UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal
    year ended December 31, 2010o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission File
    No. 001-34186
  VANDA PHARMACEUTICALS
    INC.
 (Exact name of registrant as
    specified in its charter)
   Delaware(State or other jurisdiction
    of
    incorporation or organization)

03-0491827(I.R.S. Employer
    Identification No.)   9605 Medical Center Drive, Suite 300
 Rockville, Maryland 20850
 (240) 599-4500
 (Address and telephone number,
    including area code, of registrants principal executive
    offices)
  Securities registered pursuant to Section 12(b) of the
    Exchange Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001

The Nasdaq Stock Market LLC(NASDAQ Global Market)Rights to Purchase Series A Junior Participating Preferred
    Stock

The Nasdaq Stock Market LLC
    (NASDAQ Global Market)   Securities registered pursuant to Section 12(g) of the
    Exchange Act: None
  o þ
  o þ
  þ o
  Regulation S-T o o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting company
    o   Rule 12b-2 o þ
      Regulation S-K
  DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K.




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Vanda
    Pharmaceuticals Inc.Form 10-K
    Table of Contents
   
 PagePart ICautionary Note Regarding Forward-Looking
    Statements


2Item 1.

Business


3Item 1A.

Risk Factors


19Item 1B.

Unresolved Staff Comments


40Item 2.

Properties


40Item 3.

Legal Proceedings


40Item 4.

(Removed and Reserved)


40Part IIItem 5.

Market for Registrants Common Equity, Related Shareholder
    Matters and Issuer Purchases of Equity Securities


40Item 6.

Selected Consolidated Financial Data


43Item 7.

Managements Discussion and Analysis of Financial Condition
    and Results of Operations


44Item 7A.

Qualitative and Quantitative Disclosures about Market Risk


58Item 8.

Financial Statements and Supplementary Data


58Item 9.

Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure


58Item 9A.

Controls and Procedures


58Item 9B.

Other Information


59Part IIIItem 10.

Directors, Executive Officers and Corporate Governance


59Item 11.

Executive Compensation


59Item 12.

Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters


59Item 13.

Certain Relationships and Related Transactions, and Director
    Independence


59Item 14.

Principal Accountant Fees and Services


60Part IVItem 15.

Exhibits and Financial Statements Schedules


60Signatures


61Exhibit Index


87   1




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PART I CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS    
    the extent and effectiveness of the development, sales and
    marketing and distribution support
    Fanapt®

    receives;
    our ability to successfully commercialize
    Fanapt®

    outside of the U.S. and Canada;
    delays in the completion of our clinical trials;
    a failure of our products, product candidates or partnered
    products to be demonstrably safe and effective;
    our failure to obtain regulatory approval for our products or
    product candidates or to comply with ongoing regulatory
    requirements;
    a lack of acceptance of our products, product candidates or
    partnered products in the marketplace, or a failure to become or
    remain profitable;
    our expectations regarding trends with respect to our costs and
    expenses;
    our inability to obtain the capital necessary to fund our
    research and development activities;
    our failure to identify or obtain rights to new products or
    product candidates;
    our failure to develop or obtain sales, marketing and
    distribution resources and expertise or to otherwise manage our
    growth;
    limitations on our ability to utilize some or all of our prior
    net operating losses and research and development credits;
    a loss of any of our key scientists or management personnel;
    losses incurred from product liability claims made against
    us; and
    a loss of rights to develop and commercialize our products or
    product candidates under our license and sublicense agreements.    Form 10-K. Form 10-K,
 2




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ITEM 1.
    BUSINESS  Overview
    
    Fanapt®

    (iloperidone), a compound for the treatment of schizophrenia. On
    October 12, 2009, we entered into an amended and restated
    sublicense agreement with Novartis. We had originally entered
    into a sublicense agreement with Novartis on June 4, 2004
    pursuant to which we obtained certain worldwide exclusive
    licenses from Novartis relating to
    Fanapt®.

    Pursuant to the amended and restated sublicense agreement,
    Novartis has exclusive commercialization rights to all
    formulations of
    Fanapt®

    in the U.S. and Canada. On January 11, 2010, Novartis
    launched
    Fanapt®

    in the U.S. Novartis is responsible for the further
    clinical development activities in the U.S. and Canada,
    including the development of a long-acting injectable (or depot)
    formulation of
    Fanapt®.

    Pursuant to the amended and restated sublicense agreement, we
    received an upfront payment of $200.0 million and are
    eligible for additional payments totaling up to
    $265.0 million upon the achievement of certain commercial
    and development milestones for
    Fanapt®

    in the U.S. and Canada. We also receive royalties, which,
    as a percentage of net sales, are in the low double-digits, on
    net sales of
    Fanapt®

    in the U.S. and Canada. In addition, we are no longer
    required to make any future milestone payments with respect to
    sales of
    Fanapt®

    or any future royalty payments with respect to sales of
    Fanapt®

    in the U.S. and Canada. We retain exclusive rights to
    Fanapt®

    outside the U.S. and Canada and we have exclusive rights to
    use any of Novartis data for
    Fanapt®

    for developing and commercializing
    Fanapt®

    outside the U.S. and Canada. At Novartis option, we
    will enter into good faith discussions with Novartis relating to
    the co-commercialization of
    Fanapt®

    outside of the U.S. and Canada or, alternatively, Novartis
    will receive a royalty on net sales of
    Fanapt®

    outside of the U.S. and Canada. On February 23, 2010,
    the U.S. Patent and Trademark Office (PTO) issued a notice
    of allowance for our patent application for the microsphere long
    -acting injectable (or depot) formulation of
    Fanapt®.

    On August 3, 2010, the PTO informed us that the patent had
    been issued with a patent term adjustment of 605 days,
    extending the patent expiration date to June 26, 2024.
    Subsequently, on October 28, 2010, the PTO informed us that
    it had granted an additional patent term adjustment of
    59 days, making the total extension 664 days and
    making the patent expiration date August 24, 2024. We
    continue to explore the regulatory path and commercial
    opportunity for
    Fanapt®

    oral formulation outside of the U.S. and Canada. On
    November 1, 2010, the Therapeutic Goods Administration of
    Australias Department of Health and Ageing, accepted for
    evaluation our application for marketing approval of the oral
    formulation of
    Fanapy®.
    Tasimelteon, a compound for the treatment of sleep and mood
    disorders, including Circadian Rhythm Sleep Disorders (CRSD).
    The compound binds selectively to the brains melatonin
    receptors, which are thought to govern the bodys natural
    sleep/wake cycle. Compounds that bind selectively to these
    receptors are thought to be able to help treat sleep disorders,
    and additionally believed to offer potential benefits in mood
    disorders. We announced positive top-line results from our
    Phase III trial of tasimelteon in transient insomnia in
    November 2006. In June 2008, we announced positive top-line
    results from the Phase III trial of tasimelteon in chronic
    primary insomnia. The trial was a randomized, double-blind, and
    placebo-controlled study with 324 patients. The trial
    measured time to fall asleep and sleep maintenance, as well as
    next-day
    performance. On January 19, 2010, the U.S. Food and
    Drug Administration (FDA) granted orphan drug designation status
    for tasimelteon in a specific CRSD, Non-24-Hour Sleep/Wake
    Disorder (N24HSWD) in blind individuals without light
    perception. The FDA grants orphan drug designation to drugs that
    may provide significant therapeutic advantage over existing
    treatments and target conditions affecting 200,000 or fewer
    U.S. patients per year. Orphan drug designation provides
    potential financial and regulatory incentives, including study
    design assistance, tax 3




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credits, waiver of FDA user fees, and up to seven years of
    market exclusivity upon marketing approval. On February 23,
    2011, the European Commission (EC) designated tasimelteon as an
    orphan medicinal product for the same indication. We initiated
    two clinical trials to pursue FDA approval of tasimelteon for
    the treatment of N24HSWD in blind individuals without light
    perception in the third quarter of 2010. The first trial is a
    randomized, double-blind, placebo-controlled study with a
    planned enrollment of approximately 160 patients with
    N24HSWD. The trial has a six month treatment period and includes
    measures of both nighttime and daytime sleep, as well as
    laboratory measures of the synchronization between the internal
    body clock and the
    24-hour
    environmental light/dark cycle. We also initiated a one-year
    safety study of tasimelteon for the treatment of N24HSWD. This
    trial is an open-label safety study with a planned enrollment of
    approximately 140 patients with N24HSWD. We plan to conduct
    additional clinical trials over the next one to two years to
    support the use of tasimelteon as a circadian regulator and the
    submission of a New Drug Application (NDA) to the FDA and a
    marketing authorization application to the European Medicines
    Agency (EMA). On January 6, 2011, an
    end-of-Phase
    II meeting was held with the FDA to discuss the development plan
    for tasimelteon in the treatment of N24HSWD. Tasimelteon is also
    ready for Phase II trials for the treatment of depression.
    Given the range of potential indications for tasimelteon, we may
    pursue one or more partnerships for the development and
    commercialization of tasimelteon worldwide.  Form 10-K, ® ®
  ® ® year-to-year quarter-to-quarter Form 10-K,
  ® ®
    ® ® ® sub-optimal
 4




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Our
    strategy
    
    Pursue the clinical development and regulatory approval of
    our products and product candidates.  On
    May 6, 2009, the FDA granted U.S. marketing approval
    of
    Fanapt®

    for the acute treatment of schizophrenia in adults. On
    October 12, 2009, we entered into an amended and restated
    sublicense agreement with Novartis. We had originally entered
    into a sublicense agreement with Novartis on June 4, 2004
    pursuant to which we obtained certain worldwide exclusive
    licenses from Novartis relating to
    Fanapt®.

    Pursuant to the amended and restated sublicense agreement,
    Novartis has exclusive commercialization rights to all
    formulations of
    Fanapt®

    in the U.S. and Canada. On January 11, 2010, Novartis
    launched
    Fanapt®

    in the U.S. We retain exclusive rights to
    Fanapt®

    outside the U.S. and Canada and we have exclusive rights to
    use any of Novartis data for
    Fanapt®

    for developing and commercializing
    Fanapt®

    outside the U.S. and Canada. We have successfully completed
    a Phase III trial of tasimelteon in transient insomnia and
    announced positive top-line results in November 2006. In
    addition, we have successfully completed a Phase III trial
    of tasimelteon in chronic primary insomnia and announced
    positive top-line results in June 2008. On January 19,
    2010, the FDA granted orphan drug designation status for
    tasimelteon in a specific CRSD, N24HSWD in blind individuals
    without light perception. The FDA grants orphan drug designation
    to drugs that may provide significant therapeutic advantage over
    existing treatments and target conditions affecting 200,000 or
    fewer U.S. patients per year. Orphan drug designation
    provides potential financial and regulatory incentives,
    including study design assistance, tax credits, waiver of FDA
    user fees, and up to seven years of market exclusivity upon
    marketing approval. On February 23, 2011, the EC designated
    tasimelteon as an orphan medicinal product for the same
    indication. We initiated two clinical trials to pursue FDA
    approval of tasimelteon for the treatment of N24HSWD in blind
    individuals without light perception in the third quarter of
    2010. We plan to conduct additional clinical trials over the
    next one to two years to support the use of tasimelteon as a
    circadian regulator and the submission of a NDA to the FDA and a
    marketing authorization application to the EMA. On
    January 6, 2011, an
    end-of-Phase
    II meeting was held with the FDA to discuss the development plan
    for tasimelteon in the treatment of N24HSWD. Tasimelteon is also
    ready for Phase II trials for the treatment of depression.
    Enter into partnerships to extend our commercial
    reach.  We may seek commercial partners for
    Fanapt®

    outside the U.S. and Canada. At Novartis option, we
    will enter into good faith discussions with Novartis relating to
    the co-commercialization of
    Fanapt®

    outside of the U.S. and Canada, or, alternatively, Novartis
    will receive a royalty on net sales of
    Fanapt®

    outside of the U.S. and Canada. In addition, given the
    range of potential indications for tasimelteon, we may pursue
    one or more partnerships for the development and
    commercialization of tasimelteon worldwide.
    Apply our pharmacogenetics and pharmacogenomics expertise to
    differentiate our products and product
    candidates.  We believe that our pharmacogenetics
    and pharmacogenomics expertise will yield new insights into our
    products and product candidates. These insights may enable us to
    target our products and product candidates to certain patient
    populations and to identify unexpected conditions for our
    products and product candidates to treat.
    Expand our product portfolio through the identification and
    acquisition of additional compounds.  We intend to
    continue to draw upon our clinical development expertise and
    pharmacogenetics and pharmacogenomics expertise to identify and
    pursue the acquisition of additional clinical-stage compounds. 5




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Development
    programs
    Product or product candidate

Target indications

Clinical statusFanapt®

    (Oral)

Schizophrenia

FDA approval May 6, 2009; Commercial rights in the U.S. and
    Canada sublicensed to Novartis on October 12, 2009; Launched in
    the U.S. by Novartis in January 2010Fanapt®

    (Injectable)

Schizophrenia

Ready for Phase II trial; Novartis responsible for further
    clinical developmentTasimelteon

Sleep Disorders, including CRSD

Phase III trial for transient insomnia completed in 2006Phase III trial for chronic primary insomnia completed in
    2008 Two Phase III trials for N24HSWD in blind individuals
    without light perception initiated in the third quarter of 2010Depression

Ready for Phase II trial   Fanapt®
  ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
  Therapeutic
    opportunity
   6




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® ® ® ® ® ® tm ® ® tm ® ® ® ® ®
  ® ® ®
  Intellectual
    property
  ® ® ® ® 10-year 11-year) ® ® ®
  ® ®
  Tasimelteon
   7




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end-of-Phase
  Therapeutic
    opportunity
    ® ® ® ® ® tm
  Limitations
    of current treatments
    
    Many of the products prescribed commonly for sleep disorders,
    including
    Ambien®,

    Lunesta®,

    and
    Sonata®,

    are classified as Schedule IV controlled substances by the
    United States Drug Enforcement Administration (DEA) due to their
    potential for abuse, tolerance and withdrawal symptoms. Drugs
    that are classified as Schedule IV controlled substances
    are subject to restrictions on how such drugs are prescribed and
    dispensed.
    Many drugs approved for and used in sleep disorders also induce
    a number of nuisance side effects beyond the more serious abuse
    and addiction effects associated with most approved products.
    These 8




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side effects include
    next-day
    grogginess, memory loss, unpleasant taste, dry mouth and
    hormonal changes.  
    We believe that none of the drugs used and approved for sleep,
    other than
    Rozeremtm,

    work through the bodys natural sleep/wake cycle, which is
    governed by melatonin. We believe that, for patients whose sleep
    disruption is due to a misalignment of this sleep/wake cycle (as
    is the case in CRSD), a drug that naturally modulates the
    sleep/wake cycle would be an attractive new alternative because
    it would address the underlying cause of the sleeplessness,
    rather than merely addressing its symptoms.  Potential
    advantages of tasimelteon
  tm tm next-day
  Overview
    of Phase III clinical trials
    next-day
  next-day
  24-hour
 9




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Potential
    indication for depression
  ® tm
  ®
  Intellectual
    property
  ®
    License
    agreements
    Fanapt®
  ® ® ® ® ® ® ®
 10




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® ® ® ® ® ® ® ® ® ® ® ® ®
  ® ® ®
  Tasimelteon
     11




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Government
    regulation
  ®
  United
    States government regulation
  FDA
    approval process
      
    pre-clinical laboratory tests, animal studies and formulation
    studies under Current Good Laboratory Practices (cGLP)
    submission to the FDA of an investigational new drug
    application, or IND, which must become effective before human
    clinical trials may begin
    execution of adequate and well-controlled clinical trials to
    establish the safety and efficacy of the drug for each
    indication for which approval is sought
    submission to the FDA of an NDA
    satisfactory completion of an FDA inspection of the
    manufacturing facility or facilities at which the drug is
    produced to assess compliance with Current Good Manufacturing
    Practices (cGMP)
    FDA review and approval of the NDA   12




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
    Phase I: refers typically to closely-monitored clinical trials
    and includes the initial introduction of an investigational new
    drug into human patients or health volunteer subjects. Phase I
    trials are designed to determine the safety, metabolism and
    pharmacologic actions of a drug in humans, the potential side
    effects associated with increasing drug doses and, if possible,
    to gain early evidence of the drugs effectiveness. Phase I
    trials also include the study of structure-activity
    relationships and mechanism of action in humans, as well as
    studies in which investigational new drugs are used as research
    tools to explore biological phenomena or disease processes.
    During Phase I trials, sufficient information about a
    drugs pharmacokinetics and pharmacological effects should
    be obtained to permit the design of well-controlled,
    scientifically valid Phase II studies. The total number of
    subjects and patients included in Phase I trials varies, but is
    generally in the range of 20 to 80 people.
    Phase II: refers to controlled clinical trials conducted to
    evaluate appropriate dosage and the effectiveness of a drug for
    a particular indication or indications in patients with a
    disease or condition under study and to determine the common
    short-term side effects and risks associated with the drug.
    These trials are typically well-controlled, closely monitored
    and conducted in a relatively small number of patients, usually
    involving no more than several hundred subjects.
    Phase III: refers to expanded controlled and uncontrolled
    clinical trials. These trials are performed after preliminary
    evidence suggesting effectiveness of a drug has been obtained.
    Phase III trials are intended to gather additional
    information about the effectiveness and safety that is needed to
    evaluate the overall benefit-risk relationship of the drug and
    to provide an adequate basis for physician labeling.
    Phase III trials usually include several hundred to several
    thousand subjects.   13




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14




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Direct-to-Consumer
    The
    Hatch-Waxman Act
         15




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Foreign
    regulation
        Third-party
    reimbursement and pricing controls
      Marketing
    and sales
  ® ® ® ® ® ®
 16




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® ® ® ® ® ® ®
  Patents
    and proprietary rights; Hatch-Waxman protection
    ® ® ® ®
  ® ® ® 10-year 11-year) ® ® ®
  ®
 17




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Manufacturing
      Competition
    ®
  
    For
    Fanapt®

    in the treatment of schizophrenia, the atypical antipsychotics
    Risperdal®

    (risperidone), including the depot formulation
    Risperdal®

    Consta®,

    and
    Invega®

    (paliperidone), including the depot formulation
    Invega®

    Sustennatm,

    each by Ortho-McNeil-Janssen Pharmaceuticals, Inc.,
    Zyprexa®

    (olanzapine), including the depot formulation
    Zyprexa®

    Relprevvtm,

    by Eli Lilly and Company,
    Seroquel®

    (quetiapine) by AstraZeneca PLC,
    Abilify®

    (aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd.,
    Geodon®

    (ziprasidone) by Pfizer Inc.,
    Saphris®

    (asenapine) by Schering-Plough,
    Latuda®

    (lurasidone) by Dainippon Sumitomo Pharma, and generic
    clozapine, as well as the typical antipsychotics haloperidol,
    chlorpromazine, thioridazine, and sulpiride (all of which are
    generic).
    For tasimelteon in the treatment of insomnia,
    Rozeremtm

    (ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
    such as
    Ambien®

    (zolpidem) by sanofi-aventis (including Ambien
    CR®),

    Lunesta®

    (eszopiclone) by Sepracor Inc.,
    Sonata®

    (zaleplon) by King Pharmaceuticals, Inc.,
    Silenor®

    (doxepin) by Somaxon Pharmaceuticals, Inc., generic compounds
    such as zolpidem, trazodone and doxepin, and
    over-the-counter
    remedies such as
    Benadryl®

    and Tylenol
    PM®. 18




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
    For tasimelteon in the treatment of depression, antidepressants
    such as
    Paxil®

    (paroxetine) by GlaxoSmithKline (GSK),
    Zoloft®

    (sertraline) by Pfizer,
    Prozac®

    (fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
    A/S /Forest Pharmaceuticals Inc.,
    Effexor®

    (venlafaxine) by Wyeth,
    Pristiq®

    (desvenlafaxine) by Pfizer, as well as other compounds such as
    Wellbutrin®

    (buproprion) by GSK,
    Cymbalta®

    (duloxetine) by Eli Lilly, Viibryd (vilazodone HCL) by Clinical
    Data Inc. and Valdoxan (agomelatine) by Novartis and Les
    Laboratories Servier.    Employees
    Corporate
    information
  (240) 599-4500.
  Available
    Information
  1-800-SEC-0330.
  Form 10-K, Form 10-Q, Form 8-K,
    ITEM 1A.
    RISK
    FACTORS  Investing in our common stock involves a high degree of risk.
    You should consider carefully the risks and uncertainties
    described below, together with all of the other information in
    this report, including the consolidated financial statements and
    the related notes appearing at the end of this annual report on
    Form 10-K,
    with respect to any investment in shares of our common stock. If
    any of the following risks actually occurs, our business,
    financial condition, results of operations and future prospects
    would likely be materially and adversely affected. In that
    event, the market price of our common stock could decline and
    you could lose all or part of your investment.
 19




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Risks
    related to our business and industry
  Novartis
    began selling, marketing and distributing our first approved
    product,
    Fanapt®,

    in the U.S. in the first quarter of 2010 and we will depend
    heavily on the success of this product in the
    marketplace.
  ® ®
  
    the ability of patients to be able to afford
    Fanapt®

    or obtain health care coverage that covers
    Fanapt®

    in the current uncertain economic climate
    acceptance of, and ongoing satisfaction, with
    Fanapt®

    by the medical community, patients receiving therapy and third
    party payers
    a satisfactory efficacy and safety profile as demonstrated in a
    broad patient population
    the size of the market for
    Fanapt®
    successfully expanding and sustaining manufacturing capacity to
    meet demand
    cost and availability of raw materials
    the extent and effectiveness of the sales and marketing and
    distribution support
    Fanapt®

    receives
    safety concerns in the marketplace for schizophrenia therapies
    regulatory developments relating to the manufacture or continued
    use of
    Fanapt®
    decisions as to the timing of product launches, pricing and
    discounts
    the competitive landscape for approved and developing therapies
    that will compete with
    Fanapt®
    Novartis ability to successfully develop and commercialize
    a long-acting injectable (or depot) formulation of
    Fanapt®

    in the U.S. and Canada
    Novartis ability to expand the indications for which
    Fanapt®

    can be marketed in the U.S.
    Novartis ability to obtain regulatory approval in Canada
    for
    Fanapt®

    and our ability to obtain regulatory approval for
    Fanapt®

    in countries outside the U.S. and Canada
    our ability to successfully develop and commercialize
    Fanapt®,

    including a long-acting injectable (or depot) formulation of
    Fanapt®,

    outside of the U.S. and Canada
    the unfavorable outcome of any potential litigation relating to
    Fanapt®  ® ® ® ® ® ® ® ® ® ® ®
 20




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® ® ®
  If our
    compounds are determined to be unsafe or ineffective in humans,
    whether commercially or in clinical trials, our business will be
    materially harmed.
  ® ®
  Clinical
    trials for our compounds are expensive and their outcomes are
    uncertain. Any failure or delay in completing clinical trials
    for our compounds could severely harm our
    business.
        
    the inability to manufacture or obtain from third parties
    materials sufficient for use in pre-clinical studies and
    clinical trials
    delays in beginning a clinical trial
    delays in patient enrollment and variability in the number and
    types of patients available for clinical trials
    difficulty in maintaining contact with patients after treatment,
    resulting in incomplete data
    poor effectiveness of our compounds during clinical trials
    unforeseen safety issues or side effects and
    governmental or regulatory delays and changes in regulatory
    requirements and guidelines 21




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We and
    our partners face heavy government regulation. FDA regulatory
    approval of our compounds is uncertain and we and our partners
    are continually at risk of the FDA requiring us or them to
    discontinue marketing any compounds that have obtained, or in
    the future may obtain, regulatory approval.
      
    a compound may not be shown to be safe or effective
    the FDA may interpret data from pre-clinical and clinical trials
    in different ways than we or our partners do
    the FDA may not approve our or our partners manufacturing
    processes or facilities
    a compound may not be approved for all the indications we or our
    partners request
    the FDA may change its approval policies or adopt new regulations
    the FDA may not meet, or may extend, the Prescription Drug User
    Fee Act (PDUFA) date with respect to a particular NDA and
    the FDA may not agree with our or our partners regulatory
    approval strategies or components of the regulatory filings,
    such as clinical trial designs      
    warning letters
    fines
    civil penalties
    injunctions
    recall or seizure of products
    total or partial suspension of production
    refusal of the government to grant future approvals 22




---



##### 




    withdrawal of approvals and
    criminal prosecution  ®
      We
    intend to seek regulatory approvals for our compounds in foreign
    jurisdictions, but we may not obtain any such
    approvals.
  ®
  Our
    compounds may cause undesirable side effects or have other
    properties that could delay or prevent their regulatory approval
    or limit their marketability.
   23




---



##### 




    regulatory authorities may require the addition of labeling
    statements, such as a black box warning or a
    contraindication
    regulatory authorities may withdraw their approval of the
    compound
    we or our partners may be required to change the way the
    compound is administered, conduct additional clinical trials or
    change the labeling of the compound and
    our reputation may suffer    Even
    after we or our partners obtain regulatory approvals of a
    product, acceptance of such compound in the marketplace is
    uncertain and failure to achieve market acceptance will prevent
    or delay our ability to generate revenues.
    If we
    fail to obtain the capital necessary to fund our research and
    development activities and commercialization efforts, we may be
    unable to continue operations or we may be forced to share our
    rights to commercialize our products and product candidates with
    third parties on terms that may not be attractive to
    us.
    
    the amount of royalty and milestone payments received from our
    commercial partners
    our ability to commercialize
    Fanapt®

    outside the U.S. and Canada
    costs of developing sales, marketing and distribution channels
    and our ability to sell our products
    costs involved in establishing manufacturing capabilities for
    commercial quantities of our products
    the number of potential formulations, products and product
    candidates in development
    progress with pre-clinical studies and clinical trials
    time and costs involved in obtaining regulatory (including FDA)
    clearance 24




---



##### 




    costs involved in preparing, filing, prosecuting, maintaining
    and enforcing patent, trademark and other intellectual property
    claims
    competing technological and market developments
    market acceptance of our products
    costs for recruiting and retaining employees and consultants
    costs for training physicians and
    legal, accounting, insurance and other professional and business
    related costs  ® ® proof-of-efficacy
  We
    have a history of operating losses, anticipate future losses and
    may never become profitable on a sustained basis.
    ® ® ® ® ® ® ®
    
    our and our partners ability to obtain and maintain
    regulatory approval for our compounds, both in the U.S. and
    in foreign countries
    Novartis ability to successfully market and sell
    Fanapt®

    in the U.S. and Canada and achieve certain product
    development and sales milestones 25




---



##### 




    our ability to successfully commercialize
    Fanapt®

    outside the U.S. and Canada
    our ability to enter into agreements to develop and
    commercialize our products and product candidates
    our ability to develop, have manufactured and market our
    products and product candidates
    our and our partners ability to obtain adequate
    reimbursement coverage for our compounds from insurance
    companies, government programs and other third party payors
    our ability to obtain additional research and development
    funding from collaborative partners or funding for our products
    and product candidates    
    the progress of our research and development programs for our
    products and product candidates, including clinical trials
    the time and expense that will be required to pursue FDA
    and/or
    foreign regulatory approvals for our compounds and whether such
    approvals are obtained
    the time and expense required to prosecute, enforce
    and/or
    challenge patent and other intellectual property rights
    the cost of operating and maintaining development and research
    facilities
    the cost of third party manufacturers
    the number of product candidates we pursue
    how competing technological and market developments affect our
    compounds
    the cost of possible acquisitions of technologies, compounds,
    product rights or companies
    the cost of obtaining licenses to use technology owned by others
    for proprietary products and otherwise
    the costs of potential litigation and
    the costs associated with recruiting and compensating a highly
    skilled workforce in an environment where competition for such
    employees may be intense    Our
    ability to use net operating loss carryforwards and tax credit
    carryforwards to offset future taxable income may be limited as
    a result of transactions involving our common
    stock.
    If our
    contract research organizations do not successfully carry out
    their duties or if we lose our relationships with contract
    research organizations, our drug development efforts could be
    delayed.
   26




---



##### 



We
    rely on a limited number of third party manufacturers to
    formulate and manufacture our products and product candidates
    and our business will be seriously harmed if these manufacturers
    are not able to satisfy our demand and alternative sources are
    not available.
     27




---



##### 




    because most of our third-party manufacturers and formulators
    are located outside of the U.S., there may be difficulties in
    importing our products and product candidates or their
    components into the U.S. as a result of, among other
    things, FDA import inspections, incomplete or inaccurate import
    documentation or defective packaging
    because of the complex nature of our products and product
    candidates, our manufacturers may not be able to successfully
    manufacture our products and product candidates in a
    cost-effective
    and/or
    timely manner.  Materials
    necessary to manufacture our compounds may not be available on
    commercially reasonable terms, or at all, which may delay the
    development, regulatory approval and commercialization of our
    compounds.
    We
    face substantial competition which may result in others
    developing or commercializing products before or more
    successfully than we do.
    
    developing products and product candidates
    undertaking pre-clinical testing and clinical trials
    obtaining FDA and other regulatory approvals of products and
    product candidates and
    manufacturing, marketing and selling products    ® ®
 28




---



##### 



®
  
    For
    Fanapt®

    in the treatment of schizophrenia, the atypical antipsychotics
    Risperdal®

    (risperidone), including the depot formulation
    Risperdal®

    Consta®,

    and
    Invega®

    (paliperidone), including the depot formulation
    Invega®

    Sustennatm,

    each by Ortho-McNeil-Janssen Pharmaceuticals, Inc.,
    Zyprexa®

    (olanzapine), including the depot formulation
    Zyprexa®,

    Relprevvtm

    by Eli Lilly and Company,
    Seroquel®

    (quetiapine) by AstraZeneca PLC,
    Abilify®

    (aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd.,
    Geodon®

    (ziprasidone) by Pfizer Inc.,
    Saphris®

    (asenapine) by Schering-Plough,
    Latuda®

    (lurasidone) by Dainippon Sumitomo Pharma, and generic
    clozapine, as well as the typical antipsychotics haloperidol,
    chlorpromazine, thioridazine, and sulpiride (all of which are
    generic).
    For tasimelteon in the treatment of insomnia,
    Rozeremtm

    (ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
    such as
    Ambien®

    (zolpidem) by sanofi-aventis (including Ambien
    CR®),

    Lunesta®

    (eszopiclone) by Sepracor Inc. ,
    Sonata®

    (zaleplon) by King Pharmaceuticals, Inc.,
    Silenor®

    (doxepin) by Somaxon Pharmaceuticals, Inc., generic compounds
    such as zolpidem, trazodone and doxepin, and
    over-the-counter
    remedies such as
    Benadryl®

    and Tylenol
    PM®.
    For tasimelteon in the treatment of depression, antidepressants
    such as
    Paxil®

    (paroxetine) by GlaxoSmithKline (GSK),
    Zoloft®

    (sertraline) by Pfizer,
    Prozac®

    (fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
    A/S /Forest Pharmaceuticals Inc.,
    Effexor®

    (venlafaxine) by Wyeth,
    Pristiq®

    (desvenlafaxine) by Pfizer, as well as other compounds such as
    Wellbutrin®

    (buproprion) by GSK,
    Cymbalta®

    (duloxetine) by Eli Lilly, Viibryd (vilazodone HCL) by Clinical
    Data Inc. and Valdoxan (agomelatine) by Novartis and Les
    Laboratories Servier.    We
    have no experience selling, marketing or distributing products
    and no internal capability to do so, which may make
    commercializing our products and product candidates
    difficult.
  ® ®
  ®
  
    our inability to recruit and retain adequate numbers of
    effective sales and marketing personnel
    the inability of sales personnel to obtain access to or persuade
    adequate numbers of physicians to prescribe our products
    the lack of complementary products to be offered by our sales
    personnel, which may put us at a competitive disadvantage
    against companies with broader product lines and
    unforeseen costs associated with creating our own sales and
    marketing team or with entering into a partnering agreement with
    an independent sales and marketing organization 29




---



##### 



If we
    cannot identify, or enter into licensing arrangements for, new
    products or product candidates, our ability to develop a diverse
    product portfolio will be limited.
    We may
    not be successful in the development of products for our own
    account.
    If we
    lose key scientists or management personnel, or if we fail to
    recruit additional highly skilled personnel, it will impair our
    ability to identify, develop and commercialize
    products.
      Product
    liability lawsuits could divert our resources, result in
    substantial liabilities and reduce the commercial potential of
    our compounds.
   30




---



##### 



Legislative
    or regulatory reform of the healthcare system in the U.S. and
    foreign jurisdictions may affect our or our partners
    ability to sell our products or partnered products
    profitably.
       31




---



##### 



Our
    business is subject to extensive governmental regulation and
    oversight and changes in laws could adversely affect our
    revenues and profitability.
    
    new laws, regulations or judicial decisions, or new
    interpretations of existing laws, regulations or decisions,
    related to patent protection and enforcement, health care
    availability, method of delivery and payment for health care
    products and services or our business operations generally
    changes in the FDA and foreign regulatory approval processes
    that may delay or prevent the approval of new products and
    result in lost market opportunity
    new laws, regulations and judicial decisions affecting pricing
    or marketing and
    changes in the tax laws relating to our operations   32




---



##### 



Failure
    to comply with government regulations regarding the sale and
    marketing of our products or partnered products could harm our
    business.
    and/or
    Future
    transactions may harm our business or the market price of our
    stock.
    
    mergers
    acquisitions
    strategic alliances
    licensing agreements and
    co-promotion and similar agreements   33




---



##### 



We may
    undertake strategic acquisitions in the future, and difficulties
    integrating such acquisitions could damage our ability to
    achieve or sustain profitability.
  and/or
  Our
    quarterly operating results may fluctuate
    significantly.
    
    our addition or termination of development programs
    variations in the level of expenses related to our products,
    product candidates or future development programs
    our execution of collaborative, licensing or other arrangements,
    and the timing of payments we may make or receive under these
    arrangements
    the timing of royalties or milestone payments, if any, from the
    sales of
    Fanapt®
    regulatory developments affecting our compounds or those of our
    competitors
    product sales
    cost of product sales
    marketing and other expenses
    manufacturing or supply issues and
    any intellectual property infringement lawsuit in which we may
    become involved    Risks
    related to intellectual property and other legal
    matters
  Our
    rights to develop and commercialize our product and, product
    candidates are subject in part to the terms and conditions of
    licenses or sublicenses granted to us by other pharmaceutical
    companies. With respect to tasimelteon, these terms and
    conditions include an option in favor of the licensor to
    reacquire rights to commercialize and develop this product in
    certain circumstances.
  ®
 34




---



##### 



® ® ® ® ® ® ® ® ® ®
    If our
    efforts to protect the proprietary nature of the intellectual
    property related to our compounds are not adequate, we may not
    be able to compete effectively in our markets.
   35




---



##### 



If we
    do not obtain protection under the Hatch-Waxman Act and similar
    foreign legislation to extend our patents and to obtain market
    exclusivity for our products and partnered products, our
    business will be materially harmed.
  ® ® 10-year ® ® 10-year
    Litigation
    or third-party claims of intellectual property infringement
    could require us to divert resources and may prevent or delay
    our drug discovery and development efforts.
     36




---



##### 



If we
    use hazardous and biological materials in a manner that causes
    injury or violates applicable law, we may be liable for
    damages.
        Risks
    related to our common stock
  Our
    stock price has been highly volatile and may be volatile in the
    future, and purchasers of our common stock could incur
    substantial losses.
      
    publicity regarding actual or potential testing or trial results
    relating to products under development by us or our competitors
    the outcome of regulatory review relating to products under
    development by us or our competitors
    regulatory developments in the U.S. and foreign countries
    developments concerning any collaboration or other strategic
    transaction we may undertake
    announcements of patent issuances or denials, technological
    innovations or new commercial products by us or our competitors
    termination or delay of development or commercialization
    program(s) by our partners
    safety issues with our products or those of our competitors
    our partners ability to successfully commercialize our
    partnered products 37




---



##### 




    our ability to successfully execute our commercialization
    strategies
    announcements of technological innovations or new therapeutic
    products or methods by us or others
    actual or anticipated variations in our quarterly operating
    results
    changes in estimates of our financial results or recommendations
    by securities analysts or failure to meet such financial
    expectations
    changes in government regulations or policies or patent decisions
    changes in patent legislation or adverse changes to patent law
    additions or departures of key personnel or members of our board
    of directors
    publicity regarding actual or potential transactions involving
    us or
    economic and other external factors beyond our control    If
    there are substantial sales of our common stock, our stock price
    could decline.
      If
    securities or industry analysts do not publish research or
    reports or publish unfavorable research about our business, our
    stock price and trading volume could decline.
    Our
    business could be negatively affected as a result of the actions
    of activist stockholders.
    
    responding to proxy contests and other actions by activist
    stockholders can be costly and time-consuming, disrupting
    operations and diverting the attention of management and
    employees 38




---



##### 




    perceived uncertainties as to future direction may result in the
    loss of potential acquisitions, collaborations or in-licensing
    opportunities, and may make it more difficult to attract and
    retain qualified personnel and business partners and
    if individuals are elected to a board of directors with a
    specific agenda, it may adversely affect our ability to
    effectively and timely implement our strategic plan and create
    additional value for our stockholders    Anti-takeover
    provisions in our charter and bylaws, and in Delaware law, and
    our rights plan could prevent or delay a change in control of
    our company.
    
    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
    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    Unstable
    market, credit and financial conditions may exacerbate certain
    risks affecting our business and have serious adverse
    consequences on our business.
   39




---



##### 



®
  ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES      ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    REMOVED
    AND RESERVED PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES    Year Ended December 31, 2009

High


LowFirst quarter 2009

$
0.99


$
0.47Second quarter 2009

$
14.79


$
0.82Third quarter 2009

$
16.65


$
10.46Fourth quarter 2009

$
13.21


$
9.45   40




---



##### 



Year Ended December 31, 2010

High


LowFirst quarter 2010

$
12.62


$
9.97Second quarter 2010

$
11.80


$
6.59Third quarter 2010

$
7.81


$
6.04Fourth quarter 2010

$
10.32


$
6.43     Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Equity
    Compensation Plan Information
  Number of SecuritiesRemaining Available forNumber of Securities to


Weighted-Average


Issuance Under Equitybe Issued Upon Exercise


Exercise Price of


Compensation Plansof Outstanding Options,


Outstanding Options,


(Excluding SecuritiesPlan Category

Warrants and Rights


Warrants and Rights


Reflected in Column (a))(a)


(b)


(c)Equity compensation plans approved by security holders


4,365,107


$
11.98



2,376,472Equity compensation plans not approved by security holders










Total


4,365,107


$
11.98



2,376,472     (a)
    
    Includes 4,005,544 shares issuable upon exercise of
    outstanding options and 359,563 shares issuable upon
    settlement of RSUs under the 2006 Equity Incentive Plan and
    Second Amended and Restated Management Equity Plan.(b)
    
    Does not take into account RSUs, which have no exercise price.(c)
    
    On January 1 of each year, the number of shares reserved under
    the Incentive Plan is automatically increased by 4% of the total
    number of shares of Common Stock that are outstanding at that
    time, or, if less, by 1,500,000 shares (or such lesser
    number as may be approved by the Companys Board of
    Directors).  Dividends
   41




---



##### 



Market
    Price of and Dividends on the Registrants Common Equity
    and Related Stockholder Matters
  Form 10-K Regulation S-K
  
 42




---



##### 



ITEM 6.
    SELECTED
    CONSOLIDATED FINANCIAL DATA  Form 10-K.
  Form 10-K.
  Year Ended December 31,(In thousands, except for share and per share
    amounts)

2010


2009


2008


2007


2006Statements of operations dataRevenue

$
35,709


$
4,548


$



$



$
Operating expenses:Cost of sales


2,891



1,915











Research and development


12,338



13,874



23,936



47,235



52,071General and administrative


10,147



23,724



28,909



32,803



13,637Intangible asset amortization


1,495



983











Total operating expenses


26,871



40,496



52,845



80,038



65,708Income (loss) from operations


8,838



(35,948
)


(52,845
)


(80,038
)


(65,708
)Interest income


431



89



1,781



5,978



2,197Income (loss) before tax provision


9,269



(35,859
)


(51,064
)


(74,060
)


(63,511
)Tax provision


2,077











10



Net income (loss)


7,192



(35,859
)


(51,064
)


(74,070
)


(63,511
)Net income (loss) per share:Basic

$
0.26


$
(1.33
)

$
(1.92
)

$
(2.81
)

$
(3.97
)Diluted

$
0.25


$
(1.33
)

$
(1.92
)

$
(2.81
)

$
(3.97
)Shares used in calculation of net income (loss) per shares:Basic


27,916,388



27,015,271



26,650,126



26,360,177



16,001,815Diluted


28,534,617



27,015,271



26,650,126



26,360,177



16,001,815   2010


2009


2008


2007


2006Balance sheet dataCash and cash equivalents

$
42,559


$
205,295


$
39,079


$
41,930


$
30,929Marketable securities


155,478







7,379



51,223



942Working capital


169,546



181,417



44,335



74,178



24,714Total assets


213,101



225,714



49,934



96,861



36,260Total liabilities


175,370



202,683



3,914



13,132



9,503Accumulated deficit


(253,641
)


(260,833
)


(224,974
)


(173,910
)


(99,840
)Total stockholders equity


37,731



23,031



46,020



83,729



26,757  43




---



##### 



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
    Selected Consolidated Financial Data and our
    consolidated financial statements and related notes appearing at
    the end of this annual report on
    Form 10-K.
    Some of the information contained in this discussion and
    analysis or set forth elsewhere in this annual report on
    Form 10-K
    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 the Risk Factors section of this report and
    elsewhere in this annual report on
    Form 10-K.
  Overview
    
    Fanapt®

    (iloperidone), a compound for the treatment of schizophrenia. On
    October 12, 2009, we entered into an amended and restated
    sublicense agreement with Novartis. We had originally entered
    into a sublicense agreement with Novartis on June 4, 2004
    pursuant to which we obtained certain worldwide exclusive
    licenses from Novartis relating to
    Fanapt®.

    Pursuant to the amended and restated sublicense agreement,
    Novartis has exclusive commercialization rights to all
    formulations of
    Fanapt®

    in the U.S. and Canada. On January 11, 2010, Novartis
    launched
    Fanapt®

    in the U.S. Novartis is responsible for the further
    clinical development activities in the U.S. and Canada,
    including the development of a long-acting injectable (or depot)
    formulation of
    Fanapt®.

    Pursuant to the amended and restated sublicense agreement, we
    received an upfront payment of $200.0 million and are
    eligible for additional payments totaling up to
    $265.0 million upon the achievement of certain commercial
    and development milestones for
    Fanapt®

    in the U.S. and Canada. We also receive royalties, which,
    as a percentage of net sales, are in the low double-digits, on
    net sales of
    Fanapt®

    in the U.S. and Canada. In addition, we are no longer
    required to make any future milestone payments with respect to
    sales of
    Fanapt®

    or any future royalty payments with respect to sales of
    Fanapt®

    in the U.S. and Canada. We retain exclusive rights to
    Fanapt®

    outside the U.S. and Canada and we have exclusive rights to
    use any of Novartis data for
    Fanapt®

    for developing and commercializing
    Fanapt®

    outside the U.S. and Canada. At Novartis option, we
    will enter into good faith discussions with Novartis relating to
    the co-commercialization of
    Fanapt®

    outside of the U.S. and Canada or, alternatively, Novartis
    will receive a royalty on net sales of
    Fanapt®

    outside of the U.S. and Canada. On February 23, 2010,
    the U.S. Patent and Trademark Office (PTO) issued a notice
    of allowance for our patent application for the microsphere long
    -acting injectable (or depot) formulation of
    Fanapt®.

    On August 3, 2010, the PTO informed us that the patent had
    been issued with a patent term adjustment of 605 days,
    extending the patent expiration date to June 26, 2024.
    Subsequently, on October 28, 2010, the PTO informed us that
    it had granted an additional patent term adjustment of
    59 days, making the total extension 664 days and
    making the patent expiration date August 24, 2024. We
    continue to explore the regulatory path and commercial
    opportunity for
    Fanapt®

    oral formulation outside of the U.S. and Canada. On
    November 1, 2010, the Therapeutic Goods Administration of
    Australias Department of Health and Ageing, accepted for
    evaluation our application for marketing approval of the
    Fanapt®

    oral formulation.  ® ® ®
 44




---



##### 




    Tasimelteon, a compound for the treatment of sleep and mood
    disorders, including Circadian Rhythm Sleep Disorders (CRSD).
    The compound binds selectively to the brains melatonin
    receptors, which are thought to govern the bodys natural
    sleep/wake cycle. Compounds that bind selectively to these
    receptors are thought to be able to help treat sleep disorders,
    and additionally are believed to offer potential benefits in
    mood disorders. We announced positive top-line results from our
    Phase III trial of tasimelteon in transient insomnia in
    November 2006. In June 2008, we announced positive top-line
    results from the Phase III trial of tasimelteon in chronic
    primary insomnia. The trial was a randomized, double-blind, and
    placebo-controlled study with 324 patients. The trial
    measured time to fall asleep and sleep maintenance, as well as
    next-day
    performance. On January 19, 2010, the FDA granted orphan
    designation status for tasimelteon in a specific CRSD,
    Non-24-Hour Sleep/Wake Disorder (N24HSWD) in blind individuals
    without light perception. The FDA grants orphan drug designation
    to drugs that may provide significant therapeutic advantage over
    existing treatments and target conditions affecting 200,000 or
    fewer U.S. patients per year. Orphan drug designation
    provides potential financial and regulatory incentives including
    study design assistance, tax credits, waiver of FDA user fees,
    tax credits, and up to seven years of market exclusivity upon
    marketing approval. On February 23, 2011, the European
    Commission (EC) designated tasimelteon as an orphan medicinal
    product for the same indication. We initiated two clinical
    trials to pursue FDA approval of tasimelteon for the treatment
    of N24HSWD in blind individuals without light perception in the
    third quarter of 2010. The first trial is a randomized,
    double-blind, placebo-controlled study with a planned enrollment
    of approximately 160 patients with N24HSWD. The trial has a
    six month treatment period and includes measures of both
    nighttime and daytime sleep, as well as laboratory measures of
    the synchronization between the internal body clock and the
    24-hour
    environmental light/dark cycle. We also initiated a one-year
    safety study of tasimelteon for the treatment of N24HSWD. This
    trial is an open-label safety study with a planned enrollment of
    approximately 140 patients with N24HSWD. We plan to conduct
    additional clinical trials over the next one to two years to
    support the use of tasimelteon as a circadian regulator and the
    submission of a NDA to the FDA and a marketing authorization
    application to the European Medicines Agency (EMA). On
    January 6, 2011, an
    end-of-Phase II
    meeting was held with the FDA to discuss the development plan
    for tasimelteon in the treatment of N24HSWD. Tasimelteon is also
    ready for the Phase II trials for the treatment of
    depression. Given the range of potential indications for
    tasimelteon, we may pursue one or more partnerships for the
    development and commercialization of tasimelteon worldwide. For
    the year ended December 31, 2010, we incurred
    $8.3 million in direct research and development costs
    directly attributable to our development of tasimelteon.  ® ® year-to-year Form 10-K,
  Revenues. ®
 45




---



##### 



®
  Research and development expenses. ® ®
  ®
  Year Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,(In thousands)

2010


2009


2008Direct project costs(1)Fanapt®

$
2,708


$
9,532


$
8,485Tasimelteon


8,329



2,548



11,344Other product candidates






120



2,180Total direct product costs


11,037



12,200



22,009Indirect project costs(1)Facility


609



620



683Depreciation


184



234



330Other indirect overhead costs


508



820



913Total indirect expenses


1,301



1,674



1,926Total research and development expenses

$
12,338


$
13,874


$
23,935     (1)
    
    Many of our research and development costs are not attributable
    to any individual project because we share resources across
    several development projects. We record direct costs, including
    personnel costs and 46




---



##### 



related benefits and stock-based compensation, on a
    project-by-project
    basis. We record indirect costs that support a number of our
    research and development activities in the aggregate.  General and administrative expenses. ®
  Other income.
  Critical
    accounting policies
    Form 10-K.
  Intangible asset, net.
  ® ®
    Accrued expenses.
 47




---



##### 



and/or
  Revenue Recognition. ® ®
  Stock-based compensation.
    Year Ended December 31,(In thousands)

2010


2009


2008Research and development

$
2,536


$
2,028


$
1,748General and administrative


2,271



8,738



11,667Total stock-based compensation expense

$
4,807


$
10,766


$
13,415     Income
    taxes
   48




---



##### 



Recent
    Accounting Pronouncements
      Results
    of operations
  ® ® ® ®
 49




---



##### 



Year
    ended December 31, 2010 compared to year ended
    December 31, 2009
  Revenues. ® ® ®
  Cost of sales.
  Intangible asset amortization.
  Research and development expenses.
    Year Ended December 31,Research and Development Expenses (In thousands)

2010


2009Direct project costs:Clinical trials

$
2,542


$
42Contract research and development manufacturing, consulting,
    materials and other direct costs


2,976



7,735Salaries, benefits and related costs


2,983



2,395Stock-based compensation


2,536



2,028Total direct costs


11,037



12,200Indirect project costs


1,301



1,674Total

$
12,338


$
13,874   ®
  General and administrative expenses.
 50




---



##### 



Year Ended December 31,General and Administrative Expenses (In thousands)

2010


2009Salaries, benefits and related costs

$
1,745


$
2,686Stock-based compensation


2,271



8,738Marketing, legal, accounting and other professional services


3,611



9,951Other expenses


2,520



2,349Total

$
10,147


$
23,724     Interest Income.
  Tax Provision.
      Year
    ended December 31, 2009 compared to year ended
    December 31, 2008
  Research and development expenses.
 51




---



##### 



Year Ended December 31,Research and Development Expenses (In thousands)

2009


2008Direct project costs:Clinical trials

$
42


$
7,441Contract research and development manufacturing, consulting,
    materials and other direct costs


7,735



8,731Salaries, benefits and related costs


2,395



4,089Stock-based compensation


2,028



1,748Total direct costs


12,200



22,009Indirect project costs


1,674



1,926Total

$
13,874


$
23,935   ®
  General and administrative expenses.
    Year Ended December 31,General and Administrative Expenses (In thousands)

2009


2008Salaries, benefits and related costs

$
2,686


$
4,946Stock-based compensation


8,738



11,667Marketing, legal, accounting and other professional services


9,951



9,450Other expenses


2,349



2,847Total

$
23,724


$
28,910   ®
  Interest income.
 52




---



##### 



Intangible
    Asset, Net
    Estimated

December 31, 2010Useful

Gross



NetLife

Carrying

Accumulated

Carrying(In thousands)

(years)

Amount

Amortization

AmountFanapt®


8 years


$
12,000


$
2,478


$
9,522$
12,000


$
2,478


$
9,522   ® ®
  ®
    Amortization Expense by Period(In thousands)

Total

2011

2012

2013

2014

2015

After 2015Intangible asset

$
9,522


$
1,495


$
1,495


$
1,495


$
1,495


$
1,495


$
2,047   Revenue
    December 31, 2009


Revenue


December 31, 2010(In thousands)

Deferred Revenue


Recognized


Deferred RevenueRevenue:Licensing agreement

$
197,431


$
26,789


$
170,642Royalty revenue






3,141



Product sales






5,290



Grant revenue






489



Total

$
197,431


$
35,709


$
170,642   ® ®
 53




---



##### 



Liquidity
    and capital resources
      As of December 31,(In thousands)

2010


2009Balance sheet dataCash and cash equivalents

$
42,559


$
205,295U.S. Treasury and government agencies


45,455



U.S. corporate debt


110,023



Marketable securities, short-term


155,478



Total

$
198,037


$
205,295       
    Level 1  defined as observable inputs such as
    quoted prices in active markets
    Level 2  defined as inputs other than quoted
    prices in active markets that are either directly or indirectly
    observable
    Level 3  defined as unobservable inputs in which
    little or no market data exists, therefore requiring an entity
    to develop its own assumptions    Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for


Significant Other


SignificantIdentical Assets


Observable Inputs


Unobservable Inputs(In thousands)

December 31, 2010


(Level 1)


(Level 2)


(Level 3)Description:Available-for-sale
    securities

$
155,478


$
45,455


$
110,023


$
Total

$
155,478


$
45,455


$
110,023


$
      54




---



##### 



® ® ® ® ® ®
  24-hour
     55




---



##### 



Cash
    flow
    Year Ended December 31,(In thousands)

2010


2009


2008Net cash provided by (used in) Operating activities

$
(10,898
)

$
169,336


$
(45,955
)Investing activities


(155,622
)


(4,739
)


43,088Financing activities


3,784



1,619



Effect of foreign currency translation










16Net change in cash and cash equivalents

$
(162,736
)

$
166,216


$
(2,851
)   Year
    ended December 31, 2010 compared to year ended
    December 31, 2009
    Year
    ended December 31, 2009 compared to year ended
    December 31, 2008
    Off-balance
    sheet arrangements
  Regulation S-K.
  Contractual
    obligations and commitments
  Operating leases.
 56




---



##### 



Cash Payments Due by Period(In thousands)

Total

2011

2012

2013

2014

2015

After 2015Operating leases

$
4,282


$
727


$
749


$
771


$
795


$
818


$
422   Other contracts.
  License agreements. ® ® ®
    ® ® ®
  ® ® ® ® ® ® ® ® ® ® ®
 57




---



##### 



ITEM 7A.
    QUALITATIVE
    AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK  Interest
    rates
    Effects
    of inflation
    Marketable
    securities
    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
  Rules 13a-15(e) 15d-15(e)
  Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f).
 58




---



##### 



Internal Control  Integrated
    Framework.
  Form 10-K.
  Changes
    in Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  ITEM 9B.
    OTHER
    INFORMATION   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  Form 10-K.
  ITEM 11.
    EXECUTIVE
    COMPENSATION  Form 10-K, Regulation S-K Form 10-K
  ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Form 10-K, Form 10-K.
  ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE   59




---



##### 



Form 10-K.
  ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES  Form 10-K.
 PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENTS SCHEDULES  Form 10-K
  Form 10-K.
 60




---



##### 



Signatures  Form 10-K
    By:
    /s/  MIHAEL
    H. POLYMEROPOULOS, M.D.   Chief Executive Officer
  Form 10-K
  Name

Title

Date/s/  MIHAELH.POLYMEROPOULOS, M.D.MihaelH.Polymeropoulos, M.D.

President and Chief Executive Officer and Director (principal
    executive officer)

March 10, 2011/s/  JAMES
    P. KELLYJames
    P. Kelly

Chief Financial Officer and Treasurer (principal financial
    officer and principal accounting officer)

March 10, 2011/s/  HOWARD
    PIENHoward
    Pien

Chairman of the Board and Director

March 10, 2011/s/  RICHARD
    W. DUGANRichard
    W. Dugan

Director

March 10, 2011/s/  STEVEN
    K. GALSON, M.D.Steven
    K. Galson, M.D.

Director

March 10, 2011/s/  ARGERISN.KARABELAS,
    Ph.D.ArgerisN.Karabelas,
    Ph.D.

Director

March 10, 2011/s/  VINCENT
    J. MILANOVincent
    J. Milano

Director

March 10, 2011/s/  H.
    THOMAS WATKINSH.
    Thomas Watkins

Director

March 10, 2011  61




---



##### 



Vanda
    Pharmaceuticals Inc.
  Index to
    consolidated financial statements
  Page(s)Report of Independent Registered Public
    Accounting Firm


63Consolidated financial statements


64Balance sheets at December 31, 2010 and
    2009


64Statements of operations for the years ended
    December 31, 2010, 2009 and 2008


65Statements of changes in stockholders
    equity for the years ended December 31, 2010, 2009 and
    2008


66Statements of cash flows for the years ended
    December 31, 2010, 2009 and 2008


67Notes to the consolidated financial statements


68  62




---



##### 



Report of
    Independent Registered Public Accounting Firm  
  Internal Control  Integrated
    Framework
      
    63




---



##### 



Vanda
    Pharmaceuticals Inc.
  Consolidated
    Balance Sheets
  December 31,(In thousands, except for share amounts)

2010


2009AssetsCurrent assetsCash and cash equivalents

$
42,559


$
205,295Marketable securities


155,478



Accounts receivable


511



3,164Inventory






2,399Prepaid expenses, deposits and other current assets


1,843



2,093Deferred tax, current portion


182



Total current assets


200,573



212,951Property and equipment, net


937



1,316Intangible asset, net


9,522



11,017Deferred tax, noncurrent portion


1,639



Restricted cash


430



430Total assets

$
213,101


$
225,714Liabilities and stockholders equityCurrent liabilitiesAccounts payable

$
648


$
2,424Accrued liabilities


1,324



2,321Accrued income taxes


2,266



Deferred revenues, current portion


26,789



26,789Total current liabilities


31,027



31,534Deferred rent


490



507Deferred revenues, noncurrent portion


143,853



170,642Total liabilities


175,370



202,683CommitmentsStockholders equityPreferred stock, $0.001 par value; 20,000,000 shares
    authorized, and no shares issued or outstanding






Common stock, $0.001 par value; 150,000,000 shares
    authorized, 28,041,379 and 27,568,595 shares issued and
    outstanding at December 31, 2010 and 2009, respectively


28



28Additional paid-in capital


291,342



283,836Accumulated other comprehensive income


2



Accumulated deficit


(253,641
)


(260,833
)Total stockholders equity


37,731



23,031Total liabilities and stockholders equity

$
213,101


$
225,714    64




---



##### 



Vanda
    Pharmaceuticals Inc.
  Consolidated
    Statements of Operations
  Year Ended December 31,(In thousands, except for share amounts)

2010


2009


2008Revenue:Licensing agreement

$
26,789


$
2,569


$
Royalty revenue


3,141







Product sales


5,290



1,979



Grant revenue


489







Total revenue


35,709



4,548



Operating expenses:Cost of sales  product


2,891



1,915



Research and development


12,338



13,874



23,935General and administrative


10,147



23,724



28,910Intangible asset amortization


1,495



983



Total operating expenses


26,871



40,496



52,845Income (loss) from operations


8,838



(35,948
)


(52,845
)Interest income


431



89



1,781Income (loss) before tax provision


9,269



(35,859
)


(51,064
)Tax provision


2,077







Net income (loss)

$
7,192


$
(35,859
)

$
(51,064
)Net income (loss) per share:Basic

$
0.26


$
(1.33
)

$
(1.92
)Diluted

$
0.25


$
(1.33
)

$
(1.92
)Shares used in calculation of net income (loss) per share:Basic


27,916,388



27,015,271



26,650,126Diluted


28,534,617



27,015,271



26,650,126    65




---



##### 






Vanda
    Pharmaceuticals Inc.
  Statements of Changes in Stockholders
    Equity
   AccumulatedAdditional


OtherCommon Stock


Paid-in


Comprehensive


Accumulated


Comprehensive(In thousands, except for share amounts)

Shares


Par Value


Capital


Income (Loss)


Deficit


Income (Loss)


TotalBalances at December 31, 2007


26,652,728


$
27


$
257,600


$
12


$
(173,910
)





$
83,729Issuance of common stock from restricted stock units


750























Employee and non-employee stock-based compensation










13,388















13,388Comprehensive loss:Net loss


















(51,064
)


(51,064
)Cumulative translation adjustment














16







16Net unrealized loss on marketable securities














(49
)






(49
)Comprehensive loss





















$
(51,097
)


(51,097
)Balances at December 31, 2008


26,653,478



27



270,988



(21
)


(224,974
)






46,020Issuance of common stock from exercised stock options and
    restricted stock units


915,117



1



1,618















1,619Employee and non-employee stock-based compensation










11,230















11,230Comprehensive loss:Net loss


















(35,859
)


(35,859
)Net unrealized gain on marketable securities














21







21Comprehensive loss





















$
(35,838
)


(35,838
)Balances at December 31, 2009


27,568,595



28



283,836







(260,833
)






23,031Issuance of common stock from exercised stock options and
    restricted stock units


472,784







892















892Employee and non-employee stock-based compensation










4,982















4,982Excess tax benefits from exercise of stock options










1,632















1,632Comprehensive income:Net income


















7,192



7,192Net unrealized gain on marketable securities














2







2Comprehensive income





















$
7,194



7,194Balances at December 31, 2010


28,041,379


$
28


$
291,342


$
2


$
(253,641
)





$
37,731     66




---



##### 



Vanda
    Pharmaceuticals Inc.
  Consolidated
    Statements of Cash Flows
  Year Ended December 31,(In thousands)

2010


2009


2008Cash flows from operating activitiesNet income (loss)

$
7,192


$
(35,859
)

$
(51,064
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activitiesDepreciation


336



442



531Employee and non-employee stock-based compensation


4,982



11,230



13,388Loss on disposal of assets


(23
)






Amortization of discounts and premiums on marketable securities


212



138



(235
)Amortization of intangible asset


1,495



983



Deferred tax benefit


(1,821
)






Excess tax benefits from exercise of stock options


(2,892
)






Changes in assets and liabilities:Prepaid expenses and other current assets


250



(805
)


645Accounts receivable


2,653



(3,164
)


Inventory


2,399



(2,399
)


Accounts payable


(1,776
)


1,911



(2,476
)Accrued liabilities


(997
)


(577
)


(6,893
)Accrued income taxes


3,898







Other liabilities


(17
)


5



149Deferred revenue


(26,789
)


197,431



Net cash provided by (used in) operating activities


(10,898
)


169,336



(45,955
)Cash flows from investing activitiesAcquisition of intangible asset






(12,000
)


Purchases of property and equipment










(944
)Proceeds from sale of property and equipment


66







Purchases of marketable securities


(202,438
)


(11,366
)


(14,786
)Proceeds from sale of marketable securities






127



11,258Maturities of marketable securities


46,750



18,500



47,560Net cash provided by (used in) investing activities


(155,622
)


(4,739
)


43,088Cash flows from financing activitiesExcess tax benefits from stock-based compensation


2,892







Proceeds from exercise of stock options


892



1,619



Net cash provided by financing activities


3,784



1,619



Effect of foreign currency










16Net change in cash and cash equivalents


(162,736
)


166,216



(2,851
)Cash and cash equivalentsBeginning of period


205,295



39,079



41,930End of period

$
42,559


$
205,295


$
39,079    67




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes
    to the Consolidated Financial Statements
  1.
    Business
    Organization and Presentation  Business
    organization
  ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
  24-hour
 68




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  end-of-Phase II
  Form 10-K, ® ®
  Basis
    of presentation
    2.
    Summary
    of significant accounting policies  Use of
    estimates
    Cash
    and cash equivalents
    Marketable
    securities
  available-for-sale Available-for-sale
  Inventory
   69




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  ® ®
  Intangible
    Asset, net
    ® ®
    Fair
    value of financial instruments
    Property
    and equipment
    Revenue
    Recognition
   70




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  ® ® six-month ® ®
  Concentrations
    of credit risk
    Accrued
    expenses
  and/or
 71




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  Research
    and development expenses
  ® ®
  General
    and administrative expenses
  ®
  Employee
    stock-based compensation
      Year Ended December 31,(In thousands, except for share amounts)

2010


2009


2008Research and development

$
2,536


$
2,028


$
1,748General and administrative


2,271



8,738



11,667Total employee stock-based compensation expense

$
4,807


$
10,766


$
13,415    72




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
      Year Ended December 31,2010


2009


2008Expected dividend yield


0
%


0
%


0
%Weighted average expected volatility


68
%


68
%


68
%Weighted average expected term (years)


6.03



6.03



6.18Weighted average risk-free rate


2.32
%


2.81
%


3.27
%   Income
    taxes
    Segment
    information
    Recent
    accounting pronouncements
   73




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
    Certain
    risks and uncertainties
        3.
    Earnings
    per share   74




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
    Year Ended December 31,(In thousands, except for share and per share
    amounts)

2010


2009


2008Numerator:Net income (loss)

$
7,192


$
(35,859
)

$
(51,064
)Denominator:Weighted average shares of common stock outstanding, basic


27,916,388



27,015,271



26,650,126Stock options and restricted stock units related to the issuance
    of common stock


618,229







Weighted average shares of common stock outstanding, diluted


28,534,617



27,015,271



26,650,126Net income (loss) per share:Basic

$
0.26


$
(1.33
)

$
(1.92
)Diluted

$
0.25


$
(1.33
)

$
(1.92
)Anti-dilutive securities not included in diluted net income
    (loss) per share calculation:Options to purchase common stock and restricted stock units


3,017,096



4,516,739



4,408,629     4.
    Marketable
    securities  available-for-sale
  Gross


GrossAmortized


Unrealized


Unrealized


Fair Market(In thousands)

Cost


Gains


Losses


ValueShort-term:U.S. Treasury and government agencies

$
45,466


$



$
(11
)

$
45,455U.S. corporate debt


110,010



27



(14
)


110,023$
155,476


$
27


$
(25
)

$
155,478   available-for-sale
 75




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  5.
    Prepaid
    expenses, deposits and other current assets    December 31,(In thousands)

2010


2009Current deposits with vendors

$



$
150Prepaid insurance


244



284Other prepaid expenses and vendor advances


966



1,658Accrued interest income


633



1Total prepaid expenses, deposits and other current assets

$
1,843


$
2,093   6.
    Property
    and equipment    EstimatedUseful Life


December 31,(In thousands)

(Years)


2010


2009Laboratory equipment


5


$
1,282


$
1,348Computer equipment


3



764



764Furniture and fixtures


7



706



706Leasehold improvements


10



844



8443,596



3,662Less  accumulated depreciation and amortization






(2,659
)


(2,346
)$
937


$
1,316     7.
    Intangible
    Asset, Net    December 31, 2010Estimated


Gross





NetUseful


Carrying


Accumulated


CarryingLife (years)


Amount


Amortization


Amount(In thousands)Fanapt®


8 years


$
12,000


$
2,478


$
9,522$
12,000


$
2,478


$
9,522     December 31, 2009Estimated


Gross





NetUseful Life


Carrying


Accumulated


Carrying(In thousands)

(years)


Amount


Amortization


AmountFanapt®


8 years


$
12,000


$
983


$
11,017$
12,000


$
983


$
11,017   ® ®
 76




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  ®
  ®
    Amortization Expense by Period(In thousands)

Total


2011


2012


2013


2014


2015


After 2015Intangible asset

$
9,522


$
1,495


$
1,495


$
1,495


$
1,495


$
1,495


$
2,047   8.
    Accrued
    Liabilities    December 31,(In thousands)

2010


2009Accrued research and development expenses

$
1,061


$
1,033Accrued consulting and other professional fees


201



1,076Employee benefits


62



106Other accrued expenses






106Total accrued liabilities

$
1,324


$
2,321   9.
    Revenue
    Recognition    December 31, 2009


Revenue


December 31, 2010(In thousands)

Deferred Revenue


Recognized


Deferred RevenueRevenue:Licensing agreement

$
197,431


$
26,789


$
170,642Royalty revenue






3,141



Product sales






5,290



Grant revenue






489



Total

$
197,431


$
35,709


$
170,642   ® ®
 77




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  ®
  10.
    Commitments
    and Contingencies  Operating
    leases
    (In thousands)2011

$
7272012


7492013


7712014


7952015


818After 2015


422$
4,282     Guarantees
    and indemnifications
    License
    agreements
    Fanapt ® ® ®
 78




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  ® ® ® ® ®
  ® ® ® ® ® ® ® ® ® ® ® ®
  ® ® ®
  Tasimelteon.
 79




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
        Future license payments.
  Research
    and development and marketing agreements
  ®
 80




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  11.
    Income
    taxes    Year Ended December 31,(In thousands)

2010


2009


2008Current income tax expense (benefit):Federal

$
2,413


$



$
State


1,485







Foreign










Deferred income tax expense (benefit):Federal


(1,821
)






State










Foreign










Total tax expense

$
2,077


$



$
     December 31,(In thousands)

2010


2009Deferred tax asset (liability)Net operating loss carryforwards

$



$
60,818Start-up
    costs


19,683



21,343Stock-based compensation


13,987



14,854Licensing agreements


(1,481
)


2,879Research and development and orphan drug credits


5,594



5,707Depreciation and amortization


49



23Deferred revenue


67,310



Accrued and deferred expenses


140



153Net deferred tax assets


105,282



105,777Deferred tax asset valuation allowance


(103,461
)


(105,777
)$
1,821


$
       December 31,2010


2009


2008Federal tax at statutory rate


35.0
%


(34.0
)%


(34.0
)%State taxes


11.0
%


(4.4
)%


(5.4
)%Change in valuation allowance


(25.0
)%


32.9
%


41.1
%Research and development credit


(2.7
)%


(0.7
)%


(1.9
)%Stock options


22.7
%


3.2
%


Orphan drug credit


(21.1
)%






Section 162(m) limitation


2.5
%


0.7
%


Meals, entertainment and other non-deductible items






2.3
%


0.2
%Effective tax rate


22.4
%


0.0
%


0.0
%  81




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
        ASC 740-10
    Balance At


Additions Charged


Reductions CreditedBeginning of


To Income Tax


To Income Tax


Balance At End(In thousands)

Period


Expense


Expense


Of PeriodCalendar year ended:December 31, 2008

$
71,623


$
22,364


$



$
93,987December 31, 2009

$
93,987


$
11,790


$



$
105,777December 31, 2010

$
105,777


$
67,336


$
69,652


$
103,461   12.
    Fair
    Value Measurements    
    Level 1  defined as observable inputs such as
    quoted prices in active markets
    Level 2  defined as inputs other than quoted
    prices in active markets that are either directly or indirectly
    observable
    Level 3  defined as unobservable inputs in which
    little or no market data exists, therefore requiring an entity
    to develop its own assumptions    82




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets


Significant Other


Significantfor Identical


Observable


UnobservableDecember 31,


Assets


Inputs


Inputs(In thousands)

2010


(Level 1)


(Level 2)


(Level 3)Description:Available-for-sale
    securities

$
155,478


$
45,455


$
110,023


$
Total

$
155,478


$
45,455


$
110,023


$
     13.
    Restricted
    cash    14.
    Equity
    incentive plans    10-year
 83




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
    Weighted Average


Weighted AverageNumber of


Exercise Price at


Remaining Term


Aggregate(In thousands, except for share amounts)

Shares


Grant Date


(Years)


Intrinsic ValueOutstanding at December 31, 2007


1,169,975


$
1.77



7.75


$
5,988Forfeited


(4,849
)


5.27Cancelled


(10,878
)


5.84Outstanding at December 31, 2008


1,154,248


$
1.72



6.72


$
129Cancelled


(26,793
)


3.30Exercised


(394,561
)


1.17Outstanding at December 31, 2009


732,894


$
1.97



5.79


$
6,798Forfeited


(4
)


4.73Exercised


(52,136
)


4.58






$
137Outstanding at December 31, 2010


680,754


$
1.77



4.77


$
5,232Exercisable at December 31, 2010


680,754


$
1.77



4.77


$
5,232     Weighted Average


Weighted AverageNumber of


Exercise Price at


Remaining Term


Aggregate(In thousands, except for share amounts)

Shares


Grant Date


(Years)


Intrinsic ValueOutstanding at December 31, 2007


1,765,635


$
26.08



9.14


$
Granted


1,412,250



4.75Forfeited


(19,903
)


20.28Cancelled


(526,601
)


9.89Outstanding at December 31, 2008


2,631,381


$
17.79



8.53


$
Granted


1,567,000



11.96Forfeited


(220,998
)


24.17Cancelled


(308,443
)


11.94Exercised


(184,095
)


6.29Outstanding at December 31, 2009


3,484,845


$
15.91



8.45


$
5,347Granted


787,125



8.54Forfeited


(343,575
)


24.99Cancelled


(471,957
)


13.03Exercised


(131,648
)


4.96






$
364Outstanding at December 31, 2010


3,324,790


$
14.07



8.01


$
3,426Exercisable at December 31, 2010


1,696,957


$
18.31



7.04


$
1,781      84




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
      Number of


Weighted Average


Aggregate(in thousands, except for share amounts)

Shares


Price/Share


Fair ValueOutstanding at January 1, 2007





$



$
Granted


3,000



16.24Unvested at December 31, 2007


3,000


$
16.24


$
21Granted


623,000



0.57Vested


(750
)


16.24Cancelled


(2,250
)


16.24Unvested at December 31, 2008


623,000


$
0.57


$
312Granted


54,000



5.70Vested


(336,461
)


1.11Vested and unissued


(286,500
)


0.57Cancelled


(41,539
)


2.81Unvested at December 31, 2009


12,500


$
0.80


$
141Granted


479,625



10.27Vested


(2,500
)


0.80Vested and unissued


(59,562
)


10.31Cancelled


(70,500
)


11.67Unvested at December 31, 2010


359,563


$
9.75


$
3,401   15.
    Employee
    benefit plan   85




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  16.
    Quarterly
    financial data  (unaudited)  First


Second


Third


Fourth2010(in thousands, except for per share amounts)

Quarter


Quarter


Quarter


QuarterRevenue

$
12,421


$
8,290


$
7,246


$
7,752Income from operations


6,147



1,156



744



791Net income


529



1,279



3,184



2,200Net income per shareBasic

$
0.02


$
0.05


$
0.11


$
0.08Diluted

$
0.02


$
0.04


$
0.11


$
0.082009Revenue

$



$



$



$
4,548Loss from operations


(6,557
)


(12,413
)


(7,735
)


(9,242
)Net loss


(6,504
)


(12,392
)


(7,725
)


(9,237
)Basic and diluted net loss per share

$
(0.24
)

$
(0.46
)

$
(0.28
)

$
(0.34
)  86




---



##### 



VANDA
    PHARMACEUTICALS INC.
    EXHIBIT INDEX
  Exhibit No.

Description3
.8

Form of Amended and Restated Certificate of Incorporation of the
    registrant (filed as Exhibit 3.8 to Amendment No. 2 to the
    registrants Registration Statement on Form S-1 (File No.
    333-130759), as filed on March 17, 2006, and incorporated herein
    by reference)3
.10

Form of Certificate of Designation of Series A Junior
    Participating Preferred Stock (filed as Exhibit 3.10 to the
    registrants current report on Form 8-K (File No.
    001-34186) as filed on September 25, 2008 and incorporated
    herein by reference)3
.11

Second Amended and Restated Bylaws of the registrant, as amended
    and restated on December 16, 2008 (filed as Exhibit 3.11 to the
    registrants current report on Form 8-K (File No.
    001-34186) as filed on December 17, 2008 and incorporated herein
    by reference)4
.1

2004 Securityholder Agreement (as amended) (filed as Exhibit 4.1
    to the registrants Registration Statement on Form S-1
    (File No. 333-130759), as originally filed on December 29, 2005,
    and incorporated herein by reference)4
.4

Specimen certificate representing the common stock of the
    registrant (filed as Exhibit 4.4 to Amendment No. 2 to the
    registrants Registration Statement on Form S-1 (File No.
    333-130759), as filed on March 17, 2006, and incorporated herein
    by reference)4
.5

Rights Agreement, dated as of September 25, 2008, between the
    registrant and American Stock Transfer & Trust Company,
    LLC, as Rights Agent (filed as Exhibit 4.5 to the
    registrants current report on Form 8-K (File No.
    001-34186) as filed on September 25, 2008 and incorporated
    herein by reference)4
.6

Amendment to Rights Agreement, dated as of December 22, 2009,
    between the registrant and American Stock Transfer & Trust
    Company, LLC, as Rights Agent (filed as Exhibit 4.6 to the
    registrants current report on Form 8-K (File No.
    001-34186) as filed on December 22, 2009 and incorporated herein
    by reference)10
.1

Registrants Second Amended and Restated Management Equity
    Plan (filed as Exhibit 10.1 to the registrants
    Registration Statement on Form S-1 (File No. 333-130759), as
    originally filed on December 29, 2005, and incorporated herein
    by reference)10
.2#

Sublicense Agreement between the registrant and Novartis Pharma
    AG dated June 4, 2004 (as amended) (relating to
    Fanapt®)

    (filed as Exhibit 10.2 to Amendment No. 1 to the
    registrants Registration Statement on Form S-1 (File No.
    333-130759), as filed on February 16, 2006, and incorporated
    herein by reference)10
.3#

Amended and Restated License, Development and Commercialization
    Agreement by and between Bristol-Myers Squibb Company and the
    registrant dated July 24, 2005 (relating to tasimelteon) (filed
    as Exhibit 10.3 to Amendment No. 1 to the registrants
    Registration Statement on Form S-1 (File No. 333-130759),
    as filed on February 16, 2006, and incorporated herein by
    reference)10
.7

Lease Agreement between the registrant and Red Gate III LLC
    dated June 25, 2003 (lease of Rockville, MD office space) (filed
    as Exhibit 10.7 to the registrants Registration Statement
    on Form S-1 (File No. 333-130759), as originally filed on
    December 29, 2005, and incorporated herein by reference)10
.8

Amendment to Lease Agreement between the registrant and Red
    Gate III LLC dated September 27, 2003 (filed as Exhibit
    10.8 to the registrants Registration Statement on Form S-1
    (File No. 333-130759), as originally filed on December 29,
    2005, and incorporated herein by reference)10
.9

Lease Agreement between the registrant and MCC3 LLC (by
    Spaulding and Slye LLC) dated August 4, 2005 (filed as Exhibit
    10.9 to the registrants Registration Statement on Form S-1
    (File No. 333-130759), as originally filed on December 29, 2005,
    and incorporated herein by reference)10
.10

Summary Plan Description provided for the registrants
    401(k) Profit Sharing Plan & Trust (filed as Exhibit 10.10
    to the registrants Registration Statement on Form S-1
    (File No. 333-130759), as originally filed on December 29, 2005,
    and incorporated herein by reference)10
.11

Form of Indemnification Agreement entered into by directors
    (filed as Exhibit 10.11 to the registrants Registration
    Statement on Form S-1 (File No. 333-130759), as originally filed
    on December 29, 2005, and incorporated herein by reference) 87




---



##### 



Exhibit No.

Description10
.17

2006 Equity Incentive Plan (filed as Exhibit 10.17 to Amendment
    No. 2 to the registrants Registration Statement on Form
    S-1 (File No. 333-130759), as filed on March 17, 2006, and
    incorporated herein by reference)10
.19

Amendment to Lease Agreement between the registrant and MCC3 LLC
    (by Spaulding and Slye LLC) dated November 15, 2006 (filed as
    Exhibit 10.19 to the registrants annual report on Form
    10-K (File No. 000-51863) for the year ending December 31, 2006
    and incorporated herein by reference)10
.20

Form of Tax Indemnity Agreement (filed as Exhibit 10.20 to the
    registrants quarterly report on Form 10-Q (File No.
    000-51863) for the period ending September 30, 2007 and
    incorporated herein by reference)10
.22

Second Amendment to Lease Agreement between the registrant and
    MCC3 LLC (by Spaulding and Slye MCC3 LLC) dated September 14,
    2007 (filed as Exhibit 10.22 to the registrants annual
    report on Form 10-K (File No. 000-51863) for the year ending
    December 31, 2007 and incorporated herein by reference)10
.33

Amended and Restated Employment Agreement for William D. Clark
    dated December 16, 2008 (filed as Exhibit 10.33 to the
    registrants quarterly report on Form 10-Q (File No.
    001-34186) for the quarter ending June 30, 2009 and incorporated
    herein by reference)10
.34

Amended and Restated Employment Agreement for Mihael H.
    Polymeropoulos dated December 16, 2008 (filed as Exhibit 10.34
    to the registrants quarterly report on Form 10-Q (File No.
    001-34186) for the quarter ending June 30, 2009 and incorporated
    herein by reference)10
.35

Employment Agreement for Stephanie R. Irish dated May 22, 2009
    (filed as Exhibit 10.35 to the registrants quarterly
    report on Form 10-Q (File No. 001-34186) for the quarter ending
    June 30, 2009 and incorporated herein by reference)10
.36

Employment Agreement for John Feeney dated May 22, 2009 (filed
    as Exhibit 10.36 to the registrants quarterly report on
    Form 10-Q (File No. 001-34186) for the quarter ending June 30,
    2009 and incorporated herein by reference)10
.37#

Amended and Restated Sublicense Agreement between the registrant
    and Novartis Pharma AG dated October 12, 2009 (relating to
    Fanapt®)

    (filed as Exhibit 10.37 to the registrants annual
    report on Form 10-K for the year ending December 31,
    2009 and incorporated herein by reference)10
.38

Employment Agreement for James Kelly dated December 13, 2010.10
.39

Amendment dated December 16, 2010 to Amended and Restated
    Employment Agreement for Mihael H. Polymeropoulos dated December
    16, 200810
.40

Amendment dated December 16, 2010 to Employment Agreement for
    John Feeney dated May 22, 200910
.41

Amended and Restated Tax Indemnity Agreement dated December 16,
    2010 by and between the Registrant and Mihael H. Polymeropoulos23
.1

Consent of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm31
.1

Certification of the Chief Executive Officer, as required by
    Section 302 of the Sarbanes-Oxley Act of 200231
.2

Certification of the Chief Financial Officer as required by
    Section 302 of the Sarbanes-Oxley Act of 200232
.1

Certifications of the Chief Executive Officer and Chief
    Financial Officer as required by 18 U.S.C. 135032
.2

Certifications of the Chief Executive Officer and Chief
    Financial Officer as required by 18 U.S.C. 1350     #
    
    Confidential treatment has been granted with respect to certain
    provisions of this exhibit. 88