# Vanda Pharmaceuticals Inc. (VNDA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Vanda Pharmaceuticals Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1347178/000162828023002857/vnda-20221231.htm
Accession: 0001628280-23-002857
Filing date: 2023-02-09
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/VNDA/
All MD&A years: /company/VNDA/mda/
Previous year: /company/VNDA/mda/fy2021/ (FY 2021)
Next year: /company/VNDA/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing in this annual report on Form 10-K (Annual Report). This discussion and analysis generally addresses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report include historical information and other information with respect to our plans and strategy for our business and contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under Part I, Item 1A, Risk Factors, and elsewhere in this Annual Report.

Overview

Vanda Pharmaceuticals Inc. (we, our 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 two products, HETLIOZ® for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24) and nighttime sleep disturbances in Smith-Magenis Syndrome (SMS) and Fanapt® for the treatment of schizophrenia. HETLIOZ® is the first product approved by the U.S. Food and Drug Administration (FDA) for patients with Non-24 and patients with SMS. In addition, we have a number of drugs in development, including:

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

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

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

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

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

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

•VHX-896, the active metabolite of iloperidone; and

•Antisense oligonucleotide (ASO) molecules.

Operational Highlights

HETLIOZ®

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

•In December 2022, the U.S. District Court for the District of Delaware delivered its decision for the consolidated HETLIOZ® patent lawsuit against defendants Teva Pharmaceuticals USA, Inc. (Teva) and Apotex Inc. and Apotex Corp. (Apotex), ruling in favor of the defendants. We filed an appeal to the U.S. Court of Appeals for the Federal Circuit where an oral argument is scheduled for March 14, 2023. Despite the pending appeal, Teva has launched at risk its generic version of HETLIOZ® in the U.S.

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•In December 2022, we filed patent infringement lawsuits against each of Teva and Apotex in the U.S. District Court for the District of New Jersey asserting that Teva and Apotex’s generic versions of HETLIOZ® infringe U.S. Patent No. 11,285,129.

Tradipitant

•We are continuing to conduct an open-label safety study for tradipitant in gastroparesis and approximately the first 400 patients enrolled in the study were locked in preparation for the Company’s planned New Drug Application (NDA) submission. The study continues to enroll open label patients and we continue to receive requests from patients seeking access to tradipitant through the Expanded Access program, which has multiple patients who have taken tradipitant for more than one year.

•We are preparing for the submission of an NDA for tradipitant for patients with gastroparesis. We expect to submit this NDA to the FDA in the first half of 2023.

•The Phase III study of tradipitant in the treatment of motion sickness is over 75% enrolled. Results are expected by mid-2023.

Fanapt®

•In December 2022, we announced positive results in the Phase III clinical study of Fanapt® in acute manic and mixed episodes associated with bipolar I disorder in adults. We plan to submit a supplemental New Drug Application (sNDA) in the first half of 2023.

Early-Stage Programs

•In December 2022, we announced results in a Phase II clinical study of VQW-765 in the treatment of acute performance anxiety in social situations. This is the first time that an alpha 7 nicotinic acetylcholine receptor (α7-nAChR) partial agonist has shown efficacy in a clinical study of performance anxiety.

Since we began operations, we have devoted substantially all of our resources to the in-licensing, clinical development and commercialization of our products. Our ability to generate meaningful product sales and achieve profitability largely depends on our level of success in commercializing HETLIOZ® and Fanapt® in the U.S. and Europe, on our ability, alone or with others, to complete the development of our products, and to obtain the regulatory approvals for and to manufacture, market and sell our products. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks that are detailed in Part I, Item 1A, Risk Factors, of this Annual Report.

Critical Accounting Policies and Estimates

The preparation of our 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.

A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements for the year ended December 31, 2022 included in this 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 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.

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HETLIOZ® is available in the U.S. for distribution through a limited number of specialty pharmacies, and is not available in retail pharmacies. Fanapt® is available in the U.S. for distribution through a limited number of wholesalers and is available in retail pharmacies. We invoice and record revenue when customers, specialty pharmacies and wholesalers, receive product from the third-party logistics warehouse, which is the point at which control is transferred to the customer. Revenues and accounts receivable are concentrated with these customers. Outside the U.S., we sell HETLIOZ® in Germany and have a distribution agreement with Megapharm Ltd. for the commercialization of Fanapt® in Israel. 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 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.

Reserves for variable consideration are classified as product revenue allowances on the Consolidated Balance Sheets, with the exception of prompt-pay discounts which are classified as reductions of accounts receivable. The reserve for product returns for which the product may not be returned for a period of greater than one year from the balance sheet date is included as a component of other non-current liabilities in the Consolidated Balance Sheets. Uncertainties related to variable consideration are generally resolved in the quarter subsequent to period end, with the exception of Medicaid rebates, which are dependent upon the timing of when states submit reimbursement claims, Medicare inflationary rebates, and product returns that are resolved during the product expiry period specified in the customer contract. We currently record sales allowances for the following:

•Prompt-pay: Specialty pharmacies and wholesalers are 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. The allowance for rebates is 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.

•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-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Co-pay assistance utilization is based on information provided by our third-party administrator.

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•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 goods to be resalable. There was no right of return asset as of December 31, 2022 or 2021.

The following table summarizes sales discounts and allowance activity as of and for the years ended December 31, 2022, 2021 and 2020:

[[GREPCENT_TABLE]]
[["(in thousands)","Rebates & Chargebacks","","Discounts, Returns and Other","","Total"],["Balances at December 31, 2019","22,392","","","10,151","","","32,543"],["Provision related to current period sales","70,563","","","27,952","","","98,515"],["Adjustments for prior period sales","(480)","","","1,327","","","847"],["Credits/payments made","(65,605)","","","(30,557)","","","(96,162)"],["Balances at December 31, 2020","26,870","","","8,873","","","35,743"],["Provision related to current period sales","83,965","","","31,176","","","115,141"],["Adjustments for prior period sales","(853)","","","193","","","(660)"],["Credits/payments made","(78,128)","","","(30,641)","","","(108,769)"],["Balances at December 31, 2021","31,854","","","9,601","","","41,455"],["Provision related to current period sales","92,109","","","30,636","","","122,745"],["Adjustments for prior period sales","(2,647)","","","1,396","","","(1,251)"],["Credits/payments made","(83,857)","","","(31,609)","","","(115,466)"],["Balances at December 31, 2022","$","37,459","","","$","10,024","","","$","47,483"]]
[[/GREPCENT_TABLE]]

The provision for rebates and chargebacks of $92.1 million and $84.0 million for the years ended December 31, 2022 and 2021, respectively, and their ending balances at December 31, 2022 and 2021, primarily represent Medicaid rebates applicable to sales of Fanapt® and, to a lesser extent, Medicaid rebates applicable to sales of HETLIOZ®. The provision for discounts, returns and other of $30.6 million and $31.2 million for the years ended December 31, 2022 and 2021, represents wholesaler distribution fees applicable to sales of Fanapt® and estimated product returns of Fanapt®, and co-pay assistance costs and prompt pay discounts applicable to the sales of both HETLIOZ® and Fanapt®. The ending balances of discounts, returns and other as of December 31, 2022 and 2021 primarily represent estimated product returns of Fanapt® and wholesaler distribution fees applicable to sales of Fanapt®.

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 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

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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. 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.

We filed several Hatch-Waxman lawsuits in the U.S. District Court for the District of Delaware (Delaware District Court) against Teva Pharmaceuticals USA, Inc. (Teva), Apotex Inc. (Apotex), MSN Pharmaceuticals, Inc. and MSN Laboratories Private Limited (MSN) (collectively, the HETLIOZ® Defendants) asserting infringement of patents covering HETLIOZ® 20 mg capsules. In January 2022, we entered into a license agreement with MSN and Impax Laboratories LLC resolving the lawsuits against MSN. The consolidated lawsuits against the remaining HETLIOZ® Defendants were tried in March 2022. In December 2022, the Delaware District Court ruled that Teva and Apotex did not infringe U.S. Patent No. RE46,604, and that the asserted claims of U.S. Patent Nos. RE46,604; 9,730,910; 10,149,829; and 10,376,487 were invalid. We have appealed the decision to the U.S. Court of Appeals for the Federal Circuit. We have also filed Hatch-Waxman lawsuits in U.S. District Court for the District of New Jersey against each of Teva and Apotex and in the U.S. District Court for the Southern District of Florida against Apotex, in each case, asserting infringement of a method of administration patent that was not litigated in the Delaware District Court. This litigation does not affect the sale of HETLIOZ® in the E.U. and there is no generic litigation pending outside of the U.S. with respect to HETLIOZ®. Furthermore, the litigation does not relate to the HETLIOZ LQ® oral suspension formulation. The unfavorable ruling by the Delaware District Court and subsequent developments related to the HETLIOZ® patent litigation was determined to be a triggering event for potential impairment. As a result, we performed an impairment review for our HETLIOZ® asset group and determined, based upon our review of undiscounted cash flows, that the carrying value of our HETLIOZ® asset group, inclusive of the intangible asset, is recoverable. Accordingly, we did not record an intangible asset impairment charge during the year ended December 31, 2022. Additionally, our expected cash flows continue to support our estimated useful economic life of the intangible asset through March 2035.

Income taxes. We assess the need for a valuation allowance against our deferred tax asset 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. Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities, which could be affected by the resolution of our HETLIOZ® patent litigation, amongst other factors. Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. 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 consolidated financial statements included in Part II, Item 8 of this Annual Report for information on recent accounting pronouncements.

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Results of Operations

We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including our and our partners’ ability to continue to successfully commercialize our products, any possible payments made or received pursuant to license agreements, progress of our research and development efforts, the timing and outcome of clinical trials and related possible regulatory approvals. In December 2022, the Delaware District Court ruled in favor of the Defendants in our patent litigation relating to the Defendants’ filing of Abbreviated New Drug Applications (ANDAs) for generic versions of HETLIOZ® in the U.S. We disagree with the ruling that the claims of our patents are invalid and are vigorously pursuing appeal. Teva has since launched its generic version of HETLIOZ® at risk in the U.S. The FDA has approved the ANDAs for Apotex and MSN, and HETLIOZ® could face even more competition from generic companies in the U.S. in the near term in light of the patent litigation rulings against us. Sales of generic versions of HETLIOZ® could result in a significant reduction in the demand for HETLIOZ® and/or the price at which we can sell it, which would have a material and adverse impact on our revenues and results of operations. Unless and until our appeal is successful, we may reduce the amount we spend with the intention of retaining the capability to ramp-up promptly if we win upon appeal.

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2022","","2021","","Net Change","","Percent"],["HETLIOZ\u00ae net product sales","$","159,655","","","$","173,536","","","$","(13,881)","","","(8)","%"],["Fanapt\u00ae net product sales","94,727","","","95,146","","","(419)","","","\u2014","%"],["Total net product sales","$","254,382","","","$","268,682","","","$","(14,300)","","","(5)","%"]]
[[/GREPCENT_TABLE]]

HETLIOZ® net product sales decreased by $13.9 million, or 8%, to $159.7 million for the year ended December 31, 2022 compared to $173.5 million for the year ended December 31, 2021. The decrease to net product sales was attributable to a decrease in volume partially offset by an increase in price net of deductions. The decrease in volume was due in part to continued reimbursement challenges for prescriptions for patients with Non-24.

Fanapt® net product sales decreased by $0.4 million to $94.7 million for the year ended December 31, 2022 compared to $95.1 million for the year ended December 31, 2021. The decrease to net product sales was attributable to a decrease in volume partially offset by an increase in price net of deductions.

Cost of goods sold. Cost of goods sold decreased by $1.3 million, or 5%, to $24.3 million for the year ended December 31, 2022 compared to $25.6 million for the year ended December 31, 2021. Cost of goods sold includes third-party manufacturing costs of product sold, third-party royalty costs and distribution and other costs. Third-party royalty costs were 5% of HETLIOZ® net product sales in Germany and 6% of Fanapt® net product sales. Third-party royalty costs on HETLIOZ® net product sales in the U.S. decreased from 10% to 5% in December 2022.

Research and development expenses. Research and development expenses increased by $10.4 million, or 14%, to $85.8 million for the year ended December 31, 2022 compared to $75.4 million for the year ended December 31, 2021. The increase was primarily due to an increase in clinical trial expenses associated with our Fanapt® development program and our other development programs, which include a $3.0 million upfront fee expensed in the third quarter of 2022 in consideration for entering into a research and development agreement.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2022","","2021"],["Direct project costs (1)"],["HETLIOZ\u00ae","$","12,084","","","$","11,450"],["Fanapt\u00ae","26,931","","","22,284"],["Tradipitant","25,232","","","23,460"],["VTR-297","1,814","","","1,928"],["CFTR","1,168","","","3,180"],["VQW-765","3,570","","","2,548"],["Other","7,230","","","3,067"],["Total direct project costs","78,029","","","67,917"],["Indirect project costs (1)"],["Stock-based compensation","3,964","","","3,955"],["Other indirect overhead","3,777","","","3,491"],["Total indirect project costs","7,741","","","7,446"],["Total research and development expense","$","85,770","","","$","75,363"]]
[[/GREPCENT_TABLE]]

(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 $12.4 million, or 10%, to $136.5 million for the year ended December 31, 2022 compared to $124.0 million for the year ended December 31, 2021. The increase in selling, general and administrative expenses was primarily the result of an increase in spending on ongoing litigation and other corporate activities as well as costs related to our sales force, partially offset by a decrease in spending on marketing activities for our commercial products.

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

Other income. Other income was $5.0 million for the year ended December 31, 2022 compared to $0.2 million for the year ended December 31, 2021. Other income primarily consists of investment income on our marketable securities, which increased in 2022 as a result of higher yields on our marketable securities.

Provision for income taxes. A provision for income taxes of $5.0 million and $9.2 million was recorded for the years ended December 31, 2022 and 2021, respectively. Our income tax expense or benefit is determined by applying the statutory tax rates in jurisdictions where we operate to each period’s income before income taxes. Adjustments are made for permanent differences in taxability or deductibility of pretax items as well as for other items, such as tax credits that are generated on our research and development activities. See Note 14, Income Taxes, to the consolidated financial statements in Part II, Item 8 of this Annual Report for additional information.

Liquidity and Capital Resources

As of December 31, 2022, our total cash and cash equivalents and marketable securities were $466.9 million compared to $432.8 million at December 31, 2021. 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.

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Our liquidity resources as of December 31, 2022 and 2021 are summarized as follows:

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2022","","December 31, 2021"],["Cash and cash equivalents","$","135,029","","","$","52,071"],["Marketable securities:"],["U.S. Treasury and government agencies","177,170","","","194,719"],["Corporate debt","154,660","","","186,023"],["Total marketable securities","331,830","","","380,742"],["Total cash, cash equivalents and marketable securities","$","466,859","","","$","432,813"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022, 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 are not material. Various other long-term agreements entered into for services with other third-party vendors, such as inventory purchase arrangements, are cancellable in nature or contain variable commitment terms within the agreement that are within our control.

We also have long-term contractual obligations related to our operating leases and license agreements. Refer to Note 7, Leases, and Note 10, Commitments and Contingencies, respectively, to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information about these commitments.

We do not have any off-balance sheet arrangements.

Based on our current operating plans, which include costs and expenses in connection with our continued clinical development of tradipitant and our other products, U.S. commercial activities for HETLIOZ® and Fanapt®, pursuit of market approval of HETLIOZ® and Fanapt® in other regions and in other indications, and payments due upon achievement of milestones under our license agreements, we believe that our cash, cash equivalents and marketable securities and cash received from product sales will be sufficient for at least the next 12 months. 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.

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Table of Contents

Cash Flow

The following table summarizes our net cash flows from operating, investing and financing activities for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2022","","2021","","Net Change"],["Net cash provided by (used in):"],["Operating activities:"],["Net income","$","6,275","","","$","33,152","","","$","(26,877)"],["Non-cash charges","19,635","","","28,325","","","(8,690)"],["Net change in operating assets and liabilities","6,074","","","2,737","","","3,337"],["Operating activities","31,984","","","64,214","","","(32,230)"],["Investing activities:"],["Purchases of property and equipment","(679)","","","(552)","","","(127)"],["Net purchases, sales and maturities of marketable securities","50,604","","","(76,144)","","","126,748"],["Investing activities","49,925","","","(76,696)","","","126,621"],["Financing activities:"],["Proceeds from the exercise of stock options","734","","","3,550","","","(2,816)"],["Financing activities","734","","","3,550","","","(2,816)"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","265","","","(91)","","","356"],["Net change in cash, cash equivalents and restricted cash","$","82,908","","","$","(9,023)","","","$","91,931"]]
[[/GREPCENT_TABLE]]

Operating Activities. Cash flows provided by operating activities during the year ended December 31, 2022 were $32.0 million, a decrease of $32.2 million compared to $64.2 million during the year ended December 31, 2021. The decrease reflects a decrease of $26.9 million in net income and a decrease of $8.7 million in non-cash charges primarily due to a decrease in the change in deferred tax assets and additional amortization of discounts on our marketable securities, partially offset by an increase of $3.3 million from the net change in operating assets and liabilities.

Investing Activities. Cash flows provided by investing activities during the year ended December 31, 2022 were $49.9 million, an increase of $126.6 million compared to cash used in investing activities of $76.7 million during the year ended December 31, 2021. The change in investing activities reflects the timing of net reinvestment of available cash and cash equivalents in our portfolio of marketable securities.

Financing Activities. Cash flows provided by financing activities during the year ended December 31, 2022 were $0.7 million, a decrease of $2.8 million compared to $3.6 million during the year ended December 31, 2021. Financing activities include proceeds from exercises of stock options.