2022, primarily due to stock-based compensation expense and net income, despite an accumulated other comprehensive loss Condensed Consolidated Statements of Changes in Stockholders' Equity Highlights (in thousands) | Metric | Dec 31, 2021 | Sep 30, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Total Stockholders' Equity | $504,928 | $515,657 | $10,729 | | Common Stock (Par Value) | $56 | $57 | $1 | | Additional Paid-in Capital | $669,223 | $681,847 | $12,624 | | Accumulated Other Comprehensive Loss | $(175) | $(1,485) | $(1,310) | | Accumulated Deficit | $(164,176) | $(164,762) | $(586) | Condensed Consolidated Statements of Cash Flows The Condensed Consolidated Statements of Cash Flows indicate a decrease in net cash provided by operating activities and a decrease in net cash used in investing activities for the nine months ended September 30, 2022, compared to the same period in 2021, resulting in a net decrease in cash, cash equivalents, and restricted cash Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | $22,568 | $37,607 | $(15,039) | | Net cash used in investing activities | $(25,503) | $(50,698) | $25,195 | | Net cash provided by financing activities | $129 | $2,509 | $(2,380) | | Net change in cash, cash equivalents and restricted cash | $(2,724) | $(10,572) | $7,848 | | Cash, cash equivalents and restricted cash, End of period | $49,866 | $51,041 | $(1,175) | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations and breakdowns of the financial statements, covering business operations, significant accounting policies, marketable securities, fair value measurements, inventory, intangible assets, accrued liabilities, commitments, contingencies, stock-based compensation, income taxes, earnings per share, and legal matters 1. Business Organization and Presentation Vanda Pharmaceuticals Inc. is a global biopharmaceutical company focused on developing and commercializing innovative therapies. Its commercial portfolio includes HETLIOZ® for Non-24-Hour Sleep-Wake Disorder and Smith-Magenis Syndrome, and Fanapt® for schizophrenia. The company also has several drugs in development for various indications - Vanda Pharmaceuticals Inc. operates in one reporting segment, focusing on developing and commercializing innovative therapies[28] - Commercial portfolio includes HETLIOZ® (Non-24, SMS) and Fanapt® (schizophrenia). HETLIOZ® is the first FDA-approved product for Non-24 and SMS[29] - Drugs in development include HETLIOZ® (jet lag, insomnia, DSPD, ASD, pediatric Non-24), Fanapt® (bipolar I, Parkinson's disease psychosis, LAI formulation for schizophrenia), Tradipitant (gastroparesis, motion sickness, atopic dermatitis, COVID-19 pneumonia), VTR-297 (hematologic malignancies, oncology), CFTR activators/inhibitors (dry eye, ocular inflammation, secretory diarrhea), VQW-765 (psychiatric disorders), and VHX-896 (active metabolite of iloperidone)[32] 2. Summary of Significant Accounting Policies This section outlines the basis of presentation for the unaudited condensed consolidated financial statements, which adhere to GAAP for interim information. It also details the company's policies regarding the use of estimates, cash and cash equivalents, and revenue recognition from net product sales, noting no material changes from the prior annual report - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[30] - No material changes to significant accounting policies previously disclosed in the Annual Report[31] Cash, Cash Equivalents and Restricted Cash Reconciliation (in thousands) | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $49,397 | $50,522 | | Restricted cash included in Non-current inventory and other | $469 | $519 | | Total cash, cash equivalents and restricted cash | $49,866 | $51,041 | Net Product Sales by Product (in thousands) | Product | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | HETLIOZ® net product sales | $41,335 | $45,615 | $119,554 | $129,467 | | Fanapt® net product sales | $23,983 | $24,480 | $70,346 | $71,196 | | Total net product sales | $65,318 | $70,095 | $189,900 | $200,663 | 3. Marketable Securities The company's marketable securities, classified as available-for-sale, primarily consist of U.S. Treasury and government agencies and corporate debt, all with contractual maturities of less than two years. The fair market value of these securities increased from December 31, 2021, to September 30, 2022 Marketable Securities Summary (in thousands) | Type | Sep 30, 2022 Fair Market Value | Dec 31, 2021 Fair Market Value | | :-------------------------------- | :----------------------------- | :----------------------------- | | U.S. Treasury and government agencies | $206,485 | $194,719 | | Corporate debt | $198,909 | $186,023 | | Total marketable securities | $405,394 | $380,742 | 4. Fair Value Measurements The company measures certain assets at fair value on a recurring basis using a three-tier hierarchy. As of September 30, 2022, all marketable securities were classified as Level 1 (U.S. Treasury and government agencies) or Level 2 (corporate debt) inputs, indicating observable market data Fair Value Measurement of Assets (in thousands) as of September 30, 2022 | Asset Type | Total Fair Value | Level 1 (Quoted Prices in Active Markets) | Level 2 (Significant Other Observable Inputs) | Level 3 (Significant Unobservable Inputs) | | :-------------------------------- | :--------------- | :---------------------------------------- | :------------------------------------------ | :-------------------------------------- | | U.S. Treasury and government agencies | $206,485 | $206,485 | $— | $— | | Corporate debt | $198,909 | $— | $198,909 | $— | | Total assets measured at fair value | $405,394 | $206,485 | $198,909 | $— | Fair Value Measurement of Assets (in thousands) as of December 31, 2021 | Asset Type | Total Fair Value | Level 1 (Quoted Prices in Active Markets) | Level 2 (Significant Other Observable Inputs) | Level 3 (Significant Unobservable Inputs) | | :-------------------------------- | :--------------- | :---------------------------------------- | :------------------------------------------ | :-------------------------------------- | | U.S. Treasury and government agencies | $194,719 | $194,719 | $— | $— | | Corporate debt | $186,023 | $— | $186,023 | $— | | Total assets measured at fair value | $380,742 | $194,719 | $186,023 | $— | 5. Inventory Total inventory increased from $8.252 million at December 31, 2021, to $11.057 million at September 30, 2022, driven by an increase in non-current work-in-process and finished goods Inventory Breakdown (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Current inventory: | | | | Work-in-process | $13 | $30 | | Finished goods | $1,577 | $995 | | Total current inventory | $1,590 | $1,025 | | Non-current inventory: | | | | Raw materials | $1,332 | $2,143 | | Work-in-process | $7,170 | $3,934 | | Finished goods | $965 | $1,150 | | Total non-current inventory | $9,467 | $7,227 | | Total inventory | $11,057 | $8,252 | 6. Intangible Assets The company's intangible assets primarily consist of capitalized license costs for HETLIOZ®, which are amortized over their estimated useful economic life. The net carrying amount of HETLIOZ® intangible assets decreased slightly from December 31, 2021, to September 30, 2022, due to ongoing amortization - HETLIOZ® intangible assets include $33.0 million in regulatory approval and commercial milestones paid to BMS, amortized over the estimated economic useful life of related product patents (March 2035)[45] HETLIOZ® Intangible Assets (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Gross Carrying Amount | $33,000 | $33,000 | | Accumulated Amortization | $14,056 | $12,919 | | Net Carrying Amount | $18,944 | $20,081 | | Amortization Expense (3 months) | $400 | $400 | | Amortization Expense (9 months) | $1,100 | $1,100 | 7. Accounts Payable and Accrued Liabilities Total accounts payable and accrued liabilities significantly increased from $34.438 million at December 31, 2021, to $50.125 million at September 30, 2022, primarily due to higher research and development expenses and a substantial increase in 'Accounts payable and other accrued liabilities' Accounts Payable and Accrued Liabilities (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Research and development expenses | $14,914 | $10,082 | | Consulting and other professional fees | $8,225 | $8,732 | | Royalties payable | $5,585 | $5,873 | | Compensation and employee benefits | $5,769 | $6,515 | | Operating lease liabilities | $2,199 | $2,311 | | Accounts payable and other accrued liabilities | $13,433 | $925 | | Total accounts payable and accrued liabilities | $50,125 | $34,438 | 8. Commitments and Contingencies This section details the company's various commitments and contingencies, including intellectual property indemnifications, license agreements for HETLIOZ®, Fanapt®, Tradipitant, CFTR activators/inhibitors, and VQW-765, as well as a new research and development agreement with OliPass Corporation - The company has standard intellectual property indemnification agreements with unlimited potential future payments, but has not incurred costs related to these claims since inception[48] - HETLIOZ® license agreement with BMS: $37.5 million paid in upfront and milestone fees, no remaining milestone obligations. Royalty payments are 10% on U.S. net sales (decreasing to 5% in December 2022, ending April 2024) and 5% on ex-U.S. net sales[50][51] - Fanapt® license agreement: Obligated to pay Sanofi a 6% royalty on U.S. net sales through November 2026 for non-manufacturing know-how[51] - Tradipitant license agreement with Lilly: Paid $3.0 million in upfront and development milestones. Remaining milestones include $2.0 million for first marketing authorization application filing (U.S./E.U.), $10.0 million for U.S. approval, $5.0 million for E.U. approval, and up to $80.0 million for sales milestones. Tiered royalties up to low double digits on net sales[51] - CFTR activators/inhibitors license agreement with UCSF: Paid $1.6 million in upfront and development milestones. Remaining milestones include $11.9 million for development and $33.0 million for regulatory approval and sales milestones. Single-digit royalties on net sales[52] - VQW-765 license agreement with Novartis: No milestone obligations, but Novartis is eligible for tiered royalties on net sales up to the mid-teens[53] - New agreement with OliPass Corporation in September 2022 for joint development of ASO molecules, with an upfront fee of $3.0 million recorded as R&D expense[54] 9. Accumulated Other Comprehensive Loss The accumulated other comprehensive loss increased significantly from $(175) thousand at December 31, 2021, to $(1,485) thousand at September 30, 2022, primarily due to an increase in unrealized losses on marketable securities Accumulated Other Comprehensive Loss (in thousands) | Component | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Foreign currency translation | $(51) | $32 | | Unrealized loss on marketable securities | $(1,434) | $(207) | | Accumulated other comprehensive loss | $(1,485) | $(175) | 10. Stock-Based Compensation The company recognized $3.888 million in stock-based compensation expense for the three months ended September 30, 2022, and $12.496 million for the nine months ended September 30, 2022. Unrecognized compensation costs for unvested service option awards and RSUs are expected to be recognized over weighted average periods of 1.3 and 1.7 years, respectively - As of September 30, 2022, 6,398,112 shares were subject to outstanding options and restricted stock units (RSUs) under the 2006 and 2016 Equity Incentive Plans[58] - Unrecognized compensation costs for unvested service option awards totaled $8.2 million, expected to be recognized over 1.3 years[60] - Unrecognized compensation costs for unvested service RSUs totaled $22.4 million, expected to be recognized over 1.7 years[63] Stock-Based Compensation Expense (in thousands) | Category | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Research and development | $981 | $893 | $3,040 | $2,970 | | Selling, general and administrative | $2,907 | $3,058 | $9,456 | $8,630 | | Total stock-based compensation expense | $3,888 | $3,951 | $12,496 | $11,600 | 11. Income Taxes The company recorded income tax expense of $2.2 million for the three months and $2.3 million for the nine months ended September 30, 2022, a decrease compared to the prior year, primarily driven by the estimated effective tax rate and discrete income tax expenses Provision for Income Taxes (in thousands) | Period | Income Tax Expense | | :-------------------------------- | :----------------- | | 3 Months Ended Sep 30, 2022 | $2,191 | | 3 Months Ended Sep 30, 2021 | $2,951 | | 9 Months Ended Sep 30, 2022 | $2,273 | | 9 Months Ended Sep 30, 2021 | $7,680 | 12. Earnings per Share Basic and diluted EPS decreased significantly for both the three and nine months ended September 30, 2022, reflecting the decrease in net income (or shift to net loss) compared to the prior year. For the nine months ended September 30, 2022, the net loss resulted in basic and diluted loss per share being equivalent due to the anti-dilutive effect of potential securities Net Income (Loss) Per Share (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $3,270 | $7,771 | $(586) | $26,074 | | Basic EPS | $0.06 | $0.14 | $(0.01) | $0.47 | | Diluted EPS | $0.06 | $0.14 | $(0.01) | $0.46 | | Weighted average shares outstanding, basic | 56,574,503 | 55,668,156 | 56,397,805 | 55,467,528 | | Weighted average shares outstanding, diluted | 56,969,033 | 57,040,736 | 56,397,805 | 56,818,295 | | Antidilutive securities excluded | 5,238,283 | 2,233,806 | 5,199,487 | 2,194,547 | 13. Legal Matters The company is involved in several legal proceedings, including patent infringement lawsuits related to Fanapt® and HETLIOZ® against generic manufacturers, a securities class action lawsuit that was preliminarily settled for $11.5 million, and multiple lawsuits against the FDA and CMS regarding regulatory decisions and rule interpretations - Fanapt® patent infringement lawsuits: Settlements reached with Taro, Apotex, Lupin, and Hikma, granting non-exclusive licenses effective upon '610 Patent expiration (November 2027, or May 2028 with pediatric exclusivity). Lawsuit against Inventia remains pending[71][72] - HETLIOZ® patent infringement lawsuits: Settlement with MSN and Impax grants license effective March 13, 2035 (or July 27, 2035 with pediatric exclusivity). Consolidated lawsuits against remaining defendants (Teva, Apotex) were tried in March 2022, with an opinion expected in Q4 2022[72] - Securities class action (Gordon v. Vanda Pharmaceuticals Inc.): Preliminarily settled for $11.5 million in May 2022, with payment made by insurers into an escrow account. Final settlement hearing scheduled for January 2023[72] - Lawsuits against FDA: Filed to compel production of records related to HETLIOZ® jet lag sNDA denial (FOIA), records on 9-month non-rodent toxicity study waivers (FOIA), and challenging denial of Fast Track designation for tradipitant[72][75][76][78] - Lawsuit against CMS: Challenging CMS' rule broadly interpreting 'line extension' and 'new formulation' under the ACA, which could subject certain products to enhanced rebates[74] ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Vanda's business, operational highlights, critical accounting policies, and a detailed analysis of its financial performance for the three and nine months ended September 30, 2022, compared to the prior year. It highlights decreased revenues, increased R&D and SG&A expenses, and changes in cash flows, while also discussing the company's liquidity and capital resources Overview Vanda Pharmaceuticals Inc. is a global biopharmaceutical company focused on developing and commercializing innovative therapies, utilizing technologies like genetics and genomics. Its commercial portfolio includes HETLIOZ® and Fanapt®, with several other drugs in various stages of development - Vanda is a global biopharmaceutical company focused on developing and commercializing innovative therapies for high unmet medical needs[80] - The company's commercial portfolio includes HETLIOZ® (Non-24, SMS) and Fanapt® (schizophrenia)[82] - Key drugs in development include HETLIOZ® (jet lag, insomnia, DSPD, ASD, pediatric Non-24), Fanapt® (bipolar I, Parkinson's disease psychosis, LAI formulation for schizophrenia), Tradipitant (gastroparesis, motion sickness, atopic dermatitis, COVID-19 pneumonia), VTR-297, CFTR activators/inhibitors, VQW-765, and VHX-896[84] Operational Highlights Operational highlights include preparing for sNDA submission for HETLIOZ® in insomnia, full enrollment of a Phase III study for Fanapt® in bipolar I disorder, ongoing safety studies and NDA preparation for tradipitant in gastroparesis, and progress in early-stage programs like VQW-765 and a new research agreement with OliPass Corporation - HETLIOZ®: Preparing for sNDA submission for insomnia treatment by end of 2022[82] - Fanapt®: Phase III clinical study for acute manic episodes in bipolar I disorder is fully enrolled, with results expected by end of 2022[84] - Tradipitant: Continuing open-label safety study in gastroparesis; preparing for NDA submission for short-term treatment of nausea in gastroparesis in H1 2023; Phase III study for motion sickness is ~40% enrolled, results expected by mid-2023[85] - Early-Stage Programs: Phase II clinical study of VQW-765 for social/performance anxiety is fully enrolled, results expected by end of 2022. Research and development agreement with OliPass Corporation to jointly develop ASO molecules. VPO-227 granted Orphan Drug Designation for cholera, IND submission expected in 2023[90] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates and assumptions, particularly for revenue recognition from net product sales, stock-based compensation, research and development expenses, intangible assets, and income taxes. These policies require management's judgment, and actual results may differ from estimates - Revenue from net product sales is recognized when control of the product is transferred to the customer, net of applicable product revenue allowances (discounts, rebates, chargebacks, service fees, co-pay assistance, product returns)[89][90] - Reserves for variable consideration are based on historical activity, contractual agreements, and estimated patient utilization, with uncertainties generally resolved in the subsequent quarter, except for Medicaid rebates and product returns[91][92] Sales Discounts and Allowance Activity (in thousands) for Nine Months Ended Sep 30, 2022 | Category | Rebates & Chargebacks | Discounts, Returns and Other | Total | | :-------------------------------- | :-------------------- | :--------------------------- | :---- | | Balances at December 31, 2021 | $31,854 | $9,601 | $41,455 | | Provision related to current period sales | $65,913 | $22,706 | $88,619 | | Adjustments for prior period sales | $(2,355) | $946 | $(1,409) | | Credits/payments made | $(60,681) | $(24,277) | $(84,958) | | Balances at September 30, 2022 | $34,731 | $8,976 | $43,707 | - Stock-based compensation expense is measured at grant-date fair value using the Black-Scholes-Merton model and recognized over the service period, with estimates for forfeitures[100] - Research and development expenses are expensed as incurred for development-stage products, including third-party service fees, manufacturing costs for clinical trials, and pre-approval milestone payments[101] - Intangible assets (capitalized license costs for approved products) are amortized straight-line over their useful economic life. Impairment is assessed when events indicate carrying value may not be recoverable[103][104] - Income taxes involve assessing the need for a valuation allowance against deferred tax assets based on historical and projected taxable income[105] Results of Operations The company's results of operations for the three and nine months ended September 30, 2022, show a decline in total revenues and net income (or a shift to net loss) compared to the prior year. This was primarily driven by decreased HETLIOZ® and Fanapt® net product sales due to volume decreases and increased research and development expenses, particularly for the Fanapt® development program and other initiatives Total Revenues (in thousands) | Period | 2022 | 2021 | Net Change | Percent Change | | :-------------------------------- | :--- | :--- | :--------- | :------------- | | Three months ended Sep 30 | $65,318 | $70,095 | $(4,777) | (7)% | | Nine months ended Sep 30 | $189,900 | $200,663 | $(10,763) | (5)% | Net Product Sales by Product (in thousands) | Product | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (YoY) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (YoY) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | HETLIOZ® net product sales | $41,335 | $45,615 | $(4,280) (-9%) | $119,554 | $129,467 | $(9,913) (-8%) | | Fanapt® net product sales | $23,983 | $24,480 | $(497) (-2%) | $70,346 | $71,196 | $(850) (-1%) | - Decrease in HETLIOZ® net product sales was due to decreased volume, partially offset by increased price, with volume decrease attributed to reimbursement challenges for Non-24 patients[108][115] Research and Development Expenses (in thousands) | Period | 2022 | 2021 | Net Change | Percent Change | | :-------------------------------- | :--- | :--- | :--------- | :------------- | | Three months ended Sep 30 | $24,857 | $19,653 | $5,204 | 26% | | Nine months ended Sep 30 | $67,316 | $56,032 | $11,284 | 20% | - Increase in R&D expenses was associated with tradipitant and Fanapt® development programs and other development programs, including a $3.0 million upfront fee for a research and development agreement in Q3 2022[109][115] Selling, General and Administrative Expenses (in thousands) | Period | 2022 | 2021 | Net Change | Percent Change | | :-------------------------------- | :--- | :--- | :--------- | :------------- | | Three months ended Sep 30 | $29,900 | $32,500 | $(2,600) | (8)% | | Nine months ended Sep 30 | $103,700 | $90,600 | $13,100 | 14% | - Decrease in SG&A for three months due to decreased marketing, offset by increased sales force costs. Increase for nine months due to ongoing litigation, corporate activities, and sales/commercial support[112][118] Other Income (in thousands) | Period | 2022 | 2021 | Net Change | | :-------------------------------- | :--- | :--- | :--------- | | Three months ended Sep 30 | $1,600 | $(100) | $1,700 | | Nine months ended Sep 30 | $2,000 | $200 | $1,800 | - Other income increased due to higher yields on marketable securities[113][119] Liquidity and Capital Resources As of September 30, 2022, Vanda's total cash, cash equivalents, and marketable securities were $454.8 million. The company believes its current liquidity and cash from product sales will be sufficient for at least the next 12 months, but acknowledges potential needs for additional capital to fund future operations and expansion Liquidity Resources (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $49,397 | $52,071 | | Marketable securities | $405,394 | $380,742 | | Total cash, cash equivalents and marketable securities | $454,791 | $432,813 | - The company believes its cash, cash equivalents, marketable securities, and cash from product sales will be sufficient for at least the next 12 months, based on current operating plans[126] - Future cash requirements depend on revenue generation, commercial/manufacturing activities, R&D programs, and potential costs for acquiring/licensing new products. The company may seek additional capital through debt, equity, or collaborations[126] Cash Flow Net cash provided by operating activities decreased by $15.0 million for the nine months ended September 30, 2022, primarily due to a decrease in net income and non-cash charges, partially offset by favorable changes in operating assets and liabilities. Net cash used in investing activities decreased by $25.2 million, while net cash provided by financing activities decreased by $2.4 million Net Cash Flows (in thousands) for Nine Months Ended Sep 30 | Activity | 2022 | 2021 | Net Change | | :-------------------------------- | :--- | :--- | :--------- | | Operating activities | $22,568 | $37,607 | $(15,039) | | Investing activities | $(25,503) | $(50,698) | $25,195 | | Financing activities | $129 | $2,509 | $(2,380) | | Net change in cash, cash equivalents and restricted cash | $(2,724) | $(10,572) | $7,848 | - Decrease in operating cash flow reflects a $26.7 million decrease in net income and a $6.1 million decrease in non-cash charges, partially offset by a $17.7 million increase from net change in operating assets and liabilities (primarily accounts payable and accrued liabilities, and accounts receivable)[127] ITEM 3 Quantitative and Qualitative Disclosures about Market Risk The company's market risk exposure is primarily confined to its cash, cash equivalents, marketable securities, and restricted cash. It does not hedge interest rate or foreign currency exposure, and does not use derivative financial instruments for speculation. While deposits may exceed insurance limits, no losses are anticipated. Foreign currency fluctuations have not materially impacted results - Market risk exposure is confined to cash, cash equivalents, marketable securities, and restricted cash[130] - Investments are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S. dollars, with maturities of two years or less[131] - The company does not hedge interest rate or foreign currency exposure and does not use derivative financial instruments for speculation[130][133] - Foreign currency fluctuations have not had a material impact on results of operations[133] ITEM 4 Controls and Procedures As of September 30, 2022, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective. There have been no material changes in internal control over financial reporting during the third quarter of 2022 - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[134] - No material changes in internal control over financial reporting occurred during the third quarter of 2022[135] PART II – OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, defaults, and exhibits ITEM 1 Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 13 to the condensed consolidated financial statements, detailing patent infringement lawsuits, a securities class action, and regulatory challenges - Legal proceedings information is incorporated by reference from Note 13, Legal Matters, in Part I of this report[136] ITEM 1A Risk Factors There have been no material changes to the risk factors previously disclosed in the company's annual report on Form 10-K for the fiscal year ended December 31, 2021. These factors could materially and adversely affect the business, financial condition, operating results, and stock price - No material changes in risk factors since the filing of the Annual Report for the fiscal year ended December 31, 2021[137] ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[138] ITEM 3 Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None to report[138] ITEM 4 Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not applicable[138] ITEM 5 Other Information There is no other information to report for the period - None to report[139] ITEM 6 Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and financial information formatted in Inline XBRL - Exhibits include Amended and Restated Certificate of Incorporation, Fourth Amended and Restated Bylaws, CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and financial information in iXBRL format[140] Signatures The report is duly signed on behalf of Vanda Pharmaceuticals Inc. by its President, Chief Executive Officer, and Chairman of the Board, Mihael H. Polymeropoulos, M.D., and its Senior Vice President, Chief Financial Officer, and Treasurer, Kevin Moran, on November 3, 2022 - Report signed by Mihael H. Polymeropoulos, M.D. (President, CEO, and Chairman) and Kevin Moran (SVP, CFO, and Treasurer) on November 3, 2022[144]