Vanda Pharmaceuticals Inc.: Form 10-Q for the period ended Sep 30, 2024

Overview

Vanda Pharmaceuticals Inc. (we, our, us or Vanda) is a leading global biopharmaceutical company focused on the development and commercialization of innovative therapies to address high unmet medical needs and improve the lives of patients.

We strive to advance novel approaches to bring important new medicines to market through responsible innovation. 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 three products, Fanapt® for the acute treatment of manic or mixed episodes associated with bipolar I disorder and the treatment of schizophrenia, 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), and PONVORY® 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 United States 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:

• Milsaperidone (VHX-896), the active metabolite of Fanapt® (iloperidone), for the acute treatment of manic or mixed episodes associated with bipolar I disorder and for the treatment of schizophrenia and major depressive disorder;
• Fanapt® (iloperidone) long acting injectable (LAI) formulation for the treatment of schizophrenia;
• HETLIOZ® (tasimelteon) for the treatment of jet lag disorder, insomnia, pediatric insomnia, delayed sleep phase disorder (DSPD) and pediatric Non-24;
• PONVORY® (ponesimod) for the treatment of psoriasis and ulcerative colitis;
• Tradipitant (VLY-686), a small molecule neurokinin-1 (NK-1) receptor antagonist, for the treatment of gastroparesis, motion sickness and atopic dermatitis;
• 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;
• VTR-297, a small molecule histone deacetylase (HDAC) inhibitor for the treatment of onychomycosis and 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; and
• 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 the IGHMBP2 gene.

Operational Highlights

Psychiatry Portfolio

• Fanapt®: We initiated the commercial launch of Fanapt® for the acute treatment of bipolar I disorder in adults in the third quarter of 2024, which included the expansion of our existing sales force and the introduction of prescriber awareness and comprehensive marketing programs. Several lead indicators suggest a strong initial market response including new patient starts as reflected by new to brand prescriptions (NBRx), increasing by over 90% in the third quarter of 2024 as compared to the third quarter of 2023.
• Milsaperidone: We expect to submit a New Drug Application (NDA) for milsaperidone (also known as VHX-896 and P-88), the active metabolite of Fanapt®, for the treatments of schizophrenia and acute bipolar I disorder to the FDA in early 2025. We expect to initiate a Phase III program for milsaperidone for major depressive disorder (MDD) by the end of 2024.
• Iloperidone LAI: We expect to initiate a Phase III program for the LAI formulation of Fanapt® in the fourth quarter of 2024.

HETLIOZ®

• We have initiated a HETLIOZ LQ® program in pediatric insomnia. Although the prevalence of insomnia in children is difficult to determine, it is estimated that 20-40% of children experience significant sleep problems. There are currently no approved treatments for pediatric insomnia.
• We continue to pursue FDA approval for HETLIOZ® for the treatments of jet lag disorder and insomnia. We are challenging the FDA’s rejection of our supplemental New Drug Application (sNDA) for the treatment of jet lag disorder in the U.S. Court of Appeals for the D.C. Circuit. We have accepted the opportunity for a hearing with the FDA on the approvability of the insomnia sNDA.
• Our litigation asserting HETLIOZ® Patent No. 11,285,129 against generic manufacturers is currently pending in the U.S. District Court for the District of Delaware. A jury trial has been scheduled for the first quarter of 2026.
• European Medicines Agency action on our Marketing Authorization Application for HETLIOZ® and HETLIOZ LQ® for SMS is expected in the first quarter of 2025.

PONVORY®

• We initiated the commercial launch of PONVORY® for the treatment of relapsing forms of multiple sclerosis in the third quarter of 2024, which included the deployment of a specialty sales force.
• We expect IND applications for PONVORY® in the treatments of psoriasis and ulcerative colitis to be completed in the fourth quarter of 2024.

Tradipitant

• Gastroparesis NDA: In September 2024, the FDA declined to approve our NDA for tradipitant for the treatment of symptoms of gastroparesis. We plan to continue to pursue the marketing authorization for tradipitant and support the expanded access program that is currently serving several dozen patients with gastroparesis.
• Motion Sickness NDA: We expect to submit an NDA for tradipitant for the treatment of motion sickness to the FDA in the fourth quarter of 2024. The NDA for the treatment of motion sickness is expected to include the positive results of three placebo controlled clinical studies where tradipitant was effective in preventing vomiting associated with motion.
• We plan to initiate a clinical trial to study tradipitant in the prevention of vomiting induced by a GLP-1 analog (semaglutide) in the fourth quarter of 2024.

Early-Stage Programs

• We plan to proceed with studies of VSJ-110, a CFTR activator, for the treatment of dry eye disorder. An ongoing proof of concept study indicates an effect in improving the signs (fluorescein corneal staining) of dry eye disease.
• VPO-227, a CFTR inhibitor for the treatment of cholera, has received approval to proceed in a Phase I study in Bangladesh, a country where the treatment of cholera remains a significant and unmet need. We plan to initiate this study by the end of 2024.
• The Phase I clinical study for 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, expects to enroll the patient by the end of 2024.
• The Phase I clinical study for VTR-297 for the treatment of onychomycosis, a fungal infection of the nail, was initiated in April 2024. The study is fully enrolled, and results are expected by the end of 2024.
• VQW-765, an alpha-7 nicotinic acetylcholine receptor partial agonist, is currently in clinical development for the treatment of acute performance anxiety in social situations.

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 Fanapt® and HETLIOZ® in the U.S. 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 our annual report on Form 10-K (Annual Report) for the year ended December 31, 2023 and Item 1A, Risk Factors, of this Quarterly Report.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting policies including estimates, assumptions and judgments from those described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Annual Report. A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements included in the Annual Report. However, we believe that the following accounting policies are important to understanding and evaluating our reported financial results as they involve the most significant judgments and estimates used in the preparation of our condensed consolidated financial statements, and we have accordingly included them in this discussion.

Revenue from net product sales. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue when control of the product is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer.

Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. HETLIOZ® is available in the U.S. for distribution through a limited number of specialty pharmacies and is not available in retail pharmacies. PONVORY® is available in the U.S. for distribution primarily through specialty distributors and specialty pharmacies. We invoice and record revenue when customers, wholesalers, specialty pharmacies and specialty distributors, 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 have a distribution agreement for the commercialization of Fanapt® in Israel and sell HETLIOZ® in Germany. Receivables are carried at transaction price net of allowance for credit losses. Allowance for credit losses is measured using historical loss rates based on the aging of receivables and incorporating current conditions and forward-looking estimates.

The transaction price is determined based upon the consideration to which we will be entitled in exchange for transferring product to the customer. Our product sales are recorded net of applicable product revenue allowances for which reserves are established and include discounts, rebates, chargebacks, service fees, co-pay assistance and product returns that are applicable for various government and commercial payors. Where appropriate, our estimates of variable consideration included in the transaction price consider a range of possible outcomes. 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 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 nine months ended September 30, 2024 and 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.

Reserves for variable consideration are classified as product revenue allowances on the Condensed Consolidated Balance Sheets, with the exception of prompt-pay discounts, which are classified as reductions of accounts receivable. 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 Condensed 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, 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 2024 and 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 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.

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

Chargebacks: Chargebacks are discounts that occur when contracted indirect customers purchase directly from specialty pharmacies and wholesalers. Contracted indirect customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy or wholesaler, in turn, charges back the difference between the price initially paid by the specialty pharmacy or wholesaler and the discounted price paid to the specialty pharmacy or wholesaler by the contracted customer.

Medicare Part D coverage gap: The Medicare Part D prescription drug benefit requires manufacturers to fund approximately 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients for applicable drugs. We account for the Medicare Part D coverage gap using a point of sale model. 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 of 2022. The implementation of the new discounting program is expected to result in higher discounts for our Medicare payor segment relative to the current Medicare Part D prescription drug benefit program.

Service fees: We receive sales order management, data and distribution services from certain customers, for which we are assessed fees. These fees are based on contracted terms and are known amounts. 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-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.

Product returns: We generally offer direct customers a limited right to return as contractually defined with our customers. We consider several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, historical return activity, including activity for product sold for which the return period has past, prescription trends and other relevant factors. We do not expect returned products to be resalable. There was no right of return asset as of September 30, 2024 or December 31, 2023.

The following table summarizes sales discounts and allowance activity as of and for the nine months ended September 30, 2024:

(in thousands)

The provision of $57.5 million for rebates and chargebacks for the nine months ended September 30, 2024 and its ending balance at September 30, 2024 primarily represents Medicaid rebates applicable to sales of Fanapt® and, to a lesser extent, HETLIOZ®. The provision of $22.2 million for discounts, returns and other for the nine months ended September 30, 2024 primarily represents wholesaler distribution fees applicable to sales of Fanapt® and estimated product returns of Fanapt®, and co-pay assistance costs and prompt-pay discounts across our commercial products.

Stock-based compensation. Compensation costs for all stock-based awards to employees and directors are measured based on the grant date fair value of those awards and recognized over the period during which the employee or director is required to perform service in exchange for the award. We use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatility rates are based on the historical volatility of our publicly traded common stock and other factors. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. We have never paid cash dividends to our stockholders and do not plan to pay dividends in the foreseeable future. As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Research and development expenses. Research and development expenses consist primarily of fees for services provided by third parties in connection with the clinical trials, costs of contract manufacturing services for clinical trial use, milestone payments made under licensing agreements prior to regulatory approval, costs of materials used in clinical trials and research and development, costs for regulatory consultants and filings, depreciation of capital resources used to develop products, related facilities costs, and salaries, other employee-related costs and stock-based compensation for research and development personnel. 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. Milestone payments are accrued when it is deemed probable that the milestone event will be achieved. Costs related to the acquisition of intellectual property are expensed as incurred if the underlying technology is developed in connection with our research and development efforts and has no alternative future use.

Clinical trials are inherently complex, often involve multiple service providers and can include payments made to investigator physicians at study sites. Because billing for services often lags delivery of service by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. Our assessments include, but are not limited to: (i) an evaluation by the project manager of the work that has been completed during the period, (ii) measurement of progress prepared internally and/or provided by the third-party service provider, (iii) analyses of data that justify the progress, and (iv) management’s judgment. 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 and impairment of long-lived assets. 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. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, a significant adverse change in legal or regulatory factors that could affect the value or patent life including our ability to defend and enforce patent claims and other intellectual property rights and significant negative industry or economic trends. 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.

As a result of the unfavorable events and subsequent developments in 2022 and 2023 related to the HETLIOZ® patent litigation (see Note 14, Legal Matters, to the condensed consolidated financial statements included in Part I of this quarterly report on Form 10-Q (Quarterly Report)) we performed impairment reviews for our HETLIOZ® asset group in those years 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 have not recorded an intangible asset impairment charge in any period. 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 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. We assess the need for a valuation allowance against our deferred tax assets each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. The analysis is highly dependent upon historical and projected taxable income. Since 2018, we have generated annual pretax income in the U.S. 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, the commercial launches of Fanapt® in bipolar disorder and PONVORY® in relapsing forms of MS, 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. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to the condensed consolidated financial statements included in Part I of this Quarterly Report for information on recent accounting pronouncements.

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, including activities related to the approval of Fanapt® for the acute treatment of manic or mixed episodes associated with bipolar I disorder in adults in April 2024 and acquired rights to PONVORY® in the U.S. and Canada in December 2023, 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.

For HETLIOZ®, 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. 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. The Federal Circuit affirmed this ruling, and the U.S. Supreme Court denied our petition for a writ of certiorari in April 2024. The FDA has also approved the ANDA for MSN Pharmaceuticals, Inc. and MSN Laboratories Private Limited (MSN). The license agreement that we entered into when we settled our patent 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, or 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. In April 2024, we filed litigation against MSN, Impax, and Amneal alleging fraudulent inducement of the license agreement. See Note 14, Legal Matters, to the condensed consolidated financial statements in Part I of this Quarterly Report. 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. In addition, 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.

On September 18, 2024, the U.S. Food and Drug Administration (FDA) declined to approve Vanda’s New Drug Application (NDA) of tradipitant for the treatment of symptoms in gastroparesis, providing Vanda with a Complete Response Letter (CRL). Vanda will continue to pursue the marketing authorization for tradipitant and will continue to support the expanded access program that is currently serving several dozen patients with gastroparesis.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Revenues. Total revenues increased by $8.8 million, or 23%, to $47.7 million for the three months ended September 30, 2024 compared to $38.8 million for the three months ended September 30, 2023. Revenues were as follows:

(in thousands)

Fanapt® net product sales increased by $2.6 million, or 12%, to $23.9 million for the three months ended September 30, 2024 compared to $21.3 million for the three months ended September 30, 2023. The increase to net product sales was attributable to an increase in price net of deductions and volume. We initiated the commercial launch of Fanapt® for bipolar I disorder in adults in the third quarter of 2024.

HETLIOZ® net product sales increased by $0.4 million, or 2%, to $17.9 million for the three months ended September 30, 2024 compared to $17.5 million for the three months ended September 30, 2023. The increase to net product sales was attributable to an increase in volume, partially offset by a decrease in price net of deductions, including the impact of changes in constrained revenue. Our HETLIOZ® net product sales as reported for the three months ended March 31, 2023 reflected higher unit sales as compared to recent prior periods. The higher unit sales during the three months ended March 31, 2023 resulted in a significant increase of inventory stocking at specialty pharmacy customers at March 31, 2023. During the remainder of 2023, although there was continued destocking at specialty pharmacy customers, inventory levels remained elevated relative to inventory levels prior to the entrance of generic competition and remained elevated at March 31, 2024, June 30, 2024 and September 30, 2024. Going forward, HETLIOZ® net product sales may reflect lower unit sales as a result of reduction of the elevated inventory levels at specialty pharmacy customers or may be variable depending upon when specialty pharmacy customers need to purchase again. Further, HETLIOZ® net product sales will likely decline in future periods, potentially significantly, related to continued generic competition in the U.S. We constrained HETLIOZ® net product sales for the three months ended September 30, 2024 and 2023 to an amount not probable of significant revenue reversal. The amount of revenue recognized during the three months ended September 30, 2024 and 2023 related to changes in estimates on revenue constrained during the second quarter of 2024 and 2023 was $0.8 million and $0.3 million, respectively. HETLIOZ® net product sales could experience variability in future periods as the remaining uncertainties associated with variable consideration related to inventory stocking by specialty pharmacy customers are resolved.

In December 2023, we completed the acquisition of the U.S. and Canadian rights to PONVORY® from Actelion Pharmaceuticals Ltd. (Janssen), a Johnson & Johnson Company. PONVORY® net product sales decreased by $2.8 million, or 32%, to $5.9 million for the three months ended September 30, 2024 compared to $8.6 million for the three months ended June 30, 2024. The decrease in net product sales was attributable to a decrease in volume and price net of deductions. We initiated the commercial launch of PONVORY® in relapsing forms of MS in the third quarter of 2024.

Cost of goods sold. Cost of goods sold decreased by $0.5 million, or 17%, to $2.6 million for the three months ended September 30, 2024 compared to $3.1 million for the three months ended September 30, 2023. 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 6% of Fanapt® net product sales and 5% of HETLIOZ® net product sales in Germany. Third-party royalty costs on HETLIOZ® net product sales in the U.S. decreased from 10% to 5% in December 2022 and ended in April 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 included $2.1 million and $3.0 million of Fanapt® product and $7.3 million and $7.2 million of HETLIOZ® product as of September 30, 2024 and December 31, 2023, respectively.

Research and development expenses. Research and development expenses increased by $0.2 million, or 1.1%, to $16.8 million for the three months ended September 30, 2024 compared to $16.6 million for the three months ended September 30, 2023. The increase was primarily due to an increase in expenses associated with our milsaperidone development program partially offset by expenses associated with our tradipitant development program.

The following table summarizes the costs of our product development initiatives for the three months ended September 30, 2024 and 2023:

(in thousands)

(1) We record direct costs, including personnel costs and related benefits, on a project-by-project basis. Many of our research and development costs are not attributable to any individual project because we share resources across several development projects. We record indirect costs that support a number of our research and development activities in the aggregate, including stock-based compensation.

We expect to incur significant research and development expenses as we continue to develop our products. In addition, we expect to incur licensing costs in the future that could be substantial, as we continue our efforts to expand our product pipeline.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $12.8 million, or 52%, to $37.6 million for the three months ended September 30, 2024 compared to $24.8 million for the three months ended September 30, 2023. The increase in selling, general and administrative expenses was primarily the result of an increase in spending on commercial activities related to our commercial launches of Fanapt® in bipolar disorder and PONVORY® in relapsing forms of MS, as well as legal and other corporate activities. During the first nine months of 2024, we commenced a host of commercial activities as part of our commercial launches of Fanapt® in bipolar disorder and PONVORY® in multiple sclerosis, including an expansion of our sales force and the development of prescriber awareness and comprehensive marketing programs. Selling, general and administrative expenses may increase in future periods as a result of the ongoing commercial launches of Fanapt® in bipolar disorder and PONVORY® in relapsing forms of MS, which were initiated in the third quarter of 2024.

Intangible asset amortization. Intangible asset amortization was $1.8 million and $0.4 million for the three months ended September 30, 2024 and 2023, respectively. Amortization expense increased in 2024 due to amortization on the intangible asset from the rights to PONVORY® in the U.S. and Canada which were acquired in December 2023.

Other income. Other income was $4.8 million for the three months ended September 30, 2024 compared to $5.9 million for the three months ended September 30, 2023. Other income primarily consists of investment income on our marketable securities.

Provision for income taxes. An income tax benefit of $0.9 million and $0.3 million was recorded for the three months ended September 30, 2024 and 2023, respectively. The income tax benefit for each of the three months ended September 30, 2024 and 2023 was primarily driven by the estimated effective tax rate for the year as well as discrete income tax expense of $0.2 million.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Revenues. Total revenues decreased by $1.8 million, or 1%, to $145.6 million for the nine months ended September 30, 2024 compared to $147.4 million for the nine months ended September 30, 2023. Revenues were as follows:

(in thousands)

Fanapt® net product sales decreased by $0.6 million, or 1%, to $67.6 million for the nine months ended September 30, 2024 compared to $68.3 million for the nine months ended September 30, 2023. The decrease to net product sales was attributable to a decrease in volume, partially offset by an increase in price net of deductions. We initiated the commercial launch of Fanapt® for bipolar I disorder in adults in the third quarter of 2024.

HETLIOZ® net product sales decreased by $22.5 million, or 28%, to $56.6 million for the nine months ended September 30, 2024 compared to $79.1 million for the nine months ended September 30, 2023. The decrease to net product sales was attributable to a decrease in volume, partially offset by an increase in price net of deductions. Our HETLIOZ® net product sales as reported for the three months ended March 31, 2023 reflected higher unit sales as compared to recent prior periods. The higher unit sales during the three months ended March 31, 2023 resulted in a significant increase of inventory stocking at specialty pharmacy customers at March 31, 2023. During the remainder of 2023, although there was continued destocking at specialty pharmacy customers, inventory levels remained elevated relative to inventory levels prior to the entrance of generic competition and remained elevated at March 31, 2024, June 30, 2024 and September 30, 2024. Going forward, HETLIOZ® net product sales may reflect lower unit sales as a result of reduction of the elevated inventory levels at specialty pharmacy customers or may be variable depending on when specialty pharmacy customers need to purchase again. Further, HETLIOZ® net product sales will likely decline in future periods, potentially significantly, related to continued generic competition in the U.S. We constrained HETLIOZ® net product sales for the nine months ended September 30, 2024 and 2023 to an amount not probable of significant revenue reversal. The amount of revenue recognized during the nine months ended September 30, 2024 related to changes in estimates on revenue constrained during 2023 was $1.4 million. HETLIOZ® net product sales could experience variability in future periods as the remaining uncertainties associated with variable consideration related to inventory stocking by specialty pharmacy customers are resolved.

In December 2023, we completed the acquisition of the U.S. and Canadian rights to PONVORY® from Janssen. PONVORY® net product sales were $21.3 million for the nine months ended September 30, 2024. We initiated the commercial launch of PONVORY® in relapsing forms of MS in the third quarter of 2024.

Cost of goods sold. Cost of goods sold decreased by $2.6 million, or 23%, to $8.7 million for the nine months ended September 30, 2024 compared to $11.3 million for the nine months ended September 30, 2023. 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 6% of Fanapt® net product sales and 5% of HETLIOZ® net product sales in Germany. Third-party royalty costs on HETLIOZ® net product sales in the U.S. decreased from 10% to 5% in December 2022 and ended in April 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 included $2.1 million and $3.0 million of Fanapt® product and $7.3 million and $7.2 million of HETLIOZ® product as of September 30, 2024 and December 31, 2023, respectively.

Research and development expenses. Research and development expenses increased by $2.1 million, or 4%, to $54.6 million for the nine months ended September 30, 2024 compared to $52.5 million for the nine months ended September 30, 2023. The increase in research and development expenses was associated an increase in expenses associated with our PONVORY® and CFTR development programs, partially offset by a decrease in expenses associated with our Fanapt®, tradipitant and other development programs, which include expenses incurred on product discovery such as ASO.

The following table summarizes the costs of our product development initiatives for the nine months ended September 30, 2024 and 2023:

(in thousands)

(1) We record direct costs, including personnel costs and related benefits, on a project-by-project basis. Many of our research and development costs are not attributable to any individual project because we share resources across several development projects. We record indirect costs that support a number of our research and development activities in the aggregate, including stock-based compensation.

We expect to incur significant research and development expenses as we continue to develop our products. In addition, we expect to incur licensing costs in the future that could be substantial, as we continue our efforts to expand our product pipeline.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $17.9 million, or 20%, to $107.1 million for the nine months ended September 30, 2024 compared to $89.3 million for the nine months ended September 30, 2023. The increase in selling, general and administrative expenses was primarily the result of an increase in spending on commercial activities related to our commercial launches of Fanapt® in bipolar disorder and PONVORY® in relapsing forms of MS, as well as legal and other corporate activities. During the first nine months of 2024, we commenced a host of commercial activities as part of our commercial launches of Fanapt® in bipolar disorder and PONVORY® in multiple sclerosis, including an expansion of our sales force and the development of prescriber awareness and comprehensive marketing programs. Selling, general and administrative expenses may increase in future periods as a result of the ongoing commercial launches of Fanapt® in bipolar disorder and PONVORY® in relapsing forms of MS, which were initiated in the third quarter of 2024.

Intangible asset amortization. Intangible asset amortization was $5.5 million and $1.1 million for the nine months ended September 30, 2024 and 2023, respectively. Amortization expense increased in 2024 due to amortization on the intangible asset from the rights to PONVORY® in the U.S. and Canada which were acquired in December 2023.

Other income. Other income was $14.0 million for the nine months ended September 30, 2024 compared to $14.9 million for the nine months ended September 30, 2023. Other income primarily consists of investment income on our marketable securities.

Provision for income taxes. We recorded an income tax benefit of $2.4 million and provision for income taxes of $3.1 million for the nine months ended September 30, 2024 and 2023, respectively. The income tax expense (benefit) for the nine months ended September 30, 2024 and 2023 was primarily driven by the estimated effective tax rate for the year, as well as discrete income tax expense of $1.0 million and $2.1 million, respectively.

Liquidity and Capital Resources

As of September 30, 2024, our total cash and cash equivalents and marketable securities were $376.3 million compared to $388.3 million at December 31, 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. Our marketable securities consist of investments in government sponsored and corporate enterprises and commercial paper.

Our liquidity resources as of September 30, 2024 and December 31, 2023 are summarized as follows:

(in thousands)

As of September 30, 2024, we maintained all of our cash, cash equivalents and marketable securities in two financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits, but we do not anticipate any losses with respect to such deposits.

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. 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.

We also have long-term contractual obligations related to our operating leases and license agreements. Other than the lease agreement discussed in Note 9, Commitments and Contingencies, to the condensed consolidated financial statements in Part I of this Quarterly Report, there have been no material changes to our long-term contractual obligations as disclosed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report. For further information regarding our license agreements, see Note 9, Commitments and Contingencies, to the condensed consolidated financial statements included in Part I of this Quarterly Report.

We do not have any off-balance sheet arrangements.

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

We may need or desire to obtain additional capital to finance our operations through debt, equity or alternative financing arrangements. We may also seek capital through collaborations or partnerships with other companies. The issuance of debt could require us to grant liens on certain of our assets that may limit our flexibility and debt securities may be convertible into common stock. If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may significantly dilute the ownership of our existing stockholders. If we are unable to obtain additional financing, we may be required to reduce the scope of our future activities, which could harm our business, financial condition and operating results. There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all.

Cash Flow

The following table summarizes our net cash flows from operating and investing activities for the nine months ended September 30, 2024 and 2023:

(in thousands)

Operating Activities: Cash flows used in operating activities during the nine months ended September 30, 2024 were $13.9 million, a decrease of $30.5 million compared to $16.5 million during the nine months ended September 30, 2023. The decrease reflects a decrease of $18.9 million in net income, non-cash charges, including the change in deferred income taxes, as well as the net change in operating assets and liabilities. The decrease in net change in operating assets and liabilities is primarily due to timing of payments for expenses and receipt of cash for accounts receivable.

Investing Activities: Cash flows used in investing activities during the nine months ended September 30, 2024 were $21.4 million, an increase of $53.2 million compared to $31.7 million during the nine months ended September 30, 2023. The change in investing activities primarily reflects the timing of net reinvestment of available cash and cash equivalents in our portfolio of marketable securities. Additionally, the $4.2 million asset acquisition cash flow during the nine months ended September 30, 2024 relates to the payment of the remaining consideration for the PONVORY® acquisition that was accrued as of December 31, 2023.

Our exposure to market risk is currently confined to our cash and cash equivalents, marketable securities and restricted cash. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes.

We deposit our cash with financial institutions that we consider to be of high credit quality and purchase marketable securities that are generally investment grade, liquid, short-term fixed income securities and money-market instruments denominated in U.S. dollars. Our marketable securities consist of commercial paper, corporate notes and U.S. government agency notes and have maturities of less than two years. We do not believe that an increase in market rates would have any significant impact on the realized value of our cash equivalents and marketable securities.

We are also exposed to risks related to changes in foreign currency exchange rates relating to our foreign operations. The functional currency of our international subsidiaries is the local currency. We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our subsidiaries’ respective functional currencies. 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. dollars for inclusion in our condensed 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.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of September 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2024, the end of the period covered by this quarterly report on Form 10-Q, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We previously disclosed in Part I, Item 1A of our annual report on Form 10-K (Annual Report) for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 8, 2024, important factors which could affect our business, financial condition, results of operations and future operations under the heading Risk Factors. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and the price of our common stock. Other than as set forth below, there have been no material changes in our risk factors subsequent to the filing of our Annual Report for the fiscal year ended December 31, 2023.

Anti-takeover provisions in our charter and bylaws and under Delaware law, and the adoption of a rights plan, could prevent or delay a change in control of our company.

We are a Delaware corporation and the anti-takeover provisions of Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws:

• authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
• do not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors;
• establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
• require that directors only be removed from office for cause;
• provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
• limit who may call special meetings of stockholders;
• prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
• establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Moreover, in April 2024, our board of directors adopted a rights agreement which provided each stockholder of record as of the close of business on April 29, 2024 a right for each outstanding share of common stock of the Company held by such stockholder (each, a Right), which entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, of the Company at an exercise price of $25.00, subject to adjustment. The complete terms of the Rights are set forth in the Rights Agreement, dated as of April 17, 2024, between the Company and Equiniti Trust Company, LLC, as rights agent (Rights Agent), as amended by that certain Amendment No. 1 to the Rights Agreement, by and between the Company and the Rights Agent, and that certain Amendment No. 2 to the Rights Agreement, by and between the Company and the Rights Agent (as amended, the Rights Agreement). The Rights Agreement has a one-year term, expiring on April 16, 2025, and could have the effect of discouraging, delaying or preventing a change in management or control over us. While there is no plan to do so at this time, our board of directors may choose to adopt a new rights plan in the future.