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, 2009o

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. o
  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


18Item 1B.

Unresolved Staff Comments


38Item 2.

Properties


38Item 3.

Legal Proceedings


39Item 4.

(Removed and Reserved)


39Part IIItem 5.

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


39Item 6.

Selected Consolidated Financial Data


41Item 7.

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


43Item 7A.

Qualitative and Quantitative Disclosures about
    Market Risk


57Item 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


58Part 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


59Part IVItem 15.

Exhibits and Financial Statements Schedules


59Signatures


60Exhibit Index


88   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
    Fanapttm

    receives;
    our ability to successfully commercialize
    Fanapttm

    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;
    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
    
    Fanapttm

    (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
    Fanapttm.

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

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

    in the U.S. Except for two post-approval studies started by
    us prior to the execution date of the amended and restated
    sublicense agreement, both of which were substantially completed
    by December 31, 2009, 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
    Fanapttm.

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

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

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

    or any future royalty payments with respect to sales of
    Fanapttm

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

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

    for developing and commercializing
    Fanapttm

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

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

    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 long acting
    injectable (or depot) formulation of
    Fanapttm.

    The PTO has informed us that the application is eligible for
    patent term adjustment of an additional 300 days, making
    the patent expiration date August 26, 2023.
    Tasimelteon, a compound for the treatment of sleep and mood
    disorders, including Circadian Rhythm Sleep Disorders (CRSD). In
    November 2006, we announced positive top-line results from the
    Phase III trial of tasimelteon in transient insomnia. In
    June 2008, we announced positive top-line results from the
    Phase III trial of tasimelteon in chronic primary insomnia.
    On January 19, 2010, the United States Food and Drug
    Administration (FDA) granted orphan drug designation status for
    tasimelteon in a specific CRSD, Non-24-Hour Sleep/Wake Disorder
    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. We will continue to
    explore the path to a New Drug Application (NDA) for
    tasimelteon. 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, tm tm
 3




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tm tm year-to-year quarter-to-quarter Form 10-K,
  tm tm
    tm tm tm sub-optimal
  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
    Fanapttm

    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
    Fanapttm.

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

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

    in the U.S. We retain exclusive rights to
    Fanapttm

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

    for developing and commercializing
    Fanapttm

    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, Non-24-Hour Sleep/Wake Disorder
    in blind 4




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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. We will continue to explore
    the path to a NDA for tasimelteon. 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
    Fanapttm

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

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

    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 additional clinical-stage compounds.  Development
    programs
    Product

Target indications

Clinical statusFanapttm

(Oral)

Schizophrenia

FDA approval May 6, 2009; Commercial rights in the U.S. and
    Canada sublicensed to Novartis on October 12, 2009Fanapttm

(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 Orphan drug designation granted on January 19, 2010 for
    Non-24-Hour Sleep/Wake Disorder in blind individuals without
    light perceptionDepression

Ready for Phase II trial   Fanapttm
  tm tm tm tm tm
 5




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tm tm tm tm tm tm tm tm tm tm
  Therapeutic
    opportunity
  tm ® ® ® ® ® ® ®
  tm ® ®
  Intellectual
    property
  tm tm tm tm 10-year 11-year)
 6




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tm tm tm
  tm tm
  Tasimelteon
    Therapeutic
    opportunity
    ® ® ® tm
 7




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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 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
 8




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Potential
    indication for depression
  ® tm
  ®
    Intellectual
    property
  tm
    License
    agreements
    Fanapttm
  tm tm tm tm tm
 9




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tm tm
  tm tm tm tm tm tm tm tm tm tm tm tm tm
  tm tm tm
  Tasimelteon
     10




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Government
    regulation
  tm
  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   11




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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.     12




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13




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Direct-to-Consumer
    The
    Hatch-Waxman Act
          Foreign
    regulation
   14




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Third-party
    reimbursement and pricing controls
      Marketing
    and sales
  tm tm tm tm tm tm tm
 15




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tm tm tm tm tm tm
  Patents
    and proprietary rights; Hatch-Waxman protection
    tm tm tm tm
  tm tm tm 10-year 11-year) tm tm tm
  tm
   16




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Manufacturing
      Competition
    tm
  
    For
    Fanapttm

    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®

    Relprevytm,

    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, and generic clozapine, as well
    as the typical antipsychotics haloperidol, chlorpromazine,
    thioridazine, and sulpiride (all of which are generic). In
    addition to the approved products, compounds in Phase III
    trials (or for which an NDA has been recently filed) for the
    treatment of schizophrenia include bifeprunox (Solvay
    S.A./Lundbeck A/S) and pimavanserin (Acadia
    Pharmaceuticals).
    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. and
    Sonata®

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

    and Tylenol
    PM®.

    In addition to the approved products, compounds in
    Phase III trials for insomnia (or for which an NDA has been
    recently filed) include indiplon (Neurocrine Biosciences, Inc.)
    and low-dose doxepin
    (Silenortm)

    by Somaxon Pharmaceuticals, Inc.
    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., and
    Effexor®

    (venlafaxine) by Wyeth as well as other compounds such as
    Wellbutrin®

    (buproprion) by GSK,
    Cymbalta®

    (duloxetine) by Eli Lilly, and Valdoxan (agomelatine) by
    Novartis and Les Laboratories Servier. 17




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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.
 18




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

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

    or obtain health care coverage that covers
    Fanapttm

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

    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
    Fanapttm
    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
    Fanapttm

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

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

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

    and our ability to obtain regulatory approval for
    Fanapttm

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

    including a long  acting injectable (or depot)
    formulation of
    Fanapttm,

    outside of the U.S. and Canada
    the unfavorable outcome of any potential litigation relating to
    Fanapttm  tm tm tm tm tm tm tm tm tm tm tm
 19




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tm tm tm
  If our
    compounds are determined to be unsafe or ineffective in humans,
    whether commercially or in clinical trials, our business will be
    materially harmed.
  tm tm
  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 20




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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 21




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
    withdrawal of approvals and
    criminal prosecution  tm
      We
    intend to seek regulatory approvals for our compounds in foreign
    jurisdictions, but we may not obtain any such
    approvals.
  tm
  Our
    compounds may cause undesirable side effects or have other
    properties that could delay or prevent their regulatory approval
    or limit their marketability.
   22




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
    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
    Fanapttm

    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 23




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
    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  tm tm proof-of-efficacy
  We
    have a history of operating losses, anticipate future losses and
    may never become profitable on a sustained basis.
  tm
    tm tm tm tm tm
 24




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
    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
    Fanapttm

    in the U.S. and Canada and achieve certain product
    development and sales milestones
    our ability to successfully commercialize
    Fanapttm

    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    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.
   25




---



##### 



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.
     26




---



##### 




    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    tm tm
 27




---



##### 



tm
  
    For
    Fanapttm

    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®

    Relprevytm,

    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, and generic clozapine, as well
    as the typical antipsychotics haloperidol, chlorpromazine,
    thioridazine, and sulpiride (all of which are generic). In
    addition to the approved products, compounds in Phase III
    trials (or for which an NDA has been recently filed) for the
    treatment of schizophrenia include bifeprunox (Solvay
    S.A./Lundbeck A/S) and pimavanserin (Acadia
    Pharmaceuticals).
    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. and
    Sonata®

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

    and Tylenol
    PM®.

    In addition to the approved products, compounds in
    Phase III trials for insomnia (or for which an NDA has been
    recently filed) include indiplon (Neurocrine Biosciences, Inc.)
    and low-dose doxepin
    (Silenortm)

    by Somaxon Pharmaceuticals, Inc.
    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., and
    Effexor®

    (venlafaxine) by Wyeth as well as other compounds such as
    Wellbutrin®

    (buproprion) by GSK,
    Cymbalta®

    (duloxetine) by Eli Lilly, 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.
  tm tm
  tm
  
    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 28




---



##### 




    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    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.
     29




---



##### 



Product
    liability lawsuits could divert our resources, result in
    substantial liabilities and reduce the commercial potential of
    our compounds.
    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.
       30




---



##### 



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    Failure
    to comply with government regulations regarding the sale and
    marketing of our products or partnered products could harm our
    business.
   31




---



##### 



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    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 32




---



##### 




    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
    Fanapttm
    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.
  tm tm tm tm tm tm tm tm tm tm tm
   33




---



##### 



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.
    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.
  tm tm 10-year tm tm 10-year
 34




---



##### 



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.
      If we
    use hazardous and biological materials in a manner that causes
    injury or violates applicable law, we may be liable for
    damages.
       35




---



##### 



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
    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.
   36




---



##### 



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
    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 37




---



##### 




    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.
      tm
  ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES     38




---



##### 



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, 2008

High


LowFirst quarter 2008

$
7.13


$
2.70Second quarter 2008

$
6.59


$
2.98Third quarter 2008

$
4.03


$
0.76Fourth quarter 2008

$
1.02


$
0.45   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     Dividends
   39




---



##### 



Market
    Price of and Dividends on the Registrants Common Equity
    and Related Stockholder Matters
  Form 10-K Regulation S-K
  
 40




---



##### 



ITEM 6.
    SELECTED
    CONSOLIDATED FINANCIAL DATA  Form 10-K.
  Form 10-K.
  Year Ended December 31,2009


2008


2007


2006


2005Statements of operations dataRevenue

$
4,547,744


$



$



$



$
Operating expenses:Cost of sales


2,897,625















Research and development


13,873,961



23,935,541



47,234,867



52,070,776



16,890,615General and administrative


23,724,101



28,909,580



32,803,508



13,637,664



7,396,038Total operating expenses


40,495,687



52,845,121



80,038,375



65,708,440



24,286,653Loss from operations


(35,947,943
)


(52,845,121
)


(80,038,375
)


(65,708,440
)


(24,286,653
)Total other income, net


89,097



1,780,880



5,978,564



2,197,821



410,001Loss before tax provision


(35,858,846
)


(51,064,241
)


(74,059,811
)


(63,510,619
)


(23,876,652
)Tax provision










9,879



549



7,649Net loss


(35,858,846
)


(51,064,241
)


(74,069,690
)


(63,511,168
)


(23,884,301
)Beneficial conversion feature-deemed dividend to preferred
    stockholders(1)


















(33,486,623
)Net loss attributable to common stockholders

$
(35,858,846
)

$
(51,064,241
)

$
(74,069,690
)

$
(63,511,168
)

$
(57,370,924
)Basic and diluted net loss per share applicable to common
    stockholders

$
(1.33
)

$
(1.92
)

$
(2.81
)

$
(3.97
)

$
(3,374.33
)Shares used in calculation of basic and diluted net loss per
    shares attributable to common stockholders


27,015,271



26,650,126



26,360,177



16,001,815



17,002     (1)
    
    In September and December of 2005, we completed the sale of an
    additional 27,235,783 shares of Series B preferred
    stock for net proceeds of approximately $33.5 million.
    After evaluating the fair value of the common stock obtainable
    upon conversion by the stockholders, we determined that the
    issuance of the Series B preferred stock sold in 2005
    resulted in a beneficial conversion feature which was fully
    accreted in 2005 and is recorded as a deemed dividend to
    preferred stockholders of approximately $33.5 million for
    the year ended December 31, 2005.  41




---



##### 



2009


2008


2007


2006


2005Balance sheet dataCash and cash equivalents

$
205,295,488


$
39,079,304


$
41,929,533


$
30,928,895


$
21,012,815Marketable securities






7,378,798



51,223,291



941,981



10,141,189Working capital


181,416,315



44,334,703



74,177,567



24,714,285



28,308,434Total assets


225,714,081



49,933,843



96,860,780



36,260,276



35,752,770Total liabilities


202,683,223



3,913,569



13,131,849



9,503,404



5,087,963Convertible preferred stock


















61,795,187Accumulated deficit


(260,833,353
)


(224,974,507
)


(173,910,266
)


(99,840,576
)


(36,329,408
)Total stockholders equity


23,030,858



46,020,274



83,728,931



26,756,872



30,664,807  42




---



##### 



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 risk, 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
    
    Fanapttm

    (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
    Fanapttm.

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

    in the U.S. and Canada. Novartis began selling
    Fanapttm

    in the U.S. during the first quarter of 2010. Except for
    two post-approval studies started by us prior to the execution
    date of the amended and restated sublicense agreement, both of
    which were substantially completed by December 31, 2009,
    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
    Fanapttm.

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

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

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

    or any future royalty payments with respect to sales of
    Fanapttm

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

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

    for developing and commercializing
    Fanapttm

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

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

    outside of the U.S. and Canada. On February 23, 2010,
    the PTO issued a notice of allowance for our patent application
    for the long acting injectable (or depot) formulation of
    Fanapttm.

    The PTO has informed us that the application is eligible for
    patent term adjustment of an additional 300 days, making
    the patent expiration date August 26, 2023.
    Tasimelteon, a compound for the treatment of sleep and mood
    disorders, including Circadian Rhythm Sleep Disorders (CRSD). In
    November 2006, we announced positive top-line results from the
    Phase III trial of tasimelteon in transient insomnia. In
    June 2008, we announced positive top-line results from the
    Phase III trial of tasimelteon in chronic primary insomnia.
    On January 19, 2010, the United States Food and Drug
    Administration (FDA) granted orphan designation status for
    tasimelteon in the CRSD, Non-24-Hour Sleep/Wake Disorder 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, waiver
    of FDA 43




---



##### 



user fees, tax credits, and up to seven years of market
    exclusivity upon marketing approval. We will continue to explore
    the path to an NDA for tasimelteon. Given the range of potential
    indications for tasimelteon, we may pursue one or more
    partnerships for the development and commercialization of
    tasimelteon worldwide.  tm tm year-to-year Form 10-K,
        Fanapt tm . tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm
  tm tm
 44




---



##### 



tm
  Tasimelteon. next-day
    Revenues. tm tm
  Research and development expenses. tm tm
 45




---



##### 



tm
  Year Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,2009


2008


2007Direct project costs(1)Fanapttm

$
9,532,000


$
8,485,000


$
20,668,000Tasimelteon


2,548,000



11,344,000



18,947,000Other product candidates


120,000



2,180,000



5,499,000Total direct product costs


12,200,000



22,009,000



45,114,000Indirect project costs(1)Facility


620,000



683,000



495,000Depreciation


234,000



330,000



423,000Other indirect overhead costs


820,000



913,000



1,203,000Total indirect expenses


1,674,000



1,926,000



2,121,000Total research and development expenses

$
13,874,000


$
23,935,000


$
47,235,000     (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 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. tm
  Interest and other income, net.
  Critical
    accounting policies
    Form 10-K.
  Inventory.
 46




---



##### 



tm tm
  Intangible asset, net.
  tm tm
    Accrued expenses. and/or
  Revenue Recognition. tm
 47




---



##### 



tm tm tm
  Stock-based compensation.
      Year Ended December 31,2009


2008


2007Research and development

$
2,028,000


$
1,748,000


$
4,259,000General and administrative


8,738,000



11,667,000



15,228,000Total stock-based compensation expense

$
10,766,000


$
13,415,000


$
19,487,000Stock-based compensation expense per basic and diluted share of
    common stock

$
0.40


$
0.50


$
0.74     Recent
    Accounting Pronouncements
   48




---



##### 



Results
    of operations
  tm tm tm tm
  Year
    ended December 31, 2009 compared to year ended
    December 31, 2008
  Research and development expenses.
    Year EndedDecember 31,Research and Development Expenses

2009


2008Direct project costs:Clinical trials

$
42,000


$
7,441,000Contract research and development, consulting, materials and
    other direct costs


7,735,000



8,731,000Salaries, benefits and related costs


2,395,000



4,089,000Stock-based compensation


2,028,000



1,748,000Total direct costs


12,200,000



22,009,000Indirect project costs


1,674,000



1,926,000Total

$
13,874,000


$
23,935,000  49




---



##### 



tm
  General and administrative expenses.
    Year EndedDecember 31,General and Administrative Expenses

2009


2008Salaries, benefits and related costs

$
2,686,000


$
4,946,000Stock-based compensation


8,738,000



11,667,000Marketing, legal, accounting and other professional services


9,951,000



9,450,000Other expenses


2,349,000



2,847,000Total

$
23,724,000


$
28,910,000   tm
  Other income, net.
    Year EndedDecember 31,2009


2008Interest income

$
89,000


$
1,781,000   Year
    ended December 31, 2008 compared to year ended
    December 31, 2007
  Research and development expenses.
 50




---



##### 



Year EndedDecember 31,Research and Development Expenses

2008


2007Direct project costs:Clinical trials

$
7,441,000


$
14,595,000Contract research and development, consulting, materials and
    other direct costs


8,731,000



16,253,000Milestone license fees






6,000,000Salaries, benefits and related costs


4,089,000



4,007,000Stock-based compensation


1,748,000



4,259,000Total direct costs


22,009,000



45,114,000Indirect project costs


1,926,000



2,121,000Total

$
23,935,000


$
47,235,000   tm tm tm tm
  General and administrative expenses.
    Year EndedDecember 31,General and Administrative Expenses

2008


2007Salaries, benefits and related costs

$
4,946,000


$
3,263,000Stock-based compensation


11,667,000



15,228,000Marketing and related consulting services


5,731,000



8,047,000Legal and other professional expenses


3,719,000



3,142,000Other expenses


2,847,000



3,124,000Total

$
28,910,000


$
32,804,000    51




---



##### 



tm
  Other income, net.
    Year EndedDecember 31,2008


2007Interest income

$
1,781,000


$
5,907,000Other income






71,000Total, net

$
1,781,000


$
5,978,000   Intangible
    Asset, Net
    December 31, 2009Estimated


Gross





NetUseful


Carrying


Accumulated


CarryingLife


Amount


Amortization


AmountFanapttm


8 years


$
12,000,000


$
983,000


$
11,017,000$
12,000,000


$
983,000


$
11,017,000   tm tm
  tm
 52




---



##### 



Amortization Expense by PeriodAfterTotal


2010


2011


2012


2013


2014


2014Intangible asset

$
11,017,000


$
1,495,000


$
1,495,000


$
1,495,000


$
1,495,000


$
1,495,000


$
3,542,000   Inventory
    December 31,2009Raw materials

$
1,095,000Work-in-process


Finished goods


1,304,000Total inventory, net

$
2,399,000   tm
  Revenue
    Recognition
    Year Ended December 31, 2009RevenueRecognized


Revenue Deferred


TotalRevenue:Revenue for licensing agreement

$
2,569,000


$
197,431,000


$
200,000,000Product revenue


1,979,000







1,979,000Total

$
4,548,000


$
197,431,000


$
201,979,000   tm tm
  Liquidity
    and capital resources
   53




---



##### 



As of December 31,2009


2008Balance sheet dataCash and cash equivalents

$
205,295,000


$
39,079,000U.S. Treasury and government agencies






2,000,000U.S. corporate debt






5,252,000U.S. asset-backed securities






127,000Marketable securities, short-term






7,379,000Total

$
205,295,000


$
46,458,000         
    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 InputsDecember 31, 2008


(Level 1)


(Level 2)


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

$
7,379,000


$
2,000,000


$
5,379,000


$
Total

$
7,379,000


$
2,000,000


$
5,379,000


$
   tm
 54




---



##### 



tm
  Cash
    flow
    Year Ended December 31,2009


2008


2007Net cash provided by (used in) Operating activities

$
169,336,000


$
(45,955,000
)

$
(51,641,000
)Investing activities


(4,739,000
)


43,088,000



(48,760,000
)Financing activities


1,619,000







111,403,000Effect of foreign currency translation






17,000



(1,000
)Net change in cash and cash equivalents

$
166,216,000


$
(2,850,000
)

$
11,001,000   Year
    ended December 31, 2009 compared to year ended
    December 31, 2008
    Year
    ended December 31, 2008 compared to year ended
    December 31, 2007
    Contractual
    obligations and commitments
  Operating leases.
    Cash Payments Due by PeriodAfterTotal


2010


2011


2012


2013


2014


2014Operating leases

$
4,988,000


$
706,000


$
727,000


$
749,000


$
771,000


$
795,000


$
1,240,000   Severance payments.
 55




---



##### 



Cash Payments Due by PeriodBeginning Balance


Charge


Cash Paid


Ending BalanceWorkforce Reduction:Research Development

$
571,000


$



$
571,000


$
General & Administrative


1,041,000







1,041,000



Total

$
1,612,000


$



$
1,612,000


$
   Consulting fees. tm tm
    Other contracts.
  tm
  License agreements. tm tm tm
   56




---



##### 



tm tm tm
  tm tm tm tm tm tm tm tm tm tm tm
  ITEM 7A.
    QUALITATIVE
    AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK  Interest
    rates
    Effects
    of inflation
   57




---



##### 



Marketable
    securities
    Off-balance
    sheet arrangements
  Regulation S-K.
  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). Internal Control 
    Integrated Framework.
  Changes
    in Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  Form 10-K.
  ITEM 9B.
    OTHER
    INFORMATION   58




---



##### 



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  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.
 59




---



##### 



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 15, 2010/s/  STEPHANIE
    R. IRISHStephanie
    R. Irish

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

March 15, 2010/s/  ARGERISN.KARABELAS,
    Ph.D.ArgerisN.Karabelas,
    Ph.D.

Chairman of the Board and Director

March 15, 2010/s/  RICHARD
    W. DUGANRichard
    W. Dugan

Director

March 15, 2010/s/  BRIAN
    K.
    HALAK, Ph.D.Brian
    K. Halak, Ph.D.

Director

March 15, 2010/s/  HOWARD
    PIENHoward
    Pien

Director

March 15, 2010/s/  H.
    THOMAS WATKINSH.
    Thomas Watkins

Director

March 15, 2010  60




---



##### 



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


62Consolidated financial statements


63Balance sheets at December 31, 2009 and
    2008


63Statements of operations for the years ended
    December 31, 2009, 2008 and 2007


64Statements of changes in stockholders
    equity for the years ended December 31, 2009, 2008 and
    2007


65Statements of cash flows for the years ended
    December 31, 2009, 2008 and 2007


66Notes to the consolidated financial statements


67   61




---



##### 



Report of
    Independent Registered Public Accounting Firm  
  Internal Control - Integrated Framework
      
    62




---



##### 



Vanda
    Pharmaceuticals Inc.
  Consolidated
    Balance Sheets
  December 31,2009


2008AssetsCurrent assetsCash and cash equivalents

$
205,295,488


$
39,079,304Marketable securities






7,378,798Accounts receivable


3,163,898



Inventory


2,398,517



Prepaid expenses, deposits and other current assets


2,092,581



1,287,400Total current assets


212,950,484



47,745,502Property and equipment, net


1,316,302



1,758,111Intangible asset, net


11,017,065



Restricted cash


430,230



430,230Total assets

$
225,714,081


$
49,933,843Liabilities and stockholders equityCurrent liabilitiesAccounts payable

$
2,423,877


$
512,382Accrued liabilities


2,321,301



2,898,417Deferred revenues, current portion


26,788,991



Total current liabilities


31,534,169



3,410,799Deferred rent


506,852



502,770Deferred revenues, noncurrent portion


170,642,202



Total liabilities


202,683,223



3,913,569CommitmentsStockholders 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, 27,568,595 and 26,653,478 shares issued and
    outstanding at December 31, 2009 and 2008, respectively


27,569



26,653Additional paid-in capital


283,836,642



270,988,157Accumulated other comprehensive loss






(20,029
)Accumulated deficit


(260,833,353
)


(224,974,507
)Total stockholders equity


23,030,858



46,020,274Total liabilities and stockholders equity

$
225,714,081


$
49,933,843    63




---



##### 



Vanda
    Pharmaceuticals Inc.
  Consolidated
    Statements of Operations
  Year Ended December 31,2009


2008


2007Revenue:Licensing agreement

$
2,568,807


$



$
Product sales


1,978,937







Total revenue


4,547,744







Operating expenses:Cost of sales  licensing agreement


982,935







Cost of sales  product


1,914,690







Research and development


13,873,961



23,935,541



47,234,867General and administrative


23,724,101



28,909,580



32,803,508Total operating expenses


40,495,687



52,845,121



80,038,375Loss from operations


(35,947,943
)


(52,845,121
)


(80,038,375
)Other income:Interest income


89,097



1,780,880



5,907,219Other income










71,345Total other income


89,097



1,780,880



5,978,564Loss before tax provision


(35,858,846
)


(51,064,241
)


(74,059,811
)Tax provision










9,879Net loss attributable to common stockholders

$
(35,858,846
)

$
(51,064,241
)

$
(74,069,690
)Basic and diluted net loss per share attributable to common
    stockholders

$
(1.33
)

$
(1.92
)

$
(2.81
)Shares used in calculation of basic and diluted net loss per
    share attributable to common stockholders


27,015,271



26,650,126



26,360,177    64




---



##### 






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


OtherCommon Stock


Paid-in


Comprehensive


Accumulated


ComprehensiveShares


Par Value


Capital


Income (Loss)


Deficit


Loss


TotalBalances at December 31, 2006


22,128,534


$
22,129


$
126,578,588


$
(3,269
)

$
(99,840,576
)





$
26,756,872Issuance of common stock from exercised stock options


154,194



154



148,486















148,640Follow-on offering of common stock, net of issuance costs


4,370,000



4,370



111,250,480















111,254,850Employee and non-employee stock-based compensation










19,622,814















19,622,814Comprehensive loss:Net loss


















(74,069,690
)


(74,069,690
)Cumulative translation adjustment














(12,940
)






(12,940
)Net unrealized gain on marketable securities














28,385







28,385Comprehensive loss





















$
(74,054,245
)


(74,054,245
)Balances at December 31, 2007


26,652,728



26,653



257,600,368



12,176



(173,910,266
)






83,728,931Issuance of common stock from restricted stock units


750























Employee and non-employee stock-based compensation










13,387,789















13,387,789Comprehensive loss:Net loss


















(51,064,241
)


(51,064,241
)Cumulative translation adjustment














16,220







16,220Net unrealized loss on marketable securities














(48,425
)






(48,425
)Comprehensive loss





















$
(51,096,446
)


(51,096,446
)Balances at December 31, 2008


26,653,478



26,653



270,988,157



(20,029
)


(224,974,507
)






46,020,274Issuance of common stock from exercised stock options and
    restricted stock units


915,117



916



1,618,258















1,619,174Employee and non-employee stock-based compensation










11,230,227















11,230,227Comprehensive loss:Net loss


















(35,858,846
)


(35,858,846
)Net unrealized gain on marketable securities














20,029







20,029Comprehensive loss





















$
(35,838,817
)


(35,838,817
)Balances at December 31, 2009


27,568,595


$
27,569


$
283,836,642


$



$
(260,833,353
)





$
23,030,858     65




---



##### 



Vanda
    Pharmaceuticals Inc.
  Consolidated
    Statements of Cash Flows
  Year Ended December 31,2009


2008


2007Cash flows from operating activitiesNet loss

$
(35,858,846
)

$
(51,064,241
)

$
(74,069,690
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activitiesDepreciation and amortization


441,809



530,805



571,586Employee and non-employee stock-based compensation


11,230,227



13,387,789



19,622,814(Loss) gain on disposal of assets






(174
)


28,713Amortization of discounts and premiums on marketable securities


138,095



(235,162
)


(1,571,905
)Amortization of intangible asset


982,935







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


(805,181
)


495,200



168,987Accounts receivable


(3,163,898
)






Deposits






150,000



Inventory


(2,398,517
)






Accounts payable


1,911,495



(2,475,697
)


204,029Accrued expenses


(577,116
)


(6,892,577
)


3,465,028Other liabilities


4,082



148,728



86,644Deferred revenue


197,431,193







(147,464
)Net cash provided by (used in) operating activities


169,336,278



(45,955,329
)


(51,641,258
)Cash flows from investing activitiesAcquisition of intangible asset


(12,000,000
)






Purchases of property and equipment






(943,659
)


(279,433
)Proceeds from sale of property and equipment










200,179Purchases of marketable securities


(11,365,815
)


(14,786,080
)


(138,953,879
)Proceeds from sale of marketable securities


126,547



11,258,094



3,577,859Maturities of marketable securities


18,500,000



47,560,000



86,695,000Net cash provided by (used in) investing activities


(4,739,268
)


43,088,355



(48,760,274
)Cash flows from financing activitiesProceeds from exercise of stock options


1,619,174







148,640Proceeds from issuance of common stock, net of issuance costs










111,254,850Net cash provided by financing activities


1,619,174







111,403,490Effect of foreign currency






16,745



(1,320
)Net change in cash and cash equivalents


166,216,184



(2,850,229
)


11,000,638Cash and cash equivalentsBeginning of period


39,079,304



41,929,533



30,928,895End of period

$
205,295,488


$
39,079,304


$
41,929,533    66




---



##### 



Vanda
    Pharmaceuticals Inc.



Notes to
    the Consolidated Financial Statements  1.
    Business
    organization and presentation  Business
    organization
  tm tm tm tm tm tm tm tm tm tm tm tm tm tm
    Basis
    of presentation
   67




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  Development-Stage
    Company
    2.
    Summary
    of significant accounting policies  Use of
    estimates
    Cash
    and cash equivalents
    Marketable
    securities
  available-for-sale Available-for-sale
  Inventory
  tm tm
  Accounts
    Receivable
   68




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  Intangible
    asset, net
    tm tm
    Concentrations
    of credit risk
    Fair
    value of financial instruments
    Property
    and equipment
     69




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  Revenue
    Recognition
  tm tm tm tm
  Foreign
    currency translation
    Comprehensive
    income (loss)
    Accrued
    expenses
   70




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  and/or
  Research
    and development expenses
  tm tm
  General
    and administrative expenses
  tm
  Accounting
    for stock-based compensation
     71




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
        Year Ended December 31,2009


2008


2007Expected dividend yield


0
%


0
%


0
%Weighted average expected volatility


68
%


68
%


68
%Weighted average expected term (years)


6.03



6.18



6.25Weighted average risk-free rate


2.81
%


3.27
%


4.10
%     Year Ended December 31,2009


2008


2007Research and development

$
2,028,337


$
1,747,863


$
4,259,315General and administrative


8,737,913



11,667,598



15,227,529Total Stock-based compensation expense

$
10,766,250


$
13,415,461


$
19,486,844Stock-based compensation expense per basic and diluted share of
    common stock

$
0.40


$
0.50


$
0.74     Income
    taxes
   72




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
  Segment
    information
    Recent
    accounting pronouncements
      Certain
    risks and uncertainties
       73




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
   3.
    Earnings
    per share        Year Ended December 31,2009


2008


2007Numerator:Net loss attributable to common stockholders

$
(35,858,846
)

$
(51,064,241
)

$
(74,069,690
)Denominator:Weighted average common shares outstanding


27,015,271



26,652,867



26,370,485Weighted average unvested common shares subject to repurchase






(2,741
)


(10,308
)Denominator for basic and diluted net loss per share


27,015,271



26,650,126



26,360,177Basic and diluted net loss per share attributable to common
    stockholders

$
(1.33
)

$
(1.92
)

$
(2.81
)Historical outstanding anti-dilutive securities not included in
    diluted net loss per share calculation:Options to purchase common stock


4,516,739



4,408,629



2,938,160   4.
    Marketable
    securities  available-for-sale available-for-sale
  Gross


GrossAmortized


Unrealized


Unrealized


Fair MarketCost


Gains


Losses


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

$
1,992,452


$
7,408


$



$
1,999,860U.S. corporate debt


5,279,828



2,336



(29,818
)


5,252,346U.S. asset-based securities


126,547



45







126,592$
7,398,827


$
9,789


$
(29,818
)

$
7,378,798  74




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
   5.
    Inventory    December 31,2009Raw materials

$
1,094,388Work-in-process


Finished goods


1,304,129Total inventory, net

$
2,398,517   6.
    Prepaid
    expenses, deposits and other current assets    December 31,2009


2008Current deposits with vendors

$
150,000


$
210,000Prepaid insurance


283,839



282,391Other prepaid expenses and vendor advances


1,657,521



326,201Accrued interest income


1,221



53,378Other receivables






415,430Total prepaid expenses, deposits and other current assets

$
2,092,581


$
1,287,400   7.
    Property
    and equipment    EstimatedUseful Life


December 31,(Years)


2009


2008Laboratory equipment


5


$
1,348,098


$
1,348,098Computer equipment


3



763,894



776,921Furniture and fixtures


7



705,784



705,784Leasehold improvements


10



844,158



844,1583,661,934



3,674,961Less  accumulated depreciation and amortization






(2,345,632
)


(1,916,850
)$
1,316,302


$
1,758,111    75




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
   8.
    Intangible
    Asset, Net    December 31, 2009Estimated


Gross





NetUseful


Carrying


Accumulated


CarryingLife (years)


Amount


Amortization


AmountFanapttm


8 years


$
12,000,000


$
982,935


$
11,017,065$
12,000,000


$
982,935


$
11,017,065   tm tm tm
  tm
    Amortization Expense by PeriodAfterTotal


2010


2011


2012


2013


2014


2014Intangible asset

$
11,017,065


$
1,494,881


$
1,494,881


$
1,494,881


$
1,494,881


$
1,494,881


$
3,542,660   9.
    Accrued
    liabilities    December 31,2009


2008Accrued research and development expenses

$
1,033,339


$
925,124Accrued consulting and other professional fees


1,076,111



233,829Employee benefits


106,126



126,816Other accrued expenses


105,725



Accrued severance






1,612,648Total accrued liabilities

$
2,321,301


$
2,898,417  76




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
   10.
    Revenue
    Recognition    Year Ended December 31, 2009Revenue


RevenueRecognized


Deferred


TotalRevenue:Revenue for licensing agreement

$
2,568,807


$
197,431,193


$
200,000,000Product sales


1,978,937







1,978,937Total

$
4,547,744


$
197,431,193


$
201,978,937   tm tm
  11.
    Commitments
    and Contingencies  Operating
    leases
    2010

$
705,9942011


726,9922012


748,8072013


771,4402014


794,619Thereafter


1,239,785$
4,987,637   Severance
    payments
   77




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
    Year Ended December 31, 2009Beginning Balance


Charge


Cash Paid


Ending BalanceWorkforce Reduction:Research Development

$
571,391


$



$
571,391


$
General & Administrative


1,041,257







1,041,257



Total

$
1,612,648


$



$
1,612,648


$
   Consulting
    fees
  tm tm
    Guarantees
    and indemnifications
    License
    agreements
    Fanapt tm . tm
 78




---



##### 



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




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
        Future license payments.
  Research
    and development and marketing agreements
    tm
  12.
    Singapore
    research facility   80




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
      13.
    Income
    taxes    Year Ended December 31,2009


2008


2007Current federal tax expense

$



$



$
Current state tax expense










Current foreign expense










9,879Deferred tax expense










Total tax expense

$



$



$
9,879     December 31,2009


2008Deferred tax asset (liability)Net operating loss carryforwards

$
60,817,648


$
48,781,358Start-up
    costs


21,343,210



21,234,523Stock-based compensation


14,854,312



15,324,695Licensing agreements


2,878,808



2,925,575Research and development credit


5,706,893



5,455,721Depreciation and amortization


23,037



(10,179
)Amortization of warrants






12,422Accrued and deferred expenses


153,088



263,343Net deferred tax assets


105,776,996



93,987,458Deferred tax asset valuation allowance


(105,776,996
)


(93,987,458
)$



$
    81




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
    December 31,2009


2008Federal tax at statutory rate


34.0
%


34.0
%State taxes


4.4
%


5.4
%Change in valuation allowance


(32.9
)%


(41.1
)%Research and development credit


0.7
%


1.9
%Meals, entertainment and other non-deductable items


(6.2
)%


(0.2
)%Effective tax rate


0.0
%


0.0
%         2004-34,
   82




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
    14.
    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      Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets


Significant Other


Significantfor Identical


Observable


UnobservableDecember 31,


Assets


Inputs


Inputs2008


(Level 1)


(Level 2)


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

$
7,378,798


$
1,999,860


$
5,378,938


$
Total

$
7,378,798


$
1,999,860


$
5,378,938


$
   15.
    Restricted
    cash    16.
    Equity
    incentive plans   83




---



##### 



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


Weighted AverageNumber of


Exercise Price at


Remaining Term


AggregateShares


Grant Date


(Years)


Intrinsic ValueOutstanding at December 31, 2006


1,347,205



1.69Cancelled


(14,276
)


3.72Exercised


(162,954
)


0.93






$
3,325,163Outstanding at December 31, 2007


1,169,975



1.77



7.75


$
5,988,373Forfeited


(4,849
)


5.27Cancelled


(10,878
)


5.84Outstanding at December 31, 2008


1,154,248



1.72



6.72


$
128,600Cancelled


(26,793
)


3.30Exercised


(394,561
)


1.17






$
3,698,325Outstanding at December 31, 2009


732,894



1.97Exercisable at December 31, 2009


732,891



1.97



5.79


$
6,797,720  84




---



##### 



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


Weighted AverageNumber of


Exercise Price at


Remaining Term


AggregateShares


Grant Date


(Years)


Intrinsic ValueOutstanding at December 31, 2006


359,527



20.21Granted


1,451,801



27.60Forfeited


(41,391
)


27.85Cancelled


(4,302
)


28.44Outstanding 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
)


6.29







906,667Outstanding at December 31, 2009


3,484,845



15.91



8.45


$
5,346,617Exercisable at December 31, 2009


1,687,654



20.41



7.63


$
2,302,890     tm
 85




---



##### 



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


Weighted Average


AggregateShares


Price/Share


Intrinsic ValueOutstanding at January 1, 2007





$
Granted


3,000



16.24Unvested at December 31, 2007


3,000



16.24


$
20,640Granted


623,000



0.57Vested


(750
)


16.24Cancelled


(2,250
)


16.24Unvested at December 31, 2008


623,000



0.57


$
311,500Granted


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


$
140,625   17.
    Equity  Public
    offerings and reverse stock split
    1-for-3.309755
  18.
    Employee
    benefit plan   86




---



##### 



Vanda
    Pharmaceuticals Inc.
  Notes to
    the Consolidated Financial
    Statements  (Continued)
   19.
    Quarterly
    financial data (unaudited)  First

Second

Third

Fourth2009

Quarter

Quarter

Quarter

QuarterRevenue

$



$



$



$
4,547,744Loss from operations


(6,557,375
)


(12,413,264
)


(7,735,210
)


(9,242,096
)Net loss


(6,503,988
)


(12,392,101
)


(7,725,368
)


(9,237,389
)Basic and diluted net loss per share attributable to common
    stockholders


(0.24
)


(0.46
)


(0.28
)


(0.34
)2008Loss from operations

$
(20,061,879
)

$
(13,935,894
)

$
(11,192,687
)

$
(7,654,661
)Net loss


(19,196,129
)


(13,494,882
)


(10,869,211
)


(7,504,019
)Basic and diluted net loss per share attributable to common
    stockholders


(0.72
)


(0.51
)


(0.41
)


(0.28
)  87




---



##### 



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
Fanapttm)

(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) 88




---



##### 



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
.25

Amended and Restated Employment Agreement for Steven A.
    Shallcross dated November 4, 2008 (filed as Exhibit 10.25 to the
    registrants annual report on Form 10-K (File No.
    001-34186) for the year ending December 31, 2008 and
    incorporated herein by reference)10
.26

Amended and Restated Employment Agreement for Paolo Baroldi
    dated November 4, 2008 (filed as Exhibit 10.26 to the
    registrants annual report on Form 10-K (File No.
    001-34186) for the year ending December 31, 2008 and
    incorporated herein by reference)10
.31

Separation Agreement for Paolo Baroldi dated December 17, 2008
    (filed as Exhibit 10.31 to the registrants annual report
    on Form 10-K (File No. 001-34186) for the year ending December
    31, 2008 and incorporated herein by reference)10
.32

Separation Agreement for Steven A. Shallcross dated December 17,
    2008 (filed as Exhibit 10.32 to the registrants annual
    report on Form 10-K (File No. 001-34186) for the year ending
    December 31, 2008 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
Fanapttm)23
.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.*
    
    Application has been made to the Securities and Exchange
    Commission to seek confidential treatment of certain provisions
    of this exhibit. 89