Insys Therapeutics Inc
Annual Report 2014

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 OR ☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _______ to ________ Commission File Number: 001-35902 Insys Therapeutics, Inc. (Exact name of registrant as specified in its charter) Delaware51-0327886(State or Other Jurisdiction of(I.R.S. EmployerIncorporation)Identification No.) 1333 S. Spectrum Blvd, Suite 100, Chandler, Arizona85286(Address of Principal Executive Offices)(Zip Code) (480) 500-3127(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title Of Each Class Name Of Each Exchange On Which Registered Common Stock, $0.01 Par Value Per Share The NASDAQ Global Market LLC Securities Registered Pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ☑ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes ☑ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of thisForm 10-K. ☐  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☑ Non-accelerated filer ☐ Smaller reporting company ☑ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $318.4 million as ofJune 30, 2014 based on the closing sales price of the common stock on the NASDAQ Global Market. There were 35,459,644 shares of the registrant’s common stock issued and outstanding as of February 26, 2015. Documents Incorporated by Reference Portions of the registrant's Proxy Statement relating to its 2015 Annual Meeting of Stockholders, to be filed with the Securities and ExchangeCommission (“SEC”) pursuant to Regulation 14A within 120 days after the registrant’s fiscal year ended December 31, 2014, are incorporated by reference inPart III of this Form 10-K.  TABLE OF CONTENTS PageNumbersPART I Item 1.Business1 Item 1A.Risk Factors 22 Item 1B.Unresolved Staff Comments55 Item 2.Properties55 Item 3.Legal Proceedings56 Item 4.Mine Safety Disclosures56 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities56 Item 6.Selected Financial Data57 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations57 Item 7A.Quantitative and Qualitative Disclosures About Market Risk69 Item 8.Financial Statements and Supplementary Data70 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure94 Item 9A.Controls and Procedures94 Item 9B.Other Information95 PART III Item 10.Directors, Executive Officers and Corporate Governance95 Item 11.Executive Compensation95 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters95 Item 13.Certain Relationships and Related Transactions, and Director Independence95 Item 14.Principal Accountant Fees and Services95 PART IV Item 15.Exhibits, Financial Statement Schedules96 SIGNATURES100  2014 FORM 10-K ANNUAL REPORTGLOSSARY OF TERMS The following glossary provides definitions for certain acronyms and terms used in this Annual Report on Form 10-K. These acronyms and terms arespecific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Abbreviated Term Defined Term ANDA Abbreviated New Drug ApplicationAPI Active pharmaceutical ingredientAptar AptarGroup, Inc.ATRA American Taxpayer Relief Act of 2012BTCP Breakthrough cancer painCatalent Catalent Pharma Solutions, LLCCBD Synthetic cannabidiolcGMP Current Good Manufacturing PracticesCINV Chemotherapy-induced nausea and vomitingCMS Centers for Medicare & Medicaid ServicesCRO Contract Research OrganizationCSA Federal Controlled Substances Act of 1970DEA U.S. Drug Enforcement AdministrationDPT DPT Lakewood, LLCESI Express Scripts, Inc.FDA U.S. Food and Drug AdministrationFDCA Federal Food, Drug, and Cosmetic ActGCP Good Clinical PracticesGI GastrointestinalHIPAA Health Insurance Portability and Accountability Act of 1996HITECH Health Information Technology for Economic and Clinical Health Act of 2009IND Investigational New Drug ApplicationInsys Pharma Insys Pharma, Inc.IPO Initial public offeringIRB Institutional Review BoardJOBS Act Jumpstart Our Business Startups Act of 2012MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003NDA New Drug ApplicationNeoPharm NeoPharm, Inc.NOL Net operating loss carryforwardNSAID Non-steroidal anti-inflammatory drugOrange Book FDA's Approved Drug Products with Therapeutic Equivalence EvaluationsPBM Pharmacy Benefit ManagersPK PharmacokineticsPPACA Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Actof 2010QSR FDA's Quality System RegulationREMS Risk Evaluation and Mitigation StrategyRLD Reference listed drugTHC Delta-9-tetrahydrocannabinolTIRF Transmucosal immediate-release fentanylVC Vomiting center  PART I ITEM 1. BUSINESS Overview As used in this Form 10-K, “we,” “us,” and “our” refer to Insys Therapeutics, Inc. We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have twomarketed products: Subsys, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant patients and Dronabinol SG Capsule, a generic equivalentto Marinol (dronabinol), an approved second-line treatment of CINV and anorexia associated with weight loss in patients with AIDS. Insys Therapeutics, Inc. was incorporated in Delaware in June 1990, and we maintain headquarters in Chandler, Arizona. We were in thedevelopment stage through December 31, 2011. The year 2012 is the first year during which we were considered an operating company and were nolonger in the development stage. We completed our initial public offering of common stock in May 2013. On November 8, 2010, we effected a mergerwith NeoPharm in a transaction accounted for as a reverse acquisition, or the NeoPharm merger. All of our outstanding share capital was exchanged fornewly-issued shares of common stock and convertible preferred stock of NeoPharm. As a result of the NeoPharm merger, we became a wholly-ownedsubsidiary of NeoPharm and changed our name to Insys Pharma. NeoPharm then changed its name to Insys Therapeutics, Inc. The financial statementsfor all periods subsequent to the November 8, 2010 NeoPharm merger date are the consolidated financial statements of Insys Therapeutics, Inc. and InsysPharma. Information about our company and communities is provided on our Internet website at www.insysrx.com. The information contained on ourwebsite is not part of this Annual Report on Form 10-K. Our periodic and current reports, including any amendments, filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available, free of charge, on our website as soon as reasonably practicableafter they are electronically filed with or furnished to SEC. These filings are also available on the SEC’s website at www.sec.gov. Information containedon our website it not considered part of this annual report. We are leveraging our capabilities in cannabinoid formulation and manufacturing, as well as our sublingual spray drug delivery technology, todevelop a robust portfolio of differentiated, wholly-owned product candidates. Our lead product candidate is Dronabinol Oral Solution, a proprietary,orally administered liquid formulation of dronabinol, which will be our second branded supportive care product, if it successfully obtains all requiredregulatory approvals. We believe this product candidate may provide increased flexibility in dosing for doctors and more convenient delivery and animproved absorption profile for patients, which may ultimately increase patient compliance because of more rapid onset of action and less dose-to-dosevariability and allow us to further penetrate and potentially expand the market for the use of dronabinol. We intend to market Dronabinol Oral Solutionand any other future supportive care products, if approved, through our commercial organization. Our Products and Product Candidates Subsys is a proprietary, single-use product that delivers fentanyl, an opioid analgesic, for transmucosal absorption underneath the tongue. We filedour NDA in March 2011 and received marketing approval for Subsys from the FDA in January 2012 for the treatment of BTCP. BTCP is characterized bysudden, often unpredictable, episodes of pain which can peak in severity at less than one minute to 10 minutes despite background pain controlled bymedication. We believe Subsys is an important, differentiated treatment option for patients and physicians relative to other TIRF products due to its rapidonset of action, improved bioavailability, most complete range of dosage strengths and ease of administration. Our product label includes data from ourpivotal clinical trial demonstrating that Subsys provides pain relief at five minutes, which represents the most rapid onset of action in the TIRF class ofproducts. Also, in a head-to-head study, Subsys demonstrated 76% bioavailability versus 51% for Actiq. Further, Subsys offers the most complete range ofdosage strengths in the TIRF class of products, consisting of 100 to 1,600 microgram, or mcg, doses. Patients can administer Subsys in less than oneminute while Actiq and Fentora, the leading branded TIRF products, can require 14 to 30 minutes to administer. 1 We launched Subsys as a commercial product in March 2012. Upon launch, Subsys was the fourth new branded product in the TIRF market overthe prior five years. Within the first four weeks of product launch, Subsys realized greater market share than the previous three branded productscombined at their respective peak market penetration levels according to Source Healthcare Analytics. In December 2014, Subsys was the most prescribedTIRF product with 40.2% market share on a prescription basis according to IMS. Through our ongoing commercial initiatives, we believe we cancontinue to grow our market share and net revenue for Subsys. According to Source Healthcare Analytics, in 2014, TIRF products generated $450.4million in annual U.S. product sales. Traditionally, the physician prescriber base for TIRF products is concentrated, with approximately 1,594 physicianswriting 90% of all TIRF product prescriptions in 2014, according to IMS. As a result, our commercial organization has been able to promote Subsys usinga highly targeted approach designed to maximize impact with physicians who are TIRF REMS enrolled. In addition, our commercial organizationcontinues to specifically target oncology health care providers and practices. Subsys utilizes our proprietary sublingual spray technology consisting of a small, single-unit device that delivers our proprietary formulation of drugparticles via a fine mist disbursed across a broad surface area of the highly permeable membrane underneath the tongue. This delivery platform is suitablefor other molecules for which there may be a benefit to a greater rate and extent of absorption, which could lead to a more rapid onset of action andenhanced bioavailability versus other oral preparations and routes of administration. We are developing our proprietary sublingual spray technology inother product applications in order to expand our portfolio of product candidates. Dronabinol SG Capsule is a dronabinol soft gelatin capsule that is a generic equivalent to Marinol, an approved second-line treatment for CINV andanorexia associated with weight loss in patients with AIDS. Dronabinol, the active ingredient in Marinol, is a synthetic cannabinoid whose chemicalname is THC. Dronabinol SG Capsule was the first approved product in our family of dronabinol product candidates that we are developing. Wecommercialize Dronabinol SG Capsule through our exclusive supply and distribution agreement with Mylan Pharmaceuticals Inc. We believe thatMarinol and its generic equivalents have limitations in their current formulations. Marinol is characterized by a highly variable bioavailability and anonset of action that ranges from 30 minutes to one hour. We are developing additional proprietary formulations of dronabinol, the most advanced ofwhich is Dronabinol Oral Solution, to address these limitations. Our lead product candidate is Dronabinol Oral Solution, a proprietary, orally administered liquid formulation of dronabinol, which has yet to beapproved for commercialization. Dronabinol Oral Solution has demonstrated more rapidly detectable blood levels and a more reliable absorption profilethan Marinol in our clinical studies. In 2012, we completed a pre-NDA meeting with the FDA and a pivotal bioequivalence study. Our pivotalbioequivalence study measured the PK of Dronabinol Oral Solution versus Marinol. This PK study demonstrated that 100% of subjects receivingDronabinol Oral Solution achieved detectable plasma levels at 15 minutes compared to less than 25% of subjects receiving Marinol. In this study,Dronabinol Oral Solution also demonstrated a 44% decrease in the patient coefficient of variation for area under the curve, or AUC, which is indicative ofgreater patient exposure to drug. We believe these product attributes could result in Dronabinol Oral Solution capturing a significant share of the existingU.S. market for dronabinol products, which was $156 million in 2014, according to Source Healthcare Analytics, and potentially expanding the usage ofdronabinol-based products. We expect to submit our Dronabinol Oral Solution NDA with the FDA in the first half of 2015. The Potential Market for BTCP Management The National Cancer Institute estimated that in 2011 there were approximately 13.4 million people in the United States who had been diagnosed orwere living with cancer. According to the American Cancer Society, the number of patients with cancer continues to increase as the population ages anddiagnosis, treatment and survival rates improve due to higher standards of care and greater patient access to health care. Cancer patients often sufferfrom symptoms such as pain, nausea, vomiting, fatigue, weight loss and anemia as a result of their cancer or radiation and chemotherapy treatmentsintended to eradicate or inhibit the growth of cancerous cells and tumors. Pain is a widely prevalent symptom of cancer patients, an estimated 50% to90% of whom also suffer from BTCP. We believe that the acute pain episodes of BTCP patients are not adequately managed by oncologists and painspecialists, creating an opportunity for us to educate these medical professionals and promote effective BTCP management using Subsys. According toa 2004 study by the American Society of Clinical Oncology, it is estimated that 60% to 80% of all cancer patients who receive chemotherapyexperience nausea and vomiting associated with their therapy. We believe current therapies do not adequately address the needs of many of thesepatients. Supportive care is an important component in the treatment of cancer patients, as suggested by an August 2010 article in the New EnglandJournal of Medicine indicating that improved supportive care in cancer patients prolonged median survival by over two months. By focusing onsupportive care products, we believe we can contribute to the improvement of cancer patient outcomes and survival rates. 2 Strategy Grow Subsys market share and revenues. We launched Subsys as a commercial product in March 2012. By December 2014, we had a 40.2% shareof the overall TIRF market, according to IMS. We believe that we can continue to increase Subsys net product revenue through further market penetrationand educating the medical community to ensure that patients are titrated to an effective dose of Subsys and have access to Subsys. In addition, we mayconduct post-marketing clinical trials to seek to establish incremental uses for Subsys in the supportive care market or other advantages that Subsys mayhave over existing fentanyl products. Achieve FDA approval for Dronabinol Oral Solution and advance our synthetic cannabinoid product pipeline. We believe there is an unmetpatient need for a more reliable synthetic THC for treating CINV and anorexia associated with weight loss in patients with AIDS. In a pivotalbioequivalence study, our Dronabinol Oral Solution product candidate has demonstrated rapid and more reliable absorption, which we believe representsan attractive product profile relative to Marinol. We are also evaluating proprietary sublingual spray, inhaled and intravenous formulations of dronabinolin preclinical testing. We also have the capability to manufacture CBD and we intend to pursue clinical studies that could result in future commercialproducts containing CBD. We expect to submit our Dronabinol Oral Solution NDA with the FDA, in the first half of 2015. Continue to leverage our cost-efficient commercial organization to market Subsys and, if approved, Dronabinol Oral Solution and othercomplementary products. We commercialize Subsys through a cost-efficient commercial organization utilizing an incentive-based sales model similar tothat employed by Sciele Pharma and other companies previously led by members of our board of directors, including our founder and ExecutiveChairman. We intend to market Dronabinol Oral Solution and other proprietary supportive care products, if approved, using the same approach and ourcommercial organization. We target our product detailing efforts towards oncologists, pain specialists and centers that focus on supportive care in theseareas. We may also pursue opportunities to acquire commercial products or product candidates that could further leverage our supportive care commercialorganization. Use our core competencies and expertise to expand our dronabinol and cannabidiol manufacturing capabilities. Since dronabinol is difficult toimport, procure and produce, we have a U.S.-based, state-of-the-art dronabinol manufacturing facility, which we anticipate will be able to supply the APIfor Dronabinol SG Capsule and initial launch quantities of Dronabinol Oral Solution, if approved. In 2014, we completed construction of a secondmanufacturing facility that will enable us to supply sufficient commercial quantities of dronabinol API for our continued commercialization ofDronabinol SG Capsule and for the commercialization of our proprietary synthetic cannabinoid product candidates, if approved. Research and develop additional sublingual spray product candidates. We believe that the delivery of certain pharmaceutical products using oursublingual spray platform technology could have significant advantages over other methods of delivery. Our technology delivers drug product directly tothe sublingual mucosa for rapid and efficient absorption into the bloodstream. This process is accomplished by delivering a ready-to-be absorbedformulation across the sublingual mucosa. The sublingual mucosa is an efficient medium for the delivery of certain drugs because this membrane ishighly permeable with a high density of blood vessels, which allows for the portion of the drug absorbed to bypass first-pass metabolism in the liver.Certain drug products delivered utilizing our sublingual spray technology can be absorbed quickly and take effect more rapidly than many other forms ofadministration. We are developing several product candidates, including buprenorphine, buprenorphine with naloxone, ondansetron, sildenafil,diclofenac and ketorolac, where we believe our proprietary sublingual spray technology has the potential to provide a clinically meaningful therapeuticadvantage over existing delivery methods. Our Products and Product Candidates The following table summarizes certain information regarding our marketed products and most advanced product candidates: Franchise Product orProduct Candidate RegulatoryPathway Indication Status Spray Subsys 505(b)(2) BTCP in Opioid-Tolerant Patients Marketed Dronabinol Dronabinol SG Capsule ANDA CINV and Anorexia Associated with Weight Lossin Patients with AIDS Marketed Dronabinol Oral Solution 505(b)(2) NDA Pending Dronabinol Line Extensions 505(b)(2) Preclinical______________________________(1)Marketed in the United States under an exclusive distribution agreement with Mylan Pharmaceuticals Inc.(2)Anticipated regulatory pathway. A 505(b)(2) NDA relies for its approval upon studies that were not conducted by or for the applicant, and for which theapplicant has not obtained a right of reference. The applicant may rely on the FDA’s findings of safety and/or effectiveness for a previously approveddrug (the “reference drug”). However, the applicant must still provide any additional preclinical or clinical data necessary to ensure that differencesfrom the reference drug do not compromise safety and effectiveness. For Dronabinol Oral Solution and our Dronabinol Line Extensions, we expect touse Marinol as the reference drug.(3)We expect to submit an NDA with the FDA in the first half of 2015. 3(1)(2)(3)(2) Additionally, we are focused on the development of other earlier stage product candidates. Specifically, we are currently completing preclinical work onthree products that utilize our proprietary spray technology platform with the goal of expanding our supportive care franchise: ●Buprenorphine (semi-synthetic opioid to treat moderate and acute chronic pain) ●Buprenorphine/Naloxone (opioid antagonist to treat addiction) ●Ondansetron (serotonin 5-HT3 receptor antagonist used mainly as an antiemetic to treat nausea and vomiting following chemotherapy) We have also initiated preclinical development of three additional sublingual spray candidates: ●Sildenafil (the active ingredient in Viagra) ●Diclofenac (a NSAID taken or applied to reduce inflammation and as an analgesic reducing pain) ●Ketorolac (for short-term management of moderate to moderately severe pain requiring analgesia at the opioid level) Further, we have the ability to manufacture pure, synthetic cannabidiol in our DEA approved and FDA inspected Round Rock, TX manufacturing facilityand have received orphan drug designations from the FDA for the following: ●Dravet Syndrome (a rare, catastrophic form of intractable epilepsy that begins in infancy) ●Lennox-Gastaut syndrome (a severe form of epilepsy with the typical onset at 2-6 years of age) ●Pediatric Schizophrenia (a severe brain disorder that causes a child to interpret reality abnormally and has a profound impact on the child’s behavior anddevelopment) ●Glioma (a tumor of the brain or nervous system) ●Glioblastoma Multiforme (a common and aggressive form of malignant brain cancer) Subsys Sublingual Fentanyl Spray Subsys is a proprietary, single-use product that delivers fentanyl, an opioid analgesic, for transmucosal absorption underneath the tongue. Wereceived marketing approval for Subsys from the FDA on January 4, 2012 for the treatment of BTCP. BTCP is characterized by sudden, oftenunpredictable, episodes of pain which can peak in severity at less than one minute to 10 minutes despite background pain controlled by medication. Webelieve Subsys is an important, highly differentiated treatment option for patients and physicians relative to other TIRF products due to its rapid onset ofaction, improved bioavailability, most complete range of dosage strengths and ease of administration. According to IMS, TIRF products generated $450.4million in U.S. sales in 2014. Fentanyl is an opioid analgesic approved in the United States for acute and chronic pain management. Depending upon the type of pain, physicianscurrently prescribe fentanyl in three forms of administration: injectable, transmucosal, or delivery by diffusion through the mucous membranes of themouth, and transdermal, or delivery through the skin. Fentanyl imitates natural biochemicals found in the body that moderate pain and block thetransmission of pain signals that travel along nerves to the brain. We believe these properties make fentanyl a potent and effective therapy for use inpatients with cancer who suffer from acute or breakthrough episodes of pain. 4 Subsys is a proprietary, single-use product developed to treat BTCP through the delivery of a liquid fentanyl formulation in 100, 200, 400, 600, 800,1,200 and 1,600 mcg dosages. The 1,200 and 1,600 mcg doses of Subsys are achieved by administering two 600 and 800 mcg doses, respectively. Themechanism by which the liquid is delivered is a highly consistent, one-step process in which a plume of fentanyl is generated by the actuation of thedevice. The plume disperses a small volume of liquid across the surface area of the sublingual mucosa and facilitates rapid absorption by the body. Cancer Pain Market Overview Cancer pain can occur as a result of tumors pressing on nerves, damage caused by cancer cells in bone and treatments for cancer such aschemotherapy, radiation therapy or surgery. Many cancer patients experiencing pain suffer from two types of pain: (1) persistent or continuous pain,which is typically managed by long-acting or sustained-release drugs taken by patients on a regular schedule, and (2) breakthrough pain, which can besevere and sudden, and may require a stronger, fast-acting medication. Opioids are the most widely-prescribed treatment for cancer pain followed bymedications commonly used to treat inflammatory pain, such as corticosteroids, anesthetics, non-steroidal anti-inflammatory drugs, anticonvulsants andantidepressants. A report published by Worldwide Marketing Research estimated that the value of the U.S. cancer pain market was $3.1 billion in 2008and will increase to $5.3 billion by 2018. Following rapid onset that peaks at less than one minute to 10 minutes, BTCP episodes can last several minutes to an hour, and usually occur severaltimes per day. Pain is a widely prevalent symptom of cancer patients, approximately 60% of cancer patients with persistent pain experience BTCP, whichis particularly difficult to treat due to its severity, rapid onset and the often unpredictable nature of its occurrence. Physicians typically treat BTCP with avariety of short-acting opioid medications, including morphine, morphine and codeine derivatives and fentanyl. Morphine and codeine derivatives have been available for decades in immediate-release forms of tablets, capsules or liquids that are ingested by thepatient. More recently-approved short-acting opioid-based fentanyl formulations utilize transmucosal delivery in an attempt to improve upon existingfentanyl therapies. Teva Pharmaceutical Industries Ltd.’s Actiq, approved by the FDA in 1998 and currently available in several generic options, is anoral transmucosal lozenge, and Fentora, the leading branded TIRF product, approved by the FDA in 2006, is a fentanyl buccal tablet. Three othercompanies have received approval for branded TIRF products since 2009 including BioDelivery Sciences International, Inc.’s Onsolis, a soluble filmplaced on the buccal area after wetting the inside of the cheek with saliva or water, Galena Pharmaceutical’s Abstral, an immediate-release transmucosalsublingual tablet, and Depomed’s Lazanda, a nasal spray. According to Source Healthcare Analytics, TIRF products generated $450.4 million in 2014U.S. sales. Although these existing therapies provide improvements over oral opioids, we believe that Subsys market adoption to date demonstrates thatthe current treatment options have limitations and that there remains a significant unmet need for therapies that provide faster pain relief, moreconvenient dose administration and a better PK profile. Limitations of Competing TIRF Therapies We believe that the BTCP market is underserved due to the limitations of the current market-leading TIRF therapies, which include: ●Time until statistically significant pain relief: Patients suffering from BTCP require rapid pain relief as peak intensity of episodic breakthroughpain can occur at less than one minute to 10 minutes from the onset of pain symptoms. The peak effect of Actiq and Fentora may be delayed as itmay take up to 14 to 30 minutes for the lozenge or tablet to fully dissolve and be absorbed. In addition, oral immediate-release opioids aremetabolized in the liver and consequently may take up to 30 to 45 minutes to become effective. 5 ●Pharmacokinetic profile: Actiq and its generic equivalents achieve bioavailability of approximately 50% and require 15 to 30 minutes forabsorption. Up to half of the delivered dose of competing TIRF treatments is swallowed and is absorbed slowly through the GI tract which webelieve may delay the onset of pain relief and contribute to side effects. ●Inconvenient delivery: We believe competing commercially available therapies do not adequately address patient ease of use and convenienceneeds. Competing TIRF therapies can require an administration period of several minutes, disrupt daily activities and cause patient discomfort. Forexample, Actiq requires patients to place a lozenge between their cheeks and lower gums and rub the lozenge from side to side over a 15-minuteperiod. In addition, patients with dry mouth and oral mucositis may experience difficulty in using Actiq and other commercially availabletherapies. ●Limited dosage forms: Actiq and its generic equivalents are available in six dosage strengths ranging from 200 to 1,600 mcg. No othercommercially available TIRF therapies are offered in the 1,200 and 1,600 mcg dosage range. According to Source Healthcare Analytics,approximately 47% of the U.S. dollar sales of Actiq in 2012 were in the 1,200 and 1,600 mcg doses. Our Solution We believe Subsys’ proprietary formulation and sublingual delivery mechanism offer several advantages over other FDA-approved TIRF products,and these advantages may lead to improved patient compliance and expanded medical use of fentanyl for BTCP. Such advantages include: ●Statistically significant pain relief in five minutes: Subsys is the only product to show statistically significant pain relief when measuring thesum of pain intensity difference, SPID, at five minutes in a Phase 3 BTCP clinical trial using fentanyl. We believe that Subsys is able to achievethis rapid delivery of fentanyl through sublingual delivery because there is a high density of blood vessels beneath the tongue and the thin layerin the mucosa enables higher absorption. The product sprays in a manner that is designed to maximize the area covered by the product. ●One-step administration: Subsys is administered in one step using a small handheld delivery system that sprays fentanyl beneath the patient’stongue. This delivery mechanism allows for administration in less than one minute, rather than the 14 to 30 minutes required for Actiq and Fentora.Further, Subsys can be administered without moistening the tongue or cheek, allowing for administration in cancer patients suffering from drymouth and oral mucositis. ●Superior pharmacokinetic profile. As compared to Actiq’s PK profile, Subsys’ PK profile is characterized by higher peak blood concentrations,which are achieved at a more rapid rate. This profile is, in part, due to greater than 85% absorption occurring transmucosally, resulting in higherbioavailability. Because a small volume of liquid is sprayed on to the sublingual mucosa, we believe this method of administration reduces theamount of liquid swallowed and subsequently absorbed via the digestive system. As a result, we believe that less fentanyl is exposed to first-passmetabolism in the liver. ●Broad spectrum of dosage strengths allows for proper titration and better pain relief. Subsys is available in the most complete range of dosagestrengths in the TIRF market, at 100, 200, 400, 600, 800, 1,200 and 1,600 mcg. We believe it is important to offer a product in all dose ranges forthe treatment of BTCP, as all branded products without generic equivalents, and, to our knowledge, all product candidates currently indevelopment, are not, or will not be, available in the 1,200 and 1,600 mcg dosage strengths. Subsys Market Experience to Date Prescription Trends: Monthly prescription data through January 2015 shows that approximately 77,000 prescriptions of Subsys have beendispensed since launch in March 2012. Subsys’ total prescription share of the TIRF market has increased each quarter since launch. In December 2014,Subsys was the most prescribed branded TIRF product with 40.2% market share. Physician Prescriber Base: Approximately 1,594 physicians were responsible for 90% of all TIRF prescriptions dispensed in 2014, according toIMS. We have targeted our initial commercialization efforts towards the majority of these high prescribers. As of December 2014, there wereapproximately 2,000 unique physician prescribers of Subsys. As of December 2014, approximately 95% of the top 82 TIRF prescribers had prescribedSubsys. These physicians accounted for 30% of TIRF prescriptions, according to IMS. 6 Patient Use: Existing patient data generated by available databases demonstrates that the number of Subsys-experienced patients has increasedsteadily since launch with over 13,700 unique patients as of December 2014. Importantly, the proportion of Subsys prescriptions written for repeat Subsyspatients has continued to increase since July 2012 from 50% of prescriptions to over 88% of prescriptions as of December 2014. Generally, repeat Subsyspatients receive higher doses of Subsys on average than first-time patients, as patients are titrated from a starter dose of Subsys to their effective dose inaccordance with the REMS protocol. Patient Access: Subsys is a Tier 3 medication available under most major commercial health insurance plans. Some third-party payors require usageand failure on cheaper generic versions of Actiq prior to providing reimbursement for Subsys and other branded TIRF products. We believe thatphysicians and payors will develop greater familiarity with both the differentiated features of Subsys and the process to achieve patient access to theproduct from continued and broader usage of Subsys by their patients. We offer patients a free trial of Subsys to allow for titration to their effective doseand bridge the prior authorization process. Once third-party payor reimbursement is in place, we offer patients coupons to reduce out of pocket costs. Dronabinol Product Family We have one approved dronabinol product and are developing several innovative dronabinol product candidates for the second-line treatment ofCINV and anorexia associated with weight loss in patients with AIDS. We received FDA approval for Dronabinol SG Capsule in 2011, and we currentlycommercialize this product in the United States through our exclusive distribution agreement with Mylan. We believe a significant unmet medical needexists for formulations of dronabinol that act more rapidly, are subject to less variable patient absorption and allow for more flexible dosing. Our leadproprietary dronabinol product candidate is Dronabinol Oral Solution. We expect to submit our NDA with the FDA in the first half of 2015 on ourDronabinol Oral Solution. In addition, we are evaluating proprietary sublingual spray, inhaled and intravenous formulations of dronabinol in preclinicalstudies. Dronabinol, the active ingredient in Marinol, is a synthetic form of THC. THC is an orally active cannabinoid which, like other cannabinoids, hascomplex effects on the central nervous system. Approved by the FDA in 1985, Marinol is indicated for the treatment of CINV in patients who have failedto respond adequately to conventional treatments, as well as for the treatment of anorexia associated with weight loss in patients with AIDS. Marinol isformulated in sesame oil and encapsulated in soft gelatin capsules and must be stored in cool storage conditions or in a refrigerator. Market Overview CINV is a commonly known side effect of chemotherapy that can have a significant negative impact on quality of patient life. CINV is classified intofive categories: ●Acute: Occurs within 24 hours of chemotherapy administration. ●Delayed: Occurs more than 24 hours after chemotherapy administration, with peak intensity two to three days post-administration and duration of up toone week. ●Anticipatory: Occurs prior to treatment. ●Breakthrough: Occurs after use of antiemetic agents. ●Refractory: Occurs after failed use of breakthrough therapy. The majority of chemotherapy patients experience at least one type of CINV. The National Comprehensive Cancer Network estimates that 70% to80% of patients undergoing chemotherapy experience vomiting, with 10% to 44% experiencing anticipatory vomiting. Predictive factors for developingCINV can include: age of less than 50 years, female gender, vomiting during previous chemotherapy, pregnancy-induced nausea/vomiting, history ofmotion sickness and anxiety. In addition to generally affecting patient quality of life, CINV can result in weakness, weight loss, electrolyte imbalance,dehydration or anorexia. According to a study published by Ballatori, et al in 2007, 90% of patients who experienced CINV reported an impact on dailyactivities. 7 Although the pathophysiology of CINV is not clearly understood, it is thought that chemotherapeutic agents cause vomiting by activatingneurotransmitter receptors located in the chemoreceptor trigger zone, GI tract, and VC. Activation of the VC directly or through the chemoreceptor triggerzone results in stimulation of the salivation and respiratory centers as well as control of the pharyngeal, GI and abdominal muscles. This stimulation cantrigger the body to retch and vomit. Treatment of CINV is highly patient-specific and is based on the emetogenic potential of the chemotherapy regimen. According to IMS Health, U.S.sales for drugs treating CINV were $1.3 billion in 2013, though published reports suggest that current therapies are not entirely effective. A 2004 reportpublished in Cancer estimated that approximately 35% of patients treated with CINV therapies continue to experience acute nausea, with 13% of CINVpatients experiencing acute vomiting after first-line treatment. Limitations of Existing Therapies We believe that the synthetic cannabinoid market is underserved due to the limitations of existing therapies, which include: ●Delayed absorption: Marinol is only available in a capsule formulation, which must be dissolved and digested before it is metabolized in thepatient’s liver, where the drug is broken down by enzymes. We believe that this capsule formulation and digestion process delays onset of actionand relief of nausea and vomiting. After oral administration, Marinol has an onset of action of approximately 30 minutes to one hour and peak effectat two to four hours. ●Lower level of efficacy: Due to the capsule formulation and digestion process of Marinol, only 10% to 20% of an administered dose of Marinolreaches the systemic circulation in the body. This poor absorption profile significantly reduces the bioavailability of the API in patients using itscapsule formulation which may result in lower efficacy. ●Lack of flexibility in dosing: Marinol and its generic equivalents are only available in 2.5, 5.0 and 10.0 milligram, or mg, soft-gelatin capsules.The fixed dosage amounts may cause patients to ingest more or less drug than necessary, which can result in increased side effects and/or a lowerlevel of efficacy. ●Variable patient absorption: The uptake of Marinol into systemic circulation varies widely from dose-to-dose and patient-to-patient. In general,this level of variability is atypical relative to approved pharmaceutical products. As such, physicians are unable to predict the level of efficacy orside effects that an individual patient might experience relative to other patients or even to a patient’s own last dose of dronabinol. Our Solutions We believe our proprietary dronabinol product candidates have the potential to address many of the limitations that exist in synthetic cannabinoidproducts by providing a number of key advantages, including: ●Faster absorption: Dronabinol Oral Solution is a liquid solution and is absorbed faster than a capsule formulation which has to dissolve in the GItract. We believe that quicker absorption may lead to faster onset of action for an oral solution product. Separately, we believe that our proprietarysublingual spray, inhalation and intravenous dronabinol formulations, currently in preclinical studies, may further accelerate dronabinol’s onset ofaction due to their route of delivery bypassing first-pass metabolism in the liver. ●Level of efficacy: By bypassing first-pass metabolism in the liver, we believe our proprietary sublingual spray, inhalation and intravenousdronabinol formulations may demonstrate lower dose-to-dose variability compared to Marinol and, as a result, more reliable efficacy. ●Flexibility in dosing: Dronabinol Oral Solution allows for greater flexibility across the dosing range versus the fixed dosing necessitated byMarinol. We believe that offering physicians and patients an improved formulation with the opportunity to more precisely titrate may increasemarket acceptance of dronabinol. ●Reduced dose-to-dose variability: Based on our pivotal bioequivalence and PK studies, we believe Dronabinol Oral Solution has lower dose-to-dose variability which could lead to more consistent intra-patient responses in each successive dose. Due to the higher anticipated absorption ratesfor our dronabinol inhalation formulation, we believe that lower dosages of this formulation may be required as compared to Marinol. 8 Dronabinol SG Capsule Dronabinol SG Capsule is our generic version of Marinol approved by the FDA in August 2011. Dronabinol SG Capsule is a simple solution ofdronabinol in sesame oil that is encapsulated in soft gelatin. Dronabinol SG Capsule is supplied in 2.5, 5.0 and 10.0 mg dosage strengths. We launchedDronabinol SG Capsule in the United States through our exclusive distribution partner, Mylan, in December 2011. See Note 8 under the heading “LegalMatters” in the Notes to our Consolidated Financial Statements for a discussion regarding our ongoing dispute with Mylan in connection withdistributing this product. Dronabinol Oral Solution Dronabinol Oral Solution is a proprietary synthetic THC in an oral liquid formulation, which contains ingredients to enhance absorption. We believethat this product candidate may provide increased flexibility in dosing, more convenient delivery and an improved absorption profile in patients. Webelieve these attributes may ultimately increase patient compliance because of more rapid onset of action and less dose-to-dose variability, which webelieve will allow us to further penetrate and potentially expand the market for the medical use of dronabinol. We completed a pre-NDA meeting with the FDA on April 17, 2012 and subsequently in 2012 completed a pivotal bioequivalence study forDronabinol Oral Solution. Our pivotal bioequivalence study was a 52-patient crossover bioavailability and PK clinical trial comparing Dronabinol OralSolution with Marinol. In the study, 100% of subjects receiving Dronabinol Oral Solution achieved detectable plasma levels at 15 minutes compared toless than 25% of the subjects receiving Marinol, and Dronabinol Oral Solution demonstrated a more than 60% decrease in dose-to-dose drug exposurevariability as measured by patient coefficient of variation for AUC. We expect to submit an NDA with the FDA for Dronabinol Oral Solution in the firsthalf of 2015. Other Product Candidates Our other product candidates include other dronabinol line extensions and sublingual spray product candidates. Future Cannabinoid Line Extensions. As described above, we plan to develop additional dronabinol delivery systems, including proprietarysublingual spray, inhalation and intravenous dronabinol formulations. All of these product candidates are in preclinical development. We have alsosubmitted a supplemental ANDA for a room temperature stable version of our dronabinol soft gel capsule, which we refer to as Dronabinol RT Capsule.We also have the capability to manufacture synthetic cannabidiol and intend to work with medical researchers to determine its viability. Sublingual Spray Product Candidates. As described above, we are conducting preclinical development for multiple well-known, approvedmolecules for delivery through our sublingual drug delivery technology. We intend to evaluate these and other products that we believe could have adifferentiated efficacy and/or safety profile if formulated by us and delivered via a sublingual spray. Sales and Marketing Key members of our management and board have extensive experience in building and implementing cost-efficient, incentive-based commercialorganizations as well as commercializing supportive care products, including dronabinol. We currently market Subsys and intend to commercializeDronabinol Oral Solution and future supportive care products, if approved, through our U.S.-based commercial organization focused on supportive care.Specifically, we currently market Subsys in the United States through our commercial organization. We have built this commercial organization utilizingan incentive-based model that employs a pay structure where a significant component of the compensation paid to sales representatives comes in the formof potential bonuses based on sales performance. Our product detailing efforts focus primarily on oncologists, pain specialists and centers that cater tosupportive care. We do not currently have sales and marketing capabilities outside of the United States. In international markets, we plan to enter into arrangementswith third parties to pursue requisite regulatory approvals and market and sell our products. We believe some of the key factors in generating continued growth in Subsys usage include taking market share from other competing TIRF productsand expanding the usage of Subsys for BTCP by building awareness among oncologists of its rapid onset of action, improved bioavailability, mostcomplete range of dosage strengths and ease of administration relative to other TIRF products. To successfully commercialize our family of proprietarydronabinol products, we intend to focus our commercial efforts on taking market share from Marinol and its generic alternatives as well as furtherexpanding into a broader segment of the CINV market by developing awareness of our product attributes relative to currently available dronabinolproducts. 9 As of December 31, 2014, there were approximately 8,100 physicians enrolled in the TIRF REMS program. Enrollment in this class-wide REMSprogram is required by the FDA as of March 2012 in order to prescribe TIRF products. Approximately 1,594 physicians comprise 90% of TIRFprescriptions dispensed in 2014, according to IMS. Our sales and marketing efforts have primarily targeted approximately 100% of these top 1,594prescribing physicians with a focus on the highest prescribers. As of December 2014, 95% of the top 82 physician prescribers in the TIRF REMSprogram had prescribed Subsys. These physicians accounted for 30% of all U.S. TIRF prescriptions. We believe that key factors for driving future Subsysgrowth include increasing the number of prescriptions written by those physicians who currently prescribe Subsys, increasing the number of TIRF REMSenrolled physicians and oncologists who prescribe Subsys, and allowing sufficient time for physicians and patients to identify their effective Subsys doseamong our broad spectrum of dosage strengths. We entered into a supply and distribution agreement effective as of May 20, 2011 with Mylan, pursuant to which we engaged Mylan to exclusivelydistribute our Dronabinol SG Capsule within the United States. The agreement has a seven-year term, which commenced in December 2011 upon the firstcommercial sale of the Dronabinol SG Capsule product and which will automatically renew for an additional one-year term, following the initial term,unless we or Mylan give the other party 180 days’ prior written notice of its desire to terminate the agreement. Under the terms of the agreement, we areobligated to pay Mylan a royalty between 10% and 20% on Mylan’s net Dronabinol SG Capsule sales, and a single digit percentage fee on such sales fordistribution and storage services. See Note 8 under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion onour ongoing dispute with Mylan in connection with distributing our product. Manufacturing and Supply We produce dronabinol, the API in our dronabinol product family, including Dronabinol SG Capsule and our proprietary dronabinol productcandidates, internally at our U.S.-based, state-of-the-art manufacturing facility. We believe that this facility has the capacity to supply sufficientcommercial quantities of dronabinol API for Dronabinol SG Capsule and initial launch quantities of Dronabinol Oral Solution, if approved, as well as tosupport the continued development of our other dronabinol product candidates in the near-term. We believe this facility gives us a significantcompetitive advantage since dronabinol API is a Schedule I material and consequently is subject to annual production limits set by quota for eachindividual facility, cannot be readily procured, is difficult to import into the United States and has a limited number of suppliers domestically. For our long-term needs, we have commenced construction of a second dronabinol manufacturing facility, which we anticipate will enable us tosupply sufficient commercial quantities of dronabinol API for our continued commercialization of Dronabinol SG Capsule and for the commercializationof our proprietary dronabinol product candidates, if approved. We initiated manufacturing activities in the new facility in the fourth quarter of 2014. The chemical materials for dronabinol API are sourced from independent suppliers and are manufactured utilizing well-established chemicaltechniques. Our manufacturing facility utilizes these chemical materials to produce dronabinol through a series of synthetic reactions and purificationcycles. We believe that our suppliers are equipped to meet our current and future chemical material needs for the continued commercialization ofDronabinol SG Capsule and the development and commercialization of our dronabinol-based product candidates. On March 21, 2011, we entered into a commercial manufacturing and packaging agreement with Catalent pursuant to which we engaged Catalent onan exclusive basis to provide processing and packaging services with respect to our Dronabinol SG Capsule. Pursuant to the terms of the agreement,which was amended on March 5, 2012, we are required to supply Catalent with the API for our Dronabinol SG Capsule and are required to purchase aminimum number of units of our Dronabinol SG Capsule pursuant to annual purchase orders. For units ordered, we are required to pay Catalent a per-unitfee, plus annual product maintenance fees. The initial term of the agreement is five years, unless earlier terminated, and annually renews for additionalperiods of two years, unless we or Catalent give the other party at least 12 months’ prior written notice of our, or their, desire to terminate the agreement. Subsys is manufactured by contract manufacturers and sub-component fabricators. Aptar, a dispensing system company based in Illinois, developedthe sublingual spray device we use for Subsys. We entered into a supply agreement effective as of March 7, 2011 with Aptar pursuant to which Aptarsupplies us with the delivery system to administer Subsys. We are required to provide Aptar with rolling quarterly forecasts of our requirement for Subsysdrug delivery systems. Under certain circumstances, such forecasts are non-binding; however, some portions of such forecasts may constitute a firmcommitment to purchase delivery systems. The agreement has a term of five years from the effective date, subject to early termination clauses. 10 We entered into a manufacturing agreement effective as of May 24, 2011 with DPT pursuant to which we engaged DPT on an exclusive basis toprovide processing and packaging services with respect to Subsys. The contract requires us to provide rolling quarterly forecasts, a portion of whichconstitute firm purchase commitments. In January 2015, we sent written notice to DPT that we intended to terminate the existing agreement effectiveDecember 31, 2016 and simultaneously entered into negotiations for a new agreement commencing January 1, 2017. Aptar and DPT have been selected for their specific competencies in manufacturing, product design and materials. FDA regulations require thatmaterials be produced under cGMPs or quality system regulations, as required for the respective unit operation within the manufacturing process. Webelieve both key suppliers have sufficient capacity to meet our projected product requirements. Competition Our industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We facecompetition from many different sources, such as pharmaceutical companies, including generic drug companies, biotechnology companies, drug deliverycompanies and academic and research institutions. We believe the key competitive factors that will affect the commercial success of our products and thedevelopment of our product candidates include, but are not limited to, onset of action, bioavailability, efficacy, cost, convenience of dosing, safety,tolerability profile and intellectual property rights. Many of our potential competitors have substantially greater financial, scientific, technical,intellectual property, regulatory and human resources than we do, and greater experience than we do commercializing products and developing productcandidates, including obtaining FDA and other regulatory approvals for product candidates. Consequently, our competitors may develop products for thetreatment of BTCP, CINV and anorexia associated with weight loss in patients with AIDS, or other indications we pursue that are more effective, bettertolerated, more widely-prescribed or accepted, more useful and less costly, and they may also be more successful in manufacturing and marketing theirproducts. We also face competition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA quotas, recruiting andretaining qualified personnel, establishing clinical trial sites and enrolling patients for clinical trials and in identifying and acquiring or in-licensing newproducts and product candidates. Subsys Subsys competes against numerous branded and generic products already being marketed and potentially those which are or will be in development.Subsys is the fourth new product in the TIRF market over the last four years. In the BTCP market, physicians often treat patients with a variety of short-acting opioid medications, including morphine, morphine and codeine derivatives and fentanyl. Some currently marketed products against which wedirectly compete include Teva Pharmaceutical Industries Ltd’s Fentora and Actiq, Galena Biopharma Inc.’s Abstral, Depomed Inc.’s Lazanda andBioDelivery Science International, Inc.’s Onsolis. Some generic fentanyl products against which Subsys competes are marketed by Mallinckrodt, Inc., ParPharmaceutical Companies and Actavis, Inc. In addition, we are aware of numerous companies developing other treatments and technologies for rapiddelivery of opioids to treat BTCP, including transmucosal, transdermal, nasal spray, inhaled delivery systems and sublingual delivery systems, amongothers. Dronabinol Product Family With respect to our Dronabinol SG Capsule and our dronabinol product candidates, the market in which we compete is challenging in part becausegeneric products generally face greater price competition than branded products. With respect to Dronabinol SG Capsule and any of our dronabinolproduct candidates, if approved, the competition from generic products which we encounter, or will encounter with respect to our dronabinol productcandidates, may have an effect on our product prices, market share, revenues and profitability. We or our distributor may not be able to differentiate anyproducts that we may market from those of our competitors, successfully develop or introduce new products that are less costly or offer better performancethan those of our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. Inaddition, there are a number of established therapies and products already commercially available and under development by other companies that treatthe indications which Dronabinol SG Capsule and our dronabinol product candidates are intended to treat. Specifically, Dronabinol SG Capsule and, ifapproved, our dronabinol product candidates, will compete against therapies and products such as AbbVie, Inc.’s Marinol and Marinol generics. ParPharmaceutical Companies markets an approved generic version of Marinol, and Actavis, Inc. markets an authorized generic version of Marinol.Moreover, our dronabinol products may compete with non-synthetic cannabinoid drugs, including therapies such as GW Pharmaceuticals plc’s Sativex,especially in many countries outside of the United States where non-synthetic cannabinoids are legal. In addition, literature has been published arguingthe benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted laws legalizing medicinal andrecreational marijuana. There is some support in the United States for further legalization of marijuana. We also cannot assess the extent to which patientsutilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approved dronabinol products. Furthermore, in the treatment ofCINV, physicians typically offer conventional anti-nausea agents prior to initiating chemotherapy, such as Sanofi’s Anzemet, Eisai Inc./Helsinn Group’sAloxi, Roche Holding AG’s Kytril, Par Pharmaceutical Companies’ Zuplenz and GlaxoSmithKline plc’s Zofran, as well as Neurokinin 1 receptorantagonists on the market including Kyowa Hakko Kirin Co., Ltd.’s Sancuso and Merck & Co., Inc.’s Emend. To the extent that Dronabinol SG Capsuleand our dronabinol product candidates compete in a broader segment of the CINV market, we will also face competition from these products. 11 Additionally, we are aware of companies in late stage development for CINV product candidates, including A.P. Pharma, Inc.’s APF530 (Phase 3)Aphios Corp.’s Zindo (Phase 2/3), Tesaro, Inc.’s Rolapitant (Phase 3) and Roche Holding/Helsinn Group’s netupitant (Phase 3). If these products aresuccessfully developed and approved over the next few years, they could represent significant competition for Dronabinol SG Capsule and, if approved,our dronabinol product candidates. Intellectual Property The success of most of our product candidates will depend in large part on our ability to: ●obtain and maintain patent and other legal protections for the proprietary technology, inventions and improvements we consider important to ourbusiness; ●prosecute our patent applications and defend our issued patents; ●preserve the confidentiality of our trade secrets; and ●operate without infringing the patents and proprietary rights of third parties. We intend to continue to seek appropriate patent protection for certain of our product candidates, drug delivery systems, molecular modifications, aswell as other proprietary technologies and their uses by filing patent applications in the United States and selected other countries. We intend for thesepatent applications to cover, where possible, claims for medical uses, processes for preparation, processes for delivery and formulations. As of December 31, 2014, we owned or licensed from third parties a total of nine issued U.S. utility patents and twelve pending U.S. utility patentapplications. These U.S. patents and patent applications will expire between 2015 and 2034. Some of the issued patents and pending applications, ifissued, may also be eligible for patent term adjustment and patent term restoration, thereby extending their patent terms. Subsys Our Subsys patent portfolio currently consists of four Orange Book listed (with the F.D.A.) U.S. Patent Nos. 8,486,972, 8,486,973, 8,835,459 and8,835,460 and two pending U.S. patent applications. These patents cover Subsys brand fentanyl and will expire between 2027 and 2030. These patentscover the Subsys sublingual fentanyl spray formulation, and/or the use of the Subsys sublingual fentanyl spray for the treatment of pain. The Subsyssublingual fentanyl spray is useful for delivering fentanyl directly to the sublingual mucosa to achieve appreciable plasma concentration levels withinfive minutes and differs from other fentanyl formulations in that it is readily absorbed bringing quick and effective pain relief to the patient without theneed for injections or IVs. We also currently have seven issued foreign patents and 10 pending foreign patent applications covering at least formulationsand methods of use relating to Subsys. Any patents that issue from our pending foreign patents and applications are expected to expire no earlier than2027. Dronabinol Our dronabinol patent portfolio currently consists of three issued U.S. patents, one pending U.S patent applications and one patent application ineach of Canada, Europe and Japan. The claims of the patents and applications are directed to formulations of dronabinol and methods of manufacturingand packaging dronabinol. Two of the issued dronabinol patents will expire in 2028, while the third expires in 2033. Any patents that issue from ourpending patent applications will likely expire between 2028 and 2033. 12 Other The rest of our patent portfolio relates to patents and applications owned or licensed by us and directed to other potential product candidates. Although we believe our rights under these patents and patent applications provide a competitive advantage, the patent positions of pharmaceuticaland biotechnology companies are highly uncertain and involve complex legal and factual questions. In addition, we may not be able to obtain issuedpatents from pending applications. Even if patents are granted, the allowed claims may not be sufficient to adequately protect the technology owned byor licensed to us. Any patents or patent rights that we obtain carry some risk of being circumvented, challenged or invalidated by our competitors. Forexample, as described in Note 8 in the Notes to our Consolidated Financial Statements, a former officer of Insys Pharma has sought to rescind hisassignment of his inventions concerning fentanyl and dronabinol patent applications described above. Ownership and inventorship disputes may arise forother patents and applications that we own or license. We also rely on trade secrets, proprietary know-how and continuing innovation to develop and maintain our competitive position, especially whenwe do not believe that patent protection is appropriate or can be obtained. We require each of our employees, consultants and advisors to executeproprietary information and inventions assignment agreement before they begin providing services to us. Among other things, this agreement obligateseach employee, consultant or advisor to refrain from disclosing any of our confidential information received during the course of providing services and,with some exceptions, to assign to us any inventions conceived or developed during the course of these services. We also require confidentialityagreements from third parties that receive our confidential information. The biotechnology and biopharmaceutical industries are characterized by the existence of a large number of patents and frequent litigation based onallegations of patent infringement. As our current and potential product candidates and others based upon our proprietary technologies progress towardcommercialization, the possibility of an infringement claim against us increases. While we attempt to be certain that our products and proprietarytechnologies do not infringe other parties’ patents and other proprietary rights, competitors or other parties may assert that we infringe on their proprietaryrights. We have conducted certain clearance searches of issued U.S. patents for our fentanyl formulations but we have not conducted extensive clearancesearches for our other product candidates, and cannot guarantee that the searches we have done were comprehensive and, therefore, whether Subsys or anyof our product candidates, delivery devices, or methods of using, making or delivering our product candidates infringe the patents searched, or that otherpatents do not exist that cover Subsys or product candidates, delivery devices or these methods. Interpreting patent claims involves complex legal andscientific questions and it is difficult to assess whether or not our product candidates would infringe any patent. Likewise, it is difficult to predict whetheror not third-party patent applications will issue and what claim scope they may obtain. If we conclude that any identified patents, or patent applicationsonce they issue as patents cover Subsys or our product candidates, we cannot guarantee that we will be able to formulate around such patents at all orwithout material delay or whether we can obtain reasonable license terms from the patent owners, if at all. There may also be other pending patentapplications that are unknown to us and, if granted, may prevent us from making, using or selling Subsys or our product candidates. Other productcandidates that we may develop, either internally or in collaboration with others, could be subject to similar uncertainties. If a product is found to infringea third-party patent, we could be prevented from developing and selling that product. Please see the section entitled “Risk Factors — Risks Relating toIntellectual Property.” Environmental and Safety Matters We use hazardous materials, including chemicals, biological agents and compounds that could be dangerous to human health and safety or theenvironment. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern, among other things, the use,generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulationsmay be expensive, and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. If one of our employees wasaccidentally injured as a result of the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or her treatment iswithin the coverage terms of our workers’ compensation insurance policy. However, we do not carry specific biological or hazardous waste insurancecoverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising frombiological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages orpenalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended. 13 Government Regulation FDA Approval Process In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDCA and other federal and state statutes andregulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion andmarketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply withapplicable U.S. regulations may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending INDs, andNDAs or the issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civilpenalties and criminal prosecution. FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed inthe United States. Pharmaceutical product development in the United States typically involves, among other things, preclinical laboratory and animaltests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinicaltrials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approvalrequirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the productor disease indicated for treatment. Preclinical tests include laboratory evaluation of product chemistry, stability, formulation and toxicity, as well as animal trials to assess thecharacteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations andrequirements including good laboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with otherinformation including information about product chemistry, manufacturing and controls and a proposed clinical trial protocol. Certain nonclinical tests,such as animal tests of reproductive toxicity and carcinogenicity, may be conducted after the IND is submitted. A 30-day waiting period after thesubmission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not placed a clinical hold on the IND withinthis 30-day period, the proposed clinical trial may begin. Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualifiedinvestigator. Clinical trials must be conducted in compliance with federal regulations, GCP, which include the requirement that all research subjectsprovide their informed consent in writing for their participation in any clinical trial, as well as under protocols detailing the objectives of the trial, theparameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing in U.S. patients and subsequentprotocol amendments must be submitted to the FDA as part of the IND. The FDA may order the temporary or permanent discontinuation of a clinical trialat any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents anunacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submittedto IRB for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with theIRB’s requirements, or may impose other conditions. Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1,the initial introduction of the drug into healthy human volunteers, the drug is tested to assess safety, metabolism, PK, pharmacological actions, sideeffects associated with increasing doses and, if possible, early evidence of effectiveness. Phase 2 usually involves trials in a limited patient populationto evaluate the effectiveness of the drug for a particular indication or indications, dosage tolerance and optimum dosage, and identify possibleadverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3trials are undertaken to provide substantial evidence of clinical efficacy and safety in a larger number of patients, typically at geographicallydispersed clinical trial sites, to establish the efficacy and safety of the drug and to provide adequate information for the labeling of the drug. In somecases, the FDA may condition approval on the sponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety andeffectiveness after approval. Such post-approval studies are typically referred to as Phase 4 studies. The current FDA standards for approving new pharmaceutical products are more stringent than those that were applied in the past. These standardswere not applied to many established products currently on the market, including certain opioid products. As a result, the FDA does not have as extensivesafety databases on these products as on some products developed more recently. The FDA has recently expressed an intention to develop safety data forcertain products, including many opioids. In particular, the FDA has expressed interest in specific impurities that may be present in a number of opioidnarcotic APIs, such as oxycodone. Based on certain structural characteristics, these impurities may have the potential to cause mutagenic effects. If, aftertesting, such effects are ultimately demonstrated to exist, more stringent controls on the levels of these impurities may be required for FDA approval ofproducts containing these impurities, such as oxymorphone. Any additional testing or remedial measures that may be necessary could result in increasedcosts for, or delays in, obtaining approval for certain of our products in development. 14 After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required beforemarketing of the product may begin in the United States. The NDA must include the results of all preclinical, clinical and other testing and a compilationof data relating to the product’s pharmacology, chemistry, manufacture and controls, and proposed labeling, among other things. The cost of preparingand submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application user fee, andthe manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment fees per product and per establishment.These fees are typically increased annually. The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s thresholddetermination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review.Under the Prescription Drug User Fee Act the FDA has agreed to certain performance goals in the review of NDAs. The FDA has a goal of reviewingapplications for non-priority drug products within 12 months of NDA submission. The review process may be extended by the FDA for three additionalmonths to consider certain information or clarification regarding information already provided in the submission. The FDA may also refer applications fornovel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically comprised of a panel thatincludes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is notbound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. Additionally, theFDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the product unless the facility demonstratescompliance with current cGMPs and the NDA contains data that provides substantial evidence that the drug is safe and effective for the indication soughtin the proposed labeling. Additionally, the FDA will typically inspect one or more clinical trial sites to assure compliance with GCPs before approving anNDA. After the FDA evaluates the data in the NDA and the manufacturing facilities, clinical sites, and the proposed product label, it may issue either anapproval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantialadditional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’ssatisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two to sixmonths depending on the type of information included. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDAapproval, the FDA may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy and may impose otherconditions, including labeling or distribution restrictions or other risk-management mechanisms that can materially affect the potential market andprofitability of the drug. Further, if there are any modifications to the drug, including changes in indications, dosage, labeling, or manufacturingprocesses or facilities, a new or supplemental NDA may need to be submitted, which may require additional data or additional nonclinical studies andclinical trials. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identifiedfollowing initial marketing. The FDA may require sponsors of investigational drugs to submit proposed REMS in order to ensure that the benefits of the drugs continue tooutweigh the risks associated with its use. Sponsors of certain drug applications approved without a REMS program may also be required to submit aproposed REMS program if the FDA becomes aware of new safety information and makes a determination that a REMS program is necessary. The Hatch-Waxman Act Abbreviated New Drug Applications (ANDAs) In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’sproduct. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the Orange Book. Drugs listed in theOrange Book can, in turn, be cited by potential competitors in support of approval of an ANDA. An ANDA provides for marketing of a drug product thathas the same active ingredients in the same strengths and dosage form as the RLD and has been shown to be bioequivalent to the RLD. ANDA applicantsare not required to conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, but are required toconduct bioequivalence testing, which compares the bioavailability of their drug product to that of the RLD to confirm chemical and therapeuticequivalence. Drugs approved in this way are commonly referred to as generic versions of the listed drug, and can often be substituted by pharmacistsunder prescriptions written for the original listed drug. 15 The ANDA applicant is required to certify to the FDA that any patents listed for the approved product in the FDA’s Orange Book have expired or arenot applicable. Specifically, the applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired; (3) thelisted patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or willnot be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that suchpatents are invalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents via a Paragraph IV certification, the FDAwill not approve the ANDA application until all the listed patents claiming the referenced product have expired. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification tothe NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringementlawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a ParagraphIV certification prevents the FDA from approving the ANDA until the earlier of 30 months from the date of the lawsuit, expiration of the patent, settlementof the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant. As an incentive for the rapid development of generic drugproducts, the first ANDA(s) filed that challenges a listed patent by filing a Paragraph IV certification may be granted a 180-day marketing exclusivityperiod during which the FDA may not approve another ANDA for the same product. There may be multiple such “first filers.” The 180-day marketingexclusivity period is triggered either by commercial launch of any first-filed ANDA approved product or from the date of a court decision finding thechallenged patent to be invalid, unenforceable or not infringed, whichever is first. The 180-day exclusivity can be forfeited, among other reasons, if thefirst filed and approved ANDA is not marketed, does not obtain tentative approval or the challenged patent expires. The ANDA application also will not be approved until any non-patent market exclusivity, such as exclusivity for obtaining approval of a newchemical entity, listed in the Orange Book for the referenced product has expired. Federal law provides an exclusive period of five years followingapproval of a drug containing no previously approved active ingredients, during which ANDAs for generic versions of those drugs cannot be submittedunless the submission contains a Paragraph IV challenge to a listed patent, in which case the submission may be made four years following the originalproduct approval. Federal law additionally provides for a period of three years of exclusivity following approval of a drug that contains previouslyapproved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new use, the approval of which wasrequired to be supported by new clinical trials conducted by or for the sponsor. The FDA cannot grant effective approval of an ANDA based on that listeddrug during this three-year period. Section 505(b)(2) Regulatory Pathway Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonly referredto as a Section 505(b)(2) NDA. Section 505(b)(2) of the FDCA enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy for anexisting product, or published literature, in support of its application. 505(b)(2) NDAs often provide an alternate regulatory pathway to FDA approval for new or improved formulations or new uses of previouslyapproved products. Specifically, Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes fromstudies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon the FDA’sfindings from preclinical or clinical studies conducted for an approved product. The FDA may also require 505(b)(2) applicants to perform additionalstudies or measurements to support the change from the approved product. The FDA may then approve the new product candidate for all or some of thelabel indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant. To theextent that the Section 505(b)(2) applicant is relying on findings of safety or efficacy for an already approved product, the applicant is subject to existingexclusivity for the reference product and is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book tothe same extent that an ANDA applicant would. Thus approval of a Section 505(b)(2) NDA can be stalled until all the listed patents claiming thereferenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in theOrange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until theearlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant. 16 Post-Approval FDA Requirements Once an NDA is approved, a product is subject to extensive and ongoing post-approval requirements. For instance, the FDA closely regulates thepost-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. FDA post-market regulations also include, among otherthings, requirements relating to drug listing, recordkeeping, periodic reporting, product sampling and distribution, manufacturing and reporting ofadverse events arising from use of the product. Failure to comply with these regulatory requirements may result in restrictions on the marketing ormanufacturing of the product, recall or market withdrawal, fines, warning letters, refusal to approve pending applications, suspension or revocation ofapprovals, product seizure or detention, injunctions and/or the imposition of civil or criminal penalties. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of theconditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, requiresubmission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indicationtypically requires clinical data similar to that in the original application, and the FDA uses the same procedures and can take the same actions inreviewing NDA supplements as it does in reviewing original NDAs. Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketingtesting, known as Phase 4 commitments or requirements, a REMS program and surveillance to monitor the effects of an approved product or placeconditions on an approval that could restrict the distribution or use of the product. In addition, quality control as well as drug manufacture, packaging, and labeling procedures must continue to conform to cGMPs after approval.Drug manufacturers and certain of their subcontractors are required to register their establishments with FDA and certain state agencies, and are subject toperiodic unannounced inspections by the FDA during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly,manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs. TheFDA and comparable state regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatorystandards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered. The distribution of prescription pharmaceutical products is also subject to the Prescription Drug Marketing Act, or PDMA, which governs thedistribution of drugs and drug samples at the federal level, and sets minimum standards for the licensing and regulation of drug distributors by the states.Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability indistribution. Risk Evaluation and Mitigation Strategies (REMS) On December 29, 2011, the FDA approved a single shared REMS for TIRF products. TIRF products, which include the brand-name drugs Abstral,Actiq, Fentora, Lazanda, Onsolis and Subsys, are narcotic pain medicines called opioids used to manage breakthrough pain in adults with cancer whoroutinely take other opioid pain medicines around-the-clock. The program officially began in March 2012. The goals of the TIRF REMS Access Program are to ensure patient access to important medications and mitigate the risk of misuse, abuse, addiction,overdose and serious complications due to medication errors by: ●prescribing and dispensing TIRF products only to appropriate patients, including use only in opioid-tolerant patients; ●preventing inappropriate conversion between fentanyl products; ●preventing accidental exposure to children and others for whom TIRF products were not prescribed; and ●educating prescribers, pharmacists, and patients on the potential for misuse, abuse, addiction, and overdose. Health care professionals who prescribe TIRF products that will only be used in an inpatient setting (hospitals, hospices, or long-term care facilities)are not be required to enroll in the TIRF REMS Access Program. Similarly, patients who receive TIRF products in an inpatient setting are not required toenroll in the program. Long term care and hospice patients who obtain their medications from outpatient pharmacies, however, must be enrolled. 17 Controlled Substances; Drug Enforcement Administration We sell products that are “controlled substances” as defined in the CSA which establishes registration, security, recordkeeping, reporting, storage andother requirements administered by the DEA. States impose similar requirements. The DEA regulates entities that handle controlled substances and theequipment and raw materials used in their manufacture and packaging, in order to prevent loss and diversion into illicit channels of commerce. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have high potential for abuse,no currently accepted medical use in the United States and lack accepted safety for use under medical supervision, and may not be marketed or sold in theUnited States. Except for research and industrial purposes, a pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substancesconsidered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances. Fentanyl, the activeingredient in our Subsys product, is listed by the DEA as a Schedule II substance under the CSA. Consequently, its manufacture, shipment, storage, saleand use are subject to a high degree of regulation. For example, manufacturing of fentanyl is subject to a DEA regulated quota system. In addition,generally all Schedule II drug prescriptions must be signed by a physician and physically presented to a pharmacist before filling and may not be refilledwithout a new prescription. Dronabinol is listed by the DEA as a Schedule I substance, but when formulated in sesame oil, encapsulated in a soft gelatin capsule, and in a productapproved by FDA, it is listed as a Schedule III substance. DEA regulations currently limit the formulation of FDA-approved dronabinol products that areclassified in Schedule III. Specifically, classification in Schedule III is limited to “dronabinol (synthetic) in sesame oil and encapsulated in a soft gelatincapsule in” an FDA-approved product. Accordingly, our Dronabinol SG Capsule is classified as a Schedule III substance. There is a concern that somegeneric versions of Marinol would not meet these specific conditions, and therefore, would not be classified as a Schedule III substance, but rather wouldbe considered as Schedule I products until otherwise scheduled for marketing. Currently, several products from other companies are the subject ofpending ANDAs under review by the FDA. DEA registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance. The registration isspecific to the particular location, activity and controlled substance schedule. For example, separate registrations are needed for import andmanufacturing, and each registration will specify which schedules of controlled substances are authorized to be handled under that registration. The DEA typically inspects certain facilities to review their security controls, recordkeeping and reporting prior to issuing a registration. Securityrequirements vary by controlled substance schedule, with the most stringent requirements applying to Schedule I and Schedule II substances. Securitymeasures required by the DEA include background checks on employees and physical control of inventory through measures such as vaults, cages,surveillance cameras and inventory reconciliations. Records must be maintained for the handling of all controlled substances, and periodic reports madeto the DEA, for example distribution reports for Schedule I and II controlled substances, Schedule III substances that are narcotics, and other designatedsubstances. Reports must also be made for thefts or losses of any controlled substance, suspicious orders, and to obtain authorization to destroy anycontrolled substance. In addition, special authorization and notification requirements apply to imports and exports. A DEA quota system controls and limits the availability and production of controlled substances in Schedule I or II. This includes manufacturing ofthe API and production of dosage forms. Distributions of any Schedule I or II controlled substance must also be accompanied by special order forms, withcopies provided to the DEA. Absent the Marinol-like formulation and encapsulation exception, dronabinol is a Schedule I controlled substance and,therefore, subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregate quota for how much totaldronabinol may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs.This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States each year is allocated among individual companies,who must submit applications annually to the DEA for individual manufacturing and procurement quotas. We or our partners, including our contractmanufacturers, must obtain an annual quota from the DEA in order to produce or procure any Schedule I or Schedule II substance, including dronabinoland fentanyl. The DEA may adjust aggregate production quotas and individual manufacturing quotas from time to time during the year, although theDEA has substantial discretion in whether or not to make such adjustments. Our, or our contract manufacturers’, quota of the active ingredient may not besufficient to meet commercial demand or complete clinical trials. Any delay or refusal by the DEA in establishing our, or our contract manufacturers’,quota for controlled substances could delay or stop our clinical trials or product launches which could have a material adverse effect on our business,financial position and results of operations. 18 The DEA conducts periodic inspections of certain registered establishments that handle controlled substances. Failure to maintain compliance withapplicable requirements, particularly as manifested in loss or diversion, can result in enforcement action that could have a material adverse effect on ourbusiness, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedingsto restrict, suspend or revoke those registrations. In certain circumstances, violations could result in criminal proceedings. Individual states also regulate controlled substances, and we and our contract manufacturers will be subject to state regulation on distribution ofthese products, including licensing, recordkeeping and security. Controlled substances are also regulated pursuant to several international drug control treaties. These treaties are enforced by the Untied NationalCommission on Narcotic Drugs. The United States is a signatory to these treaties and thus must conform its laws and regulations to the internationalrequirements, which generally include licensing, recordkeeping and reporting requirements. Both fentanyl and dronabinol are currently classified underthe international treaties and current U.S. controls adequately address international requirements. Any change in the international treaties regardingclassification of these products could affect regulation of these substances in the United States and in other countries. Anti-Kickback and False Claims Laws In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrictcertain marketing practices in the pharmaceutical industry in recent years. These laws include Anti-Kickback and False Claims statutes. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return forpurchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid orother federally financed healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value, including for example,gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providinganything at less than its fair market value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceuticalmanufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions andregulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and our practices maynot in all cases meet all of the criteria for statutory exemptions or safe harbor protection. Practices that involve remuneration that may be alleged to beintended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Severalcourts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals offederal healthcare covered business, the statute has been violated. The reach of the Anti-Kickback Statute was also broadened by the PPACA whichamends the intent requirement of the federal Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of this statuteor specific intent to violate it in order to have committed a violation. In addition, PPACA provides that the government may assert that a claim includingitems or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal FalseClaims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented orcaused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimedor is false or fraudulent. The federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim to the federalgovernment. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” formoney or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have been prosecuted under theselaws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaidreimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal healthcare programsfor the product. In addition, certain marketing practices, including off-label promotion, may also lead to violations of the False Claims Act. Many statesalso have statutes or regulations similar to the federal Anti-Kickback Statute and False Claims Act, which state laws apply to items and servicesreimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Also, the federal Health Insurance Portability andAccountability Act of 1996 created new federal criminal statutes that prohibit knowingly and willfully executing a scheme to defraud any healthcarebenefit program, including private third-party payers and knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. 19 To the extent that any of our product candidates are ultimately sold in a foreign country, we may be subject to similar foreign laws and regulations,which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation ofcorporate compliance programs and reporting of payments or transfers of value to healthcare professionals. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply tous, we may be subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion fromparticipation in government healthcare programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability tooperate our business and our results of operations. Coverage and Reimbursement The commercial success of our products and our ability to commercialize any approved product candidates successfully will depend in part on theextent to which governmental authorities, private health insurers and other third-party payors provide coverage for and establish adequate reimbursementlevels for our products, product candidates, and related treatments. Government health administration authorities, private health insurers and other organizations generally decide which drugs they will pay for andestablish reimbursement levels for health care. In particular, in the U.S., private health insurers and other third-party payers often provide reimbursementfor products and services based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for suchtreatments. In the U.S., the European Union and other potentially significant markets for our product candidates, government authorities and third-partypayers are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products andtherapies, which has resulted in lower average selling prices. Further, the increased emphasis on managed healthcare in the U.S. and on country andregional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and usage, which mayadversely affect our future product sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicialdecisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies andpricing in general. The cost containment measures that healthcare payors and providers are instituting and the effect of any healthcare reform couldsignificantly reduce our revenues from the sale of any products or approved product candidates. We cannot provide any assurances that we will be able toobtain and maintain third-party coverage or adequate reimbursement for our product candidates in whole or in part. The MMA imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicarebeneficiaries may enroll in prescription drug plans offered by private entities which provide coverage of outpatient prescription drugs. Part D plansinclude both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike MedicarePart A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and eachdrug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drugformularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each categoryor class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Governmentpayment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, anynegotiated prices for our future products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain.Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and paymentlimitations in setting their own payment rates. Any reduction in payment that results from Medicare Part D may result in a similar reduction in paymentsfrom non-governmental payors. The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of differenttreatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for HealthcareResearch and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made toCongress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it isnot clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subjectof a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales ofour products or product candidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they maynot cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on aprofitable basis. 20 The U.S. and some foreign jurisdictions are considering enacting or have enacted a number of additional legislative and regulatory proposals tochange the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payers in the U.S. andelsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving qualityand/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by majorlegislative initiatives, including, most recently, the PPACA, which changes the way healthcare is financed by both governmental and private insurers. Healthcare Privacy and Security Laws We may be subject to various privacy and security regulations, including but not limited to HIPAA, as amended by HITECH, and their respectiveimplementing regulations, including the final omnibus rule published on January 25, 2013. HIPAA mandates, among other things, the adoption ofuniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and securityof individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect suchinformation. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates” — independentcontractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a coveredentity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly otherpersons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA lawsand seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of healthinformation in certain circumstances, some of which are more stringent then HIPAA and many of which differ from each other in significant ways and maynot have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition ofsignificant civil and criminal penalties. Approval Outside the United States In order to market any product outside of the United States, we must comply with numerous and varying regulatory requirements of other countriesregarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products. Approvalprocedures vary among countries and can involve additional product testing and additional administrative review periods, and may be otherwisecomplicated by our product candidates being controlled substances such as synthetic cannabinoids and fentanyl. The time required to obtain approval inother countries might differ from and be longer than that required to obtain FDA approval and DEA classification. Regulatory approval in one countrydoes not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact theregulatory process in others. To date, we have not initiated any discussions with the European Medicines Agency or any other foreign regulatory authorities with respect toseeking regulatory approval for any indication in Europe or in any other country outside the United States. As in the United States, the regulatoryapproval process in Europe and in other countries is a lengthy, challenging and inherently uncertain process. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals,product recalls, seizure of products, operating restrictions and criminal prosecution. Employees As of December 31, 2014, we employed 382 full-time employees, including 19 manufacturing employees, 286 sales and marketing employees,47 employees in research and development, and 30 employees in administration. As of the same date, 12 of our employees had a Ph.D. or M.D. degree.None of our employees is subject to a collective bargaining agreement and we consider our relationship with our employees to be good. Scientific Advisory Board We have established a scientific advisory board consisting of industry experts with knowledge of our target markets. Our scientific advisors generallymeet twice a year as a group to assist us in formulating our research, development, clinical and sales and marketing strategies. Some individual scientificadvisors consult with and meet informally with us on a more frequent basis. Our scientific advisors are not our employees and may have commitments to,or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our scientific advisors may have arrangementswith other companies to assist those companies in developing products or technologies that may compete with ours. 21 ITEM 1A. RISK FACTORS Risks Related to Our Business and Industry We are largely dependent on the commercial success of our two approved products, Subsys and Dronabinol SG Capsule, and although we havegenerated revenue and profit from sales of Subsys and Dronabinol SG Capsule, we may not be able to continue to be profitable. We anticipate that in the near term our ability to maintain profitability will depend upon the continued commercial success of our two approvedproducts, Subsys and Dronabinol SG Capsule. In addition to the risks discussed elsewhere in this section, our ability to continue to generate revenuesfrom these products will depend on a number of factors, including, but not limited to: ●achievement of broad market acceptance and coverage by third-party payors for our products; ●the effectiveness of our efforts in marketing and selling Subsys; ●the effectiveness of Mylan’s efforts in distributing Dronabinol SG Capsule, as our exclusive distributor of that product and the ultimate resolution ofour ongoing dispute with Mylan; ●our and our contract manufacturers’ ability to successfully manufacture commercial quantities of our products at acceptable cost levels and incompliance with regulatory requirements; ●our ability to maintain a cost-efficient commercial organization and, to the extent we seek to do so, successfully partner with additional third parties; ●our ability to successfully expand and maintain intellectual property protection for Subsys; ●our ability to effectively work with physicians to ensure that patients are titrated to an effective dose of Subsys; ●the efficacy and safety of our products; ●our ability to comply with regulatory requirements; and ●our ability to find an effective distribution model or platform for Dronabinol SG Capsule in the event that our relationship with Mylan ends. Because of the numerous risks and uncertainties associated with our commercialization efforts, including our reliance on Mylan for the distributionof Dronabinol SG Capsule, and other factors, we are unable to predict the extent to which we will continue to generate revenues and profits from Subsysand Dronabinol SG Capsule. See Note 8 under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion on ourongoing dispute with Mylan. 22 If Subsys and Dronabinol SG Capsule, or any of our product candidates for which we receive regulatory approval, do not maintain broad marketacceptance or coverage by third-party payors, the revenues that we generate from those products will be limited. The commercial success of Subsys and Dronabinol SG Capsule, and any product candidates for which we obtain marketing approval from the FDA orother regulatory authorities, will depend upon the continued acceptance of these products by physicians, patients, healthcare payors and the medicalcommunity. Coverage and reimbursement of our approved products by third-party payors is also necessary for commercial success. The degree of marketacceptance of Subsys and Dronabinol SG Capsule and any other product candidates for which we may receive regulatory approval will depend on anumber of factors, including: ●our ability to obtain sufficient third-party payor coverage and reimbursement; ●our ability to provide acceptable evidence of safety and efficacy; ●acceptance by physicians and patients of the product as a safe and effective treatment; ●the relative convenience and ease of administration; ●the prevalence and severity of adverse side effects; ●limitations or warnings contained in a product’s FDA-approved labeling; ●the clinical indications for which the product is approved; ●the DEA scheduling classification for controlled substances, such as our dronabinol-based and fentanyl-based products; ●availability and perceived advantages of alternative treatments; ●any negative publicity related to our or our competitors’ products; ●the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies; ●pricing and cost effectiveness; ●the willingness of patients to pay out of pocket in the absence of third-party payor coverage; and ●our ability to maintain compliance with regulatory requirements. For example, while we believe our sublingual spray delivery method for Subsys appeals to patients, some patients may not view our sublingual spraydevice as easy to administer, safe and effective, and otherwise may not react favorably to sublingual delivery. In accordance with the REMS protocol forall TIRF products, physicians are advised to begin patients at the lowest dose available for the applicable TIRF product, which for Subsys is 100 mcg. Ifpatients do not experience pain relief at initial low-dose prescriptions of Subsys, they or their physicians may conclude that Subsys is ineffective ingeneral and may discontinue use of Subsys before titrating to an effective dose. In addition, many third-party payors require usage and failure on cheapergeneric versions of Actiq prior to providing reimbursement for Subsys and other branded TIRF products, which limits Subsys’ use as a first-line treatmentoption. In addition, products used to treat and manage pain, especially in the case of controlled substances, are from time to time subject to negativepublicity, including illegal use, overdoses, abuse, diversion, serious injury and death. These events have led to heightened regulatory scrutiny.Controlled substances are classified by the DEA as Schedule I through V substances, with Schedule I substances being prohibited for sale in the UnitedStates, Schedule II substances considered to present the highest risk of abuse and Schedule V substances being considered to present the lowest relativerisk of abuse. Subsys contains fentanyl, an opioid, and is regulated as a Schedule II controlled substance, and our Dronabinol SG Capsule is regulated as aSchedule III controlled substance, and despite the strict regulations on the marketing, distributing, prescribing and dispensing of such substances, illicituse and abuse of controlled substances is well-documented. Thus, the marketing of Subsys, Dronabinol SG Capsule and, if approved, our productcandidates that contain controlled substances, may generate public controversy that may adversely affect market acceptance of Subsys and DronabinolSG Capsule and, if approved, such product candidates. Our efforts to educate the medical community and third-party payors on the benefits of Subsys, and any of our product candidates for which weobtain marketing approval from the FDA or other regulatory authorities, and gain broad market acceptance requires significant resources and may notcontinue to be successful. If our products do not continue to receive an adequate level of acceptance by physicians, third-party payors and patients, wemay not generate sufficient revenue from these products to remain profitable. In addition, fentanyl and dronabinol treatments can be costly to third-party payors and patients. Accordingly, hospitals and physicians may resistprescribing our products and third-party payors and patients may not purchase our products due to cost. 23 The commercial success of Dronabinol SG Capsule, as a generic product, also depends to some extent on wholesalers, pharmacies and the medicalcommunity being willing to purchase and prescribe a generic versus the branded product. Although Marinol has been marketed safely for many years,there is a possibility that Dronabinol SG Capsule could produce an unanticipated clinical side effect, or be considered less effective or less convenient, orotherwise inferior, to Marinol, which could result in an adverse effect on our ability to achieve market acceptance for Dronabinol SG Capsule by thirdparties. Furthermore, the potential market for dronabinol products may not expand as we anticipate or may even decline based on numerous factors,including the introduction of superior alternative products and regulatory action negatively impacting the dronabinol market. Moreover, even ifDronabinol SG Capsule and, if approved, our dronabinol product candidates are successfully commercialized, there is no guarantee that introduction ofimproved formulations of dronabinol will result in expansion of the dronabinol market or permit us to gain share in that market or maintain or increaseany market share we may capture. New dronabinol products that we introduce could potentially replace our then currently marketed dronabinol products,thus not impacting the overall size of the market or increasing our overall share of that market. If we are unable to expand the market for the medical useof dronabinol or gain, maintain or increase market share in that market, this failure would have a material adverse effect on our ability to execute on ourbusiness plan and ability to generate revenue. The unpredictability and regulation surrounding reimbursement on Subsys may affect our financial condition and results of operations. Our sales of, and revenue from, Subsys depend in significant part on the coverage and reimbursement policies of third-party payers, includinggovernment payers such as Medicare and Medicaid, and private health insurers. All third-party payers are sensitive to the cost of drugs and consistentlyimplement efforts to control these costs, which efforts include, but are not limited to, establishing excluded or preferred drug lists. Subsys has been, andwill likely continue to be, subject to these restrictions and impediments from third-party payers, particularly PBMs and private health insurers. Ourproduct, Subsys, has been included on an exclusion list for at least one PBM and may in the future be included on other PBM exclusion lists. ThesePBMs, which administer prescription drug benefits for employers and health plans and runs large mail-order pharmacies, have significant influence inthe insurance industry. While most PBMs have an exception process that physicians may pursue to have an off-formulary, medically necessary drugcovered for patients, being placed on an exclusion list makes it difficult for many patients covered through a PBM administered plan to have Subsyscovered by insurance. In the future, we may not be able to work with other PBMs to evaluate price increases and to communicate with managed careand health-system decision-makers to ensure a balanced approach which takes into account the clinical performance and efficacy of our products.Moreover, in the United States, there have been, and we expect there will continue to be, a number of state and federal proposals that limit the amountthat third party payers may pay to reimburse the cost of drugs, particularly for state and federal government programs such as Medicare and Medicaid, aswell as managed care providers and private insurance plans. We believe the increasing emphasis on managed care in the United States has and willcontinue to put pressure on the price and usage of Subsys. Our ability to generate revenue is affected by the availability of third-party reimbursement forSubsys and our results of operations will be negatively affected if we fail to manage adequate reimbursement levels for Subsys from such third-partypayers. In addition, our business operations include administrative reimbursement support assistance for patients, in large part through our patientservices hub, to help patients work with their insurance companies. The patient support assistance provided by us, including our patient services hub, issubject to extensive and complex federal and state laws and varied third party payers standards, procedures, processes and conditions. Our compliancewith applicable laws, regulations and standards is expensive and time consuming and substantial governmental resources exist to enforce and prosecutethese applicable laws, regulations and standards and companies that violate such laws, regulations and standards may face substantial penalties. Thepotential sanctions include significant civil, criminal and administrative penalties, damages and fines and exclusion from participation in federal healthcare programs. Because of the breadth of these laws and the lack of extensive legal guidance in the form of regulations or court decisions, it is possiblethat some of our business activities could be subject to challenge or penalty under one or more of these laws. Such a challenge, irrespective of theunderlying merits of the challenge or the ultimate outcome of the matter, could have a material adverse effect on our business, financial condition,results of operations and growth prospects. 24 We or our collaborators may not be successful in executing sales and marketing strategies for Subsys, Dronabinol SG Capsule or any additionalproduct candidates for which we obtain regulatory approval. If such sales and marketing strategies are not successful, we may not be able to maintainor increase our revenues. Prior to our launch of Subsys in March 2012, we built a commercial organization including sales, marketing, managed markets, trade and distributionfunctions, which is now focused exclusively on marketing and selling Subsys. We utilize in the United States, with respect to Subsys, and plan to utilizein the United States, with respect to any of our product candidates for which we obtain regulatory approval and maintain sales and marketingresponsibility, an incentive-based sales model similar to that employed at Sciele Pharma and other companies previously led by members of our board,including our founder, Executive Chairman and principal stockholder. Under this model, we maintain a low-cost commercial organization that is smallerthan many of our competitors, which could hinder our efforts to broadly market Subsys and any other products that we are able to commercialize ascompared to our competitors. Our commercial organization has only recently been established, and may not perform over time as we currently anticipate.To the extent our commercial organization does not perform over time as we currently anticipate, we will need to consider alternatives, such as enteringinto arrangements with third parties to market and sell our products. Any arrangement would likely result in significantly greater sales and marketingexpenses or lower revenues than our current estimates. Our field sales force promotes Subsys primarily to oncologists, pain management specialists and centers that cater to supportive care in the UnitedStates. We may either increase or decrease the size of our sales force in the future based upon market conditions and actual sales performance, as well as inthe event that we obtain regulatory approval for any of our product candidates. In addition, we could lose sales personnel or the performance of our salespersonnel as measured by actual sales may be disappointing. Many of our competitors have significantly larger sales and marketing organizations, andsignificantly greater experience than we do in selling, marketing and distributing pharmaceuticals, and we may not be able to compete successfully withthem with our existing commercial organization. We currently distribute Dronabinol SG Capsule exclusively through Mylan pursuant to our May 2011 supply and distribution agreement. We havean ongoing dispute with Mylan that may result in the termination of this relationship or otherwise be resolved in a manner that materially and adverselyaffects our financial condition and results of operations. In the event that Mylan fails to adequately commercialize Dronabinol SG Capsule because itlacks adequate financial or other resources, decides to focus on other initiatives or otherwise is not adequately fulfilling its obligations, our business,financial condition, results of operations and prospects would be harmed. See Note 8 under the heading “Legal Matters” in the Notes to our ConsolidatedFinancial Statements for a discussion on our ongoing dispute with Mylan. Ultimately, we are subject to a number of other risks associated with ourdependence on Mylan as our exclusive distributor of Dronabinol SG Capsule in the United States, including, but limited to: ●We and Mylan have an ongoing dispute and may in the future have additional disputes related to obligations and liabilities, including payments,under the applicable agreement which may not be resolved in our favor, if at all; ●Mylan may not provide us with timely and accurate information regarding sales and marketing activities and supply forecasts, which couldadversely impact our ability to comply with our supply obligations and manage our inventory of Dronabinol SG Capsule, as well as our ability togenerate accurate financial forecasts; ●We do not have any control over discounts from the wholesale acquisition price that Mylan offers, which may reduce the payments we receive fromMylan from sales of Dronabinol SG Capsule; ●Mylan has in the past disagreed with us and may in the future disagree with us regarding whether any Dronabinol SG Capsule that we supply toMylan conforms to specifications and has in the past and may in the future reject batches of Dronabinol SG Capsule for reasons we may not agreewith, in which case we would likely realize lower gross margins and would lose revenues if we were unable to timely supply sufficient replacementquantities of Dronabinol SG Capsule to satisfy market demand; ●Mylan may not comply with applicable regulatory guidelines with respect to marketing and selling Dronabinol SG Capsule, which could adverselyimpact sales of Dronabinol SG Capsule in the United States; and ●The resolution of our ongoing dispute with Mylan may result in the termination of the agreement with Mylan which would require us to eitherperform this function ourselves or obtain an alternative distributor(s). Generally speaking, our agreement with Mylan may be terminated early by either party upon 45 days’ prior written notice to the other party if theother party commits a material breach of the agreement and fails to cure the breach within the 45-day period or immediately if the other party becomesinsolvent. Mylan may also terminate the agreement in the event of a negative outcome of a quality audit of our and/or Catalent’s manufacturing facilities.We cannot assure you that we would be able to generate equal or greater revenues from the commercialization of Dronabinol SG Capsule if we were tomarket and sell such product on our own or through another distribution partner rather than through Mylan, or that any dispute with or termination of ouragreement with Mylan would not otherwise materially negatively impact our business or reputation. In international markets, we plan to enter intoarrangements with third parties to pursue requisite regulatory approvals and market and sell our products as opposed to building an internationalcommercial organization. We may not be successful in establishing arrangements with third parties for international development and commercializationon acceptable terms, or at all, which may limit the market potential for our products and product candidates. 25 We are at an early stage of commercialization and have a history of net losses and negative cash flow from operations. We have a limited operating and commercialization history and there is little historical basis upon which to assess how we will respond tocompetitive or economic challenges or other challenges to our business. Our business and prospects must be considered in light of the risks anduncertainties frequently encountered by pharmaceutical companies in the early stages of commercialization. Our ability to generate sufficient revenues from any of our product candidates, if approved, will depend on numerous factors described in thefollowing risk factors, and although we are currently profitable, we may incur losses and negative cash flow in the future. We expect that our gross marginmay fluctuate from period to period as a result of changes in product mix sold, potentially by the introduction of new products by us or our competitors,discounts, including discounts on Dronabinol SG Capsule that may be offered by Mylan, manufacturing efficiencies related to our products and a varietyof other factors. If we are unable to maintain profitability and continue to generate positive cash flow over time, our business, results of operations andfinancial condition would be materially and adversely affected, which could result in our inability to continue operations. We have recently grown our business and will need to further increase the size and complexity of our organization in the future, and we mayexperience difficulties in managing our growth and executing our growth strategy. Our management and personnel, systems and facilities currently in place may not be adequate to support our business plan and future growth. Withthe commercialization of two of our products beginning with Dronabinol SG Capsule in December 2011 followed by Subsys in March 2012, we haveincreased our number of full-time employees from 32 on December 31, 2010 to 382 as of December 31, 2014, primarily because we established acommercial organization and our commercial infrastructure over that period, and the complexity of our business operations has substantially increased.We will need to further expand our scientific, sales and marketing, managerial, operational, financial and other resources to support our planned research,development and commercialization activities. Our need to effectively manage our operations, growth and various projects requires that we: ●continue to improve our operational, financial, management and regulatory compliance controls and reporting systems and procedures; ●attract and retain sufficient numbers of talented employees; ●manage our commercialization activities for Subsys effectively and in a cost-effective manner; ●resolve our dispute with Mylan or find an alternative path to market for our Dronabinol SG Capsule; ●manage our clinical trials effectively; ●manage our internal dronabinol production operations effectively and in a cost effective manner; ●manage our development efforts effectively while carrying out our contractual obligations to contractors and other third parties; and ●continue to improve and expand our facilities. In addition, historically, we have utilized and continue to utilize the services of part-time outside consultants to perform a number of tasks for us,including tasks related to compliance programs, clinical trial management, regulatory affairs, formulation development and other drug developmentfunctions. For example, in addition to seeking advice from our scientific advisory board, we utilize consultants for tasks such as state licensingprocurement. Our growth strategy may also entail expanding our use of consultants to implement these and other tasks going forward. Because we rely onconsultants for certain functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry outtheir contractual obligations and meet expected deadlines. There can be no assurance that we will be able to manage our existing consultants or find othercompetent outside consultants, as needed, on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiringnew employees and expanding our use of consultants, we may be unable to successfully implement the tasks necessary to effectively execute on ourplanned research, development and commercialization activities and, accordingly, may not achieve our research, development and commercializationgoals. 26 We may not be able to obtain regulatory approval for Dronabinol Oral Solution, which would limit our future growth prospects. In addition to growing sales of our two approved products, Subsys and Dronabinol SG Capsule, the ability to improve our business, results ofoperations and financial condition in the near-term will depend heavily on our ability to obtain regulatory approval and acceptable DEA classificationfor Dronabinol Oral Solution. Based on a pre-NDA meeting with the FDA in April 2012 and our progress to date, we currently expect to submit an NDAfor Dronabinol Oral Solution in the first half of 2015. However, we can provide no assurance that we will submit such NDA or receive regulatory approvalfor Dronabinol Oral Solution on the timeframe we expect, or at all. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. While we have estimated the approximate cost of approval of thisparticular product, we cannot be certain that our current estimate of the cost to obtain FDA approval for Dronabinol Oral Solution is currently accurate orthat such costs might increase over time. For instance, following the FDA’s review of our planned NDA, we may be required to run additional clinicaltrials and may not ever obtain FDA approval for Dronabinol Oral Solution. Ultimately, the FDA has substantial discretion in the drug approval process,including the ability to delay, limit or deny approval of a product candidate for various reasons. If we are unable to obtain regulatory approval for Dronabinol Oral Solution, our ability to generate additional near-term revenues beyond thosederived from the commercial sale of Subsys and Dronabinol SG Capsule will be materially delayed, which would have a material adverse impact on ourbusiness, results of operations and financial condition. We produce our dronabinol API internally and may encounter manufacturing failures that could impede or delay commercial production ofDronabinol SG Capsule or our dronabinol product candidates, if approved, or the preclinical and clinical development or regulatory approval of ourdronabinol product candidates. Any failure in our internal dronabinol API manufacturing operations, including as conducted at any new facilities that we may construct, could causeus to be unable to meet demand for our Dronabinol SG Capsule and lose potential revenue, delay the preclinical and clinical development or regulatoryapproval of our dronabinol product candidates, and harm our reputation. Our internal manufacturing operations may encounter difficulties involving,among other things, production yields, regulatory compliance, contamination, quality control and quality assurance, obtaining DEA quotas which allowus to produce dronabinol in the quantities needed to execute on our business plan, and shortages of qualified personnel. Our ability to commerciallysupply Dronabinol SG Capsule, and regulatory approval of our dronabinol product candidates, could be impeded, delayed, limited or denied if the FDAdoes not approve and maintain the approval of our manufacturing processes and facilities. In addition, we have limited experience producing dronabinolin commercial quantities and may encounter difficulties with continuing to manufacture commercial quantities of dronabinol or the quantities needed forour preclinical studies or clinical trials. Such difficulties could result in commercial supply shortfalls of our Dronabinol SG Capsule, a delay in thecommercial launch of Dronabinol Oral Solution, if approved, delays in our preclinical studies, clinical trials and regulatory submissions, or the recall orwithdrawal of Dronabinol SG Capsule from the market. We are aware of only two other manufacturers that are able to produce pharmaceutical grade dronabinol in the United States. We are aware of onlyfive manufacturers that hold Drug Master Files for the production of dronabinol in the United States. Because dronabinol is a controlled substance,inability to manufacture dronabinol in the United States would have a material adverse effect on our business given the regulatory restrictionsassociated with obtaining authorization to import and transport controlled substances into the United States. Moreover, we believe dronabinol isdifficult to produce and if there was any problem in manufacturing it internally, we may not be able to identify a third party to manufacture it for us in acost-effective manner, if at all. 27 We must comply with current cGMPs enforced by the FDA through its facilities inspection program and review of submitted technicalinformation. In addition, we must obtain and maintain necessary DEA and state registrations, and must establish and maintain processes to assurecompliance with DEA and state requirements governing, among other things, the storage, handling, security, recordkeeping and reporting forcontrolled substances. We must also apply for and receive a quota for dronabinol. Any failure to comply with these requirements may result inpenalties, including fines and civil penalties, suspension of production, suspension or delay in product approvals, product seizure or recall, operatingrestrictions, criminal prosecutions or withdrawal of product approvals, any of which could significantly and adversely affect our business. If the safetyof any product or product candidate or component is compromised due to a failure to adhere to applicable laws or for other reasons, we may not beable to successfully commercialize or obtain regulatory approval for the affected product or product candidate, and we may be held liable for anyinjuries sustained as a result. Any of these factors could cause a delay or termination of commercialization, preclinical studies and clinical trials,regulatory submissions or approvals of our products or product candidates, entail higher costs or result in our being unable to effectivelycommercialize our approved products. Certain changes in our dronabinol API manufacturing processes or procedures, including a change in thelocation where the material is manufactured, generally require prior FDA, or foreign regulatory authority, review and/or approval. We may need toconduct additional preclinical studies and clinical trials to support approval of such changes. This review and approval process may be costly andtime-consuming, and could impede, delay, limit or prevent commercialization of a product. We have recently expanded our dronabinol API production capacity by constructing a second facility. We may encounter a number of challengesrelating to the management and operation of such a facility, and we may never realize a return on our investment. We have expanded our dronabinol API production capacity by constructing a second facility designed to meet our expected future dronabinol APIsupply needs. The construction of the second facility has required significant capital expenditures and has resulted in significantly increased fixed costs.In addition, we will need to transfer our manufacturing processes, technology and know-how to the second facility. We cannot assure you that we will beable to successfully operate the second facility in a timely or profitable manner, or at all, or within the budget that we currently project. If we are unable totransition our dronabinol API manufacturing operations to the second facility in a cost-efficient and timely manner, then we may experience disruptionsin our operations, which could negatively impact our business and financial results. Further, if we are unable to achieve certain minimum productionefficiencies at the second facility, or if we fail to continue to successfully commercialize our Dronabinol SG Capsule or to obtain regulatory approval forand successfully commercialize our dronabinol product candidates, including Dronabinol Oral Solution, we may never realize a return on our investment.If the demand for our dronabinol products decreases or if we do not produce the output we plan or anticipate after our new facility is operational, we maynot be able to spread a significant amount of our fixed costs over the production volume, thereby increasing our per unit fixed cost, which would have anegative impact on our financial condition and results of operations. We will need to obtain and maintain a number of regulatory approvals in connection with the production of dronabinol API at our planned secondmanufacturing facility. Our ability to obtain and maintain these approvals may be subject to additional costs and possible delays beyond what weinitially anticipate. In addition, any new dronabinol API manufacturing facility must comply on an ongoing basis with applicable regulatoryrequirements as discussed in the preceding risk factor. Failure to comply with any such regulatory requirements would harm our business and our resultsof operations. Our ability to operate a new, larger facility successfully will greatly depend on our ability to hire, train and retain an adequate number of additionalmanufacturing employees, in particular employees with the appropriate level of knowledge, background and skills. Should we be unable to hire suchemployees, our business and financial results could be negatively impacted. Disruptions or other adverse developments during the construction and planned operations of our planned second facility could materiallyadversely affect our business. If our dronabinol API production is disrupted for any reason, we may be forced to locate alternative dronabinol APIproduction facilities, including facilities operated by third parties. Locating alternative facilities would be time-consuming and would disrupt ourproduction and cause supply delays that could result in us defaulting on our obligations under our supply agreement with Mylan, as well as damage toour reputation and profitability and other possible adverse effects, including those described in the preceding risk factor. Additionally, we cannot assureyou that alternative manufacturing facilities would offer the same cost structure as the planned second facility. 28 We have no internal manufacturing capabilities other than for our dronabinol API, we are dependent on numerous third parties in our supplychain for the commercial supply of Subsys and Dronabinol SG Capsule, and if we fail to maintain our supply and manufacturing relationships withthese third parties or develop new relationships with other third parties, we may be unable to continue to commercialize Subsys and Dronabinol SGCapsule or to develop our product candidates. We rely on a number of third parties for the commercial supply of Subsys and Dronabinol SG Capsule and the clinical supply of our productcandidates. Our ability to commercially supply Subsys and Dronabinol SG Capsule and to develop our product candidates depends, in part, on our abilityto successfully obtain the API for Subsys and the starting materials for dronabinol API for Dronabinol SG Capsule and our dronabinol product candidatesand the API for any other product candidates, and outsource most if not all of the aspects of their manufacturing at competitive costs, in accordance withregulatory requirements and in sufficient quantities for commercialization and clinical testing. If we fail to develop and maintain supply relationshipswith these third parties, we may be unable to continue to commercialize Subsys and Dronabinol SG Capsule or develop our Dronabinol Oral Solution orany other product candidates. We purchase the fentanyl API utilized in connection with Subsys and the starting materials for our dronabinol API from several third parties. We donot have long-term agreements with any of these parties, but rather purchase material on a purchase order basis. Moreover, some of the starting materialfor our dronabinol API is difficult to procure and produce. Our ability to obtain fentanyl API and the starting materials for our dronabinol API in sufficientquantities and quality, and on a timely basis, is critical to our continued commercialization of Subsys and Dronabinol SG Capsule, respectively, and toour successful completion of preclinical studies and clinical trials for our product candidates. There is no assurance that these suppliers will continue toproduce the materials in the quantities and quality and at the times they are needed, if at all, especially in light of the fact that we intend to significantlyincrease our orders for these materials in the near future. Moreover, the replacement of any of these suppliers, particularly the supplier of the startingmaterial for our dronabinol API that is difficult to produce, could lead to significant delays and increase in our costs. Our Dronabinol SG Capsule is manufactured and packaged by Catalent. We do not own or operate manufacturing facilities for Subsys and currentlylack the in-house capabilities to manufacture Subsys. Our Subsys sub-component manufacturing is performed by Aptar, with the final fill, assembly andpackaging of Subsys performed by DPT. If there are problems relating to the equipment utilized by Aptar to manufacture Subsys, we will be responsiblefor fixing or replacing that equipment. Any requirement to do so could result in unexpected costs and expenses and delay the production of Subsys,which could in turn negatively impact our business. We have contracts in place with Catalent, Aptar and DPT. In January 2015, we sent written notice to DPT that we intended to terminate the existingagreement effective December 31, 2016 and simultaneously entered into negotiations for a new agreement commencing January 1, 2017. To the extentthat we are unsuccessful in negotiating a new agreement or finding suitable alternative sources, we may be unable to continue to manufacture Subsys tomeet future demand. The manufacture of pharmaceutical products generally requires significant expertise and capital investment, often including the development ofadvanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production,particularly in scaling up and validating initial production. These problems can include difficulties with production costs and yields, quality control,including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, stateand foreign regulations. Additionally, our manufacturers may experience difficulties due to resource constraints, labor disputes, unstable politicalenvironments or natural disasters. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractualobligations for any reason, our ability to commercially supply Subsys or Dronabinol SG Capsule or to provide dronabinol for any product candidates forpreclinical studies or clinical trials could be jeopardized. Any delay or interruption in our ability to commercially supply Subsys or Dronabinol SGCapsule will result in the loss of potential revenues and could adversely affect the market’s acceptance of these products. For example, in the fourthquarter of 2012, two batches of Dronabinol SG Capsule were not released for commercial sale due to manufacturing process inconsistencies atCatalent. This resulted in an inability to meet market demand for Dronabinol SG Capsule during the quarter and our net revenues from this productdecreased dramatically compared to the third quarter of 2012. While we believe we have since resolved this manufacturing issue and have delivered newbatches of Dronabinol SG Capsule that have been released for commercial sale, we cannot guarantee that we will not encounter other manufacturingissues in the future. In addition, any delay or interruption in the supply of preclinical study or clinical trial supplies could delay the completion of thosestudies or trials, increase the costs associated with maintaining our programs and, depending upon the period of delay, require us to commence newstudies or trials at additional expense or terminate studies or trials completely. Manufacturers and suppliers are subject to regulatory requirements including cGMPs, which cover, among other things, manufacturing, testing,quality control and recordkeeping relating to our products and product candidates, and are subject to ongoing inspections by FDA, DEA and otherregulatory agencies. Moreover, if we seek regulatory approval for any product candidate, the facilities to be used by us or our third-party manufacturersfor the manufacture of the product candidate must be approved by the applicable regulatory authorities before the product candidate may be approvedand marketed. We do not control the manufacturing processes of third-party manufacturers and except for dronabinol API, we are currently completelydependent on them. If any of our third-party manufacturers cannot successfully manufacture product that conforms to our specifications and theapplicable regulatory authorities’ strict regulatory requirements, they will not be able to secure or maintain regulatory approval for the manufacturingfacilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance andqualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our products orproduct candidates or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities, which wouldsignificantly impact our ability to commercially supply Subsys and Dronabinol SG Capsule or develop or obtain regulatory approval for our productcandidates. 29 If our third-party manufacturers or suppliers fail to deliver the required commercial quantities of Subsys or Dronabinol SG Capsule and theirrespective sub-components and starting materials, on a timely basis and at commercially reasonable prices, and we are unable to find one or morereplacement manufacturers or suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on atimely basis, the continued commercialization of Subsys and Dronabinol SG Capsule and the development of our product candidates would be impeded,delayed, limited or prevented, which could have a material adverse effect on our business, results of operations, financial condition and prospects. We may encounter delays in the manufacturing of Subsys or fail to generate revenue if our supply of the components of our sublingual spraydelivery system is interrupted. Our sublingual spray drug delivery system is sourced, manufactured and assembled by multiple third parties across different geographic locations inthe United States and Europe. All contract manufacturers and component suppliers have been selected for their specific competencies in themanufacturing processes and materials that make up the sublingual spray system. The components of the spray system include the actuator subassembly,vial subassembly, and the setting mechanism. The actuator subassembly is comprised of nine individual components which are collectively supplied bysix different third-party manufacturers. The vial subassembly that houses the sterile drug formulation fentanyl is comprised of five different componentssupplied by four third-party manufacturers. Each of these third-party manufacturers is currently the single source of their respective components. If any ofthese manufacturers is unable to supply its respective component for any reason, including due to violations of cGMPs for medical devices, known asQSR our ability to have the finished sublingual spray device manufactured and commercially supply. Subsys will be adversely affected and we wouldlose potential revenue. Accordingly, a failure in any part of our supply chain may cause a material adverse effect on our ability to generate revenue fromSubsys, which in turn could have a material adverse effect on our business, results of operations, financial condition and prospects. We face intense competition, including from generic products. If our competitors market or develop alternative treatments that are approved morequickly or marketed more effectively than our product candidates or are demonstrated to be safer or more effective than our products, our commercialopportunities will be reduced or eliminated. The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on developingproprietary therapeutics. We face competition from a number of sources, some of which may target the same indications as our products or productcandidates, such as pharmaceutical companies, including generic drug companies, biotechnology companies, drug delivery companies and academic andresearch institutions, many of which have greater financial resources, marketing capabilities, including well-established sales forces, manufacturingcapabilities, research and development capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us. Subsys competes against numerous branded and generic products already being marketed and potentially those which are or will be in development.Many of these competitive products are offered in the United States by large, well-capitalized companies. Subsys is the fourth new branded TIRF productin the last five years. In the BTCP market, physicians often treat BTCP with a variety of short-acting opioid medications, including morphine, morphineand codeine derivatives and fentanyl. Some currently marketed products against which we directly compete include Teva Pharmaceutical IndustriesLtd.’s Fentora and Actiq, Galena’s Abstral, Depomed’s Lazanda and BioDelivery Sciences International, Inc.’s Onsolis. Some generic fentanyl productsagainst which Subsys competes are marketed by Mallinckrodt, Inc., Par Pharmaceutical Companies, Inc. and Actavis, Inc. In addition, we are aware ofnumerous companies developing other treatments and technologies for rapid delivery of opioids to treat BTCP, including transmucosal, transdermal,nasal spray, and inhaled sublingual delivery systems. If these treatments and technologies are successfully developed and approved, they could representsignificant additional competition to Subsys. With respect to our Dronabinol SG Capsule and our dronabinol product candidates, the market in which we compete is challenging in part becausegeneric products generally face greater price competition than branded products. With respect to Dronabinol SG Capsule and any of our dronabinolproduct candidates, if approved, the competition from generic products may have an effect on our product prices, market share, revenues and profitability.We or our distributor may not be able to differentiate any products that we may market from those of our competitors, successfully develop or introducenew products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products payment and othercommercial terms as favorable as those offered by our competitors. In addition, there are a number of established therapies and products alreadycommercially available and under development by other companies that treat the indications which Dronabinol SG Capsule and our dronabinol productcandidates are intended to treat. Specifically, Dronabinol SG Capsule competes and, if approved, our dronabinol product candidates will compete, againsttherapies and products such as Abbvie, Inc.’s Marinol and Marinol generics. Par Pharmaceutical Companies markets an approved generic version ofMarinol and Actavis markets an authorized generic version of Marinol. We cannot give any assurance that other companies will not obtain regulatoryapproval or acceptable DEA classification for, or commercialize additional generic dronabinol products. 30 Moreover, our dronabinol products may compete with non-synthetic cannabinoid drugs, including therapies such as GW Pharmaceuticals plc’sSativex, especially in many countries outside of the United States where non-synthetic cannabinoids are legal. In addition, literature has been publishedarguing the benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted laws legalizingmedicinal and recreational marijuana. There is some support in the United States for further legalization of marijuana. We also cannot assess the extent towhich patients utilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approved dronabinol products. Furthermore, inthe treatment of CINV, physicians typically offer conventional anti-nausea drugs prior to initiating chemotherapy, such as Sanofi’s Anzemet, EisaiInc./Helsinn Group’s Aloxi, Roche Holding AG’s Kytril, Par Pharmaceutical Companies’ Zuplenz and GlaxoSmithKline plc’s Zofran, as well asNeurokinin 1 receptor antagonists on the market including Kyowa Hakko Kirin Co., Ltd.’s Sancuso and Merck & Co., Inc.’s Emend. To the extent thatDronabinol SG Capsule and our dronabinol product candidates compete in the broader CINV market, we will also face competition from these productsand their generic equivalents, as applicable. Additionally, we are aware of companies in late stage development for CINV product candidates, including A.P. Pharma, Inc.’s APF530 (Phase 3)Aphios Corp.’s Zindo (Phase 2/3), Tesaro, Inc.’s Rolapitant (Phase 3) and Roche Holding/Helsinn Group’s Netupitant (Phase 3). If these products aresuccessfully developed and approved over the next few years, they could represent significant competition for Dronabinol SG Capsule and, if approved,our dronabinol product candidates We also face competition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA annual quotas, recruiting andretaining qualified personnel, establishing clinical trial sites and enrolling patients in clinical trials, and in identifying and acquiring or in-licensing newproducts and product candidates. Our competitors may also develop products that are more effective, better tolerated, subject to fewer or less severe side effects, more useful, morewidely-prescribed or accepted, or less costly than ours. For each product we commercialize, sales and marketing efficiency are likely to be significantcompetitive factors. We have built a commercial organization to market Subsys in the United States without using third-party sales or marketingchannels, and expect to expand and utilize this commercial organization in the United States for any additional proprietary product candidates that wedevelop, and there can be no assurance that we can maintain and augment these capabilities in a manner that will be cost efficient and competitive withthe sales and marketing efforts of our competitors, especially since some or all of those competitors could expend greater economic resources than we doand/or employ third-party sales and marketing channels. If we are unable to achieve and maintain adequate levels of coverage and reimbursement from third-party payors for Subsys and Dronabinol SGCapsule, or any future products we may seek to commercialize, on reasonable pricing terms, their commercial success may be severely hindered. Successful sales of our products depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who areprescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with theirprescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercialpayors is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug productswhen more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming we obtain coverage for agiven product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high.Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of ourproducts. In addition, the market for our products will depend significantly on access to third-party payors’ drug formularies, or lists of medications for whichthird-party payors provide coverage and reimbursement. The competition to be included in such formularies often leads to downward pricing pressures onpharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient accessto a branded drug when a less costly generic equivalent or other alternative is available. For example, many third-party payors require usage and failureon cheaper generic versions of Actiq prior to providing reimbursement for Subsys and other branded TIRF products, which limits Subsys’ use as a first-line treatment option. 31 Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controllinghealthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors.Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage determination process isoften a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payorseparately, with no assurance that coverage and adequate reimbursement will be obtained. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and ininternational markets. Third-party coverage and reimbursement for Subsys or Dronabinol SG Capsule or any of our product candidates for which we mayreceive regulatory approval may not be available or adequate in either the United States or international markets, which could have a material adverseeffect on our business, results of operations, financial condition and prospects. We and Mylan depend on wholesale pharmaceutical distributors for retail distribution of Subsys and Dronabinol SG Capsule, respectively; if weor Mylan lose any of our significant wholesale pharmaceutical distributors, our business could be harmed. The majority of our sales of Subsys, and the majority of Mylan’s sales of Dronabinol SG Capsule, are to wholesale pharmaceutical distributors who,in turn, sell the products to pharmacies, hospitals and other customers. For the year ended December 31, 2014, four wholesale pharmaceutical distributors,Rochester Drug Cooperative, Inc., McKesson Corporation, Cardinal Health, Inc., and AmerisourceBergen Corporation, individually comprisedapproximately 38%, 22%, 14% and 14%, respectively, of our total gross sales of Subsys, and McKesson Corporation comprised approximately 91% ofMylan’s total gross sales of our Dronabinol SG Capsule. The loss by us or Mylan of any of these wholesale pharmaceutical distributors’ accounts or amaterial reduction in their purchases could have a material adverse effect on our business, results of operations, financial condition and prospects. In addition, these wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the United States. Thisdistribution network has undergone, and may continue to undergo, significant consolidation marked by mergers and acquisitions. As a result, a smallnumber of large wholesale distributors control a significant share of the market. Consolidation of drug wholesalers has increased, and may continue toincrease, competitive and pricing pressures on pharmaceutical products. We cannot assure you that we or Mylan can manage these pricing pressures orthat wholesaler purchases will not fluctuate unexpectedly from period to period. Our sales of Subsys and Mylan’s sales of Dronabinol SG Capsule can be greatly affected by the inventory levels our respective wholesalers carry. Wemonitor wholesaler inventory of Subsys using a combination of methods. Pursuant to distribution service agreements with our three largest wholesalecustomers, we receive inventory level reports. For most other wholesalers where we do not receive inventory level reports, however, our estimates ofwholesaler inventories may differ significantly from actual inventory levels. Significant differences between actual and estimated inventory levels mayresult in excessive production (requiring us to hold substantial quantities of unsold inventory), inadequate supplies of products in distribution channels,insufficient product available at the retail level, and unexpected increases or decreases in orders from our or Mylan’s wholesalers. These changes maycause our revenues to fluctuate significantly from quarter to quarter, and in some cases may cause our operating results for a particular quarter to be belowour expectations or the expectations of securities analysts or investors. In addition, at times, wholesaler purchases may exceed customer demand, resultingin reduced wholesaler purchases in later quarters, which may result in substantial fluctuations in our results of operations from period to period. If ourfinancial results are below expectations for a particular period, the market price of our common stock may drop significantly. We rely on third parties to perform many necessary services for Subsys, including services related to distribution, invoicing, storage andtransportation, and expect to do so for any future branded proprietary products, if approved. We have retained third-party service providers to perform a variety of functions related to the sale and distribution of Subsys, key aspects of whichare out of our direct control. For example, we rely on Cardinal Health 105, Inc. (a/k/a Specialty Pharmaceutical Services) to provide key services related tologistics, warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivable managementand call center management, and, as a result, most of our Subsys inventory is stored at a single warehouse maintained by the service provider. We mustrely on this provider as well as other third-party providers that perform services for us, including entrusting our inventories of Subsys to their care andhandling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do notcarry out their contractual duties to us, or encounter physical damage or natural disaster at their facilities, our ability to deliver Subsys to meetcommercial demand would be significantly impaired. In addition, we utilize third parties to perform various other services for us relating to sampleaccountability and regulatory monitoring, including adverse event reporting, safety database management and other product maintenance services. If thequality or accuracy of the data maintained by these service providers is insufficient, our ability to continue to market Subsys could be jeopardized or wecould be subject to regulatory sanctions. We do not currently have the internal capacity to perform these important commercial functions, and we may notbe able to maintain commercial arrangements for these services on reasonable terms. 32 In addition to the level of commercial success of our approved products, our future growth is also dependent on our ability to successfully developa pipeline of product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory approval or acceptableDEA classification, if applicable, or that any approved products will be successfully commercialized. Our long-term growth will be limited unless we can successfully develop a pipeline of additional product candidates. We do not have internal newdrug discovery capabilities, and our primary focus is on developing improved formulations and delivery methods for existing FDA-approved products. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products containing controlled substances, amongother things, are subject to extensive regulation by the FDA, the DEA and other regulatory authorities in the United States. Obtaining approval of an NDAis a lengthy, expensive and uncertain process. The FDA also has substantial discretion in the drug approval process, including the ability to delay, limitor deny approval of a product candidate for many reasons. For example: ●the FDA may not deem a product candidate safe and effective; ●the FDA may not find the data from pre-clinical studies and clinical trials sufficient to support approval; ●the FDA may require additional pre-clinical studies or clinical trials; ●the FDA may not approve our third-party manufacturers’ processes and facilities; or ●the FDA may change its approval policies or adopt new regulations. Any of our product candidates may fail to achieve their specified endpoints in clinical trials. Furthermore, product candidates may not be approvedeven if they achieve their specified endpoints in clinical trials. The FDA may disagree with our trial design and our interpretation of data from clinicaltrials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. The FDA may alsoapprove a product candidate for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approval clinical trials (i.e., Phase IV trials). In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for thesuccessful commercialization of our product candidates. If we are unable to expand our pipeline and obtain regulatory approval for our product candidates on the timelines we anticipate, we will not be ableto execute our business strategy effectively and our ability to substantially grow our revenues will be limited, which would have a material adverseimpact on our long-term business, results of operations, financial condition and prospects. Failure to obtain or maintain Schedule III classification for any of our dronabinol product candidates would substantially limit our ability toproduce and commercialize any such product candidates. The DEA generally regulates dronabinol as a Schedule I controlled substance, except in the case of the FDA-approved Marinol product and itsgenerics, such as Dronabinol SG Capsule, which are Schedule III controlled substances. Schedule I controlled substances have high potential for abuse,have no currently accepted medical use in the United States, lack accepted safety for use under medical supervision and may not lawfully becommercially sold or marketed to patients. After the initial FDA approval of Marinol in 1985, the DEA scheduled dronabinol in sesame oil andencapsulated in a soft gelatin capsule as a Schedule II substance. In 1999, the DEA promulgated a regulation that reclassified this formulation as aSchedule III controlled substance. This regulation directly corresponds to the product characteristics of Marinol, whose sponsor had petitioned the DEAfor the scheduling change. DEA regulations currently limit the formulation of FDA-approved dronabinol products that are classified in Schedule III.Specifically, classification in Schedule III is limited to “dronabinol (synthetic) in sesame oil and encapsulated in a soft gelatin capsule in” an FDA-approved product. There is a possibility that some generic versions of Marinol would not meet these specific conditions, and therefore, would not beclassified as a Schedule III substance, but rather would be considered as Schedule I products until otherwise scheduled for marketing. Currently, severalproducts from other companies that are the subject of ANDAs are under review by the FDA. If this ruling is allowed, it may increase the number ofgenerics approved as we believe there are active ANDAs which utilize naturally-derived dronabinol and hard gelatin capsule technology. Dronabinol SGCapsule is also subject to regulation by state-controlled substance authorities. 33 In addition, because the DEA currently regulates the scheduling of dronabinol on a product-specific basis as opposed to regulating all dronabinol-containing products under one schedule, we believe that the DEA will also need to make individual scheduling decisions with respect to our proprietarydronabinol product candidates, if approved, based on, among other factors, assessments of the drug abuse potential for each of our formulations.Therefore, even though Dronabinol SG Capsule has been classified under Schedule III, because our other proprietary dronabinol product candidates will,if approved, represent novel dosage forms, and in the case of the Dronabinol Inhalation Device, a novel route of administration for dronabinol, the DEAmay determine that stricter scheduling controls than those applicable to Schedule III controlled substances are appropriate for the additional productcandidates. In fact, these product candidates will likely default to Schedule II until the DEA completes a scheduling action for them. Moreover, there maybe significant delay in the issuance of the DEA’s scheduling decisions with respect to our products following FDA approval, if such approval is granted.Even with FDA approval, we will not be able to market any of our controlled substance products until the DEA has issued a scheduling decision withrespect to each drug product. Because the restrictions on the manufacture, sale, distribution, prescribing, and dispensing of Schedule II substances are greater than for Schedule IIIsubstances, failure to obtain Schedule III classification for our dronabinol product candidates could significantly impact our anticipated ability toproduce and commercialize any such dronabinol products and would have a material adverse effect on our business and ability to generate revenue. Forexample, Schedule II drugs or substances generally may not be dispensed without the written prescription of a practitioner, and prescriptions for thesedrugs or substances may not be refilled. Although the DEA regulates the frequency of Schedule III prescription refills, physicians may call in theprescriptions and they may be refilled. A failure by the DEA to respond favorably to our classification petition before, or in a timely manner after, FDAapproval of our dronabinol product candidates or a refusal by the DEA to grant our request to schedule our dronabinol product candidates under ScheduleIII, if approved by the FDA, would have an adverse impact on our ability to promptly or effectively commercialize such products. Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy of any of our product candidates, which could prevent orsignificantly delay their regulatory approval. Our product candidates are prone to the risks of failure inherent in drug development. Before obtaining U.S. regulatory approval for the commercialsale of any product candidate, we must gather substantial evidence from well-controlled clinical trials that demonstrate to the satisfaction of the FDA thatthe product candidate is safe and effective for its proposed indication, and similar regulatory approvals would be necessary to commercialize the productcandidate in other countries. In light of widely publicized events concerning the safety risk of certain drug products, particularly drug products that contain controlled substances,regulatory authorities, members of Congress, the Government Accountability Office, medical professionals and the general public have raised concernsabout potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of thedrug products and establishment of risk management programs that may, for instance, restrict distribution of drug products after approval. In addition, theFederal Food, Drug, and Cosmetic Act, or FDCA, authorizes the FDA to, among other things, require post-approval studies and clinical trials, mandatechanges to drug labeling to reflect new safety information and require a REMS for certain drugs, including certain currently approved drugs. Under theFDCA, companies that violate these and other provisions of the law are subject to substantial civil monetary penalties, among other regulatory, civil andcriminal penalties. The increased attention to drug safety issues may result in a more cautious approach by the FDA in its review of our clinical trials. Data from clinicaltrials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trialsbefore completion, or require longer or additional clinical trials that may result in a delay or failure in obtaining approval or approval for a more limitedindication than originally sought. 34 Clinical trials for our product candidates are expensive, time consuming, uncertain and susceptible to change, delay or termination. Clinical trials are very expensive, time consuming and difficult to design and implement. Other than with respect to our lead product candidate,Dronabinol Oral Solution, most of our other product candidates are in preclinical development. We estimate that clinical trials for these productcandidates, if and when initiated, will continue for several years and may take significantly longer than expected to complete. In addition, we, the FDA,an Institutional Review Board, or other regulatory authorities, including state and local, may suspend, delay or terminate our clinical trials at any time, orthe DEA could suspend or terminate the registrations and quota allotments we require in order to procure and handle controlled substances, for variousreasons, including: ●lack of effectiveness of any product candidate during clinical trials; ●discovery of serious or unexpected toxicities or side effects experienced by study participants or other safety issues; ●slower than expected rates of subject recruitment and enrollment rates in clinical trials; ●difficulty in retaining subjects who have initiated a clinical trial but may withdraw at any time due to adverse side effects from the therapy, insufficientefficacy, fatigue with the clinical trial process or for any other reason; ●delays or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials, in particular obtaining sufficient quantitiesof dronabinol due to regulatory and manufacturing constraints; ●inadequacy of or changes in our manufacturing process or product formulation; ●delays in obtaining regulatory authorization to commence a study, or “clinical holds” or delays requiring suspension or termination of a study by aregulatory agency, such as the FDA, before or after a study is commenced; ●DEA-related recordkeeping, reporting, or security violations at a clinical site, leading the DEA or state authorities to suspend or revoke the site’scontrolled substance license and causing a delay or termination of planned or ongoing studies; ●changes in applicable regulatory policies and regulations; ●delays or failure in reaching agreement on acceptable terms in clinical trial contracts or protocols with prospective clinical trial sites; ●uncertainty regarding proper dosing; ●unfavorable results from ongoing clinical trials and preclinical studies; ●failure of our CROs or other third-party contractors to comply with all contractual and regulatory requirements or to perform their services in a timely oracceptable manner; ●failure by us, our employees, our CROs or their employees to comply with all applicable FDA, DEA or other regulatory requirements relating to theconduct of clinical trials or the handling, storage, security and recordkeeping for controlled substances; ●scheduling conflicts with participating clinicians and clinical institutions; ●failure to design appropriate clinical trial protocols; ●insufficient data to support regulatory approval; ●inability or unwillingness of medical investigators to follow our clinical protocols; ●difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data; or ●regulatory concerns with cannabinoid or opioid products generally and the potential for abuse of the drugs. Generally, there is a high rate of failure for drug candidates proceeding through clinical trials. We may suffer significant setbacks in our clinical trialssimilar to the experience of a number of other companies in the pharmaceutical and biotechnology industries, even after receiving promising results inearlier trials. Further, even if we view the results of a clinical trial to be positive, the FDA or other regulatory authorities may disagree with ourinterpretation of the data. In the event that we abandon or are delayed in our clinical development efforts related to our product candidates, we may not beable to execute on our business plan effectively, we may not be able to become profitable, our reputation in the industry and in the investmentcommunity would likely be significantly damaged and our stock price would likely decrease significantly. 35 We have in the past relied and expect to continue to rely on third parties to conduct and oversee our clinical trials. If these third parties do notmeet our deadlines or otherwise conduct the trials as required we may not be able to obtain regulatory approval for or commercialize our productcandidates when expected or at all. We have in the past relied and expect to continue to rely on third-party CROs to conduct and oversee our clinical trials. For example, we contractedwith Worldwide Clinical Trials to conduct and oversee our pivotal bioequivalence study for Dronabinol Oral Solution. We also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinicalprotocols and all applicable regulatory requirements, including the FDA’s good clinical practice regulations and DEA and state regulations governing thehandling, storage, security and recordkeeping for controlled substances. These CROs and third parties play a significant role in the conduct of these trialsand the subsequent collection and analysis of data from the clinical trials. We rely heavily on these parties for the execution of our clinical andpreclinical studies, and control only certain aspects of their activities. If any of our clinical trial sites terminate their involvement in one of our clinical trials for any reason, we may experience the loss of follow-upinformation on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trialsite. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash orequity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts ofinterest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA. We have conducted and may in the future conduct clinical trials for our products or product candidates outside the United States and the FDA maynot accept data from such trials. We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States. For example, our Phase 3Subsys safety trial was conducted at 46 sites in the United States and ten sites in India. Although the FDA may accept data from clinical trials conductedoutside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example, the study must be well designed andconducted and performed by qualified investigators in accordance with ethical principles. The study population must also adequately represent the U.S.population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful.Generally, the patient population for any clinical studies conducted outside of the United States must be representative of the population for whom weintend to label the product in the United States. In addition, such studies would be subject to the applicable local laws and FDA acceptance of the datawould be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations. There can be no assurance theFDA will accept data from trials conducted outside of the United States. If the FDA does not accept any such data, it would likely result in the need foradditional trials, which would be costly and time-consuming and delay aspects of our business plan. Since the starting materials we utilize to manufacture dronabinol are sourced out of India, we are exposed to a number of risks and uncertaintiesassociated with that geographic region. The suppliers of the starting materials we utilize to manufacture dronabinol are located in India. This exposes us to a number of risks anduncertainties outside our control. India has suffered political instability in the past due to various factors. There have also been armed conflicts betweenIndia and neighboring Pakistan. Moreover, extremist groups within India and neighboring Pakistan have from time to time targeted Western interests. Inaddition, India is susceptible to natural disasters such as earthquakes and floods. Political instability, future hostilities with countries such as Pakistan,targeting of our interests by extremist attacks, and earthquakes or other natural disasters in India could harm our operations and impede our ability toproduce dronabinol on our anticipated timeline, or at all. 36 If the FDA does not conclude that certain of our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approvalpathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those productcandidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and ineither case may not be successful. We are developing several proprietary dronabinol product candidates, including Dronabinol Oral Solution, Dronabinol Inhalation Device andDronabinol IV Solution, for which we intend to seek FDA approval through the Section 505(b)(2) regulatory pathway. Section 505(b)(2), if applicable tous under the FDCA, would allow an NDA we submit to FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding thesafety and effectiveness of approved compounds, which could expedite the development program for our product candidates by potentially decreasingthe amount of clinical data that we would need to generate in order to garner FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2)regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additionalstandards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates, andcomplications and risks associated with these product candidates, would likely substantially increase. We could need to obtain more additional funding,which could result in significant dilution to the ownership interests of our then existing stockholders to the extent we issue equity securities orconvertible debt. We cannot assure you that we would be able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inabilityto pursue the Section 505(b)(2) regulatory pathway would likely result in new competitive products reaching the market more quickly than our productcandidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization. In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, certain brand-namepharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) issuccessfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the FDA fromapproving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAsare subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer dependingon the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delayapproval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or evenprevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while itconsiders and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee thiswould ultimately lead to accelerated product development or earlier approval. Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses forwhich the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance tomonitor the safety or efficacy of the products. Annual DEA quotas on the amount of dronabinol allowed to be produced in the United States and our specific allocation of dronabinol by theDEA could significantly limit the production or sale of Dronabinol SG Capsule and any dronabinol product candidates for which we obtain regulatoryapproval as well as significantly delay the clinical development of our dronabinol product candidates. Dronabinol, a Schedule I substance, is subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregatequota for the amount of dronabinol that may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimatescientific and medicinal needs. This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States each year isallocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. We arerequired to obtain an annual quota from the DEA in order to manufacture and produce dronabinol. The DEA may adjust aggregate production quotas andindividual production and procurement quotas from time to time during the year and has substantial discretion in deciding whether or not to make suchadjustments. The DEA’s aggregate production quota for dronabinol for 2015 is 497.5 kilograms, compared to 491 kilograms for 2014. For 2015, we wereallocated what we believe is a sufficient quantity of dronabinol to meet our currently anticipated production and testing needs through 2015. However,we may need additional amounts of dronabinol in future years to implement our business plan. We do not know what amounts of dronabinol other companies developing or marketing dronabinol product candidates may have requested for 2016or will request in future years. The DEA, in assessing factors such as medical need, abuse potential and other policy considerations, may have chosen toset the aggregate dronabinol quota for 2015 lower than the total amount requested by the companies, and may do so in the future. Though companies arepermitted to petition the DEA to increase the aggregate quota for dronabinol in a given year after it is initially established, there is no guarantee the DEAwould act promptly or favorably upon such a petition. The success of our business plan will depend in part on our being able to expand the overallmarket for the medical use of dronabinol by introducing new dronabinol formulations, and to sell significant amounts of our approved dronabinolproducts. In order to do so, we will need to receive from the DEA significantly increased allotments of dronabinol quotas over time and likely an increasein the aggregate annual quota. Any delay or refusal by the DEA in establishing quotas necessary for us to execute on our business plan could negativelyimpact our ability to sell Dronabinol SG Capsule and any other dronabinol product candidate for which we obtain regulatory approval, as well as ourpreclinical studies and clinical trials, which would in turn have a material adverse effect on our business, our ability to execute on our business plan, ourfinancial position and results of operations, our prospects, and our ability to generate revenue to fund the development of our other product candidates. 37 Our failure to successfully develop, acquire and market additional product candidates or approved products would impair our ability to grow ourbusiness. As part of our growth strategy we intend to seek to expand our product pipeline by developing or exploring acquisition or in-licensing opportunitiesof proven drugs that can be paired with our sublingual spray drug delivery system. Some of these drugs may require reformulation to accommodate theapproved doses in smaller volumes that are compatible with our delivery system. Any reformulation may increase the risk of failure during development,extend the development timelines, increase development costs and add complexity to the regulatory approval process and in some cases reformulationmay not be possible. If we are not able to identify additional drug compounds that can be delivered via the current version of our sublingual spraytechnology, or if we are unable to successfully develop higher dose versions of this technology, our ability to develop additional product candidates andgrow our business would be adversely affected. Furthermore, we intend to in-license, acquire, develop and/or market additional products and product candidates in the areas of supportive care.Because our internal research and development capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies,academic scientists and other researchers to license or sell products or technology to us. The success of this strategy depends partly upon our ability toidentify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their current ownersand finance these arrangements. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex.Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with us for the license oracquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-partyproducts, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions orlicensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rightsto additional product candidates on terms that we find acceptable, or at all. Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including pre-clinical or clinicaltesting and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical ofpharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective forapproval by regulatory authorities. In addition, we cannot provide assurance that any approved products that we acquire will be manufactured or soldprofitably or achieve market acceptance. If we fail to attract and keep management and other key personnel, as well as our board members, we may be unable to continue to successfullycommercialize Subsys or Dronabinol SG Capsule, develop our product candidates or otherwise implement our business plan. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highlyqualified managerial, scientific, medical and other personnel. We are highly dependent on our management, scientific and medical personnel, as well asour board members, including our founder, Executive Chairman and principal stockholder, Dr. John N. Kapoor, and our President and Chief ExecutiveOfficer, Michael L. Babich. The loss of the services of any of these individuals could impede, delay or prevent the continuing commercialization ofSubsys and Dronabinol SG Capsule and the development of our product candidates and could negatively impact our ability to successfully implementour business plan. If we lose the services of any of these individuals, we may not be able to find suitable replacements on a timely basis or at all, and ourbusiness would likely be harmed as a result. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of ourother employees. We employ all of our executive officers and key personnel on an at-will basis and their employment can be terminated by us or them atany time, for any reason and without notice; provided, however, that under certain circumstances we may owe them additional compensation inconnection with such termination. 38 In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide incentive stock options that vest overtime as well as certain other market based benefits and compensation. The value to employees of stock options that vest over time will be significantlyaffected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract offers from other companies. We may not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses, particularly in the Chandler, Arizona area where we are headquartered. Ourindustry has experienced a high rate of turnover of management personnel in recent years. As such, we could have difficulty attracting experiencedpersonnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts. Many of theother biotechnology and pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, differentrisk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement.Some of these characteristics may be more appealing to high quality candidates than that which we have to offer. If we are not able to attract and retainthe necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly our ability to implement ourbusiness strategy and achieve our business objectives. In addition, we have scientific and clinical advisors who assist us in formulating our development and clinical strategies. These advisors are not ouremployees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability or loyalty to us. Inaddition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may competewith ours. Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements andinsider trading. We are exposed to the risk of fraud or other misconduct. Misconduct by employees, contractors or agents could include intentional failures tocomply with FDA regulations, provide accurate information by our employees, contractors and agents to the FDA, comply with applicable manufacturingstandards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or discloseunauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws andregulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibita wide range of pricing, false claims, discounting, marketing and promotion, sales commission, customer incentive programs and other businessarrangements. Misconduct could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drugproduct, or illegal promotion of a drug product for off-label use, which could result in regulatory sanctions and serious harm to our reputation. We haveadopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take todetect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmentalinvestigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are institutedagainst us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business,including the imposition of significant fines or other sanctions. Our ability to utilize our net operating loss carryforwards, or NOLs, and research and development income tax credit carryforwards may belimited. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, substantial changes in our ownership may limit the amount ofNOLs and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income, if any.Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Anysuch annual limitation, whether as the result of prior transactions, sales of common stock by our existing stockholders or additional sales of commonstock by us, may significantly reduce the utilization of the NOLs before they expire and could have an adverse effect on our future results of operations. On November 8, 2010, we entered into the NeoPharm merger. The NeoPharm merger was accounted for as a reverse acquisition and resulted in achange of 50% or more of the ownership of NeoPharm. Based on the above, we have estimated the amount of pre-merger federal NOLs that are availableto offset our post-merger income is limited to an aggregate of $1.6 million as of December 31, 2014. For state income tax purposes, we have$272.0 million of state NOLs including approximately $269.5 million of Illinois state NOLs which are available to offset future Illinois taxable income.We have placed a valuation allowance on a significant portion of our Illinois state NOLs because it is not more likely than not that such amounts will berealized due to current levels of activity in Illinois. 39 We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to ourmanagement. From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing ofproducts, product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements,including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction mayrequire us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges ordisrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entailnumerous operational and financial risks, including: ●exposure to unknown or unanticipated liabilities; ●disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates ortechnologies; ●incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions; ●higher than expected acquisition and integration costs; ●write-downs of assets or goodwill or impairment charges; ●increased amortization expenses; ●difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel; ●impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and ●inability to retain key employees of any acquired businesses. Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, anytransactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects. We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurancecoverage for those claims is inadequate. The commercial use of our products and clinical use of our product candidates expose us to the risk of product liability claims. This risk exists even ifa product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA, such as the case with Subsys andDronabinol SG Capsule, or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodilyfunctions and processes. Any side effects, manufacturing defects, misuse or abuse associated with Subsys or Dronabinol SG Capsule or our productcandidates could result in injury to a patient or even death. For example, because our sublingual spray technology is designed to be self-administered bypatients, it is possible that a patient could fail to follow instructions and as a result apply a dose in a manner that results in injury or death. In addition,Subsys is an opioid pain reliever that contains fentanyl, and Dronabinol SG Capsule is a synthetic cannabinoid, which are regulated “controlledsubstances” under the Controlled Substances Act of 1970, or CSA, and could result in harm to patients relating to its potential for abuse. In addition, aliability claim may be brought against us even if our products or product candidates merely appear to have caused an injury. Product liability claims maybe brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with ourproducts or product candidates, among others. If we cannot successfully defend ourselves against product liability claims we will incur substantialliabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in: ●the inability to commercialize our products or, if approved, our product candidates; ●decreased demand for our products or, if approved, product candidates; ●impairment of our business reputation; ●product recall or withdrawal from the market; ●withdrawal of clinical trial participants; ●costs of related litigation; ●distraction of management’s attention from our primary business; ●substantial monetary awards to patients or other claimants; or ●loss of revenues. 40 We have obtained product liability insurance coverage for commercial product sales and clinical trials with a $10.0 million per occurrence and a$10.0 million annual aggregate coverage limit. We also carry excess product liability insurance coverage for commercial product sales and clinical trialswith an additional $10.0 million per occurrence and an additional $10.0 million annual aggregate coverage limit. Our insurance coverage may not besufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover,insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, insufficient amounts or upon adequate terms to protect us against losses due to product liability. If we determine that it is prudent to increase our productliability coverage based on sales of Subsys and Dronabinol SG Capsule, approval, if applicable, of other product candidates or otherwise, we may beunable to obtain this increased product liability insurance on commercially reasonable terms or at all. Large judgments have been awarded in class actionor individual lawsuits based on drugs that had unanticipated side effects, including side effects that are less severe than those of Subsys and DronabinolSG Capsule and our product candidates. A successful product liability claim or series of claims brought against us could cause our stock price to declineand, if judgments exceed our insurance coverage, could decrease our cash and have a material adverse effect our business, results of operations, financialcondition and prospects. Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmentallaws and regulations, which can be expensive and restrict how we do business. Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposalof hazardous materials owned by us, including the components of our products and product candidates and other hazardous compounds. We and ourmanufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardousmaterials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pendinguse and disposal. We cannot completely eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, researchand development efforts and business operations, injury to our employees and others, environmental damage resulting in costly clean-up and liabilitiesunder applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although webelieve that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with thestandards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injuryfrom these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources. We do not currentlycarry biological or hazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically excludecoverage for damages and fines arising from biological or hazardous waste exposure or contamination. Our business and operations would suffer in the event of system failures. Despite the implementation of security measures, our internal computer systems and those of our current and any future partners, contractors andconsultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electricalfailures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and causeinterruptions in our operations, it could result in a material disruption of our commercialization activities, drug development programs and our businessoperations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data. Likewise, we rely on a large number of third parties to supply components for andmanufacture our products and product candidates, warehouse and distribute Subsys and Dronabinol SG Capsule and conduct clinical trials, and similarevents relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breachwere to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incurliability and the further commercialization and development of our products and product candidates could be delayed. 41 We may be adversely affected by natural disasters or other events that disrupt our business operations and our business continuity and disasterrecovery plans may not adequately protect us from a serious disaster. Our corporate headquarters and other facilities are located in Chandler, Arizona and Round Rock, Texas, which are not areas that have experiencedsevere earthquakes. We do not carry earthquake insurance. However, other natural disasters or similar events, like fires or explosions or large-scaleaccidents or power outages, could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financialcondition and prospects. Our enterprise financial systems are located in our Chandler, Arizona headquarters. Our dronabinol API manufacturing facility is in Round Rock,Texas. If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters or our Round Rockfacility, that damaged critical infrastructure, such as enterprise financial systems or manufacturing resource planning and enterprise quality systems, orthat otherwise disrupted operations at either location, it may be difficult or, in certain cases, impossible for us to continue our business for a substantialperiod of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the eventof a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuityplans which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business. Risks Related to Our Financial Position and Capital Requirements We have had significant and increasing operating expenses and may require additional funding. Our operations have consumed substantial amounts of cash since inception. Our accumulated deficit as of December 31, 2014 was $51.1 million. Weexpect our operating and general and administrative expenses to continue to be significant and increase substantially in connection with our plannedresearch, development and commercialization activities. We believe that the net proceeds from our May 2013 initial public offering, cash generated fromoperations and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through at least the next 24months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources muchfaster than we currently expect. Further, we may need to raise additional capital to fund our operations and continue to support our planned research anddevelopment and commercialization activities. The amount and timing of our future funding requirements will depend on many factors, including, but not limited to: ●the timing and amount of revenue from sales of our approved products, Subsys and Dronabinol SG Capsule, and any subsequently approved productcandidates that are commercialized; ●the size and cost of our commercial infrastructure; ●the timing and cost associated with establishing a second dronabinol manufacturing facility; ●the timing of FDA approval and DEA classification of our product candidates, if at all; ●the timing, rate of progress and cost of any future clinical trials and other product development activities for our dronabinol product candidates and anyother product candidates that we may develop, in-license or acquire; ●costs associated with marketing and distributing Subsys and any subsequently approved product candidates; ●costs and timing of completion of any additional outsourced commercial manufacturing supply arrangements that we may establish; ●costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with Subsys, Dronabinol SGCapsule and our product candidates; ●costs associated with prosecuting or defending any litigation that we are or may become involved in and any damages payable by us that result fromsuch litigation; ●costs of operating as a public company; ●the effect of competing technological and market developments; ●our ability to acquire or in-license products and product candidates, technologies or businesses; ●personnel, facilities and equipment requirements; and ●the terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish. 42 We may also need to raise additional funds to finance future cash needs through public or private equity offerings, debt financings, receivables orroyalty financings or corporate collaboration and licensing arrangements. We cannot be certain that additional funding will be available on acceptableterms, or at all. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be diluted. Any futuredebt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens oradditional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Inaddition, if we raise additional funds through corporate collaboration and licensing arrangements, it may be necessary to relinquish potentially valuablerights to products or product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinueone or more of our product development programs or commercialization efforts, or other aspects of our business plan. We also may be required torelinquish, license or otherwise dispose of rights to products or product candidates that we would otherwise seek to commercialize or develop ourselveson terms that are less favorable than might otherwise be available. In addition, our ability to achieve profitability or to respond to competitive pressureswould be significantly limited. Risks Related to Regulation of our Products and Product Candidates If we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we couldface substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected. As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid orother third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will beapplicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and thestates in which we conduct our business. The laws that may affect our ability to operate include: ●the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies, and relationships withhealthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly orindirectly, to induce, or in return for, either the referral of an individual or the purchase or recommendation of an item or service reimbursable undera federal healthcare program, such as the Medicare and Medicaid programs; ●federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities frompresenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; ●HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making falsestatements relating to healthcare matters; ●HIPAA, as amended by the HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security andtransmission of individually identifiable health information; and ●state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items orservices reimbursed by any third-party payor, including commercial insurers, and state and foreign laws governing the privacy and security ofhealth information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thuscomplicating compliance efforts. 43 Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-KickbackStatute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. To the extent that any product wemake is sold in a foreign country, we may be subject to similar foreign laws and regulations. If we or our operations are found to be in violation of any ofthe laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties,damages, fines, exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our operations. Anypenalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and ourfinancial results. The FDA provides guidelines with respect to appropriate drug and product promotion, product labeling, and continuing medical and healtheducation activities. Although we endeavor to follow these guidelines, the FDA or the Office of the Inspector General: U.S. Department of Health andHuman Services may disagree, and we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. Inaddition, management’s attention could be diverted and our reputation could be damaged. See Note 8 under the heading “Legal Matters” in the Notes toour Consolidated Financial Statements for a discussion of an ongoing investigations by the Department of Health and Human Services and the U.S.District Attorney’s Office for the District of Massachusetts, of potential violations involving our Subsys marketing activities. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirelyeliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expensesand divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal andstate privacy, security and fraud laws may prove costly. Our currently marketed products, Subsys and Dronabinol SG Capsule, and any of our product candidates that receive regulatory approval, will besubject to ongoing and continued regulatory review, which may result in significant expense and limit our ability to commercialize such products. Even after we achieve U.S. regulatory approval for a product, the FDA may still impose significant restrictions on the approved indicated uses forwhich the product may be marketed or on the conditions of approval. For example, a product’s approval may contain requirements for potentially costlypost-approval studies and surveillance, including Phase 4 clinical trials, to monitor the safety and efficacy of the product. We are also subject to ongoingFDA obligations and continued regulatory review with respect to the manufacturing, processing, labeling, packaging, distribution, adverse eventreporting, storage, advertising, promotion and recordkeeping for our product. These requirements include submissions of safety and other post-marketinginformation and reports, registration, as well as continued compliance with cGMPs and with GCPs and good laboratory practices, which are regulationsand guidelines enforced by the FDA for all of our products in clinical and pre-clinical development, and for any clinical trials that we conduct post-approval. To the extent that a product is approved for sale in other countries, we may be subject to similar restrictions and requirements imposed by lawsand government regulators in those countries. In the case of Subsys, Dronabinol SG Capsule and any of our product candidates containing controlled substances, we and our contract manufacturerswill also be subject to ongoing DEA regulatory obligations, including, among other things, annual registration renewal, security, recordkeeping, theft andloss reporting, periodic inspection and annual quota allotments for the raw material for commercial production of our products. In addition, manufacturersof drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliancewith cGMP regulations, QSR requirements for medical device components or similar requirements, if applicable. If we or a regulatory agency discoverspreviously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where, orprocesses by which, the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturer or us, including requiringproduct recall, notice to physicians, withdrawal of the product from the market or suspension of manufacturing. In that regard, because certain of ourcontract manufacturers for Subsys are located outside the United States, they may be subject to foreign laws and regulations governing the manufacture ofdrugs and devices, and any failure by them to comply with those laws and regulations may delay or interrupt supplies of our products. 44 If we, our products or product candidates or the manufacturing facilities for our products or product candidates fail to comply with applicableregulatory requirements, a regulatory agency may: ●impose restrictions on the marketing or manufacturing of the product, suspend or withdraw product approvals or revoke necessary licenses; ●issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available; ●commence criminal investigations and prosecutions; ●impose injunctions, suspensions or revocations of necessary approvals or other licenses; ●impose fines or other civil or criminal penalties; ●suspend any ongoing clinical trials; ●deny or reduce quota allotments for the raw material for commercial production of our controlled substance products; ●delay or refuse to approve pending applications or supplements to approved applications filed by us; ●refuse to permit drugs or precursor chemicals to be imported or exported to or from the United States; ●suspend or impose restrictions on operations, including costly new manufacturing requirements; or ●seize or detain products or require us to initiate a product recall. In addition, our product labeling, advertising and promotion are subject to regulatory requirements and continuing regulatory review. The FDAstrictly regulates the promotional claims that may be made about prescription drug products. In particular, a drug product may not be promoted for usesthat are not approved by the FDA as reflected in the product’s approved labeling, although the FDA does not regulate the prescribing practices ofphysicians. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that isfound to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminalprosecution. For example, we received subpoenas dated December 9, 2013 and September 8, 2014 from the U.S. Department of Health and HumanServices, Office of Inspector General and the U.S. District Attorney’s Office for the District of Massachusetts, respectively. The subpoenas primarilyrequest documents relating to the marketing of Subsys. We are cooperating in responding to the subpoenas. See Note 8 under the heading “LegalMatters” in the Notes to our Consolidated Financial Statements for a discussion regarding there ongoing investigations. The FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could preventor delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature orextent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are notable to achieve and maintain regulatory compliance, we may not be permitted to market our products, which would adversely affect our ability togenerate revenue and achieve or maintain profitability. Our products and our product candidates may cause undesirable side effects or have other unexpected properties that could result in post-approvalregulatory action. If we or others identify undesirable side effects, or other previously unknown problems, caused by our products, other products with the same orrelated active ingredients or our product candidates, after obtaining U.S. regulatory approval, a number of potentially significant negative consequencescould result, including: ●regulatory authorities may withdraw their approval of the product; ●regulatory authorities may require us to recall product; ●regulatory authorities may require the addition of warnings in the product label or narrowing of the indication in the product label; ●we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients; ●we may be required to change the way the product is administered or modify the product in some other way; ●the FDA may require us to conduct additional clinical trials or costly post-marketing testing and surveillance to monitor the safety or efficacy ofthe product; ●we could be sued and held liable for harm caused to patients; and ●our reputation may suffer. 45 Any of the above events resulting from undesirable side effects or other previously unknown problems could prevent us from achieving ormaintaining market acceptance of the affected product and could substantially increase the costs of commercializing our products. Health care reform measures and changes in policies, funding, staffing and leadership at the FDA and other agencies could hinder or prevent thecommercial success of our products and any of our product candidates that may be approved by the FDA. In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our futureresults of operations and the future results of operations of our potential customers. For example, the Medicare Prescription Drug, Improvement, andModernization Act of 2003 established a new Part D prescription drug benefit, which became effective January 1, 2006. Under the prescription drugbenefit, Medicare beneficiaries can obtain prescription drug coverage from private sector plans that are permitted to limit the number of prescriptiondrugs that are covered in each therapeutic category and class on their formularies. If Subsys, Dronabinol SG Capsule or any of our product candidates thatare approved by the FDA are not widely included on the formularies of these plans, our ability to market our products to the Medicare population couldsuffer. Furthermore, there have been and continue to be a number of initiatives at the federal and state levels that seek to reduce healthcare costs. Forexample, PPACA includes measures to significantly change the way health care is financed by both governmental and private insurers. Among theprovisions of the PPACA of importance to the pharmaceutical industry are the following: ●an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportionedamong these entities according to their market share in certain government healthcare programs, beginning in 2011; ●an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to23% and 13% of the average manufacturer price for most branded and generic drugs, respectively; ●a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiatedprices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs tobe covered under Medicare Part D, beginning in 2011; ●extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations, effective March 23, 2010; ●expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals beginning in April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133% ofthe Federal Poverty Level beginning in 2014, thereby potentially increasing both the volume of sales and manufacturers’ Medicaid rebate liability; ●expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective in January 2010; ●new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementingregulations, including reporting any “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers andreporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasingorganizations during the preceding calendar year, with data collection to be required beginning August 1, 2013 and reporting to theCMS to berequired by March 31, 2014 and by the 90th day of each subsequent calendar year; ●a new requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012; ●expansion of health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigativepowers, and enhanced penalties for noncompliance; ●a licensure framework for follow-on biologic products; ●a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research; ●creation of the Independent Payment Advisory Board which, beginning in 2014, has authority to recommend certain changes to the Medicareprogram that could result in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congressdoes not act on the recommendations; and ●establishment of a Center for Medicare Innovation at the CMS to test innovative payment and service delivery models to lower Medicare andMedicaid spending, potentially including prescription drug spending. 46 In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, the Budget Control Act of2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggeringthe legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to2% per fiscal year, starting in 2013. On January 2, 2013, President Obama signed into law the ATRA which, among other things, delayed for another twomonths the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. The ATRA also reduced Medicare payments toseveral providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government torecover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other health care funding,which could have a material adverse effect on our customers and accordingly, our financial operations. Additionally, individual states have become increasingly aggressive in passing legislation and implementing regulations designed to controlpharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketingcost disclosure and transparency measures, and to encourage importation from other countries and bulk purchasing. Legally-mandated price controls onpayment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceuticalproducts and which suppliers will be included in their prescription drug and other healthcare programs. This can reduce demand for our products or putpressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects. In certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement and may, in some cases, beunavailable. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirementsgoverning drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinalproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. Amember state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability ofthe company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursementlimitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. In the United States, the commercial success of Subsys, Dronabinol SG Capsule and our product candidates, if and when commercialized, willdepend, in part, upon the availability of coverage and reimbursement from third-party payors at the federal, state and private levels. Third-party payorsinclude governmental programs such as Medicare or Medicaid, private insurance plans and managed care plans. These third-party payors may denycoverage or reimbursement for a product or therapy in whole or in part if they determine that the product or therapy was not medically appropriate ornecessary. Also, third-party payors have attempted to control costs by limiting coverage through the use of formularies and other cost-containmentmechanisms and the amount of reimbursement for particular procedures or drug treatments. 47 Additionally, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatureswill likely continue to focus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid programs. While we cannotpredict the full outcome of any such legislation, it may result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to market our products and generate revenues. In addition, legislation hasbeen introduced in Congress that, if enacted, would permit more widespread importation or re-importation of pharmaceutical products from foreigncountries into the United States, including from countries where the products are sold at lower prices than in the United States. Such legislation, or similarregulatory changes, could lead to a decision to decrease our prices to better compete, which, in turn, could adversely affect our business, results ofoperations, financial condition and prospects. Alternatively, in response to legislation such as this, we might elect not to seek approval for or market ourproducts in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we generate from our product sales.It is also possible that other legislative proposals having similar effects will be adopted. Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and can beaffected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing andleadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects. Forexample, average review times at the FDA for marketing approval applications have fluctuated over the last ten years, and we cannot predict the reviewtime for any of our submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors, including budget andfunding levels and statutory, regulatory and policy changes. Risks Related to Intellectual Property We may not be able to obtain and enforce patent rights or other intellectual property rights that cover our products or product candidates, such asSubsys, Dronabinol Oral Solution, Dronabinol Inhalation Device and Dronabinol IV Solution, and that are of sufficient breadth to prevent thirdparties from competing against us. Our success with respect to our products and product candidates, such as Subsys, Dronabinol Oral Solution, Dronabinol Inhalation Device andDronabinol IV Solution will depend in part on our ability to obtain and maintain patent protection in both the United States and other countries, topreserve our trade secrets, and to prevent third parties from infringing upon our proprietary rights on our product candidates. Our ability to protect any ofour approved drug products from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain validand enforceable patents. Fentanyl and dronabinol have been approved for many years and therefore our ability to obtain any patent protection is limited.Composition of matter patents on APIs are a particularly effective form of intellectual property protection for pharmaceutical products as they applywithout regard to any method of use. However, we will not be able to obtain composition of matter patents or methods of use patents that cover the APIsin any of our products or product candidates. As a result, competitors who obtain the requisite regulatory approval can offer products with the same activeingredients as our products or product candidates so long as the competitors do not infringe any formulation patents that we may obtain or license, if any. Our patent portfolio related to our sublingual spray technology that is used in Subsys includes patents and patent applications in the United States,Australia, Brazil, Canada, China, Europe, India Japan, Mexico, New Zealand and Russia. The covered technology and the scope of coverage vary fromcountry to country. For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use of oursublingual spray technology. In addition, the only patent protection that we can expect will otherwise cover Subsys and dronabinol products and product candidates consists ofpatents relating to formulations, methods of treatment using certain formulations and methods of manufacturing and packaging. Formulation patentspreclude competitors from using a similar formulation. Manufacturing or packaging patents preclude competitors from using the same manufacturing orpackaging methods. However, these type of patents do not preclude a competitor from making and marketing the same composition of matter unless theyuse the same formulation or manufacturing or packaging methods. Any patents that we may obtain may be too narrow in scope and thus easilycircumvented by competitors. Further, in countries where we do not have granted patents directed to our formulations or manufacturing or packaging, third parties may be able tomake, use, or sell products identical to, or substantially similar to, Subsys, our dronabinol products or product candidates. 48 We have multiple pending patent applications in the United States and in some foreign jurisdictions directed to formulations for our fentanyl anddronabinol products and product candidates. We have a number of pending applications and issued patents in the United States and in many foreigncountries that pertain to either fentanyl or dronabinol formulations. We can give no assurances that any patents will issue, that if they do issue or haveissued, they will provide sufficient protection against competitors, or that they would be valid and enforceable. Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability toobtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any patents we may obtainor license may not provide us with sufficient protection for our products and product candidates to afford a commercial advantage against competitiveproducts or processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guarantee that any patents will issuefrom any pending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, we cannot guarantee that the claimsof these patents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products orotherwise be commercially valuable to us. Patent applications in the United States are generally maintained in confidence for up to 18 months after their filing. Similarly, publication ofdiscoveries in scientific or patent literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors were the firstto invent, or the first to file patent applications on our products or product candidates. In the event that a third party has also filed an U.S. patentapplication relating to our drug product or a similar invention, we may have to participate in interference proceedings declared by the USPTO todetermine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would beunsuccessful, resulting in a loss of our U.S. patent position. In addition, third parties may challenge our in-licensed patents and any of our own patents that we may obtain, which could result in the invalidationor unenforceability of some or all of the relevant patent claims. Litigation or other proceedings to enforce or defend intellectual property rights is verycomplex, expensive, and may divert our management’s attention from our core business and may result in unfavorable results that could adversely affectour ability to prevent third parties from competing with us. The laws of some foreign jurisdictions do not provide intellectual property rights to the same extent as in the United States and many companieshave encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting orare otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantiallyharmed. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questionsfor which important legal principles remain evolving or unresolved. Changes in either the patent laws or in the interpretations of patent laws in the UnitedStates and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowedor enforced in our patents or in third-party patents. The degree of future protection of our proprietary rights is uncertain. Patent protection may be unavailable or severely limited in some cases and maynot adequately protect our rights or permit us to gain or keep our competitive advantage. For example: ●we might not have been the first to invent or the first to file the inventions covered by each of our pending patent applications and issued patents; ●others may independently develop similar or alternative technologies or duplicate any of our technologies; ●the patents of others may have an adverse effect on our business; ●it is possible that some or none of our or our licensors’ pending patent applications will result in issued patents; ●any patents we obtain or our licensors’ issued patents may not encompass commercially viable products, may not provide us with any competitiveadvantages, or may be challenged by third parties; ●any patents we obtain or our in-licensed issued patents may not be valid or enforceable; or ●we may not develop additional proprietary technologies that are patentable. 49 If we or our licensors fail to prosecute, maintain and enforce patent protection for our products or product candidates, our ability to develop andcommercialize our products or product candidates may be adversely affected and we may not be able to prevent competitors from making, using andselling competing products. This failure to properly protect the intellectual property rights relating to our products or product candidates could have amaterial adverse effect on our business, financial condition and results of operation. Moreover, our competitors may independently develop equivalentknowledge, methods and know-how. Proprietary trade secrets and unpatented know-how are also very important to our business. Although we have taken steps to protect our trade secretsand unpatented know-how, by entering into confidentiality agreements with third parties, and proprietary information and invention agreements withcertain employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. We also have limitedcontrol over the protection of trade secrets used by our licensors, collaborators and suppliers. There can be no assurance that binding agreements will notbe breached, that we would have adequate remedies for any breach, or that our trade secrets and unpatented know-how will not otherwise become knownor be independently discovered by our competitors. If trade secrets are independently discovered, we would not be able to prevent their use. Enforcing aclaim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome isunpredictable. In addition, courts outside the United States may be less willing to protect trade secret information. We are a defendant in a lawsuit to seek rescission of certain invention assignments, and if we do not prevail, any resulting rescission of inventionassignments could have a material adverse impact on our business by preventing us from obtaining exclusive patent rights covering certain of ourproducts and product candidates. Although we expect all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties whohave access to our proprietary know-how, information or technology to enter into confidential information and invention agreements, we cannot provideany assurances that all such agreements have been duly executed, will be honored by the employee, consultant, advisor, or third party, or will be heldenforceable. For example, in September 2009, Insys Pharma, our wholly owned subsidiary, and certain of its officers and directors, as well as their spouses, werenamed as defendants in a lawsuit in Arizona Superior Court brought by Santosh Kottayil, Ph.D., certain of his family members and a trust of whichDr. Kottayil is the trustee. In 2014, Insys Therapeutics, Inc., Insys Pharma’s parent, was also named as defendant in this lawsuit. Dr. Kottayil formerlyserved as President, Chief Scientific Officer and a director of Insys Pharma, among other positions. The complaint brought a cause of action, amongothers, seeking to rescind Dr. Kottayil’s assignment to Insys Pharma of his interest in all of the fentanyl and dronabinol patent applications we own and torecover the benefits of those interests. We and the other defendants have answered and filed counter-claims to Dr. Kottayil’s complaint. If the patentassignments are successfully rescinded, we may not have exclusive patent rights covering our fentanyl and dronabinol product candidates, and suchexclusive patent rights may not be available to us on acceptable terms, if at all, which would have a materially adverse effect on our business. If theassignments are rescinded, Kottayil could assign his interest in the fentanyl and dronabinol patent applications to a competitor and we would not be ableto prevent generic copies of our products. Regardless of our assessment of the merits of this legal proceeding, it has and continues to be a distraction formanagement and the board of directors and has caused and may continue to cause us to spend material resources in our defense. See Note 8 under theheading “Legal Matters” in the Notes to our Consolidated Financial Statements for more information on this and other of our pending legal proceedings. We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and we maybe unable to protect our rights to our products and technology. If we or our collaborators or licensors choose to go to court to stop a third party from using the inventions claimed in our own or in-licensed patents,that third party may ask the court to rule that the patents are invalid and/or should not be enforced against that third party. These lawsuits are expensiveand would consume time and other resources even if we or they, as the case may be, were successful in stopping the infringement of these patents. Inaddition, there is a risk that the court will decide that these patents are not valid and that we or they, as the case may be, do not have the right to stopothers from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the third party on the ground that such third-party’s activities do not infringe our owned or in-licensed patents. In addition, our own or in-licensed patents may be subject to challenge and subsequentinvalidation or significant narrowing of claim scope in a reexamination or opposition proceeding before a governmental patent agency, or duringlitigation. 50 We may also not be able to detect infringement of our own or in-licensed patents, which may be especially difficult for methods of manufacturing orformulation products. While we intend to take actions reasonably necessary to enforce our patent rights, we depend, in part, on our licensors andcollaborators to protect a substantial portion of our proprietary rights. If we are sued for alleged infringement of intellectual property rights of third parties, it will be costly and time consuming, and an unfavorableoutcome in that litigation would have a material adverse effect on our business. Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our products andproduct candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issuedpatents and pending patent applications, which are owned by third parties, exist in the fields relating to our products and product candidates. As themedical device, biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert our products orproduct candidates infringe the patent rights of others. Moreover, it is not always clear to industry participants, including us, which patents cover varioustypes of medical devices, drugs, products or their methods of use. Thus, because of the large number of patents issued and patent applications filed in ourfields, there may be a risk that third parties may allege they have patent rights encompassing our products, product candidates, technology or methods. In addition, there may be issued patents of third parties of which we are currently unaware, that are infringed or are alleged to be infringed by ourproducts, product candidates or proprietary technologies. Because some patent applications in the United States may be maintained in secrecy until thepatents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing,and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applicationsfor technology covered by our own and in-licensed issued patents or our pending applications. Our competitors may have filed, and may in the future file,patent applications covering our products, product candidates or technology similar to ours. Any such patent application may have priority over our ownand in-licensed patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If anotherparty has filed an U.S. patent application on inventions similar to those owned or in-licensed to us, we or, in the case of in-licensed technology, thelicensor may have to participate, in the United States, in an interference proceeding to determine priority of invention. If another party has reason to assert a substantial new question of patentability against any of our claims in our own and in-licensed U.S. patents, thethird party can request that the patent claims be reexamined, which may result in a loss of scope of some claims or a loss of the entire patent. In addition topotential infringement suits and, interference and reexamination proceedings, we may become a party to patent opposition proceedings where either thepatentability of the inventions subject of our patents are challenged, or we are challenging the patents of others. The costs of these proceedings could besubstantial, and it is possible that such efforts would be unsuccessful. We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that ourproducts and/or product candidates and/or proprietary technologies infringe their intellectual property rights. These lawsuits are costly and couldadversely affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that weor our commercialization partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by the patents.In addition, there is a risk that a court will order us or our collaborators to pay the other party damages for having violated the other party’s patents. If a third-party’s patents was found to cover our products and/or product candidates, proprietary technologies or their uses, we or our collaboratorscould be enjoined by a court and required to pay damages and could be unable to continue to commercialize our products or our product candidates oruse our proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our collaborators onacceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which couldprohibit us from making, using or selling our products, technologies or methods pending a trial on the merits, which could be years away. 51 There is a substantial amount of litigation involving patent and other intellectual property rights in the device, biotechnology and pharmaceuticalindustries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including,but not limited to: ●infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divertour management’s attention from our core business; ●substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes or violates the third party’srights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees; ●a court prohibiting us from selling or licensing the product unless the third party licenses its product rights to us, which it is not required to do; ●if a license is available from a third party, we may have to pay substantial royalties, upfront fees and/or grant cross-licenses to intellectual propertyrights for our products; and ●redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expenditures andtime. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantiallygreater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on ourability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial condition and prospects. We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed to us alleged tradesecrets of their other clients or former employers. As is common in the biotechnology and pharmaceutical industry, certain of our employees were formerly employed by other biotechnology orpharmaceutical companies, including our competitors or potential competitors. Moreover, we engage the services of consultants to assist us in thedevelopment of our products and product candidates, many of whom were previously employed at or may have previously been or are currentlyproviding consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may besubject to claims that these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietaryinformation of their former employers or their former or current customers. For example, we have in the past received letters from third parties assertingthat one of our employees may have used proprietary information of his former employers in connection with our prior regulatory filings. Litigation maybe necessary to defend against these types of claims. Even if we are successful in defending against any such claims, any such litigation would likely beprotracted, expensive, a distraction to our management team, not viewed favorably by investors and other third parties, and may potentially result in anunfavorable outcome. Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and otherrequirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements. Periodic maintenance fees on our own and in-licensed patents are due to be paid to the governmental patent agencies over the lifetime of the patents.Future maintenance fees will also need to be paid on other patents which may be issued to us. We have systems in place to remind us to pay these fees,and we employ outside firms to remind us or our licensor to pay annuity fees due to patent agencies on our patents and pending patent applications. Thevarious governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during thepatent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicablerules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial orcomplete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance wouldhave a material adverse effect on our business. 52 Risks Relating to an Investment in Our Stock Our founder, Executive Chairman and principal stockholder can individually control our direction and policies, and his interests may be adverseto the interests of our stockholders. As of December 31, 2014, our founder, Executive Chairman and principal stockholder, Dr. John N. Kapoor, beneficially owned approximately 68%of our outstanding, publicly-traded common stock. By virtue of his holdings, Dr. Kapoor can and will continue to be able to effectively control theelection of the members of our board of directors, our management and our affairs and prevent corporate transactions such as mergers, consolidations orthe sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders or cause a transaction that we orour other stockholders may view as unfavorable. Accordingly, this concentration of ownership may harm the market price of our common stock by: ●delaying, deferring or preventing a change in control; ●impeding a merger, consolidation, takeover or other business combination involving us; ●discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us; or ●otherwise effectively limiting the rights of other stockholders because Dr. Kapoor has the ability to approve matters submitted to stockholders,including the election of directors, approval of significant transactions and the amendment of our certificate of incorporation. In addition, sales of shares of our common stock beneficially owned by Dr. Kapoor could be viewed negatively by third parties and have a negativeimpact on our stock price. Moreover, upon his passing, we cannot assure you as to how these shares will be distributed and subsequently voted. Our common stock price has been volatile, which could result in substantial losses for stockholders. Our common stock is currently traded on The NASDAQ Global Market. We have in the past experienced, and may in the future experience, limiteddaily trading volume. The trading price of our common stock has been and may continue to be volatile. The market for pharmaceutical companies, inparticular, has at various times experienced extreme volatility that often has been unrelated to the operating performance of particular companies. Thesebroad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance.The trading price of our common stock could be affected by a number of factors, including, but not limited to, changes in expectations of our futureperformance, changes in estimates by securities analysts (or failure to meet such estimates), quarterly fluctuations in our sales and financial results and avariety of risk factors, including the ones described elsewhere in this report. Periods of volatility in the market price of a company’s securities sometimesresult in securities class action litigation, which regardless of the merit of the claims, can be time-consuming, costly and divert management’s attention. Inaddition, if we needed to raise equity funds under adverse conditions, it would be difficult to sell a significant amount of our stock without causing asignificant decline in the trading price of our stock. If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price andtrading volume could decline. The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stockprice would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock coulddecrease, which could cause our stock price and trading volume to decline. Future sales of our common stock or securities convertible into our common stock may depress our stock price. Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market could occur at anytime. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of ourcommon stock. As of December 31, 2014, we had (i) 35,351,344 outstanding shares of common stock; (ii) 3,853,581 shares of common stock issuableupon the exercise of stock options under our 2013 Equity Incentive Plan and other existing stock option plans; and (iii) 197,225 shares were available forfuture issuance under our 2013 Equity Incentive Plan. The exercise of outstanding stock options could result in increased sales of our common stock inthe market, which could exert significant downward pressure on our stock price. These sales also might make it more difficult for us to sell equity orequity-related securities in the future at a time and price we deem appropriate. If a large number of shares of our common stock or securities convertible into our common stock are sold in the public market after they becomeeligible for sale, the sales could reduce the trading price of our common stock and impede our ability to raise future capital. 53 Anti-takeover provisions in our stockholder rights plan, charter documents and Delaware law might deter acquisition bids for us that you mightconsider favorable. On August 15, 2014, after approval by our stockholders, we entered into a rights agreement traditionally referred to as a poison pill. This rightsagreement will have certain anti-takeover effects which will cause substantial dilution to a person or group that attempts to acquire the Company on termsnot approved by our Board. In addition, our amended and restated certificate of incorporation and bylaws contain provisions that may make theacquisition of our company more difficult without the approval of our board of directors. These provisions: ●establish a classified board of directors so that not all members of our board are elected at one time; ●authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued withoutstockholder approval, and which may include rights superior to the rights of the holders of common stock; ●prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; ●provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and ●establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders atstockholder meetings. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Lawwhich, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us.These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control ofour company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for youand other stockholders to elect directors of your choosing so as to cause us to take certain corporate actions you desire. We qualify as an ““emerging growth company’’ as defined in the JOBS Act and as a “controlled company” under Nasdaq’s rules and have availedourselves of certain reduced disclosure requirements applicable to emerging growth companies and may avail ourselves of exemptions from certainNasdaq independence rules, which could make our common stock less attractive to investors. We qualify as an “emerging growth company’’ as defined in the JOBS Act, and we have taken advantage of certain exemptions from variousreporting requirements that are applicable to other public companies that are not “emerging growth companies’’ including certain reduced financialstatement reporting obligations, reduced disclosure obligations about our executive compensation arrangements, exemptions from the requirement thatwe solicit non-binding advisory votes on executive compensation or golden parachute arrangements, and exemption from the auditor’s attestationrequirements of Section 404(b) of the Sarbanes-Oxley Act. Investors may find our common stock less attractive because we rely on these exemptions. Ifsome investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price maybe more volatile. We intend to take advantage of these reporting exemptions until we are no longer an “emerging growth company.’’ We will remain an“emerging growth company’’ until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more,(ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our May 2013 IPO (December 31, 2018), (iii) the date onwhich we have issued more than $1 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a largeaccelerated filer under the rules of the SEC. Moreover, as a result of Dr. Kapoor’s stock ownership and related voting power, we are a “controlled company” as defined in the Nasdaq ListingRules and, therefore we may avail ourselves of certain exemptions under applicable Nasdaq rules, including exemptions from the rules that require us tohave (i) a majority of independent directors on the Board; (ii) independent director oversight of executive officer compensation; and (iii) independentdirector oversight of director nominations. We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future. The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cashdividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of ourboard of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law andother factors our board of directors deems relevant. 54 Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’sattention and affect our ability to attract and retain qualified board members. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, theSarbanes-Oxley Act and the Nasdaq Stock Market Rules, or Nasdaq rules. The requirements of these rules and regulations have increased our legal andfinancial compliance costs, made some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems andresources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financialcondition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control overfinancial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consumingeffort that needs to be re-evaluated frequently. In addition, beginning with our annual report on Form 10-K following the date we are no longer an“emerging growth company” as defined in the JOBS Act, we will be required to obtain from our independent registered public accounting firm anattestation report on the effectiveness of our internal control over financial reporting. We will remain an “emerging growth company” until the earliest of(i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more, (ii) the last day of our fiscal year following the fifthanniversary of the date of the completion of our May 2013 IPO (December 31, 2018), (iii) the date on which we have issued more than $1 billion innonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, entailsubstantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, beeffective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accuratefinancial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover,effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure tosatisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, whichin turn could cause the market value of our common stock to decline. We expect that the various rules and regulations applicable to public companies will make it more difficult and more expensive for us to maintaindirectors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. Ifwe are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors whomay be deemed independent for purposes of Nasdaq rules, and officers will be significantly curtailed. Compliance with these reporting rules, Sarbanes-Oxley Act and Nasdaq requirements may require us to build out our accounting and finance staff.We may need to expand our accounting and financing staff, and our failure to adequately do so would harm our ability to comply with the requirementslisted above. Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and ExchangeCommission. Any forward-looking statements in this report should be considered in light of various important factors, including the risks anduncertainties listed above, as well as others. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES We lease a total of approximately 73,000 square feet of office and lab space in Chandler, Arizona under lease agreements that expire betweenDecember 2017 and June 2021. We believe that the Chandler, Arizona facilities are adequate to meet our current needs, and that suitable additional oralternative space will be available for our foreseeable future needs. Additionally, we lease a total of approximately 62,000 square feet for our U.S.-based,state-of-the-art dronabinol manufacturing facilities, which are both located in Round Rock, Texas under lease agreements that expire between January2017 and March 2024. We have the option to extend our primary manufacturing facility lease for two 5-year periods following March 2024. We believethat the Round Rock, Texas manufacturing facilities are adequate to meet our current needs and that suitable additional or alternative space will beavailable for our foreseeable future needs. 55 ITEM 3. LEGAL PROCEEDINGS The information included in Note 8 under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements in Part II, Item 8.Financial Statements and Supplementary Data is incorporated herein by reference. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES Beginning with our initial public offering on May 7, 2013, our common stock is traded on the NASDAQ Global Market under the symbol INSY. Thefollowing table sets forth the high and low sales prices for our common stock for the fiscal periods indicated as reported by the NASDAQ Global Market. Price Range of Common Stock Fourth Quarter Third Quarter Second Quarter First Quarter 2014 price range per share $47.18 $33.00 $40.29 $22.52 $44.45 $20.52 57.91 25.67 Fourth Quarter Third Quarter May 7, 2013 –June 30, 2013 First Quarter 2013 price range per share $35.76 $22.05 $25.29 $9.27 $9.67 $5.33 NA NA Share price adjusted to reflect a 3-for-2 stock split that occurred on March 28, 2014. Holders As of February 26, 2015, there were approximately 43 holders of record of our common stock and 35,459,644 shares of our common stock outstanding. Dividends Since our initial public offering, we have not declared nor paid dividends on our common stock and we do not expect to pay cash dividends on ourcommon stock in the foreseeable future. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Company Stock Performance Not applicable. 56(1)(1)(1)(1)(1)(1)(1)(1)(1) ITEM 6. SELECTED FINANCIAL DATA Not applicable. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The information in this Annual Report on Form 10-K, or this Form 10-K, including this discussion in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, or MD&A, contains forward-looking statements and information within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safeharbor” created by those sections. All statements, other than statements of historical facts, included or incorporated in this Form 10-K could be deemedforward-looking statements, particularly statements about our plans, strategies and prospects under this MD&A heading and under the heading “Business.” Insome cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. All forward-lookingstatements in this Form 10-K are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and otherfactors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, youshould specifically consider various factors, uncertainties and risks that could affect our future results or operations as described from time to time in our SECreports., including those risks outlined under the heading “Risk Factors” in Item 1A of this Form 10-K. These factors, uncertainties and risks may cause ouractual results to differ materially from any forward-looking statement set forth in this Form 10-K. You should carefully consider the trends, risks anduncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the SEC before making anyinvestment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified intheir entirety by this cautionary statement. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, futurerevenues, projected costs, prospects and plans and objectives of management; the benefits of our planned second dronabinol manufacturing facility and thetiming of our initiation of manufacturing activities at the facility; estimated costs to complete development and obtain approvals for our Dronabinol OralSolution product candidate and the timing related to actions in connection therewith; that net revenue from sales of Dronabinol SG Capsule will fluctuateon a quarterly basis; the sufficiency of our manufacturing capacity; the beneficial attributes of our products and product candidates; that our suppliers areequipped to supply us with our current and future chemical needs; that pending dronabinol candidates will default to Schedule II classification; thatchanges in healthcare laws will result in reduced Medicaid and Medicare payments for prescription drugs; our expectation that gross margins willfluctuate; that sales and marketing and research and development costs will be our largest categories of expenses; that sales and marketing expenses willfluctuate based on changes in Subsys net revenue; that our Subsys revenue will increase in 2015; our development of different dronabinol delivery systems;that we can grow market share and net revenue for Subsys and our strategies relating thereto; that we may pursue strategies relating to syntheticcannabidiol; our sales and marketing strategy for future products and delivery systems; that we may pursue strategic transactions such acquisitions orother companies, asset purchase out- or in-licensing of products, strategic partnerships, joint ventures, divestitures, business combinations and investments;our ability to obtain foundation materials and manufacture dronabinol in light of government quotas; our strategy of using Marinol as a reference drug infuture drug approval applications; the expected pathway of drug applications we expect to file in 2015; that physicians and payors will gain familiarityabout the features of Sybsys; our plans and strategies for obtaining future international approvals; our plans and strategies to protect our intellectualproperty; our intention of not paying dividends; the source and sufficiency of our liquidity our capital resources to fund our operations; possible capitalraising transactions we may pursue; that we may avail ourselves of certain SEC reporting and Nasdaq governance requirements because of our status as anemerging growth company and controlled company, respectively; that we will hire additional sales and marketing, research and development andadministrative personnel and that costs relating thereto will increase; accounting estimates and the impact of new or recently issued accountingpronouncements; that cash flows from operations will increase as a result of increased sales of Subsys and Dronabinol; the sufficiency and sources of ourcapital resources; and the impact of pending litigation and our strategy relating thereto; that we will not recognize revenue in the near term from currentresearch and development initiatives; the probability of making payments relating to the NeoPharm contingent payment rights; the impact of changinginterest rates; the exposure of our cash to default and illiquidity risks; the potential impact of Section 382 limitations on our NOLs; and the magnitude andimpact of ownership changes, including pre-merger changes relating to NeoPharm, under Section 382 of the Internal Revenue Code. The words“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identifyforward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentionsor expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results orevents could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-lookingstatements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. 57 The following discussion and analysis of the results of operations and financial condition of Insys Therapeutics, Inc. for the years ended December 31,2014 and 2013 should be read in conjunction with the consolidated financial statements and the notes thereto, and other financial information containedelsewhere in this Form 10-K. Overview We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have twomarketed products: • Subsys — a proprietary, single-use product that delivers fentanyl, an opioid analgesic, for transmucosal absorption underneath the tongue,offered in 100, 200, 400, 600, 800, 1,200 and 1,600 mcg dosages. Subsys is approved for the treatment of breakthrough cancer pain in opioid-tolerant patients. We received FDA approval for Subsys in January 2012 and commercially launched Subsys in March 2012. • Dronabinol SG Capsule — a dronabinol soft gelatin capsule that is a generic equivalent to Marinol, an approved second-line treatment forchemotherapy-induced nausea and vomiting and anorexia associated with weight loss in patients with AIDS, offered in 2.5, 5.0 and 10.0milligram dosages. We received FDA approval for Dronabinol SG Capsule in August 2011. We commercially launched Dronabinol SGCapsule through our exclusive distribution partner, Mylan Pharmaceuticals, Inc., in December 2011. Subsys is our primary product, accounting for 99% of our revenue in 2014. We market Subsys through our U.S.-based field sales force focused onsupportive care physicians. We utilize an incentive-based sales model that employs a pay structure where a significant component of the compensation paidto sales representatives is in the form of potential bonuses based on sales performance. Our sales of, and revenue from, Subsys depend in significant part on the coverage and reimbursement policies of third-party payers, includinggovernment payers such as Medicare and Medicaid, and private health insurers. All third-party payers are sensitive to the cost of drugs and consistentlyimplement efforts to control these costs, which efforts include, but are not limited to, establishing excluded or preferred drug lists. Subsys has been, and willlikely continue to be, subject to these restrictions and impediments from third-party payers, particularly pharmacy benefit managers (“PBMs”) and privatehealth insurers. We provide administrative patient support assistance, in large part through our patient services hub, which provides administrative supportassistance to help patients work with their insurance companies. On or around August 1, 2014, ESI officially released its exclusion list of drugs, effective January 1, 2015, in connection with its national preferredformulary. Our product, Subsys, was included on this exclusion list. ESI is a large PBM that administers prescription drug benefits for employers and healthplans and runs large mail-order pharmacies. While ESI, like most PBMs, has an exception process that physicians may pursue to have an off-formulary,medically necessary drug covered for patients, this decision will make it difficult for many patients covered through an ESI administered plan to have Subsyscovered by insurance. This change in ESI formulary status did not take effect until 2015 and therefore this ESI announcement did not impact our 2014revenue or results of operations. As we have in the past, we will continue working with other PBMs to evaluate price increases and to communicate withmanaged care and health-system decision-makers to ensure a balanced approach, which takes into account the clinical performance and efficacy of ourproducts. We produce the Active Pharmaceutical Ingredient for Dronabinol SG Capsule at our U.S.-based, state-of-the-art dronabinol manufacturing facility.While we believe that this facility has the capacity to supply sufficient commercial quantities of dronabinol API for our Dronabinol SG Capsule, initiallaunch quantities of Dronabinol Oral Solution, if approved, and support the continued development of our other dronabinol product candidates in the near-term, we have commenced construction of a second dronabinol manufacturing facility, which we anticipate will enable us to supply sufficient commercialquantities of dronabinol API for our continued commercialization of Dronabinol SG Capsule and for the commercialization of our proprietary dronabinolproduct candidates, if approved. In May 2011, we entered into a supply and distribution agreement with Mylan, pursuant to which we engaged Mylan toexclusively distribute Dronabinol SG Capsule within the United States. See Note 8 under the heading “Legal Matters” in the Notes to our ConsolidatedFinancial Statements for a discussion on our ongoing dispute with Mylan. 58 In addition, we are developing other product candidates, such as dronabinol line extensions and sublingual spray product candidates. Our mostadvanced potential cannabinoid line extension is Dronabinol Oral Solution. This product candidate has demonstrated more rapidly detectable blood levelsand a more reliable absorption profile than Marinol in our clinical studies. We believe these attributes may ultimately increase patient compliance because ofmore rapid onset of action and less dose-to-dose variability, which we believe will allow us to further penetrate and potentially expand the market for themedical use of dronabinol. We completed a pre-NDA meeting with the FDA and a pivotal bioequivalence study for Dronabinol Oral Solution in 2012 and wecompleted the clinical dossier for this product candidate during the third quarter of 2013. We are currently engaged in an ongoing dialogue with the DEAregarding the potential scheduling classification for this product candidate. On October 15, 2014, we announced that we received a Refusal to File Letterfrom the FDA for our proprietary Dronabinol Oral Solution. The letter indicates that the FDA refused to file the NDA because the NDA contained aninadequate or incomplete pediatric study plan. We are currently working with the FDA to resubmit the application as quickly as possible. We have the capability to manufacture pharmaceutical CBD, a synthetically produced and over 99% pure form of cannabidiol, in our Round Rock,Texas manufacturing facility. We believe we are the only U.S.-based company with the capacity to produce pharmaceutical CBD in large quantities. Weintend to file an IND application with the FDA during 2015 for the treatment of epilepsy. Factors Affecting Our Performance We believe that our performance and future success are dependent upon a number of factors, including our approved product sales, investments in ourinfrastructure and growth, and our ability to successfully develop product candidates and complete related regulatory processes. In addition, our ability toensure that our products, policies and practices adhere to the extensive national, state and local regulations applicable to our industry is critical to oursuccess, particularly as our operations and product opportunities continue to grow at a rapid pace. While each of these areas presents significant opportunitiesfor us, they also pose significant risks and challenges that we must successfully address. Approved Product Sales. Our operating results will depend significantly upon our, and any of our third-party distributors’, sales of approved products.During the years ended December 31, 2014 and 2013, all of our net revenues were generated from the sale of our two approved products, Subsys andDronabinol SG Capsule, with sales of Subsys accounting for 99% of our 2014 year-to-date revenues. Our results will depend on prescription volumegenerally, which we believe will be driven primarily by achievement of broad market acceptance and coverage by third-party payors and effectiveness of themarketing and selling efforts with respect to our products. In addition, our results will also depend on our mix of sales between Subsys and Dronabinol SGCapsule as well as the amounts of dosage strengths sold. Subsys gross margins are substantially higher than those of Dronabinol SG Capsule. Moreover, ourgross margins improve on a unit-by-unit basis as we sell higher dosage strengths of our products. Importantly, the proportion of prescriptions written forrepeat Subsys patients has continued to increase since July 2012 from 50% of prescriptions to approximately 88% of prescriptions as of December 31, 2014.Generally, repeat Subsys patients receive significantly higher doses of Subsys on average than first-time patients as patients are titrated from a starter dose ofSubsys to their effective dose in accordance with the TIRF REMS protocol. Investments in Our Infrastructure and Growth. Our ability to increase our sales and to further penetrate our target market segments is dependent in parton our ability to invest in our infrastructure and in marketing efforts. In order to drive further growth, we may hire additional sales and marketing personneland invest in marketing our products to our target physician prescriber base. For example, as of December 31, 2014, we had 286 full-time sales and marketingpersonnel. This will lead to corresponding increases in our operating expenses, although we anticipate that these investments will result in increased productsales and net revenue. In addition, we have commenced construction on a second dronabinol manufacturing facility, which we anticipate will supply us withsufficient commercial quantities of dronabinol API for our continued commercialization of Dronabinol SG Capsule and for the commercialization of ourproprietary dronabinol product candidates, if approved. Capital expenditures associated with the completion of our second dronabinol manufacturing facilitywere approximately $18.0 million through December 31, 2014. This second facility will also increase our operating expenses. We have incurred and willcontinue to incur substantial operating costs in connection with our transition to operating as a public company, including increasing headcount and salariesand related expenses, legal and consultant fees, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relationsservices, and enhanced business and accounting systems. 59 Product Development and Related Regulatory Processes. Our operating results will also depend significantly on our research and developmentactivities and related regulatory developments. Our research and development expenses were $33.1 million and $8.5 million for the years ended December31, 2014 and 2013, respectively. As of December 31, 2014, we had 47 full-time research and development personnel. We expect research and developmentexpenses to increase as we increase related headcount and continue our planned preclinical studies and clinical trials for our product candidates, particularlyour proprietary cannabinoid product candidates, including Dronabinol Oral Solution, and sublingual spray product candidates. We do not expect to realizenet revenues from all of these research and development initiatives in the near term and may never realize net revenues from these investments. Due to therisks inherent in conducting preclinical studies and clinical trials, the regulatory approval process and the costs of preparing, filing and prosecuting patentapplications, our development completion dates and costs will vary significantly for each product candidate and are very difficult to estimate. The lengthyprocess of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial additionalresources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals or acceptable DEA classifications for our product candidates, inparticular those related to Dronabinol Oral Solution, could cause our research and development expenditures to increase significantly and, in turn, have amaterial adverse effect on our results of operations. Basis of Presentation Net Revenue During the year ended December 31, 2012, we began recognizing net revenue from sales of Subsys made by us, and from Dronabinol SG Capsule underour supply and distribution agreement with Mylan. We sell Subsys in packages of various sized single-dose units in dosage strengths of 100, 200, 400, 600,800, 1,200 and 1,600 mcg, to wholesale pharmaceutical distributors and retail pharmacies, collectively, our customers, on a wholesale basis. Sales to ourcustomers are subject to specified rights of return. From product launch in March 2012 to September 30, 2013, because we did not have sufficient historicalinformation to estimate returns, we deferred recognition of revenue on product shipments of Subsys to our customers until the right of return no longer exists,which occurs at the earlier of the time Subsys units are sold to healthcare facilities or dispensed through patient prescriptions, or expiration of the right ofreturn. We estimated patient prescriptions dispensed using an analysis of third-party information, including TIRF REMS mandated data and third-partymarket research data. In the fourth quarter of 2013, in response to our ability to estimate returns, we changed the timing of our revenue recognition for Subsysand began recognizing revenue upon shipment to our customers. We sell Dronabinol SG Capsule exclusively to Mylan in dosage strengths of 2.5, 5.0 and 10.0 milligrams under the Mylan label. Mylan distributesDronabinol SG Capsule and on a monthly basis pays us an amount equal to the value of Dronabinol SG Capsule it sold to wholesale pharmaceuticaldistributors and retail pharmacies, less contractually defined deductions for chargebacks, rebates, sales discounts, distribution and storage fees, and royalties.We are obligated to pay Mylan a royalty between 10% and 20% on Mylan’s net product sales, and a single digit percentage fee on such sales for distributionand storage services. We bear no risk of product return upon acceptance by Mylan. As Mylan has control over the amount it charges to wholesalepharmaceutical distributors for Dronabinol SG Capsule and the discounts offered to the distributors, the sales price is not fixed and determinable at the datewe ship such product to Mylan. Accordingly, we recognize revenue on the sale of Dronabinol SG Capsule upon Mylan’s sale of product to wholesaledistributors, which is the point at which the sales price is fixed and determinable. See Note 8 under the heading “Legal Matters” to the Notes to ourConsolidated Financial Statements for a discussion on our ongoing dispute with Mylan. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue for Subsys consists primarily of materials, third-party manufacturing costs, freight and indirect personnel costs, and other overhead costsbased on units dispensed through patient prescriptions. Cost of revenue for Dronabinol SG Capsule primarily consists of materials, manufacturing costs andthird-party assembly and packaging costs based on units sold by Mylan to wholesale distributors. We manufacture the API for Dronabinol SG Capsule at ourU.S.-based, dronabinol manufacturing facilities. Also included in cost of revenue are charges for reserves for excess, dated or obsolete commercial inventoriesand production manufacturing variances. Gross profit is net revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of net revenue. 60 Sales and Marketing Expenses Our sales and marketing expenses consist primarily of salaries, commissions, benefits, consulting fees, costs of obtaining prescription and market data,and market research studies related to Subsys. As of December 31, 2014, we had 286 full-time sales and marketing personnel. We expect the number of oursales and marketing personnel to increase as we seek to continue to increase our existing product sales and as any subsequently approved products arecommercialized. We expect our sales and marketing expenses, along with our research and development expenses, to be our largest categories of operatingexpenses for the foreseeable future. In addition, because we use an incentive-based compensation model for our sales professionals, we expect our sales andmarketing expenses to fluctuate from period to period based on changes in Subsys net revenue. Specifically, we expect our sales and marketing expenses toincrease in the near future to the extent that expected increases in Subsys net revenue are realized. Research and Development Expenses Research and development expenses consist of costs associated with our preclinical studies and clinical trials, and other expenses related to our drugdevelopment efforts. Our research and development expenses consist primarily of: ●external research and development expenses incurred under agreements with third-party CROs, and investigative sites, third-party manufacturersand consultants; ●employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical andclinical drug development activities; and ●facilities, depreciation and other allocated expenses, equipment and laboratory supplies. To date, our research and development efforts have been focused primarily on our fentanyl and dronabinol programs. As of December 31, 2014, we had47 full-time research and development personnel. We expect research and development expenses to increase as we increase related headcount and continueour planned preclinical studies and clinical trials for our product candidates, particularly our proprietary dronabinol product candidates, includingDronabinol Oral Solution. We determine which research and development projects to pursue, as well as the level of funding available for each project, basedon the scientific and preclinical and clinical results of each product candidate and related regulatory action. We expect our research and developmentexpenses, along with our sales and marketing expenses, to be our largest categories of operating expenses for the foreseeable future. The following table provides a breakdown of our research and development expenses during the years ended December 31, 2014 and 2013 (inmillions): Years Ended December 31, 2014 2013 Cannabidiol $5.8 $- Buprenorphine 3.4 0.6 Fentanyl 2.8 0.8 Dronabinol 1.6 2.0 LEP-ETU and IL-13 1.1 0.2 Buprenorphine/Naloxone 0.8 0.6 Sildenafil 0.8 0.2 Ondansetron 0.7 - Internal research and development costs 16.1 4.1 Total research and development expenses $33.1 $8.5 General and Administrative Expenses Our general and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting, businessdevelopment and internal support functions. In addition, general and administrative expenses include facility costs not otherwise included in research anddevelopment expenses, and professional fees for legal, consulting and accounting services. As of December 31, 2014, we had 30 full-time general andadministrative personnel. We expect general and administrative expense will increase as a result of increasing related headcount, expanding our operatingactivities and the costs we incur operating as a public company. We expect these increases to include salaries and related expenses, legal and consultant fees,accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services, and enhanced business andaccounting systems. 61 Interest Expense Prior to our IPO, interest expense consisted primarily of the interest accrued on outstanding promissory notes payable to The John N. Kapoor Trust andthe Kapoor Children 1992 Trust. These trusts are controlled by or are affiliated with our founder, Executive Chairman and principal stockholder, Dr. John N.Kapoor. We recorded interest expense of $0.9 million related to accrued interest on these notes during the year ended December 31, 2013. Upon completionof our IPO in May 2013, all outstanding principal and accrued interest on the Kapoor Notes converted into 11,115,512 shares of common stock (7,410,341on a pre-split basis) and all of the Kapoor Notes were cancelled. Income Tax Benefit, Net Operating Loss Carryforwards Under Section 382 of the Code, substantial changes in our ownership may limit the amount of NOLs that can be utilized annually in the future to offsettaxable income, if any. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within athree-year period as determined under the Code, which we refer to as an ownership change. Any such annual limitation may significantly reduce theutilization of these NOLs before they expire. Our ability to utilize federal NOLs created prior to the NeoPharm merger is significantly limited. Based on the above, we have estimated the amount of pre-NeoPharm merger federal NOLs that are available to offset post-NeoPharm merger income atapproximately $1.6 million as of December 31, 2014, which begin to expire in 2018. For state tax purposes, we had approximately $272.0 million of state NOLs at December 31, 2014. Approximately $269.5 million of these NOLs relateonly to Illinois. Based on projections and our limited activity in Illinois, we estimate that approximately $263.2 million of these Illinois NOLs will not beutilized. For this reason, we recorded a valuation allowance for the estimated tax benefit relating to this amount, or $20.4 million. Generally, the state NOLcarryforwards begin expiring in 2027 if not utilized. The Illinois NOLs began expiring in 2015 if not utilized. Significant Accounting Polices and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, whichhave been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in thisprospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financialstatements. Revenue Recognition We recognize revenue from the sale of Subsys and Dronabinol SG Capsule. Revenue is recognized when (i) persuasive evidence of an arrangement exists,(ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. Subsys Subsys was commercially launched in March 2012, and is available through an FDA mandated TIRF REMS program. We sell Subsys in the UnitedStates to wholesale pharmaceutical distributors, and on a very limited basis directly to retail pharmacies, or collectively our customers, on a wholesale basis,subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. Subsys currently has a shelflife of 36 months from the date of manufacture. Given the limited history of prescriptions of Subsys prior to the fourth quarter of 2013, we were not able toreliably estimate expected returns of the product at the time of shipment prior to the fourth quarter of 2013. Accordingly, we initially deferred the recognitionof revenue and related product costs of Subsys product shipments until the product was dispensed through patient prescriptions. The quantity of prescriptionunits dispensed was estimated using an analysis of third-party information, including TIRF REMS mandated data and third-party market research data. Basedon the shipment and prescription trends for Subsys and based on an analysis of historical return rates of our own experience with Subsys, we concluded thatwe had the information needed to reasonably estimate product returns for Subsys during the fourth quarter of 2013. Beginning in the fourth quarter of 2013,in response to our ability to reasonably estimate returns, we began recognizing revenue for Subsys sales at the time of shipment to our customers.Accordingly, in the fourth quarter of 2013, we recognized a one-time increase of $1.5 million in net product sales of Subsys, representing product salespreviously deferred, net of estimated product returns, wholesaler discounts, prompt pay discounts, stocking allowances, patient discount programs, rebates,and chargebacks. Including deferred cost of sales, this change resulted in a one-time $0.9 million increase to operating income for the year endedDecember 31, 2013. Prior to this change, cost of manufacturing Subsys associated with the deferred revenue was recorded as deferred costs, which wereincluded in inventory, until such time as the deferred revenue was recognized. 62 We recognize estimated product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product salesallowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements withcustomers and third-party payors and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, suchas patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future resultsvary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowancesinclude: Product Returns. We allow customers to return product for credit on returned product that is within six months before and up to 12 months following itsproduct expiration date. The shelf life of Subsys is currently 36 months from the date of manufacture. We have monitored actual product sold through topatient prescriptions since product launch, which provides us with a basis to reasonably estimate future product returns, taking into consideration the shelflife of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels, and consideration of theintroduction of competitive products. Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to 12 monthsafter its product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits on returnedproduct. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments. Theallowance for product returns is included in sales allowances. Wholesaler Discounts. We offer discounts to certain wholesale distributors based on contractually determined rates. We accrue the discount as areduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies and recognize the discount asa reduction of revenue in the same period the related revenue is recognized. Prompt Pay Discounts. We offer cash discounts to our customers, generally 2.0% of the sales price, as an incentive for prompt payment. We account forcash discounts by reducing accounts receivable by the full amount and recognize the discount as a reduction of revenue in the same period the relatedrevenue is recognized. Stocking Allowances. We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a new productand on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue the discount as areduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies and recognize the discount asa reduction of revenue in the same period the related revenue is recognized. Patient Discount Programs. We offer discount card programs to patients for Subsys in which patients receive discounts on their prescriptions that arereimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a percentage of actual redemption applied to inventory in thedistribution and retail channel and recognize the discount as a reduction of revenue in the same period the related revenue is recognized. The allowance forpatient discount programs is included in sales allowances.. Rebates. We participate in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebate programs,we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject to the rebate arefilled. We estimate and accrue these rebates based on current contract prices, historical and estimated future percentages of product sold to qualified patientsand estimated levels of inventory in the distribution channel. Rebates are recognized as a reduction of revenue in the period the related revenue isrecognized. The allowance for rebates is included in sales allowances. Chargebacks. We provide discounts primarily to authorized users of the Federal Supply Schedule, or FSS, of the General Services Administrationunder an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These entitiespurchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between thecurrent retail price and the price the entity paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels, currentcontract prices and historical chargeback activity. Chargebacks are recognized as a reduction of revenue in the same period the related revenue is recognized.The allowance for chargebacks is included as a reduction to accounts receivable. 63 A rollforward of our product sales allowances for the years ended December 31, 2014 and 2013 is as follows (in thousands): Patient Wholesale Discount Discounts Programs Rebates Returns Total Balance at December 31, 2012 $834 $1,540 $134 $- $2,508 Revenue allowances: Provision related to current period sales 9,038 10,351 6,997 1,294 27,680 Provisions related to sales made in prioryears - 3 371 12 386 Provision related to change in revenuerecognition (526) (1,490) (102) 221 (1,897)Payment and credits related to sales made incurrent period (5,764) (7,905) (3,110) (928) (17,707)Payment and credits related to sales made inprior periods (834) (1,543) (505) - (2,882)Balance at December 31, 2013 2,748 956 3,785 599 8,088 Revenue allowances: Provision related to current period sales 22,395 36,471 24,866 2,286 86,018 Provisions related to sales made in prioryears - 239 (656) 539 122 Payment and credits related to sales made incurrent period (16,977) (34,244) (16,956) (1,127) (69,304)Payment and credits related to sales made inprior periods (2,748) (1,195) (3,129) (1,138) (8,210)Balance at December 31, 2014 $5,418 $2,227 $7,910 $1,159 $16,714 (1) Includes wholesaler discounts, prompt pay discounts, stocking allowances and government chargebacks. Dronabinol SG Capsule Dronabinol SG Capsule was commercially launched in December 2011, and we sell Dronabinol SG Capsule exclusively through Mylan in the UnitedStates under a supply and distribution agreement. Pursuant to the terms of the Mylan agreement, we manufacture Dronabinol SG Capsule under the Mylanlabel. Mylan distributes Dronabinol SG Capsule and on monthly basis pays us an amount equal to the value of Dronabinol SG Capsule it sold to wholesalepharmaceutical distributors, less contractually defined deductions for chargebacks, rebates, sales discounts, distribution and storage fees, and royalties. Underthe terms of the supply and distribution agreement with Mylan, we are obligated to pay Mylan a royalty of between 10% and 20% on Mylan’s net productsales, and a single digit percentage fee on such sales for distribution and storage services. We bear no risk of product return upon acceptance by Mylan. AsMylan has control over the amount it charges to wholesale pharmaceutical distributors for Dronabinol SG Capsule and the discounts offered to thedistributors, the sales price is not fixed and determinable at the date we ship such product to Mylan. Accordingly, we recognize revenue upon Mylan’s sale ofproduct to wholesale distributors, which is the point at which the sales price we ultimately charge to Mylan is fixed and determinable. See Note 8 under theheading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion on our ongoing dispute with Mylan. Inventories Inventories consist of raw materials, work-in-process and finished product and are valued at the lower of cost (first-in, first-out cost method) or market.Inventory costs are capitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercial use and netrealizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatory process, ourrequired investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the riskof manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation for product launches, we consider theprobability that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approvalprocess, as well as the market for the product in its current state. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization,or other potential factors including product expiration. 64 (1) Stock-Based Compensation Stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award. The cost is recognized, net of forfeitures,in our consolidated financial statements as expense ratably over the employee’s requisite service period or vesting period, which is generally three to fouryears, on a straight-line basis. Equity awards issued to non-employees are recorded at their fair value on the grant date and are periodically re-measured as theunderlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitable on the date of grant. Expense recognized forconsultant stock options was immaterial for the years ended December 31, 2014 and 2013. We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock-based payment awards. This model requires the input ofhighly subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, risk-freeinterest rates, the expected term of the option and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and theapplication of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materiallydifferent in the future. These assumptions are estimated as follows: ●Fair Value of Our Common Stock — Because our stock was not publicly traded prior to our initial public offering, we previously estimated the fairvalue of our common stock. Upon the completion of our May 2013 IPO, our common stock is valued by reference to the publicly-traded price of ourcommon stock. ●Expected Volatility — Prior to the NeoPharm merger, we did not have a history of market prices for our common stock and since the merger, we do nothave what we consider a sufficiently active and readily traded market for our common stock to use historical market prices for our common stock toestimate volatility. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historical stock pricevolatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peersconsist of other public companies in the pharmaceutical industry similar in size, stage of life cycle and financial leverage. We intend to continue toconsistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility ofour own common stock share price becomes available. ●Risk-Free Interest Rate — The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of our awards. Therisk-free interest rate assumption is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for eachoption group. ●Expected Term — The expected term represents the period that our stock-based awards are expected to be outstanding. The expected terms of theawards are based on a simplified method which defines the term as the average of the contractual term of the options and the weighted-average vestingperiod for all open tranches. ●Expected Dividend Yield — We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeablefuture. Consequently, we used an expected dividend yield of zero. In addition to the assumptions used in the Black-Scholes option-pricing model, the amount of stock option expense we recognize in our consolidatedstatements of operations includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis of our actual forfeitures and willcontinue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Changesin the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate isrecognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment ismade that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate islower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognizedin our consolidated financial statements. Deferred Tax Valuation Allowance We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount ofthe valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which weoperate. Historically, we have recorded a deferred tax valuation allowance in an amount equal to our net deferred tax assets. In the fourth quarter of 2013, wedetermined that it was more likely than not that we will ultimately be able to utilize deferred tax assets for which a valuation allowance had been provided.Accordingly, during the year ended December 31, 2013, the valuation allowance was reduced by $26.2 million and we recorded a total income tax benefit of$8.8 million. 65 Recently Issued Accounting Pronouncements Recent accounting pronouncements which may be applicable to us are described in “Note 2. Significant Accounting Policies” in our ConsolidatedFinancial Statements contained herein in Part II, Item 8. Results of Operations Comparison of year ended December 31, 2014 to year ended December 31, 2013 The following table presents certain selected consolidated financial data for the years ended December 31, 2014 and 2013 expressed as a percentage ofnet revenue: Years EndedDecember 31, 2014 2013 Net revenue 100.0% 100.0%Cost of revenue 10.2 12.8 Gross profit 89.8 87.2 Operating expenses: Sales and marketing 26.2 29.4 Research and development 14.9 8.6 General and administrative 19.9 16.5 Total operating expenses 61.0 54.5 Operating income 28.8 32.8 Other income (expense): Interest income (expense) 0.1 (0.9)Other income (expense), net 0.0 (0.1)Total other income (expense) 0.1 (1.0) Income before income taxes 28.9 31.8 Income tax (expense) benefit (11.8) 8.8 Net income 17.1% 40.6% Net Revenue. Net revenue increased $122.8 million, or 124%, to $222.1 million for the year ended December 31, 2014, compared to $99.3 million forthe year ended December 31, 2013. The increase in net revenue was primarily attributable to the $123.8 million, or 129%, increase in net revenue of Subsysto $219.5 million for the year ended December 31, 2014 compared to $95.7 million for the year ended December 31, 2013. Subsys sales have grown rapidlysince Subsys was initially marketed in 2012. Provisions for wholesaler discounts, patient discounts, rebates and returns increased to $22.4 million, $36.5million, $24.4 million and $2.8 million, respectively, or 39.2% on a combined basis of gross revenue from the sale of Subsys for the year ended December 31,2014, compared to $9.0 million, $10.4 million and $7.4 million, and $1.3 million, respectively, or 29.4% on a combined basis of gross revenue from the saleof Subsys for the year ended December 31, 2013. The increase in revenue provisions as a percentage of gross revenue was primarily attributable to an increasein the issuance of patient discount credits and rebate claims from managed care organizations and government programs. We expect net revenue from sales ofSubsys to continue to increase during 2015 due primarily to anticipated increases in unit prices and in the number of prescriptions fulfilled, combined withchanges in prescription strength mix. The increase in sales of Subsys was partially offset by a decrease in sales of Dronabinol SG Capsule of $1.0 million to$2.6 million for the year ended December 31, 2014, compared to $3.6 million for the year ended December 31, 2013. The decrease in sales of Dronabinol SGCapsule was due primarily to a dispute with our exclusive distributor of Dronabinol SG Capsule and the resulting impact of reduced product supply andlower selling prices since 2012. As Dronabinol SG Capsule is marketed by Mylan, we expect net revenue from sales of Dronabinol SG Capsule to continue tofluctuate in the future. 66 Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue increased $9.9 million to $22.6 million for the year ended December 31, 2014compared to $12.7 million for the year ended December 31, 2013. The increase in cost of revenue was primarily attributable to the increase in sales of Subsysduring the year ended December 31, 2014. Gross profit increased $112.9 million to $199.5 million for the year ended December 31, 2014 compared to $86.6million for the year ended December 31, 2013. Gross margin for the year ended December 31, 2014 was approximately 90% compared to approximately 87%for the year ended December 31, 2013. The increase in gross margin was due primarily to a higher mix of sales of Subsys, which yields higher gross marginsthan sales of Dronabinol SG Capsule. Subsys gross margin was approximately 91% and 90% for the years ended December 31, 2014 and 2013, respectively.This increase in 2014 is attributable to a shift in sales mix to higher margin products in 2013 as repeat patients progress to higher dosage prescriptions. During July 2014, we were notified by Mylan that certain Dronabinol SG Capsule inventories were approaching their product expiry date, and therefore,the inventory was not saleable to Mylan customers. As a result of this notice, we recorded $0.7 million in revenue related to the recognition of non-refundable deposits for amounts paid by Mylan for this inventory, and a corresponding $1.4 million charge to cost of revenue for the second quarter of 2014.We expect that the Dronabinol SG Capsule revenues will continue to be an insignificant portion of our consolidated net revenues prospectively. See Note 8under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion on our ongoing dispute with Mylan. Sales and Marketing Expense. Sales and marketing expense increased $28.9 million to $58.1 million for the year ended December 31, 2014 comparedto $29.2 million for the year ended December 31, 2013. The increase in sales and marketing expense was due primarily to sales compensation expense andincremental product marketing expense associated with the increase in sales of Subsys Research and Development Expense. Research and development expense increased $24.6 million to $33.1 million for the year ended December 31,2014 compared to $8.5 million for the year ended December 31, 2013. The increase in research and development expense was due primarily to an increase inresearch and development personnel and to clinical and development expenses incurred during 2014 related to our growing product pipeline. General and Administrative Expense. General and administrative expense increased $27.9 million to $44.3 million for the year ended December 31,2014 compared to $16.4 million for the year ended December 31, 2013. The increase in general and administrative expense was due primarily to increases inlegal expense incurred in connection with various ongoing litigation and subpoena related matters, stock-based compensation costs and administrativeinfrastructure to support the growth of Subsys sales combined with increased cost of being a public company during 2014. Interest Income/(Expense). We reported interest income of $0.2 million for the year ended December 31, 2014 as compared to incurring net interestexpense of $0.9 million for the year ended December 31, 2013 as a result of our investing excess cash in 2014 and the result of the conversion of the KapoorNotes to common stock and the repayment of the $15.0 million line of credit in May 2013 in connection with our IPO. Income Tax Expense/Benefit. Provision for income taxes was $26.2 million for the year ended December 31, 2014 representing an effective tax rateof 40.8%. Income tax benefit was $8.8 million for the year ended December 31, 2013 as a result of the release of a portion of our valuation allowance thatwas previously recognized against our deferred tax assets. Liquidity and Capital Resources Sources of Liquidity We incurred losses from our inception through December 31, 2012. As of December 31, 2014, we had an accumulated deficit of $51.1 million. Prior toour initial public offering, or IPO, we financed our operations primarily through the issuance of promissory notes to The John N. Kapoor Trust and the KapoorChildren 1992 Trust, which are controlled by or affiliated with our founder, Executive Chairman and principal stockholder. On May 7, 2013, we completed our IPO, pursuant to which we sold 6,900,000 shares of our common stock (4,600,000 on a pre-split basis) at a price of$5.33 per share ($8.00 on a pre-split basis), which included the underwriters’ exercise of their over-allotment option. As a result of the IPO, we raised a total of$32.5 million in net proceeds after deducting underwriting discounts and commissions of $2.6 million and offering expenses of $1.8 million. These costshave been recorded as a reduction of the proceeds received in arriving at the amount recorded in additional paid-in capital. Upon completion of the IPO, alloutstanding shares of our preferred stock were converted into 12,793,290 shares of common stock (8,528,860 on a pre-split basis). On September 30, 2014, our $15,000,000 revolving credit facility (the “Facility”), which we entered into in October 2013 with JPMorgan Chase Bank,N.A. matured. As of December 31, 2013, no amounts were outstanding under the Facility. 67 Cash Flows The following table shows a summary of our cash flows for the years indicated (in millions): Years EndedDecember 31, 2014 2013 Net cash provided by operating activities $49.7 $24.2 Net cash used in investing activities (69.9) (5.5)Net cash provided by financing activities 32.9 26.3 Net increase in cash and cash equivalents 12.7 45.0 Cash and cash equivalents, beginning of period 45.4 0.4 Cash and cash equivalents, end of period $58.1 $45.4 Cash Flows from Operating Activities. Net cash provided by operating activities was $49.7 million for the year ended December 31, 2014 and netcash provided by operating activities was $24.2 million for the year ended December 31, 2013. The net cash provided during the years ended December 31,2014 and 2013 primarily reflects net income driven primarily by growth in Subsys net sales, adjusted in part by depreciation and amortization, stock-basedcompensation expense, deferred income taxes, excess tax benefits on stock options and awards and non-cash interest expense and is also impacted bychanges in working capital. Cash Flows from Investing Activities. Net cash used in investing activities was $69.9 million and $5.5 million for the years ended December 31, 2014and 2013, respectively. During 2014, we invested $48.0 million of excess cash in short-term and long-term investments and we also incurred $22.2 millionfor purchases of equipment and leasehold improvements, including $18.0 million in connection with the construction of our second dronabinol facility.During 2013, our investing cash flows consisted primarily of expenditures on our dronabinol facility. Cash Flows from Financing Activities. Net cash provided by financing activities was $32.9 million and $26.3 million for the years ended December31, 2014 and 2013, respectively. During the year ended December 31, 3014, we recognized $22.0 million of financing cash flows from excess tax benefits onstock options and awards, $9.0 million from the proceeds from exercise of stock options and $2.0 million of proceeds from shares issued under an employeestock purchase plan. During the year ended December 31, 2013, we received $32.5 million in net proceeds in connection with our IPO. We used $11.9million of these proceeds to pay in full the credit facility with Bank of America. During the year ended December 31, 2013, we also received proceeds of $2.1million from the exercise of stock options and $0.9 million of proceeds from shares issued under an employee stock purchase program. Additionally, werecognized excess tax benefits on stock options and awards of $2.7 million. We invoice wholesalers upon shipment of Subsys. To date, our wholesalers have typically paid us 30 to 60 days from their applicable invoice dates. Our cash flows for 2015 and beyond will depend on a variety of factors, including sales of Subsys and Dronabinol SG Capsule and any additionalapproved products, regulatory approvals, investments in manufacturing and production such as our planned second dronabinol manufacturing facility,capital equipment, and research and development. We expect our net cash inflows from operating activities to increase as we expect to increase sales ofSubsys and Dronabinol SG Capsule, partially offset by anticipated expansion in sales and marketing, research and development, manufacturing, and generaland administrative expenses as a public company. Funding Requirements We believe that the remaining net proceeds from the IPO, cash from operations and our pre-existing cash and cash equivalents and investments, togetherwith interest thereon, will be sufficient to fund our operations for at least the next 12 months. 68 Because of the numerous risks and uncertainties associated with commercialization of Subsys and Dronabinol SG Capsule and the development of ourproduct candidates, we are unable to predict the amounts of increased capital outlays and operating expenditures associated with our current anticipatedproduct introduction, clinical trials and preclinical studies. The timing and amounts of our funding requirements will depend on numerous factors, includingbut not limited to: ●the levels and mix of our product sales; ●the rates of progress, costs and outcomes of our clinical trials and other product development programs, including for Dronabinol Oral Solution and anyother product candidates that we may develop, in-license or acquire; ●regulatory approvals, DEA classifications and other regulatory related events; ●personnel, facilities, equipment and other similar requirements; ●costs of operating as a public company; ●the effects of competing technological and market developments; ●costs associated with litigation and government investigations; ●costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates; ●our ability to acquire or in-license products and product candidates, technologies or businesses; and ●terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish. Although we generated cash from operating activities during the year ended December 31, 2014 and we expect to continue to fund our operationsprimarily from operating activities, we cannot guarantee that we will generate sufficient operating cash flows to fund our planned activities. We cannot besure that additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders.Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or allrights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. If we raise additional funds byissuing equity or convertible securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring new debtobligations, the terms of the debt will likely require significant cash payment obligations as well as covenants and specific financial ratios that may restrictour ability to operate our business. Off-Balance Sheet Arrangements During the year ended December 31, 2014, we did not have any relationships with unconsolidated organizations or financial partnerships, such asstructured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for smaller reporting companies. 69 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Insys Therapeutics, Inc. Report of Independent Registered Public Accounting Firm71Consolidated Balance Sheets as of December 31, 2014 and 201372Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014 and 201373Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2014 and 201374Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 201375Notes to Consolidated Financial Statements76 70 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders ofInsys Therapeutics, Inc.Chandler, Arizona We have audited the accompanying consolidated balance sheets of Insys Therapeutics, Inc. (the “Company”) as of December 31, 2014 and 2013 andthe related consolidated statements of comprehensive income, stockholders’ equity (deficit), and cash flows for the years then ended. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InsysTherapeutics, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America. /s/ BDO USA, LLP Phoenix, ArizonaMarch 3, 2015 71 INSYS THERAPEUTICS, INC. CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2014 2013 Assets Current Assets: Cash and cash equivalents $58,106 $45,382 Restricted cash - 400 Short-term investments 24,757 - Accounts receivable, net of allowances of $5,816 and $2,748 at December 31, 2014 and 2013, respectively 26,544 16,313 Inventories 34,781 14,528 Prepaid expenses and other assets 2,243 1,727 Deferred income tax assets 4,611 3,800 Total current assets 151,042 82,150 Property and equipment, net 29,872 10,127 Long-term investments 23,262 - Deferred income tax assets 7,602 8,238 Other assets 3,343 43 Total assets $215,121 $100,558 Liabilities and Stockholders' Equity (Deficit) Current Liabilities: Accounts payable and accrued expenses $27,454 $12,173 Accrued compensation 6,926 3,568 Accrued sales allowances 11,296 5,340 Total current liabilities 45,676 21,081 Uncertain income tax position 3,778 - Total liabilities 49,454 21,081 Commitments and contingencies Stockholders' Equity: Preferred stock (par value $0.001 per share, 10,000,000 shares authorized; 0 shares issued and outstandingas of December 31, 2014 and 2013, respectively) - - Common stock (par value $0.01 per share; 100,000,000 and 50,000,000 shares authorized as of December31, 2014 and 2013, respectively; 35,351,344 and 33,184,892 shares issued and outstanding as ofDecember 31, 2014 and 2013, respectively) 354 332 Additional paid in capital 216,414 168,199 Unrealized loss on available-for-sale securities (24) - Notes receivable from stockholders (21) (21)Accumulated deficit (51,056) (89,033)Total stockholders' equity 165,667 79,477 Total liabilities and stockholders' equity $215,121 $100,558 See accompanying notes to consolidated financial statements. 72 INSYS THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands, except share and per share data) Years Ended December 31, 2014 2013 Net revenue $222,125 $99,289 Cost of revenue 22,578 12,665 Gross profit 199,547 86,624 Operating expenses: Sales and marketing 58,105 29,194 Research and development 33,136 8,499 General and administrative 44,283 16,372 Total operating expenses 135,524 54,065 Operating income 64,023 32,559 Other income (expense): Interest income 151 22 Interest expense - (950)Other income (expense), net 2 (54)Total other income (expense) 153 (982) Income before income taxes 64,176 31,577 Income tax (expense) benefit (26,199) 8,800 Net income 37,977 40,377 Unrealized loss on available-for-sale securities (24) - Total comprehensive income $37,953 $40,377 Net income per common share: Basic $1.10 $1.56 Diluted $1.04 $1.41 Weighted average common shares outstanding Basic 34,379,535 25,919,768 Diluted 36,667,566 28,734,617 See accompanying notes to consolidated financial statements. 73 INSYS THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(in thousands, except share amounts) ConvertiblePreferred Stock Common Stock AdditionalPaid in UnrealizedLoss onAvailable-For-Sale NotesReceivableFrom Accumulated Shares Amount Shares Amount Capital Securities Stockholders Deficit Total Balance at December 31, 2012 14,864,607 $149 1,284,059 $13 $64,591 $- $(21) $(129,410) $(64,827)Conversion of preferred tocommon stock (14,864,607) (149) 12,793,290 128 21 - - - 149 Conversion of notes payable tocommon stock - - 11,115,512 111 59,173 - - - 59,284 Issuance of common stock -initial public offering - - 6,900,000 69 32,387 - - - 32,456 Issuance of common stock -employee stock purchaseplan - - 188,055 2 850 - - - 852 Exercise of stock options - - 903,977 9 2,093 - - - 2,102 Excess tax benefits on stockoptions and awards - - - - 2,745 - - - 2,745 Stock based compensation -stock options and awards - - - - 6,339 - - - 6,339 Net income - - - - - - - 40,377 40,377 Balance at December 31, 2013 - - 33,184,892 332 168,199 - (21) (89,033) 79,477 Exercise of stock options - - 1,808,395 18 8,938 - - - 8,956 Issuance of common stock-employee stock purchaseplan 358,057 4 1,985 - - - 1,989 Excess tax benefits on stockoptions and awards - - 22,003 - - - 22,003 Stock based compensation -stock options and awards - - - - 15,289 - - - 15,289 Unrealized loss on available-for-sale securities - - - - - (24) - - (24)Net income - - - - - 37,977 37,977 Balance at December 31, 2014 - $- 35,351,344 $354 $216,414 $(24) $(21) $(51,056) $165,667 See accompanying notes to consolidated financial statements. 74 INSYS THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2014 2013 Cash flows from operating activities: Net income $37,977 $40,377 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,500 1,788 Stock-based compensation 15,289 6,339 Deferred income tax benefit (175) (12,038)Excess tax benefits on stock options and awards (22,003) (2,745)Interest expense accrued on notes payable - 900 Changes in operating assets and liabilities: Accounts receivable (10,230) (13,224)Inventories (20,253) (7,433)Prepaid expenses and other current assets (3,816) (365)Accounts payable, accrued expenses and other current liabilities 50,375 10,650 Net cash provided by operating activities 49,664 24,249 Cash flows from investing activities: Change in restricted cash and restricted cash equivalents 400 (400)Purchase of investments (48,043) - Purchases of property and equipment (22,245) (5,125)Net cash used in investing activities (69,888) (5,525) Cash flows from financing activities: Proceeds from issuance of common stock 1,989 33,308 Net repayments on line of credit - (11,858)Excess tax benefits on stock options and awards 22,003 2,745 Proceeds from exercise of stock options 8,956 2,102 Net cash provided by financing activities 32,948 26,297 Change in cash and cash equivalents 12,724 45,021 Cash and cash equivalents, beginning of year 45,382 361 Cash and cash equivalents, end of year $58,106 $45,382 Supplemental cash flow disclosures: Cash paid for interest expense $- $51 Cash paid for income taxes $2,975 $991 See accompanying notes to consolidated financial statements. 75 INSYS THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business Insys Therapeutics, Inc., which was incorporated in Delaware in June 1990, and our subsidiaries (collectively, “we,” “us,” and “our”) maintainheadquarters in Chandler, Arizona. We are a specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have two marketed products:Subsys, a proprietary sublingual fentanyl spray for breakthrough cancer pain in opioid-tolerant patients and Dronabinol SG Capsule, a generic equivalent toMarinol, an approved second-line treatment for chemotherapy-induced nausea and vomiting and anorexia associated with weight loss in patients with AIDS. 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Insys Therapeutics, Inc. and its wholly-owned subsidiary, Insys Pharma, Inc. (“InsysPharma”). All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Reclassification Certain amounts in the 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation. Fair Value of Financial Instruments The carrying values of our financial instruments, including cash, accounts receivable and accounts payable approximate their fair value due to the shortterm nature of these financial instruments. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820, “Fair Value Measurement” defines fair value asthe exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the assetor liability in an orderly transaction between market participants on the measurement date. It also establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value as follows: Level 1:Observable inputs such as quoted prices in active markets; Level 2:Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Revenue Recognition We recognize revenue from the sale of Subsys and Dronabinol SG Capsule. Revenue is recognized when (i) persuasive evidence of an arrangementexists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. 76 Subsys Subsys was commercially launched in March 2012, and is available through a U.S. Food and Drug Administration (“FDA”) mandated Risk Evaluationand Mitigation program known as the Transmucosal Immediate Release Fentanyl program (“TIRF REMS”). We sell Subsys in the United States to wholesalepharmaceutical distributors, and on a very limited basis directly to retail pharmacies, or collectively our customers, on a wholesale basis, subject to rights ofreturn within a period beginning six months prior to, and ending 12 months following, product expiration. Subsys currently has a shelf life of 36 months fromthe date of manufacture. Given the limited sales history of prescriptions of Subsys prior to the fourth quarter of 2013, we were not able to reliably estimateexpected returns of the product at the time of shipment prior to the fourth quarter of 2013. Accordingly, we initially deferred the recognition of revenue andrelated product costs of Subsys product shipments until the product was dispensed through patient prescriptions. The quantity of prescription units dispensedwas estimated using an analysis of third-party information, including TIRF REMS mandated data and third-party market research data. Beginning in thefourth quarter of 2013, we were able to reasonably estimate product returns of Subsys. Therefore, we began recognizing revenue for Subsys sales at the time ofshipment. Accordingly, in the fourth quarter of 2013, we recognized a one-time increase of $1.5 million in net product sales of Subsys, representing productsales previously deferred, net of estimated product returns, wholesaler discounts, prompt pay discounts, stocking allowances, patient discount programs,rebates, and chargebacks. Including deferred cost of sales, this change resulted in a one-time $0.9 million increase to operating income for the year endedDecember 31, 2013. We recognize estimated product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product salesallowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements withcustomers and third-party payors and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, suchas patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future resultsvary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowancesinclude: Product Returns. We allow customers to return product for credit within six months before and up to 12 months following its product expiration date.The shelf life of Subsys is currently 36 months from the date of manufacture. We have monitored actual return history since product launch, which providesus with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment andprescription trends, estimated distribution channel inventory levels, and consideration of the introduction of competitive products. Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits onreturned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.The allowance for product returns is included in sales allowances. Wholesaler Discounts. We offer discounts to certain wholesale distributors based on contractually determined rates. We accrue the discount as areduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies and recognize the discount asa reduction of revenue in the same period the related revenue is recognized. Prompt Pay Discounts. We offer cash discounts to our customers, generally 2.0% of the sales price, as an incentive for prompt payment. We accountfor cash discounts by reducing accounts receivable by the full amount and recognize the discount as a reduction of revenue in the same period the relatedrevenue is recognized. Stocking Allowances. We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a new productand on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue the discount as areduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies and recognize the discount asa reduction of revenue in the same period the related revenue is recognized. Patient Discount Programs. We offer discount card programs to patients for Subsys in which patients receive discounts on their prescriptions that arereimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a percentage of actual redemption applied to inventory in thedistribution and retail channel and recognize the discount as a reduction of revenue in the same period the related revenue is recognized. The allowance forpatient discount programs is included in accrued sales allowances. Rebates. We participate in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebate programs,we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject to the rebate arefilled. We estimate and accrue these rebates based on current contract prices, historical and estimated future percentages of products sold to qualified patientsand estimated levels of inventory in the distribution channel. Rebates are recognized as a reduction of revenue in the period the related revenue isrecognized. The allowance for rebates is included in accrued sales allowances. 77 Chargebacks. We provide discounts primarily to authorized users of the Federal Supply Schedule (“FSS”) of the General Services Administrationunder an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These entitiespurchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between thecurrent retail price and the price the entity paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels,current contract prices and historical chargeback activity. Chargebacks are recognized as a reduction of revenue in the same period the related revenue isrecognized. The allowance for chargebacks is included as a reduction to accounts receivable. Dronabinol SG Capsule Dronabinol SG Capsule was commercially launched in December 2011, and we sell Dronabinol SG Capsule exclusively to Mylan Pharmaceuticals, Inc.(“Mylan”) in the United States under a supply and distribution agreement. Pursuant to the terms of the Mylan agreement, we manufacture Dronabinol SGCapsule under the Mylan label. Mylan distributes Dronabinol SG Capsule and on a monthly basis pays us an amount equal to the value of Dronabinol SGCapsule it sold to wholesale pharmaceutical distributors, less contractually defined deductions for chargebacks, rebates, sales discounts, distribution andstorage fees, and royalties. Under the terms of the supply and distribution agreement with Mylan, we are obligated to pay Mylan a royalty of between 10%and 20% on Mylan’s net product sales, and a single digit percentage fee on such sales for distribution and storage services. We bear no risk of product returnupon acceptance by Mylan. As Mylan has control over the amount it charges to wholesale pharmaceutical distributors for Dronabinol SG Capsule and thediscounts offered to the distributors, the sales price is not fixed and determinable at the date we ship such products to Mylan. Accordingly, we recognizerevenue upon Mylan’s sale of products to wholesale distributors, which is the point at which the sales price is fixed and determinable. See Note 8 under theheading “-Legal Matters” of these Notes for a discussion on our ongoing dispute with Mylan. Cash and Cash Equivalents We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value ofthose investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand andamounts on deposit with financial institutions, which at times may exceed FDIC limits. Accounts Receivable, Net Trade accounts receivable are recorded at the invoice amount net of allowances for wholesaler discounts, prompt pay discounts, stocking allowances,and doubtful accounts. See Note 2 – “Revenue Recognition” above for a description of our wholesaler discounts, prompt pay discounts, stocking allowancesand chargebacks. We evaluate the collectability of our accounts receivable based on a variety of factors including the length of time the receivables are pastdue, the financial health of the customer and historical experience. Inventories Inventories consist of raw materials, work-in-process and finished product and are valued at the lower of cost (first-in, first-out cost method) or market.Inventory costs are capitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercial use and netrealizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatory process, ourrequired investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the riskof manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation for product launches, we consider theprobability that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approvalprocess, as well as the market for the product in its current state. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization,or other potential factors including product expiration. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Maintenance and repairsthat do not extend the life of assets are charged to expense when incurred. When properties are disposed of, the related costs and accumulated depreciationare removed from the accounts and any gain or loss is reported in the period the transaction takes place. 78 Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cashflows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognizedby the amount by which the carrying amount exceeds the fair value of the asset. Income Taxes We account for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities,and net operating loss carry forwards (the “NOLs”) and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that willbe in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the periodthat includes the enactment date. We record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making suchdeterminations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected futuretaxable income, tax planning strategies and recent financial operations. We recognize a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, includingresolutions of any related appeals or litigation processes, based on the technical merits of the position. Our policy is to classify interest and penalties associated with income tax liabilities as income tax expense in the statement of operations. Research and Development Expenses Research and development (“R&D”) costs are expensed when incurred. These costs consist of external research and development expenses incurredunder agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drugdevelopment activities; and facilities expense, depreciation and other allocated expenses; and equipment and laboratory supplies. Advertising and Marketing Advertising and marketing costs are expensed as incurred. Stock-Based Compensation Expenses Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over thevesting period. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options using the following assumptions: ●Exercise price - Prior to May 7, 2013, we determined the exercise price based on valuations using the best information available to managementat the time of the valuations. Subsequent to our initial public offering of common stock (“IPO”) on May 7, 2013, the exercise price is equal tothe fair market value of the stock on the grant date which is determined based on quoted market prices. ●Volatility - Prior to our IPO, we did not have a reliable history of market prices for our common stock. Following our IPO, while we have anactive trading market, we do not have sufficient historical data to accurately determine volatility for the period equivalent to the expected termof the stock option grants. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historicalstock price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock optiongrants. ●Expected term - The expected term is based on a simplified method which defines the term as the average of the contractual term of the optionsand the weighted-average vesting period for all open employee awards. ●Risk-free rate - The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. treasury securities ineffect during the quarter in which the options were granted. ●Dividends - The dividend yield assumption is based on our history and expectation of paying no dividends. ●Forfeitures - Forfeitures have historically been insignificant. 79 Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expense during the reporting period. Actual results could materially differ from those estimates. Segment Information FASB ASC No. 280, “Segment Reporting” establishes standards for reporting information about reportable segments. Operating segments are defined ascomponents of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, ordecision-making group (“CODM”), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profitsbased on product lines and routes to market. Based on our integration and management strategies, we operate in a single reportable segment. Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedesnearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods orservices are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenuerecognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interimperiods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each priorreporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoptionof ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017. 3.Short-Term and Long-Term Investments Our policy for short-term and long-term investments is to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoidsinappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Short-term and long-terminvestments consist of corporate, various government agency and municipal debt securities, as well as certificates of deposit that have maturity dates that aregreater than 90 days. Certificates of deposit are carried at cost which approximates fair value. We classify our marketable securities as available-for-sale inaccordance with FASB Accounting Standards Codification Topic 320, Investments — Debt and Equity Securities. Available-for-sale securities are carried atfair value with unrealized gains and losses reported in stockholders’ equity. A decline in the market value of any available-for-sale security below cost that isdeemed to be other than temporary, results in impairment of the fair value of the investment. We did not have any realized gains or losses or decline in valuesjudged to be other than temporary during the year ended December 31, 2014. If we had realized gains and losses and declines in value judged to be otherthan temporary, we would have been required to include those changes in other expense in the consolidated statements of income and comprehensiveincome. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. The cost of securities sold is calculated usingthe specific identification method. At December 31, 2014, our certificates of deposit as well as our marketable securities have been recorded at an estimatedfair value of $24,757,000 and $23,262,000 in short-term and long-term investments, respectively. 80 Investments consisted of the following at December 31, 2014 (in thousands): AmortizedCost UnrealizedGains UnrealizedLosses Other-Than-TemporaryImpairmentLosses FairValue Cash andCashEquivalents Short-termInvestments Long-termInvestments Cash $44,785 $- $- $- $44,785 $44,785 $- $- Money market funds 13,321 - - - 13,321 13,321 - - Certificates of deposit 12,657 - - - 12,657 3,160 9,497 Marketable securities: Corporate securities 10,837 - (26) - 10,811 - 6,229 4,582 Federal agencysecurities 9,512 - (10) - 9,502 - 5,009 4,493 Municipal securities 15,037 15 (3) - 15,049 - 10,359 4,690 Total marketablesecurities 35,386 15 (39) - 35,362 - 21,597 13,765 $106,149 $15 $(39) $- $106,125 $58,106 $24,757 $23,262 We did not have certificates of deposit or marketable securities at December 31, 2013. The amortized cost and estimated fair value of the marketable securities at December 31, 2014, by maturity, are shown below (in thousands): December 31, 2014 Amoritzed Cost RFair Value Marketable securities: Due in one year or less $21,597 $21,597 Due after one year through 5 years 13,789 13,765 Due after 5 years through 10 years - - Due after 10 years - - $35,386 $35,362 The following table shows the gross unrealized losses and the fair value of our investments, with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position atDecember 31, 2014 (in thousands): December 31, 2014 Less Than 12 Months Greater Than 12 Months Fair Value Unrealized Loss Fair Value Unrealized Loss Marketable securities: Corporate securities $9,809 $(26) $- $- Federal agency securities 6,490 (10) - - Municipal securities 1,832 (3) - - $18,131 $(39) $- $- As of December 31, 2014, we have concluded that the unrealized losses on our marketable securities are temporary in nature. Marketable securities arereviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individualinvestment such as the severity of loss, the expectation for that security’s performance and the creditworthiness of the issuer. Additionally, we do not intendto sell, and it is not probable that we will be required to sell, any of the securities before the recovery of their amortized cost basis. 4. Fair Value Measurement At December 31, 2014, we held short-term and long-term investments, as described in Note 3, that are required to be measured at fair value on arecurring basis. All available-for-sale investments held by us at December 31, 2014 have been valued based on Level 2 inputs. Available-for-sale securitiesclassified within Level 2 of the fair value hierarchy are valued utilizing reports from third-party asset managers that hold our investments, showing closingprices on the last business day of the period presented. These asset managers utilize an independent pricing source to obtain quotes for most fixed incomesecurities, and utilize internal procedures to validate the prices obtained. In addition, we use an independent third-party to perform price testing, comparing asample of quoted prices listed in the asset managers’ reports to quotes listed through a public quotation service. 81 Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820, Fair Value Measurements andDisclosures, at December 31, 2014 were as follows (in thousands): Fair Value Measurement at Reporting Date December 31,2014 QuotedPrices inactiveMarkets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Marketable securities: Corporate securities $10,811 $- $10,811 $- Federal agency securities 9,502 - 9,502 - Municipal securities 15,049 - 15,049 - Total assets measured at fair value $35,362 $- $35,362 $- We did not have any certificates of deposit or marketable securities at December 31, 2013. 5. Inventories Inventories are stated at lower of cost or market. Cost, which includes amounts related to materials and costs incurred by our contract manufacturers, isdetermined on a first-in, first-out basis. Inventories are reviewed periodically for potential excess, dated or obsolete status. Management evaluates thecarrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, theprice we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand. The components of inventories, net of allowances, are as follows (in thousands): December 31, December 31, 2014 2013 Finished goods $30,998 $8,084 Work-in-process 4,316 3,886 Raw materials and supplies 2,785 2,558 Total inventories 38,099 14,528 Less: non-current work-in-process (3,318) - $34,781 $14,528 As of December 31, 2014 and 2013, raw materials inventories consisted of raw materials used in the manufacture of our active pharmaceuticalingredient (“API”) in our U.S.-based, state-of-the-art dronabinol manufacturing facility and component parts used in the manufacture of Subsys. Work-in-process consisted of actual production costs, including facility overhead and tolling costs of in-process Dronabinol SG Capsule and Subsys products.Finished goods inventories consisted of finished Dronabinol SG Capsule and Subsys products. Non-current work-in-process represent those inventoriespending FDA approval which is not expected before December 31, 2015, and are included in other assets in our consolidated balance sheets. 82 6. Property and Equipment Property and equipment are comprised of the following (in thousands): Estimated Useful Life As of December 31, (in years) 2014 2013 Computer equipment 3-5 $1,530 $713 Scientific equipment 5-7 5,928 3,379 Furniture 5-7 1,545 487 Manufacturing equipment 5-10 13,101 8,098 Leasehold improvements * 16,688 3,869 Less: accumulated depreciation and amortization (8,920) (6,419)Total fixed assets $29,872 $10,127 *The estimated useful life of the leasehold improvements is the lesser of the lease term or the estimated useful life. Total depreciation and amortization expense for the years ended December 31, 2014 and 2013 was $2,500,000 and $1,788,000, respectively. 7. Debt On September 30, 2014, our $15,000,000 secured revolving credit facility (the “Facility”), which we entered into in October 2013 with JPMorganChase Bank, N.A. matured. As of December 31, 2013, no amounts were outstanding under the Facility. Upon the May 2013 closing of our IPO, we paid off all indebtedness under our previous line of credit and converted several notes due to a principalstockholder into common stock. 8. Commitments and Contingencies Lease Commitments We lease facilities under non-cancelable operating lease agreements. Future minimum commitments for these operating leases in place as ofDecember 31, 2014, with a remaining non-cancelable lease term in excess of one year, are as follows (in thousands): Years ending December 31, 2015 $1,896 2016 2,062 2017 1,989 2018 1,770 2019 1,795 Thereafter 5,160 Total $14,672 The terms of certain lease agreements provide for rental payments on a graduated basis. We recognize rent expense on the straight-line basis over thelease period and have accrued for rent expense incurred but not paid. Rent expense under operating leases for the years ended December 31, 2014 and 2013was approximately $1,698,000 and $498,000, respectively. Defined Contribution Retirement Plans (401(k) Plan) We sponsor a 401(k) plan covering all full-time employees. Participants may contribute up to the legal limit. The 401(k) plan provides for employeecontributions, and beginning October 2014, our matching contribution is 50 percent of the first 6 percent of earnings contributed by each participant. 83 Contractual Commitments Manufacture and Supply Agreements We maintain certain manufacture and supply agreements with third party vendors for the manufacturing, processing, and packaging of Subsys andDronabinol SG Capsule which expire in 2016. As of December 31, 2014, our remaining estimated annual contractual obligations under these agreements arenot material. Contingent Consideration In connection with a reverse merger we made in 2010, selling stockholders obtained certain non-transferable contingent payment rights. These rightsentitle the selling stockholders to receive cash payments aggregating $20,000,000 (equivalent to $0.70402 per share) if, prior to the five-year anniversary ofthe acqusition, the FDA approves a New Drug Application for any one or more of the acquired company’s product candidates that were under development atthe time of the acqusition. The distribution is payable within nine months of FDA approval. We believe it is not probable that the contingent considerationwill be paid. Legal Matters Other than the matters that we have disclosed below, we from time to time become involved in various ordinary course legal and administrativeproceedings, which include intellectual property, commercial, governmental and regulatory investigations, employee related issues and private litigation,which we do not believe are either individually, or in the aggregate, likely to have a material adverse effect on our results of operations and financialcondition. Notwithstanding the foregoing, legal and governmental proceedings are inherently unpredictable and, in part, beyond our control, and we cannotreasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss, or range of loss, if any, that may result from theseproceedings generally described above or specifically described below. An adverse outcome in any of these proceedings could have a material adverse effecton our business, financial condition, results of operations and cash flows, and could cause the market value of our common stock to decline. Government Proceedings Like other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies in theUnited States. As a result, interaction with government agencies occurs in the normal course of our operations. The following is a brief description of pendinggovernmental investigations which we believe are potentially material at this time. It is possible that criminal charges and substantial fines and/or civilpenalties or damages could result from any government investigation or proceeding whether we deem them to be material or not. Department of Health and Human Services Investigation. We received a subpoena, dated December 9, 2013, from the Office of Inspector General ofthe Department of Health and Human Services, or HHS, in connection with an investigation of potential violations involving HHS programs. The subpoenawas issued in connection with an investigation by the U.S. Attorney’s Office for the Central District of California. The subpoena requests documentsregarding our business, including the commercialization of Subsys. We are cooperating with this investigation and have produced documents in response tothe subpoena and have provided other requested information. Health Insurance Portability and Accountability Act Investigation. On September 8, 2014, we received a subpoena issued pursuant to the HealthInsurance Portability and Accountability Act of 1996, as amended, from the U.S. Attorney’s Office for the District of Massachusetts. The subpoena requestsdocuments regarding Subsys, including our sales and marketing practices related to this product. We are cooperating with this investigation and haveproduced documents in response to the subpoena and have provided other requested information. We believe that the probability of unfavorable outcome or loss related to these governmental proceedings and an estimate of the amount or range ofloss, if any, from an unfavorable outcome are not determinable at this time. We believe we have meritorious legal positions and will continue to represent ourinterests vigorously in these matters. However, responding to government investigations, defending any claims raised, and any resulting fines, restitution,damages and penalties, settlement payments or administrative actions, as well as any related actions brought by shareholders or other third parties, couldhave a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business. 84 Federal Securities Litigation Between May 15 and May 19, 2014, two complaints (captioned Larson v. Insys Therapeutics, Inc., Case No. 14-cv-01043-GMS) and (Li vs. InsysTherapeutics, Inc., Case No 14-cv-01077-DGC) were filed in the U.S. District Court for the District of Arizona, or Arizona District Court, against us andcertain of our current officers. The complaints were brought as purported class actions, on behalf of purchasers of our common stock. In general, theplaintiffs allege that the defendants violated federal securities laws by making intentionally false and misleading statements regarding our business andoperations, therefore artificially inflating the price of our common stock. The plaintiffs seek unspecified monetary damages and other relief. On July 14,2014, several purported shareholders filed motions to consolidate the two cases, appoint a lead plaintiff, and appoint lead counsel. On August 29, 2014, theArizona District Court issued an order consolidating the action, appointing Hongwei Li as lead plaintiff, and appointing the lead counsel. Lead plaintiffscomplaint was filed on October 27, 2014. On December 11, 2014, we moved to dismiss the amended consolidated complaint. The parties have filed a motionto stay the action pending a mediation in connection with a potential resolution of the action. General Litigation and Disputes Kottayil vs. Insys Pharma, Inc. On September 29, 2009, Insys Pharma, Inc., our wholly owned subsidiary, and certain of our officers and the fivedirectors who comprised the Insys Pharma board of directors as of June 2009, as well as their spouses, were named as defendants in a lawsuit in the SuperiorCourt of the State of Arizona, Maricopa County, or the Arizona Superior Court, brought by Santosh Kottayil, Ph.D., certain of his family members and a trustof which Dr. Kottayil is the trustee. Dr. Kottayil formerly served as President, Chief Scientific Officer and a director of Insys Pharma, among other positions.The complaint brought a cause of action for statutory and common law appraisal of Dr. Kottayil’s Insys Pharma common stock. The cause of action forappraisal relates to a reverse stock split that Insys Pharma effected in June 2009, which resulted in Dr. Kottayil’s ownership position becoming a fractionalshare of Insys Pharma common stock. Following the reverse stock split, Insys Pharma cancelled all resulting fractional shares, including the fractional shareheld by Dr. Kottayil, and offered a cash payment in lieu of the fractional shares. The complaint also brought causes of action for breach of fiduciary duty,fraud and negligent misrepresentation in the defendants’ dealings with Dr. Kottayil on the subject of his compensation and stock ownership in Insys Pharma.In January 2010, the plaintiffs added claims seeking to rescind Dr. Kottayil’s assignment to Insys Pharma of his interest in all of the fentanyl and dronabinolpatent applications previously assigned to Insys Pharma and to recover the benefits of those interests. Dr. Kottayil is seeking, among other relief, the fairvalue of his Insys Pharma common stock as of June 2, 2009, compensatory and punitive damages, and rescission of all assignments to Insys Pharma of hisinterest in the patent applications, as well as attorneys’ fees, costs and interest. In February 2010, Insys Pharma and the other defendants answered and filed counter-claims to Dr. Kottayil’s amended complaint. The counter-claimsinclude actions for breach of fiduciary duty, fraud and negligent misrepresentations and omissions with respect to the time during which Dr. Kottayil wasemployed at Insys Pharma. The counter-claims, among other relief, seek compensatory and punitive damages. Discovery on all of the foregoing claims was completed and a trial was scheduled to commence on January 27, 2014; however, on January 22, 2014, thecourt vacated the trial and granted plaintiffs leave to file an amended complaint to add Insys Therapeutics, Inc. as a defendant. On January 29, 2014, the plaintiffs filed a second amended complaint in the Arizona Superior Court in which Insys Therapeutics, Inc. was also namedas defendant in this lawsuit. This amended complaint filed by plaintiffs re-alleges substantially the same claims set forth in the prior complaint, except thatplaintiffs now allege that they are entitled to rescissory damages, plaintiffs have also added our majority stockholder, a private trust, as a defendant to thebreach of fiduciary duty claim and plaintiffs have revised their fraud claim against the Insys Pharma director defendants. On February 25, 2014, we filed a Motion to Dismiss the Kottayil Plantiffs’ claims for a statutory and common law appraisal. The motion was denied onMay 2, 2014. The trial commenced on December 1, 2014 with the evidence phase of the trial completing on January 29, 2015. The parties are awaiting an order fromthe court. Insys Therapeutics, Inc. vs. Mylan Pharmaceuticals. On or around May 30, 2013, we filed a lawsuit against Mylan Pharmaceuticals, or Mylan,seeking a declaration that the parties’ Supply and Distribution Agreement dated May 20, 2011, or the Distribution Agreement, had been terminated becauseof Mylan’s material breach of the Distribution Agreement. Mylan removed the action to the United States District Court for the District of Arizona, or theDistrict Court, as Case No. 2:13-cv-01112-DGC, and moved to compel arbitration and sought a preliminary injunction. The District Court compelledarbitration and issued a preliminary injunction requiring that the Distribution Agreement continue in full force and effect pending the outcome of arbitration.The District Court then dismissed the lawsuit. 85 On May 31, 2013, Mylan filed a demand with the American Arbitration Association, Case No. 55 122 00119 13. Mylan’s demand alleged that we werein breach of the Distribution Agreement. On July 10, 2013, we filed a response to Mylan’s demand, denying we were in breach of the DistributionAgreement, and asserting counterclaims based on Mylan’s material breach of the Distribution Agreement and the duty of good faith and fair dealing. On January 21, 2014, Mylan filed a second new lawsuit against us with the District Court, as Case No. 2:14-cv-00119-GMS, asserting a claim fordeclaratory judgment and seeking a temporary restraining order and preliminary injunction relating to our notice of termination of the DistributionAgreement with respect to the parties’ failure to agree on floor pricing. On January 24, 2014, we responded in opposition to the application for temporaryrestraining order and preliminary injunction, or Application. A hearing was initially set for April 3, 2014. After stipulation of the parties to postpone thehearing, the Court denied all pending motions as moot on April 2, 2014. The Application was dismissed by the Court with prejudice on June 2, 2014. Afterthe Application was dismissed, Mylan filed a Motion to Enforce a draft settlement agreement between the parties. We responded in opposition and theDistrict Court denied Mylan’s motion on September 12, 2014. We have moved for sanctions against Mylan for filing the motion to enforce and we intend toseek damages and attorneys’ fees as part of this arbitration. On September 23, 2014, the three member arbitration panel held a preliminary hearing wherein it decided that the arbitration proceeding would bebifurcated. The first phase of the proceeding will determine whether there has been a material breach of the Agreement. If either party is successful inestablishing its claims during this first phase then there will be a second phase of the arbitration to determine damages. In November 2014, the arbitration panel held Phase I of the arbitration proceeding which we anticipate will resolve (1) whether Mylan materiallybreached the Agreement by failing to accept the delivery of conforming shipments of product in October 2012, January 2014 and March 2014; (2) whetherMylan has materially breached the parties’ Supply and Distribution Agreement by failing to use commercially reasonable efforts to market and sell theproduct; and (3) whether we are in breach of the Agreement by delivering non-conforming product. If we are successful in our claims, the Panel will schedulea Phase II of the arbitration to determine the amount, if any, of damages suffered because of the breach of the Supply and Distribution Agreement. Thearbitration panel had not yet delivered a Phase I decision as of March 3, 2015. We believe that the probability of unfavorable outcome or loss related to all of the above litigation matters and an estimate of the amount or range ofloss, if any, from an unfavorable outcome are not determinable at this time. We believe we have meritorious legal positions and will continue to represent ourinterests vigorously in these matters but the range possible outcomes on these matters is very broad and we are not able to provide a reasonable estimate ofour potential liability, if any, nor are we able to predict the outcome of each litigation matter. For instance, in the Kottayil matter, if the patent assignmentsare successfully rescinded, we may not have exclusive patent rights covering our fentanyl and dronabinol product candidates, and such patent rights may notbe available to us on acceptable terms, if at all, which would have a material adverse effect on our business. Responding to each of these litigation matters,defending any claims raised, and any resulting fines, restitution, damages and penalties, or settlement payments as well as any related actions brought byshareholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of ourmanagement from operating our business. 9. Equity Preferred Stock Prior to our May 2013 IPO, we had outstanding shares of convertible preferred stock that were convertible into common stock on a one-to-0.57377basis and, until converted, were entitled to the voting and dividend rights of the same number of shares of common stock into which they were convertible.Each share of convertible preferred stock automatically converted into shares of our common stock immediately prior to the closing of our initial publicoffering of common stock at the conversion ratio. In August, 2014, we entered into a Rights Agreement with respect to a newly-designated Series A Participating Preferred Stock. In connection with theRights Agreement, our Board of Directors declared a dividend distribution of the right to purchase one one-hundredth of one share of our newly designatedSeries A Junior Participating Preferred Stock, par value $0.001 per share (a “Right”) for each outstanding share of common stock, par value $0.01 per share,held by the stockholders of the Company at the close of business on September 1, 2014 (the “Record Date”). 86 Each Right entitles the registered holder to purchase from us one one-hundredth of a share of preferred stock (each, a “Preferred Share” andcollectively, the “Preferred Shares”) at a price of $160 per one one-hundredth of a Preferred Share (the “Purchase Price”), subject to adjustment. Each oneone-hundredth of a Preferred Share has the designations, powers, privileges, preferences, rights, qualifications, limitations and restrictions that are designedto make it the economic equivalent of one share of common stock. The Rights will not become exercisable until the earlier to occur of the close of business on (i) the tenth calendar day following acquisition by anyperson, entity or group of affiliated or associated persons of beneficial ownership of 15% or more of our outstanding shares of common stock (an“Acquiring Person”) or (ii) the tenth business day (or such later date as may be determined by action of the Board prior to such time as any person or entitybecomes an Acquiring Person) following the date of commencement of, or the first announcement of, an intention to commence, a tender offer or exchangeoffer, the consummation of which would result in any person or entity or group of persons or entities acting in concert becoming an Acquiring Person (theearlier of such dates being called the “Distribution Date”). Until the Distribution Date, the Rights will be transferable with and only with our CommonShares. The Rights will expire ten years after the execution of the Rights Agreement unless the Rights are earlier redeemed or exchanged by us. Each Preferred Share is entitled to a minimum preferential quarterly dividend payment equal to the greater of $1.00 per share or 100 times the aggregateper share price of all cash and non-cash dividends declared per share of common stock. In the event of liquidation, the holders of the Preferred Shares wouldbe entitled to a minimum preferential liquidation payment of $100 per share plus an amount equal to accrued and unpaid dividends and distributionsthereon, provided that the Preferred Shares would be entitled to receive an aggregate amount per share equal to 100 times the aggregate amount to bedistributed per share to holders of common stock. Each Preferred Share has 100 votes, voting together with the common stock. Common Stock On February 26, 2014, our board of directors approved a three-for-two stock split of our common stock to be effected through a stock dividend. Therecord date for the stock split was the close of business on March 17, 2014, with share distribution occurring on March 28, 2014. As a result of the dividend,shareholders received one additional share of Insys Therapeutics, Inc. common stock, par value $0.0002145, for each two shares they held as of the recorddate. All share and per share amounts have been retroactively restated for the effects of this stock split. On May 6, 2014, our shareholders approved an amendment to our certificate of incorporation to increase the authorized shares of common stock from50,000,000 to 100,000,000 and an amendment to increase the par value for our common stock to $0.01 per share. Our consolidated financial statements andnotes herein have been retroactively restated to reflect the impact of these amendments. Initial Public Offering On May 7, 2013, we completed our IPO, pursuant to which we sold 6,900,000 shares of our common stock (4,600,000 on a pre-split basis) at a price of$5.33 per share ($8.00 on a pre-split basis), which included the underwriters’ exercise of their over-allotment option. As a result of the IPO, we raised a total of$32.5 million in net proceeds after deducting underwriting discounts and commissions of $2.6 million and offering expenses of $1.8 million. Costs directlyassociated with our IPO were capitalized and recorded as deferred IPO costs prior to the completion of the IPO. These costs have been recorded as a reductionof the proceeds received in arriving at the amount recorded in additional paid-in capital. Upon completion of the IPO, all outstanding shares of our preferredstock were converted into 12,793,290 shares of common stock (8,528,860 on a pre-split basis). Also, upon completion of our IPO, the outstanding balance ofprincipal and accrued interest related to several promissory and demand notes in favor of entities controlled by Dr. John Kapoor in the amount of$59,284,000 were converted into 11,115,512 shares of common stock (7,410,341 at a pre-split basis). 10. Stock-based Compensation We currently have the following stock-based incentive plans: 2013 Employee Stock Purchase Plan The 2013 Employee Stock Purchase Plan (the “ESPP”) was adopted by our board of directors and approved by our stockholders, and became effectivein connection with our initial public offering in May 2013. The ESPP authorizes the issuance of 262,500 shares of common stock (175,000 on a pre-splitbasis) pursuant to purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of common stockreserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 through January 1, 2023, by the least of (a) 1% ofthe total number of shares of common stock outstanding on December 31 of the preceding calendar year, (b) 300,000 shares (200,000 on a pre-split basis), or(c) a number determined by our board of directors that is less than (a) and (b). The ESPP is intended to qualify as an “employee stock purchase plan” withinthe meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2014, 546,112 shares of common stockhave been purchased under the ESPP. 87 2013 Equity Incentive Plan The 2013 Equity Incentive Plan (the “2013 Plan”) is the successor to and continuation of the 2006 Equity Incentive Plan and the Insys Pharma, Inc.,Amended and Restated Equity Incentive Plan. The 2013 Plan was adopted by our board of directors and approved by our stockholders, and became effectivein connection with our initial public offering in May 2013. The 2013 Plan provides for the grant of stock awards, including stock options, restricted stock,stock appreciation rights, performance units, performance shares and other stock awards, to our employees, directors and consultants. The number of shares ofcommon stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 through January 1, 2023, by thelesser of (a) 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; or (b) a number of shares ofcommon stock that may be determined each year by the Registrants board of directors that is less than the preceeding clause (a). As of December 31, 2014,options to purchase 2,808,111 shares of common stock were outstanding and 197,225 shares remained available for future grant. 2006 Equity Incentive Plan The 2006 Equity Incentive Plan (the “2006 Plan”) provided for the grant of stock awards, including stock options, restricted stock, stock appreciationrights, performance units, performance shares and other stock awards, to our employees, directors and consultants. The 2006 Plan was adopted in April 2006.As of December 31, 2014, options to purchase 728,857 shares of common stock were outstanding. There were no unvested options outstanding under thePlan as of December 31, 2014. The Plan has been terminated and we will not grant additional equity awards under the Plan. Awards under the 2006 Plan generally consist of stock options that have an exercise price equal to the fair market value of our common stock on thedate of grant, a ten-year term, and vest ratably over four years, subject to continuous employment. Stock awards granted to our non-employee directors underthe 2006 Plan typically vest one year from the date of grant. Awards under the 2006 Plan vest immediately upon a change in control. Although the 2006 Planprovides for the issuance of performance units and performance shares, we have not made grants of these types of awards. Insys Pharma, Inc. Amended and Restated Equity Incentive Plan Insys Pharma, Inc.’s Amended and Restated Equity Incentive Plan (the “Plan”) provided for the grant of stock options to employees, directors andconsultants to acquire Insys Pharma’s voting and non-voting common stock. The Plan was originally adopted by Insys Pharma in December 2002 and wasamended and restated in June 2006. In connection with our reverse acquisition of Insys Pharma in November 2010, all of the outstanding options grantedunder the Plan were assumed by us and were converted into options to purchase shares of our common stock at the exchange ratio set forth in the mergeragreement. As of December 31, 2014, options to purchase an aggregate of 316,613 shares of our common stock under the Plan were outstanding. There wereno unvested options outstanding under the Plan as of December 31, 2014. The Plan has been terminated and we will not grant additional equity awards underthe Plan. Option awards under the Plan were generally granted with an exercise price equal to the fair market value of Insys Pharma’s common stock on the dateof grant. Option awards under the Plan typically have a ten-year life and vest within the first two years of the grant, subject to continuous employment.Option awards granted to Insys Pharma’s non-employee consultants under the Plan typically vest within two years from the date of grant. These options aremarked to market at each reporting period. The expense associated with these adjustments has historically been immaterial. Amounts recognized in the consolidated statements of comprehensive income with respect to our stock-based compensation plans were as follows (inthousands): Years Ended December 31, 2014 2013 Research and development $5,498 $915 General and administrative 9,791 5,424 Total cost of stock-based compensation $15,289 $6,339 88 Included in stock-based compensation for the year ended December 31, 2014 was approximately $4,016,000 of expense associated with theaccelerated vesting of option awards related to two terminated employees. The following table summarizes stock option activity during the years ended December 31, 2014 and 2013: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm (in years) AggregateIntrinsicValue(in millions) Outstanding as of December 31, 2012 3,258,860 $2.12 Granted 2,230,050 $9.71 Cancelled (87,444) $5.71 Exercised (903,977) $2.31 Outstanding as of December 31, 2013 4,497,489 $5.79 Granted 1,698,599 $29.13 Cancelled (534,112) $15.42 Exercised (1,808,395) $4.95 Outstanding as of December 31, 2014 3,853,581 $15.14 8.30 $104.1 Vested and exercisable as of December 31, 2013 1,810,653 $2.80 7.05 $41.7 Vested and exercisable as of December 31, 2014 1,330,360 $7.90 7.20 $45.6 The aggregate intrinsic value for stock options outstanding and exercisable is defined as the positive difference between the fair market value of ourcommon stock and the exercise price of the stock options. As of December 31, 2014, we expect to recognize $34,118,000 of stock-based compensation forour outstanding options over a weighted-average period of 3.0 years. Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2014 and 2013, was $8,956,000 and$2,102,000. For the years ended December 31, 2014 and 2013, we recorded net reductions of $22,003,000 and $2,745,000, respectively, of our federal andstate income tax liability, with an offsetting credit to additional paid-in capital resulting from the excess tax benefits related to exercised stock options. Stock Option Valuation Information The weighted-average assumptions used to estimate the fair value of employee stock options granted during the periods presented are as follows: 2014 2013 Expected volatility 69.3% 73.54% Risk-free interest rate 1.72% 2.04% Expected term (in years) 6.0 7.0 Expected dividend yield 0.00% 0.00% For the years ended December 31, 2014 and 2013, the weighted-average estimated fair value per option granted was $21.05 and $10.07, respectively. 89 11. Income Taxes Income tax (benefit) expense consists of the following (in thousands): Years Ended December 31, 2014 2013 Current income taxes: Federal $22,500 $2,281 State and local 3,874 957 Total current income tax 26,374 3,238 Deferred income taxes: Federal 867 (9,123)State and local (1,042) (2,915)Total deferred income tax (175) (12,038)Provision (benefit) for income taxes $26,199 $(8,800) As of December 31, 2014, we had approximately $1.6 million of federal net operating loss carryforwards (“NOLs”) all of which are subject to asignificant Section 382 limitation. Under Section 382 of the Code, substantial changes in our ownership may limit the amount of NOLs that can be utilizedannually in the future to offset taxable income, if any. Specifically, this limitation may arise in the event of a cumulative change in ownership of ourcompany of more than 50% within a three-year period as determined under the Code, which we refer to as an ownership change. Any such annual limitationmay significantly reduce the utilization of these NOLs before they expire. Our ability to utilize federal NOLs created prior to the NeoPharm merger issignificantly limited. For federal tax purposes, the Section 382 NOL carryforward is limited on an annual basis and begins expiring in 2018. For state tax purposes, we had approximately $272.0 million of state NOLs at December 31, 2014, including the excess tax deductions from theexercise of stock options. Approximately $269.5 million of these NOLs relate only to Illinois. Based on projections, we estimate that approximately $263.2million of these Illinois NOLs will not be utilized. For this reason, we recorded a valuation allowance for the estimated tax benefit relating to this amount, or$20.4 million. Generally, the state NOL carryforwards begin expiring in 2016 if not utilized. The Illinois NOLs begin expiring in 2015 if not utilized. At December 31, 2012, a full valuation allowance was placed on our net deferred tax assets because we determined that it was more likely than not thatwe would not benefit from these tax attributes in the future. During the fourth quarter of 2013, we determined it was more likely than not that we would beable to utilize nearly all types of our deferred tax assets, including all federal net operating loss carryforwards. This determination was made based on ourprofitability in 2013 and our expectations of future profitability. Accordingly, we reversed the deferred tax asset valuation allowance associated with themajority of our deferred tax assets. 90 Deferred Income Taxes The tax effects of temporary differences and carry forwards that give rise to the deferred tax assets and liabilities are comprised of the following as ofDecember 31 (in thousands): Deferred tax assets: 2014 2013 NOLs and credits $24,683 $23,429 Start-up expenditures 3,349 3,613 Stock-based compensation 4,351 2,411 Deferred revenue and allowances 2,516 2,310 Expenses currently not deductible for tax purposes 3,884 2,116 Other 149 - Gross deferred tax assets 38,932 33,879 Deferred tax asset valuation allowance (20,402) (20,684)Deferred tax assets 18,530 13,195 Deferred tax liabilities: Federal impact of state taxes (1,384) (1,021)Property and equipment (4,354) (136)Prepaid expenses (579) - Net deferred tax assets $12,213 $12,038 In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets willnot be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which thosetemporary differences become deductible. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income or losses, andtax planning strategies in making this assessment. Based upon our current net income and projections for future taxable income over the periods in which thedeferred tax assets are deductible, we believe that, with the exception of the Illinois NOL discussed above, the realization of these tax assets is more likelythan not. As such, with the exception of the valuation allowance that has been placed on the future tax benefit relating to our Illinois NOLs, no othervaluation allowance exists on our deferred tax assets at December 31, 2014. Effective Tax Rate Reconciliation: Our federal statutory tax rate is 35%, while our effective tax rate was 40.8% for the year ended December 31, 2014 as set forth below: 2014 2013 U.S. statutory tax rate 35.0% 35.0%Increase (reduction) of income taxes resulting from: State income taxes, net of federal benefit 2.9% 11.8%Non-deductible litigation expense 3.0% - Other non-deductible and includible items and credits 0.6% 2.3%Research and other credits (2.2)% (1.8)%Uncertain tax positions 1.8% - Other (0.3)% (0.6)%Change in valuation allowance 0.0% (74.6)%Total (benefit) provision for income taxes 40.8% (27.9)% 91 The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits (in thousands): Years Ended December 31, 2014 2013 Beginning balance $325 $- Additions based on current year tax positions 450 270 Additions based on prior year tax positions 4,591 55 Ending balance $5,366 $325 The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of a position. The Company hada reserve of $5,366,000 as of December 31, 2014, mostly related to tax credits of $1,606,000, state and local income tax filing positions of $2,503,000, and$1,257,000 of other permanent differences. No significant penalties or interest are included in income taxes or accounted for on the balance sheet related to unrecognized tax positions as ofDecember 31, 2014. Tax years subsequent to 2010 remain open to examination by federal and state taxing authorities. In addition, our reverse acquisition NOLs remainopen to examination. 12. Net Income per Share Basic net income per common share is computed by dividing the net income by the weighted average number of common shares outstanding duringthe period. The diluted income per share further includes any common shares available to be issued upon exercise of outstanding stock options if suchinclusion would be dilutive. The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts): Years EndedDecember 31, 2014 2013 Historical net income per share - Basic Numerator: Net income $37,977 $40,377 Denominator: Weighted average number of common shares outstanding 34,379,535 25,919,768 Basic net income per common share $1.10 $1.56 Historical net income per share - Diluted Numerator: Net income $37,977 $40,377 Denominator: Weighted average number of common shares outstanding 34,379,535 25,919,768 Effect of dilutive stock options 2,288,031 2,814,849 Weighted average number of common shares outstanding 36,667,566 28,734,617 Diluted net income per common share $1.04 $1.41 The calculation of diluted net income per common share excludes the effects of 890,186 outstanding stock options for the year ended December 31,2014 as the impact of these options was anti-dilutive. There were no anti-dilutive share equivalents for the year ended December 31, 2013. 92 13. Product Lines, Concentration of Credit Risk and Significant Customers We are engaged in the business of developing and selling pharmaceutical products. We have two product lines, consisting of Subsys and DronabinolSG Capsule. Our chief operating decision-maker evaluates revenues based on product lines. The following tables summarize our net revenue by product line, as well as the percentages of revenue by route to market (in thousands): Net Revenue by Product LineYears Ended December 31, 2014 2013 Subsys $219,530 $95,740 Dronabinol SG Capsule 2,595 3,549 Total net revenue $222,125 $99,289 Percent of Revenue by Route to MarketYears Ended December 31, 2014 2013 Pharmaceutical wholesalers 99% 96%Generic pharmaceutical distributors 1% 4% 100% 100% All our products are sold in the United States of America. Product shipments to four pharmaceutical wholesalers accounted for 38%, 22%, 14% and 14% of shipments of Subsys for the year ended December 31,2014. Product shipments to four pharmaceutical wholesalers accounted for 30%, 21%, 20% and 19% of shipments of Subsys for the year ended December 31,2013. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 26%, 24%, 23% and 14% of gross accounts receivable as of December31, 2014. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 40%, 21%, 17% and 14% of accounts receivable as of December 31,2013. Currently, for Subsys, we use one vendor as our sole supplier of the active pharmaceutical ingredient in this product. Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We place ourcash with high credit quality financial institutions and generally limit the amount of credit exposure to the amount of FDIC coverage. However, periodicallyduring the year, we maintain cash in financial institutions in excess of the current FDIC insurance coverage limit of $250,000. We perform ongoing creditevaluations of our customers’ financial condition but do not typically require collateral to support customer receivables. We established an allowance fordoubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. 93 14. Supplemental Financial Information A summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2014 and 2013 are asfollows (in thousands): Balanceat Beginning ofYear Charged toCosts andExpenses Utilization Balance atEnd ofYear Allowance for doubtful accounts: Year ended December 31, 2014 $- $398 $- $398 Year ended December 31, 2013 $- $- $- $- Allowance for sales wholesaler discounts, prompt pay discounts,stocking allowances, and chargebacks: Year ended December 31, 2014 $2,748 $22,395 $(19,725) $5,418 Year ended December 31, 2013 $834 $8,512 $(6,598) $2,748 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this AnnualReport on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosurecontrols and procedures were effective. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, weused the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control — IntegratedFramework. Based on our assessment using those criteria, our management concluded that our internal control over financial reporting was effective as ofDecember 31, 2014. This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm. For as long as we remain an “emerginggrowth company” as defined in the JOBS Act, we are exempt from the requirement that our registered public accounting firm provide an attestation report onthe effectiveness of our internal control over financial reporting. 94 Changes in Internal Controls Over Financial Reporting There was no change in our internal control over financial reporting that occurred during the quarterly period ended December 31, 2014 that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control systemare met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have beendetected. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item will be included in our Proxy Statement to be filed pursuant to Regulation 14A within 120 days after our yearended December 31, 2014 in connection with our 2015 Annual Meeting of Stockholders, or the 2015 Proxy Statement, and is incorporated herein byreference. Code of Business Conduct and Ethics We have adopted a Code of Business Conduct and Ethics that applies to employees, officers and directors, including our executive management team,such as our Chief Executive Officer and Chief Financial Officer. This Code of Business Conduct and Ethics is posted on our website at www.insysrx.com. Weintend to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of the Code of BusinessConduct and Ethics by posting such information on our website. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item will be included in the 2015 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference. 95 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a)Documents filed as part of this report. (1)Financial Statements. The consolidated financial statements listed on the index to Part II Item 8 of this Annual Report on Form 10-K are filed asa part of this Annual Report. (2)Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required oris included in the financial statements or notes thereof. (3)Exhibits. Those exhibits marked with a (*) refer to exhibits filed or furnished herewith. The other exhibits are incorporated herein by reference, asindicated in the following list. Those exhibits marked with a (+) refer to management contracts or compensatory plans or arrangements. Portionsof the exhibits marked with a (Ω) are the subject of a Confidential Treatment Request under 17 C.F.R. §§ 200.80(b)(4), 200.83 and 240.24b-2. Omitted material for which confidential treatment has been requested has been filed separately with the SEC. EXHIBIT INDEXExhibitNumber Description of Document 2.1 Agreement and Plan of Merger Among the Registrant, Insys Therapeutics, Inc. and ITNI Merger Sub Inc. dated October 29, 2010 (1) 3.1 Registrant’s Amended and Restated Certificate of Incorporation (2) 3.2 Registrant’s Amended and Restated Bylaws (3) 3.3 Certificate of Designation of Series A Junior Participating Preferred Stock (4) 4.1 Form of Common Stock Certificate of the Registrant 4.2 Rights Agreement, dated August 15, 2014 between the Insys Therapeutics, Inc. and Computershare Trust Company, N.A. (5) 10.1+ Form of Indemnity Agreement by and between the Registrant and its directors and officers (6) 10.2+ Insys Therapeutics, Inc. 2006 Equity Incentive Plan, as amended (7) 10.3+ Insys Pharma, Inc. Amended and Restated Equity Incentive Plan (8) 10.4+ 2013 Equity Incentive Plan and Form of Stock Option Grant Notice and Form of Stock Option Agreement thereunder (9) 10.5+ 2013 Employee Stock Purchase Plan (10) 10.6+ Amended and Restated Employment Agreement by and between the Registrant and Michael Babich dated April 18, 2013 (11) 10.7+ Separation and Consulting Agreement by and between the Registrant and Larry Dillaha, M.D. dated March 28, 2014 (12) 10.8+ Employment Agreement by and between the Registrant and Darryl Baker dated April 18, 2013 (13) 96 10.9Ω Softgel Commercial Manufacturing and Packaging Agreement dated as of March 21, 2011 by and between the Registrant and CatalentPharma Solutions, LLC (14) 10.10Ω First Amendment to Softgel Commercial Manufacturing and Packaging Agreement dated as of March 5, 2012 by and between theRegistrant and Catalent Pharma Solutions, LLC (15) 10.11Ω Supply and Distribution Agreement dated as of May 20, 2011 by and between the Registrant and Mylan Pharmaceuticals Inc. (16) 10.12Ω Amendment to Supply and Distribution Agreement dated as of March 13, 2012 by and between the Registrant and Mylan PharmaceuticalsInc. (17) 10.13Ω Manufacturing Agreement dated as of March 7, 2011 by and between the Registrant and DPT Lakewood, LLC (18) 10.14Ω Letter Agreement dated April 23, 2012, amending the DPT Lakewood, LLC Manufacturing Agreement dated as of March 7, 2011 (19) 10.15 Supply Agreement dated as of March 7, 2011 by and between the Registrant and AptarGroup, Inc. (20) 10.16+ Non-Employee Director Compensation Policy (21) 10.17+ Employment Offer Statement effective January 31, 2014 by and between Registrant and Franc Del Fosse. (22) 10.18+ Separation and Consulting Agreement dated October 31, 2014 between Registrant and Christopher Homrich. (23) 21.1 Subsidiaries of the Registrant (24) 23.1* Consent of BDO USA, LLP, Independent Registered Public Accounting Firm. 24.1 Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K) 31.1* Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) 97 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)Previously filed as Exhibit 2.1 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011. (2)Previously filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 12, 2014. (3)Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 10, 2014. (4)Previously filed as 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 18, 2014. (5)Previously filed as 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 18, 2014. (6)Previously filed as Exhibit 10.1 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011. (7)Previously filed as Exhibit 10.3 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011. (8)Previously filed as Exhibit 10.4 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011. (9)Previously filed as Exhibit 99.3 to the Company’s Form S-8 Registration Statement (No. 333-188306) on May 2, 2013. (10)Previously filed as Exhibit 99.4 to the Company’s Form S-8 Registration Statement (No. 333-188306) on May 2, 2013. (11)Previously filed as Exhibit 10.6 to the Company’s Form S-1 Registration Statement (No. 333-173154) on April 25, 2013. (12)Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on April 1, 2014. (13)Previously filed as Exhibit 10.8 to the Company’s Form S-1 Registration Statement (No. 333-173154) on April 25, 2013. (14)Previously filed as Exhibit 10.12 to the Company’s Form S-1 Registration Statement (No. 333-173154) on July 15, 2011. 98 (15)Previously filed as Exhibit 10.13 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (16)Previously filed as Exhibit 10.14 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (17)Previously filed as Exhibit 10.15 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (18)Previously filed as Exhibit 10.16 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (19)Previously filed as Exhibit 10.17 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (20)Previously filed as Exhibit 10.18 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (21)Previously filed as Exhibit 10.22 to the Company’s Form S-1 Registration Statement (No. 333-173154) on April 15, 2013. (22)Previously filed as 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014. (23)Previously filed as 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 31, 2014. (24)Previously filed as Exhibit 21.1 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011. 99 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on March 3, 2015. Insys Therapeutics, Inc. By/s/ Michael L. Babich Michael L. Babich President and Chief Executive Officer (Principal Executive Officer) 100 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Darryl S. Baker and Franc DelFosse, jointly and severally, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this AnnualReport on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following personson behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Michael L. Babich Michael L. Babich President and Chief Executive Officer March 3, 2015 /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer andPrincipal Accounting Officer March 3, 2015 /s/ John N. Kapoor John N. Kapoor Director March 3, 2015 /s/ Patrick P. Fourteau Patrick P. Fourteau Director March 3, 2015 /s/ Steven Meyer Steven Meyer Director March 3, 2015 /s/ Brian Tambi Brian Tambi Director March 3, 2015 /s/ Pierre Lapalme Pierre Lapalme Director March 3, 2015 /s/ Theodore H. Stanley, M.D. Theodore H. Stanley, M.D. Director March 3, 2015 101Exhibit 4.1  Exhibit 23.1 Consent of Independent Registered Public Accounting Firm Insys Therapeutics, Inc.Chandler, Arizona We hereby consent to the incorporation by reference in these Registration Statements on Form S-8 (No. 333-188306 and 333-194374) of InsysTherapeutics, Inc. of our report dated March 3, 2015, relating to the consolidated financial statements of Insys Therapeutics, Inc. which appears in thisForm 10-K. /s/ BDO USA, LLP Phoenix, ArizonaMarch 3, 2015  Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael L. Babich, certify that: 1.I have reviewed this annual report on Form 10-K of Insys Therapeutics, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 3, 2015 /s/ Michael L. Babich Michael L. Babich President and Chief Executive Officer Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Darryl S. Baker, certify that: 1.I have reviewed this annual report on Form 10-K of Insys Therapeutics, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalentfunctions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 3, 2015 /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 For purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, each of the undersigned officers of Insys Therapeutics, Inc., a Delaware corporation (“Company”), does hereby certify, to such officer’s knowledge,that: The Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (“Form 10-K”) of the Company fully complies with the requirementsof Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects,the financial condition and results of operations of the Company. Dated: March 3, 2015 /s/ Michael L. Babich Michael L. Babich President and Chief Executive Officer Dated: March 3, 2015 /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer 

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