Insys Therapeutics Inc
Annual Report 2015

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 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 of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements 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 registrantwas required 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, tothe best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment of this Form 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.See the 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 $832.5 millionas of June 30, 2015 based on the closing sales price of the common stock on the NASDAQ Global Market. There were 71,510,190 shares of the registrant’s common stock issued and outstanding as of February 17, 2016. Documents Incorporated by Reference Portions of the registrant's Proxy Statement relating to its 2016 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, 2015, are incorporated byreference in Part III of this Form 10-K.  TABLE OF CONTENTS PageNumbersPART I Item 1.Business1 Item 1A.Risk Factors 21 Item 1B.Unresolved Staff Comments51 Item 2.Properties51 Item 3.Legal Proceedings51 Item 4.Mine Safety Disclosures51 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities52 Item 6.Selected Financial Data53 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations54 Item 7A.Quantitative and Qualitative Disclosures About Market Risk67 Item 8.Financial Statements and Supplementary Data69 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure96 Item 9A.Controls and Procedures96 Item 9B.Other Information98 PART III Item 10.Directors, Executive Officers and Corporate Governance98 Item 11.Executive Compensation98 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters98 Item 13.Certain Relationships and Related Transactions, and Director Independence98 Item 14.Principal Accountant Fees and Services98 PART IV Item 15.Exhibits, Financial Statement Schedules98 SIGNATURES102  2015 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 2012AUC Area under the curveAVC Assurance of Voluntary ComplianceBTCP Breakthrough cancer painCatalent Catalent Pharma Solutions, LLCCBD Synthetic cannabidiolcGMP Current Good Manufacturing PracticesCID Civil Investigative DemandCINV 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, LLCERP Enterprise Resource PlanningESI Express Scripts, Inc.FDA U.S. Food and Drug AdministrationFDCA Federal Food, Drug, and Cosmetic ActFSS Federal Supply ScheduleGAAP Generally Accepted Accounting PrinciplesGAO Government Accountability OfficeGCP Good Clinical PracticesGI GastrointestinalGLP Good Laboratory PracticesHHS U.S. Department of Health and Human ServicesHIPAA Health Insurance Portability and Accountability Act of 1996HITECH Health Information Technology for Economic and Clinical Health Act of 2009IMS IMS HealthIND Investigational New Drug ApplicationInsys Pharma Insys Pharma, Inc.Insys Therapeutics Insys Therapeutics, Inc.IPO Initial public offeringIPR Inter Partes ReviewIRB Institutional Review BoardJOBS Act Jumpstart Our Business Startups Act of 2012MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003Mylan Mylan Pharmaceuticals, Inc.NDA New Drug ApplicationNeoPharm NeoPharm, Inc.NOL Net operating loss carryforwardNRV Net Realizable ValueNSAID Non-steroidal anti-inflammatory drugOrange Book FDA's Approved Drug Products with Therapeutic Equivalence EvaluationsODOJ Oregon Department of JusticePBM Pharmacy Benefit ManagersPDEs Prescription Drug EventsPDMA Prescription Drug Marketing ActPDUFA Prescription Drug User Fee ActPK PharmacokineticsPPACA Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education ReconciliationAct of 2010  QSR FDA's Quality System RegulationREMS Risk Evaluation and Mitigation StrategyRLD Reference listed drugSEC U.S. Securities and Exchange CommissionTHC Delta-9-tetrahydrocannabinolTIRF Transmucosal immediate-release fentanylTIRF REMS Transmucosal immediate release fentanyl risk evaluation and mitigation strategyUSAO United States Attorney OfficeUSPTO United States Patent and Trademark OfficeVC Vomiting center  PART I ITEM 1. BUSINESS Overview As used in this Form 10-K, “we,” “us,” and “our” refer to Insys Therapeutics. We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We haveone marketed product: Subsys, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients. Insys Therapeutics was incorporated in Delaware in June 1990, and maintains headquarters in Chandler, Arizona. Our parent, Insys Therapeutics,was formerly named Neopharm, Inc. Our subsidiary, Insys Pharma, was formerly called Insys Therapeutics, Inc. On November 8, 2010, Insys Pharmaeffected a merger with NeoPharm in a transaction accounted for as a reverse acquisition, or the NeoPharm merger. All of our outstanding share capitalwas exchanged for newly-issued shares of common stock and convertible preferred stock of NeoPharm. As a result of the NeoPharm merger, InsysPharma became a wholly-owned subsidiary of NeoPharm and changed its name from Insys Therapeutics to Insys Pharma. NeoPharm then changed itsname to Insys Therapeutics. Insys Therapeutics completed its initial public offering of common stock in May 2013. The financial statements for allperiods 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 reasonablypracticable after they are electronically filed with or furnished to SEC. These filings are also available on the SEC’s website at www.sec.gov. Information contained on 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 portfolio of differentiated, wholly-owned product candidates. Our lead product candidate is Syndros®, a proprietary, orally administeredliquid formulation of dronabinol, which will be our second, branded supportive care product, if it successfully obtains all required regulatoryapprovals. We believe this product candidate may provide increased flexibility in dosing for doctors and an improved absorption profile for patients,which may ultimately increase patient compliance because of less dose-to-dose variability and allow us to further penetrate and potentially expandthe market for the use of dronabinol. We intend to market Syndros, 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. Wefiled our NDA in March 2011 and received marketing approval for Subsys from the FDA in January 2012 for the treatment of BTCP. BTCP ischaracterized by sudden, often unpredictable, episodes of pain that can peak in severity at less than one minute to 10 minutes despite backgroundpain controlled by around-the-clock medication. We believe Subsys is an important, differentiated treatment option for patients and physiciansrelative to other TIRF products due to its rapid onset of action, improved bioavailability, most complete range of dosage strengths and ease ofadministration. Our product label includes data from our pivotal clinical trial demonstrating that Subsys may provide pain relief in as little as fiveminutes, which represents the most rapid onset of action in the TIRF class of products. Also, in a head-to-head study, Subsys demonstrated 76%bioavailability versus 51% for Actiq. Further, Subsys offers the most complete range of dosage strengths in the TIRF class of products, consisting of100 to 1,600 microgram, or mcg, doses. Patients can administer Subsys in less than one minute while Actiq and Fentora, the leading branded TIRFproducts, can require 14 to 30 minutes to administer. 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 2015, Subsys was the mostprescribed TIRF product, with 46.8% market share on a prescription basis according to IMS. According to Source Healthcare Analytics, in 2015, TIRFproducts generated $821.6 million in annual U.S. product sales. Traditionally, the physician prescriber base for TIRF products is concentrated, withapproximately 1,700 physicians writing 90% of all TIRF product prescriptions in 2015, according to IMS. As a result, our commercial organizationhas been able to promote Subsys using a highly targeted approach designed to maximize impact with physicians who are TIRF REMS enrolled. Inaddition, our commercial organization continues to specifically target oncology health care providers and practices. 1 Subsys utilizes our proprietary sublingual spray technology consisting of a small, single-unit device that delivers our proprietary formulation ofdrug particles via a fine mist disbursed across a broad surface area of the highly permeable membrane underneath the tongue. This delivery platform issuitable for 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 ofaction and enhanced bioavailability versus other oral preparations and routes of administration. We are developing our proprietary sublingual spraytechnology in other product applications in order to expand our portfolio of product candidates. Dronabinol, the active ingredient in Marinol, is a synthetic cannabinoid whose chemical name is THC, an approved second-line treatment forCINV and anorexia associated with weight loss in patients with AIDS. We believe that Marinol and its generic equivalents have limitations in theircurrent formulations. Marinol is characterized by a highly variable bioavailability and an onset of action that ranges from 30 minutes to one hour. Our Dronabinol SG Capsule product was commercially launched in December 2011, and we sold Dronabinol SG Capsule exclusively to Mylan inthe United States under a supply and distribution agreement. Pursuant to the terms of the Mylan agreement, we manufactured Dronabinol SG Capsuleunder the Mylan label. Mylan distributed Dronabinol SG Capsule and on a monthly basis paid 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, distributionand storage fees, and royalties. Under the terms of the former supply and distribution agreement with Mylan, we were obligated to pay Mylan aroyalty 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 bore no risk of product return upon acceptance by Mylan. We were involved in a dispute with Mylan that commenced in May 2013 and whichultimately led to an arbitration proceeding with the American Arbitration Association (Case No. 55 122 00119 13). In October 2015, we entered into asettlement agreement and mutual and general release with Mylan which settled the claims in dispute and resulted in the termination of thisrelationship and confirmed the termination of the supply and distribution agreement. We do not have any current plans to manufacture or market thisproduct in the future. See Note 7 of the Notes to our Consolidated Financial Statements for additional discussion on our dispute with Mylan. Our lead product candidate is Syndros, a proprietary, orally administered liquid formulation of dronabinol, which has yet to be approved forcommercialization. Syndros has demonstrated more rapidly detectable blood levels and a more reliable absorption profile than Marinol in our clinicalstudies. In 2012, we completed a pre-NDA meeting with the FDA and a pivotal bioequivalence study. Our pivotal bioequivalence study measured thePK of Syndros versus Marinol. This PK study demonstrated that 100% of subjects receiving Syndros achieved detectable plasma levels at 15 minutescompared to less than 25% of subjects receiving Marinol. In this study, Syndros also demonstrated a 44% decrease in the patient coefficient ofvariation for area under the curve, or AUC, which is indicative of greater patient exposure to drug. We believe these product attributes could result inSyndros capturing a significant share of the existing U.S. market for dronabinol products, which was $199 million in 2015, according to SourceHealthcare Analytics, and potentially expanding the usage of dronabinol-based products. In August 2015, FDA accepted for filing the NDA forSyndros. The PDUFA goal date for a decision on this NDA is April 1, 2016, which reflects a standard review by the FDA. 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 beendiagnosed or were living with cancer. According to the American Cancer Society, the number of patients with cancer continues to increase as thepopulation ages and diagnosis, treatment and survival rates improve due to higher standards of care and greater patient access to health care. Cancerpatients often suffer from symptoms such as pain, nausea, vomiting, fatigue, weight loss and anemia as a result of their cancer or radiation andchemotherapy treatments intended to eradicate or inhibit the growth of cancerous cells and tumors. Pain is a widely prevalent condition of cancerpatients, an estimated 60% of whom may also suffer from BTCP. We believe that the acute pain episodes of BTCP patients are not adequatelymanaged by oncologists and pain specialists, creating an opportunity for us to educate these medical professionals and promote effective BTCPmanagement using Subsys. According to a 2004 study by the American Society of Clinical Oncology, it is estimated that 60% to 80% of all cancerpatients who receive chemotherapy experience nausea and vomiting associated with their therapy. We believe current therapies do not adequatelyaddress the needs of many of these patients. Supportive care is an important component in the treatment of cancer patients, as suggested by anAugust 2010 article in the New England Journal of Medicine indicating that improved supportive care in cancer patients prolonged median survivalby over two months. By focusing on supportive care products, we believe we can contribute to the improvement of cancer patient outcomes andsurvival rates. 2 Strategy Achieve FDA approval for Syndros and advance our synthetic cannabinoid product pipeline. We believe there is an unmet patient need for amore reliable synthetic THC for treating CINV and anorexia associated with weight loss in patients with AIDS. In a pivotal bioequivalence study, ourSyndros product candidate has demonstrated rapid and more reliable absorption, which we believe represents an attractive product profile relative toMarinol. We are also evaluating proprietary sublingual spray, inhaled and intravenous formulations of dronabinol in preclinical testing. We also havethe capability to manufacture CBD and we are pursuing clinical studies that could result in future commercial products containing CBD. In August2015, FDA accepted for filing the NDA for Syndros. The PDUFA goal date for a decision on this NDA is April 1, 2016, which reflects a standardreview by the FDA. Subsys market share and revenues. We launched Subsys as a commercial product in March 2012. By December 2015, we had a 46.8% share ofthe overall TIRF market, according to IMS. While we are committed to working with the health care community to ensure patients have access toSubsys, we believe that we may not be able to continue to increase or even maintain Subsys net product revenue at historic levels as the TIRF marketevolves. Continue to leverage our commercial organization to market Subsys and, if approved, Syndros and other complementary products. Wecommercialize Subsys through our commercial sales organization. We intend to market Syndros and other proprietary supportive care products, ifapproved, using this same commercial sales organization. We may also pursue opportunities to acquire commercial products or product candidatesthat could further leverage our supportive care commercial sales organization. Research and develop additional sublingual spray product candidates. We believe that the delivery of certain pharmaceutical products usingour sublingual spray platform technology could have significant advantages over other methods of delivery. Our technology delivers drug productdirectly to the sublingual mucosa for rapid and efficient absorption into the bloodstream. This process is accomplished by delivering a ready-to-beabsorbed formulation across the sublingual mucosa. The sublingual mucosa is an efficient medium for the delivery of certain drugs because thismembrane is highly permeable with a high density of blood vessels, which allows for the portion of the drug absorbed to bypass first-pass metabolismin the liver. Certain drug products delivered utilizing our sublingual spray technology can be absorbed quickly and take effect more rapidly thanmany other forms of administration. We are developing several product candidates, including buprenorphine, buprenorphine with naloxone,naloxone, ondansetron, sildenafil, diclofenac, epinephrine and ketorolac, where we believe our proprietary sublingual spray technology has thepotential to provide a clinically meaningful therapeutic advantage over existing delivery methods. Use our core competencies and expertise to expand our dronabinol and cannabidiol manufacturing capabilities. Since dronabinol is difficultto import, procure and produce, we have a U.S.-based, state-of-the-art dronabinol manufacturing facility, which we anticipate will be able to supplythe API for initial launch quantities of Syndros, if approved. In 2014, we completed construction of a second manufacturing facility that will enable usto supply sufficient commercial quantities of dronabinol API the commercialization of our proprietary synthetic cannabinoid product candidates, ifapproved. Our Products and Product Candidates The following table summarizes certain information regarding our marketed products and most advanced product candidates: ProductIndicationPathwayStatusSubsys (fentanyl sublingual spray)1.Breakthrough Cancer Pain505(b)(2)MarketedSyndros (dronabinol oral solution)1.2.CINVAppetite Stimulation in AIDSPatients505(b)(2)NDA Filed;PDUFA Date: April 1, 2016Cannabidiol Oral Solution1.2.3.Dravet SyndromeLennox-Gastaut SyndromeWest Syndrome (InfantileSpasms)505(b)(1)● ●Pediatric study in refractoryepilepsy ongoing; Dravetsyndrome/Lennox-GastautSyndrome Phase 3 to initiate in2H 2016Infantile Spasms Phase 2actively enrollingBuprenorphine Sublingual SprayAcute Pain505(b)(2)Phase 3 study actively enrolling;NDA submission 2H 2016Buprenorphine Sublingual SprayChronic Pain505(b)(2)Initiate Phase 3 Studies 2H 2016Buprenorphine/NaloxoneSublingualSprayOpioid Dependence505(b)(2)2 Pivotal Studies completed;pending FDA feedback ondevelopment planNaloxone Sublingual SprayOpioid Antagonist505(b)(2)Formulation under development.Proof of concept study to initiatein 2H 2016Ondansetron Sublingual SprayNausea and Vomiting in CancerChemotherapy505(b)(2)Formulation under developmentLiposomal Encapsulated Paclitaxel(LEP)1.2.Gastric CancerCervical Cancer505(b)(2)IND filing 1H 2016Initiate Phase 2 Studies in 2H 2016 3123 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 whichthe applicant has not obtained a right of reference. The applicant may rely on the FDA’s findings of safety and/or effectiveness for a previouslyapproved drug (the “reference drug”). However, the applicant must still provide any additional preclinical or clinical data necessary to ensure thatdifferences from the reference drug do not compromise safety and effectiveness. For Dronabinol Oral Solution and our Dronabinol Line Extensions,we expect to use Marinol as the reference drug. In August 2015, FDA accepted for filing the NDA for Dronabinol Oral Solution. The PDUFA goal date for a decision on this NDA is April 1, 2016,which reflects a Standard Review by the FDA. 3Application is a complete NDA that contains all the studies conducted by the applicant necessary to demonstrate a drug’s safe and effective use. Additionally, we intend to develop Subys for additional indications which may include management of pain for procedures conducted in amonitored setting such as bone marrow biopsy, burn dressing changes, emergency room procedures. We anticipate initiating some of these studies tosupport new indication in 2016 based on the guidance we received from the FDA We are also actively engaged in the development of other earlier stageproduct candidates. Specifically, we are currently completing preclinical work on three products that utilize our proprietary spray technology platformwith the goal of expanding our supportive care franchise: ●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) ●Hydromorphone (opioid used to treat moderate to severe pain) ●Epinephrine (Type I Allergic reactions including Anaphylaxis) Further, we have the ability to manufacture pure, synthetic cannabidiol in our DEA approved and FDA inspected Round Rock, TX manufacturingfacility and have received orphan drug designations from the FDA for the following: ●Pediatric Schizophrenia (a severe brain disorder that causes a child to interpret reality abnormally and has a profound impact on the child’sbehavior and development) ●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 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. The mechanism by which the liquid is delivered is a highly consistent, one-step process in which a plume of fentanyl is generated by theactuation of the device. The plume disperses a small volume of liquid across the surface area of the sublingual mucosa and facilitates rapid absorptionby the body. 412 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 canbe severe and sudden, and may require a stronger, fast-acting medication. Opioids are the most widely-prescribed treatment for cancer pain followedby medications commonly used to treat inflammatory pain, such as corticosteroids, anesthetics, NSAIDs, anticonvulsants and antidepressants. A reportpublished by Worldwide Marketing Research estimated that the value of the U.S. cancer pain market was $3.1 billion in 2008 and 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 occurseveral times per day. Pain is a widely prevalent condition of cancer patients, approximately 60% of cancer patients with persistent pain mayexperience BTCP, which is particularly difficult to treat due to its severity, rapid onset and the often unpredictable nature of its occurrence. Physicianstypically treat BTCP with a variety 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 bythe patient. More recently-approved short-acting opioid-based fentanyl formulations utilize transmucosal delivery in an attempt to improve uponexisting fentanyl therapies. Teva Pharmaceutical Industries Ltd.’s Actiq, approved by the FDA in 1998 and currently available in several genericoptions, is an oral transmucosal lozenge, and Fentora, the second leading branded TIRF product, approved by the FDA in 2006, is a fentanyl buccaltablet. Three other companies have received approval for branded TIRF products since 2009 including BioDelivery Sciences International, Inc.’sOnsolis, a soluble film placed on the buccal area after wetting the inside of the cheek with saliva or water, Sentynl Therapeutics’ Abstral, animmediate-release transmucosal sublingual tablet, and Depomed’s Lazanda, a nasal spray. According to Source Healthcare Analytics, TIRF productsgenerated $821.6 million in 2015 U.S. sales. Although these existing therapies provide improvements over oral opioids, we believe that the marketadoption of Subsys to date demonstrates that the current treatment options have limitations and that there remains a significant unmet need fortherapies that provide faster pain relief, more convenient dose administration and a better PK profile. Limitations of Competing TIRF Therapies We believe that the BTCP market is often underserved due to the limitations of other TIRF therapies, which include: ●Time until significant pain relief: Patients suffering from BTCP require rapid pain relief as peak intensity of episodic breakthrough pain canoccur 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 it maytake 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. ●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.For example, Actiq requires patients to place a lozenge between their cheeks and lower gums and rub the lozenge from side to side over a 15-minute period. In addition, patients with dry mouth and oral mucositis may experience difficulty in using Actiq and other commerciallyavailable therapies. 5 Our Solution We believe Subsys’ proprietary formulation and sublingual delivery mechanism offer several advantages over other FDA-approved TIRFproducts, and these advantages may lead to improved patient compliance and expanded medical use of fentanyl for BTCP. Such advantages include: ●Pain relief in five minutes: Subsys is the only product to show pain relief when measuring the sum of pain intensity difference, SPID, at fiveminutes in a Phase 3 BTCP clinical trial using fentanyl. We believe that Subsys is able to achieve this rapid delivery of fentanyl throughsublingual delivery because there is a high density of blood vessels beneath the tongue and the thin layer in the mucosa enables higherabsorption. 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 andFentora. Further, Subsys can be administered without moistening the tongue or cheek, allowing for administration in cancer patients sufferingfrom dry mouth and oral mucositis. ●Pharmacokinetic profile. As compared to Actiq’s PK profile, Subsys’ PK profile is characterized by higher peak blood concentrations, which areachieved 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 ofdosage strengths 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 doseranges for the treatment of BTCP, as all branded products without generic equivalents, and, to our knowledge, all product candidates currentlyin development, 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 December 2015 shows that approximately 130,000 prescriptions of Subsys have beendispensed since launch in March 2012. In December 2015, Subsys was the most prescribed branded TIRF product with 46.8% market share. Physician Prescriber Base: Approximately 1,700 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 2015, there wereapproximately 3,240 unique physician prescribers of Subsys. As of December 2015, approximately 89% of the top 413 TIRF prescribers hadprescribed Subsys. These physicians accounted for 60% of TIRF prescriptions, according to IMS. Patient Use: Existing patient data generated by available databases demonstrates that the number of Subsys-experienced patients has increasedsteadily since launch with over 19,500 unique patients as of December 2015. Importantly, the proportion of Subsys prescriptions written for repeatSubsys patients has continued to increase since July 2012 from 50% of prescriptions to over 92% of prescriptions as of December 2015. Generally,repeat Subsys patients receive higher doses of Subsys on average than first-time patients, as patients are titrated from a starter dose of Subsys to theireffective dose in accordance with the REMS protocol. Patient Access: Subsys is a Tier 3 medication available under most major commercial health insurance plans. Some third-party payors requireusage and failure on cheaper generic versions of Actiq prior to providing reimbursement for Subsys and other branded TIRF products. We concentrateon assisting physicians and payors with developing greater familiarity with both the differentiated features of Subsys and the process to achievepatient access to the product from continued and broader usage of Subsys by their patients. We offer patients a free trial of Subsys to allow for titrationto their effective dose and bridge the prior authorization process. Once third-party payor reimbursement is in place, we may offer patients coupons toreduce out of pocket costs. 6 Cannabinoid Product Family Syndros (dronabinol oral solution) Our lead proprietary dronabinol product candidate is Syndros, which is currently under review for approval at the Food and Drug Administration.In addition, we are evaluating proprietary sublingual spray, inhaled and intravenous formulations of dronabinol in preclinical studies. Dronabinol, theactive ingredient in Marinol, is a synthetic form of THC. THC is an orally active cannabinoid which, like other cannabinoids, has complex effects onthe central nervous system. Approved by the FDA in 1985, Marinol is indicated for the treatment of CINV in patients who have failed to respondadequately 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. We believe a significant unmet medical need exists for formulations of dronabinol that act more rapidly and are subject to less variable patientabsorption. We completed a pivotal bioequivalence study that was a 52-patient crossover bioavailability and PK clinical trial comparing Syndroswith Marinol. In the study, 100% of subjects receiving Syndros achieved detectable plasma levels at 15 minutes compared to less than 25% of thesubjects receiving Marinol. We believe these attributes may ultimately increase patient compliance because of its less dose-to-dose variability, whichwe believe will allow us to further penetrate and potentially expand the market for the medical use of dronabinol. In August 2015, FDA accepted forfiling the NDA for Syndros. The PDUFA goal date for a decision on this NDA is April 1, 2016, which reflects a Standard Review by the FDA. 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 classifiedinto five 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 upto one 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 fordeveloping CINV can include: age of less than 50 years, female gender, vomiting during previous chemotherapy, pregnancy-inducednausea/vomiting, history of motion 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 whoexperienced CINV reported an impact on daily activities. 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 chemoreceptortrigger zone results in stimulation of the salivation and respiratory centers as well as control of the pharyngeal, GI and abdominal muscles. Thisstimulation can trigger 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 2004report published in Cancer estimated that approximately 35% of patients treated with CINV therapies continue to experience acute nausea, with 13%of CINV patients experiencing acute vomiting after first-line treatment. 7 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 peakeffect at two to four hours. ●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 ourSyndros product candidate has the potential to address many of the limitations that exist in synthetic cannabinoid products byproviding a number of key advantages, including: ●Faster absorption: Syndros is a liquid solution and is absorbed faster than a capsule formulation which has to dissolve in the GI tract. Webelieve that quicker absorption may lead to faster onset of action for an oral solution product. Separately, we believe that our proprietaryinhalation dronabinol formulation may further accelerate dronabinol’s onset of action due to their route of delivery bypassing first-passmetabolism in the liver. ●Reduced dose-to-dose variability: Based on our PK study, we believe Syndros has lower variability between patients. Cannabidiol Oral Solution Cannabidiol has been shown pre-clinically to protect from seizures in various rodent models of seizures, to alleviate neuropathic pain caused bychemotherapy-induced peripheral neuropathy mouse models treated with paclitaxel, and reduce tumor burden in xenograft mouse model of humanglioblastoma tumors. We are developing a Cannabidiol Oral Solution, a synthetic cannabidiol, for childhood catastrophic epilepsy syndromes focusingon Dravet syndrome, Lennox-Gastaut syndrome and Infantile Spasms. Epilepsy affects approximately 0.5 to 1.0% of the population. While seizures can be controlled with current anti-epileptic drugs, 30-40% ofpatients do not have complete control of their seizures. This is especially true of the catastrophic childhood epilepsy syndromes such as Dravetsyndrome and Lennox-Gastaut syndrome where it is rare for a patient to reach complete seizure freedom for any prolonged period of time. And whilethese syndromes are rare and considered orphan indications, because they present in infancy or childhood, they have a large impact on the entirelifespan of these children. Dravet syndrome occurs as a result of a mutation in the sodium channel gene SCN1A in about 70-80% of patients and occurs with an incidenceof approximately 1:30,000. It initially presents in the first year of life with prolonged febrile-induced status epilepticus. In the second year of life, thechild shows developmental stagnation or regression and develops other seizure types such as clonic, hemi-clonic and atypical absence. Mortality isbetween 14-20% by adolescence which is approximately three times higher than in other chronic epilepsy syndromes such as Lennox-Gastautsyndrome. Currently, there are no FDA-approved drugs for the treatment of Dravet syndrome and a significant number of normally effective anti-epileptic drugs can actually worsen seizure control in Dravet syndrome. We have received both Orphan Drug Designation and Fast-Track Designationfrom FDA for CBD in the treatment of Dravet syndrome. 8 Lennox-Gastaut syndrome is a catastrophic epilepsy syndrome that presents early in childhood with multiple seizure types including atypicalabsence, tonic seizures, and myoclonic seizures. However, the most devastating include the seizure types that can lead to “drop attacks” (atonic, tonicand myoclonic) where the child may sustain significant injuries such as broken bones and skull fractures. There is significant development delayassociated with the syndrome as well as characteristic EEG changes. Multiple etiologies can lead to Lennox-Gastaut syndrome including head injuries,anoxic insults, and often genetic etiologies. While there are currently few drugs approved for the treatment of seizures in Lennox-Gastaut syndrome,very few children achieve seizure freedom. The prevalence of Lennox-Gastaut syndrome has been estimated to be approximately 113,000 patients inthe US. We received Orphan Drug Designation for CBD in the treatment of Lennox-Gastaut syndrome. Infantile Spasms is considered an epileptic encephalopathy as is Dravet syndrome and Lennox-Gastaut syndrome. It presents in early infancywith clusters of myoclonic seizures that are often mistaken for colic. When IS is accompanied by characteristic EEG findings of hypsarrhthmia anddevelopmental delay, the diagnosis of West syndrome is made. Like LGS, IS can result from many different etiologies including brain injury, anoxicinjury, and genetic causes such as tuberous sclerosis complex (TSC). In a significant number of patients, Infantile Spasms will develop into classicLennox-Gastaut syndrome. The prevalence of Infantile Spasms is 0.31 in about 1000 live births. Currently there are two FDA approved drugs forInfantile Spasms. We have received Orphan Drug Designation for CBD in the treatment of Infantile Spasms. In addition to the above epilepsy indications, we have also received Orphan Drug Designations for the treatment of CBD in glioblastomamultiforme, pontine glioma, and pediatric schizophrenia. Early studies in animal models demonstrate that while CBD has anticonvulsant properties and the effectiveness of CBD-enriched cannabinoidsin the treatment of epilepsy has been reported. A survey of children using a CBD-enriched plant product reported a reduction in their child’s seizures in84% and 11% reported complete seizure freedom. In an open access program using a CBD-enriched plant deprived product, which included 214patients who received drug, the median reduction in monthly motor seizures was 36.5% and the drug was generally well-tolerated. However, parentalreport can be subject to significant bias, especially where expectations are high. Currently, we have two ongoing studies in epilepsy: a Phase 1b pharmacokinetic study that is evaluating three different doses of CBD inpediatric patients with refractory epilepsy: 10mg/kg/day, 20mg/kg/day and 40mg/kg/day in pediatric patients with refractory seizures. A second study, a Phase 2 study to assess the efficacy and safety of Cannabidiol Oral Solution for the treatment of refractory infantile spasms willstudy the effect of Cannabidiol Oral Solution in patients who have failed all approved treatments. This study has been initiated. Should CBDdemonstrate benefit in this population, it will provide a treatment option where currently only poorly tolerated options exist, fulfilling a large unmetneed. The subsequent development of CBD for Lennox-Gastaut syndrome, Dravet syndrome and Infantile Spasms will be depend on the safety of CBDobserved in the above Phase 2 studies and the regulatory requirements to gain approval for these indications. We intend to discuss these developmentplans with the FDA once the results of the Phase 2 studies become available. We also provide Cannabidiol Oral Solution and some financial support for Investigator Initiated Trials of Cannabidiol Oral Solution in variousclinical settings. None of these trials have currently been initiated. 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 a proprietaryinhalation dronabinol formulation. All of these product candidates are in preclinical development. We also have the capability to manufacturesynthetic cannabidiol and intend to work with medical researchers to determine its viability. Sublingual Spray Product Candidates. As described above, we are conducting clinical and preclinical development for multiple well-known,approved molecules for delivery through our sublingual drug delivery technology. We intend to evaluate these and other products that we believecould have a differentiated efficacy and/or safety profile if formulated by us and delivered via a sublingual spray. 9 Sales and Marketing We currently market Subsys and intend to commercialize Syndros and future supportive care products, if approved, through our U.S.-basedcommercial sales organization focused on supportive care. Specifically, we currently market Subsys in the United States through our commercialsales organization. Our product detailing efforts focus primarily on oncologists, pain specialists and centers that cater to supportive care. We do not currently have sales and marketing capabilities outside of the United States. In international markets, we plan to enter intoarrangements with 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 TIRFproducts and expanding the usage of Subsys for BTCP by building awareness among oncologists of its rapid onset of action, improvedbioavailability, most complete range of dosage strengths and ease of administration relative to other TIRF products. To successfully commercializeour family of proprietary dronabinol products, we intend to focus our commercial efforts on taking market share from Marinol and its genericalternatives. As of December 31, 2015, there were approximately 9,000 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 1,700 physicians comprise 90% of TIRFprescriptions dispensed in 2015, according to IMS. Our sales and marketing efforts have primarily targeted approximately 100% of these top 1,700prescribing physicians with a focus on the highest prescribers. As of December 2015, 89% of the top 413 physician prescribers in the TIRF REMSprogram had prescribed Subsys. These physicians accounted for 60% of all U.S. TIRF prescriptions. We believe that key factors for driving futureSubsys growth include increasing the number of prescriptions written by those physicians who currently prescribe Subsys, increasing the number ofTIRF REMS enrolled physicians and oncologists who prescribe Subsys, and allowing sufficient time for physicians and patients to identify theireffective Subsys dose among our broad spectrum of dosage strengths. Manufacturing and Supply We produce dronabinol, the API in our dronabinol product family, including our proprietary dronabinol product candidates, internally at ourU.S.-based, state-of-the-art manufacturing facility. We believe that this facility has the capacity to supply sufficient commercial quantities ofdronabinol API for the initial launch quantities of Syndros, if approved, as well as to support the continued development of our other cannabinoidproduct candidates in the near-term. We believe this facility gives us a significant competitive advantage since dronabinol API is a Schedule Imaterial and consequently is subject to annual production limits set by quota for each individual facility, cannot be readily procured, is difficult toimport into the United States and has a limited number of suppliers domestically. For our long-term needs, in 2015 we completed construction of a second domestic dronabinol manufacturing facility, which we believe willenable us to supply sufficient commercial quantities of dronabinol API for our continued commercialization of our proprietary dronabinol productcandidates, if approved. 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 commercialization of Syndros andthe development and commercialization of our dronabinol-based product candidates. Subsys is manufactured by contract manufacturers and sub-component fabricators. Aptar, a dispensing system company based in Illinois,developed the sublingual spray device we use for Subsys. We entered into a supply agreement effective as of March 7, 2011 with Aptar pursuant towhich Aptar supplies us with the delivery system to administer Subsys. We are required to provide Aptar with rolling quarterly forecasts of ourrequirement for Subsys drug delivery systems. Under certain circumstances, such forecasts are non-binding; however, some portions of such forecastsmay constitute a firm commitment to purchase delivery systems. The agreement has a term of five years from the effective date, subject to earlytermination clauses. On October 30, 2015, we entered into an amended and restated supply, development & exclusive licensing agreement withAptargroup, Inc. which, among other things, extended our exclusive supply rights to the current sublingual device, currently utilized by Subsys, aswell any new device(s) jointly developed by the two companies for a period of seven years. In addition to extending the term, this amendment addedcertain minimum purchase commitments and requires certain tiered royalties as a percentage of net revenue to be paid by us ranging from less thanone precent to the low single digits, commencing in March 2016 through the term of the agreement, from our sales of Subsys and future products thatuse the Aptar spray device technology. 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 April 2015, we entered into an amendment to our manufacturing and supply agreement with DPT, whichextends our existing manufacturing and supply agreement to produce Subsys until the end of 2020. In addition to extending the term, this amendmentadded certain minimum purchase commitments. 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, drugdelivery companies and academic and research institutions. We believe the key competitive factors that will affect the commercial success of ourproducts and the development of our product candidates include, but are not limited to, onset of action, bioavailability, efficacy, cost, convenience ofdosing, 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 anddeveloping product candidates, including obtaining FDA and other regulatory approvals for product candidates. Consequently, our competitors maydevelop products for the treatment of BTCP, CINV and anorexia associated with weight loss in patients with AIDS, or other indications we pursue thatare more effective, better tolerated, more widely-prescribed or accepted, more useful and less costly, and they may also be more successful inmanufacturing and marketing their products. We also face competition from third parties in obtaining allotments of fentanyl and dronabinol underapplicable DEA quotas, recruiting and retaining qualified personnel, establishing clinical trial sites and enrolling patients for clinical trials and inidentifying and acquiring or in-licensing new products and product candidates. Subsys Subsys competes against numerous branded and generic products already being marketed and potentially those which are or will be indevelopment. Subsys is the fourth new product in the TIRF market over the last five years. In the BTCP market, physicians often treat patients with avariety of short-acting opioid medications, including morphine, morphine and codeine derivatives and fentanyl. Some currently marketed productsagainst which we directly compete include Teva Pharmaceutical Industries Ltd.’s Fentora and Actiq, Galena Biopharma Inc.’s Abstral, Depomed Inc.’sLazanda and BioDelivery Science International, Inc.’s Onsolis. Some generic fentanyl products against which Subsys competes are marketed byMallinckrodt, Inc., Par Pharmaceutical Companies and Actavis, Inc. In addition, we are aware of numerous companies developing other treatments andtechnologies for rapid delivery of opioids to treat BTCP, including transmucosal, transdermal, nasal spray, inhaled delivery systems and sublingualdelivery systems, among others. Cannabinoid Product Family With respect to our dronabinol product candidates, the market in which we intend to compete is challenging in part because of the presence ofgeneric products. We or our distributor may not be able to differentiate any products that we may market from those of our competitors, successfullydevelop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our productspayment and other commercial terms as favorable as those offered by our competitors. In addition, there are a number of established therapies andproducts already commercially available and under development by other companies that treat the indications which Syndros and our otherdronabinol product candidates are intended to treat. Specifically, Syndros, if approved, and our other dronabinol product candidates, will competeagainst therapies and products such as AbbVie, Inc.’s Marinol and Marinol generics. Par Pharmaceutical Companies markets an approved genericversion of Marinol, and Actavis, Inc. markets an authorized generic version of Marinol. Moreover, our cannabinoid products may compete with non-synthetic cannabinoid drugs, including therapies such as GW Pharmaceuticals plc’s Sativex and Epidiolex, especially in many countries outside ofthe United States where non-synthetic cannabinoids are legal. In addition, literature has been published arguing the benefits of natural cannabis, ormarijuana, over dronabinol, and there are a number of states that have already enacted laws legalizing medicinal and recreational marijuana. There issome support in the United States for further legalization of marijuana. We also cannot assess the extent to which patients utilize marijuana illegallyto alleviate CINV, instead of using prescribed therapies such as approved dronabinol products. Furthermore, in the treatment of CINV, physicianstypically offer conventional anti-nausea agents prior to initiating chemotherapy, such as Sanofi’s Anzemet, Eisai Inc./Helsinn Group’s Aloxi, RocheHolding AG’s Kytril, Par Pharmaceutical Companies’ Zuplenz and GlaxoSmithKline plc’s Zofran, as well as Neurokinin 1 receptor antagonists on themarket including Kyowa Hakko Kirin Co., Ltd.’s Sancuso and Merck & Co., Inc.’s Emend. To the extent that Syndros and our other dronabinolproduct candidates, if approved, 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 Syndros. 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, molecularmodifications, as well as other proprietary technologies and their uses by filing patent applications in the United States and selected other countries.We intend for these patent applications to cover, where possible, claims for medical uses, processes for preparation, processes for delivery andformulations. As of February 16, 2016, we owned or licensed from third parties a total of twelve issued U.S. utility patents and fourteen pending U.S. utilitypatent applications. These U.S. patents and patent applications will expire between 2017 and 2035. Some of the issued patents and pendingapplications, if issued, 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 FDA) U.S. Patent Nos. 8,486,972, 8,486,973, 8,835,459 and8,835,460, one granted U.S. patent no. 9,241,935 and and three pending U.S. patent applications. These patents cover Subsys brand fentanyl and willexpire between 2027 and 2030. These patents cover the Subsys sublingual fentanyl spray formulation, and/or the use of the Subsys sublingualfentanyl spray for the treatment of pain. We also currently have ten issued foreign patents and five pending foreign patent applications covering atleast formulations and methods of use relating to Subsys. Any patents that issue from our pending foreign patents and applications are expected toexpire no earlier than 2027. See Note 7 under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion of three inter partes reviewpetitions filed by a hedge fund with the U.S. Patent and Trademark Office, challenging three of the four Orange Book-listed patents covering Subsys(US Patent Nos. 8,486,972; 8,835,459 and 8,835,460). Dronabinol Our dronabinol patent portfolio currently consists of three issued U.S. patents, one pending U.S. patent applications and one patent applicationin each of Canada, Europe and Japan. The claims of the patents and applications are directed to formulations of dronabinol and methods ofmanufacturing and packaging dronabinol. Two of the issued dronabinol patents will expire in 2028, while the third expires in 2033. Any patents thatissue from our pending 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 ofpharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual questions. In addition, we may not be ableto obtain issued patents from pending applications. Even if patents are granted, the allowed claims may not be sufficient to adequately protect thetechnology owned by or licensed to us. Any patents or patent rights that we obtain carry some risk of being circumvented, challenged or invalidatedby our competitors. For example, as described in Note 7 in the Notes to our Consolidated Financial Statements, a former officer of Insys Pharmasought unsuccessfully to rescind his assignment of his inventions concerning fentanyl and dronabinol patent applications described above.Ownership and inventorship disputes may arise for other 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, especiallywhen we do not believe that patent protection is appropriate or can be obtained. We require each of our employees, consultants and advisors toexecute a proprietary information and inventions assignment agreement before they begin providing services to us. Among other things, thisagreement obligates each employee, consultant or advisor to refrain from disclosing any of our confidential information received during the course ofproviding services and, with some exceptions, to assign to us any inventions conceived or developed during the course of these services. We alsorequire confidentiality agreements 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 basedon allegations of patent infringement. As our current and potential product candidates and others based upon our proprietary technologies progresstoward commercialization, the possibility of an infringement claim against us increases. While we attempt to be certain that our products andproprietary technologies do not infringe other parties’ patents and other proprietary rights, competitors or other parties may assert that we infringe ontheir proprietary rights. 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 fully comprehensive and, therefore, whetherSubsys or any of our product candidates, delivery devices, or methods of using, making or delivering our product candidates infringe the patentssearched, or that other patents do not exist that cover Subsys or product candidates, delivery devices or these methods. Interpreting patent claimsinvolves complex legal and scientific questions and it is difficult to assess whether or not our product candidates would infringe any patent. Likewise,it is difficult to predict whether or not third-party patent applications will issue and what claim scope they may obtain. If we conclude that anyidentified patents, or patent applications once issued as patents, cover Subsys or our product candidates, we cannot guarantee that we will be able toformulate around such patents at all or without material delay or whether we can obtain reasonable license terms from the patent owners, if at all.There may also be other pending patent applications that are unknown to us and, if granted, may prevent us from making, using or selling Subsys orour product candidates. Other product candidates that we may develop, either internally or in collaboration with others, could be subject to similaruncertainties. If a product is found to infringe a third-party patent, we could be prevented from developing and selling that product. Please see thesection entitled “Risk Factors — Risks Relating to Intellectual 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, theuse, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws andregulations may 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 employeeswas accidentally injured as a result of the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or hertreatment should be within the coverage terms of our workers’ compensation insurance policy. However, we do not carry specific biological orhazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coverage for damagesand fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could beheld liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could besuspended. 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,and NDAs or the issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,fines, civil penalties 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 marketedin the United States. Pharmaceutical product development in the United States typically involves, among other things, preclinical laboratory andanimal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDApre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexityand novelty of the product or 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 GLPs. The results of preclinical testing are submitted to the FDA as part of an IND along with other information includinginformation about product chemistry, manufacturing and controls and a proposed clinical trial protocol. Certain nonclinical tests, such as animal testsof reproductive toxicity and carcinogenicity, may be conducted after the IND is submitted. A 30-day waiting period after the submission of each INDis required prior to the commencement of clinical testing in humans. If the FDA has not placed a clinical hold on the IND within this 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 andsubsequent protocol amendments must be submitted to the FDA as part of the IND. The FDA may order the temporary or permanent discontinuation ofa clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements orpresents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must alsobe submitted to IRB for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure tocomply with the IRB’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. Thesestandards were not applied to many established products currently on the market, including certain opioid products. As a result, the FDA does nothave as extensive safety databases on these products as on some products developed more recently. The FDA has recently expressed an intention todevelop safety data for certain products, including many opioids. In particular, the FDA has expressed interest in specific impurities that may bepresent in a number of opioid narcotic APIs, such as oxycodone. Based on certain structural characteristics, these impurities may have the potential tocause mutagenic effects. If, after testing, such effects are ultimately demonstrated to exist, more stringent controls on the levels of these impurities maybe required for FDA approval of products containing these impurities, such as oxymorphone. Any additional testing or remedial measures that may benecessary could result in increased costs 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 acompilation of data relating to the product’s pharmacology, chemistry, manufacture and controls, and proposed labeling, among other things. Thecost of preparing and submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantialapplication user fee, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment fees perproduct 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-depthreview. Under the PDUFA the FDA has agreed to certain performance goals in the review of NDAs. The FDA has a goal of reviewing applications fornon-priority drug products within 12 months of NDA submission. The review process may be extended by the FDA for three additional months toconsider certain information or clarification regarding information already provided in the submission. The FDA may also refer applications for noveldrug 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 indicationsought in the proposed labeling. Additionally, the FDA will typically inspect one or more clinical trial sites to assure compliance with GCPs beforeapproving an NDA. 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 requiresubstantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed tothe FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissionsin two to six months 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 ofNDA approval, 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 areidentified following 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 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 productthat has the same active ingredients in the same strengths and dosage form as the RLD and has been shown to be bioequivalent to the RLD. ANDAapplicants are not required to conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, but arerequired to conduct bioequivalence testing, which compares the bioavailability of their drug product to that of the RLD to confirm chemical andtherapeutic equivalence. Drugs approved in this way are commonly referred to as generic versions of the listed drug, and can often be substituted bypharmacists under prescriptions written for the original listed drug. 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 orare not applicable. Specifically, the applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired;(3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent isinvalid or will not be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patentsor that such patents are invalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents via a Paragraph IVcertification, the FDA will not approve the ANDA application until all the listed patents claiming the referenced product have expired. 15 If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certificationto the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patentinfringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of thereceipt of a Paragraph IV certification prevents the FDA from approving the ANDA until the earlier of 30 months from the date of the lawsuit,expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant. As an incentive forthe rapid development of generic drug products, the first ANDA(s) filed that challenges a listed patent by filing a Paragraph IV certification may begranted a 180-day marketing exclusivity period during which the FDA may not approve another ANDA for the same product. There may be multiplesuch “first filers.” The 180-day marketing exclusivity period is triggered either by commercial launch of any first-filed ANDA approved product orfrom the date of a court decision finding the challenged patent to be invalid, unenforceable or not infringed, whichever is first. The 180-dayexclusivity can be forfeited, among other reasons, if the first filed and approved ANDA is not marketed, does not obtain tentative approval or thechallenged 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 besubmitted unless the submission contains a Paragraph IV challenge to a listed patent, in which case the submission may be made four years followingthe original product approval. Federal law additionally provides for a period of three years of exclusivity following approval of a drug that containspreviously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new use, the approval ofwhich was required to be supported by new clinical trials conducted by or for the sponsor. The FDA cannot grant effective approval of an ANDAbased on that listed drug 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, commonlyreferred to 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 andefficacy for an existing 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 comesfrom studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon theFDA’s findings from preclinical or clinical studies conducted for an approved product. The FDA may also require 505(b)(2) applicants to performadditional studies or measurements to support the change from the approved product. The FDA may then approve the new product candidate for all orsome of the label 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 the extent that the Section 505(b)(2) applicant is relying on findings of safety or efficacy for an already approved product, the applicantis subject to existing exclusivity for the reference product and is required to certify to the FDA concerning any patents listed for the approved productin the Orange Book to the same extent that an ANDA applicant would. Thus approval of a Section 505(b)(2) NDA can be stalled until all the listedpatents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemicalentity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patentinfringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant. 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 other things, requirements relating to drug listing, recordkeeping, periodic reporting, product sampling and distribution, manufacturing andreporting of adverse events arising from use of the product. Failure to comply with these regulatory requirements may result in restrictions on themarketing or manufacturing of the product, recall or market withdrawal, fines, warning letters, refusal to approve pending applications, suspension orrevocation of approvals, product seizure or detention, injunctions and/or the imposition of civil or criminal penalties. 16 Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some ofthe conditions 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-marketing testing, known as Phase 4 commitments or requirements, a REMS program and surveillance to monitor the effects of an approved productor place conditions 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 aresubject to periodic unannounced inspections by the FDA during which the agency inspects manufacturing facilities to assess compliance withcGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintaincompliance with cGMPs. The FDA and comparable state regulatory authorities may withdraw product approvals or request product recalls if acompany fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems aresubsequently discovered. The distribution of prescription pharmaceutical products is also subject to the PDMA which governs the distribution of drugs and drug samples atthe federal level, and sets minimum standards for the licensing and regulation of drug distributors by the states. Both the PDMA and state laws limitthe distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution. Risk Evaluation and Mitigation Strategies 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 carefacilities) are not be required to enroll in the TIRF REMS Access Program. Similarly, patients who receive TIRF products in an inpatient setting arenot required to enroll in the program. Long term care and hospice patients who obtain their medications from outpatient pharmacies, however, must beenrolled. Controlled Substances; Drug Enforcement Administration We sell products that are “controlled substances” as defined in the CSA which establishes registration, security, recordkeeping, reporting, storageand other requirements administered by the DEA. States impose similar requirements. The DEA regulates entities that handle controlled substancesand the equipment and raw materials used in their manufacture and packaging, in order to prevent loss and diversion into illicit channels ofcommerce. 17 The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have high potential forabuse, no currently accepted medical use in the United States and lack accepted safety for use under medical supervision, and may not be marketed orsold in the United States. Except for research and industrial purposes, a pharmaceutical product may be listed as Schedule II, III, IV or V, withSchedule II substances considered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among suchsubstances. Fentanyl, the active ingredient in our Subsys product, is listed by the DEA as a Schedule II substance under the CSA. Consequently, itsmanufacture, shipment, storage, sale and use are subject to a high degree of regulation. For example, manufacturing of fentanyl is subject to a DEAregulated quota system. In addition, generally all Schedule II drug prescriptions must be signed by a physician and physically presented to apharmacist before filling and may not be refilled without 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 aproduct approved by FDA, it is listed as a Schedule III substance. DEA regulations currently limit the formulation of FDA-approved dronabinolproducts that are classified in Schedule III. Specifically, classification in Schedule III is limited to “dronabinol (synthetic) in sesame oil andencapsulated in a soft gelatin capsule in” an FDA-approved product. Accordingly, Dronabinol SG Capsule is classified as a Schedule III substance.There is a concern that some generic versions of Marinol would not meet these specific conditions, and therefore, would not be classified as aSchedule III substance, but rather would be considered as Schedule I products until otherwise scheduled for marketing. Currently, several productsfrom other companies are the subject of pending ANDAs under review by the FDA. DEA registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance. Theregistration is specific to the particular location, activity and controlled substance schedule. For example, separate registrations are needed for importand manufacturing, 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 reportsmade to the DEA, for example distribution reports for Schedule I and II controlled substances, Schedule III substances that are narcotics, and otherdesignated substances. Reports must also be made for thefts or losses of any controlled substance, suspicious orders, and to obtain authorization todestroy any controlled 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 manufacturingof the API and production of dosage forms. Distributions of any Schedule I or II controlled substance must also be accompanied by special orderforms, with copies provided to the DEA. Absent the Marinol-like formulation and encapsulation exception, dronabinol is a Schedule I controlledsubstance and, therefore, subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregate quota for howmuch total dronabinol may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific andmedicinal needs. This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States each year is allocated amongindividual companies, who must submit applications annually to the DEA for individual manufacturing and procurement quotas. We or our partners,including our contract manufacturers, must obtain an annual quota from the DEA in order to produce or procure any Schedule I or Schedule IIsubstance, including dronabinol and fentanyl. The DEA may adjust aggregate production quotas and individual manufacturing quotas from time totime during the year, although the DEA has substantial discretion in whether or not to make such adjustments. Our, or our contract manufacturers’,quota of the active ingredient may not be sufficient to meet commercial demand or complete clinical trials. Any delay or refusal by the DEA inestablishing our, or our contract manufacturers’, quota for controlled substances could delay or stop our clinical trials or product launches whichcould have a material adverse effect on our business, financial position and results of operations. The DEA conducts periodic inspections of certain registered establishments that handle controlled substances. Failure to maintain compliancewith applicable requirements, particularly as manifested in loss or diversion, can result in enforcement action that could have a material adverse effecton our business, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiateproceedings to 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 United 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 classifiedunder the international treaties and current U.S. controls adequately address international requirements. Any change in the international treatiesregarding classification of these products could affect regulation of these substances in the United States and in other countries. 18 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 federalAnti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or inreturn for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare,Medicaid or other 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 providing anything at less than its fair market value. The Anti-Kickback Statute has been interpreted to apply to arrangementsbetween pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a numberof statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawnnarrowly, and our practices may not in all cases meet all of the criteria for statutory exemptions or safe harbor protection. Practices that involveremuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do notqualify for an exemption or safe harbor. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of anarrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The reach of the Anti-Kickback Statute was also broadened by the PPACA which amends the intent requirement of the federal Anti-Kickback Statute such that a person orentity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition,PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-KickbackStatute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below) or the civil monetary penalties statute,which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that theperson knows or should know is for an item or service that was not provided as claimed or 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 thefederal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request ordemand” for money or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have beenprosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to setMedicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would billfederal healthcare programs for the product. In addition, certain marketing practices, including off-label promotion, may also lead to violations of theFalse Claims Act. Many states also have statutes or regulations similar to the federal Anti-Kickback Statute and False Claims Act, which state lawsapply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Also, the HIPPAcreated new federal criminal statutes that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefit program, includingprivate third-party payers and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitiousor fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. To the extent that any of our product candidates are ultimately sold in a foreign country, we may be subject to similar foreign laws andregulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, andimplementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. Coverage and Reimbursement The commercial success of our products and our ability to commercialize any approved product candidates successfully will depend in part onthe extent to which governmental authorities, private health insurers and other third-party payors provide coverage for and establish adequatereimbursement levels for our products, product candidates, and related treatments. 19 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 providereimbursement for products and services based on the level at which the government (through the Medicare or Medicaid programs) providesreimbursement for such treatments. In the U.S., the European Union and other potentially significant markets for our product candidates, governmentauthorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services, particularly for new andinnovative products and therapies, which has resulted in lower average selling prices. Further, the increased emphasis on managed healthcare in theU.S. and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing,reimbursement and usage, which may adversely affect our future product sales and results of operations. These pressures can arise from rules andpractices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform,pharmaceutical reimbursement policies and pricing in general. The cost containment measures that healthcare payors and providers are instituting andthe effect of any healthcare reform could significantly reduce our revenues from the sale of any products or approved product candidates. We cannotprovide any assurances that we will be able to obtain and maintain third-party coverage or adequate reimbursement for our product candidates inwhole 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. UnlikeMedicare Part 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 each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescriptiondrug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in eachcategory or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.Government payment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval.However, any negotiated prices for our future products covered by a Part D prescription drug plan will likely be lower than the prices we mightotherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coveragepolicy and payment limitations in setting their own payment rates. Any reduction in payment that results from Medicare Part D may result in a similarreduction in payments from 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, itis not 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 thesubject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affectthe sales of our products or product candidates. If third-party payors do not consider our products to be cost-effective compared to other availabletherapies, they may not 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 sellour products on a profitable basis. 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, improvingquality and/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantlyaffected by major legislative initiatives, including, most recently, the PPACA, which changes the way healthcare is financed by both governmentaland 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 related final published omnibus rule. HIPAA mandates, among other things, the adoption of uniformstandards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security ofindividually 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 acovered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possiblyother persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federalHIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security ofhealth information in certain circumstances, some of which are more stringent then HIPAA and many of which differ from each other in significantways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in theimposition of significant civil and criminal penalties. 20 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 othercountries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products.Approval procedures vary among countries and can involve additional product testing and additional administrative review periods, and may beotherwise complicated by our product candidates being controlled substances such as synthetic cannabinoids and fentanyl. The time required toobtain approval in other countries might differ from and be longer than that required to obtain FDA approval and DEA classification. Regulatoryapproval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country maynegatively impact the regulatory 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. Employees As of December 31, 2015, we employed 510 full-time employees, including 47 manufacturing employees, 343 sales and marketing employees,75 employees in research and development, and 45 employees in administration. As of the same date, 38 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 advisorsgenerally meet twice a year as a group to assist us in formulating our research, development, clinical and sales and marketing strategies. Someindividual scientific advisors consult with and meet informally with us on a more frequent basis. Our scientific advisors are not our employees andmay have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our scientificadvisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours. Available Information We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reportsavailable, free of charge, in the “Investors” section of our Internet website as soon as reasonably practicable after we electronically file these materialswith, or furnish these materials to, the Securities and Exchange Commission (the “SEC”). Our website is www.insysrx.com. You may also read or copy any materials that we file with the SEC at its Public Reference Room at 100 F. Street, N.E., Washington, DC 20549. Youmay obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, you will find these materialson the SEC Internet site at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically withthe SEC. ITEM 1A. RISK FACTORS Risks Related to Our Business and Industry We are largely dependent on the commercial success of our product, Subsys, and although we have generated revenue and profit from sales ofSubsys, 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 main approvedproduct, Subsys. In addition to the risks discussed elsewhere in this section, our ability to continue to generate revenues from this product will dependon 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; 21 ●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; and ●our ability to comply with regulatory requirements. If Subsys, or any of our product candidates for which we receive regulatory approval, do not maintain broad market acceptance or coverage bythird-party payors, the revenues that we generate from this product will be limited. The commercial success of Subsys, and any product candidates for which we obtain marketing approval from the FDA or other regulatoryauthorities, will depend upon the continued acceptance of these products by physicians, patients, healthcare payors and the medical community.Coverage and reimbursement of our approved products by third-party payors is also necessary for commercial success. The degree of marketacceptance of Subsys and any other product candidates for which we may receive regulatory approval will depend on a number 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 sublingualspray device as easy to administer, safe and effective, and otherwise may not react favorably to sublingual delivery. In accordance with the REMSprotocol for all TIRF products, physicians are advised to begin patients at the lowest dose available for the applicable TIRF product, which for Subsysis 100 mcg. If patients do not experience pain relief at initial low-dose prescriptions of Subsys, they or their physicians may conclude that Subsys isineffective in general and may discontinue use of Subsys before titrating to an effective dose. In addition, many third-party payors require usage andfailure on cheaper generic versions of Actiq prior to providing reimbursement for Subsys and other branded TIRF products, which limits Subsys’ useas a first-line treatment option. 22 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 theUnited States, Schedule II substances considered to present the highest risk of abuse and Schedule V substances being considered to present thelowest relative risk of abuse. Subsys contains fentanyl, an opioid, and is regulated as a Schedule II controlled substance, and despite the strictregulations on the marketing, distributing, prescribing and dispensing of such substances, illicit use and abuse of controlled substances is well-documented. Thus, the marketing of Subsys and, if approved, our product candidates that contain controlled substances, may generate publiccontroversy that may adversely affect market acceptance of Subsys 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,we may 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. 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 ourdronabinol product candidates are approved and successfully commercialized, there is no guarantee that introduction of improved formulations ofdronabinol will result in expansion of the dronabinol market or permit us to gain share in that market or maintain or increase any market share we maycapture. New dronabinol products that we introduce could potentially replace our then currently marketed dronabinol products, thus not impactingthe overall size of the market or increasing our overall share of that market. If we are unable to expand the market for the medical use of dronabinol orgain, maintain or increase market share in that market, this failure would have a material adverse effect on our ability to execute on our business planand 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 andconsistently implement efforts to control these costs, which efforts include, but are not limited to, establishing excluded or preferred drug lists.Subsys has been, and will likely continue to be, subject to these restrictions and impediments from third-party payers, particularly PBMs and privatehealth insurers. Our product, Subsys, has been included on an exclusion list for at least one significant PBM and may in the future be included onother PBM exclusion lists. These PBMs, which administer prescription drug benefits for employers and health plans and runs large mail-orderpharmacies, have significant influence in the insurance industry. While most PBMs have an exception process that physicians may pursue to havean off-formulary, medically necessary drug covered for patients, being placed on an exclusion list makes it difficult for many patients coveredthrough a PBM administered plan to have Subsys covered by insurance. In the future, we may not be able to work with other PBMs toevaluate price increases and to communicate with managed care and health-system decision-makers to ensure a balanced approach which takes intoaccount the clinical performance and efficacy of our products. Moreover, in the United States, there have been, and we expect there will continue tobe, a number of state and federal proposals that limit the amount that third party payers may pay to reimburse the cost of drugs, particularly for stateand federal government programs such as Medicare and Medicaid, as well as managed care providers and private insurance plans. We believe theincreasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of Subsys. Our ability togenerate revenue is affected by the availability of third-party reimbursement for Subsys and our results of operations will be negatively affected ifwe fail to manage adequate reimbursement levels for Subsys from such third-party payers. 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 serviceshub, is subject to extensive and complex federal and state laws and varied third party payers standards, procedures, processes and conditions. Ourcompliance with applicable laws, regulations and standards is expensive and time consuming and substantial governmental resources exist toenforce and prosecute these applicable laws, regulations and standards and companies that violate such laws, regulations and standards may facesubstantial penalties. The potential sanctions include significant civil, criminal and administrative penalties, damages and fines and exclusion fromparticipation in federal health care programs. Because of the breadth of these laws and the lack of extensive legal guidance in the form ofregulations or court decisions, it is possible that some of our business activities could be subject to challenge or penalty under one or more of theselaws. Such a challenge, irrespective of the underlying merits of the challenge or the ultimate outcome of the matter, could have a material adverseeffect on our business, financial condition, results of operations and growth prospects. 23 We or our collaborators may not be successful in executing sales and marketing strategies for Subsys, or any additional product candidates forwhich we obtain regulatory approval. If such sales and marketing strategies are not successful, we may not be able to maintain or increase ourrevenues. Prior to our launch of Subsys in March 2012, we built a commercial organization including sales, marketing, managed markets, trade anddistribution functions, which is now focused exclusively on marketing and selling Subsys. We utilize in the United States, with respect to Subsys, andplan to utilize in the United States, with respect to any of our product candidates for which we obtain regulatory approval and maintain sales andmarketing responsibility. Our commercial organization may not perform over time as we currently anticipate. To the extent our commercialorganization does not perform over time as we currently anticipate, we will need to consider alternatives, such as entering into arrangements with thirdparties to market and sell our products. Any arrangement would likely result in significantly greater sales and marketing expenses or lower revenuesthan 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 wellas in the event that we obtain regulatory approval for any of our product candidates. In addition, we could lose sales personnel or the performance ofour sales personnel as measured by actual sales may be disappointing. Many of our competitors have significantly larger sales and marketingorganizations, and significantly greater experience than we do in selling, marketing and distributing pharmaceuticals, and we may not be able tocompete successfully with them with our existing commercial organization. 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.With the commercialization of Subsys in March 2012 and our anticipated launch of Syndros in 2016, we have increased our number of full-timeemployees from 32 on December 31, 2010 to 510 as of December 31, 2015, primarily because we established a commercial organization and ourcommercial infrastructure over that period, and the complexity of our business operations has substantially increased. We will need to further expandour scientific, sales and marketing, managerial, operational, financial and other resources to support our planned research, development andcommercialization 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; ●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. 24 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 relyon consultants for certain functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfullycarry out their contractual obligations and meet expected deadlines. There can be no assurance that we will be able to manage our existingconsultants or find other competent outside consultants, as needed, on economically reasonable terms, or at all. If we are not able to effectivelyexpand our organization by hiring new employees and expanding our use of consultants, we may be unable to successfully implement the tasksnecessary to effectively execute on our planned research, development and commercialization activities and, accordingly, may not achieve ourresearch, development and commercialization goals. We may not be able to obtain regulatory approval for Syndros, which would limit our future growth prospects. In addition to growing sales of our main approved product, Subsys, the ability to improve our business, results of operations and financialcondition in the near-term will depend heavily on our ability to obtain regulatory approval and acceptable DEA classification for Syndros. In August2015, FDA accepted for filing our NDA for Syndros. The PDUFA goal date for a decision on this NDA is April 1, 2016, which reflects a StandardReview by the FDA.However, we can provide no assurance that we will receive regulatory approval for Syndros 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 Syndros is currently accurate or that suchcosts might increase over time. For instance, following the FDA’s review of our planned NDA, we may be required to run additional clinical trials andmay not ever obtain FDA approval for Syndros. Ultimately, the FDA has substantial discretion in the drug approval process, including the ability todelay, limit or deny approval of a product candidate for various reasons. If we are unable to obtain regulatory approval for Syndros, our ability to generate additional near-term revenues beyond those derived from thecommercial sale of Subsys will be materially delayed, which would have a material adverse impact on our business, results of operations and financialcondition. We produce our dronabinol API internally and may encounter manufacturing failures that could impede or delay commercial production ofSyndros or our other 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 could cause us to be unable to meet demand for our Syndros, if approved,and lose potential revenue, delay the preclinical and clinical development or regulatory approval of our dronabinol product candidates, and harm ourreputation. Our internal manufacturing operations may encounter difficulties involving, among other things, production yields, regulatorycompliance, contamination, quality control and quality assurance, obtaining DEA quotas which allow us to produce dronabinol in the quantitiesneeded to execute on our business plan, and shortages of qualified personnel. Our ability to support regulatory approval of our dronabinol productcandidates, could be impeded, delayed, limited or denied if the FDA does not approve and maintain the approval of our manufacturing processes andfacilities. In addition, we have limited experience producing dronabinol in commercial quantities and may encounter difficulties with continuing tomanufacture commercial quantities of dronabinol or the quantities needed for our preclinical studies or clinical trials. Such difficulties could result ina delay in the commercial launch of Syndros, if approved, delays in our preclinical studies, clinical trials and regulatory submissions. 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 ina cost-effective manner, if at all. 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. 25 We have recently expanded our dronabinol API production capacity by constructing a second facility. We may encounter a number ofchallenges relating 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 dronabinolAPI supply needs. The construction of the second facility has required significant capital expenditures and has resulted in significantly increasedfixed costs. In addition, we will need to transfer our manufacturing processes, technology and know-how to the second facility. We cannot assure youthat we will be able 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 to transition our dronabinol API manufacturing operations to the second facility in a cost-efficient and timely manner, then we mayexperience disruptions in our operations, which could negatively impact our business and financial results. Further, if we are unable to achieve certainminimum production efficiencies at the second facility, or if we fail to obtain regulatory approval for and successfully commercialize our dronabinolproduct candidates, including Syndros, we may never realize a return on our investment. If the demand for our dronabinol products decreases or if wedo not produce the output we plan or anticipate after our new facility is operational, we may not be able to spread a significant amount of our fixedcosts over the production volume, thereby increasing our per unit fixed cost, which would have a negative impact on our financial condition andresults of operations. We will need to obtain and maintain a number of regulatory approvals in connection with the production of dronabinol API at our plannedsecond manufacturing facility. Our ability to obtain and maintain these approvals may be subject to additional costs and possible delays beyond whatwe initially 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 ourresults of operations. Our ability to operate a new, larger facility successfully will greatly depend on our ability to hire, train and retain an adequate number ofadditional manufacturing employees, in particular employees with the appropriate level of knowledge, background and skills. Should we be unable tohire such employees, 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. Additionally, we cannot assure you that alternative manufacturing facilities would offer the same cost structure as the planned secondfacility. 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 if we fail to maintain our supply and manufacturing relationships with these third parties ordevelop new relationships with other third parties, we may be unable to continue to commercialize Subsys or to develop our product candidates. We rely on a number of third parties for the commercial supply of Subsys and the clinical supply of our product candidates. Our ability tocommercially supply Subsys and to develop our product candidates depends, in part, on our ability to successfully obtain the API for Subsys and thestarting materials for dronabinol API for our dronabinol product candidates and the API for any other product candidates, and outsource most if not allof the aspects of their manufacturing at competitive costs, in accordance with regulatory requirements and in sufficient quantities forcommercialization and clinical testing. If we fail to develop and maintain supply relationships with these third parties, we may be unable to continueto commercialize Subsys or develop our Syndros or any other product candidates. 26 We purchase the fentanyl API utilized in connection with Subsys and the starting materials for our dronabinol API from several third parties. Wedo not have long-term agreements with any of these parties, but rather purchase material on a purchase order basis. Moreover, some of the startingmaterial for our dronabinol API is difficult to procure and produce. Our ability to obtain fentanyl API and the starting materials for our dronabinol APIin sufficient quantities and quality, and on a timely basis, is critical to our continued commercialization of Subsys and to our successful completion ofpreclinical studies and clinical trials for our product candidates. There is no assurance that these suppliers will continue to produce the materials inthe quantities and quality and at the times they are needed, if at all, especially in light of the fact that we intend to significantly increase our orders forthese materials in the near future. Moreover, the replacement of any of these suppliers, particularly the supplier of the starting material for ourdronabinol API that is difficult to produce, could lead to significant delays and increase in our costs. We do not own or operate manufacturing facilities for Subsys and currently lack the in-house capabilities to manufacture Subsys. Our Subsys sub-component manufacturing is performed by Aptar, with the final fill, assembly and packaging of Subsys performed by DPT. If there are problemsrelating to the equipment utilized by Aptar to manufacture Subsys, we will be responsible for fixing or replacing that equipment. Any requirement todo 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 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 theextent that we are unsuccessful in negotiating a new agreement or finding suitable alternative sources, we may be unable to continue to manufactureSubsys to meet 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,state and foreign regulations. Additionally, our manufacturers may experience difficulties due to resource constraints, labor disputes, unstablepolitical environments or natural disasters. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with theircontractual obligations for any reason, our ability to commercially supply Subsys or to provide dronabinol for any product candidates for preclinicalstudies or clinical trials could be jeopardized. Any delay or interruption in our ability to commercially supply Subsys will result in the loss ofpotential revenues and could adversely affect the market’s acceptance of these products. We cannot guarantee that we will not encounter othermanufacturing issues in the future. In addition, any delay or interruption in the supply of preclinical study or clinical trial supplies could delay thecompletion of those studies or trials, increase the costs associated with maintaining our programs and, depending upon the period of delay, require usto commence new studies 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-partymanufacturers for the manufacture of the product candidate must be approved by the applicable regulatory authorities before the product candidatemay be approved and marketed. We do not control the manufacturing processes of third-party manufacturers and except for dronabinol API, we arecurrently completely dependent on them. If any of our third-party manufacturers cannot successfully manufacture product that conforms to ourspecifications and the applicable regulatory authorities’ strict regulatory requirements, they will not be able to secure or maintain regulatory approvalfor the manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control,quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufactureof our products or product candidates or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities,which would significantly impact our ability to commercially supply Subsys or develop or obtain regulatory approval for our product candidates. If our third-party manufacturers or suppliers fail to deliver the required commercial quantities of Subsys and the respective sub-components andstarting materials, on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers orsuppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on a timely basis, thecontinued commercialization of Subsys and the development of our product candidates would be impeded, delayed, limited or prevented, whichcould have a material adverse effect on our business, results of operations, financial condition and prospects. 27 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 locationsin the 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 actuatorsubassembly, vial subassembly, and the setting mechanism. The actuator subassembly is comprised of nine individual components which arecollectively supplied by six different third-party manufacturers. The vial subassembly that houses the sterile drug formulation fentanyl is comprisedof five different components supplied by four third-party manufacturers. Each of these third-party manufacturers is currently the single source of theirrespective components. If any of these manufacturers is unable to supply its respective component for any reason, including due to violations ofcGMPs for medical devices, known as QSR our ability to have the finished sublingual spray device manufactured and commercially supply. Subsyswill be adversely affected and we would lose potential revenue. Accordingly, a failure in any part of our supply chain may cause a material adverseeffect on our ability to generate revenue from Subsys, 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 approvedmore quickly or marketed more effectively than our product candidates or are demonstrated to be safer or more effective than our products, ourcommercial opportunities 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 academicand research institutions, many of which have greater financial resources, marketing capabilities, including well-established sales forces,manufacturing capabilities, research and development capabilities, experience in obtaining regulatory approvals for product candidates and otherresources than us. Subsys competes against numerous branded and generic products already being marketed and potentially those which are or will be indevelopment. Many of these competitive products are offered in the United States by large, well-capitalized companies. Subsys is the fourth newbranded TIRF product in the last five years. In the BTCP market, physicians often treat BTCP with a variety of short-acting opioid medications,including morphine, morphine and codeine derivatives and fentanyl. Some currently marketed products against which we directly compete includeTeva Pharmaceutical Industries Ltd.’s Fentora and Actiq, Galena’s Abstral, Depomed’s Lazanda and BioDelivery Sciences International, Inc.’sOnsolis. Some generic fentanyl products against which Subsys competes are marketed by Mallinckrodt, Inc., Par Pharmaceutical Companies, Inc. andActavis, Inc. In addition, we are aware of numerous companies developing other treatments and technologies for rapid delivery of opioids to treatBTCP, including transmucosal, transdermal, nasal spray, and inhaled sublingual delivery systems. If these treatments and technologies aresuccessfully developed and approved, they could represent significant additional competition to Subsys. With respect to our dronabinol product candidates, the market in which we intend to compete is challenging in part because generic productsgenerally face greater price competition than branded products and the competition from generic products may have an effect on our product prices,market share, revenues and profitability. We may not be able to differentiate any products that we may market from those of our competitors,successfully develop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of ourproducts payment and other commercial terms as favorable as those offered by our competitors. In addition, there are a number of established therapiesand products already commercially available and under development by other companies that treat the indications that our dronabinol productcandidates are intended to treat. Specifically, if approved, our dronabinol product candidates will compete, against therapies and products such asAbbvie, Inc.’s Marinol and Marinol generics. Par Pharmaceutical Companies markets an approved generic version of Marinol and Actavis markets anauthorized generic version of Marinol. We cannot give any assurance that other companies will not obtain regulatory approval or acceptable DEAclassification for, or commercialize additional generic dronabinol products. 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 beenpublished arguing the benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted lawslegalizing medicinal and recreational marijuana. There is some support in the United States for further legalization of marijuana. We also cannotassess the extent to which patients utilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approved dronabinolproducts. Furthermore, in the treatment of CINV, physicians typically offer conventional anti-nausea drugs prior to initiating chemotherapy, such asSanofi’s Anzemet, Eisai Inc./Helsinn Group’s Aloxi, Roche Holding AG’s Kytril, Par Pharmaceutical Companies’ Zuplenz and GlaxoSmithKline plc’sZofran, as well as Neurokinin 1 receptor antagonists on the market including Kyowa Hakko Kirin Co., Ltd.’s Sancuso and Merck & Co., Inc.’s Emend.To the extent that Syndros and our dronabinol product candidates compete in the broader CINV market, we will also face competition from theseproducts and 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 our dronabinol product candidates. 28 We also face competition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA annual quotas, recruitingand retaining qualified personnel, establishing clinical trial sites and enrolling patients in clinical trials, and in identifying and acquiring or in-licensing new products 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 thatwe develop, and there can be no assurance that we can maintain and augment these capabilities in a manner that will be cost efficient and competitivewith the sales and marketing efforts of our competitors, especially since some or all of those competitors could expend greater economic resourcesthan we do and/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, or any futureproducts 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 coveragefor a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptablyhigh. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost ofour products. In addition, the market for our products will depend significantly on access to third-party payors’ drug formularies, or lists of medications forwhich third-party payors provide coverage and reimbursement. The competition to be included in such formularies often leads to downward pricingpressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwiserestrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. For example, many third-party payorsrequire usage and failure on cheaper generic versions of Actiq prior to providing reimbursement for Subsys and other branded TIRF products, whichlimits Subsys’ use as a first-line treatment option. Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods ofcontrolling healthcare 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 coveragedetermination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of ourproducts to each payor separately, 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 any of our product candidates for which we may receive regulatoryapproval may not be available or adequate in either the United States or international markets, which could have a material adverse effect on ourbusiness, results of operations, financial condition and prospects. We depend on wholesale pharmaceutical distributors for retail distribution of Subsys; if we lose any of our significant wholesalepharmaceutical distributors, our business could be harmed. The majority of our sales of Subsys are to wholesale pharmaceutical distributors who, in turn, sell the products to pharmacies, hospitals and othercustomers. For the year ended December 31, 2015, four wholesale pharmaceutical distributors, Rochester Drug Cooperative, Inc., AmerisourceBergenCorporation, McKesson Corporation, and Cardinal Health, Inc., individually comprised approximately 32%, 20%, 17% and 14%, respectively, of ourtotal gross sales of Subsys. The loss by us of any of these wholesale pharmaceutical distributors’ accounts or a material reduction in their purchasescould have a material adverse effect on our business, results of operations, financial condition and prospects. 29 In addition, these wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the United States.This distribution network has undergone, and may continue to undergo, significant consolidation marked by mergers and acquisitions. As a result, asmall number of large wholesale distributors control a significant share of the market. Consolidation of drug wholesalers has increased, and maycontinue to increase, competitive and pricing pressures on pharmaceutical products. We cannot assure you that we can manage these pricing pressuresor that wholesaler purchases will not fluctuate unexpectedly from period to period. Our sales of Subsys can be greatly affected by the inventory levels our respective wholesalers carry. We monitor wholesaler inventory of Subsysusing a combination of methods. Pursuant to distribution service agreements with our three largest wholesale customers, we receive inventory levelreports. For most other wholesalers where we do not receive inventory level reports, however, our estimates of wholesaler inventories may differsignificantly from actual inventory levels. Significant differences between actual and estimated inventory levels may result in excessive production(requiring us to hold substantial quantities of unsold inventory), inadequate supplies of products in distribution channels, and insufficient productavailable at the retail level. These changes may cause our revenues to fluctuate significantly from quarter to quarter, and in some cases may cause ouroperating results for a particular quarter to be below our expectations or the expectations of securities analysts or investors. In addition, at times,wholesaler purchases may exceed customer demand, resulting in reduced wholesaler purchases in later quarters, which may result in substantialfluctuations in our results of operations from period to period. If our financial results are below expectations for a particular period, the market price ofour 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 ofwhich are out of our direct control. For example, we rely on Cardinal Health 105, Inc. (a/k/a Specialty Pharmaceutical Services) to provide keyservices related to logistics, warehousing and inventory management, distribution, contract administration and chargeback processing, accountsreceivable management and call center management, and, as a result, most of our Subsys inventory is stored at a single warehouse maintained by theservice provider. We must rely on this provider as well as other third-party providers that perform services for us, including entrusting our inventoriesof Subsys to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expecteddeadlines, or otherwise do not carry out their contractual duties to us, or encounter physical damage or natural disaster at their facilities, our ability todeliver Subsys to meet commercial demand would be significantly impaired. In addition, we utilize third parties to perform various other services forus relating to sample accountability and regulatory monitoring, including adverse event reporting, safety database management and other productmaintenance services. If the quality or accuracy of the data maintained by these service providers is insufficient, our ability to continue to marketSubsys could be jeopardized or we could be subject to regulatory sanctions. We do not currently have the internal capacity to perform these importantcommercial functions, and we may not be able to maintain commercial arrangements for these services on reasonable terms. In addition to the level of commercial success of our approved products, our future growth is also dependent on our ability to successfullydevelop a pipeline of product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory approval oracceptable DEA 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 internalnew drug discovery capabilities, and our primary focus is on developing improved formulations and delivery methods for existing FDA-approvedproducts. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products containing controlled substances,among other things, are subject to extensive regulation by the FDA, the DEA and other regulatory authorities in the United States. Obtaining approvalof an NDA is a lengthy, expensive and uncertain process. The FDA also has substantial discretion in the drug approval process, including the abilityto delay, limit or 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. 30 Any of our product candidates may fail to achieve their specified endpoints in clinical trials. Furthermore, product candidates may not beapproved even if they achieve their specified endpoints in clinical trials. The FDA may disagree with our trial design and our interpretation of datafrom clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. TheFDA may also approve a product candidate for fewer or more limited indications than we request, or may grant approval contingent on theperformance of costly post-approval clinical trials (i.e., Phase IV trials). In addition, the FDA may not approve the labeling claims that we believe arenecessary or desirable for the successful 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 beable to execute our business strategy effectively and our ability to substantially grow our revenues will be limited, which would have a materialadverse impact 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 forabuse, 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 theDEA for the scheduling change. DEA regulations currently limit the formulation of FDA-approved dronabinol products that are classified in ScheduleIII. 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,several products from other companies that are the subject of ANDAs are under review by the FDA. If this ruling is allowed, it may increase the numberof generics approved as we believe there are active ANDAs which utilize naturally-derived dronabinol and hard gelatin capsule technology.Dronabinol SG Capsule is also subject to regulation by state-controlled substance authorities. In addition, because the DEA currently regulates the scheduling of dronabinol on a product-specific basis as opposed to regulating alldronabinol-containing products under one schedule, we believe that the DEA will also need to make individual scheduling decisions with respect toour proprietary dronabinol product candidates, if approved, based on, among other factors, assessments of the drug abuse potential for each of ourformulations. Therefore, even though Dronabinol SG Capsule has been classified under Schedule III, because our other proprietary dronabinol productcandidates will, if approved, represent novel dosage forms, and in the case of the Dronabinol Inhalation Device, a novel route of administration fordronabinol, the DEA may determine that stricter scheduling controls than those applicable to Schedule III controlled substances are appropriate forthe additional product candidates. In fact, these product candidates will likely default to Schedule II until the DEA completes a scheduling action forthem. Moreover, there may be significant delay in the issuance of the DEA’s scheduling decisions with respect to our products following FDAapproval, if such approval is granted. Even with FDA approval, we will not be able to market any of our controlled substance products until the DEAhas issued a scheduling decision with respect to each drug product. Because the restrictions on the manufacture, sale, distribution, prescribing, and dispensing of Schedule II substances are greater than for ScheduleIII substances, 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.For example, Schedule II drugs or substances generally may not be dispensed without the written prescription of a practitioner, and prescriptions forthese drugs 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 underSchedule III, if approved by the FDA, would have an adverse impact on our ability to promptly or effectively commercialize such products. 31 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 thecommercial sale of any product candidate, we must gather substantial evidence from well-controlled clinical trials that demonstrate to the satisfactionof the FDA that the product candidate is safe and effective for its proposed indication, and similar regulatory approvals would be necessary tocommercialize the product candidate in other countries. In light of widely publicized events concerning the safety risk of certain drug products, particularly drug products that contain controlledsubstances, regulatory authorities, members of Congress, the GAO, medical professionals and the general public have raised concerns about potentialdrug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug productsand establishment of risk management programs that may, for instance, restrict distribution of drug products after approval. In addition, the FDCAauthorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect new safetyinformation and require a REMS for certain drugs, including certain currently approved drugs. Under the FDCA, companies that violate these andother provisions of the law are subject to substantial civil monetary penalties, among other regulatory, civil and criminal 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 fromclinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminateclinical trials before completion, or require longer or additional clinical trials that may result in a delay or failure in obtaining approval or approvalfor a more limited indication than originally sought. 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,Syndros, most of our other product candidates are in preclinical development. We estimate that clinical trials for these product candidates, if and wheninitiated, will continue for several years and may take significantly longer than expected to complete. In addition, we, the FDA, an IRB, or otherregulatory authorities, including state and local, may suspend, delay or terminate our clinical trials at any time, or the DEA could suspend or terminatethe registrations and quota allotments we require in order to procure and handle controlled substances, for various reasons, 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,insufficient efficacy, 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 sufficientquantities of 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 timelyor acceptable manner; 32 ●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 clinicaltrials similar to the experience of a number of other companies in the pharmaceutical and biotechnology industries, even after receiving promisingresults in earlier trials. Further, even if we view the results of a clinical trial to be positive, the FDA or other regulatory authorities may disagree withour interpretation of the data. In the event that we abandon or are delayed in our clinical development efforts related to our product candidates, wemay not be able to execute on our business plan effectively, we may not be able to become profitable, our reputation in the industry and in theinvestment community would likely be significantly damaged and our stock price would likely decrease significantly. 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, wecontracted with Worldwide Clinical Trials to conduct and oversee our pivotal bioequivalence study for Syndros. We also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with ourclinical protocols and all applicable regulatory requirements, including the FDA’s good clinical practice regulations and DEA and state regulationsgoverning the handling, storage, security and recordkeeping for controlled substances. These CROs and third parties play a significant role in theconduct of these trials and the subsequent collection and analysis of data from the clinical trials. We rely heavily on these parties for the execution ofour clinical and preclinical 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 FDAmay not 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 trialsconducted outside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example, the study must be welldesigned and conducted and performed by qualified investigators in accordance with ethical principles. The study population must also adequatelyrepresent 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 clinicallymeaningful. Generally, the patient population for any clinical studies conducted outside of the United States must be representative of the populationfor whom we intend to label the product in the United States. In addition, such studies would be subject to the applicable local laws and FDAacceptance of the data would be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations. Therecan be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept any such data, it wouldlikely result in the need for additional trials, which would be costly and time-consuming and delay aspects of our business plan. 33 Since the starting materials we utilize to manufacture dronabinol are sourced out of India, we are exposed to a number of risks anduncertainties associated 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 conflictsbetween India and neighboring Pakistan. Moreover, extremist groups within India and neighboring Pakistan have from time to time targeted Westerninterests. In addition, India is susceptible to natural disasters such as earthquakes and floods. Political instability, future hostilities with countries suchas Pakistan, targeting of our interests by extremist attacks, and earthquakes or other natural disasters in India could harm our operations and impedeour ability to produce dronabinol on our anticipated timeline, or at all. 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 in either case may not be successful. We are developing several proprietary dronabinol product candidates, including Syndros and Dronabinol Inhalation Device, for which we intendto seek FDA approval through the Section 505(b)(2) regulatory pathway. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDAwe submit to FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approvedcompounds, which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that wewould 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 asanticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatoryapproval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates, and complications andrisks associated with these product candidates, would likely substantially increase. We could need to obtain more additional funding, which couldresult in significant dilution to the ownership interests of our then existing stockholders to the extent we issue equity securities or convertible debt.We cannot assure you that we would be able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue theSection 505(b)(2) regulatory pathway would likely result in new competitive products reaching the market more quickly than our product candidates,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)is successfully 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)NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in aSection 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 orlonger depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with theFDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions cansignificantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA maysubstantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatorypathway, there is no guarantee this would 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 usesfor which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing andsurveillance to monitor 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 any dronabinol product candidates for which we obtain regulatory approval as well assignificantly 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 anaggregate quota for the amount of dronabinol that may be produced in the United States based on the DEA’s estimate of the quantity needed to meetlegitimate scientific and medicinal needs. This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States eachyear is allocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas.We are required to obtain an annual quota from the DEA in order to manufacture and produce dronabinol. The DEA may adjust aggregate productionquotas and individual production and procurement quotas from time to time during the year and has substantial discretion in deciding whether or notto make such adjustments. The DEA’s aggregate production quota for dronabinol for 2016 is 511.3 kilograms, compared to 497.5 kilograms for 2015.For 2016, we were allocated what we believe is a sufficient quantity of dronabinol to meet our currently anticipated production and testing needsthrough 2016. However, we may need additional amounts of dronabinol in future years to implement our business plan. 34 We do not know what amounts of dronabinol other companies developing or marketing dronabinol product candidates may have requested for2017 or will request in future years. The DEA, in assessing factors such as medical need, abuse potential and other policy considerations, may havechosen to set the aggregate dronabinol quota for 2016 lower than the total amount requested by the companies, and may do so in the future. Thoughcompanies are permitted to petition the DEA to increase the aggregate quota for dronabinol in a given year after it is initially established, there is noguarantee the DEA would act promptly or favorably upon such a petition. The success of our business plan will depend in part on our being able toexpand the overall market for the medical use of dronabinol by introducing new dronabinol formulations, and to sell significant amounts of ourapproved dronabinol products. In order to do so, we will need to receive from the DEA significantly increased allotments of dronabinol quotas overtime and likely an increase in the aggregate annual quota. Any delay or refusal by the DEA in establishing quotas necessary for us to execute on ourbusiness plan could negatively impact our ability to sell Syndros, assuming FDA approval, and any other dronabinol product candidate for which weobtain regulatory approval, as well as our preclinical studies and clinical trials, which would in turn have a material adverse effect on our business, ourability to execute on our business plan, our financial position and results of operations, our prospects, and our ability to generate revenue to fund thedevelopment of our other product candidates. Our failure to successfully develop, acquire and market additional product candidates or approved products would impair our ability to growour business. As part of our growth strategy we intend to seek to expand our product pipeline by developing or exploring acquisition or in-licensingopportunities of proven drugs that can be paired with our sublingual spray drug delivery system. Some of these drugs may require reformulation toaccommodate the approved doses in smaller volumes that are compatible with our delivery system. Any reformulation may increase the risk of failureduring development, extend the development timelines, increase development costs and add complexity to the regulatory approval process and insome cases reformulation may not be possible. If we are not able to identify additional drug compounds that can be delivered via the current versionof our sublingual spray technology, or if we are unable to successfully develop higher dose versions of this technology, our ability to developadditional product candidates and grow 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 currentowners and finance these arrangements. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy andcomplex. Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with us for thelicense or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensingof third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources topotential acquisitions or licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We maynot be able to acquire the rights to 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 orclinical testing 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. 35 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, 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 retainhighly qualified managerial, scientific, medical and other personnel. We are highly dependent on our management, scientific and medical personnel,as well as our board members, including our founder, President, Chief Executive Officer and principal stockholder, Dr. John N. Kapoor. The loss of theservices of any of these individuals could impede, delay or prevent the continuing commercialization of Subsys and the development of our productcandidates and could negatively impact our ability to successfully implement our business plan. If we lose the services of any of these individuals, wemay not be able to find suitable replacements on a timely basis or at all, and our business would likely be harmed as a result. We do not maintain “keyman” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ all of our executive officers and keypersonnel on an at-will basis and their employment can be terminated by us or them at any time, for any reason and without notice; provided,however, that under certain circumstances we may owe them additional compensation in connection with such termination. 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 besignificantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract offers from othercompanies. 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 ofthe other biotechnology and pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources,different risk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for careeradvancement. Some of these characteristics may be more appealing to high quality candidates than that which we have to offer. If we are not able toattract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly ourability to implement our business 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 notour employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability or loyalty to us.In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that maycompete with ours. Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards. We are exposed to the risk of fraud or other misconduct of our employees, contractors or agents. Misconduct by employees, contractors or agentscould include intentional failures to comply with FDA regulations, provide accurate information by our employees, contractors and agents to theFDA, comply with applicable manufacturing standards, comply with federal and state healthcare privacy, fraud and abuse laws and regulations, reportfinancial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in thehealthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusivepractices. These laws and regulations may restrict or prohibit a wide range of pricing, false claims, discounting, marketing and promotion, salescommission, customer incentive programs and other business arrangements. These laws also dictate the proper use of patient information and datawhich is subject to privacy laws such as HIPAA. Misconduct could also involve the improper use of information obtained in the course of clinicaltrials, or illegal misappropriation of drug product, or illegal promotion of a drug product for off-label use, which could result in regulatory sanctionsand serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deteremployee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanagedrisks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with suchlaws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actionscould 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.Any such annual limitation, whether as the result of prior transactions, sales of common stock by our existing stockholders or additional sales ofcommon stock by us, may significantly reduce the utilization of the NOLs before they expire and could have an adverse effect on our future results ofoperations. 36 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 areavailable to offset our post-merger income is limited to an aggregate of $1.2 million as of December 31, 2015. For state income tax purposes, we have$268.3 million of state NOLs, all of which relate to Illinois state NOLs, which are available to offset future Illinois taxable income. We have placed avaluation allowance on a significant portion of our Illinois state NOLs because it is not more likely than not that such amounts will be realized due tocurrent levels of activity in Illinois. 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 businessarrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any suchtransaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significantintegration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, thesetransactions may entail numerous 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,any transactions 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 existseven if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA, such as the case withSubsys and our discontinued Dronabinol SG Capsule, or an applicable foreign regulatory authority. Our products and product candidates are designedto affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with Subsys or Dronabinol SGCapsule or our product candidates could result in injury to a patient or even death. For example, because our sublingual spray technology is designedto be self-administered by patients, it is possible that a patient could fail to follow instructions and as a result apply a dose in a manner that results ininjury or death. In addition, Subsys is an opioid pain reliever that contains fentanyl, and Dronabinol SG Capsule is a synthetic cannabinoid, which areregulated “controlled substances” under the CSA and could result in harm to patients relating to its potential for abuse. In addition, a liability claimmay be brought against us even if our products or product candidates merely appear to have caused an injury. Product liability claims may be broughtagainst us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products orproduct candidates, among others. If we cannot successfully defend ourselves against product liability claims we will incur substantial liabilities. Inaddition, regardless of merit or eventual outcome, product liability claims may result in: ●the inability to commercialize our products or, if approved, our product candidates; 37 ●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. 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 clinicaltrials with an additional $10.0 million per occurrence and an additional $10.0 million annual aggregate coverage limit. Our insurance coverage maynot be sufficient 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 areasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability. If we determine that it is prudent toincrease our product liability coverage based on sales of Subsys and Dronabinol SG Capsule, approval, if applicable, of other product candidates orotherwise, we may be unable to obtain this increased product liability insurance on commercially reasonable terms or at all. Large judgments havebeen awarded in class action or individual lawsuits based on drugs that had unanticipated side effects, including side effects that are less severe thanthose associated with Subsys, our discontinued Dronabinol SG Capsule and our product candidates. A successful product liability claim or series ofclaims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and have amaterial adverse effect our business, results of operations, financial condition 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 anddisposal of hazardous materials owned by us, including the components of our products and product candidates and other hazardous compounds. Weand our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of thesehazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’facilities pending use and disposal. We cannot completely eliminate the risk of contamination, which could cause an interruption of ourcommercialization efforts, research and development efforts and business operations, injury to our employees and others, environmental damageresulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materialsand specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing ofthese materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate therisk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liabilitycould exceed our resources. We do not currently carry biological or hazardous waste insurance coverage and our property and casualty and generalliability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure orcontamination. 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 andelectrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occurand cause interruptions in our operations, it could result in a material disruption of our commercialization activities, drug development programs andour business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatoryapproval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on a large number of third parties to supplycomponents for and manufacture our products and product candidates, warehouse and distribute Subsys and conduct clinical trials, and similar eventsrelating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach wereto 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. 38 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 haveexperienced severe earthquakes. We do not carry earthquake insurance. However, other natural disasters or similar events, like fires or explosions orlarge-scale accidents or power outages, could severely disrupt our operations, and have a material adverse effect on our business, results of operations,financial condition 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 RoundRock facility, that damaged critical infrastructure, such as enterprise financial systems or manufacturing resource planning and enterprise qualitysystems, or that otherwise disrupted operations at either location, it may be difficult or, in certain cases, impossible for us to continue our business fora substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to proveadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recoveryand business continuity plans which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect onour 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. We expect our operating and general and administrative expenses tocontinue to be significant and increase substantially in connection with our planned research, development and commercialization activities. Webelieve that the net proceeds from our May 2013 initial public offering, cash generated from operations and our existing cash and cash equivalents,together with interest thereon, will be sufficient to fund our operations through at least the next 24 months. We have based these estimates, however,on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Further, wemay need to raise additional capital to fund our operations and continue to support our planned research and development and commercializationactivities. 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 main approved product, Subsys, and any subsequently approved product candidates that arecommercialized; ●the size and cost of our commercial infrastructure; ●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 andany other 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 and our productcandidates; ●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; 39 ●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. 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 onacceptable terms, or at all. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will bediluted. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our abilityto incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset saletransactions. In addition, if we raise additional funds through corporate collaboration and licensing arrangements, it may be necessary to relinquishpotentially valuable rights 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 ordiscontinue one or more of our product development programs or commercialization efforts, or other aspects of our business plan. We also may berequired to relinquish, license or otherwise dispose of rights to products or product candidates that we would otherwise seek to commercialize ordevelop ourselves on terms that are less favorable than might otherwise be available. In addition, our ability to achieve profitability or to respond tocompetitive pressures would 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, wecould face 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, Medicaidor other 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 reimbursableunder a 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 the Anti-Kickback Statute and false claims laws which may apply toitems or services reimbursed by any third-party payor, including commercial insurers, and state and foreign laws governing the privacy andsecurity of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted byHIPAA, thus complicating compliance efforts. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-Kickback Statute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. To the extent thatany product we make 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 inviolation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civiland criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuringof our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operateour business and our financial results. 40 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 criminalsanctions. In addition, management’s attention could be diverted and our reputation could be damaged. See Note 7 under the heading “LegalMatters” in the Notes to our Consolidated Financial Statements for a discussion of ongoing investigations by HHS, Office of Inspector General, theU.S. District Attorney’s Office for the District of Massachusetts and other attorney generals from several states, of potential violations involving ourSubsys 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 legalexpenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicablefederal and state privacy, security and fraud laws may prove costly. Our currently marketed product, Subsys, and any of our product candidates that receive regulatory approval, will be subject to ongoing andcontinued 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 potentiallycostly post-approval studies and surveillance, including Phase IV clinical trials, to monitor the safety and efficacy of the product. We are also subjectto ongoing FDA obligations and continued regulatory review with respect to the manufacturing, processing, labeling, packaging, distribution,adverse event reporting, storage, advertising, promotion and recordkeeping for our product. These requirements include submissions of safety andother post-marketing information and reports, registration, as well as continued compliance with cGMPs and with GCPs and GLPs, which areregulations and guidelines enforced by the FDA for all of our products in clinical and pre-clinical development, and for any clinical trials that weconduct post-approval. To the extent that a product is approved for sale in other countries, we may be subject to similar restrictions and requirementsimposed by laws and government regulators in those countries. In the case of Subsys and any of our product candidates containing controlled substances, we and our contract manufacturers will also be subjectto ongoing DEA regulatory obligations, including, among other things, annual registration renewal, security, recordkeeping, theft and loss reporting,periodic inspection and annual quota allotments for the raw material for commercial production of our products. In addition, manufacturers of drugproducts and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance withcGMP 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, includingrequiring product recall, notice to physicians, withdrawal of the product from the market or suspension of manufacturing. In that regard, becausecertain of our contract manufacturers for Subsys are located outside the United States, they may be subject to foreign laws and regulations governingthe manufacture of drugs and devices, and any failure by them to comply with those laws and regulations may delay or interrupt supplies of ourproducts. 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; 41 ●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 foruses that 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 have received subpoenas from the HHS, Office of Inspector General, the U.S. District Attorney’s Office for the District ofMassachusetts and other attorney generals from several states. The subpoenas primarily request documents relating to the marketing of Subsys. We arecooperating in responding to the subpoenas. See Note 7 under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements fora discussion regarding these ongoing investigations. The FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that couldprevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. We cannot predict thelikelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the UnitedStates or abroad. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market our products, which wouldadversely affect our ability to generate 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-approval regulatory 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 negativeconsequences could 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. 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. 42 Health care reform measures and changes in policies, funding, staffing and leadership at the FDA and other agencies could hinder or preventthe commercial 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 MMA established a new Part D prescription drugbenefit, which became effective January 1, 2006. Under the prescription drug benefit, Medicare beneficiaries can obtain prescription drug coveragefrom private sector plans that are permitted to limit the number of prescription drugs that are covered in each therapeutic category and class on theirformularies. If Subsys or any of our product candidates that are approved by the FDA are not widely included on the formularies of these plans, ourability to market our products to the Medicare population could suffer. 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,to 23% 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 drugsto be covered under Medicare Part D; ●extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations; ●expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal PovertyLevel, 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; ●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 and reporting to the CMS by the 90th day of eachsubsequent calendar year; ●a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; ●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 has authority to recommend certain changes to the Medicare program that couldresult in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congress does not act on therecommendations; 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. 43 In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, the Budget Control Actof 2011, 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, therebytriggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments toproviders of up to 2% per fiscal year, starting in 2013. On January 2, 2013, President Obama signed into law the ATRA reduced Medicare payments toseveral providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the governmentto recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other health carefunding, 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 controlson payment 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 orput pressure 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 ofmedicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products forhuman use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls onthe profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls orreimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. In the United States, the commercial success of Subsys and our product candidates, if and when commercialized, will depend, in part, upon theavailability of coverage and reimbursement from third-party payors at the federal, state and private levels. Third-party payors include governmentalprograms such as Medicare or Medicaid, private insurance plans and managed care plans. These third-party payors may deny coverage orreimbursement for a product or therapy in whole or in part if they determine that the product or therapy was not medically appropriate or necessary.Also, third-party payors have attempted to control costs by limiting coverage through the use of formularies and other cost-containment mechanismsand the amount of reimbursement for particular procedures or drug treatments. Additionally, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and statelegislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid programs.While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for prescription drugs, which may furtherexacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to market our products and generate revenues orcould result in lower margins. In addition, legislation has been introduced in Congress that, if enacted, would permit more widespread importation orre-importation of pharmaceutical products from foreign countries into the United States, including from countries where the products are sold at lowerprices than in the United States. Such legislation, or similar regulatory changes, could lead to a decision to decrease our prices to better compete,which, in turn, could adversely affect our business, results of operations, financial condition and prospects. Alternatively, in response to legislationsuch as this, we might elect not to seek approval for or market our products 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 willbe adopted. Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and canbe affected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffingand leadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects.For example, average review times at the FDA for marketing approval applications have fluctuated over the last ten years, and we cannot predict thereview time for any of our submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors, includingbudget and funding levels and statutory, regulatory and policy changes. 44 Heightened attention on the use of opioids, including government litigation changes in policies, legislation and leadership at the federal andstate level could hinder or prevent the commercial success of our current fentanyl-based product and any potential future opioid productcandidates. Many federal and governmental agencies are focused on the abuse of opioids in the United States and agencies such as the HHS have expressedtheir belief that the United States is in the midst of a prescription opioid abuse epidemic. Common prescription drugs that contain opioids are drugssuch as oxycodone, hydrocodone, and fentanyl. Our product, Subsys, is fentanyl based product in the TIRF class. To the extent that the healthcarecommunity, regulatory bodies and governmental agencies associate us with, or determine that we are a part of, this perceived opioid abuse epidemicthen this may negatively affect our stock price and our business in various ways including from a marketing, sales and public relations standpoint andthese perceptions may also negatively affect our ongoing governmental investigations. 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, suchas Subsys, Syndros and Dronabinol Inhalation Device, and that are of sufficient breadth to prevent third parties from competing against us. Our success with respect to our products and product candidates, such as Subsys, Syndros and Dronabinol Inhalation Device will depend in parton our ability to obtain and maintain patent protection in both the United States and other countries, to preserve our trade secrets, and to prevent thirdparties from infringing upon our proprietary rights on our product candidates. Our ability to protect any of our approved drug products fromunauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents.Fentanyl and dronabinol have been approved for many years and therefore our ability to obtain any patent protection is limited. Composition ofmatter patents on APIs are a particularly effective form of intellectual property protection for pharmaceutical products as they apply without regard toany method of use. However, we will not be able to obtain composition of matter patents or methods of use patents that cover the APIs in any of ourproducts 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, ifany. Our patent portfolio related to our sublingual spray technology that is used in Subsys includes patents and patent applications in the UnitedStates, Australia, Brazil, Canada, China, Europe, India Japan, Mexico, New Zealand and Russia. The covered technology and the scope of coveragevary from country to country. For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized useof our sublingual spray technology. In addition, the only patent protection that we can expect will otherwise cover Subsys and dronabinol products and product candidates consistsof patents relating to formulations, methods of treatment using certain formulations and methods of manufacturing and packaging. Formulationpatents preclude competitors from using a similar formulation. Manufacturing or packaging patents preclude competitors from using the samemanufacturing or packaging methods. However, these type of patents do not preclude a competitor from making and marketing the same compositionof matter unless they use the same formulation or manufacturing or packaging methods. Any patents that we may obtain may be too narrow in scopeand thus easily circumvented by competitors. Further, in countries where we do not have granted patents directed to our formulations or manufacturing or packaging, third parties may be ableto make, use, or sell products identical to, or substantially similar to, Subsys, our dronabinol products or product candidates. 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, ourability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any patentswe may obtain or license may not provide us with sufficient protection for our products and product candidates to afford a commercial advantageagainst competitive products or processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guaranteethat any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, wecannot guarantee that the claims of these patents are or will be held valid or enforceable by the courts or will provide us with any significantprotection against competitive products or otherwise be commercially valuable to us. 45 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 thefirst to 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 theinvalidation or unenforceability of some or all of the relevant patent claims. Litigation or other proceedings to enforce or defend intellectual propertyrights is very complex, expensive, and may divert our management’s attention from our core business and may result in unfavorable results that couldadversely affect our 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 inprotecting or are otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could besubstantially harmed. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal andfactual questions for which important legal principles remain evolving or unresolved. Changes in either the patent laws or in the interpretations ofpatent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth ofclaims that may be allowed or 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 andmay not 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. 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 developequivalent knowledge, 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 tradesecrets and unpatented know-how, by entering into confidentiality agreements with third parties, and proprietary information and inventionagreements with certain employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights.We also have limited control over the protection of trade secrets used by our licensors, collaborators and suppliers. There can be no assurance thatbinding agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets and unpatented know-howwill not otherwise become known or be independently discovered by our competitors. If trade secrets are independently discovered, we would not beable to prevent their use. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensiveand time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secretinformation. 46 We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and wemay be 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-licensedpatents, 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 areexpensive and would consume time and other resources even if we or they, as the case may be, were successful in stopping the infringement of thesepatents. In addition, 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 theright to stop others 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 andsubsequent invalidation or significant narrowing of claim scope in a reexamination or opposition proceeding before a governmental patent agency, orduring litigation. We may also not be able to detect infringement of our own or in-licensed patents, which may be especially difficult for methods of manufacturingor formulation 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 ourproducts or product candidates infringe the patent rights of others. Moreover, it is not always clear to industry participants, including us, whichpatents cover various types of medical devices, drugs, products or their methods of use. Thus, because of the large number of patents issued and patentapplications filed in our fields, there may be a risk that third parties may allege they have patent rights encompassing our products, productcandidates, 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 untilthe patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 monthsafter filing, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filedpatent applications for 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 applicationmay have priority over our own and in-licensed patent applications or patents, which could further require us to obtain rights to issued patentscovering such technologies. If another party has filed an U.S. patent application on inventions similar to those owned or in-licensed to us, we or, inthe case of in-licensed technology, the licensor may have to participate, in the United States, in an interference proceeding to determine priority ofinvention. 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,the third 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. Inaddition to potential infringement suits and, interference and reexamination proceedings, we may become a party to patent opposition proceedingswhere either the patentability of the inventions subject of our patents are challenged, or we are challenging the patents of others. The costs of theseproceedings could be substantial, 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 thatwe or our commercialization partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by thepatents. 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’spatents. 47 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 candidatesor use 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. There is a substantial amount of litigation involving patent and other intellectual property rights in the device, biotechnology andpharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a numberof 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 intellectualproperty rights 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 havesubstantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a materialadverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financialcondition 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. Litigationmay be necessary to defend against these types of claims. Even if we are successful in defending against any such claims, any such litigation wouldlikely be protracted, expensive, a distraction to our management team, not viewed favorably by investors and other third parties, and may potentiallyresult in an unfavorable outcome. Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment andother requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance withthese requirements. Periodic maintenance fees on our own and in-licensed patents are due to be paid to the governmental patent agencies over the lifetime of thepatents. 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 paythese 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 patentapplications. The various governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similarprovisions during the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means inaccordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patentapplication, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enterthe market and this circumstance would have a material adverse effect on our business. 48 Risks Relating to an Investment in Our Stock Our founder, President, Chief Executive Officer and principal stockholder can individually control our direction and policies, and his interestsmay be adverse to the interests of our stockholders. As of December 31, 2015, our founder, President, Chief Executive Officer and principal stockholder, Dr. John N. Kapoor, beneficially ownedapproximately 66% of our outstanding, publicly-traded common stock. By virtue of his holdings, Dr. Kapoor can and will continue to be able toeffectively control the election of the members of our Board of Directors, our management and our affairs and prevent corporate transactions such asmergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders orcause a transaction that we or our other stockholders may view as unfavorable. Accordingly, this concentration of ownership may harm the marketprice 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 anegative impact on our stock price. Moreover, upon his passing, we cannot assure you as to how these shares will be distributed and subsequentlyvoted. 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,limited daily trading volume. The trading price of our common stock has been and may continue to be volatile. The market for pharmaceuticalcompanies, in particular, has at various times experienced extreme volatility that often has been unrelated to the operating performance of particularcompanies. These broad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actualoperating performance. The trading price of our common stock could be affected by a number of factors, including, but not limited to, changes inexpectations of our future performance, changes in estimates by securities analysts (or failure to meet such estimates), quarterly fluctuations in oursales and financial results and a variety of risk factors, including the ones described elsewhere in this report. Periods of volatility in the market price ofa company’s securities sometimes result in securities class action litigation, which regardless of the merit of the claims, can be time-consuming, costlyand divert management’s attention. In addition, if we needed to raise equity funds under adverse conditions, it would be difficult to sell a significantamount of our stock without causing a significant decline in the trading price of our stock. If we are unable to successfully remediate any material weakness in our internal control over financial reporting, or identify any additionalmaterial weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance withsecurities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, and our stockprice may decline materially as a result. In connection with the audit of our consolidated financial statements for the year ended December 31, 2015, our management and independentregistered public accounting firm concluded that there was a material weakness in our internal control over financial reporting. A material weakness is asignificant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that amaterial misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness we andour independent registered public accounting firm identified related specifically to the lack of effective policies and procedures, and effective reviewsby personnel at an appropriate level, for accounting for stock options awards in accordance with GAAP. While we expect to take the measures necessary to address the underlying causes of this material weakness, we cannot at this time estimate howlong it will take and our efforts may not prove to be successful in remediating this material weakness . While we have not incurred and do not expect toincur material expenses specifically related to the remediation of this material weakness, actual expenses may exceed our current estimates and overallcosts of compiling the system and processing documentation necessary to assess the effectiveness of our internal control over financial reporting maybe material. 49  We cannot assure you that we have identified all or that we will not in the future have additional material weaknesses. In addition, ourindependent registered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2014 or2013 in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation was required. Had our independent registered publicaccounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act,additional material weaknesses may have been identified. If we are unable to successfully remediate any material weakness in our internal control overfinancial reporting, or identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be adverselyaffected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicablestock exchange listing requirements, and our stock price may decline materially as a result. 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 orour business. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business,our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for ourstock could decrease, 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 atany time. 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 ofour common stock. As of December 31, 2015, we had (i) 71,907,858 outstanding shares of common stock; (ii) 7,138,089 shares of common stockissuable upon the exercise of stock options under our 2013 Equity Incentive Plan and other existing stock option plans; and (iii) 2,183,946 shareswere available for future issuance under our 2013 Equity Incentive Plan. The exercise of outstanding stock options could result in increased sales ofour common stock in the market, which could exert significant downward pressure on our stock price. These sales also might make it more difficult forus to sell equity or equity-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. Anti-takeover provisions in our stockholder rights plan, charter documents and Delaware law might deter acquisition bids for us that youmight consider 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 onterms not 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 stockholdersat stockholder meetings. 50 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 combiningwith us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a changein control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it moredifficult for you and other stockholders to elect directors of your choosing so as to cause us to take certain corporate actions you desire. We qualify as a “controlled company” under Nasdaq’s rules and may avail ourselves of exemptions from certain Nasdaq independence rules,which could make our common stock less attractive to investors. As a result of Dr. Kapoor’s stock ownership and related voting power, we are a “controlled company” as defined in the Nasdaq Listing Rules and,therefore we may avail ourselves of certain exemptions under applicable Nasdaq rules, including exemptions from the rules that require us to have (i)a majority of independent directors on the Board; (ii) independent director oversight of executive officer compensation; and (iii) independent directoroversight 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 anycash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion ofour Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable lawand other factors our Board of Directors deems relevant. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES We lease a total of approximately 100,000 square feet of office and lab space in Chandler, Arizona under lease agreements that expire betweenAugust 2020 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 64,000 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 betweenJanuary 2017 and March 2024. We have the option to extend our primary manufacturing facility lease for two 5-year periods following March 2024.We believe that the Round Rock, Texas manufacturing facilities are adequate to meet our current needs and that suitable additional or alternativespace will be available for our foreseeable future needs. ITEM 3. LEGAL PROCEEDINGS The information included in Note 7 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. 51 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 2015 pricerange per share $33.88 $20.15 $46.17 $26.07 $42.69 $25.67 31.24 20.79 Fourth Quarter Third Quarter Second Quarter First Quarter 2014 pricerange pershare $23.59 $16.50 $20.15 $11.26 $22.23 $10.26 28.96 12.84 Share price adjusted to reflect a 2-for-1 stock split that occurred on June 8, 2015. Share price adjusted to reflect a 3-for-2 stock split that occurred on March 28, 2014 and a 2-for-1 stock split that occurred on June 8, 2015. Holders As of February 17, 2015, there were approximately 39 holders of record of our common stock and 71,510,190 shares of our common stockoutstanding. Dividends Since our initial public offering, we have not declared nor paid dividends on our common stock and we do not expect to pay cash dividends on ourcommon stock in the foreseeable future. Issuer Purchases of Equity Securities Share Repurchase Program The following table provides information regarding repurchases of our common stock during the three months ended December 31, 2015. Also seeNote 8 of the Notes to our Consolidated Financial Statements for additional information on this repurchase program. Total Number of ApproximateDollar Shares Purchasedas Value of Sharesthat Total Number of Average PricePaid Part of Publicly May Yet BePurchased Shares Purchased per Share ($) AnnouncedProgram (1) Under theProgram ($) October 1 - 31, 2015 - $- - $- November 1 - 30, 2015 181,600 30.24 181,600 44,508,416 December 1 - 31, 2015 378,600 29.05 378,600 33,510,086 Total 560,200 $29.45 560,200 $33,510,086 (1)On November 5, 2015, we announced a stock repurchase program which authorizes up to $50 million in repurchases of common stock. Thisprogram is effective immediately and has no planned expiration date. 52 (1) (1) (1) (1) (1) (1) (1) (1) (1) (2) (2)(1)(2) Company Stock Performance The following graph compares our total cumulative shareholder return as compared to the NASDAQ Composite Index and the NASDAQPharmaceutical Index for the period beginning on May 3, 2013 (our IPO date) and ending on December 31, 2015. Total shareholder return assumes$100.00 invested at the beginning of the period in our common stock, the stocks represented by the NASDAQ Composite Index and the NASDAQPharmaceutical Index, respectively. Total return assumes reinvestment of dividends. This stock performance graph shall not be considered soliciting material and shall not be deemed “filed” for purposes of Section 18 of the ExchangeAct, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933,as amended, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain financial data with respect to our business. The selected consolidated financial data should be read inconjunction with our Consolidated Financial Statements and related Notes and Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and other information contained elsewhere in this Annual Report on Form 10-K. The selected financial data in the table belowas of December 31, 2013, 2012 and 2011 and for the years ended December 31, 2012 and 2011, were derived from our audited consolidated financialstatements not included in this Annual Report on Form 10-K. 53 Years Ended December 31, 2015 2014 2013 2012 2011 (In thousands, except share and per share data) Consolidated Statement of Operations Data: Net revenue $330,797 $222,125 $99,289 $15,476 $- Gross profit 301,943 199,547 86,624 7,849 - Operating income (loss) 92,430 64,023 32,559 (23,440) (17,373)Income tax expense/(benefit) 34,492 26,199 (8,800) - - Net income (loss) 58,476 37,977 40,377 $(24,378) $(19,361)Net income (loss) per common share: Basic $0.82 $0.55 $0.78 $(0.87) $(0.70)Diluted $0.77 $0.52 $0.70 $(0.87) $(0.70)Weighted average common shares outstanding Basic 71,592,581 68,759,070 51,839,536 27,948,102 27,732,084 Diluted 75,707,651 73,335,132 57,469,234 27,948,102 27,732,084 Dividends declared per common share $- $- $- $- $- December 31, 2015 2014 2013 2012 2011 (In thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $159,091 $82,863 $45,782 $361 $11 Total current assets 253,238 146,431 82,150 11,889 7,908 Total assets 351,196 215,121 100,558 18,741 20,960 Total current liabilities, including debt 88,859 45,676 21,081 83,419 61,701 Total liabilities 97,494 49,454 21,081 83,419 64,173 Total stockholders' equity (deficit) 253,702 165,667 79,477 (64,678) (43,213) 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 ofthe Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject tothe “safe harbor” created by those sections. All statements, other than statements of historical facts, included or incorporated in this Form 10-K could bedeemed forward-looking statements, particularly statements about our plans, strategies and prospects under this MD&A heading and under the heading“Business.” In some 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,although not all forward-looking statements contain these identifying words. All forward-looking statements in this Form 10-K are made based on ourcurrent expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differmaterially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors,uncertainties and risks that could affect our future results or operations as described from time to time in our SEC reports., including those risks outlinedunder the heading “Risk Factors” in Item 1A of this Form 10-K. These factors, uncertainties and risks may cause our actual results to differ materially fromany forward-looking statement set forth in this Form 10-K. You should carefully consider the trends, risks and uncertainties described below and otherinformation in this Form 10-K and subsequent reports filed with or furnished to the SEC before making any investment decision with respect to oursecurities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionarystatement. 54 These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position,future revenues, projected costs, prospects and plans and objectives of management; the benefits of our new dronabinol manufacturing facilities;estimated costs to complete development and obtain approvals for our Syndros product candidate and the timing related to actions in connectiontherewith; the sufficiency of our manufacturing capacity; the beneficial attributes of our products, product candidates and delivery mechanisms; thatour suppliers are equipped to supply us with our current and future chemical needs; that pending dronabinol candidates will default to Schedule IIclassification; that changes in healthcare laws will result in reduced Medicaid and Medicare payments for prescription drugs; our expectation thatgross margins will fluctuate; that sales and marketing and research and development costs will be our largest categories of expenses; that sales andmarketing expenses will fluctuate based on changes in Subsys net revenue; that our Subsys revenue will increase in 2016; our development of differentdronabinol delivery systems; that we can grow market share and net revenue for Subsys and our strategies relating thereto; that we may pursuestrategies relating to synthetic cannabidiol; our sales and marketing strategy for future products and delivery systems; that we may pursue strategictransactions such acquisitions or other 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; ourstrategy of using Marinol as a reference drug in future drug approval applications; the expected pathway of drug applications we expect to file in thefuture; that physicians and payors will gain familiarity about the features of Subsys; our plans and strategies for obtaining future internationalapprovals; our plans and strategies to protect our intellectual property; our intention of not paying dividends; the source and sufficiency of ourliquidity our capital resources to fund our operations; possible capital raising transactions we may pursue; that we may avail ourselves of certainNasdaq governance provisions because of our status as a controlled company; that we will hire additional sales and marketing, research anddevelopment and administrative personnel and that costs relating thereto will increase; accounting estimates and the impact of new or recently issuedaccounting pronouncements; that cash flows from operations will increase as a result of increased sales of Subsys; the sufficiency and sources of ourcapital resources; 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 impact of changing interest rates; the exposure of our cash to default and illiquidity risks; the potentialimpact of Section 382 limitations on our NOLs; and the magnitude and impact of ownership changes, including pre-merger changes relating toNeoPharm, 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 identify forward-looking statements, although not all forward-looking statementscontain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and youshould not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions andexpectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which theyare made, and we do not assume any obligation to update any forward-looking statements. The following discussion and analysis of the results of operations and financial condition of Insys Therapeutics, Inc. for the years ended December31, 2015 and 2014 should be read in conjunction with the consolidated financial statements and the notes thereto, and other financial informationcontained elsewhere in this Form 10-K. Overview We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We haveone marketed product and one discontinued product: •Subsys — a proprietary, single-use product that delivers fentanyl, an opioid analgesic, for transmucosal absorption underneath the tongue, offeredin 100, 200, 400, 600, 800, 1,200 and 1,600 mcg dosages. Subsys is approved for the treatment of BTCP in opioid-tolerant patients. We receivedFDA 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 for CINVand anorexia associated with weight loss in patients with AIDS, offered in 2.5, 5.0 and 10.0 milligram dosages. We received FDA approval forDronabinol SG Capsule in August 2011. We commercially launched Dronabinol SG Capsule through our former exclusive distribution partner,Mylan Pharmaceuticals, Inc., in December 2011. We entered into a settlement agreement with Mylan in October 2015, which resulted intermination of our former distribution agreement with Mylan. We market Subsys through our U.S.-based field sales force focused on supportive care physicians. We utilize an incentive-based sales model thatemploys a pay structure where a significant component of the compensation paid to sales representatives is in the form of potential bonuses based onsales performance. Consistent with most pharmaceutical manufacturing companies, we sell Subsys primarily to pharmaceutical wholesalers and collect sales proceedsfrom those wholesalers. We do not own or have any ownership stake in any pharmaceutical wholesaler, nor do we have an option to acquire anywholesaler. For the year ended December 31, 2015, sales to our four largest wholesale customers accounted for 83% of gross revenue. We also sell Subsyson a limited basis directly to specialty pharmaceutical retailers. For the year ended December 31, 2015 direct sales to specialty pharmaceutical retailersaccounted for 5% of gross revenue. We distribute Subsys through both specialty and traditional retail pharmacies. All pharmacies that fulfill Subsysprescriptions are fully independent. We do not own or have an ownership stake in any pharmacy and do not possess an option to acquire any pharmacy.Our relationships with every pharmacy that fulfills Subsys prescriptions are non-exclusive, in that each of these pharmacies may also fulfill prescriptionsfor other pharmaceutical manufacturers. For the year ended December 31, 2015, more than 800 independent pharmacies have fulfilled at least one Subsysprescription. 55 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. Weprovide administrative reimbursement support assistance, in large part through our insurance reimbursement support hub, which provides administrativesupport assistance to help patients coordinate with their insurance companies. We are also developing other product candidates, such as dronabinol line extensions and sublingual spray product candidates. Our most advancedpotential cannabinoid line extension is Syndros. This product candidate has demonstrated more rapidly detectable blood levels and a more reliableabsorption profile than Marinol in our clinical studies. We believe these attributes may ultimately increase patient compliance because of more rapidonset of action and less dose-to-dose variability, which we believe will allow us to further penetrate and potentially expand the market for the medicaluse of dronabinol. In August 2015, FDA accepted for filing the NDA for Syndros. The PDUFA goal date for a decision on this NDA is April 1, 2016,which reflects a Standard Review by the FDA. We produce the API for Syndros at our U.S.-based, state-of-the-art dronabinol manufacturing facility. While we believe that this facility has thecapacity to supply sufficient commercial quantities of dronabinol API for our initial launch quantities of Syndros, if approved, and support the continueddevelopment of our other dronabinol product candidates in the near-term, we have opened a second dronabinol manufacturing facility, which weanticipate will enable us to supply sufficient commercial quantities of dronabinol API for the anticipated commercialization of our proprietarydronabinol product candidates, if approved. We have the capability to manufacture pharmaceutical CBD, a synthetically produced and over 99.5% pure form of cannabidiol, in our RoundRock, Texas manufacturing facility. On April 23, 2015 we announced that we had commenced dosing of epilepsy patients in a Phase I PK study inpediatric subjects. We intend to file an IND application with the FDA 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 inour infrastructure and growth, and our ability to successfully develop product candidates and complete related regulatory processes. In addition, ourability to ensure that our products, policies and practices adhere to the extensive national, state and local regulations applicable to our industry is criticalto our success, particularly as our operations and product opportunities continue to grow at a rapid pace. While each of these areas presents significantopportunities for 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 approvedproducts. During the year ended December 31, 2015 and 2014, all of our net revenues were generated from the sale of our two approved products, Subsysand our discontinued Dronabinol SG Capsule, with sales of Subsys accounting for over 99% of our 2015 and 2014 year-to-date revenues. We entered intoa settlement agreement with Mylan in October 2015, which resulted in termination of our former distribution agreement with Mylan. Accordingly, we willnot generate any meaningful revenue from the sale of our discontinued Dronabinol SG Capsule in future periods. Our results will depend on prescriptionvolume generally, which we believe will be driven primarily by achievement of broad market acceptance and coverage by third-party payors andeffectiveness of the marketing and selling efforts with respect to Subsys. Moreover, our gross margins improve on a unit-by-unit basis as we sell higherdosage strengths of our products. Importantly, the proportion of prescriptions written for repeat Subsys patients has continued to increase since July 2012from 50% of prescriptions to approximately 92% of prescriptions as of December 31, 2015. Generally, repeat Subsys patients receive significantly higherdoses of Subsys on average than first-time patients as patients are titrated from a starter dose of Subsys to their effective dose in accordance with the TIRFREMS protocol. Third Party Payer Interactions and Government Programs Associated with Reimbursement. Our interaction with third-party payers is critical to thesuccess of our business and financial condition. Our relationships with these third-party payers evolves on a regular basis and is often difficult to predict.By way of example, from time to time, third-party payers modify which drugs they choose to reimburse. For instance, on or around August 1, 2014, ESIofficially released its exclusion list of drugs, effective January 1, 2015, in connection with its national preferred formulary. Our product, Subsys, wasincluded on this exclusion list. ESI is a large PBM that administers prescription drug benefits for employers and health plans and runs large mail-orderpharmacies. While ESI, like most PBMs, has an exception process that physicians may pursue to have an off-formulary, medically necessary drug coveredfor patients, this decision will make it difficult for many patients covered through an ESI administered plan to have Subsys covered by insurance. The ESIformulary change did not have a material impact on our net revenue during the year ended December 31, 2015; however, other PBMs may take similaractions and this action by ESI may have a material impact on our net revenue in the future. As we have in the past, we will continue working with otherPBMs to evaluate price increases and to communicate with managed care and health-system decision-makers to ensure a balanced approach, which takesinto account the clinical performance and efficacy of our products. In addition, from time to time, our business may be affected by evolving or new governmental programs in the reimbursement landscape. Forinstance, CMS, which is part of the Department of Health and Human Services, has instituted The Recovery Audit Program whose mission is to identifyand correct Medicare improper payments through the efficient detection and collection of overpayments made on claims of health care services providedto Medicare beneficiaries, and the identification of underpayments to providers so that the CMS can implement actions that will prevent future improperpayments in all 50 states. We are aware that in January 2016, certain specialty pharmacies received written correspondence from Humana indicating thatas a result of a CMS audit, Humana was initiating a deletion of certain PDEs related to Subsys which will result in a reversal and recovery of identifiedclaims paid to certain pharmacies. This audit by CMS may have been part of The Recovery Audit Program or a similar initiative of CMS. Based uponinformation available to us, all of these claims involve Medicare Part D patients whose prescriptions were in connection with off-label indications andrelated to approximately $5.6 million in Subsys claims in the aggregate. Upon our inquiry for more information about these matters, Humana notified usthat these deletions of certain PDEs resulting from the CMS audit also involve TIRF medications other than Subsys and Humana intends to resolve thesematters with the pharmacies. We believe that some affected pharmacies may alter their processes and or protocols related to dispensing off label TIRFprescriptions to Medicare patients as a result of these and similar events.  56 Investments in Our Infrastructure and Growth. Our ability to increase our sales and to further penetrate our target market segments is dependent inpart on our ability to invest in our infrastructure and in our sales and marketing efforts. In order to drive further growth, we may hire additional sales andmarketing personnel and invest in marketing our products to our target physician prescriber base. For example, as of December 31, 2015, we had 343 full-time sales and marketing personnel. This will lead to corresponding increases in our operating expenses, although we anticipate that these investmentswill result in increased product sales and net revenue. In addition, we have constructed a second dronabinol manufacturing facility, which we anticipatewill supply us with sufficient commercial quantities of dronabinol API for the commercialization of our proprietary dronabinol product candidates, ifapproved. This second facility will also increase our operating expenses. 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 $55.3 million and $33.1 million for the year endedDecember 31, 2015 and 2014, respectively. As of December 31, 2015, we had 75 full-time research and development personnel. We expect research anddevelopment expenses to increase as we increase related headcount and continue our planned preclinical studies and clinical trials for our productcandidates, particularly our proprietary cannabinoid product candidates, including Syndros, and sublingual spray product candidates. We do not expectto realize net revenues from all of these research and development initiatives in the near term and may never realize net revenues from these investments.Due to the risks inherent in conducting preclinical studies and clinical trials, the regulatory approval process and the costs of preparing, filing andprosecuting patent applications, our development completion dates and costs will vary significantly for each product candidate and are very difficult toestimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure ofsubstantial additional resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals or acceptable DEA classifications for ourproduct candidates, in particular those related to Syndros, could cause our research and development expenditures to increase significantly and, in turn,have a material 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 Capsuleunder our former supply and distribution agreement with Mylan. We sell Subsys in packages of various sized single-dose units in dosage strengths of100, 200, 400, 600, 800, 1,200 and 1,600 mcg, to wholesale pharmaceutical distributors and retail pharmacies, collectively, our customers, on awholesale basis. Sales to our customers are subject to specified rights of return. We record revenue for Subsys at the time the wholesaler receives theshipment. We sold Dronabinol SG Capsule exclusively to Mylan in dosage strengths of 2.5, 5.0 and 10.0 milligrams under the Mylan label. Mylandistributed Dronabinol SG Capsule and on a monthly basis paid us an amount equal to the value of Dronabinol SG Capsule it sold to wholesalepharmaceutical distributors and retail pharmacies, less contractually defined deductions for chargebacks, rebates, sales discounts, distribution andstorage fees, and royalties. We were obligated to pay Mylan a royalty between 10% and 20% on Mylan’s net product sales, and a single digit percentagefee on such sales for distribution and storage services. We bore no risk of product return upon acceptance by Mylan. As Mylan had control over theamount it charged to wholesale pharmaceutical distributors for Dronabinol SG Capsule and the discounts offered to the distributors, the sales price wasnot fixed and determinable at the date we shipped such product to Mylan. Accordingly, we recognized revenue on the sale of Dronabinol SG Capsuleupon Mylan’s sale of product to wholesale distributors, which was the point at which the sales price was fixed and determinable. We entered into asettlement agreement with Mylan in October 2015, which resulted in termination of our former distribution agreement with Mylan. Accordingly, we willnot generate any meaningful revenue from the sale of Dronabinol SG Capsule in future periods. See Note 7 of the Notes to our Consolidated FinancialStatements for a discussion on our 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 in, indirect personnel costs, and other overheadcosts based on units dispensed through patient prescriptions. Cost of revenue for Dronabinol SG Capsule primarily consists of materials, manufacturingcosts and third-party assembly and packaging costs based on units sold by Mylan to wholesale distributors. We manufactured the API for Dronabinol SGCapsule at our U.S.-based, dronabinol manufacturing facility. Also included in cost of revenue are charges for reserves for excess, dated or obsoletecommercial inventories and production manufacturing variances. Gross profit is net revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of net revenue. Sales and Marketing Expenses Our sales and marketing expenses consist primarily of salaries, commissions, benefits, consulting fees, costs of obtaining prescription and marketdata, and market research studies related to Subsys. As of December 31, 2015, we had 343 full-time sales and marketing personnel. We expect the numberof our sales and marketing personnel to increase as we seek to continue to increase our existing product sales and as any subsequently approved productsare commercialized. We expect our sales and marketing expenses, along with our research and development expenses, to be our largest categories ofoperating expenses for the foreseeable future. In addition, because we use an incentive-based compensation model for our sales professionals, we expectour sales and marketing expenses to fluctuate from period to period based on changes in Subsys net revenue. Specifically, we expect our sales andmarketing expenses to increase in the near future to the extent that expected increases in Subsys net revenue are realized. 57 Research and Development Expenses Research and development expenses consist of costs associated with our preclinical studies and clinical trials, and other expenses related to ourdrug development 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 manufacturers andconsultants; ●employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinicaldrug 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, dronabinol and Cannabidiol programs. As of December31, 2015, we had 75 full-time research and development personnel. We expect research and development expenses to increase as we increase relatedheadcount and continue our planned preclinical studies and clinical trials for our product candidates, particularly our proprietary dronabinol productcandidates, including Syndros. We determine which research and development projects to pursue, as well as the level of funding available for eachproject, based on the scientific and preclinical and clinical results of each product candidate and related regulatory action. The following table provides a breakdown of our research and development expenses (in millions): Years Ended December 31, 2015 2014 2013 Cannabidiol $16.3 $5.8 $- Dronabinol 6.3 1.6 2.0 Buprenorphine/Naloxone 4.6 0.8 0.6 Buprenorphine 3.4 3.4 0.6 Fentanyl 2.8 2.8 0.8 LEP-ETU and IL-13 2.5 1.1 0.2 Naloxone 2.2 0.2 - Ondansetron 1.4 0.7 - Other 1.2 - - Sildenafil 0.2 0.8 0.2 Internal research and development costs 14.4 15.9 4.1 Total research and development expenses $55.3 $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 researchand development expenses, and professional fees for legal, consulting and accounting services. As of December 31, 2015, we had 45 full-time general andadministrative personnel. We expect general and administrative expense will increase as a result of increasing related headcount, expanding ouroperating activities and the costs we incur operating as a public company. We expect these increases to include salaries and related expenses, legal andconsultant fees, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services, and enhancedbusiness and accounting systems. 58 Charges Related to Litigation Award Charges related to litigation award expenses for the year ended December 31, 2015 represent a legal accrual of $9.5 million related to our disputewith Dr. Kottayil. See Note 7 of the Notes to our Consolidated Financial Statements for a discussion of our ongoing dispute with Dr. Kottayil. Interest Expense Prior to our IPO, interest expense consisted primarily of the interest accrued on outstanding promissory notes payable to The John N. Kapoor Trustand the 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 completion of our IPO in May 2013, all outstanding principal and accrued interest on the Kapoor Notes converted into 22,231,024 shares ofcommon stock (7,410,341 on a pre-split basis) and all of the Kapoor Notes were cancelled. Income Taxes, 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 tooffset 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 as determined under the Code, which we refer to as an ownership change. Any such annual limitation may significantly reducethe utilization 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 incomeat approximately $1.2 million as of December 31, 2015, which begin to expire in 2018. For state tax purposes, we had approximately $268.3 million of state NOLs at December 31, 2015, all of which relate to Illinois. Based on projectionsand our limited activity in Illinois, we estimate that approximately $259.3 million of these Illinois NOLs will not be utilized. For this reason, we recordeda valuation allowance for the estimated tax benefit relating to this amount, or $20.2 million. 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,which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires us to make estimates andassumptions that affect 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 consolidatedfinancial statements. 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. 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 wholesalebasis, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. Subsys currently hasa shelf life 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 notable to reliably estimate expected returns of the product at the time of shipment prior to the fourth quarter of 2013. Accordingly, we initially deferred therecognition of revenue and related product costs of Subsys product shipments until the product was dispensed through patient prescriptions. The quantityof prescription units dispensed was estimated using an analysis of third-party information, including TIRF REMS mandated data and third-party marketresearch data. Based on the shipment and prescription trends for Subsys and based on an analysis of historical return rates of our own experience withSubsys, we concluded that we had the information needed to reasonably estimate product returns for Subsys during the fourth quarter of 2013. Beginningin the fourth quarter of 2013, in response to our ability to reasonably estimate returns, we began recognizing revenue for Subsys sales at the time ofshipment 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 sales previously deferred, net of estimated product returns, wholesaler discounts, prompt pay discounts, stocking allowances, patientdiscount programs, rebates, and chargebacks. Including deferred cost of sales, this change resulted in a one-time $0.9 million increase to operatingincome for the year ended December 31, 2013. Prior to this change, cost of manufacturing Subsys associated with the deferred revenue was recorded asdeferred costs, which were included in inventory, until such time as the deferred revenue was recognized. 59 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,such as patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual futureresults vary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product salesallowances include: Product Returns. We allow customers to return product for credit on returned product that is within six months before and up to 12 months followingits product expiration date. The shelf life of Subsys is currently 36 months from the date of manufacture. We have monitored actual product sold throughto patient prescriptions since product launch, which provides us with a basis to reasonably estimate future product returns, taking into consideration theshelf life 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 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 ofadjustments. The allowance for product returns is included in accrued 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. 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. Stocking Allowances. We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a newproduct and on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue thediscount as a reduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies. Patient Discount Programs. We offer discount card programs to patients for Subsys in which patients receive discounts on their prescriptions thatare reimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a percentage of actual redemption applied to inventoryin the distribution and retail channel. The allowance for patient 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 rebateprograms, we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject tothe rebate are filled. We estimate and accrue these rebates based on current contract prices, historical and estimated future percentages of product sold toqualified patients and estimated levels of inventory in the distribution channel. The allowance for rebates is included in accrued sales allowances. Chargebacks. We provide discounts primarily to authorized users of the FSS of the General Services Administration under an FSS contractnegotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These entities purchase productsfrom the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail priceand the price the entity paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels, current contract pricesand historical chargeback activity. The allowance for chargebacks is included as a reduction to accounts receivable. 60 A roll-forward of our product sales allowances for the years ended December 31, 2015 and 2014 is as follows (in thousands): Patient Wholesale Discount Discounts Programs Rebates Returns Total Balance at December 31, 2013 $2,748 $956 $3,785 $599 $8,088 Revenue allowances: Provision related to current periodsales 22,395 36,471 24,866 2,286 86,018 Provisions related to sales made inprior years - 239 (656) 539 122 Payment and credits related to salesmade in current period (16,977) (34,244) (16,956) (1,127) (69,304)Payment and credits related to salesmade in prior 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 Provision related to current periodsales 36,849 60,991 63,402 3,158 164,400 Provisions related to sales made inprior years - - (367) 138 (229)Payment and credits related to salesmade in current period (30,480) (53,848) (41,030) - (125,358)Payment and credits related to salesmade in prior periods (5,418) (2,227) (7,543) (1,257) (16,445)Balance at December 31, 2015 $6,369 $7,143 $22,372 $3,198 $39,082 (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 sold Dronabinol SG Capsule exclusively to Mylan in dosagestrengths of 2.5, 5.0 and 10.0 milligrams under the Mylan label. Mylan distributed Dronabinol SG Capsule and on a monthly basis paid us an amountequal to the value of Dronabinol SG Capsule it sold to wholesale pharmaceutical distributors and retail pharmacies, less contractually defined deductionsfor chargebacks, rebates, sales discounts, distribution and storage fees, and royalties. We were obligated to pay Mylan a royalty between 10% and 20% onMylan’s net product sales, and a single digit percentage fee on such sales for distribution and storage services. We bore no risk of product return uponacceptance by Mylan. As Mylan had control over the amount it charged to wholesale pharmaceutical distributors for Dronabinol SG Capsule and thediscounts offered to the distributors, the sales price was not fixed and determinable at the date we shipped such product to Mylan. Accordingly, werecognized revenue on the sale of Dronabinol SG Capsule upon Mylan’s sale of product to wholesale distributors, which was the point at which the salesprice was fixed and determinable. We entered into a settlement agreement with Mylan in October 2015, which resulted in termination of ourformer distribution agreement with Mylan. Accordingly, we will not generate any meaningful revenue from the sale of Dronabinol SG Capsule in futureperiods. See Note 7 of the Notes to our Consolidated Financial Statements for a discussion on our 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 andnet realizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatoryprocess, our required investment in the product, market conditions, competing products and our economic expectations for the product post-approvalrelative to the risk of manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation for productlaunches, we consider the probability that revenue will be obtained from the future sale of the related inventory together with the status of the productwithin the regulatory approval process, as well as the market for the product in its current state. We could be required to permanently write downpreviously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval byregulatory bodies, a delay in commercialization, or other potential factors including product expiration. 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 offorfeitures, in our consolidated financial statements as expense ratably over the employee’s requisite service period or vesting period, which is generallythree to four years, on a straight-line basis. Equity awards issued to non-employees are recorded at their fair value on the grant date and are periodicallyre-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitable on the date of grant.Expense recognized for consultant stock options was immaterial for the years ended December 31, 2015 and 2014. 61 (1) We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock-based payment awards. This model requires the inputof highly subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock,risk-free interest rates, the expected term of the option and the expected dividend yield of our common stock. These estimates involve inherentuncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expensecould be materially different 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 donot have what we consider a sufficiently active and readily traded market for our common stock to use historical market prices for our common stockto estimate 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 volatilityof our 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.The risk-free interest rate assumption is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options foreach option 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-averagevesting period 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 ourconsolidated statements of operations includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis of our actualforfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover andother factors. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect ofadjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiturerate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If arevised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-basedcompensation expense recognized in 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 amountof the 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,we determined that it was more likely than not that we will ultimately be able to utilize deferred tax assets for which a valuation allowance had beenprovided. Accordingly, during the year ended December 31, 2013, the valuation allowance was reduced by $26.2 million and we recorded a total incometax benefit of $8.8 million. As of December 31, 2015, we have recorded a valuation allowance of $20.2 million, all related to Illinois NOLs expiringbefore being used. 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. 62 Results of Operations The following table presents certain selected consolidated financial data expressed as a percentage of net revenue: Years Ended December 31, 2015 2014 2013 Net revenue 100.0% 100.0% 100.0%Cost of revenue 8.7 10.2 12.8 Gross profit 91.3 89.8 87.2 Operating expenses: Sales and marketing 24.4 26.2 29.4 Research and development 16.7 14.9 8.5 General and administrative 19.4 19.9 16.5 Charges related to litigation award 2.9 - - Total operating expenses 63.4 61.0 54.4 Operating income 27.9 28.8 32.8 Other income (expense): Interest expense - - (0.9)Interest income 0.2 0.1 - Other income (expense), net 0.0 0.0 (0.1)Total other income (expense) 0.2 0.1 (1.0) Income before income taxes 28.1 28.9 31.8 Less: income tax expense/(benefit) 10.4 11.8 (8.8) Net income 17.7% 17.1% 40.6% Comparison of year ended December 31, 2015 to year ended December 31, 2014 Net Revenue. Net revenue increased $108.7 million, or 49%, to $330.8 million for the year ended December 31, 2015, compared to $222.1 millionfor the year ended December 31, 2014. The increase in net revenue was primarily attributable to the $109.9 million, or 50%, increase in net revenue ofSubsys to $329.5 million for the year ended December 31, 2015 compared to $219.5 million for the year ended December 31, 2014. The increase inSubsys revenue is primarily as a result of a 30% increase in shipments to pharmaceutical wholesalers and retailers for the year ended December 31, 2015as compared to the year ended December 31, 2014, as well as a 20% increase in net sales price, which was impacted by price increases in January 2014,April 2014, July 2014, January 2015 and July 2015, combined with changes in mix of prescribed dosages and changes in provisions for wholesalerdiscounts, patient discounts, rebates and returns. Provisions for wholesaler discounts, patient discounts, rebates and returns increased to $36.8 million,$61.0 million, $63.0 million and $3.3 million, respectively, or 33.2% on a combined basis of gross revenue from the sale of Subsys for the year endedDecember 31, 2014, compared to $22.4 million, $36.5 million, $24.4 million and $2.8 million, respectively, or 39.2% on a combined basis of grossrevenue from the sale of Subsys for the year ended December 31, 2013. The increase in revenue provisions as a percentage of gross revenue was primarilyattributable to an increase in the issuance of patient discount credits and rebate claims from managed care organizations and government programs. Weexpect net revenue from sales of Subsys to continue to increase during 2016 due primarily to anticipated increases in unit prices and in the number ofprescriptions fulfilled, combined with changes in prescription strength mix. The increase in sales of Subsys was partially offset by a decrease in sales ofDronabinol SG Capsule of $1.3 million to $1.3 million for the year ended December 31, 2015, compared to $2.6 million for the year ended December 31,2014. We entered into a settlement agreement with Mylan in October 2015, which resulted in termination of our former distribution agreement withMylan. Accordingly, we will not generate any meaningful revenue from the sale of Dronabinol SG Capsule in future periods. See Note 7 in ourConsolidated Financial Statements contained herein for a discussion on our dispute with Mylan. Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue increased $6.3 million to $28.9 million for the year ended December 31, 2015compared to $22.6 million for the year ended December 31, 2014. The increase in cost of revenue was primarily attributable to the increase in sales ofSubsys during the year ended December 31, 2015. Gross profit increased $102.4 million to $301.9 million for the year ended December 31, 2015compared to $199.5 million for the year ended December 31, 2014. Gross margin for the year ended December 31, 2015 was approximately 91%compared to approximately 90% for the year ended December 31, 2014. The increase in gross margin was due primarily to a higher mix of sales of Subsys,which yields higher gross margins than sales of Dronabinol SG Capsule, and the effects of the 2014 inventory expiry issue described below. Subsys grossmargin was approximately 92% and 91% for the years ended December 31, 2015 and 2014, respectively. This increase in 2015 is attributable to a shift insales mix to higher margin products in 2015 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, andtherefore, 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 ofnon-refundable deposits for amounts paid by Mylan for this inventory, and a corresponding $1.4 million charge to cost of revenue for the second quarterof 2014. 63 Sales and Marketing Expense. Sales and marketing expense increased $22.6 million to $80.7 million for the year ended December 31, 2015compared to $58.1 million for the year ended December 31, 2014. The increase in sales and marketing expense was due primarily to sales compensationexpense and incremental product marketing expense associated with the increase in sales of Subsys. Research and Development Expense. Research and development expense increased $22.2 million to $55.3 million for the year ended December31, 2015 compared to $33.1 million for the year ended December 31, 2014. The increase in research and development expense was due primarily to anincrease in research and development personnel and to clinical and development expenses incurred during 2015 related to our growing productpipeline. General and Administrative Expense. General and administrative expense increased $19.7 million to $64.0 million for the year ended December31, 2015 compared to $44.3 million for the year ended December 31, 2014. The increase in general and administrative expense was due primarily toincreases in legal expense incurred in connection with various ongoing government investigation and subpoena related matters, which increased $7.9million to $13.8 million for the year ended December 31, 2015 compared to $5.9 million for the year ended December 31, 2014. Legal expensesassociated with litigation and other matters decreased $5.4 million to $5.6 million for the year ended December 31, 2015 compared to $11.0 million forthe year ended December 31, 2014. Also contributing to the increase in general and administrative expense was an increase in stock-based compensationcosts of $10.0 million to $19.8 million for the year ended December 31, 2015 compared to $9.8 million for the year ended December 31, 2014. The otherincreases in general and administrative expense resulted from growth in administrative infrastructure to support the growth of the business. We expect tocontinue to incur significant legal expense for the foreseeable future until government investigations and subpoena related matters are resolved. Suchcosts could materially exceed the amounts we have historically incurred in connection with government investigations and subpoena related matters onan annual basis. Charges Related to Litigation Award. Charges related to litigation award for the year ended December 31, 2015 represents a $9.5 million legalexpense accrual associated with our dispute with Dr. Kottayil. See Note 7 of the Notes to our Consolidated Financial Statements for a discussion on ourongoing dispute with Dr. Kottayil. There was no similar expense for the year ended December 31, 2014. Interest Income/(Expense). We reported interest income of $0.5 million for the year ended December 31, 2015 and $0.2 million for the year endedDecember 31, 2014 as a result of our investing excess cash. Income Tax Expense/Benefit. Provision for income taxes was $34.5 million for the year ended December 31, 2015 representing an effective taxrate of 37.1%. Provision for income taxes was $26.2 million for the year ended December 31, 2014 representing an effective tax rate of 40.8%. Comparison of year ended December 31, 2014 to year ended December 31, 2013 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 millionfor the year ended December 31, 2013. The increase in net revenue was primarily attributable to the $123.8 million, or 129%, increase in net revenue ofSubsys to $219.5 million for the year ended December 31, 2014 compared to $95.7 million for the year ended December 31, 2013. The increase in Subsysrevenue is primarily as a result of a 99% increase in shipments to pharmaceutical wholesalers for the year ended December 31, 2014, as compared tothe year ended December 31, 2013, as well as a 30% increase in net sales price, which was impacted by price increases in February 2013,January 2014,April 2014 and July 2014, combined with changes in mix of prescribed dosages and changes in provisions for wholesaler discounts, patient discounts,rebates and returns. Provisions for wholesaler discounts, patient discounts, rebates and returns increased to $22.4 million, $36.5 million, $24.4 millionand $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 sale of Subsys forthe year ended December 31, 2013. The increase in revenue provisions as a percentage of gross revenue was primarily attributable to an increase in theissuance of patient discount credits and rebate claims from managed care organizations and government programs. The increase in sales of Subsys waspartially 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 $3.6million for the year ended December 31, 2013. The decrease in sales of Dronabinol SG Capsule was due primarily to a dispute with our exclusivedistributor of Dronabinol SG Capsule and the resulting impact of reduced product supply and lower selling prices since 2012. 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 ofSubsys during the year ended December 31, 2014. Gross profit increased $112.9 million to $199.5 million for the year ended December 31, 2014compared to $86.6 million for the year ended December 31, 2013. Gross margin for the year ended December 31, 2014 was approximately 90% comparedto 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, whichyields higher gross margins than sales of Dronabinol SG Capsule. Subsys gross margin was approximately 91% and 90% for the years ended December31, 2014 and 2013, respectively. This increase in 2014 was attributable to a shift in sales mix to higher margin products in 2013 as repeat patientsprogress to higher dosage prescriptions. During July 2014, we were notified by Mylan that certain Dronabinol SG Capsule inventories were approaching their product expiry date, andtherefore, 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 ofnon-refundable deposits for amounts paid by Mylan for this inventory, and a corresponding $1.4 million charge to cost of revenue for the second quarterof 2014. 64 Sales and Marketing Expense. Sales and marketing expense increased $28.9 million to $58.1 million for the year ended December 31, 2014compared to $29.2 million for the year ended December 31, 2013. The increase in sales and marketing expense was due primarily to sales compensationexpense and incremental 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 December31, 2014 compared to $8.5 million for the year ended December 31, 2013. The increase in research and development expense was due primarily to anincrease in research and development personnel and to clinical and development expenses incurred during 2014 related to our growing productpipeline. General and Administrative Expense. General and administrative expense increased $27.9 million to $44.3 million for the year ended December31, 2014 compared to $16.4 million for the year ended December 31, 2013. The increase in general and administrative expense was due primarily toincreases in legal expense incurred in connection with various ongoing government investigation and subpoena related matters, which increased $5.7million to $5.9 million for the year ended December 31, 2014 compared to $0.2 million for the year ended December 31, 2013. Legal expenses associatedwith litigation and other matters increased $9.5 million to $11.0 million for the year ended December 31, 2014 compared to $1.5 million for the yearended December 31, 2013. Also contributing to the increase in general and administrative expense were increases in stock-based compensation costs of$4.4 million to $9.8 million for the year ended December 31, 2014 compared to $5.4 million for the year ended December 31, 2013. Other increases ingeneral and administrative expense resulted from growth in administrative infrastructure to support the growth of the business combined with increasedcost 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 theKapoor Notes 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 taxrate of 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 valuationallowance that was previously recognized against our deferred tax assets. Liquidity and Capital Resources Sources of Liquidity We incurred losses from our inception through December 31, 2012. Prior to our initial public offering, or IPO, we financed our operations primarilythrough the issuance of promissory notes to The John N. Kapoor Trust and the Kapoor Children 1992 Trust, which are controlled by or affiliated with ourfounder, Executive Chairman and principal stockholder. On May 7, 2013, we completed our IPO, pursuant to which we sold 13,800,000 shares of our common stock (4,600,000 on a pre-split basis) at a priceof $2.66 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 atotal 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 costs have been recorded as a reduction of the proceeds received in arriving at the amount recorded in additional paid-in capital. Upon completionof the IPO, all outstanding shares of our preferred stock were converted into 25,586,580 shares of common stock (8,528,860 on a pre-split basis). Since the completion of our IPO, we have financed our operations principally with existing cash on hand and cash flows from operations. 65 Cash Flows The following table shows a summary of our cash flows for the years indicated (in millions): Years Ended December 31, 2015 2014 2013 Net cash provided by operating activities $100.9 $49.7 $24.2 Net cash used in investing activities (88.8) (69.9) (5.5)Net cash provided by financing activities 9.3 32.9 26.3 Net increase (decrease) in cash and cash equivalents 21.4 12.7 45.0 Cash and cash equivalents, beginning of period 58.1 45.4 0.4 Cash and cash equivalents, end of period $79.5 $58.1 $45.4 Cash Flows from Operating Activities. Net cash provided by operating activities was $100.9 million and $49.7 million for the year ended December31, 2015 and 2014, compared to $24.2 million for the year ended December 31, 2013. The net cash provided during the years indicated primarily reflectsnet income driven primarily by the growth in Subsys net sales, adjusted in part by depreciation and amortization, stock-based compensation expense,deferred income taxes, excess tax benefits on stock options and awards and non-cash interest expense and is also impacted by changes in working capital. Cash Flows from Investing Activities. Net cash used in investing activities was $88.8 million and $69.9 million for the years ended December 31,2015 and 2014, compared to $5.5 million for the year ended December 31, 2013. During 2015, we invested $74.9 million of excess cash in short-term andlong-term investments and we also invested $13.8 million for purchases of equipment and leasehold improvements. During 2014, we invested $48.0million of excess cash in short-term and long-term investments and we also invested $22.2 million for purchases of equipment and leaseholdimprovements, including $18.0 million in connection with the construction of our second dronabinol facility. During 2013, our investing cash flowsconsisted primarily of expenditures on our dronabinol facility. Cash Flows from Financing Activities. Net cash provided by financing activities were $9.3 million and $32.9 million for the years endedDecember 31, 2015 and 2014, compared to $26.3 million for the year ended December 31, 2013. During the year ended December 31, 2015, werecognized $13.6 million of financing cash flows from excess tax benefits on stock options and awards, $9.5 million from the proceeds from exercise ofstock options and $2.6 million of proceeds from shares issued under an employee stock purchase plan, partially offset by $16.5 million expended torepurchase shares of our common stock. During the year ended December 31, 2014, we recognized $22.0 million of financing cash flows from excess taxbenefits on stock options and awards, $9.0 million from the proceeds from exercise of stock options and $2.0 million of proceeds from shares issued underan employee stock purchase plan. During the year ended December 31, 2013, we received $32.5 million in net proceeds in connection with our IPO. Weused $11.9 million of these proceeds to pay in full the credit facility with Bank of America. During the year ended December 31, 2013, we also receivedproceeds of $2.1 million from the exercise of stock options and $0.9 million of proceeds from shares issued under an employee stock purchase program.Additionally, we recognized 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 2016 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, partially offset by anticipated expansion in sales and marketing, research and development, manufacturing, and general and administrativeexpenses as a public company. Funding Requirements We believe that the cash from operations and our pre-existing cash and cash equivalents and investments, together with interest thereon, will besufficient to fund our operations for at least the next 12 months. 66 Because of the numerous risks and uncertainties associated with commercialization of Subsys and the development of our other product candidates,we are unable to predict the amounts of increased capital outlays and operating expenditures associated with our current anticipated productintroduction, clinical trials and preclinical studies. The timing and amounts of our funding requirements will depend on numerous factors, including butnot 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 Syndros and any other productcandidates 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, 2015 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 orall rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. If we raise additional fundsby issuing equity or convertible securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring newdebt obligations, the terms of the debt will likely require significant cash payment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business. Contractual Obligations Contractual Obligations Total PaymentsDue inLess Than1 Year PaymentsDue in1-3 Years PaymentsDue in 3-5Years PaymentsDue inMoreThan 5Years Operating leases $17,517 $2,669 $5,333 $5,674 $3,841 Purchase obligations 70,530 2,000 25,100 39,100 4,330 $88,047 $4,669 $30,433 $44,774 $8,171 Off-Balance Sheet Arrangements During the year ended December 31, 2015, 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 At December 31, 2015, $20.4 million of our cash equivalent investments was in money market securities that are reflected as cash equivalentsbecause all maturities are within 90 days. Included in money market securities are commercial paper, Federal agency discount notes and money marketfunds. We believe our interest rate risk with respect to these investments is limited due to the short-term duration of these arrangements and the yieldsearned, which approximate current interest rates. 67 Our policy for our 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. Our investmentportfolio, consisting of fixed income securities that we hold on an available-for-sale basis, was approximately $122.8 million as of December 31, 2015,and $48.0 million as of December 31, 2014. These securities, like all fixed income instruments, are subject to interest rate risk and would likely decline invalue if market interest rates increase. We have the ability to hold our fixed income investments until maturity and, therefore, we would not expect torecognize any material adverse impact in income or cash flows if market interest rates increase. The following table provides information about our available-for-sale securities that are sensitive to changes in interest rates. We have aggregatedour available-for-sale securities for presentation purposes since they are all very similar in nature (dollar amounts in millions): Interest Rate SensitivityPrincipal Amount by Expected Maturity as of December 31, 2015 Financial instruments mature during year ended: 2016 2017 2018 2019 2020 Thereafter CD's and available-for-salesecurities $82.8 $30.7 $12.5 $- $- $- Weighted-average yield rate 0.38% 0.23% 0.12% - - - We have not entered into derivative financial instruments. We do not have operations outside of the U.S. and, accordingly, we have not beensusceptible to significant risk from changes in foreign currencies. During the normal course of business we could be subjected to a variety of market risks, examples of which include, but are not limited to, interestrate movements and foreign currency fluctuations, as we discussed above, and collectability of accounts receivable. We continuously assess these risksand have established policies and procedures to protect against the adverse effects of these and other potential exposures. Although we do not anticipateany material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future. 68 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Insys Therapeutics, Inc. Report of Independent Registered Public Accounting Firm70Consolidated Balance Sheets as of December 31, 2015 and 201471Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 201372Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2015, 2014 and 201373Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 201474Notes to Consolidated Financial Statements75 69 Report of Independent Registered Public Accounting Firm Board of Directors and StockholdersInsys Therapeutics, Inc.Chandler, Arizona We have audited the accompanying consolidated balance sheets of Insys Therapeutics, Inc. (the “Company”) as of December 31, 2015 and 2014 and therelated consolidated statements of comprehensive income, stockholders’ equity (deficit), and cash flows for each of the three years in the period endedDecember 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial 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. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insys Therapeutics,Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015,in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company changed the classification of deferred taxes in the consolidated balancesheet in 2015, due to the adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This change was applied retrospectively to allperiods presented. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Insys Therapeutics, Inc.’sinternal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 26, 2016 expressed an adverseopinion thereon. /s/ BDO USA, LLP Phoenix, ArizonaFebruary 26, 2016 70 INSYS THERAPEUTICS, INC. CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2015 2014 Assets Current Assets: Cash and cash equivalents $79,515 $58,106 Short-term investments 79,576 24,757 Accounts receivable, net of allowances of $7,180 and $5,816 at December 31, 2015 and 2014,respectively 48,459 26,544 Inventories 41,715 34,781 Prepaid expenses and other assets 3,973 2,243 Total current assets 253,238 146,431 Property and equipment, net 38,382 29,872 Long-term investments 43,219 23,262 Deferred income tax assets 16,331 12,213 Other assets 26 3,343 Total assets $351,196 $215,121 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $36,354 $27,454 Accrued compensation 10,225 6,926 Accrued sales allowances 32,713 11,296 Accrued litigation award 9,567 - Total current liabilities 88,859 45,676 Uncertain income tax position 8,635 3,778 Total liabilities 97,494 49,454 Commitments and contingencies Stockholders' Equity: Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; 0 shares issued and outstandingas of December 31, 2015 and 2014, respectively) - - Common stock (par value $0.01 per share; 100,000,000 shares authorized; 71,907,858 and 70,702,688shares issued and outstanding as of December 31, 2015 and 2014, respectively) 719 707 Additional paid in capital 245,736 216,061 Unrealized gain (loss) on available-for-sale securities (152) (24)Notes receivable from stockholders (21) (21)Retained earnings (accumulated deficit) 7,420 (51,056)Total stockholders' equity 253,702 165,667 Total liabilities and stockholders' equity $351,196 $215,121 See accompanying notes to consolidated financial statements. 71 INSYS THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands, except share and per share data) Years Ended December 31, 2015 2014 2013 Net revenue $330,797 $222,125 $99,289 Cost of revenue 28,854 22,578 12,665 Gross profit 301,943 199,547 86,624 Operating expenses: Sales and marketing 80,668 58,105 29,194 Research and development 55,281 33,136 8,499 General and administrative 64,049 44,283 16,372 Charges related to litigation award 9,515 - - Total operating expenses 209,513 135,524 54,065 Operating income 92,430 64,023 32,559 Other income (expense): Interest expense - - (950)Interest income 502 151 22 Other income (expense), net 36 2 (54)Total other income 538 153 (982) Income before income taxes 92,968 64,176 31,577 Less: income tax expense/(benefit) 34,492 26,199 (8,800) Net income $58,476 $37,977 $40,377 Unrealized loss on available-for-sale securities (128) (24) - Total comprehensive income $58,348 $37,953 $40,377 Net income per common share: Basic $0.82 $0.55 $0.78 Diluted $0.77 $0.52 $0.70 Weighted average common shares outstanding Basic 71,592,581 68,759,070 51,839,536 Diluted 75,707,651 73,335,132 57,469,234 See accompanying notes to consolidated financial statements. 72 INSYS THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(in thousands, except share amounts) Unrealized Loss on Notes Retained Convertible Additional Available- Receivable Earnings Preferred Stock Common Stock Paid in For-Sale From (Accumulated Shares Amount Shares Amount Capital Securities Stockholders Deficit) Total Balance at December31, 2012 14,864,607 $149 2,568,116 $26 $64,578 $- $(21) $(129,410) $(64,678)Conversion of preferredto common stock (14,864,607) (149) 25,586,580 256 (107) - - - - Conversion of notespayable to commonstock - - 22,231,024 222 59,062 - - - 59,284 Issuance of commonstock - initial publicoffering - - 13,800,000 138 32,318 - - - 32,456 Issuance of commonstock - employeestock purchase plan - - 376,110 4 848 - - - 852 Exercise of stockoptions - - 1,807,954 18 2,084 - - - 2,102 Excess tax benefits onstock options andawards - - - - 2,745 - - - 2,745 Stock basedcompensation - stockoptions and awards - - - - 6,339 - - 6,339 Net income - - - - - - 40,377 40,377 Balance at December31, 2013 - - 66,369,784 664 167,867 - (21) (89,033) 79,477 Exercise of stockoptions - - 3,616,790 36 8,920 - - - 8,956 Issuance of commonstock- employeestock purchase plan 716,114 7 1,982 - - - 1,989 Excess tax benefits onstock options andawards - - 22,003 - - - 22,003 Stock basedcompensation - stockoptions and awards - - - - 15,289 - - - 15,289 Unrealized loss onavailable-for-salesecurities - - - - - (24) - - (24)Net income - - - - - 37,977 37,977 Balance at December31, 2014 - - 70,702,688 707 216,061 (24) (21) (51,056) 165,667 Exercise of stockoptions - - 1,607,683 16 9,508 - - - 9,524 Issuance of commonstock- employeestock purchase plan - - 151,906 2 2,645 - - - 2,647 Excess tax benefits onstock options andawards - - - - 13,593 - - - 13,593 Stock basedcompensation - stockoptions and awards - - 5,781 - 20,382 - - - 20,382 Unrealized loss onavailable-for-salesecurities - - - - - (128) - - (128)Repurchase of commonstock (560,200) (6) (16,453) - - - (16,459)Net income - - - - - 58,476 58,476 Balance at December31, 2015 - $- 71,907,858 $719 $245,736 $(152) $(21) $7,420 $253,702 See accompanying notes to consolidated financial statements. 73 INSYS THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2015 2014 2013 Cash flows from operating activities: Net income $58,476 $37,977 $40,377 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,291 2,500 1,788 Stock-based compensation 20,382 15,289 6,339 Deferred income tax benefit (4,118) (175) (12,038)Loss on disposal of assets 41 - - Excess tax benefits on stock options and awards (13,593) (22,003) (2,745)Interest expense accrued on notes payable - - 900 Changes in operating assets and liabilities: Accounts receivable (21,915) (10,230) (13,224)Inventories (6,934) (20,253) (7,433)Prepaid expenses and other current assets 1,586 (3,816) (365)Accounts payable, accrued expenses and other current liabilities 52,211 50,375 14,417 Deferred revenue - - (3,767)Accrued litigation award 9,423 - - Net cash provided by operating activities 100,850 49,664 24,249 Cash flows from investing activities: Change in restricted cash - 400 (400)Purchase of investments (74,904) (48,043) - Purchases of property and equipment (13,842) (22,245) (5,125)Net cash used in investing activities (88,746) (69,888) (5,525) Cash flows from financing activities: Proceeds from issuance of common stock 2,647 1,989 852 Excess tax benefits on stock options and awards 13,593 22,003 2,745 Proceeds from exercise of stock options 9,524 8,956 2,102 Repurchase of common stock (16,459) - - Net repayments on line of credit - - (11,858)Proceeds from issuance of common stock - initial public offering - - 32,456 Net cash provided by financing activities 9,305 32,948 26,297 Change in cash and cash equivalents 21,409 12,724 45,021 Cash and cash equivalents, beginning of period 58,106 45,382 361 Cash and cash equivalents, end of period $79,515 $58,106 $45,382 Supplemental cash flow disclosures: Cash paid for interest expense $- $- $51 Cash paid for income taxes $15,351 $2,975 $991 See accompanying notes to consolidated financial statements. 74 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 one marketed productand one discontinued product: Subsys, a proprietary sublingual fentanyl spray for breakthrough cancer pain in opioid-tolerant patients and DronabinolSG Capsule, a generic equivalent to Marinol, an approved second-line treatment for chemotherapy-induced nausea and vomiting and anorexia associatedwith weight loss in patients with AIDS, respectively. In October 2015, we entered into a settlement agreement with Mylan, our former exclusivedistributor of Dronabinol SG Capsule and terminated our distribution agreement with Mylan and thus no longer market Dronabinol SG Capsule. 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 prior periods have been reclassified to conform to the current period 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 theshort term nature of these financial instruments. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820, “Fair Value Measurement” defines fairvalue as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous marketfor the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a three-tier fair value hierarchy,which prioritizes 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. Subsys Subsys was commercially launched in March 2012, and is available through a U.S. Food and Drug Administration (“FDA”) mandated RiskEvaluation and Mitigation program known as the Transmucosal Immediate Release Fentanyl program (“TIRF REMS”). We sell Subsys in the UnitedStates primarily to wholesale pharmaceutical distributors and to a lesser extent, specialty retail pharmacies, or collectively our customers, on a wholesalebasis, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. Subsys currently hasa shelf life of 36 months from the date of manufacture. Given the limited sales history of prescriptions of Subsys prior to the fourth quarter of 2013, wewere not able to reliably estimate expected returns of the product at the time of shipment prior to the fourth quarter of 2013. Accordingly, we initiallydeferred the recognition of revenue and related product costs of Subsys product shipments until the product was dispensed through patient prescriptions.The quantity of prescription units dispensed was estimated using an analysis of third-party information, including TIRF REMS mandated data and third-party market research data. Beginning in the fourth quarter of 2013, we were able to reasonably estimate product returns of Subsys. Therefore, we beganrecognizing revenue for Subsys sales at the time of shipment. 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 sales previously deferred, net of estimated product returns, wholesaler discounts, promptpay 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 ended December 31, 2013. 75 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,such as patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual futureresults vary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product salesallowances include: Product Returns. We allow customers to return product for credit within six months before and up to 12 months following its product expirationdate. The shelf life of Subsys is currently 36 months from the date of manufacture. We have monitored actual return history since product launch, whichprovides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipmentand prescription 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 ofadjustments. The allowance for product returns is included in accrued 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. Prompt Pay Discounts. We offer cash discounts to our customers, generally 2.0% of the sales price, as an incentive for prompt payment. Weaccount for cash discounts by reducing accounts receivable by the full amount and recognize the discount as a reduction of revenue in the same periodthe related revenue is recognized. Stocking Allowances. We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a newproduct and on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue thediscount as a reduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies. Patient Discount Programs. We offer discount card programs to patients for Subsys in which patients receive discounts on their prescriptions thatare reimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a percentage of actual redemption applied to inventoryin the distribution and retail channel. The allowance for patient 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 rebateprograms, we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject tothe rebate are filled. We estimate and accrue these rebates based on current contract prices, historical and estimated future percentages of products sold toqualified patients and estimated levels of inventory in the distribution channel. The allowance for rebates is included in accrued sales allowances. Chargebacks. We provide discounts primarily to authorized users of the Federal Supply Schedule (“FSS”) of the General ServicesAdministration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts andregulations. These entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to usthe difference between the current retail price and the price the entity paid for the product. We estimate and accrue chargebacks based on estimatedwholesaler inventory levels, current contract prices and historical chargeback activity. The allowance for chargebacks is included as a reduction toaccounts receivable. 76 Dronabinol SG Capsule Dronabinol SG Capsule was commercially launched in December 2011, and we sold Dronabinol SG Capsule exclusively to Mylan Pharmaceuticals,Inc. (“Mylan”) in the United States under a former supply and distribution agreement. Pursuant to the terms of the Mylan agreement, we manufacturedDronabinol SG Capsule under the Mylan label. Mylan distributed Dronabinol SG Capsule and on a monthly basis paid us an amount equal to the value ofDronabinol SG Capsule it sold to wholesale pharmaceutical distributors, less contractually defined deductions for chargebacks, rebates, sales discounts,distribution and storage fees, and royalties. Under the terms of the supply and distribution agreement with Mylan, we were obligated to pay Mylan aroyalty 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. Webore no risk of product return upon acceptance by Mylan. As Mylan had control over the amount it charged to wholesale pharmaceutical distributors forDronabinol SG Capsule and the discounts offered to the distributors, the sales price was not fixed and determinable at the date we shipped such productsto Mylan. Accordingly, we recognized revenue upon Mylan’s sale of products to wholesale distributors, which was the point at which the sales price wasfixed and determinable. We were involved in a dispute with Mylan that commenced in May 2013 and which ultimately led to an arbitration proceedingwith the American Arbitration Association (Case No. 55 122 00119 13). In October 2015, we entered into a settlement agreement and full and finalmutual and general release with Mylan which settled the claims in dispute and resulted in the termination of this relationship and confirmed thetermination of the former supply and distribution agreement. We do not have any current plans to manufacture or market this product in the future. 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. 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-term investments consist of corporate, various government agency and municipal debt securities, as well as certificates of deposit that have maturity datesthat are greater than 90 days. Certificates of deposit are carried at cost which approximates fair value. We classify our marketable securities as available-for-sale in accordance with FASB Accounting Standards Codification Topic 320, Investments — Debt and Equity Securities. Available-for-sale securitiesare carried at fair value with unrealized gains and losses reported in stockholders’ equity. A decline in the market value of any available-for-sale securitybelow cost that is deemed to be other than temporary, results in impairment of the fair value of the investment. We did not have any realized gains orlosses or decline in values judged to be other than temporary during the year ended December 31, 2015. If we had realized gains and losses and declinesin value judged to be other than temporary, we would have been required to include those changes in other expense in the consolidated statements ofincome and comprehensive income. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. The cost ofsecurities sold is calculated using the specific identification method. At December 31, 2015, our certificates of deposit as well as our marketable securitieshave been recorded at an estimated fair value of $3,155,000, $79,576,000 and $43,219,000 in cash and cash equivalents, short-term investments andlong-term investments, respectively. Accounts Receivable, Net Trade accounts receivable are recorded at the invoice amount net of allowances for wholesaler discounts, prompt pay discounts, stockingallowances, and doubtful accounts. See “Revenue Recognition” above for a description of our wholesaler discounts, prompt pay discounts, stockingallowances and chargebacks. We evaluate the collectability of our accounts receivable based on a variety of factors including the length of time thereceivables are past due, 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) ormarket. Inventory costs are capitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercialuse and net realizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in theregulatory process, our required investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation forproduct launches, we consider the probability that revenue will be obtained from the future sale of the related inventory together with the status of theproduct within the regulatory approval process, as well as the market for the product in its current state. We could be required to permanently write downpreviously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval byregulatory bodies, a delay in commercialization, or other potential factors including product expiration. 77 Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Maintenance andrepairs that do not extend the life of assets are charged to expense when incurred. When property and equipment is disposed of, the related costs andaccumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscountedcash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge isrecognized by 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 andliabilities, and net operating loss carry forwards (the “NOLs”) and other tax credit carry forwards. These items are measured using the enacted tax rates andlaws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities isrecognized in the period that 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, projectedfuture taxable 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,including resolutions 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. Advertising expense totaled $1,166,000, $800,000 and $645,000 for the three yearsending December 31, 2015, 2014 and 2013, respectively. Legal Fees Legal fees are expensed as incurred. Accordingly, we do not accrue for estimated future legal fees to be incurred in connection with litigation andother related legal matters. Legal expense totaled $19,448,000, $16,926,000 and $1,715,000 for the three years ending December 31, 2015, 2014 and2013, respectively. 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 overthe vesting period. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options using the followingassumptions: ●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 to thefair 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 estimate volatility for the period equivalent to the expected term ofthe stock option grants. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historical stockprice volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. 78 ●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. 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 thoseestimates. Segment Information FASB ASC No. 280, “Segment Reporting” establishes standards for reporting information about reportable segments. Operating segments aredefined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decisionmaker, or decision-making group (“CODM”), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues andgross profits based 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), whichsupersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues whenpromised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for thosegoods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be requiredwithin the revenue recognition process than are required under existing U.S. GAAP. As amended by the FASB in July 2015, the standard is effective forannual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospectiveapproach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) aretrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additionalfootnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and havenot yet determined the method by which we will adopt the standard in 2018. In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, toprovide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a goingconcern and to provide related footnote disclosures requirement. ASU 2014-15 (1) provides a definition of the term substantial doubt, (2) requires anevaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4)requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement andother disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financialstatements are issued (or available to be issued). ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016, and for annualperiods and interim periods thereafter. We do not expect the adoption of this guidance will have a material impact on our consolidated financial position,results of operations or cash flows. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 primarilyprovides that an entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at thelower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling price in the ordinary course of business,less reasonably predictable costs of completion, disposal, and transportation. This standard is effective for annual reporting periods beginning afterDecember 15, 2016. We are currently evaluating the effect of adoption of this standard, if any, on our consolidated financial position, results ofoperations or cash flows. 79 In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 470): Balance Sheet Classification of Deferred Taxes. The amendments inASU 2015-17 eliminate the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred taxliabilities and assets be classified as noncurrent on the balance sheet. The amendments for ASU-2015-17 can be applied retrospectively or prospectivelyand early adoption is permitted. We early-adopted the ASU 2015-17 as of December 31, 2015 and the statement of financial position as of this datereflects the revised classification of current deferred tax assets and liabilities as noncurrent. We elected to adopt the ASU retrospectively and, accordingly,the statement of financial position as of December 31, 2014 also reflects the revised classification of current deferred tax assets and liabilities asnoncurrent. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement ofFinancial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financialinstruments. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, andearly adoption is not permitted. We are currently evaluating the effect of adoption of this standard, if any, on our consolidated financial position, resultsof operations or cash flows. 3.Short-Term and Long-Term Investments Investments consisted of the following at December 31, 2015 (in thousands): December 31, 2015 Cost UnrealizedGains UnrealizedLosses Other-Than-TemporaryImpairmentLosses FairValue Cash andCashEquivalents Short-termInvestments Long-termInvestments Cash $55,987 $- $- $- $55,987 $55,987 $- $- Money market securities 20,373 - - - 20,373 20,373 - - Certificates of deposit 26,223 - - - 26,223 - 16,637 9,586 Marketable securities: Corporate securities 27,186 - (68) - 27,118 1,621 19,181 6,316 Federal agencysecurities 18,823 - (65) - 18,758 - 10,129 8,629 Municipal securities 53,870 16 (35) - 53,851 1,534 33,629 18,688 Total marketablesecurities 99,879 16 (168) - 99,727 3,155 62,939 33,633 $202,462 $16 $(168) $- $202,310 $79,515 $79,576 $43,219 Investments consisted of the following at December 31, 2014 (in thousands): December 31, 2014 Cost UnrealizedGains UnrealizedLosses Other-Than-TemporaryImpairmentLosses FairValue Cash andCashEquivalents Short-termInvestments Long-termInvestments Cash $44,785 $- $- $- $44,785 $44,785 $- $- Money market securities 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 80 The amortized cost and estimated fair value of the marketable securities, by maturity, are shown below (in thousands): December 31, 2015 December 31, 2014 Amortized Cost Fair Value Amortized Cost Fair Value Marketable securities: Due in one year or less $66,148 $66,094 $21,597 $21,597 Due after one year through 5 years 33,731 33,633 13,789 13,765 Due after 5 years through 10 years - - - - Due after 10 years - - - - $99,879 $99,727 $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 lossposition (in thousands): December 31, 2015 December 31, 2014 Less Than 12 Months Greater Than 12 Months Less Than 12 Months Greater Than 12 Months FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss Marketable securities: Corporate securities $25,137 $(68) $- $- $9,809 $(26) $- $- Federal agencysecurities 18,759 (65) - - 6,490 (10) - - Municipal securities 22,981 (35) - - 1,832 (3) - - $66,877 $(168) $- $- $18,131 $(39) $- $- As of December 31, 2015 and 2014, we have concluded that the unrealized losses on our marketable securities are temporary in nature. Marketablesecurities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of eachindividual investment such as the severity of loss, the expectation for that security’s performance and the creditworthiness of the issuer. Additionally, wedo not intend to 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, 2015 and 2014, we held short-term and long-term investments, as described in Note 3, that are required to be measured at fair valueon a recurring basis. All available-for-sale investments held by us at December 31, 2015 and 2014 have been valued based on Level 2 inputs. Available-for-sale securities classified within Level 2 of the fair value hierarchy are valued utilizing reports from third-party asset managers that hold ourinvestments, showing closing prices on the last business day of the period presented. These asset managers utilize an independent pricing source toobtain quotes for most fixed income securities, and utilize internal procedures to validate the prices obtained. In addition, we use an independent third-party to perform price testing, comparing a sample of quoted prices listed in the asset managers’ reports to quotes listed through a public quotationservice. 81 Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2015 were as follows(in thousands): Fair Value Measurement at Reporting Date Total QuotedPrices inactiveMarkets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Marketable securities: Corporate securities $27,118 $- $27,118 $- Federal agency securities 18,758 - 18,758 - Municipal securities 53,851 - 53,851 - Total assets measured at fair value $99,727 $- $99,727 $- Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2014 were as follows(in thousands): Fair Value Measurement at Reporting Date Total 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 $- 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,is determined 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,the price 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 31,2015 December 31,2014 Finished goods $28,216 $30,998 Work-in-process 7,018 4,316 Raw materials and supplies 6,481 2,785 Total inventories 41,715 38,099 Less: non-current work-in-process - (3,318) $41,715 $34,781 As of December 31, 2015 and 2014, raw materials inventories consisted of raw materials used in the manufacture of the active pharmaceuticalingredient (“API”) in our U.S.-based, state-of-the-art dronabinol manufacturing facility and component parts and packaging materials used in themanufacture of Subsys. Work-in-process consists of actual production costs, including facility overhead and tolling costs of in-process dronabinol andSubsys products. Finished goods inventories consisted of finished Subsys products. Non-current work-in-process represent those inventories pendingFDA approval which is not expected within 12 months of the balance sheet date and are included in other assets in our consolidated balance sheets. As ofDecember 31, 2015, all work-in-process inventory is expected to be used within 12 months of the balance sheet date and, therefore, is classified as currentinventory. 82 6. Property and Equipment Property and equipment are comprised of the following (in thousands): Estimated Useful Life As of December 31, (in years) 2015 2014 Computer equipment 3-7 $2,798 $1,530 Scientific equipment 3-10 9,283 5,928 Furniture 3-10 2,022 1,545 Manufacturing equipment 7-10 19,536 13,101 Leasehold improvements * 16,771 16,688 Less: accumulated depreciation and amortization (12,028) (8,920)Total fixed assets $38,382 $29,872 *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, 2015, 2014 and 2013 was $5,295,000, $2,500,000 and $1,788,000,respectively. 7. 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, 2015, with a remaining non-cancelable lease term in excess of one year, are as follows (in thousands): Years ending December 31, 2016 $2,669 2017 2,612 2018 2,721 2019 2,799 2020 2,875 Thereafter 3,841 Total $17,517 The terms of certain lease agreements provide for rental payments on a graduated basis. We recognize rent expense on the straight-line basis overthe lease period and have accrued for rent expense incurred but not paid. Rent expense under operating leases for the years ended December 31, 2015,2014 and 2013 was approximately $2,445,000, $1,698,000, and $498,000, respectively. Material Agreements In April 2015, we entered into an amendment to our manufacturing and supply agreement with DPT, which extends our existing manufacturingand supply agreement to produce Subsys until the end of 2020. In addition to extending the term, this amendment added certain minimum purchasecommitments. 83 On October 30, 2015, we entered into an amended and restated supply, development & exclusive licensing agreement with Aptargroup, Inc.which, among other things, extended our exclusive supply rights to the current sublingual device, currently utilized by Subsys, as well any new device(s)jointly developed by the two companies for a period of seven years. In addition to extending the term, this amendment added certain minimum purchasecommitments and requires certain tiered royalties as a percentage of net revenue to be paid by us ranging from less than one percent to the low singledigits, commencing in March 2016 through the term of this agreement, from our sales of Subsys and future products that use the Aptar spray devicetechnology. The following table sets forth our aggregate minimum purchase commitments with DPT and Aptar under these agreements (in thousands): Years ending December 31, 2016 $2,000 2017 10,450 2018 14,650 2019 18,260 2020 20,840 Thereafter 4,330 Total $70,530 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 foremployee contributions, and beginning October 2014, our matching contribution is 50 percent of the first 6 percent of earnings contributed by eachparticipant. Contractual Commitments Manufacture and Supply Agreements We maintain certain manufacture and supply agreements with third party vendors for the manufacturing, processing, and packaging of Subsyswhich expire in 2016. As of December 31, 2015, our remaining estimated annual contractual obligations under these agreements are not material. Legal Matters Other than the matters that we have disclosed below, we from time to time become involved in various ordinary course legal disputes and claimsand administrative and regulatory proceedings, which include intellectual property and commercial litigation, governmental and regulatoryinvestigations, employee related issues and disputes and other business matters, which we do not believe are either individually or collectively material. We record accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. Theseaccruals are adjusted periodically as assessments change or additional information becomes available. If the reasonable estimate of a probable loss is arange, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannotbe reasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters. Our loss estimates are generally developedin consultation with outside counsel and are based on analyses of potential outcomes. As legal and governmental proceedings, disputes andinvestigations are inherently unpredictable and, in part, beyond our control, unless otherwise indicated, we cannot reasonably predict the outcome ofthese legal proceedings, nor can we estimate the amount of loss, or range of loss, if any, that may result from these proceedings. While our liability inconnection with certain claims cannot be currently estimated, the resolution in any reporting period of one or more of these matters could have asignificant impact on our financial condition, results of operations and cash flows for that future period and could ultimately have a material adverseeffect on our consolidated financial position and could cause the market value of our common shares to decline. While we believe we have validdefenses in these matters, litigation and governmental and regulatory investigations are inherently uncertain and we may in the future incur materialjudgments or enter into material settlements of claims. 84 Except as it pertains to the $9,567,000 accrued for the dispute with Dr. Kottayil and the settlement payment related to the 2014 federal securitieslitigation that was covered by our director and officers insurance policies as noted below, we believe that the probability of unfavorable outcome or lossrelated to all of the other litigation matters discussed below and an estimate of the amount or range of loss, if any, from an unfavorable outcome are notdeterminable at this time. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters but therange of possible outcomes on these matters is very broad and we are not able to provide a reasonable estimate of our potential liability, if any, nor are weable to predict the outcome of each litigation matter. 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 by shareholders or other third parties, could have amaterial impact on our reputation, business and financial condition and divert the attention of our management from operating our business. Government Proceedings Like other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies inthe United States. As a result, interaction with government agencies occurs in the normal course of our operations. The following is a brief descriptionof pending governmental investigations which we believe are potentially or actually material at this time. It is possible that criminal charges andsubstantial payments, fines and/or civil penalties or damages or exclusion from federal health care programs or other administrative actions could resultfrom any government investigation or proceeding, as well as a corporate integrity agreement or similar government mandated compliance document. Inaddition, even certain investigations that are not discussed below and which we do not deem to be material at this time could be determined to bematerial and could have a material adverse effect on our financial condition, results of operations and cash flows. Department of Health and Human Services Investigation. We received a subpoena, dated December 9, 2013, from the Office of Inspector Generalof the HHS in connection with an investigation of potential violations involving HHS programs. This subpoena was issued in connection with aninvestigation by the U.S. Attorney’s Office for the Central District of California. This subpoena requests documents regarding our business, including thecommercialization of Subsys. We are cooperating with this investigation and have produced documents in response to the subpoena and have providedother 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. This subpoena andsubsequent information demands request documents regarding Subsys, including our sales and marketing practices related to this product, as well as ourpatient services hub. We are cooperating with this investigation and have produced documents in response to these requests and have provided otherrequested information. On or about June 23, 2015, a nurse practitioner located in Connecticut, who served on our speaker bureau in connection with our speaker programsdesigned to educate and promote product awareness and safety for external health care providers, pled guilty to violating the federal Anti-KickbackStatute in connection with payments of approximately $83,000 from us. In connection with the review of this matter by the Compliance Committee of ourBoard of Directors, with the assistance of outside legal counsel reporting directly to the Compliance Committee, we have taken a number of remedialactions and implemented enhancements to our compliance controls regarding relationships with health care providers. We will continue to assess thesematters to ensure we have an effective compliance program. On or about February 18, 2016, one of our former sales employees located in Alabama pled guilty to a conspiracy to violate the federal Anti-Kickback Statute in regards to two Alabama health care professionals who prescribed our drug Subsys. Those two Alabama health care professionalsserved on our speaker bureau in connection with our speaker programs designed to educate and promote product awareness and safety for external healthcare providers. We continue to assess these matters to ensure we have an effective compliance program. State Related Investigations. We have received CIDs from each of the Office of the Attorney General of the State of Arizona, ODOJ, the AttorneyGeneral of the Commonwealth of Massachusetts and the Office of the Attorney General of Illinois and we have also received a subpoena from the ChiefConsumer Protection and Antitrust Division of the State of New Hampshire. In addition, we understand that numerous physicians practicing in NewJersey have received subpoenas from the Department of Justice of the State of New Jersey in connection with these physicians’ interactions with ourcompany. These CIDs and subpoenas request documents regarding Subsys, including our sales and marketing practices related to Subsys in theapplicable state, as well as our patient services hub. We are cooperating with each of these investigations and have produced documents in response tothese CIDs and related requests for information from each office. In connection with the investigation by the ODOJ we have entered into a settlement agreement with the ODOJ referred to as an AVC, and agreed tomake monetary payments totaling approximately $1,100,000. The AVC requires us to maintain certain controls and processes around our promotionaland sales activity related to Subsys in Oregon. This AVC expressly provides that we do not admit any violation of law or regulation. This settlement wasreached as result of our cooperation with the ODOJ's investigation and after producing documents in response to certain CIDs and related requests forinformation from the ODOJ. All monetary payments in connection with this settlement were made prior to December 31, 2015. 85 Investigations of Physicians. In addition to the above investigations that are specifically directed at our company, we have received governmentalagency requests for information from the USAO of Eastern District of Michigan, Rhode Island, Florida (Jacksonville), Connecticut, New Hampshire,Southern District of Alabama regarding specific physicians that we have interacted with in those states. Opioid Litigation. Many federal and governmental agencies are focused on the abuse of opioids in the United States and agencies such as the HHShave expressed their belief that the United States is in the midst of a prescription opioid abuse epidemic. Common prescription drugs that containopioids are drugs such as oxycodone, hydrocodone, and fentanyl. Our product, Subsys, is fentanyl based product in the TIRF class. Certain stakeholdersin the healthcare community, regulatory bodies and governmental agencies may associate us with, or determine that we are a part of, this perceivedopioid abuse epidemic. Like all TIRF products, our product is part of the mandatory TIRF REMS program which is designed “to ensure informed risk-benefit decisions before initiating treatment, and while patients are treated to ensure appropriate use of TIRF medicines” and “to mitigate the risk ofmisuse, abuse, addiction, overdose and serious complications due to medication errors with the use of TIRF medicines.” Nevertheless, from time to time,we may be included in litigation or investigations that are directed at the abuse of opioids in the United States. For example, in May 2014, Santa Claraand Orange Counties in California filed a complaint in state court in Orange County, California against numerous pharmaceutical manufacturers allegingclaims related to opioid marketing practices, including false advertising, unfair competition, and public nuisance. Despite the fact that we are not namedspecifically in the complaint and this lawsuit was recently stayed, we have received a preservation notice letter from the Office of the County Counsel forthe County of Santa Clara. From time to time, we may be included in these types of litigations as a result of the fact that we market an opioid product. With the exception of the ODOJ investigation which we have quantified above, we believe a loss from an unfavorable outcome of thesegovernmental proceedings is reasonably possible and an estimate of the amount or range of loss from an unfavorable outcome is not determinable atthese early stages. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters. However,responding to government investigations has and could continue to burden us with substantial unanticipated legal costs in connection with defendingany claims raised. Any potential resulting fines, restitution, damages and penalties, settlement payments or exclusion from federal health care programsor other administrative actions, as well as any related actions brought by shareholders or other third parties, could have a material adverse effect on ourfinancial position, results of operations or cash flows. Additionally, these matters could also have a negative impact on our reputation and divert theattention of our management from operating our business. 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,the Arizona District Court issued an order consolidating the action, appointing Hongwei Li as lead plaintiff, and appointing the lead counsel. Leadplaintiffs complaint was filed on October 27, 2014. On December 11, 2014, we moved to dismiss the amended consolidated complaint. On March 19,2015, the parties participated in a mediation and the parties subsequently agreed in principle, on April 14, 2015, to settle the action. On April 20, 2015,the parties filed a Notice of Settlement with the Court. On April 29, 2015, the Court ordered that the lawsuit be dismissed within 60 days, vacated allpending hearings, and denied all pending motions as moot. On May 28, 2015, the parties filed a Stipulation of Settlement, which provided the terms of asettlement agreement. On June 2, 2015, the Court granted preliminary approval of the settlement agreement and the potential class members have been(or will be) notified of the proposed settlement and the procedure by which they can object to the settlement or request to be excluded from the class. OnDecember 7, 2015, the Court issued a final judgment and dismissal order granting final approval of the settlement agreement and dismissing the casewith prejudice. Because we met our retainage amount under the applicable policy, we believe that any potential obligations that relate to the settlementin this matter are fully covered under our directors and officers insurance policy. Accordingly, we did not accrue for any contingencies in this matter intoour operating results. On or about February 2, 2016, a complaint (captioned Richard Di Donato v. Insys Therapeutics, Inc., Case 2:16-cv-00302-NVW) was filed in theArizona District Court, against us and certain of our current and former officers. This complaint was brought as a purported class action, on behalf ofpurchasers of our common stock between March 3, 2015 and January 25, 2016. In general, the plaintiffs allege that the defendants violated federalsecurities laws by making intentionally false and misleading statements regarding our business and operations, therefore artificially inflating the price ofour common stock. The plaintiffs seek unspecified monetary damages and other relief. We intend to vigorously defend this claim. 86 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 theSuperior Court of the State of Arizona, Maricopa County, or the Arizona Superior Court, brought by Santosh Kottayil, Ph.D., certain of his familymembers and a trust of 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 for appraisal relates to a reverse stock split that Insys Pharma effected in June 2009, which resulted in Dr. Kottayil’s ownershipposition becoming a fractional share of Insys Pharma common stock. Following the reverse stock split, Insys Pharma cancelled all resulting fractionalshares, including the fractional share held by Dr. Kottayil, and offered a cash payment in lieu of the fractional shares. The complaint also brought causesof action for breach of fiduciary duty, fraud and negligent misrepresentation in the defendants’ dealings with Dr. Kottayil on the subject of hiscompensation and stock ownership in Insys Pharma. In January 2010, the plaintiffs added claims seeking to rescind Dr. Kottayil’s assignment to InsysPharma of his interest in all of the fentanyl and dronabinol patent applications previously assigned to Insys Pharma and to recover the benefits of thoseinterests. Dr. Kottayil was seeking, among other relief, the fair value of his Insys Pharma common stock as of June 2, 2009, compensatory and punitivedamages, and rescission of all assignments to Insys Pharma of his interest 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-claims include actions for breach of fiduciary duty, fraud and negligent misrepresentations and omissions with respect to the time during whichDr. Kottayil was employed 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, the court 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., the parent ofInsys Pharma, was also named as defendant in this lawsuit. This amended complaint filed by plaintiffs re-alleged substantially the same claims set forth inthe prior complaint, except that plaintiffs also allegedthat they were entitled to rescissory damages, plaintiffs also added our majority stockholder, aprivate trust, as a defendant to the breach of fiduciary duty claim and plaintiffs 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 deniedon May 2, 2014. The trial commenced on December 1, 2014 with the evidence phase of the trial completed on January 29, 2015. On June 8, 2015, the court issued findings of fact and conclusions of law in its final trial ruling. Specifically, the court found (i) in favor of InsysPharma, our majority stockholder, a private trust and four of the Insys Pharma directors who were on the board in July 2008 on plaintiffs’ claim for breachof fiduciary duty arising out of transactions the board approved in July 2008, (ii) found in favor of plaintiffs and against Insys Pharma, Inc., our majoritystockholder, a private trust and three of the Insys Pharma directors who were on the board in June 2009 on plaintiffs’ claims under Delaware law and forbreach of fiduciary duties arising out of the reverse stock split the board approved in June 2009 in the amount of $7,317,450, along with pre-judgmentand post-judgment interest and court costs, (iii) found in favor of two of the Insys Pharma directors who were on the Insys Pharma board as of June 2009and against plaintiffs on plaintiffs’ breach of fiduciary duty claims, (iv) found in favor of Insys Pharma and against plaintiff (Kottayil) on his claim forrescission of the patent application assignments that he entered in favor of Insys Pharma before and after his employment terminated, (v) found in favor ofus and against plaintiff on plaintiffs' claims of successor liability and fraudulent transfer, and (vi) found in favor of Kottayil and against Insys Pharma onInsys Pharma’s counterclaims of breach of fiduciary duty, fraud, and negligent misrepresentation. The court still had to resolve certain post-trial issuesbefore a final judgment was entered. On June 29, 2015, we moved the court to award Insys Therapeutics, Inc. its attorneys’ fees in connection with its successful defense of plaintiff’sclaims of successor liability and fraudulent transfer. The court denied Insys Therapeutics request for attorney’s fees. 87 On October 2, 2015, the court entered a final judgment, awarding plaintiffs the amount of $7,317,450, along with pre-judgment interest from June2, 2009, and post-judgment interest, from October 2, 2015, at the rate of 4.25% per annum, compounded quarterly and taxable costs in the amount of$93,163. On the same date, the court denied plaintiffs’ request to submit an application for attorneys’ fees for his defense of the Insys Pharmacounterclaims, finding that the request was premature. On October 20, 2015, plaintiffs appealed the foregoing judgment and on November 4, 2015, Insys Pharma and the other defendants against whomjudgment was entered filed a notice of cross-appeal. The appeal and cross-appeal remain pending before the Court of Appeals for the State of Arizona.Plaintiffs opening brief is due to the Court of Appeals on March 7, 2016. As a result of the final ruling, we have accrued $9,567,000 at September 30, 2015 including $2,249,000 of estimated pre-and post-judgementinterest. The pending appeal (and cross appeal) could cause the estimates to vary materially from the final award. On or around November 1, 2015 we received a notice from Dr. Kottayil’s attorneys demanding indemnification for legal and other defense costsalleged to have been incurred in connection with Dr. Kottayil’s defense of the Insys Pharma counterclaims in the amount of $3,630,000. We are in theprocess of assessing the merit of such claims as well as evaluating the basis for the costs claimed. Because of the uncertainty surrounding the ultimateoutcome we have not accrued for this claim at this time; however, we believe that that it is reasonably possible that there may be a material lossassociated with this claim and we currently estimate the range of the reasonably possible loss to be between $0 and the $3,630,000 claimed. Insys Therapeutics, Inc. vs. Mylan Pharmaceuticals. Commencing May 2013, we were in a legal dispute with Mylan Pharmaceuticals, Inc.concerning the parties’ supply and distribution agreement dated May 20, 2011. On October 5, 2015, we have entered into a settlement agreement andmutual and general release, or the Settlement Agreement, with Mylan that (i) confirmed the termination of the supply and distribution agreement and therelationship between the parties with respect to this product, (ii) released the claims in dispute in connection with this arbitration and (iii) containedother customary terms and conditions such as confidentiality. The parties jointly filed with the arbitration panel a stipulation to dismiss with prejudicethe arbitration proceedings and definitively resolve this dispute. On October 30, 2015, the parties received the signed order from the arbitration panelgranting the stipulation to dismiss with prejudice. As a result of the executed Settlement Agreement, we have not accrued for any contingencies in thismatter into our operating results and consider the matters in dispute in connection with this arbitration settled. Patent-Related Matters. On August 26, 2015, we received purported service of notice of three IPR petitions filed by a hedge fund with the U.S.Patent and Trademark Office, challenging three of the four Orange Book-listed patents covering Subsys (US Patent Nos. 8,486,972; 8,835,459 and8,835,460). On December 11, 2015, we filed preliminary responses opposing the three requests to institute the IPR’s. We expect a decision before or onMarch 11, 2016. If any of the three petitions are granted, we intend to vigorously defend the validity of each patent challenged in each IPR. Wayne Automatic Fire Sprinklers. On or about January 26, 2016, Wayne Automatic Fire Sprinklers, Inc., of Wayne, a Florida corporationheadquartered in Ocoee, Orange County, Florida, which installs, repairs, and monitors fire sprinkler and fire alarm systems throughout Florida andprovides health insurance benefits to its employees and covered dependents through its self-funded health benefit plan filed a complaint in the CircuitCourt of the Ninth Judicial Circuit in and for Orange County, Florida. Wayne is seeking injunctive relief and damages in excess of $75,000, exclusive ofinterest, costs and attorney’s fees, against Insys Therapeutics, Inc., Gessler Clinic, P.A., Edward Lubin, M.D., UMR, Inc. and OptumRx, Inc., as defendants,for claims based under the Florida Racketeer Influenced and Corrupt Organization Act pursuant to section 895.03(3), Florida Statutes, the Florida CivilRemedies for Criminal Practices Act pursuant to section 772.103(3), Florida Statutes, the Florida Deceptive and Unfair Trade Practices Act under sections501.201-501.203, Florida Statutes, common law fraud, and civil conspiracy, as well as breach of contract against UMR and OptumRx. The complaintalleges certain claims related to Subsys were erroneously paid by Wayne’s health benefit plan between January 2014 and October 2014 in connectionwith benefits totaling approximately $198,000 as a result of misrepresentations and failure to properly convey the nature of the indications theprescriptions were written for by the prescribing physician. We plan to vigorously defend this lawsuit. 8. Equity Preferred Stock In August 2014, we entered into a Rights Agreement with respect to a newly-designated Series A Participating Preferred Stock. In connection withthe Rights Agreement, our Board of Directors declared a dividend distribution of the right to purchase one one-hundredth of one share of our newlydesignated Series 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”). 88 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 aredesigned to 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 orentity becomes an Acquiring Person) following the date of commencement of, or the first announcement of, an intention to commence, a tender offer orexchange offer, the consummation of which would result in any person or entity or group of persons or entities acting in concert becoming an AcquiringPerson (the earlier of such dates being called the “Distribution Date”). Until the Distribution Date, the Rights will be transferable with and only with ourCommon Shares. 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 theaggregate per share price of all cash and non-cash dividends declared per share of common stock. In the event of liquidation, the holders of the PreferredShares would be entitled to a minimum preferential liquidation payment of $100 per share plus an amount equal to accrued and unpaid dividends anddistributions thereon, provided that the Preferred Shares would be entitled to receive an aggregate amount per share equal to 100 times the aggregateamount to be distributed 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 thedividend, shareholders received one additional share of Insys Therapeutics, Inc. common stock, par value $0.0002145, for each two shares they held as ofthe record date. 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 stockfrom 50,000,000 to 100,000,000 and an amendment to increase the par value for our common stock to $0.01 per share. Our consolidated financialstatements and notes herein have been retroactively restated to reflect the impact of this amendment. On May 5, 2015, our Board of Directors approved a two-for-one stock split of our common stock to be effected through a stock dividend. The recorddate for the stock split was the close of business on May 26, 2015, with share distribution occurring on June 8, 2015. As a result of the dividend,shareholders received one additional share of Insys Therapeutics, Inc. common stock, par value $0.01, for each one share they held as of the record date.All share and per share amounts have been retroactively restated for the effects of this stock split. Initial Public Offering On May 7, 2013, we completed our IPO, pursuant to which we sold 13,800,000 shares of our common stock (4,600,000 on a pre-split basis) at aprice of $2.67 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, weraised a total of $32.5 million in net proceeds after deducting underwriting discounts and commissions of $2.6 million and offering expenses of $1.8million. These costs have been recorded as a reduction of the proceeds received in arriving at the amount recorded in additional paid-in capital. Uponcompletion of the IPO, all outstanding shares of our preferred stock were converted into 25,586,590 shares of common stock (8,528,860 on a pre-splitbasis). Also, upon completion of our IPO, the outstanding balance of principal and accrued interest related to several promissory and demand notes infavor of entities controlled by Dr. John Kapoor in the amount of $59,284,000 were converted into 22,231,024 shares of common stock (7,410,341 at apre-split basis). Stock Repurchase Program On November 3, 2015, we adopted a new stock repurchase program. The stock repurchase program authorizes up to $50 million in repurchases ofcommon stock in the open market, block transactions on or off an exchange, or in privately negotiated transactions at management's discretion from timeto time. The stock repurchase program is effective immediately, and there is no fixed termination date for this program. The repurchase program has notime limit and may be suspended for periods or discontinued at any time. During the year ended December 31, 2015, we acquired 560,200 shares ofcommon stock at an aggregate price of $16,459,000. We intend to retire all acquired shares. 89 9. 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 becameeffective in connection with our initial public offering in May 2013. Under the terms of the ESPP, eligible employees are granted a purchase right topurchase shares of our common stock that cannot exceed 15% of their earnings, nor exceed the Board of Director defined limits on the number of ourcommon shares that can be offered under the ESPP. The purchase right entitles the eligible employee to purchase shares at the lesser of an amount equalto 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. The ESPP authorizesthe issuance of 530,400 shares of common stock (175,000 on a pre-split basis) pursuant to purchase rights granted to our employees or to employees ofany of our designated affiliates. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendaryear, from January 1, 2014 through January 1, 2023, by the least of (a) 1% of the total number of shares of common stock outstanding on December 31 ofthe preceding calendar year, (b) 600,000 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” within the meaning of Section 423 of the Internal Revenue Code of 1986,as amended (the “Code”). As of December 31, 2015, 1,244,130 shares of common stock have been purchased under the ESPP. 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 becameeffective in 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. Thenumber of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 throughJanuary 1, 2023, by the lesser 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 of common stock that may be determined each year by the Registrants Board of Directors that is less than the preceding clause (a). Asof December 31, 2015, options to purchase 7,138,089 shares of common stock were outstanding and 2,183,946 shares remained available for future grant. Amounts recognized in the consolidated statements of comprehensive income with respect to our stock-based compensation plans were as follows(in thousands): Years Ended December 31, 2015 2014 2013 Research and development $633 $5,498 $915 General and administrative 19,749 9,791 5,424 Total cost of stock-based compensation $20,382 $15,289 $6,339 Included in stock-based compensation for the years ended December 31, 2015 and 2014 was approximately $4,867,000 and $4,016,000,respectively, of expense associated with the accelerated vesting of option awards related to two terminated employees. There was no such acceleratedvesting of option awards during 2013. 90 The following table summarizes stock option activity during the year ended December 31, 2015: Weighted Weighted Average Aggregate Average Remaining Intrinsic Number of Exercise Contractual Value Shares Price Term (in years) (in millions) Outstanding as of December 31, 2012 6,517,719 $1.06 Granted 4,460,100 $4.86 Cancelled (174,888) $2.86 Exercised (1,807,953) $1.15 Outstanding as of December 31, 2013 8,994,978 $2.90 Granted 3,397,198 $14.57 Cancelled (1,068,224) $7.71 Exercised (3,616,790) $2.48 Outstanding as of December 31, 2014 7,707,162 $7.57 Granted 1,733,671 $29.38 Cancelled (695,061) $17.03 Exercised (1,607,683) $5.89 $40.2 Outstanding as of December 31, 2015 7,138,089 $12.33 7.8 $118.7 Vested and exercisable as of December 31, 2015 3,722,736 $6.91 7.0 $81.1 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, 2015, we expect to recognize $41,370,000 of stock-based compensationfor our outstanding options over a weighted-average period of 2.9 years. The total fair value of shares vested for the years ended December 31, 2015, 2014, and 2013 was $25,392,000, $14,572,000 and $5,785,000,respectively. Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2015, 2014 and 2013 was$9,524,000, $8,956,000 and $2,102,000, respectively. For the years ended December 31, 2015, 2014 and 2013, we recorded net reductions of$13,593,000, $22,003,000 and $2,745,000 respectively, of our federal and state income tax liability, with an offsetting credit to additional paid-in capitalresulting 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: 2015 2014 2013 Expected volatility 69.9% 69.3% 73.5% Risk-free interest rate 1.9% 1.7% 2.0% Expected term (in years) 7.0 6.0 7.0 Expected dividend yield 0.0% 0.0% 0.0% For the years ended December 31, 2015, 2014, and 2013 the weighted-average estimated fair value per option granted was $19.20, $10.53 and$5.04, respectively. 91 10. Income Taxes Income tax (benefit) expense consists of the following (in thousands): Years Ended December 31, 2015 2014 2013 Current income taxes: Federal $32,039 $22,500 $2,281 State and local 6,572 3,874 957 Total current income tax 38,611 26,374 3,238 Deferred income taxes: Federal (2,997) 867 (9,123)State and local (1,122) (1,042) (2,915)Total deferred income tax (4,119) (175) (12,038)Income tax expense/(benefit) $34,492 $26,199 $(8,800) As of December 31, 2015, we had approximately $1.2 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 beutilized annually in the future to offset taxable income, if any. Specifically, this limitation may arise in the event of a cumulative change in ownership ofour company of more than 50% within a three-year period as determined under the Code, which we refer to as an ownership change. Any such annuallimitation may significantly reduce the utilization of these NOLs before they expire. Our ability to utilize federal NOLs created prior to the NeoPharmmerger is significantly 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 $268.3 million of state NOLs at December 31, 2015, all of which relate to Illinois. This $268.3 millionof state NOLs excludes $1.7M of NOLs under ASC Topic 718 that have not been benefitted. Based on projections, we estimate that approximately $259.4million 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 $20.2 million. The Illinois NOLs began 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 notthat we 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 wewould be able to utilize nearly all types of our deferred tax assets, including all federal net operating loss carryforwards. This determination was madebased on our profitability in 2013 and our expectations of future profitability. Accordingly, we reversed the deferred tax asset valuation allowanceassociated with the majority of our deferred tax assets. 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 income tax assets: 2015 2014 NOLs and credits $26,931 $24,683 Start-up expenditures 2,896 3,349 Stock-based compensation 8,578 4,351 Allowances 1,581 2,516 Expenses currently not deductible for tax purposes 5,640 3,884 Other 284 149 Gross deferred tax assets 45,910 38,932 Deferred income tax asset valuation allowance (20,191) (20,402)Deferred income tax assets 25,719 18,530 Deferred income tax liabilities: Federal impact of state taxes (1,778) (1,384)Property and equipment (6,189) (4,354)Prepaid expenses (1,421) (579)Net deferred income tax assets $16,331 $12,213 92 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 whichthose temporary differences become deductible. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income orlosses, and tax planning strategies in making this assessment. Based upon our current net income and projections for future taxable income over theperiods in which the deferred tax assets are deductible, we believe that, with the exception of the Illinois NOL discussed above, the realization of thesetax assets is more likely than not. As such, with the exception of the valuation allowance that has been placed on the future tax benefit relating to ourIllinois NOLs, no other valuation allowance exists on our deferred tax assets at December 31, 2015. Effective Tax Rate Reconciliation: Our federal statutory tax rate is 35.0%, while our effective tax rate was 37.1% for the year ended December 31, 2015 as set forth below: 2015 2014 2013 U.S. statutory tax rate 35.0% 35.0% 35.0%Increase (reduction) of income taxes resulting from: State income taxes, net of federal benefit 1.7% 2.9% 11.8%Non-deductible litigation expense 4.3% 3.0% - Non-deductible and includible items and credits 0.8% 0.6% 2.3%Research and other credits (4.6)% (2.2)% (1.8)%Uncertain tax positions 2.7% 1.8% - Domestic manufacturing deduction (3.0)% (0.3)% - Other 0.4% - (0.6)%Change in valuation allowance (0.2)% - (74.6)%Total (benefit) provision for income taxes 37.1% 40.8% (27.9)% The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits (in thousands): Years Ended December 31, 2015 2014 Beginning balance $5,366 $325 Additions based on current year's tax positions 3,885 450 Additions based on prior year's tax positions (240) 4,591 Ending balance $9,011 $5,366 We establish reserves when it is more likely than not that we will not realize the full tax benefit of a position. We had a reserve of $9,011,000 as ofDecember 31, 2015, mostly related to tax credits of $1,971,000, state and local income tax filing positions of $5,360,000, and $1,680,000 of otherpermanent differences. Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to taxexamination changes, settlement activities, expirations of statutes of limitations, or the impact on recognition and measurement considerations related tothe results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12months. Approximately $406,000 of interest has been included in income taxes and accounted for on the balance sheet related to unrecognized taxpositions as of December 31, 2015. Tax years subsequent to 2011 remain open to examination by federal and state taxing authorities. In addition, our reverse acquisition NOLs remainopen to examination. 11. 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 outstandingduring the period. The diluted income per share further includes any common shares available to be issued upon exercise of outstanding stock options ifsuch inclusion would be dilutive. 93 The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts): Years Ended December 31, 2015 2014 2013 Historical net income per share - Basic Numerator: Net income $58,476 $37,977 $40,377 Denominator: Weighted average number of common shares outstanding 71,592,581 68,759,070 51,839,536 Basic net income per common share $0.82 $0.55 $0.78 Historical net income per share - Diluted Numerator: Net income $58,476 $37,977 $40,377 Denominator: Weighted average number of common shares outstanding 71,592,581 68,759,070 51,839,536 Effect of dilutive stock options 4,115,070 4,576,062 5,629,698 Weighted average number of common shares outstanding 75,707,651 73,335,132 57,469,234 Diluted net income per common share $0.77 $0.52 $0.70 The calculation of diluted net income per common share excludes the effects of 1,460,986 and 1,780,372 outstanding stock options for the yearended December 31, 2015 and 2014, respectively, as the impact of these options was anti-dilutive. There were no anti-dilutive share equivalents forthe year ended December 31, 2013. 12. Product Lines, Concentration of Credit Risk and Significant Customers We are engaged in the business of developing and selling pharmaceutical products. We have one marketed and one discontinued product line,consisting of Subsys and Dronabinol SG Capsule, respectively. 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 Line Years Ended December 31, 2015 2014 2013 Subsys $329,514 $219,530 $95,740 Dronabinol SG Capsule 1,283 2,595 3,549 Total net revenue $330,797 $222,125 $99,289 Percent of Revenue by Route to Market Years Ended December 31, 2015 2014 2013 Pharmaceutical wholesalers 95% 99% 96%Specialty pharmaceutical retailers 5% 0% 0%Generic pharmaceutical distributors 0% 1% 4% 100% 100% 100% All our products are sold in the United States of America. Product shipments to four pharmaceutical wholesalers accounted for 32%, 20%, 17% and 14% of shipments of Subsys for the year ended December31, 2015. Product shipments to four pharmaceutical wholesalers accounted for 38%, 22%, 14% and 14% of shipments of Subsys for the year endedDecember 31, 2014. Product shipments to four pharmaceutical wholesalers accounted for 30%, 21%, 20% and 19% of shipments of Subsys for the yearended December 31, 2013. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 20%, 19%, 17% and 14% of accounts receivableas of December 31, 2015. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 26%, 24%, 23% and 14% of gross accountsreceivable as of December 31, 2014. 94 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 placeour cash with high credit quality financial institutions and generally limit the amount of credit exposure to the amount of FDIC coverage. However,periodically during the year, we maintain cash in financial institutions in excess of the current FDIC insurance coverage limit of $250,000. We performongoing credit evaluations of our customers’ financial condition but do not typically require collateral to support customer receivables. We establishedan allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. 13. Supplemental Financial Information A summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2015 and 2014 are asfollows (in thousands): Balance atBeginning ofYear Charged toCosts andExpenses Utilization Balance atEnd ofYear Allowance for doubtful accounts: Year ended December 31, 2015 $398 $413 $- $811 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, 2015 $5,418 $36,849 $(35,898) $6,369 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 95 14. Quarterly Results of Operations (Unaudited) The following table sets forth a summary of our unaudited quarterly operating results for each of the last eight quarters in the periodended December 31, 2015. We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have beenprepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurringadjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read inconjunction with our financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarilyindicative of the results that may be expected for any future period (in thousands, except per share data). Quarter Ended 12/31/15 9/30/15 6/30/15 3/31/15 Net revenue $91,135 $91,259 $77,633 $70,770 Gross profit 84,668 83,552 69,328 64,395 Net income 17,011 26,128 7,314 8,023 Net income per common share: Basic $0.24 $0.36 $0.10 $0.11 Diluted $0.22 $0.34 $0.10 $0.11 Quarter Ended 12/31/14 9/30/14 6/30/14 3/31/14 Net revenue $66,512 $58,281 $55,696 $41,636 Gross profit 60,652 52,891 49,141 36,863 Net income 9,349 11,505 9,465 7,658 Net income per common share: Basic $0.13 $0.17 $0.14 $0.12 Diluted $0.13 $0.16 $0.13 $0.11 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 ofour disclosure 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 thisAnnual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that because of certainmaterial weakness in its internal control over financial reporting, as further described below, our disclosure controls and procedures were not effective asof December 31, 2015. 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 ActRules 13a-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, 2015. 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 identified a material weakness in our internal controls over financial reporting.Specifically, we did not have effective policies and procedures, and effective reviews by personnel at an appropriate level, for accounting for stock optionawards in accordance with generally accepted accounting principles. As a result, we concluded that our internal control over financial reporting was noteffective as of December 31, 2015. Our independent registered public accounting firm, BDO USA, LLP, has audited the effectiveness of our internal controls over financial reporting asof December 31, 2015, as stated in its audit report which is included herein. 96 Change in Internal Controls Over Financial Reporting During the quarterly period ending December 31, 2015, we identified a material weakness in our internal control over financial reporting regardingthe accounting for stock option awards. There were no other changes in our internal control over financial reporting as such term is defined in ExchangeAct Rules 13a–15(f) and 15d–15(f) that occurred during the quarterly period ended December 31, 2015 that has materially affected, or is reasonablylikely 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 controlsystem are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any companyhave been detected. Report of Independent Registered Public Accounting Firm Board of Directors and StockholdersInsys Therapeutics, Inc.Chandler, Arizona We have audited Insys Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in orInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).Insys Therapeutics, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintainedin all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresof the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a materialeffect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Amaterial weakness regarding management’s failure to design and maintain controls over the accounting for stock option awards has been identified anddescribed in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in ouraudit of the 2015 financial statements, and this report does not affect our report dated February 26, 2016 on those financial statements. In our opinion, Insys Therapeutics, Inc. did not maintain, in all material respects, effective internal control over financial reporting as of December31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of Insys Therapeutics, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income,stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2015 and our report dated February 26, 2016expressed an unqualified opinion thereon. /s/ BDO USA, LLP Phoenix, ArizonaFebruary 26, 2016 97 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, 2015 in connection with our 2016 Annual Meeting of Stockholders, or the 2016 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 managementteam, such as our Chief Executive Officer and Chief Financial Officer. This Code of Business Conduct and Ethics is posted on our website atwww.insysrx.com. We intend to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisionsof the Code of Business Conduct and Ethics by posting such information on our website. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be included in the 2016 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS MANAGEMENT AND RELATED STOCKHOLDERMATTERS The information required by this Item will be included in the 2016 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 2016 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 2016 Proxy Statement and is incorporated herein by reference. 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 filedas a part of this Annual Report. (2)Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable orrequired or is 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 byreference, as indicated in the following list. Those exhibits marked with a (+) refer to management contracts or compensatory plans orarrangements. Portions of 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. 98 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 (19) 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+ Employment Agreement by and between the Registrant and Darryl Baker dated April 18, 2013 (12) 10.8Ω Softgel Commercial Manufacturing and Packaging Agreement dated as of March 21, 2011 by and between the Registrant and CatalentPharma Solutions, LLC (13) 10.9Ω First Amendment to Softgel Commercial Manufacturing and Packaging Agreement dated as of March 5, 2012 by and between theRegistrant and Catalent Pharma Solutions, LLC (14) 10.10Ω Manufacturing Agreement dated as of March 7, 2011 by and between the Registrant and DPT Lakewood, LLC (15) 99 10.11Ω Letter Agreement dated April 23, 2012, amending the DPT Lakewood, LLC Manufacturing Agreement dated as of March 7, 2011 (16) 10.12Ω* Amended and Restated Supply, Development & Exclusive Licensing Agreement dated as of October 30, 2015 by and between theRegistrant and AptarGroup, Inc. 10.15+ Non-Employee Director Compensation Policy (17) 10.16+ Employment Offer Statement effective January 31, 2014 by and between Registrant and Franc Del Fosse. (18) 10.18+ Separation Agreement dated November 4, 2015 between the Registrant and Michael L. Babich (20) 10.19+ Employment Offer Statement and Agreement effective October 20, 2015 by and between the Registrant and Dan Brennan (21) 21.1* Subsidiaries of the Registrant 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) 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 for the quarterly period ended June 30, 2014. (3)Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC 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. 100 (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 10.8 to the Company’s Form S-1 Registration Statement (No. 333-173154) on April 25, 2013. (13)Previously filed as Exhibit 10.12 to the Company’s Form S-1 Registration Statement (No. 333-173154) on July 15, 2011. (14)Previously filed as Exhibit 10.13 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (15)Previously filed as Exhibit 10.16 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (16)Previously filed as Exhibit 10.17 to the Company’s Form S-1 Registration Statement (No. 333-173154) on February 27, 2013. (17)Previously filed as Exhibit 10.22 to the Company’s Form S-1 Registration Statement (No. 333-173154) on April 15, 2013. (18)Previously filed as 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014. (19)Previously filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (20)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (21)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 101 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 onits behalf by the undersigned, thereunto duly authorized on February 26, 2016. Insys Therapeutics, Inc. By/s/ Dr. John N. Kapoor Dr. John N. Kapoor President and Chief Executive Officer (Principal Executive Officer) By/s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 102 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Darryl S. Baker and FrancDel Fosse, jointly and severally, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to thisAnnual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and ExchangeCommission, 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 byvirtue 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 followingpersons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dr. John N. Kapoor Dr. John N. Kapoor President, Chief Executive Officer February 26, 2016 and Director /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer February 26, 2016 /s/ Patrick P. Fourteau Patrick P. Fourteau Director February 26, 2016 /s/ Steven Meyer Steven Meyer Director February 26, 2016 /s/ Brian Tambi Brian Tambi Director February 26, 2016 /s/ Pierre Lapalme Pierre Lapalme Director February 26, 2016 /s/ Theodore H. Stanley, M.D. Theodore H. Stanley, M.D. Director February 26, 2016 103 Exhibit 10.12 ***Text Omitted and Filed Separatelywith the Securities and Exchange Commission.Confidential Treatment RequestedUnder 17 C.F.R. Sections 200.80(b)(4)and 240.24b-2. AMENDED AND RESTATED SUPPLY, DEVELOPMENT & EXCLUSIVE LICENSING AGREEMENT This AMENDED AND RESTATED SUPPLY, DEVELOPMENT & EXCLUSIVE LICENSING AGREEMENT (the “Agreement”), effective as ofOctober 30, 2015 (the “Effective Date”), is made and entered into by and between Insys Therapeutics, Inc., a Delaware corporation having its principalplace of business at 1333 S. Spectrum Blvd., Suite 100, Chandler, AZ 85286 (hereinafter called “PURCHASER”) and Aptargroup, Inc., a Delawarecorporation having its principal place of business at 475 West Terra Cotta, Suite E, Crystal Lake, IL, 60014-9695 (hereinafter called “SELLER”).PURCHASER and SELLER being hereinafter called individually the “Party” and collectively the “Parties”. WHEREAS, SELLER is engaged in the development and manufacture of dispensing systems for medical use, with particular reference to sublingualspray devices; WHEREAS, PURCHASER desires to purchase the Device (defined below) for Purchaser’s own use with Drug Product and New Molecules (each asdefined below), subject to the terms and conditions herein; and WHEREAS, SELLER desires to sell the Device to PURCHASER subject to the terms and conditions herein; and WHEREAS, the Parties entered into that certain Supply Agreement, dated as of March 7, 2011 (the “Original Agreement”), for the supply of the OriginalDevice (as defined below, but noting that under the terms of the Original Agreement, the Original Device was referred to as the Device) and now wish toamend and restate the terms of the Original Agreement as set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Parties agree as follows: 1.DEFINITIONS As used herein, the following terms and expressions shall have the meanings set forth below: 1.1“Aesthetic” means any combination of outer shape and color of the Device. 1.2“Affiliate” means any person or entity that directly or indirectly through one or more intermediaries’ Controls, is Controlled by, or isunder common Control with a Party, where “Control” means the direct or indirect, legal or beneficial ownership of more than fiftypercent (50%) of the outstanding voting rights in a company. 1.3“cGMP” means the current good manufacturing practices stipulated or promulgated from time to time by the Regulatory Authoritiesthat are applicable to the manufacture of the Device.  1.4“Development Activities” means all research and development activities related to the development of a drug (including alternativedelivery systems) through preclinical and clinical stages. 1.5“Device” means, as context requires, the Original Device or any New Device. 1.6“Device Equipment” means the moulds and assembly machines required at SELLER’s premises to manufacture the Device incommercial quantities. 1.7“Device Specifications” means, for each Device, the applicable Device’s specifications as described in Exhibit A. 1.8“Drug Product” means the sublingual formulation of Fentanyl owned by PURCHASER and currently known as “Fentanyl SL,”regardless of the approved indication. 1.9“Effective Date” means the day inserted on the introductory clause of this Agreement. 1.10“FDA Approval” means the approval of the new drug application (NDA) for the Finished Product by the Food and Drug Administrationin the United States of America (FDA). 1.11“Fentanyl” means the compound with molecular formula C22H28N20 and IUPAC name N-(1-2-phenlyethyl)-4-piperidinyl)-N-phenylpropanamide. 1.12“Finished Product” means (a) the Drug Product in conjunction with the Original Device or a New Device or (b) a New Molecule inconjunction with the Original Device or a New Device. 1.13“Intellectual Property” means all present and future intellectual property rights and information, material and trade secrets that relate tothe Device or the Drug Product, as the case may be, whether or not patentable, including any know-how. 1.14“Marketing Approval” means, with respect to any country, the approval of any marketing application for the Finished Product by theappropriate Regulatory Authority in such country, including (a) FDA Approval, (b) approval of a marketing authorization applicationby the EU Medicines Agency and (c) approval of other product registration application with respect to any other territory. 1.15“Minimum Quantity” shall have the meaning set forth in Section 4.6. 1.16“Net Sales Revenue” means […***…]. 1.17“New Device” means any new device developed by the Seller or jointly by the Parties working together for supply by SELLER toPURCHASER pursuant to this Agreement, but specifically excluding an Off-The-Shelf-Device. ***Confidential Treatment Requested 2 1.18“New Molecule” means drug product other than the Drug Product, as provided for and specifically defined in Exhibit D. 1.19“Off-The-Shelf-Device” means any device for sublingual application of liquid formulations of drug products that is or was available for“off the shelf” purchase by third parties or is otherwise generally commercially available, including those “off the shelf” productsoffered by Seller. 1.20“Original Device” means the Device set forth in the Device Specifications as of the Effective Date (which, for the avoidance of doubt, isfor use with the Drug Product and is not an Off-The-Shelf-Device). 1.21“Purchase Price” shall have the meaning set forth in Exhibit C. 1.22“Purchaser Owned Device Equipment” shall have the meaning set forth in Section 2.2. 1.23“Regulatory Authority” or “Regulatory Authorities” means the United States Food and Drug Administration and any divisions thereof,any equivalent agency of any other country and any division thereof, and any other applicable regulatory body. 1.24“Relevant Affiliates” means any of PURCHASER’s subsidiaries or entities formed or organized by PURCHASER within its corporatestructure or for the purpose of operating a similar business. 1.25“Royalties” shall have the meaning set forth in Section 3.4. 1.26“Seller Owned Device Equipment” shall have the meaning set forth in Section 2.2. 1.27“Sublingual Drug(s)” means Fentanyl and other New Molecules listed in Exhibit D which PURCHASER is intending to deliver bysublingual route. 2.MANUFACTURE AND SALE 2.1Supply and Purchase Obligations. SELLER agrees to manufacture and sell to PURCHASER, and PURCHASER agrees to purchase fromSELLER, such quantities of the Device as PURCHASER may order from SELLER in accordance with the terms and conditions of thisAgreement. The Parties acknowledge that SELLER is developing tooling to produce certain plungers that may be used for the Devices.SELLER shall use commercially reasonable efforts to assist PURCHASER in securing Regulatory Authority approval or validation to usesuch plungers in Finished Products. In the event that PURCHASER achieves Regulatory Authority approval or validation for use of theplunger in a Finished Product then SELLER agrees to use commercially reasonable efforts to supply the plungers upon materially equalpricing and other material terms consistent with other plunger suppliers that PURCHASER currently has at that time and consistent withPURCHASER’s specifications. In the event that SELLER is able to supply plungers on pricing and other material terms that are materiallyequal to or better than PURCHASER’s current suppliers and subject to any existing contractual relationship that PURCHASER has as ofthe Effective Date, then PURCHASER agrees to enter into a purchase arrangement with SELLER that provides for PURCHASER topurchase approximately […***…] percent ([…***…]%) (and in no case any less than [...***...] percent ([...***...]%) of PURCHASER’sand its Relevant Affiliates’ requirements of plungers for use in Finished Products. ***Confidential Treatment Requested 32 2.2Device Equipment. Seller will utilize Device Equipment for the manufacture of the Device. Commencing as of [...***...] (and including anypurchase orders paid by PURCHASER in […***…] for Device Equipment), ownership of Device Equipment that PURCHASER has paidfor pursuant to all purchase orders issued by SELLER in connection with such Device Equipment (“Purchaser Owned Device Equipment”),shall remain with PURCHASER. Ownership of Device Equipment other than Purchaser Owned Device Equipment shall remain withSELLER (“Seller Owned Device Equipment”). In case PURCHASER wants to obtain ownership of Seller Owned Device Equipment,PURCHASER shall purchase from SELLER such Seller Owned Device Equipment at a price to be agreed between Parties and payapplicable sales taxes (including any applicable VAT and excluding, for clarity, income taxes payable by SELLER) at the time of transferof ownership. No such purchase shall occur without SELLER’s prior written consent. In no case shall Device Equipment, regardless ofownership, leave SELLER’s premises or the premises of SELLER’s approved subcontractors and at all times during the Term SELLER shallmaintain customary and standard insurance in connection with the housing of such Device Equipment (with PURCHASER as a namedbeneficiary for Purchaser Owned Device Equipment). SELLER agrees that the Purchaser Owned Device Equipment shall not be used for theproduction of devices not to be sold to PURCHASER without PURCHASER’s written consent, but in no case for products competitive withPURCHASER’s product (i.e., the Finished Product). The Parties acknowledge and agree that, (a) as of the Effective Date, the DeviceEquipment for the manufacture of the Original Device is located on the premises of SELLER and (b) depending on the development ofNew Devices or the selection of New Molecules, additional Device Equipment may need to be developed or procured and the terms of suchdevelopment or procurement shall be set forth in a separate agreement between the Parties. Except as otherwise agreed to by the Parties,PURCHASER shall be responsible for all costs of developing or procuring such additional Device Equipment. Any additional DeviceEquipment PURCHASER agrees to procure and fully purchase in connection with this Agreement shall be owned by PURCHASER, butsuch additional Purchaser Owned Device Equipment shall remain at SELLER’s facility. 2.3cGMP Compliance. SELLER shall develop, manufacture, assemble and package the Device in accordance with the Device Specificationsand applicable cGMP. 2.4Intellectual Property. Any existing Intellectual Property owned or controlled as of the Effective Date (“Background IP”) by PURCHASER,SELLER, or their Affiliates shall remain their separate and absolute unencumbered property and any improvements or continuations inpart to Background IP shall be owned by the same Party who owned such Background IP regardless of which Party invented or createdsuch improvement. In connection with this Agreement and other than improvements and continuations in part to Background IP, eachParty shall be the owner of any Intellectual Property its personnel or agents invents or creates as a matter of law under applicableintellectual property laws. If the Parties have jointly created any new Intellectual Property then the Parties shall jointly own suchIntellectual Property. PURCHASER shall own all arising Intellectual Property rights related to the Drug Product and any New Molecules itinvents or creates in connection with this Agreement and any devices it invents or creates other than a Device (and, for clarity, withoutusing any of SELLER’s Intellectual Property or confidential information). SELLER shall own all arising Intellectual Property rights relatedto the Device (which, for clarity, could include any New Devices). ***Confidential Treatment Requested 4 2.5License Grant; Prosecution, Maintenance and Defense. SELLER grants PURCHASER a license to the applicable Intellectual Propertyowned by SELLER in accordance with the terms of Exhibit D and the royalty payment hereunder. For the sake of clarity, PURCHASERdoes not grant any license to SELLER with respect to PURCHASER’s Intellectual Property. SELLER reserves the right to prosecute,maintain and defend SELLER’s Intellectual Property, at SELLER’s discretion and expense. If SELLER elects not to pursue the filing,prosecution, or maintenance of any of its Intellectual Property used in a Finished Product marketed and sold by PURCHASER inconnection with this Agreement, then SELLER shall notify PURCHASER promptly in writing and in reasonable time to enablePURCHASER to meet any deadlines by which an action must be taken to establish or preserve any such Intellectual Property. Uponreceipt of each such notice from SELLER, PURCHASER shall have the right, but not the obligation, to pursue the filing or support thecontinued prosecution or maintenance of such Intellectual Property, at PURCHASER’S expense. If, after such process, it is determined byPURCHASER that a suit should be filed against a third party infringer and PURCHASER files such suit or commences settlementnegotiations forthwith against such infringer, then any damages or other recovery from such infringement action undertaken byPURCHASER shall first be used to reimburse the Parties for their respective costs and expenses specifically incurred in such action, andshall thereafter be allocated between the Parties as follows: (i) [...***...] percent ([…***…]%) to PURCHASER and (ii) […***…] percent([…***…]%) to SELLER. For the avoidance of doubt, the preceding sentence is not intended to result in multiple Royalties being paidon the sale of one Finished Product or on the waiver of Royalties being paid on the sale of any Finished Product. Notwithstandinganything else in this Agreement, if SELLER ever assumes the responsibility for any action to enforce or protect its own IntellectualProperty in no event shall PURCHASER be required to reimburse SELLER for its costs and expense in connection with such assumption. 3.EXCLUSIVITY, LICENSING, AND ROYALTY 3.1SELLER hereby agrees to supply the Device to PURCHASER on an exclusive basis, and PURCHASER agrees to purchase all of its and itsRelevant Affiliates’ requirements for sublingual spray devices from SELLER, as per the conditions and limitations set forth in Exhibit D. 3.2The SELLER agrees that, in addition to the Exclusivity set forth in Exhibit D, the PURCHASER has Aestheticexclusivity to the Device. 3.3The exclusivity rights granted to PURCHASER hereunder shall be valid for the duration of the ExclusivityTerm (as defined in Exhibit D); provided, that, should the Exclusivity Term end, PURCHASER shall have theright to sell any product purchased under this Agreement (or otherwise from SELLER) until its inventory iscompletely exhausted. ***Confidential Treatment Requested 5 3.4For any sales occurring on March 1, 2016 or thereafter during the Exclusivity Term, and as furtherconsideration for the exclusive rights granted under this Agreement (including the Exclusivity), PURCHASERshall pay to Seller “Royalties” as set forth below. 3.4.1 Royalties on Finished Product comprised of a Device with the Drug Product shall be based upon NetSales Revenue, if any, calculated in accordance with the following:(i) [...***...]% on the first […***…] US dollars ($[…***…]) in Net Sales Revenue;(ii) […***…]% on that portion of Net Sales Revenue which is greater than […***…] USdollars ($[…***…]) but less than or equal to […***…] US dollars ($[…***…); and(iii) […***…]% on Net Sales Revenue which is greater than […***…] US dollars ($[…***…]). 3.4.2 Royalties on Finished Products other than those described in Section 3.4.1 shall be based upon NetSales Revenue, if any, calculated in accordance with the following:(i) […***…]% on the first […***…] US dollars ($[…***…]) in Net Sales Revenue;(ii) […***…]% on that portion of Net Sales Revenue which is greater than […***…] USdollars ($[…***…]) but less than or equal to […***…] US dollars ($[…***…]); and(iii) […***…]% on Net Sales Revenue which is greater than […***…] US dollars ($[…***…]). 3.4.3 For purposes of Royalties, every sale of an applicable Finished Product shall be deemed to have beenmade on the date on which the PURCHASER first recognizes such Net Sales Revenue on its quarterly and annual financialstatements filed with the Securities and Exchange Commission. Both Parties shall use good faith in connection with thecalculation of Net Sales Revenue and Royalties and disputes related thereto. Additional terms for the payment of Royaltiesare set forth in Exhibit E. For […***…], PURCHASER shall provide a pro-rated Royalty calculated by taking the Net SalesRevenue for the […***…] (as reflected in PURCHASER’s Annual Report on Form 10-K) and dividing by […***…]. 4.FORECASTS, ORDERS AND DELIVERY 4.1Estimates and Forecasts. On the first day of each calendar quarter, PURCHASER shall provide SELLER a written rolling forecast ofpurchases of the Device for the […***…] months following the calendar quarter in which such forecast is submitted (the “Forecast”). TheForecast shall specify the desired delivery dates for each month submitted. PURCHASER shall use its best efforts to assure that eachForecast is accurate, provided however, that the Parties agree that such Forecast (other than the quantities set forth in the Purchase Order)shall not constitute an obligation of PURCHASER to purchase the estimated quantities contained in the Forecast. SELLER may chargePURCHASER for otherwise un-reimbursed charges incurred due to reasonable commitments made by SELLER to suppliers based on thefirst [...***...] months of each Forecast where such commitments cannot be reallocated to subsequent months of the Forecast withoutmaterial costs being incurred by SELLER. SELLER shall keep PURCHASER reasonably apprised of material costs it is incurring onPURCHASER’s behalf in the context of Forecasts. PURCHASER agrees that the first […***…] months of each Forecast shall be a firmpurchase order of the Device by PURCHASER for which SELLER is authorized to commence production, and which PURCHASER shallpurchase (the “Purchase Order”). For the avoidance of doubt, when New Devices are added to this Agreement, they will be included in eachsubsequent Forecast and Purchase Order. ***Confidential Treatment Requested 6 4.2Delivery. Subject to Section 4.7 below, SELLER shall manufacture, package and deliver ordered quantities of the Device as long as suchorders are within the scope of confirmed Purchase Orders. SELLER shall promptly notify PURCHASER if it will be unable to deliver anypart of an order exceeding the quantities set forth on the confirmation of the Purchase Order. SELLER shall not be obligated to supply inany month any quantity of the Device exceeding […***…] percent ([…***…]%) of the Purchase Order, and PURCHASER shall purchaseat least […***…] percent ([…***…]%) of the quantities set forth in the Purchase Order. SELLER will use its reasonable commercial effortsto deliver the Device within the time schedule set forth in the confirmation of the Purchase Order. 4.3Terms of Delivery. Unless otherwise specified in the Purchase Order, shipment of the Device to PURCHASER shall be via truck, and shallbe delivered DDP Lakewood, NJ (INCOTERMS 2010). In the event PURCHASER requests SELLER to transport the Device toPURCHASER via air, PURCHASER shall bear all additional costs of such air transportation. SELLER shall arrange for transportation of theDevice by insured common carrier, or SELLER’s truck to PURCHASER’s specified plant or other designated destination in the UnitedStates of America. In the event PURCHASER requires delivery to destination outside the United States of America, new delivery termsshall be negotiated. The Purchase Price for the Device is based on DDP Lakewood, NJ (INCOTERMS 2010). 4.4Shipment. SELLER shall ship the Device in multiples of full production lots, as defined in Exhibit C. SELLER shall deliver with each lot aCertificate of Analysis substantially in the form attached hereto as Exhibit B. SELLER will promptly notify PURCHASER of anyanticipated delay with respect to a shipment of the Device. Unless otherwise expressly agreed to by the Parties in writing, SELLER may notmake partial shipments of product to PURCHASER. 4.5Transfer of Title and Risk of Loss. Title and risk of loss to product shipped under any Purchase Order (or otherwise by SELLER) passes toPURCHASER upon delivery of the SELLER’s product at the delivery point designated by the Parties. ***Confidential Treatment Requested 7 4.6Minimum Quantity. Commencing on […***…], PURCHASER agrees to purchase the minimum volume of Devices from SELLER as setforth below (each such amount, the “Minimum Quantity”): From […***…] through […***…], PURCHASER commits to purchase a minimum of […***…] total units (in the aggregate for combinedpurchase in those […***…]) but no less than […***…] units in any […***…]. The table below designates the individual MinimumQuantity for each […***…]. […***…][…***…][…***…] Unit-Dose Devices[…***…][…***…][…***…]Multi-Dose Devices[…***…][…***…][…***…] For clarity, the Minimum Quantity for […***…] through […***…] refers to […***…] units during such […***…] period (and for theavoidance of doubt, does not refer to […***…] units per […***…]) and Minimum Quantity for […***…] refers to the quantities set forthin the table above for each such […***…]. For purposes of this Agreement, a Unit-Dose Device is a Device that is able to deliver one or twodoses of liquid formulation of drug product sublingually. In the event that PURCHASER fails to purchase the number of Devices set forth in Minimum Quantity during the applicable period inwhich SELLER was ready, willing and able to deliver the designated number of Devices, then PURCHASER shall pay SELLER […***…]($[…***…]) for each Device that would have been purchased had PURCHASER adhered to the Minimum Quantity (i.e., if the product oftaking the Minimum Quantity and subtracting the amount of Devices purchased by PURCHASER in the applicable period equals a positivenumber, then that number shall be multiplied by […***…]). The foregoing consequence (and remedy for SELLER) is the sole consequenceand remedy for a failure by PURCHASER to meet the Minimum Quantity. Notwithstanding anything to the contrary in this Agreement, the Minimum Quantity (and payment for failure to meet such MinimumQuantity) set forth above shall be subject to adjustment as follows: (i) If the FDA approves for marketing, a generic version of any of the Finished Products, then, at PURCHASER’s option, the Parties shallnegotiate in good faith a reduction of the Minimum Quantity for the applicable period during which such generic version becomescommercially available and each subsequent period in order to provide relief to PURCHASER with respect to the anticipated impact of suchgeneric version on the Finished Products' market share and/or net wholesale price; (ii) If SELLER, for any reason not excused by this Agreement, fails to timely ship to PURCHASER conforming Devices ordered byPURCHASER in accordance with the terms and conditions herein, the number of Devices that SELLER failed to timely ship shall bedeemed a credit against the Minimum Quantity for such period; ***Confidential Treatment Requested 8 (iii) If there shall be a recall of any of the Finished Products (and such recall is reasonably determined by to be caused in whole or insubstantial part by SELLER) during the Term, the Minimum Quantity for the period(s) during which such recall occurs shall be reduced bythe number of Devices affected by such recall; (iv) If PURCHASER experiences a significant regulatory event, which is not caused by PURCHASER’s acts or omissions, and such eventmaterially and adversely affects the ability to sell Finished Product, then the Parties shall negotiate in good faith a reduction of theMinimum Quantity for the applicable period during which such significant regulatory event has a material adverse effect on the sales ofFinished Product; (v) If, by [...***...], PURCHASER has not received FDA approval for either (i) an expansion of the Finished Product incorporating the DrugProduct for a future indication not on the COMPANY’s current label for the SUBSYS® brand or (ii) an additional approval for a sublingualspray device utilizing a New Molecule, then the Parties shall negotiate in good faith a reduction of the Minimum Quantity for theapplicable period(s) to provide relief to PURCHASER with respect to the anticipated impact on demand for PURCHASER’S products basedupon the non-expansion event; (vi) If PURCHASER experiences a significant reduction in insurance coverage that materially and adversely affects for the reimbursementand coverage landscape for the Finished Product incorporating the Drug Product marketed under the SUBSYS® brand then the Parties shallnegotiate in good faith a reduction of the Minimum Quantity for the applicable period(s) to provide relief to PURCHASER with respect tothe anticipated impact of such event on the Finished Products' market share and/or net wholesale price; and (vii) If this Agreement is properly terminated prior to the expiration of the applicable Term, the Minimum Quantity for the period duringwhich such termination occurs shall be prorated accordingly and the remaining requirements for future periods shall be null and void. 4.7SELLER’s Capacity Obligations. Contingent upon PURCHASER and SELLER not having any unresolved disputes regarding the need forPURCHASER to invest in adequate tooling and manufacturing equipment, including additional Device Equipment as contemplated bySection 2.2, in a timely manner on terms agreed to by the Parties, SELLER shall have Devices in sufficient capacity to support sales toPURCHASER as set forth below (unless such amounts are less than the capacity planning forecasts issued by PURCHASER that SELLERhas explicitly accepted in writing (pursuant to the paragraph below the table in this Section 4.7), in which case SELLER has accepted theobligation to meet the higher capacity planning forecasts): […***…][…***…][…***…][…***…][…***…][…***…]TOTAL DEVICES NEEDED[…***…][…***…][…***…][…***…][…***…][…***…]Unit-Dose Devices[…***…][…***…][…***…][…***…][…***…][…***…]Multi-Dose Devices[…***…][…***…][…***…][…***…][…***…][…***…] 9 ***Confidential Treatment Requested Separate from the Forecast as discussed in Section 4.1 above and solely for capacity planning purposes, PURCHASER will provide [] anestimate of capacity needs to SELLER which SELLER shall explicitly accept in writing once agreed to. The Parties shall work together todevise such capacity planning estimate in a manner that best fits the purpose of the foregoing requirement. 5.PRICES AND PAYMENT 5.1Purchase Price. The Purchase Price for the Device is set forth in Exhibit C. 5.2Payment for the Device. Payment related to the Device shall be made in full within […***…] days of the date of SELLER’s invoice, unlessPurchaser disputes such invoice in good faith (in which case only the disputed portion of such invoice may be withheld and only untilsuch dispute is resolved). SELLER shall date and send invoices for the Device upon shipment of the Device. 5.3Taxes. The Purchase Price for the Device does not include any property, license, privilege, sales, service, use, excise, value added, grossreceipts, or other like taxes. PURCHASER agrees to pay or reimburse SELLER for any such taxes that SELLER is required to pay or collector that are required to be withheld. 5.4Currency. All payments hereunder shall be made in United States Dollars (USD). 5.5Interest. If PURCHASER fails to pay the full invoiced amount for the Device, or any part thereof, within […***…] days after the due date,SELLER shall be entitled (without prejudice to any other right or remedy it may have whether under the terms of this Agreement orotherwise) to charge, in addition to any monies due hereunder, interest on the outstanding amount at the rate of […***…]% per month orthe highest applicable rate allowed by law, whichever is less, calculated on a daily basis from such due date until the date actual payment ismade. 5.6Price Revision Due to Changes in Device Specifications. 5.6.1 By PURCHASER. PURCHASER may request a change, in writing, to the Device Specifications, the manufacturing procedures or control procedures. SELLERwill use commercially reasonable efforts to implement the change subject to pricing adjustments, which will be negotiated in good faith bySELLER and PURCHASER. 5.6.2 By SELLER. SELLER will notify PURCHASER in writing prior to implementing any change affecting the chemical, biological or physical aspects ofthe Device. SELLER will not make any changes to the Device Specifications without PURCHASER’s prior written consent which shall notbe unreasonably withheld or delayed. SELLER will implement the change subject to pricing adjustments, which will be negotiated ingood faith by SELLER and PURCHASER. 5.6.3 By Regulatory Authorities. In the event of changes required by cGMP’s or other applicable laws or regulations, or in the requirements for the Device, whether writtenor un-written, by the Regulatory Authorities, SELLER shall have the right to adjust the Purchase Price, such adjustment being negotiatedin good faith by SELLER and PURCHASER. ***Confidential Treatment Requested 1010 6.REGULATORY RESPONSIBILITY 6.1 Regulatory Responsibility. SELLER shall be responsible, at its sole expense, for complying with applicable regulatory requirementsrelating to the development, qualification and manufacture of the Device as applicable in SELLER’ s facilities where the Device isdeveloped, designed, manufactured and, shall use commercially reasonable efforts to perform all of its responsibilities and obligations,including applicable design, development, manufacture, testing, quality control and documentation activities relating to the Device underor contemplated by this Agreement substantially in accordance with all relevant quality standards that must be met to secure regulatoryapproval worldwide. PURCHASER shall be responsible, at its sole expense, for complying with all other applicable regulatory requirements relating to its use,promotion, sale and resale of the Finished Product. 6.2 Import and Export Laws. PURCHASER shall comply, at its sole expense, with all export and import regulations and laws necessary toexport and import components of the Device to and from PURCHASER’s premises, including without limitation, procuring andmaintaining all import and export licenses necessary to ship from the point of manufacture to PURCHASER’s premises in accordanceherewith and the payment of all duties, tariffs, surcharges and other customs and other governmental fees levied in connection with theexportation and importation of components of the Device from SELLER to PURCHASER’s premises, or such other location as designatedby PURCHASER. 7.QUALITY CONTROL REQUIREMENTS 7.1Quality. 7.1.1The Parties shall agree upon reasonable release tests to be performed by SELLER prior to shipment of the Device in accordancewith applicable regulatory requirements and subject to pricing conditions. Results of such testing will be supplied in theCertificate of Analysis with each shipment as seen in Exhibit B. 7.1.2PURCHASER shall send prior written notice of any change requested to be made to Drug Product being delivered by the Devicethat PURCHASER suspects may affect the Device Specifications. 7.1.3Notwithstanding any provision to the contrary in this Agreement, SELLER shall not assign or otherwise delegate any of itsobligations to ensure the Device’s quality or compliance with Device Specifications to any third party other than an Affiliatewithout consent from the PURCHASER. ***Confidential Treatment Requested 11 7.2PURCHASER’s Inspections. 7.2.1The Device shall be subjected to a quality control inspection by PURCHASER in accordance with the Device Specifications setforth in Exhibit A, within […***…] days as from delivery of the Device to the location designated by PURCHASER in theapplicable Purchase Order. 7.2.2Upon reasonable prior notice, SELLER shall permit PURCHASER to review SELLER’ s quality control procedures and recordsrelated to the Device for the purpose of assuring satisfactory compliance with the Device Specifications and compliance with theprovisions of the Quality Agreement. That review shall be conducted in a reasonable manner, during SELLER’s business hours,in the presence of a SELLER representative and at PURCHASER’s own expense. 7.2.3Upon reasonable prior notice, SELLER must permit PURCHASER’s quality assurance personnel to visit SELLER’s productionfacility, to the extent that such visit is reasonably required to assure compliance with regulatory requirements or to the extent areview of records alone is not adequate to assure satisfaction with such quality control requirements. Such visit shall beconducted in a reasonable manner, during SELLER’s business hours, in the presence of a SELLER representative, atPURCHASER’s own expense and shall be limited to the equipment, records or production actually used in the manufacture ofthe Device. 7.2.4SELLER shall (i) participate and cooperate with PURCHASER’s personnel who may visit SELLER’s production facility asprovided in this Section 7, (ii) take corrective action in a timely manner as may be reasonably required by PURCHASER tocomply with the provisions of this Agreement and with cGMP requirements when applicable, subject to pricing conditions inSection 5 and Exhibit C, and (iii) when requested by PURCHASER, describe in writing, any appropriate corrective actionplanned or taken. 7.3Regulatory Inspections. 7.3.1In the event that any of SELLER’s products, facilities and/or processes that are used for the manufacture of the Device are thesubject of an inspection by any Regulatory Authority or any other duly authorized agency of any national, state, or localgovernment, SELLER shall promptly notify PURCHASER of such inspection and shall supply PURCHASER with copies of anycorrespondence or portions of correspondence that relate to the Device, as well as SELLER’s proposed response, if any. 7.3.2In the event that any of PURCHASER’s facilities that are used for the storage of the Device or the manufacturing of the FinishedProduct are the subject of an inspection by any Regulatory Authority or any other duly authorized agency of any national, state,or local government, PURCHASER shall promptly notify SELLER of such inspection to the extent such inspection is reasonablydetermined by PURCHASER to relate to SELLER’s work under this Agreement and shall supply SELLER with copies of anycorrespondence or portions of correspondence that relate to the Device, as well as PURCHASER’s proposed response, if any. ***Confidential Treatment Requested 12 7.3.3In the event that either Party receives any written communications from any Regulatory Authority in connection with thedevelopment, design, manufacture, use, or sale of the Device, it shall provide the other Party with a copy of each suchcommunication and the proposed response, if any. 7.3.4Records. SELLER shall retain samples of the Device, batch and other manufacturing and analytical records, records of shipmentsof the Device and validation data relating to the Device for a minimum of [] years and shall make such data available toPURCHASER and Regulatory Authorities upon PURCHASER’s reasonable request or if required by law. 8.REJECTION 8.1General. In the event that any portion of the Device delivered to PURCHASER by SELLER shall fail to conform with the DeviceSpecifications, PURCHASER may reject that portion or the complete lot by giving written notice within […***…] days following receiptof Products and sending, at SELLER’ s expense, the defective samples to SELLER after SELLER’s acceptance of rejection. 8.2Unattributed Defects. In case the Device does not comply with the Device Specifications due to hidden or latent defects that were notnoticeable at the time of inspection by PURCHASER pursuant to Section 8.1, PURCHASER shall immediately inform SELLER of itsclaims in this respect, at the latest within the later period of […***…] days following the discovery of the defect or any third party orregulatory claim or liability arising from the defect. Failing any claims within […***…] days in this respect, it shall not be possible toengage SELLER’s liability. Notwithstanding the foregoing, SELLER shall not be liable for any defect appearing more than […***…]months after the Device (stored and handled in accordance with commercially reasonable standards) is received at PURCHASER’spremises. 8.3Claims. Any and all claims shall be substantiated and explained in reasonable detail as to the nature of the defects or failure of the Deviceto comply with the Device Specifications. PURCHASER shall reasonably provide SELLER with any and all substantiation regarding thereality of the anomalies recorded, notably with defective samples and shall ensure that SELLER has reasonable means of confirming theexistence of such anomalies. 8.4Rejected Device. If PURCHASER rejects the Device in accordance with this Section 8, then, at SELLER’s expense and discretion,PURCHASER shall return to SELLER any such shipment, or any part thereof, that does not comply with the Device Specifications, andreceive in exchange therefore at the option of PURCHASER, either (i) a complete refund of the Purchase Price, taxes paid and notrecoverable, and shipping costs associated with the Device in form of a credit note, or (ii) fully compliant replacement Device(s). If theParties so agree, PURCHASER shall destroy any non-conforming Device, at SELLER’s expense and in accordance with all applicablelegal requirements. While SELLER is investigating the rejection, payments of purchased goods subject to such rejection shall be put onhold until claim response is given. ***Confidential Treatment Requested 1312 8.5Disputes. If SELLER disputes PURCHASER’s rejection, the Parties shall submit samples of the rejected Device to a mutually acceptableindependent laboratory for analysis, whose decision in the matter shall be final and binding. The costs of such analysis shall be borne bySELLER unless such analysis shows that the Device conforms to the Device Specifications, in which case PURCHASER shall bear the costof such analysis. 9.WARRANTY 9.1SELLER’s Warranty. SELLER warrants to PURCHASER that the Device (i) will conform in all respects to the Device Specifications andapplicable cGMP, (ii) will be free from defects, latent or otherwise, in design materials and workmanship; (iii) to the best of SELLER’sknowledge, does not infringe upon, violate or misappropriate the intellectual property of any other party, person or entity, (iv) willcomply with applicable laws with respect to SELLER’s manufacture of such Device, (v) will be new and, provided proper payment byPURCHASER, will be conveyed by SELLER to PURCHASER with good title, free and clear of all encumbrances or liens. If the SELLERfails to comply with the Device Specifications requirement and anything else in this warranty then the SELLER will fix the deficiencies ornon-conformance at its cost. Unless otherwise agreed upon by the Parties in writing, PURCHASER’s rights under this warranty areextended for a period of [] from and after the date of delivery of the Device to PURCHASER. For the avoidance of doubt, SELLER is notresponsible for normal wear and tear of any Device. 9.1.1Subject to the warranty provided by SELLER set forth in this Section 9, it is the responsibility ofPURCHASER to ensure that (i) the Device shipped from SELLER according to the DeviceSpecifications is adapted to the use which it is intended for, (ii) that the Device Specifications areadapted to the storage of the Device, (iii) that the Device is compatible with the Drug Product, and (iv)that the Drug Product and the Finished Product (other than the Device) comply with all applicablelaws. 9.1.2SELLER may, but is not required to, perform tests for compatibility between the Device and the DrugProduct. SELLER MAKES NO REPRESENTATION OR WARRANTY THAT ANY TESTSPERFORMED BY OR ON BEHALF OF SELLER ARE ADEQUATE OR SUFFICIENT FORPURCHASER’S PURPOSES. PURCHASER AGREES NOT TO HOLD SELLER RESPONSIBLE FORTHE ADEQUACY OR SUFFICIENCY OF SUCH TESTS, OR THE RESULTS DERIVED FROM SUCHTESTS. 9.2Exclusions. The warranty provided under Section 9.1 shall not apply to any Device that (i) has been tampered with or otherwise alteredby PURCHASER, its Affiliates or their customers, distributors, or agents; (ii) has been subjected to misuse, negligence, malice or accidentby PURCHASER, its Affiliates or their customers, distributors agents; or (iii) has been stored, handled or used by PURCHASER, itsAffiliates or their customers, distributors agents in a manner contrary to the Device Specifications and the Device Specifications orSELLER’s written instructions which can, among others, define maximum periods for the use of the Device. ***Confidential Treatment Requested 1413 9.3Limitations on Warranty. THE FOREGOING WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OFQUALITY AND PERFORMANCE, WRITTEN, ORAL OR IMPLIED, AND ALL OTHER WARRANTIES, INCLUDING, WITHOUTLIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT, ARE HEREBY DISCLAIMED BY SELLER. 9.4LIMITATION OF LIABILITY 9.4.1 No Consequential Damages. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL,INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, whether in warranty, contract, negligence, tort,strict liability, or otherwise including, but not limited to, loss of profits or revenue, delays, or claims of the otherparty’s or its Affiliates or other third parties for such or other damages. This limitation of liability shall not apply toclaims of liability for death or personal injury caused by either party’s gross negligence, willful act, or omission. 9.4.2 Limitation of Liability. Each Party’s cumulative liability to the other Party for all claims relating to theDevice and this Agreement, including any cause of action based on any theory of contract, tort, or strict liability,shall not exceed One Million US Dollars ($1,000,000). This limitation of liability shall not apply to claims ofliability for death or personal injury caused by either Party’s gross negligence, willful act, or omission. 10.INDEMNIFICATION 10.1SELLER. Subject to the liability limitations set forth in clause 9.4, SELLER shall defend, indemnify and hold PURCHASER and itsAffiliates, and their shareholders, directors, officers, employees and agents harmless from and against any and all liability, loss, damage,recalls, causes of action, suits, claims, demands, settlements, costs and expenses or judgments arising from injury or death to persons ordamage to property, of any nature whatsoever, resulting from the failure of the Device to conform to the warranty set forth under Section9.1 or any defect, failure to warn or other Device liability claims that are the result of SELLER’s negligence or intentional misconduct,except to the extent that PURCHASER is required to indemnify SELLER under Section 10.2 of this Agreement, provided thatPURCHASER shall have given prompt notice in writing to SELLER of any such claim. 10.2PURCHASER. PURCHASER shall defend, indemnify and hold SELLER and its Affiliates, their shareholders, directors, officers,employees and agents harmless from and against any and all liability, loss, damage, expense, causes of action, suits, claims, demands,settlements, costs and expenses or judgments of any nature whatsoever, resulting from the Finished Product or its marketing, sale, clinicaltesting, clinical use or other use or misuse, including any defect, failure to warn or other Device liability claims that are the result ofPURCHASER’s negligence or intentional misconduct, except to the extent SELLER is required to indemnify PURCHASER underSection 10.1 of this Agreement, provided that SELLER shall have given prompt notice in writing to PURCHASER of any such claim. ***Confidential Treatment Requested 15 10.3Insurance. Each of SELLER and PURCHASER will use its best efforts, by itself or through its Affiliates’ group insurance policies and atits sole cost and expense, to procure and maintain adequate General & Products Liability Insurance. In addition, SELLER will use its bestefforts, by itself or through its Affiliates’ group insurance policies and at its sole cost and expense, to procure and maintain adequateProperty All Risks Insurance in order to cover the value of the Device Equipment and any components thereof in SELLER’s possession orfor which SELLER bears the risk of loss. 11.REPRESENTATIONS 11.1 Each Party hereby represents and warrants that it has the full power and authority to enter into and perform this Agreement, and eachParty knows of no contract, agreement, promise, undertaking or other fact or circumstance that would prevent the full execution andperformance of this Agreement. 12.TERM AND TERMINATION 12.1 Term and Renewal. This Agreement shall, unless otherwise terminated, remain in full force and effect for a period of seven (7) years fromthe Effective Date (the “Initial Term”). Commencing upon the start of the sixth year of the Initial Term, the Parties agree to discuss ingood faith whether an extension of this Agreement is mutually desired and, if so, whether there should be modification to any terms. Theterm of this Agreement may be renewed for additional terms upon mutual written agreement by the Parties (any applicable extended term,a “Renewal Term” and collectively together with the Initial Term, the “Term”). If the Initial Term or any Renewal Term is renewed for anyRenewal Term(s) pursuant to this Section 12.1, the terms and conditions of this Agreement during each such Renewal Term will be thesame as the terms in effect immediately prior to such renewal unless modifications to the terms have been agreed to in writing by theParties. The Parties agree that, to the extent that applicable law in a country restricts the term of Exclusivity rights in such country to aperiod shorter than the Term or prohibits the Exclusivity rights from being renewed in accordance with this Section 12.1, thenPURCHASER shall either (a) defend, indemnify and hold harmless SELLER and its Affiliates from any losses suffered from anychallenges by third parties or governmental authorities based on antitrust or anti-competition laws or regulations or (b) elect thatExclusivity rights in such country shall terminate (i.e., convert to non-exclusive rights) immediately prior to the term permitted byapplicable law and, if permitted by law, the Parties may discuss in good faith whether to renew this Agreement in such country on similaror modified terms. Notwithstanding the foregoing, if, at any time during the Exclusivity Term, the Exclusivity rights granted toPURCHASER are challenged by a third party or governmental authority based on antitrust or anti-competition laws or regulations,notwithstanding anything to the contrary in this Agreement, the Parties shall use commercially reasonable efforts to cooperate on suchmatter. ***Confidential Treatment Requested 16 12.2Early Termination. Without prejudice to any other rights it may have hereunder or at law or in equity, either Party may terminate thisAgreement: 12.2.1 immediately if the other Party makes an assignment for the benefit of its creditors or a receiver orcustodian is appointed for it or its business is placed under attachment, garnishment or other process involving asignificant portion of its business; 12.2.2 after [] days written notice from the terminating Party specifying an alleged material breach(including payment breach) and stating its intent to so terminate, if the other Party fails to commence anddiligently pursue to remedy any such material breach of this Agreement; or 12.2.3 immediately if the other Party becomes insolvent, an order for relief is entered against the other Partyunder any bankruptcy or insolvency laws or laws of similar import. 12.3Effect of Termination. Neither termination nor non-renewal of this Agreement shall release either Party from fulfilling anyobligations it may have incurred prior to any such termination, nor prejudice any other rights or remedies that either Party mayhave at law or in equity. In case of early termination by PURCHASER not due to a breach by SELLER, PURCHASER will compensate SELLER forany costs directly related to the value of the goods or components already incurred by SELLER on the basis of the PurchaseOrders received from PURCHASER according to Section 4.1 above. PURCHASER will also compensate SELLER for anycosts associated with stock at SELLER’s or at SELLER’s sub suppliers, including, but not limited to, rubber stoppers, glassvials, and steel needles; provided SELLER and SELLER’s sub suppliers shall be obligated to take all commerciallyreasonable measures to mitigate the damages resulting from such remaining inventory. 12.4Surviving Clauses. Notwithstanding any termination, any provision set forth in this Agreement remainingto be performed in whole or in part, capable of taking effect following termination, or which by its natureis contemplated to survive the termination of this Agreement shall survive and continue in full force andeffect despite termination. 12.5Duty to Advise. SELLER shall promptly provide written notice to PURCHASER of any of the followingevents or occurrences, or any facts or circumstances reasonably likely to give rise to any of the followingevents or occurrences: (a) any failure by SELLER or its Affiliates to perform or comply with any of itsobligations under this Agreement including but not limited to the Exclusivity obligations; (b) any delayin delivery of Devices (or any other product to be delivered by SELLER to PURCHASER); (c) any defectsor quality problems relating to the Devices (or any other product to be delivered by SELLER toPURCHASER); (d) any deficiency in specifications, samples, prototypes or test results relating to thisAgreement; or (e) any failure by SELLER, or its subcontractors or common carriers, to comply withapplicable law directly or indirectly related to this Agreement. In addition, SELLER shall promptly notifyPURCHASER in writing of any material change in SELLER’s insurance coverage or professionalcertifications. ***Confidential Treatment Requested 17...***... 12.6Protection Against Supply Interruptions. SELLER shall, at its sole cost and expense, take such actions asare reasonably necessary or appropriate to ensure the uninterrupted supply of Devices (and such otherproducts to be delivered under this Agreement) to PURCHASER during any foreseeable or anticipatedevent or circumstance that could interrupt or delay SELLER’s performance under this Agreement. 13.MISCELLANEOUS 13.1Notices. All notices, requests, demands, waivers, consents, approvals or other communications to any Partyhereunder shall be in writing and shall be deemed to have been duly given if delivered personally to suchParty or sent to such Party by facsimile transmission, overnight courier or by registered or certified mail,postage prepaid, to the addresses set forth below (or to such other address as the addressee may havespecified in notice duly given to the sender as provided herein): If to SELLER:AptarGroup, Inc.475 West Terra Cotta, Suite ECrystal Lake, IL 60014-9695 USAAttn: Chief Operating OfficerPhone No.: (815) 477-0424Fax No.: (815) 477-0481 With cc to: Aptar Congers, a division of AptarGroup, Inc.250 North Route 303Congers, NJ 10920-1408 USAAttn: President, Aptar Pharma North AmericaPhone No.: (845) 639-3700Fax No: (845) 639-3900 If to PURCHASER:Name: INSYS Therapeutics, Inc.1333 S. Spectrum Blvd., Suite 100 ***Confidential Treatment Requested 18 Chandler, AZ 85286-8435Attn: SVP, ManufacturingPhone No.: (602) 910 2617 With cc to (if involving a dispute or indemnification matter):Name: INSYS Therapeutics, Inc.1333 S. Spectrum Blvd., Suite 100Chandler, AZ 85286-8435Attn: General CounselPhone No.: (602) 910 2617 Such notice, request, demand, waiver, consent, approval or other communications will be deemed to have been given as ofthe date so delivered, sent by facsimile transmission with receipt confirmed, or […***…] days after so mailed. 13.2Choice of Law. This Agreement, along with the Schedules and Exhibits attached, incorporated andreferenced herein and all Purchase Orders issued hereunder shall be governed and interpreted, and allrights and obligations of the Parties shall be determined, in accordance to the laws of the State of NewYork. 13.3Force Majeure. Neither Party shall be responsible or liable in any way for failure or delay in carrying outthe terms of this Agreement resulting from any cause or circumstance beyond that Party’s reasonablecontrol, including, but not limited to, fire, flood, other natural disasters, war, labor difficulties, interruptionof transit, accident, explosion, civil commotion, and acts of any governmental authority; nor shallSELLER be responsible or liable in any way for failure or delay in carrying out the terms of this Agreementif due to any shortage or inability to obtain any raw materials (including energy), equipment ortransportation; provided, in each case, that the affected Party shall give prompt notice thereof to the otherParty. No such failure or delay shall terminate this Agreement, and each Party shall complete itsobligations hereunder as promptly as reasonably practicable following cessation of the cause orcircumstances of such failure or delay; provided, that if any of the above conditions continues to exist formore than […***…] months after the date of any notice given with regard thereto and such condition hasa material adverse effect on a Party’s ability to perform its obligations hereunder, either Party mayterminate this Agreement forthwith upon notice to the other. 13.4Severability. In the event that any provision of this Agreement shall be found in any jurisdiction to be inviolation of public policy or illegal or unenforceable at law or in equity, such finding shall in no eventinvalidate any other provision of this Agreement in that jurisdiction, and this Agreement shall be deemedamended to the minimum extent required to comply with the law of such jurisdiction, such provisionbeing adjusted rather than voided if possible. ***Confidential Treatment Requested 19 13.5Entire Agreement. This Agreement, including any Schedules and Exhibits attached, incorporated orreferenced herein, the Quality Agreement, and the confidentiality agreement referenced in Section 13.9 setforth the entire agreement reached between the Parties with respect to the transactions contemplatedhereby. This Agreement supersedes the Original Agreement (except that any liability existing under theOriginal Agreement as of the Effective Date of this Agreement shall remain subject to the OriginalAgreement). This Agreement (including all Schedules and Exhibits) may not be amended or modifiedexcept by written instrument duly executed by the Parties hereto stating that it is an amendment to thisAgreement. The terms of this Agreement shall take precedence over the Quality Agreement, the confidentiality agreement referenced inSection 13.9 or any standard terms and conditions of either Party if there is any conflict between them. 13.6No Waiver. The failure of either Party hereto to enforce at any time, or for any period of time, any provision of this Agreement shall not beconstrued as a waiver of such provision or of the right of such Party thereafter to enforce each and every provision. Any waiver by a Party ofany of its rights under this Agreement in one or more instances shall be in a writing signed by such Party and shall not be construed asconstituting a continuing waiver or as a waiver in other instances. 13.7Assignment, Binding Effect. Neither Party shall assign this Agreement nor any of its respective rights orobligations hereunder without the prior written consent of the other Party, which consent will not beunreasonably withheld, except in the case of SELLER to any Affiliate and in the case of PURCHASER toany Relevant Affiliate of the assigning Party or by operation of law or as otherwise permitted hereunder.Any such attempted assignment without such consent shall be void. This Agreement and the rights hereingranted shall be binding upon and shall inure to the benefit of PURCHASER and SELLER and theirrespective successors and permitted assigns. 13.8Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement, or thebreach, termination or invalidity hereof, that the Parties are unable to resolve between themselves, shall besettled by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce,and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdictionthereof. Such proceedings shall take place in New York, USA, and shall be conducted in English. The decisionof the arbitration proceeding shall be final and binding upon the Parties. This clause shall not be construed tolimit the right of either Party to apply to any court of competent jurisdiction for injunctive relief forunauthorized use of confidential information. 13.9Confidentiality. In concert with the execution of this Agreement, the Parties have executed a separateconfidentiality agreement and that agreement constitutes the entire agreement and understanding of theParties relating to the subject matter of confidentiality and supersedes any previous agreement orunderstanding between the Parties in relation to such subject matter. [Signature page follows]. ***Confidential Treatment Requested 20 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the day and year first above written. /s/ Sali M. Haffar APTARGROUP, INC.Name: Sali M. HaffarTitle: President, Aptar PharmaDate: 11/01/2015 /s/ Darryl S. Baker INSYS THERAPEUTICS, INC.Name: Darryl S. BakerTitle: CFODate: 10/30/15 [Signature page of Amended and Restated Supply, Development & Exclusive Licensing Agreement between AptarGroup, Inc. and Insys Therapeutics,Inc.] ***Confidential Treatment Requested  EXHIBIT A: DEVICE SPECIFICATION ***Confidential Treatment Requested  […***…] ***Confidential Treatment Requested  EXHIBIT B: SELLER CERTIFICATE OF ANALYSIS ***Confidential Treatment Requested  […***…]***Confidential Treatment Requested  EXHIBIT C: PURCHASE PRICE The purchase price for the Original Device (“Purchase Price”) is based on the procured annual quantities of the Original Device inaccordance with Table Cl below. Purchase Prices for any New Devices will be agreed to by the Parties and set forth in an amendment to(or a revised version of) this Exhibit C: Table C.1 Original Device Purchasing Price Levels Price LevelQuantities (pieces)Price ([…***…])1[…***…][…***…]2[…***…][…***…]3[…***…][…***…]4[…***…][…***…]5[…***…][…***…] The Parties agree that prices may be adjusted annually based on the Producer Price Index (“All Other Plastics Product Manufacturing”)from the US Bureau of Labor Statistics. The lot size for the Original Device is no less than […***…] units and no more than […***…] units.***Confidential Treatment Requested  EXHIBIT D: EXCLUSIVITY PURCHASER shall buy exclusively from SELLER, and shall develop exclusively with SELLER, all of its and its Relevant Affiliates’ requirements fordevices for sublingual delivery of drug products, and SELLER and its Affiliates are willing to supply the Original Device and New Devices toPURCHASER on an exclusive basis in accordance with the terms of this Agreement and this Exhibit D. SELLER and its Affiliates grant to PURCHASER an exclusive, worldwide license to the Intellectual Property owned by SELLER and its Affiliates thatspecifically relates to the Devices, but only to the extent necessary or useful for the use and sale of the Finished Products and agrees to not license suchapplicable Intellectual Property to any other party for the development and commercialization of such sublingual products as described more specificallyin Paragraph 1 below (“Exclusivity”). For the avoidance of doubt, the foregoing license does not grant PURCHASER the right to use such IntellectualProperty to develop or manufacture or have developed or manufactured any devices. Such Exclusivity also includes the obligation to use commerciallyreasonable efforts to assist PURCHASER, at PURCHASER’s cost, in the adaptation of the Original Device or development of New Devices for each of theNew Molecules and, once the Parties have accepted each such Device with its applicable functionality, quality, design and cost, SELLER commits tosupply each such Device to PURCHASER on an exclusive basis for such New Molecule. SELLER represents that it does not have any existing relationship (prior to the Effective Date or during the Term) with a competitor of PURCHASER thatconflicts with the Exclusivity granted under this Agreement. 1.Application, Drug molecule SELLER grants PURCHASER Exclusivity for sublingual application of liquid formulations of the Drug Product using Devices. Such exclusivityrelates to a device capable of delivering one or two doses or multiple doses of the Drug Product sublingually in a Device. In addition, SELLER provides PURCHASER Exclusivity for the following [...***...] molecules (such molecules, or such other molecules addedpursuant to this Exhibit D, the “New Molecules”) in connection with sublingual application of such molecules using the applicable Deviceagreed to by the Parties. This list of […***…] molecules may be altered or revised by PURCHASER pursuant to the procedure set forth inParagraph 5 below. […***…] ***Confidential Treatment Requested  2.Exclusivity Payments For the […***…] payment of $[…***…] ([…***…] DOLLARS) to be paid by PURCHASER to SELLER commencing upon theEffective Date (and recurring on […***…]), SELLER agrees to provide Exclusivity for the […***…] New Molecules asdescribed above. PURCHASER may in accordance with the procedure set forth in Paragraph 5 below, with written notice to SELLER, addadditional compounds/molecules to the […***…] New Molecules for an additional, […***…] payment of $[…***…]. 3.Territory The territory of Exclusivity granted by SELLER is worldwide. 4.Timeline Exclusivity terms as stated in this Exhibit D are granted until expiration of the Term of this Agreement (“Exclusivity Term”), subjectto early termination for any New Molecule for failure of a party to exercise Commercially Reasonable and Diligent Efforts withrespect to the development of a Device for such New Molecule (as described in more detail below) 5. Additional New Molecules; Revision of New Molecule List (a)PURCHASER may revise the New Molecule list or add new New Molecules to the list […***…] (measured aseach […***…] period beginning on the Effective Date). In such instance, PURCHASER shall notify SELLER inwriting of the compound or molecule that PURCHASER wishes to add to the New Molecule list (and, if any NewMolecule is being removed from the New Molecule list, shall include the identity of such New Molecule in suchnotice). Within […***…] days of receiving such notice, SELLER shall in good faith determine whether it isable to grant Exclusivity with respect to such New Molecule and shall notify PURCHASER of such ability inwriting. (b)If SELLER confirms that it is able to grant Exclusivity with respect to a proposed New Molecule, Exclusivitywith respect to such New Molecule shall begin (i) immediately if such New Molecule is replacing a NewMolecule that is being removed from the list (in which case, for the avoidance of doubt, no additional paymentis required) or (ii) if such New Molecule is being added to the list but no New Molecule is being removed, uponthe payment of the applicable fee for such New Molecule as set forth in Paragraph 2 above. (c)If PURCHASER fails to pay the amount required by the preceding clause (b) within […***…] days ofconfirmation by SELLER in writing that it is able to grant Exclusivity with respect to the applicable proposedNew Molecule, then no Exclusivity shall be granted and SELLER shall have no obligation (but may, in itsdiscretion opt to) consider future requests for Exclusivity with respect to such New Molecule. ***Confidential Treatment Requested  6. PURCHASER Right of First Refusal If a third party seeks to use SELLER for supply of devices for sublingual delivery of a specific drug product (other than Off-The-Shelf-Devices), SELLER will grant PURCHASER a right of first refusal with respect to such drug product in accordance with theterms of this Paragraph 6. When SELLER becomes aware of a request for supply of such devices for sublingual delivery of drugproduct (such request, a “Proposed Supply Request” and such drug product, a “Proposed Drug Product”), SELLER shall promptlynotify PURCHASER in writing of such Proposed Supply Request (the “ROFR Notice”) and may not commit to supplying such thirdparty with such sublingual delivery device with respect to such Proposed Drug Product until PURCHASER has declined or failed toexercise its right of first refusal with respect to such Proposed Drug Product within the allotted exercise period below. For clarity, (a)the ROFR Notice does not apply to Off-The-Shelf-Devices; and (b) the ROFR Notice is only required to identify the Proposed DrugProduct and not any other material terms of the Proposed Supply Request or the identity of the applicable third party. PURCHASERshall have [...***...] days from its receipt of the ROFR Notice to exercise its right of first refusal with respect to the applicableProposed Drug Product. If PURCHASER exercises its right of first refusal with respect to the applicable Proposed Drug Product, theProposed Drug Product shall be deemed a New Molecule and will be subject to Paragraphs 5(b)(ii) and 5(c) above. If PURCHASERnotifies SELLER in writing that it does not intend to exercise its right of first refusal with respect to such Proposed Drug Product orthe applicable […***…] day period has lapsed and PURCHASER has not notified SELLER of its intent to (or not to) exercise itsright of first refusal with respect to such Proposed Drug Product, then (a) the right of first refusal with respect to such Proposed DrugProduct shall lapse, (b) the applicable Drug Product shall not be deemed a New Molecule (i.e., no Exclusivity will be granted toPURCHASER with respect to such Drug Product) and (c) SELLER may enter into agreements with third parties with respect to thesupply of devices for sublingual delivery of the Proposed Drug Product. 7. Diligence; Reporting; Termination of Exclusivity Following designation of a New Molecule, the Parties shall use Commercially Reasonable and Diligent Efforts to develop NewDevices (or the adaptation of the Original Device) for each such New Molecule. On a regular basis, and no less often than […***…]days following each […***…], PURCHASER shall provide a detailed written report to SELLER summarizing the progress of suchdevelopment (and including copies of the minutes of any meetings with the FDA or other Regulatory Authority relating to suchDevice). If either Party fails to exercise Commercially Reasonable and Diligent Efforts with respect to the development of NewDevices (or the adaptation of the Original Device) for a New Molecule, and fails to remedy such breach (or uses good faith efforts tocommence and diligently pursue curing such breach) within […***…] days of written notice from the other Party, the notifying Partymay terminate Exclusivity with respect to such New Molecule upon written notice to the other Party. ***Confidential Treatment Requested  For purposes of this Paragraph 7, “Commercially Reasonable and Diligent Efforts” means those diligent efforts consistent with theexercise of prudent business judgment that a specialty pharmaceutical company or pharmaceutical device supplier, as appropriate,would reasonably devote to a product of similar market potential or profit potential resulting from its own research efforts, based onconditions then prevailing, including by: (a) promptly assigning responsibility for development activities to specific employees whoare held accountable for progress and monitoring such progress on an on-going basis, (b) setting and consistently seeking to achievespecific and meaningful objectives and timelines for carrying out such development and (c) consistently making and implementingdecisions and allocating resources designed to advance progress with respect to such objectives and timelines. ***Confidential Treatment Requested  EXHIBIT E: PROVISIONS RELATING TO ROYALTY PAYMENTS 1.Currency. All Royalty payments shall be made in United States Dollars (US $) via wire transfer of immediatelyavailable funds to an account identified by SELLER in writing from time to time. 2.Payment Provisions. Royalties under this Agreement shall be calculated for every calendar quarter and shall be paidwithin […***…] days from the date on which the PURCHASER’s quarterly financial statements become publiclyavailable. In connection with any sales outside of the United States or territories that do not utilize United StatesDollars, if any, conversion of foreign currency to United States Dollars shall be made at the conversion as reported inThe Wall Street Journal on the last working day of the applicable calendar quarter. 3.Reports. PURCHASER shall, at each time of payment of Royalties, dispatch to SELLER its relevant financialstatements that are filed with the Securities and Exchange Commission, which evidence the Net Sales Revenue and thecomputation of Royalties payable by PURCHASER to SELLER hereunder. Each such report shall contain total numberof units of Finished Products sold or transferred by PURCHASER or its applicable Affiliate, total Net Sales Revenue ofPURCHASER (including its Affiliates) during the most recent quarter on a Finished Product-by-Finished Product,country-by-country basis, together with the exchange rates used for conversion, and total Royalty payments due.Express acceptance by SELLER of any of the reports furnished pursuant to this Paragraph 3 of this Exhibit E shallpreclude SELLER from questioning the correctness thereof at any time except in a situation where its audit raiseslegitimate concerns of factual accuracy of the information provided by PURCHASER, and in the event anyinconsistencies or mistakes are discovered (and not disputed) in such reports or payments, they shall be promptlyrectified and, as applicable, appropriate payment shall be made by PURCHASER or credit for overpayment shall begranted to PURCHASER against the next payment. 4.Audits and Records. SELLER shall be entitled to inspect, at most […***…] per […***…] during the Term and […***…] thereafter, and PURCHASER shall maintain, and shall cause its Affiliates and Sublicensees to maintain, fulland true books of accounts and other records in sufficient detail so that the amounts payable to SELLER hereunder canbe properly ascertained. These records shall be ready for inspection and examination during normal business hoursupon no less than […***…] business days written notice to duly authorized representatives of SELLER for a period of[…***…] years following the end of the […***…] to which they pertain; provided, that if such duly authorizedrepresentative is an independent third party auditor, such third party auditor will be required to sign a confidentialityagreement in a form reasonably acceptable to PURCHASER. PURCHASER shall cooperate with such examination, andshall give any explanations that may reasonably be requested. The cost for such examination shall be borne bySELLER. However, and without prejudice to any other remedy or action available due to breach of Agreement, if theaudit should determine a discrepancy of more than […***…] percent ([…***…]%) between the amount reported andthe amount actually due, then the cost and expense of the audit shall be borne by PURCHASER. PURCHASER shallpromptly pay to SELLER all amounts determined by any inspection to be due to SELLER, with interest in accordancewith Paragraph 5 of this Exhibit E from the date that such amount should have originally been paid.***Confidential Treatment Requested  5.Late Payments. In the event that PURCHASER at any time should fail to make payment in full more than […***…]days after the due date, SELLER shall be entitled to claim interest on the sum overdue until payment is made at therate of […***…] percent ([…***…]%) per month or the maximum rate permitted by law, whichever is lower. 6.Taxes. PURCHASER will make all payments to SELLER under this Agreement without deduction or withholding fortaxes except to the extent that any such deduction or withholding is required by law in effect at the time of payment. Ifany taxes are required by applicable law to be withheld by PURCHASER on amounts payable under this Agreement,PURCHASER will (a) deduct such taxes from the payment made to SELLER, (b) promptly pay the taxes to theappropriate governmental authority and (c) furnish SELLER with proof of payment of such tax. PURCHASER andSELLER will cooperate with respect to all documentation required by any taxing authority or reasonably requested byPURCHASER to secure a reduction in the rate of applicable withholding taxes. ***Confidential Treatment Requested Exhibit 21.1 Subsidiaries of Insys Therapeutics, Inc.: NAME: JURISDICTION OF ORGANIZATION:Insys Pharma, Inc. DelawareInsys Development Company, Inc. DelawareInsys Manufacturing, LLC TexasIPSC, LLC Arizona Exhibit 23.1 Consent of Independent Registered Public Accounting Firm Insys Therapeutics, Inc.Chandler, Arizona We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-188306 and 333-194374) of InsysTherapeutics, Inc. (“Company”) of our reports dated February 26, 2016, relating to the consolidated financial statements and the effectiveness of InsysTherapeutics, Inc.’s internal control over financial reporting which appear in this Form 10-K. Our report on the effectiveness of internal control overfinancial reporting expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. /s/ BDO USA, LLP Phoenix, ArizonaFebruary 26, 2016  Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dr. John N. Kapoor, 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 tous by others 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to 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’sinternal control over financial reporting. Date: February 26, 2016 /s/ John N. Kapoor Dr. John N. Kapoor President and Chief Executive Officer Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the 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 (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-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 tous by others 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to 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’sinternal control over financial reporting. Date: February 26, 2016 /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, 2015 (“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: February 26, 2016 /s/ John N. Kapoor Dr. John N. Kapoor President and Chief Executive Officer Dated: February 26, 2016 /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer 

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