Insys Therapeutics Inc
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES 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 1934For the fiscal year ended December 31, 2016OR☐☐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) Delaware 51-0327886(State or Other Jurisdiction of (I.R.S. EmployerIncorporation) Identification No.) 1333 S. Spectrum Blvd, Suite 100, Chandler, Arizona 85286(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 RegisteredCommon Stock, $0.01 Par Value Per Share The NASDAQ Global Market LLC Securities Registered Pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing 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 File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was 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, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment 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 “largeaccelerated 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 $300 million as of June 30, 2016 based onthe closing sales price of the common stock on the NASDAQ Global Market.There were 71,957,343 shares of the registrant’s common stock issued and outstanding as of March 28, 2017.Documents Incorporated by ReferencePortions of the registrant's Proxy Statement relating to its 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission (“SEC”) pursuant toRegulation 14A within 120 days after the registrant’s fiscal year ended December 31, 2016, are incorporated by reference in Part III of this Form 10-K. TABLE OF CONTENTS PageNumbers PART I Item 1. Business 1Item 1A. Risk Factors 24Item 1B. Unresolved Staff Comments 57Item 2. Properties 57Item 3. Legal Proceedings 57Item 4. Mine Safety Disclosures 57 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 58Item 6. Selected Financial Data 59Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 61Item 7A. Quantitative and Qualitative Disclosures About Market Risk 77Item 8. Financial Statements and Supplementary Data 78Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 116Item 9A. Controls and Procedures 116Item 9B. Other Information 119 PART III Item 10. Directors, Executive Officers and Corporate Governance 120Item 11. Executive Compensation 120Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 120Item 13. Certain Relationships and Related Transactions, and Director Independence 120Item 14. Principal Accountant Fees and Services 120 PART IV Item 15. Exhibits, Financial Statement Schedules 121Item 16. Form 10-K Summary 124SIGNATURES 125 2016 FORM 10-K ANNUAL REPORTGLOSSARY OF TERMSThe 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.ASC Accounting Standards CodificationASU Accounting Standards UpdateATRA 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.FASB Financial Accounting Standards BoardFDA U.S. Food and Drug AdministrationFDCA Federal Food, Drug, and Cosmetic ActFSS Federal Supply ScheduleGAO 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 BoardMMA 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 EvaluationsODOJ 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 Reconciliation Act of2010QSR 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 OfficeU.S. GAAP Accounting Principles Generally Accepted in the United States of AmericaUSPTO United States Patent and Trademark OfficeVC Vomiting center PART IITEM 1.BUSINESSOverviewAs used in this Form 10-K, “we,” “us,” and “our” refer to Insys Therapeutics, Inc. and our subsidiaries.We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have onemarketed product: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients.Insys Therapeutics, Inc. was incorporated in Delaware in June 1990, and maintains headquarters in Chandler, Arizona. For further detail concerning our company and communities, see the “Available Information” section included in this Item 1.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 administered liquidformulation of dronabinol, which will be our second, branded supportive care product, if it successfully obtains all required regulatory approvals. We believethis product candidate may provide increased flexibility in dosing for doctors and an improved absorption profile for patients, which may contribute toincreased patient compliance because of less dose-to-dose variability and allow us to further penetrate and potentially expand the market for the use ofdronabinol. We received FDA approval for SYNDROS™ in July 2016. In March 2017, the DEA issued an interim final ruling that would result inSYNDROS™ being placed in Schedule II of the CSA. We are currently awaiting the finalization of labeling by the FDA as the final approval prior tocommercial launch.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 background paincontrolled by around-the-clock medication. We believe SUBSYS® is an important, differentiated treatment option for patients and physicians relative toother TIRF products due to its rapid onset of action, improved bioavailability, most complete range of dosage strengths and ease of administration. Ourproduct label includes data from our pivotal clinical trial demonstrating that SUBSYS® may provide pain relief in as little as five minutes, which representsthe most rapid onset of action in the TIRF class of products. Also, in a head-to-head study, SUBSYS® demonstrated 76% bioavailability versus 51% forActiq. Further, SUBSYS® offers the most complete range of dosage strengths in the TIRF class of products, consisting of 100 to 1,600 microgram, or mcg,doses. Patients can administer SUBSYS® in less than one minute while Actiq and Fentora, the leading branded TIRF products, can require 14 to 30 minutesto administer. We launched SUBSYS® as a commercial product in March 2012. Upon launch, SUBSYS® was the fourth new branded product in the TIRF marketover the 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 2016, SUBSYS® was the most prescribedTIRF product, with 42% market share on a prescription basis according to IMS. According to Source Healthcare Analytics, in 2016, TIRF products generated$710 million in annual U.S. product sales. Traditionally, the physician prescriber base for TIRF products is concentrated, with approximately 1,600physicians writing 90% of all TIRF product prescriptions in 2016, according to IMS. As a result, our commercial organization has been able to promoteSUBSYS® using a highly targeted approach designed to maximize impact with physicians who are TIRF REMS enrolled. In addition, our commercialorganization 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 of action andenhanced bioavailability versus other oral preparations and routes of administration. We are developing our proprietary sublingual spray technology in otherproduct 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 for CINVand anorexia associated with weight loss in patients with AIDS. We believe that Marinol and its generic equivalents have limitations in their currentformulations. Marinol is characterized by a highly variable bioavailability and an onset of action that ranges from 30 minutes to one hour.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 the PK ofSYNDROS™ 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 of variationfor area under the curve, or AUC, which is indicative of greater patient exposure to drug. We believe these product attributes could result in SYNDROS™capturing a significant share of the existing U.S. market for dronabinol products and potentially expanding the usage of dronabinol-based products. Wereceived FDA approval for SYNDROS™ in July 2016. In March 2017, the DEA issued an interim final ruling that would result in SYNDROS™ being placedin Schedule II of the CSA. We are currently awaiting the finalization of labeling by the FDA as the final approval prior to commercial launch.Our discontinued Dronabinol SG Capsule product was commercially launched in December 2011, and we sold Dronabinol SG Capsule exclusively toMylan in the United States under a supply and distribution agreement. We do not have any current plans to manufacture or market this product in the future.StrategyAchieve finalization of labeling by the FDA for SYNDROS™ and advance our synthetic cannabinoid product pipeline. We believe there is anunmet patient need for a more reliable synthetic THC for treating CINV and anorexia associated with weight loss in patients with AIDS. In a pivotalbioequivalence study, our SYNDROS™ product candidate has demonstrated rapid and less variable absorption, which we believe represents an attractiveproduct profile relative to Marinol. We are also evaluating proprietary sublingual spray, inhaled and intravenous formulations of dronabinol in preclinicaltesting. We also have the capability to manufacture CBD and we are pursuing clinical studies that could result in future commercial products containingCBD. We received FDA approval for SYNDROS™ in July 2016. In March 2017, the DEA issued an interim final ruling that would result in SYNDROS™being placed in Schedule II of the CSA. We are currently awaiting the finalization of labeling by the FDA as the final approval prior to commercial launch.SUBSYS® market share and revenues. We launched SUBSYS® as a commercial product in March 2012. As of December 31, 2016, there wereapproximately 8,100 physicians enrolled in the TIRF REMS program. Enrollment in this class-wide REMS program is required by the FDA in order toprescribe TIRF products. Approximately 1,600 physicians comprise 90% of TIRF prescriptions dispensed in 2016, according to IMS. Our sales and marketingefforts have primarily targeted approximately 100% of these top 1,600 prescribing physicians with a focus on the highest prescribers.Continue to leverage our commercial organization to market SUBSYS® and, if finalization of labeling by the FDA is obtained, SYNDROS™, andother complementary products. We commercialize SUBSYS® through our commercial sales organization. We intend to market SYNDROS™ whenfinalization of labeling by the FDA is obtained, and other proprietary supportive care products, if approved, using this same commercial sales2organization. We may also pursue opportunities to acquire commercial products or product candidates that could further leverage our supportive carecommercial sales organization.Research and develop additional sublingual spray product candidates. We believe that the delivery of certain pharmaceutical products using oursublingual spray platform technology could have significant advantages over other methods of delivery. Our technology delivers drug product directly to thesublingual mucosa for rapid and efficient absorption into the bloodstream. This process is accomplished by delivering a ready-to-be absorbed formulationacross the sublingual mucosa. The sublingual mucosa is an efficient medium for the delivery of certain drugs because this membrane is highly permeablewith a high density of blood vessels, which allows for the portion of the drug absorbed to bypass first-pass metabolism in the liver. Certain drug productsdelivered utilizing our sublingual spray technology can be absorbed quickly and take effect more rapidly than many other forms of administration. We aredeveloping several product candidates, including buprenorphine, buprenorphine with naloxone, naloxone, ondansetron, sildenafil, diclofenac, epinephrineand ketorolac, where we believe our proprietary sublingual spray technology has the potential to provide a clinically meaningful therapeutic advantage overexisting delivery methods.Use our core competencies and expertise to expand our dronabinol and cannabidiol manufacturing capabilities. Because 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 supply the APIfor initial launch quantities of SYNDROS™. In 2014, we completed construction of a second manufacturing facility that will enable us to supply sufficientcommercial quantities of dronabinol API for the anticipated commercialization of our proprietary synthetic cannabinoid product candidates, once scheduledby the DEA, which is required prior to commercialization of this product.Our Products and Product CandidatesThe following table summarizes certain information regarding our marketed products and most advanced product candidates: ProductIndicationPathwayStatusSUBSYS® (fentanyl sublingual spray)1. Breakthrough Cancer Pain505(b)(2)1MarketedSYNDROS™ (dronabinol oral solution) 1. CINV2. Appetite Stimulation in AIDS Patients505(b)(2)NDA Filed;Approved: April 1, 2016; Scheduled March2017Pending finalization of labeling by the FDACannabidiol Oral Solution1.Pediatric Epilepsy2.Prader Willi505(b)(1)2• Pediatric study in refractory epilepsyongoing• Prader Willi Phase 2 planned for 2nd Half2017Buprenorphine Sublingual SprayAcute Pain505(b)(2)Phase 3 completed;NDA submission 2nd Half 2017Buprenorphine/Naloxone SublingualSprayOpioid Dependence505(b)(2)Formulation under developmentNaloxone Sublingual SprayOpioid Antagonist505(b)(2)Formulation under developmentFentanyl/NaloxoneAbuse Deterrent for Intravenous505(b)(2)Formulation under development 1Anticipated 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.2Application is a complete NDA that contains all the studies conducted by the applicant necessary to demonstrate a drug’s safe and effective use.3Additionally, we intend to develop SUBSYS® for additional indications that may include management of pain for procedures conducted in amonitored setting such as bone marrow biopsy, burn dressing changes, radiation oncology, post-operative procedures. We anticipate initiating some of thesestudies to support a new indication in 2017 based on the guidance we anticipate receiving from the FDA.Further in 2017, we intend to develop SYNDROS ™ for additional indications which may include the treatment of agitation in Alzheimer's Diseaseand the treatment of anorexia associated with weight loss in cancer patients.We are also actively engaged in the development of other earlier stage product candidates. Specifically, we are currently completing preclinical workon six products that utilize our proprietary spray technology platform with the goal of expanding our supportive care franchise: •Epinephrine (Type I allergic reactions including anaphylaxis) •Ondansetron (nausea and vomiting in cancer chemotherapy) •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)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: IndicationDrugApproval DateGastric CancerLiposomal Encapsulated Paclitaxel 12/3/2014Ovarian CancerLiposomal Encapsulated Paclitaxel 1/21/2015Malignant GliomaIL-1311/2/2001Interstitial Pulmonary Fibrosis (IPF)IL-134/30/2010Lennox-Gastaut Syndrome (rare pediatric epilepsy)Cannabidiol6/23/2014Dravet Syndrome(rare pediatric epilepsy)Cannabidiol7/1/2014West Syndrome(Rare pediatric epilepsy)Cannabidiol7/23/2015Glioblastoma multiformeCannabidiol8/20/2014Pontine gliomaCannabidiol9/24/2014Pediatric SchizophreniaCannabidiol11/17/2014 4SUBSYS® -Sublingual Fentanyl SpraySUBSYS® 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 the actuation of thedevice. The plume disperses a small volume of liquid across the surface area of the sublingual mucosa and facilitates rapid absorption by the body. Cancer Pain Market OverviewCancer 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 istypically managed by long-acting or sustained-release drugs taken by patients on a regular schedule, and (2) breakthrough pain, which can be severe andsudden, and may require a stronger, fast-acting medication. Opioids are the most widely-prescribed treatment for cancer pain followed by medicationscommonly used to treat inflammatory pain, such as corticosteroids, anesthetics, NSAIDs, anticonvulsants and antidepressants. A report published byWorldwide 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 occur severaltimes per day. Pain is a widely prevalent condition of cancer patients, approximately 60% of cancer patients with persistent pain may experience BTCP,which is particularly difficult to treat due to its severity, rapid onset and the often unpredictable nature of its occurrence. Physicians typically treat BTCPwith 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 by thepatient. More recently-approved short-acting opioid-based fentanyl formulations utilize transmucosal delivery in an attempt to improve upon existingfentanyl therapies. Teva Pharmaceutical Industries Ltd.’s Actiq®, approved by the FDA in 1998 and currently available in several generic options, is an oraltransmucosal lozenge, and Fentora®, the second leading branded TIRF product, approved by the FDA in 2006, is a fentanyl buccal tablet. Three othercompanies have received approval for branded TIRF products since 2009 including BioDelivery Sciences International, Inc.’s Onsolis®, a soluble filmplaced on the buccal area after wetting the inside of the cheek with saliva or water, Sentynl Therapeutics’ Abstral®, an immediate-release transmucosalsublingual tablet, and Depomed’s Lazanda®, a nasal spray. According to Source Healthcare Analytics, TIRF products generated $821.6 million in 2015 U.S.sales. Although these existing therapies provide improvements over oral opioids, we believe that the market adoption of SUBSYS® to date demonstrates thatthe current treatment options have limitations and that there remains a significant unmet need for therapies that provide faster pain relief, more convenientdose administration and a better PK profile.5Limitations of Competing TIRF TherapiesWe 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 paincan occur at less than one minute to 10 minutes from the onset of pain symptoms. The peak effect of Actiq and Fentora may be delayed as itmay take up to 14 to 30 minutes for the lozenge or tablet to fully dissolve and be absorbed. In addition, oral immediate-release opioids aremetabolized in the liver and consequently, may take up to 30 to 45 minutes to become effective. •Pharmacokinetic profile: Actiq and its generic equivalents achieve bioavailability of approximately 51% 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 andconvenience needs. Competing TIRF therapies can require an administration period of several minutes, disrupt daily activities and causepatient discomfort. For example, Actiq requires patients to place a lozenge between their cheeks and lower gums and rub the lozenge fromside to side over a 15-minute period. In addition, patients with dry mouth and oral mucositis may experience difficulty in using Actiq andother commercially available therapies.Our SolutionWe 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 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 thepatient’s tongue. This delivery mechanism allows for administration in less than one minute, rather than the 14 to 30 minutes required forActiq and Fentora. Further, SUBSYS® can be administered without moistening the tongue or cheek, allowing for administration in cancerpatients suffering from 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 are achieved at a more rapid rate. This profile is, in part, due to greater than 85% absorption occurring transmucosally, resulting inhigher bioavailability. Because a small volume of liquid is sprayed on to the sublingual mucosa, we believe this method of administrationreduces the amount of liquid swallowed and subsequently absorbed via the digestive system. As a result, we believe that less fentanyl isexposed to first-pass metabolism 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 alldose ranges for the treatment of BTCP, as all branded products without generic equivalents, and, to our knowledge, all product candidatescurrently in development, are not, or will not be, available in the 1,200 and 1,600 mcg dosage strengths.SUBSYS® Market Experience to DatePrescription Trends: Monthly prescription data through December 2016 shows that approximately 162,000 prescriptions of SUBSYS® have beendispensed since launch in March 2012. In December 2016, SUBSYS® was the most prescribed branded TIRF product with 42% market share according toIMS.6The continuing and heightened publicity surrounding the national opioid epidemic continues to result in sensitivity by some healthcareprofessionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by healthcare professionals and pharmacies is the result of third-partypayers, such as insurance companies, and regulatory and government agencies increasingly scrutinizing the indications and uses for which healthcareprofessionals are prescribing, and pharmacies are dispensing, opioids. Moreover, ongoing state and federal investigations into our sales, marketing and othercommercial practices and developments and media reports that may arise in connection with such investigations may negatively affect our relationships withhealthcare professionals and pharmacies and their prescribing or dispensing habits. Consequently, these current and potential future events have and willlikely continue to affect the manner in which, and the situations when, SUBSYS® is being prescribed, dispensed and approved for coverage.Physician Prescriber Base: Approximately 1,600 physicians were responsible for 90% of all TIRF prescriptions dispensed in 2016, according toIMS. We have targeted our commercialization efforts towards approximately 100% of these top 1,600 prescribing physicians with a focus on the highestprescribers. As of December 2016, there were approximately 3,900 unique physician prescribers of SUBSYS®.Patient Use: Existing patient data generated by available databases demonstrates that the number of SUBSYS® -experienced patients has increasedsteadily since launch with over 22,100 unique patients as of December 2016. 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 2016. Generally, repeatSUBSYS® 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 payers requireusage and failure on cheaper generic versions of Actiq prior to providing reimbursement for SUBSYS® and other branded TIRF products. We concentrate onassisting physicians and payers with developing greater familiarity with both the differentiated features of SUBSYS® and the process to achieve patientaccess to the product from continued and broader usage of SUBSYS® by their patients. We offer patients a free trial of SUBSYS® to allow for titration to theireffective dose and bridge the prior authorization process. Once third-party payer reimbursement is in place, we may offer patients coupons to reduce out ofpocket costs.Cannabinoid Product FamilySYNDROS™ (dronabinol oral solution)Our lead proprietary dronabinol product candidate is SYNDROS™. The DEA has issued an interim final ruling that would result in SYNDROS™being placed in Schedule II of the CSA and we now must interact with the FDA to finalize the labeling prior to commercial launch. In addition, we areevaluating proprietary sublingual spray, inhaled and intravenous formulations of dronabinol in preclinical studies. Dronabinol, the active ingredient inMarinol, is a synthetic form of THC. THC is an orally active cannabinoid which, like other cannabinoids, has complex effects on the central nervous system.Approved by the FDA in 1985, Marinol is indicated for the treatment of CINV in patients who have failed to respond adequately to conventional treatments,as well as for the treatment of anorexia associated with weight loss in patients with AIDS. Marinol is formulated in sesame oil and encapsulated in soft gelatincapsules 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 SYNDROS™ withMarinol. In the study, 100% of subjects receiving SYNDROS™ achieved detectable plasma levels at 15 minutes compared to less than 25% of the subjectsreceiving Marinol. Additionally, SYNDROS™ demonstrated lower intra-subject variability relative to Marinol. We believe these attributes may be aconsideration for the providers in selecting the appropriate formulation of dronabinol for patients, which we also believe will allow us to further penetrateand potentially expand the market for the medical use of dronabinol. 7Market OverviewCINV is a commonly known side effect of chemotherapy that can have a significant negative impact on quality of patient life. CINV is classified intofive categories: •Acute: Occurs within 24 hours of chemotherapy administration. •Delayed: Occurs more than 24 hours after chemotherapy administration, with peak intensity two to three days post-administration andduration of up to 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 for developingCINV can include: age of less than 50 years, female gender, vomiting during previous chemotherapy, pregnancy-induced nausea/vomiting, history of motionsickness and anxiety. In addition to generally affecting patient quality of life, CINV can result in weakness, weight loss, electrolyte imbalance, dehydrationor anorexia. According to a study published by Ballatori, et al in 2007, 90% of patients who experienced 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 chemoreceptor triggerzone results in stimulation of the salivation and respiratory centers as well as control of the pharyngeal, GI and abdominal muscles. This stimulation cantrigger the body to retch and vomit.Treatment of CINV is highly patient-specific and is based on the emetogenic potential of the chemotherapy regimen. According to IMS Health, U.S.sales for drugs treating CINV were $1.3 billion in 2013, though published reports suggest that current therapies are not entirely effective. A 2004 reportpublished in Cancer estimated that approximately 35% of patients treated with CINV therapies continue to experience acute nausea, with 13% of CINVpatients experiencing acute vomiting after first-line treatment.Limitations of Existing TherapiesWe 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 inthe patient’s liver, where the drug is broken down by enzymes. We believe that this capsule formulation and digestion process delays onsetof action and relief of nausea and vomiting. After oral administration, Marinol has an onset of action of approximately 30 minutes to onehour and peak effect 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. Ingeneral, this level of variability is atypical relative to approved pharmaceutical products. As such, physicians are unable to predict the levelof efficacy or side effects that an individual patient might experience relative to other patients or even to a patient’s own last dose ofdronabinol.8Our SolutionsWe believe our SYNDROS™ 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.We believe that quicker absorption may be an important consideration in the selection of a dronabinol product by physicians. Separately, webelieve that our proprietary inhalation dronabinol formulation may further accelerate dronabinol’s onset of action due to their route ofdelivery bypassing first-pass metabolism in the liver. •Reduced dose-to-dose variability: Based on our PK study, we believe SYNDROS™ has lower variability of absorption between patients.Cannabidiol Oral SolutionCannabidiol 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 examples ofwhich include infantile spasms, Dravet Syndrome and Lennox-Gastaut syndrome for which we have received Orphan Drug Designations for CBD.In addition to the above epilepsy indications, we have also received Orphan Drug Designations for the treatment of CBD in glioblastoma multiforme,pontine glioma, and pediatric schizophrenia.Early studies in animal models demonstrate that while CBD has anticonvulsant properties and the effectiveness of CBD-enriched cannabinoids in thetreatment of epilepsy has been reported. A survey of children using a CBD-enriched plant product reported a reduction in their child’s seizures in 84% and11% reported complete seizure freedom. In an open access program using a CBD-enriched plant deprived product, which included 214 patients who receiveddrug, the median reduction in monthly motor seizures was 36.5% and the drug was generally well-tolerated. However, parental report can be subject tosignificant bias, especially where expectations are high.Currently, we have one ongoing and one completed study in epilepsy. The first study, a Phase 1b pharmacokinetic study that is evaluating threedifferent doses of CBD in pediatric patients with refractory epilepsy: 10mg/kg/day, 20mg/kg/day and 40mg/kg/day in pediatric patients with refractoryseizures, is ongoing.A second study, a Phase 2 study to assess the efficacy and safety of Cannabidiol Oral Solution for the treatment of refractory Infantile Spasms, studiedthe effect of Cannabidiol Oral Solution in patients who have failed all approved treatments. This study has been completed and we are evaluating thedevelopment in Infantile Spasms in a less refractory population. Should CBD demonstrate benefit in this population, it will provide a treatment option wherecurrently only poorly tolerated options exist, fulfilling a large unmet need.Further, we are exploring Cannabidiol Oral Solution for pediatric epilepsies and non-epilepsy indications. The initiation of these studies are plannedfor the second half of 2017.Prader-Willi Syndrome, first described in 1956, is a multifaceted developmental disorder and the most common genetic syndrome associated withobesity. It is caused by the absent expression of paternally-inherited genes in the Prader-Willi Syndrome region on 15q11-q13. While it presents withgeneralized hypotonia and developmental delay in infancy, Prader-Willi Syndrome then manifests with uncontrollable appetite, hyperphagia, and excessiveweight gain leading to severe obesity, and it is the appetite behavior classified as hyperphagia in Prader-Willi Syndrome that is the most life threatening.Until recently, no patient lived over the age of 50 due to morbid obesity and its related complications. The mortality rate in patients with Prader-WilliSyndrome is six times higher than patients with other intellectual disabilities.Hyperphagic behaviors can also be dangerous in persons who are not obese, with increased risks of death due to choking while sneaking food, andgastric perforations after consuming more food than usual. Approximately 8%9of deaths in individuals with Prader-Willi Syndrome are reported due to the choking, especially on hot dogs. Prader-Willi Syndrome patients also are knownto eat discarded (contaminated) food and items that are not for human consumption such as pet food, or even non-food items such as paint or paper.Currently, there are no FDA-approved therapies for the treatment of hyperphagia or obesity in patients with Prader-Willi Syndrome. In addition, drugsthat have demonstrated efficacy in the past have been withdrawn or have significant safety concerns (e.g., rimonabant, beloranib). Recent studiesinvestigating modulation of the endocannabinoid system have shown promise. The endocannabinoid system appears to be critically involved in the regulation of appetite, body weight, metabolism, hypothalamic-pituitary-adrenal axis, and reward brain circuitry. In clinical studies, compounds with endocannabinoid effects (fenfluramine, rimonabant) have shown significanteffects on weight and appetite suppression. These effects on appetite also occurred in 19% of epilepsy patients treated with Epidiolex© (i.e., cannabidiolextracted from the cannabis plant) during an open-access program for patients with pediatric seizure disorder.We also provide Cannabidiol Oral Solution and some financial support for Investigator Initiated Trials of Cannabidiol Oral Solution in variousclinical settings such as cocaine dependence, analgesia, and early psychosis. These trials are currently ongoing.Other Product CandidatesOur 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 manufacture syntheticcannabidiol 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 believe couldhave a differentiated efficacy and/or safety profile if formulated by us and delivered via a sublingual spray.Sales and MarketingWe currently market SUBSYS® and intend to commercialize SYNDROS™, if finalization of labeling by the FDA is obtained, and future supportivecare products, if approved, through our U.S.-based commercial sales organization focused on supportive care. Specifically, we currently market SUBSYS® inthe United States through our commercial sales organization. Our product detailing efforts focus primarily on oncologists, pain specialists and centers thatcater to supportive care.We do not currently have sales and marketing capabilities outside of the United States. In international markets, we plan to enter into arrangementswith third parties to pursue requisite regulatory approvals and market and sell our products.We believe some of the key factors in generating continued growth in SUBSYS® usage include taking market share from other competing TIRFproducts and expanding the usage of SUBSYS® for BTCP by building awareness among oncologists of its rapid onset of action, improved bioavailability,most complete range of dosage strengths and ease of administration relative to other TIRF products. To successfully commercialize our family of proprietarydronabinol products, we intend to focus our commercial efforts on taking market share from Marinol and its generic alternatives.As of December 31, 2016, there were approximately 8,100 physicians enrolled in the TIRF REMS program. Enrollment in this class-wide REMSprogram is required by the FDA as of March 2012 in order to prescribe TIRF10products. Approximately 1,600 physicians comprise 90% of TIRF prescriptions dispensed in 2016, according to IMS. Our sales and marketing efforts haveprimarily targeted approximately 100% of these top 1,600 prescribing physicians with a focus on the highest prescribers. We believe that key factors fordriving future SUBSYS® growth include increasing the number of prescriptions written by those physicians who currently prescribe SUBSYS®, increasingthe number of TIRF REMS enrolled physicians and oncologists who prescribe SUBSYS®, and allowing sufficient time for physicians and patients to identifytheir effective SUBSYS® dose among our broad spectrum of dosage strengths.Manufacturing and SupplyWe produce dronabinol, the API in our dronabinol product family, including our proprietary dronabinol product candidates, internally at our U.S.-based, state-of-the-art manufacturing facility. We believe that this facility has the capacity to supply sufficient commercial quantities of dronabinol API forthe initial launch quantities of SYNDROS™, if finalization of labeling by the FDA is obtained, as well as to support the continued development of our othercannabinoid product 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 to importinto the United States and has a limited number of suppliers domestically. For additional information, see “Risk Factors—Risks Related to Our Business andHistory—We produce our dronabinol API internally and may encounter manufacturing failures that could impede or delay commercial production ofSYNDROS™, if finalization of labeling by the FDA is obtained, or our other dronabinol product candidates, if approved, or the preclinical and clinicaldevelopment or regulatory approval of our dronabinol product candidates” in Part I, Item 1A of this report.For our long-term needs, in 2014 we completed construction of a second domestic dronabinol manufacturing facility, which we believe will enableus to supply sufficient commercial quantities of dronabinol API for our continued commercialization of our proprietary dronabinol product candidates, ifapproved. For additional information, see “Risk Factors—Risks Related to Our Business and History—We have expanded our dronabinol API productioncapacity by constructing a second facility. We may encounter a number of challenges relating to the management and operation of such a facility, and wemay never realize a return on our investment” in Part I, Item 1A of this report.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 purification cycles.We believe that our suppliers are equipped to meet our current and future chemical material needs for the commercialization of SYNDROS™, if finalizationof labeling by the FDA is obtained, and the development and commercialization of our dronabinol-based product candidates. For additional information, see“Risk Factors—Risks Related to Our Business and History—We have no internal manufacturing capabilities other than for our dronabinol API, we aredependent on numerous third parties in our supply chain for the commercial supply of SUBSYS®, and if we fail to maintain our supply and manufacturingrelationships with these third parties or develop new relationships with other third parties, we may be unable to continue to commercialize SUBSYS® or todevelop our product candidates.” in Part I, Item 1A of this report.We purchase the fentanyl API utilized in connection with SUBSYS® from one vendor as our sole supplier of the API in this product. SUBSYS® ismanufactured by contract manufacturers and sub-component fabricators. Aptar, a dispensing system company based in Illinois, developed the sublingualspray device we use for SUBSYS®. We entered into a supply agreement effective as of March 7, 2011, with Aptar pursuant to which Aptar supplies us withthe delivery system to administer SUBSYS®. We are required to provide Aptar with rolling quarterly forecasts of our requirement for SUBSYS® drug deliverysystems. Under certain circumstances, such forecasts are non-binding; however, some portions of such forecasts may constitute a firm commitment topurchase delivery systems. The agreement has a term of five years from the effective date, subject to early termination clauses. On October 30, 2015, weentered into an amended and restated supply, development & exclusive licensing agreement with Aptargroup, Inc. which, among other things, extended ourexclusive supply rights to the current sublingual device, currently utilized by SUBSYS®, as well any new device(s) jointly developed by the two companiesfor a period of seven years. In addition to extending the term, this amendment added certain minimum purchase commitments and requires certain tieredroyalties as a percentage of net revenue to be paid by us ranging from less than one percent to the low single digits, commencing in March 2016 through theterm of the agreement, from our sales of SUBSYS® and future products that use the Aptar spray device technology. In January 2016, we assigned our rights,title, duties and11obligations of our manufacturing and supply agreement with DPT and our supply, development & exclusive licensing agreement with Aptar from our parentto our manufacturing subsidiary as part of a corporate restructuring.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, which extendsour existing manufacturing and supply agreement to produce SUBSYS® until the end of 2020. In addition to extending the term, this amendment addedcertain minimum purchase commitments. In July 2016, we, through our manufacturing subsidiary, entered into a further amendment to our DPTmanufacturing and supply agreement dated May 24, 2011. This amendment effectively eliminates any prior minimum purchase (and batch) obligations thathad been set forth in the amendment dated April 30, 2015 and replaces it with a new annual purchase commitment of $4 million per calendar yearcommencing January 1, 2017 through December 31, 2020. As a result, the cumulative effect related to this amendment reduces our aggregated minimumpurchase commitments with DPT from $50 million to $16 million through December 31, 2020.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. We believeboth key suppliers have sufficient capacity to meet our projected product requirements.CompetitionOur industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We facecompetition from many different sources, such as pharmaceutical companies, including generic drug companies, biotechnology companies, drug deliverycompanies and academic and research institutions. We believe the key competitive factors that will affect the commercial success of our products and thedevelopment of our product candidates include, but are not limited to, onset of action, bioavailability, efficacy, cost, convenience of dosing, safety,tolerability profile and intellectual property rights. Many of our potential competitors have substantially greater financial, scientific, technical, intellectualproperty, regulatory and human resources than we do, and greater experience than we do commercializing products and developing product candidates,including obtaining FDA and other regulatory approvals for product candidates. Consequently, our competitors may develop products for the treatment ofBTCP, CINV and anorexia associated with weight loss in patients with AIDS, or other indications we pursue that are more effective, better tolerated, morewidely-prescribed or accepted, more useful and less costly, and they may also be more successful in manufacturing and marketing their products. We also facecompetition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA quotas, recruiting and retaining qualified personnel,establishing clinical trial sites and enrolling patients for clinical trials and in identifying 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 products againstwhich we directly compete include Teva Pharmaceutical Industries Ltd.’s Fentora and Actiq, Galena Biopharma Inc.’s Abstral, Depomed Inc.’s Lazanda andBioDelivery Science International, Inc.’s Onsolis. Some generic fentanyl products against which SUBSYS® competes are marketed by Mallinckrodt, Inc., ParPharmaceutical Companies and Actavis, Inc. In addition, we are aware of numerous companies developing other treatments and technologies for rapiddelivery of opioids to treat BTCP, including transmucosal, transdermal, nasal spray, inhaled delivery systems and sublingual delivery systems, among others.Cannabinoid Product FamilyWith 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 products12that we may market from those of our competitors, successfully develop or introduce new products that are less costly or offer better performance than thoseof our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. In addition, thereare a number of established therapies and products already commercially available and under development by other companies that treat the indicationswhich SYNDROS™ and our other dronabinol product candidates are intended to treat. Specifically, SYNDROS™, if finalization of labeling by the FDA isobtained, and our other dronabinol product candidates, will compete against therapies and products such as AbbVie, Inc.’s Marinol and Marinol generics. ParPharmaceutical Companies markets an approved generic version of Marinol, and Actavis, Inc. markets an authorized generic version of Marinol. Moreover,our 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 of the United States where non-synthetic cannabinoids are legal. In addition, literature has been published arguing thebenefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted laws legalizing medicinal andrecreational marijuana. There is some support in the United States for further legalization of marijuana. We also cannot assess the extent to which patientsutilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approved dronabinol products. Furthermore, in the treatment ofCINV, physicians typically offer conventional anti-nausea agents prior to initiating chemotherapy, such as Sanofi’s Anzemet, Eisai Inc./Helsinn Group’sAloxi, Roche Holding AG’s Kytril, Par Pharmaceutical Companies’ Zuplenz and GlaxoSmithKline plc’s Zofran, as well as Neurokinin 1 receptor antagonistson the market 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.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 PropertyThe 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 importantto our business; •prosecute our patent applications and defend our issued patents; •preserve the confidentiality of our trade secrets; and •operate without infringing the patents and proprietary rights of third parties.We intend to continue to seek appropriate patent protection for certain of our product candidates, drug delivery systems, molecular modifications, aswell as other proprietary technologies and their uses by filing patent applications in the United States and selected other countries. We intend for these patentapplications to cover, where possible, claims for medical uses, processes for preparation, processes for delivery and formulations.As of February 13, 2017, we owned or licensed from third parties a total of twenty-nine worldwide patents and fifty-four patent applicationsincluding seventeen issued U.S. utility patents and twenty-eight pending U.S. utility patent applications. These U.S. patents and patent applications willexpire between 2017 and 2036. Some of the issued patents and pending applications, if issued, may also be eligible for patent term adjustment and patentterm restoration, thereby extending their patent terms.SUBSYS®Our SUBSYS® patent portfolio currently consists of five Orange Book listed (with the FDA) U.S. Patent Nos. 8,486,972, 8,486,973, 8,835,459,8,835,460 and 9,241,935, one granted U.S. patent no. 9,289,387 and two pending U.S. patent applications. These patents are directed to SUBSYS® brandfentanyl and/or the use of the SUBSYS® sublingual fentanyl spray for the treatment of pain and will expire in 2027 and 2030. We also currently have elevenissued foreign patents and six pending foreign patent applications covering formulations and methods of use relating13to SUBSYS®. Any patents that issue from our pending foreign patents and applications are expected to expire no earlier than 2027.DronabinolOur dronabinol patent portfolio currently consists of four issued U.S. patents and one pending U.S. patent application. Two of the U.S. patents aredirected to formulations of dronabinol and methods of manufacturing and packaging dronabinol in capsules. Two of the U.S. patents and the pendingapplications are directed to SYNDROS™ brand oral solution formulations of dronabinol. Three of the issued dronabinol patents will expire in 2028, whilethe forth will expire in 2033. Any patents that issue from our pending patent application will likely expire in 2028.OtherThe rest of our patent portfolio relates to patents and applications owned or licensed by us and directed to other potential product candidates. Although we believe our rights under these patents and patent applications provide a competitive advantage, the patent positions of pharmaceuticaland biotechnology companies are highly uncertain and involve complex legal and factual questions. In addition, we may not be able to obtain issued patentsfrom pending applications. Even if patents are granted, the allowed claims may not be sufficient to adequately protect the technology owned by or licensedto us. Any patents or patent rights that we obtain carry some risk of being circumvented, challenged or invalidated by our competitors. For example, asdescribed in Note 7 in the Notes to our Consolidated Financial Statements, a former officer of Insys Pharma sought unsuccessfully to rescind his assignmentof his inventions concerning fentanyl and dronabinol patent applications described above. Ownership and inventorship disputes may arise for other patentsand applications that we own or license.We also rely on trade secrets, proprietary know-how and continuing innovation to develop and maintain our competitive position, especially whenwe do not believe that patent protection is appropriate or can be obtained. We require each of our employees, consultants and advisors to execute aproprietary information and inventions assignment agreement before they begin providing services to us. Among other things, this agreement obligates eachemployee, consultant or advisor to refrain from disclosing any of our confidential information received during the course of providing services and, withsome exceptions, to assign to us any inventions conceived or developed during the course of these services. We also require confidentiality agreements fromthird parties that receive our confidential information.The biotechnology and biopharmaceutical industries are characterized by the existence of a large number of patents and frequent litigation based onallegations of patent infringement. As our current and potential product candidates and others based upon our proprietary technologies progress towardcommercialization, the possibility of an infringement claim against us increases. While we attempt to be certain that our products and proprietarytechnologies do not infringe other parties’ patents and other proprietary rights, competitors or other parties may assert that we infringe on their proprietaryrights.We have conducted certain clearance searches of issued U.S. patents for our fentanyl formulations but we have not conducted extensive clearancesearches for our other product candidates, and cannot guarantee that the searches we have done were 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 isdifficult to predict whether or not third-party patent applications will issue and what claim scope they may obtain. If we conclude that any identified patents,or patent applications once issued as patents, cover SUBSYS® -or our product candidates, we cannot guarantee that we will be able to formulate around suchpatents 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 pendingpatent applications that are unknown to us and, if granted, may prevent us from making, using or selling SUBSYS® or our product candidates. Other productcandidates that we may develop, either internally or in collaboration with others, could be subject to similar uncertainties. If a product is14found to infringe a third-party patent, we could be prevented from developing and selling that product. Please see the section entitled “Risk Factors — RisksRelating to Intellectual Property.”Environmental and Safety MattersWe use hazardous materials, including chemicals, biological agents and compounds that could be dangerous to human health and safety or theenvironment. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern, among other things, the use,generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations maybe expensive, and current or future environmental laws and regulations may impair our product development efforts.In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. If one of our employees wasaccidentally injured as a result of the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or her treatment should bewithin the coverage terms of our workers’ compensation insurance policy. However, we do not carry specific biological or hazardous waste insurancecoverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biologicalor hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized withfines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.Government RegulationFDA Approval ProcessIn the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDCA and other federal and state statutes andregulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion andmarketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply withapplicable U.S. regulations may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending INDs, andNDAs or the issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civilpenalties and criminal prosecution.FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed inthe United States. Pharmaceutical product development in the United States typically involves, among other things, preclinical laboratory and animal 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 toestablish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirementstypically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or diseaseindicated 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 and requirementsincluding GLPs. The results of preclinical testing are submitted to the FDA as part of an IND along with other information including information aboutproduct chemistry, manufacturing and controls and a proposed clinical trial protocol. Certain nonclinical tests, such as animal tests of reproductive toxicityand carcinogenicity, may be conducted after the IND is submitted. A 30-day waiting period after the submission of each IND is required prior to thecommencement 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 maybegin.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 subjects providetheir informed consent in writing for their participation in any clinical trial, as well as under protocols detailing the objectives of the trial, the parameters tobe used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing in U.S. patients and subsequent protocolamendments must be submitted to the FDA as part of the IND. The FDA may order the temporary or permanent discontinuation of a clinical trial at any timeor impose other sanctions if it believes that the15clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocoland informed consent information for patients in clinical trials must also be submitted to IRB for approval. An IRB may also require the clinical trial at thesite to be halted, either temporarily or permanently, for failure to comply 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, theinitial introduction of the drug into healthy human volunteers, the drug is tested to assess safety, metabolism, PK, pharmacological actions, side effectsassociated with increasing doses and, if possible, early evidence of effectiveness. Phase 2 usually involves trials in a limited patient population to evaluatethe effectiveness of the drug for a particular indication or indications, dosage tolerance and optimum dosage, and identify possible adverse effects and safetyrisks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to providesubstantial evidence of clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to establish theefficacy and safety of the drug and to provide adequate information for the labeling of the drug. In some cases, the FDA may condition approval on thesponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety and effectiveness after approval. Such post-approval studies aretypically referred to as Phase 4 studies.The current FDA standards for approving new pharmaceutical products are more stringent than those that were applied in the past. These standardswere not applied to many established products currently on the market, including certain opioid products. As a result, the FDA does not have as extensivesafety databases on these products as on some products developed more recently. The FDA has recently expressed an intention to develop safety data forcertain products, including many opioids. In particular, the FDA has expressed interest in specific impurities that may be present in a number of opioidnarcotic APIs, such as oxycodone. Based on certain structural characteristics, these impurities may have the potential to cause mutagenic effects. If, aftertesting, such effects are ultimately demonstrated to exist, more stringent controls on the levels of these impurities may be required for FDA approval ofproducts containing these impurities, such as oxymorphone. Any additional testing or remedial measures that may be necessary could result in increasedcosts for, or delays in, obtaining approval for certain of our products in development.After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required beforemarketing of the product may begin in the United States. The NDA must include the results of all preclinical, clinical and other testing and a compilation ofdata relating to the product’s pharmacology, chemistry, manufacture and controls, and proposed labeling, among other things. The cost of preparing andsubmitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application user fee, and themanufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment fees per product and per establishment. These feesare typically increased annually.The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s thresholddetermination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review.Under the PDUFA the FDA has agreed to certain performance goals in the review of NDAs. The FDA has a goal of reviewing applications for non-prioritydrug products within 12 months of NDA submission. The review process may be extended by the FDA for three additional months to consider certaininformation or clarification regarding information already provided in the submission. The FDA may also refer applications for novel drug products or drugproducts which present difficult questions of safety or efficacy to an advisory committee, typically comprised of a panel that includes clinicians and otherexperts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of anadvisory committee, but it considers such recommendations carefully when making decisions. Additionally, the FDA will inspect the facility or the facilitiesat which the drug is manufactured. The FDA will not approve the product unless the facility demonstrates compliance with current cGMPs and the NDAcontains data that provides substantial evidence that the drug is safe and effective for the indication sought in the proposed labeling. Additionally, the FDAwill typically inspect one or more clinical trial sites to assure compliance with GCPs before approving 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 require substantialadditional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’ssatisfaction16in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two to six months dependingon the type of information included.An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDAapproval, the FDA may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy and may impose other conditions,including labeling or distribution restrictions or other risk-management mechanisms that can materially affect the potential market and profitability of thedrug. Further, if there are any modifications to the drug, including changes in indications, dosage, labeling, or manufacturing processes or facilities, a new orsupplemental NDA may need to be submitted, which may require additional data or additional nonclinical studies and clinical trials. Once granted, productapprovals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified 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 ApplicationsIn 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 the OrangeBook can, in turn, be cited by potential competitors in support of approval of an ANDA. An ANDA provides for marketing of a drug product that has the sameactive ingredients in the same strengths and dosage form as the RLD and has been shown to be bioequivalent to the RLD. ANDA applicants are not requiredto conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, but are required to conductbioequivalence testing, which compares the bioavailability of their drug product to that of the RLD to confirm chemical and therapeutic equivalence. Drugsapproved in this way are commonly referred to as generic versions of the listed drug, and can often be substituted by pharmacists under prescriptions writtenfor 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 or arenot applicable. Specifically, the applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired; (3) thelisted patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not beinfringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents areinvalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents via a Paragraph IV certification, the FDA will not approvethe ANDA application until all the listed patents claiming the referenced product have expired.If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification tothe NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringementlawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IVcertification 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 thelawsuit or a decision in the infringement case that is favorable to the ANDA applicant. As an incentive for the rapid development of generic drug products,the first ANDA(s) filed that challenges a listed patent by filing a Paragraph IV certification may be granted a 180-day marketing exclusivity period duringwhich the FDA may not approve another ANDA for the same product. There may be multiple such “first filers.” The 180-day marketing exclusivity period istriggered either by commercial launch of any first-filed ANDA approved product or from the date of a court decision finding the challenged patent to beinvalid, unenforceable or not infringed, whichever is first. The 180-day exclusivity can be forfeited, among other reasons, if the first filed and approvedANDA is not marketed, does not obtain tentative approval or the challenged patent expires.17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 following approvalof a drug containing no previously approved active ingredients, during which ANDAs for generic versions of those drugs cannot be submitted unless thesubmission contains a Paragraph IV challenge to a listed patent, in which case the submission may be made four years following the original productapproval. Federal law additionally provides for a period of three years of exclusivity following approval of a drug that contains previously approved activeingredients but is approved in a new dosage form, route of administration or combination, or for a new use, the approval of which was required to besupported by new clinical trials conducted by or for the sponsor. The FDA cannot grant effective approval of an ANDA based on that listed drug during thisthree-year period.Section 505(b)(2) Regulatory PathwayMost drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonly referredto as a Section 505(b)(2) NDA. Section 505(b)(2) of the FDCA enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy for anexisting product, or published literature, in support of its application.505(b)(2) NDAs often provide an alternate regulatory pathway to FDA approval for new or improved formulations or new uses of previouslyapproved products. Specifically, Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes fromstudies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon the FDA’sfindings from preclinical or clinical studies conducted for an approved product. The FDA may also require 505(b)(2) applicants to perform additional studiesor measurements to support the change from the approved product. The FDA may then approve the new product candidate for all or some of the labelindications 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 extentthat the Section 505(b)(2) applicant is relying on findings of safety or efficacy for an already approved product, the applicant is subject to existingexclusivity for the reference product and is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to thesame extent that an ANDA applicant would. Thus approval of a Section 505(b)(2) NDA can be stalled until all the listed patents claiming the referencedproduct have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for thereferenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement 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 RequirementsOnce an NDA is approved, a product is subject to extensive and ongoing post-approval requirements. For instance, the FDA closely regulates thepost-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. FDA post-market regulations also include, among otherthings, requirements relating to drug listing, recordkeeping, periodic reporting, product sampling and distribution, manufacturing and reporting of adverseevents arising from use of the product. Failure to comply with these regulatory requirements may result in restrictions on the marketing or manufacturing ofthe product, recall or market withdrawal, fines, warning letters, refusal to approve pending applications, suspension or revocation of approvals, productseizure or detention, injunctions and/or the imposition of civil or criminal penalties.Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of theconditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submissionand FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requiresclinical data similar to that in the original application, and the FDA uses the same procedures and can take the same actions in reviewing NDA supplementsas it does in reviewing original NDAs.Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketingtesting, known as Phase 4 commitments or requirements, a REMS program18and surveillance to monitor the effects of an approved product or 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 are subject toperiodic unannounced inspections by the FDA during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly,manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs. The FDAand comparable state regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatorystandards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.The distribution of prescription pharmaceutical products is also subject to the PDMA which governs the distribution of drugs and drug samples at thefederal level, and sets minimum standards for the licensing and regulation of drug distributors by the states. Both the PDMA and state laws limit thedistribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.Risk Evaluation and Mitigation StrategiesOn December 29, 2011, the FDA approved a single shared REMS for TIRF products. TIRF products, which include the brand-name drugs Abstral,Actiq, Fentora, Lazanda, Onsolis and SUBSYS®, are narcotic pain medicines called opioids used to manage breakthrough pain in adults with cancer whoroutinely take other opioid pain medicines around-the-clock. The program officially began in March 2012.The goals of the TIRF REMS Access Program are to ensure patient access to important medications and mitigate the risk of misuse, abuse, addiction,overdose and serious complications due to medication errors by: •prescribing and dispensing TIRF products only to appropriate patients, including use only in opioid-tolerant patients; •preventing inappropriate conversion between fentanyl products; •preventing accidental exposure to children and others for whom TIRF products were not prescribed; and •educating prescribers, pharmacists, and patients on the potential for misuse, abuse, addiction, and overdose.Health care professionals who prescribe TIRF products that will only be used in an inpatient setting (hospitals, hospices, or long-term care facilities)are not be required to enroll in the TIRF REMS Access Program. Similarly, patients who receive TIRF products in an inpatient setting are not required toenroll in the program. Long term care and hospice patients who obtain their medications from outpatient pharmacies, however, must be enrolled.Controlled Substances; Drug Enforcement AdministrationWe sell products that are “controlled substances” as defined in the CSA which establishes registration, security, recordkeeping, reporting, storage andother requirements administered by the DEA. States impose similar requirements. The DEA regulates entities that handle controlled substances and theequipment and raw materials used in their manufacture and packaging, in order to prevent loss and diversion into illicit channels of commerce.The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have high potential for abuse,no currently accepted medical use in the United States and lack accepted safety for use under medical supervision, and may not be marketed or sold in theUnited States. Except for research and industrial purposes, a pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substancesconsidered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances. Fentanyl, the activeingredient in our SUBSYS® product, is listed by the DEA as a Schedule II substance under the CSA. Consequently, its manufacture, shipment, storage, saleand use are subject to a high degree of regulation. For example, manufacturing of fentanyl is subject to a DEA regulated quota system. In addition,19generally all Schedule II drug prescriptions must be signed by a physician and physically presented to a pharmacist before filling and may not be refilledwithout a new prescription.DEA registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance. The registration isspecific to the particular location, activity and controlled substance schedule. For example, separate registrations are needed for import and 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 reports made tothe DEA, for example distribution reports for Schedule I and II controlled substances, Schedule III substances that are narcotics, and other designatedsubstances. Reports must also be made for thefts or losses of any controlled substance, suspicious orders, and to obtain authorization to destroy anycontrolled substance. In addition, special authorization and notification requirements apply to imports and exports.A DEA quota system controls and limits the availability and production of controlled substances in Schedule I or II. This includes manufacturing ofthe API and production of dosage forms. Distributions of any Schedule I or II controlled substance must also be accompanied by special order forms, withcopies provided to the DEA. Absent the Marinol-like formulation and encapsulation exception, dronabinol is a Schedule I controlled substance and,therefore, subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregate quota for how much total dronabinolmay be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limitedaggregate amount of dronabinol that the DEA allows to be produced in the United States each year is allocated among individual companies, who mustsubmit 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 II substance, including dronabinol and fentanyl. TheDEA may adjust aggregate production quotas and individual manufacturing quotas from time to time during the year, although the DEA has substantialdiscretion in whether or not to make such adjustments. Our, or our contract manufacturers’, quota of the active ingredient may not be sufficient to meetcommercial demand or complete clinical trials. Any delay or refusal by the DEA in establishing our, or our contract manufacturers’, quota for controlledsubstances could delay or stop our clinical trials or product launches which could have a material adverse effect on our business, financial position andresults of operations.The DEA conducts periodic inspections of certain registered establishments that handle controlled substances. Failure to maintain compliance withapplicable requirements, particularly as manifested in loss or diversion, can result in enforcement action that could have a material adverse effect on ourbusiness, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings torestrict, 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 classified under theinternational treaties and current U.S. controls adequately address international requirements. Any change in the international treaties regarding classificationof these products could affect regulation of these substances in the United States and in other countries.Anti-Kickback and False Claims LawsIn 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. These20laws include Anti-Kickback and False Claims statutes. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering,paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of anyhealthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. The term “remuneration” has beenbroadly 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 beeninterpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other.Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions andsafe harbors are drawn narrowly, and our practices may not in all cases meet all of the criteria for statutory exemptions or safe harbor protection. Practices thatinvolve remuneration 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 an arrangementinvolving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The reach of the Anti-Kickback Statute wasalso broadened by the PPACA which amends the intent requirement of the federal Anti-Kickback Statute such that a person or entity no longer needs to haveactual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that the government mayassert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim forpurposes of the federal False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who isdetermined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service thatwas 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 the federalgovernment. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money orproperty presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws forallegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates,and for allegedly providing free product to customers with the expectation that the customers would bill federal healthcare programs for the product. Inaddition, certain marketing practices, including off-label promotion, may also lead to violations of the False Claims Act. Many states also have statutes orregulations similar to the federal Anti-Kickback Statute and False Claims Act, which state laws apply to items and services reimbursed under Medicaid andother state programs, or, in several states, apply regardless of the payer. Moreover, qui tam suits filed under the False Claims Act can be brought by anyindividual on behalf of the government and such individuals, commonly known as “relators” or “whistleblowers,” may share in any amounts paid by theentity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers ofhealth care companies to have to defend such qui tam actions and pay substantial sums to settle such actions.Also, the HIPAA created new federal criminal statutes that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefitprogram, including private third-party payers and knowingly and willfully falsifying, concealing or covering up a material fact or making any materiallyfalse, fictitious or 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 and regulations,which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation ofcorporate compliance programs and reporting of payments or transfers of value to healthcare professionals. Coverage and ReimbursementThe commercial success of our products and our ability to commercialize any approved product candidates successfully will depend in part on theextent to which governmental authorities, private health insurers and other third-party payers provide coverage for and establish adequate reimbursementlevels for our products, product candidates, and related treatments.21Government health administration authorities, private health insurers and other organizations generally decide which drugs they will pay for andestablish reimbursement levels for health care. In particular, in the U.S., private health insurers and other third-party payers often provide reimbursement forproducts and services based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments.In the U.S., the European Union and other potentially significant markets for our product candidates, government authorities and third-party payers areincreasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which hasresulted in lower average selling prices. Further, the increased emphasis on managed healthcare in the U.S. and on country and regional pricing andreimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and usage, which may adversely affect ourfuture product sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmentallaws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general. The costcontainment measures that healthcare payers and providers are instituting and the effect of any healthcare reform could significantly reduce our revenuesfrom the sale of any products or approved product candidates. We cannot provide any assurances that we will be able to obtain and maintain third-partycoverage or adequate reimbursement for our product candidates in whole or in part.The MMA imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicarebeneficiaries may enroll in prescription drug plans offered by private entities which provide coverage of outpatient prescription drugs. Part D plans includeboth stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A andB, 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 candevelop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must includedrugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary usedby a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs ofprescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our future productscovered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drugbenefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations in setting their own payment rates. Anyreduction in payment that results from Medicare Part D may result in a similar reduction in payments from non-governmental payers.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 payers, it is notclear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of astudy. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of ourproducts or product candidates. If third-party payers do not consider our products to be cost-effective compared to other available therapies, they may notcover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on 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. and elsewhere,there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/orexpanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislativeinitiatives, including, most recently, the PPACA, which changes the way healthcare is financed by both governmental and private insurers.22Healthcare Privacy and Security LawsWe 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 uniform standards forthe electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individuallyidentifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among otherthings, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates” — independent contractors or agents of coveredentities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased thecivil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys generalnew authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associatedwith pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, some of which aremore stringent then HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating complianceefforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and criminal penalties.Approval Outside the United StatesIn order to market any product outside of the United States, we must comply with numerous and varying regulatory requirements of other countriesregarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products. Approval proceduresvary among countries and can involve additional product testing and additional administrative review periods, and may be otherwise complicated by ourproduct candidates being controlled substances such as synthetic cannabinoids and fentanyl. The time required to obtain approval in other countries mightdiffer from and be longer than that required to obtain FDA approval and DEA classification. Regulatory approval in one country does not ensure regulatoryapproval in another, but a failure or delay in obtaining regulatory approval in one country may negatively 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 regulatory approvalprocess in Europe and in other countries is a lengthy, challenging and inherently uncertain process.Research and Development Our operating results will also depend significantly on our research and development activities and related regulatory developments. Our researchand development expenses were $73.9 million, $56.7 million and $33.1 for the years ended December 31, 2016, 2015 and 2014, respectively. As ofDecember 31, 2016, we had 59 full-time research and development personnel. We expect research and development expenses to increase as we increaserelated headcount and continue our planned preclinical studies and clinical trials for our product candidates, particularly our proprietary cannabinoidproduct candidates, including SYNDROS™, and sublingual spray product candidates. We do not expect to realize net revenues from all of these research anddevelopment initiatives in the near term and may never realize net revenues from these investments. For additional information, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Performance—Product Development and RelatedRegulatory Processes.EmployeesAs of December 31, 2016, we employed 423 full-time employees, including 44 manufacturing employees, 274 sales and marketing employees,59 employees in research and development, and 46 employees in administration. As of the same date, 30 of our employees had a Ph.D. or M.D. degree. Noneof our employees is subject to a collective bargaining agreement and we consider our relationship with our employees to be good.23Scientific Advisory Board We have established a scientific advisory board consisting of industry experts with knowledge of our target markets. Our scientific advisors generallymeet twice a year as a group to assist us in formulating our research, development, clinical and sales and marketing strategies. Some individual scientificadvisors consult with and meet informally with us on a more frequent basis. Our scientific advisors are not our employees and may have commitments to, orconsulting or advisory contracts with, other entities that may limit their availability to us. In addition, our scientific advisors may have arrangements withother companies to assist those companies in developing products or technologies that may compete with ours.Available InformationWe 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 reports available,free of charge, in the “Investors” section of our Internet website as soon as reasonably practicable after we electronically file these materials with, or furnishthese materials to, 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 materials onthe SEC Internet site at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with theSEC.ITEM 1A.RISK FACTORSRisks Related to Our Business and IndustryWe 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 depend ona number of factors, including, but not limited to: •achievement of broad market acceptance and coverage by third-party payers for our products; •the effectiveness of our efforts in marketing and selling SUBSYS®; •our and our contract manufacturers’ ability to successfully manufacture commercial quantities of our products at acceptable cost levels andin compliance 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 thirdparties; •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.The continuing and heightened publicity surrounding the national opioid epidemic continues to result in sensitivity by some healthcareprofessionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by healthcare professionals and pharmacies is the result of third-partypayers, such as insurance companies, and regulatory and government agencies increasingly scrutinizing the indications and uses for which healthcareprofessionals are prescribing, and pharmacies are dispensing, opioids. Moreover, ongoing state and federal investigations into our sales, marketing and othercommercial practices and developments and media reports that may24arise in connection with such investigations may negatively affect our relationships with healthcare professionals and pharmacies and their prescribing ordispensing habits. Consequently, these current and potential future events have and will likely continue to affect the manner in which, and the situationswhen, SUBSYS® is being prescribed, dispensed and approved for coverage.If SUBSYS®, SYNDROS™, or any of our product candidates for which we receive regulatory approval, do not maintain broad market acceptanceor coverage by third-party payers, the revenues that we generate from this product will be limited.The commercial success of SUBSYS®, SYNDROS™ and any product candidates for which we obtain marketing approval from the FDA or otherregulatory authorities, will depend upon the continued acceptance of these products by physicians, patients, healthcare payers and the medical community.Coverage and reimbursement of our approved products by third-party payers is also necessary for commercial success. The degree of market acceptance ofSUBSYS®, SYNDROS™ and any other product candidates for which we may receive regulatory approval will depend on a number of factors, including: •patients’ ability to obtain sufficient third-party payer 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 payer 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 REMS protocolfor all TIRF products, physicians are advised to begin patients at the lowest dose available for the applicable TIRF product, which for SUBSYS® is 100 mcg.If patients do not experience pain relief at initial low-dose prescriptions of SUBSYS®, they or their physicians may conclude that SUBSYS® is ineffective ingeneral and may discontinue use of SUBSYS® before titrating to an effective dose. In addition, many third-party payers require usage and failure on cheapergeneric versions of Actiq prior to providing reimbursement for SUBSYS® and other branded TIRF products, which limits SUBSYS®’ use as a first-linetreatment option.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. Controlledsubstances are classified by the DEA as Schedule I through V substances, with Schedule I substances being prohibited for sale in the United States, ScheduleII substances considered to present the highest risk of abuse and Schedule V substances being considered to present the lowest relative risk of abuse.SUBSYS® contains fentanyl, an opioid, and is regulated as a Schedule II controlled25substance, and despite the strict regulations on the marketing, distributing, prescribing and dispensing of such substances, illicit use and abuse of controlledsubstances is well-documented. Thus, the marketing of SUBSYS® and, if approved, our product candidates that contain controlled substances, may generatepublic controversy that may adversely affect market acceptance of SUBSYS® and, if approved, such product candidates.Our efforts to educate the medical community and third-party payers 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 payers and patients, we maynot generate sufficient revenue from these products to remain profitable.In addition, fentanyl and dronabinol treatments can be costly to third-party payers and patients. Accordingly, hospitals and physicians may resistprescribing our products and third-party payers 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 impacting theoverall 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 or gain,maintain or increase market share in that market, this failure would have a material adverse effect on our ability to execute on our business plan and ability togenerate revenue.The unpredictability and regulation surrounding reimbursement on SUBSYS® and SYNDROS™ may affect our financial condition and results ofoperations.Our sales of, and revenue from, SUBSYS® (and our anticipated future revenue from SYNDROS™) depend in significant part on the coverage andreimbursement policies of third-party payers, including government payers such as Medicare and Medicaid, and private health insurers. All third-party payersare sensitive to the cost of drugs and consistently implement efforts to control these costs, which efforts include, but are not limited to, establishing excludedor preferred drug lists. SUBSYS® has been, and will likely continue to be, subject to these restrictions and impediments from third-party payers, particularlyPBMs and private health insurers. Our product, SUBSYS®, has been included on an exclusion list for at least one significant PBM and may in the future beincluded on other 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 have an off-formulary, medically necessary drug covered for patients, being placed on an exclusion list makes it difficult for many patients covered through a PBMadministered plan to have SUBSYS® covered by insurance. In the future, we may not be able to work with other PBMs to evaluate price increases and tocommunicate with managed care and health-system decision-makers to ensure a balanced approach which takes into account the clinical performance andefficacy of our products. Moreover, in the United States, there have been, and we expect there will continue to be, a number of state and federal proposals thatlimit the amount that third-party payers may pay to reimburse the cost of drugs, particularly for state and federal government programs such as Medicare andMedicaid, as well as managed care providers and private insurance plans. We believe the increasing emphasis on managed care in the United States has andwill continue to put pressure on the price and usage of SUBSYS®. Our ability to generate revenue is affected by the availability of third-party reimbursementfor SUBSYS® and our results of operations will be negatively affected if we 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 patient serviceshub, to help patients work with their insurance companies. The patient support assistance provided by us, including our patient services hub, is subject toextensive and complex federal and state laws and varied third-party payers standards, procedures, processes and conditions. Our compliance with applicablelaws, regulations and standards is expensive and time consuming and substantial governmental resources exist to26enforce and prosecute these applicable laws, regulations and standards and companies that violate such laws, regulations and standards may face substantialpenalties. The potential sanctions include significant civil, criminal and administrative penalties, damages and fines and exclusion from participation infederal health care programs. Because of the breadth of these laws and the lack of extensive legal guidance in the form of regulations or court decisions, it ispossible that some of our business activities could be subject to challenge or penalty under one or more of these laws. Such a challenge, irrespective of theunderlying merits of the challenge or the ultimate outcome of the matter, could have a material adverse effect on our business, financial condition, results ofoperations and growth prospects.We or our collaborators may not be successful in executing sales and marketing strategies for SUBSYS®, SYNDROS™, or any additional productcandidates for which we obtain regulatory approval. If such sales and marketing strategies are not successful, we may not be able to maintain or increaseour revenues.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 SYNDROS™ or any of our product candidates for which we obtain regulatory approval and maintain salesand marketing responsibility, our commercial organization. Our commercial organization may not perform over time as we currently anticipate. To the extentour commercial organization does not perform over time as we currently anticipate, we will need to consider alternatives, such as entering into arrangementswith third parties to market and sell our products. Any arrangement would likely result in significantly greater sales and marketing expenses or lowerrevenues than our current estimates.Our field sales force promotes SUBSYS® primarily to oncologists, pain management specialists and centers that cater to supportive care in the UnitedStates. We may either increase or decrease the size of our sales force in the future based upon market conditions and actual sales performance, as well as in theevent that we obtain regulatory approval for any of our product candidates. In addition, we could lose sales personnel or the performance of our salespersonnel as measured by actual sales may be disappointing. Many of our competitors have significantly larger sales and marketing organizations, andsignificantly greater experience than we do in selling, marketing and distributing pharmaceuticals, and we may not be able to compete successfully withthem with our existing commercial organization.We have recently grown our business and will need to further increase the size and complexity of our organization in the future, and we mayexperience difficulties in managing our growth and executing our growth strategy.Our management and personnel, systems and facilities currently in place may not be adequate to support our business plan and future growth. Withthe commercialization of SUBSYS® in March 2012 and our anticipated launch of SYNDROS™ in 2017, we have increased our number of full-timeemployees from 32 on December 31, 2010 to 423 as of December 31, 2016, primarily because we established a commercial organization and our commercialinfrastructure over that period, and the complexity of our business operations has substantially increased. We will need to further expand our scientific, salesand marketing, managerial, operational, financial and other resources to support our planned research, development and commercialization activities.Our need to effectively manage our operations, growth and various projects requires that we: •continue to improve our operational, financial, management and regulatory compliance controls and reporting systems and procedures; •attract and retain sufficient numbers of talented employees; •manage our commercialization activities for SUBSYS® effectively and in a cost-effective manner; •manage our clinical trials effectively; •manage our internal dronabinol production operations effectively and in a cost effective manner;27 •manage our development efforts effectively while carrying out our contractual obligations to contractors and other third parties; and •continue to improve and expand our facilities.In addition, historically, we have utilized and continue to utilize the services of part-time outside consultants to perform a number of tasks for us,including tasks related to compliance programs, clinical trial management, regulatory affairs, formulation development and other drug developmentfunctions. For example, in addition to seeking advice from our scientific advisory board, we utilize consultants for tasks such as state licensing procurement.Our growth strategy may also entail expanding our use of consultants to implement these and other tasks going forward. Because we rely on consultants forcertain functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractualobligations and meet expected deadlines. There can be no assurance that we will be able to manage our existing consultants or find other competent outsideconsultants, as needed, on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees andexpanding our use of consultants, we may be unable to successfully implement the tasks necessary to effectively execute on our planned research,development and commercialization activities and, accordingly, may not achieve our research, development and commercialization goals.We may not be able to obtain all necessary approvals for SYNDROS™, which would limit our near-term future revenue 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 all necessary approvals for the commercial launch of SYNDROS™. We received FDAapproval for SYNDROS™ in July 2016. In March 2017, the DEA issued an interim final ruling that would result in SYNDROS™ being placed in Schedule IIof the CSA. We are currently awaiting the finalization of labeling by the FDA as the final approval prior to commercial launch.If we are unable to obtain all necessary approvals for the commercial launch of SYNDROS™, our ability to generate additional near-term revenuesbeyond those derived from the commercial sale of SUBSYS® will be significantly, if not completely, limited or materially delayed, which would have amaterial adverse impact on our business, results of operations and financial condition.We produce our dronabinol API internally and may encounter manufacturing failures that could impede or delay commercial production ofSYNDROS™, if all necessary approvals are obtained, or our other dronabinol product candidates, if approved, or the preclinical and clinical developmentor regulatory approval of our dronabinol product candidates.Any failure in our internal dronabinol API manufacturing operations could cause us to be unable to meet demand for SYNDROS™, if all necessaryapprovals are obtained, or our other dronabinol product candidates, if approved, and lose potential revenue, delay the preclinical and clinical development orregulatory approval of our dronabinol product candidates, and harm our reputation. Our internal manufacturing operations may encounter difficultiesinvolving, among other things, production yields, regulatory compliance, contamination, quality control and quality assurance, obtaining DEA quotas whichallow us to produce dronabinol in the quantities needed to execute on our business plan, and shortages of qualified personnel. Our ability to supportregulatory approval of our dronabinol product candidates, could be impeded, delayed, limited or denied if the FDA does not approve and maintain theapproval of our manufacturing processes and facilities. In addition, we have limited experience producing dronabinol in commercial quantities and mayencounter difficulties with continuing to manufacture commercial quantities of dronabinol or the quantities needed for our preclinical studies or clinicaltrials. Such difficulties could result in a delay in the commercial launch of SYNDROS™, if all necessary approvals are obtained, or our other dronabinolproduct candidates, 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, inabilityto manufacture dronabinol in the United States would have a material adverse effect on our business given the regulatory restrictions associated withobtaining28authorization to import and transport controlled substances into the United States. Moreover, we believe dronabinol is difficult to produce and if there wasany problem in manufacturing it internally, we may not be able to identify a third-party to manufacture it for us in a 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 technical information. Inaddition, we must obtain and maintain necessary DEA and state registrations, and must establish and maintain processes to assure compliance with DEA andstate requirements governing, among other things, the storage, handling, security, recordkeeping and reporting for controlled substances. We must also applyfor and receive a quota for dronabinol. Any failure to comply with these requirements may result in penalties, including fines and civil penalties, suspensionof production, suspension or delay in product approvals, product seizure or recall, operating restrictions, criminal prosecutions or withdrawal of productapprovals, any of which could significantly and adversely affect our business. If the safety of any product or product candidate or component is compromiseddue to a failure to adhere to applicable laws or for other reasons, we may not be able to successfully commercialize or obtain regulatory approval for theaffected product or product candidate, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay or terminationof commercialization, preclinical studies and clinical trials, regulatory submissions or approvals of our products or product candidates, entail higher costs orresult in our being unable to effectively commercialize our approved products. Certain changes in our dronabinol API manufacturing processes or procedures,including a change in the location where the material is manufactured, generally require prior FDA, or foreign regulatory authority, review and/or approval.We may need to conduct additional preclinical studies and clinical trials to support approval of such changes. This review and approval process may becostly and time-consuming, and could impede, delay, limit or prevent commercialization of a product.We have expanded our dronabinol API production capacity by constructing a second facility. We may encounter a number of challenges relatingto the management and operation of such a facility, and we may never realize a return on our investment.We have expanded our dronabinol API production capacity by constructing a second facility designed to meet our expected future dronabinol APIsupply needs. The construction of the second facility has required significant capital expenditures and has resulted in significantly increased fixed costs. Inaddition, we will need to transfer our manufacturing processes, technology and know-how to the second facility. We cannot assure you that we will be able tosuccessfully 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 transitionour dronabinol API manufacturing operations to the second facility in a cost-efficient and timely manner, then we may experience disruptions in ouroperations, which could negatively impact our business and financial results. Further, if we are unable to achieve certain minimum production efficiencies atthe second facility, or if we fail to obtain regulatory approval for and successfully commercialize our dronabinol product candidates, including SYNDROS™,we may never realize a return on our investment. If the demand for our dronabinol products decreases or if we do not produce the output we plan or anticipateafter our new facility is operational, we may not be able to spread a significant amount of our fixed costs over the production volume, thereby increasing ourper unit fixed cost, which would have a negative impact on our financial condition and results of operations.We will need to obtain and maintain a number of regulatory approvals in connection with the production of dronabinol API at our secondmanufacturing facility. Our ability to obtain and maintain these approvals may be subject to additional costs and possible delays beyond what we initiallyanticipate. In addition, any new dronabinol API manufacturing facility must comply on an ongoing basis with applicable regulatory requirements asdiscussed in the preceding risk factor. Failure to comply with any such regulatory requirements would harm our business and our results 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 of additionalmanufacturing employees, in particular employees with the appropriate level of knowledge, background and skills. Should we be unable to hire suchemployees, our business and financial results could be negatively impacted.Disruptions or other adverse developments during the construction and planned operations of our planned second facility could materially adverselyaffect our business. If our dronabinol API production is disrupted for any reason, we may be forced to locate alternative dronabinol API production facilities,including facilities operated by29third parties. Locating alternative facilities would be time-consuming and would disrupt our production. Additionally, we cannot assure you that alternativemanufacturing facilities would offer the same cost structure as the planned second facility. 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 or developnew 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 all of theaspects of their manufacturing at competitive costs, in accordance with regulatory requirements and in sufficient quantities for commercialization andclinical testing. If we fail to develop and maintain supply relationships with these third parties, we may be unable to continue to commercialize SUBSYS® ordevelop our SYNDROS™ or any other product candidates.We purchase the fentanyl API utilized in connection with SUBSYS® from one vendor as our sole supplier of the API in this product. We purchase thestarting materials for our dronabinol API from several third parties. We do not have long-term agreements with any of these parties, but rather purchasematerial on a purchase order basis. Moreover, some of the starting material for our dronabinol API is difficult to procure and produce. Our ability to obtainfentanyl API and the starting materials for our dronabinol API in sufficient quantities and quality, and on a timely basis, is critical to our continuedcommercialization of SUBSYS® and to our successful completion of preclinical studies and clinical trials for our product candidates. There is no assurancethat these suppliers will continue to produce the materials in the quantities and quality and at the times they are needed, if at all, especially in light of the factthat we intend to significantly increase our orders for these materials in the near future. Moreover, the replacement of any of these suppliers, particularly thesupplier of the starting material for our dronabinol 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®. OurSUBSYS® sub-component manufacturing is performed by Aptar, with the final fill, assembly and packaging of SUBSYS® performed by DPT. If there areproblems relating to the equipment utilized by Aptar to manufacture SUBSYS®, we will be responsible for fixing or replacing that equipment. Anyrequirement to do so could result in unexpected costs and expenses and delay the production of SUBSYS®, which could in turn negatively impact ourbusiness.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, particularlyin scaling up and validating initial production. These problems can include difficulties with production costs and yields, quality control, including stabilityof 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, unstable political environments or natural disasters. Ifour manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations for any reason, our ability tocommercially supply SUBSYS® or to provide dronabinol for any product candidates for preclinical studies or clinical trials could be jeopardized. Any delayor interruption in our ability to commercially supply SUBSYS® will result in the loss of potential revenues and could adversely affect the market’sacceptance of these products. We cannot guarantee that we will not encounter other manufacturing issues in the future. In addition, any delay or interruptionin the supply of preclinical study or clinical trial supplies could delay the completion of those studies or trials, increase the costs associated with maintainingour programs and, depending upon the period of delay, require us to commence new studies or trials at additional expense or terminate studies or trialscompletely.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 other regulatoryagencies. Moreover, if we seek regulatory30approval for any product candidate, the facilities to be used by us or our third-party manufacturers for the manufacture of the product candidate must beapproved by the applicable regulatory authorities before the product candidate may be approved and marketed. We do not control the manufacturingprocesses of third-party manufacturers and except for dronabinol API, we are currently completely dependent on them. If any of our third-party manufacturerscannot successfully manufacture product that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, theywill not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of third-partymanufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities donot approve these facilities for the manufacture of our products or product candidates or if they withdraw any such approval in the future, we may need to findalternative manufacturing facilities, which would significantly impact our ability to commercially supply SUBSYS® or develop or obtain regulatoryapproval 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 or supplierscapable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on a timely basis, the continuedcommercialization of SUBSYS® and the development of our product candidates would be impeded, delayed, limited or prevented, which could have amaterial adverse effect on our business, results of operations, financial condition and prospects.We may encounter delays in the manufacturing of SUBSYS® or fail to generate revenue if our supply of the components of our sublingual spraydelivery system is interrupted.Our sublingual spray drug delivery system is sourced, manufactured and assembled by multiple third parties across different geographic locations inthe United States and Europe. All contract manufacturers and component suppliers have been selected for their specific competencies in the manufacturingprocesses and materials that make up the sublingual spray system. The components of the spray system include the actuator subassembly, vial subassembly,and the setting mechanism. The actuator subassembly is comprised of nine individual components which are collectively supplied by six different third-partymanufacturers. The vial subassembly that houses the sterile drug formulation fentanyl is comprised of five different components supplied by four third-partymanufacturers. Each of these third-party manufacturers is currently the single source of their respective components. If any of these manufacturers is unable tosupply its respective component for any reason, including due to violations of cGMPs for medical devices, known as QSR, our ability to both have thefinished sublingual spray device manufactured and to commercially supply SUBSYS® will be adversely affected and we would lose potential revenue.Accordingly, a failure in any part of our supply chain may cause a material adverse effect on our ability to generate revenue from SUBSYS®, which in turncould have a material adverse effect on our business, results of operations, financial condition and prospects.We face intense competition, including from generic products. If our competitors market or develop alternative treatments that are approved morequickly or marketed more effectively than our product candidates or are demonstrated to be safer or more effective than our products, our commercialopportunities will be reduced or eliminated.The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on developingproprietary therapeutics. We face competition from a number of sources, some of which may target the same indications as our products or productcandidates, such as pharmaceutical companies, including generic drug companies, biotechnology companies, drug delivery companies and academic andresearch institutions, many of which have greater financial resources, marketing capabilities, including well-established sales forces, manufacturingcapabilities, research and development capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us.SUBSYS® competes against numerous branded and generic products already being marketed and potentially those which are or will be indevelopment. Many of these competitive products are offered in the United States by large, well-capitalized companies. SUBSYS® is the fourth new brandedTIRF product in the last six 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 include Teva PharmaceuticalIndustries Ltd.’s Fentora and Actiq, Galena’s Abstral, Depomed’s Lazanda and31BioDelivery Sciences International, Inc.’s Onsolis. Some generic fentanyl products against which SUBSYS® competes are marketed by Mallinckrodt, Inc.,Par Pharmaceutical Companies, Inc. and Actavis, Inc. In addition, we are aware of numerous companies developing other treatments and technologies forrapid delivery of opioids to treat BTCP, including transmucosal, transdermal, nasal spray, and inhaled sublingual delivery systems. If these treatments andtechnologies are successfully 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, marketshare, revenues and profitability. We may not be able to differentiate any products that we may market from those of our competitors, successfully develop orintroduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products payment and othercommercial terms as favorable as those offered by our competitors. In addition, there are a number of established therapies and products already commerciallyavailable and under development by other companies that treat the indications that our dronabinol product candidates are intended to treat. Specifically, ifapproved, our dronabinol product candidates will compete, against therapies and products such as Abbvie, Inc.’s Marinol and Marinol generics. ParPharmaceutical Companies markets an approved generic version of Marinol and Actavis markets an authorized generic version of Marinol. We cannot giveany assurance that other companies will not obtain regulatory approval or acceptable DEA classification for, or commercialize additional generic dronabinolproducts.Moreover, our dronabinol products may compete with non-synthetic cannabinoid drugs, including therapies such as GW Pharmaceuticals plc’sSativex, especially in many countries outside of the United States where non-synthetic cannabinoids are legal. In addition, literature has been publishedarguing the benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted laws legalizing medicinaland recreational marijuana. There is some support in the United States for further legalization of marijuana. We also cannot assess the extent to which patientsutilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approved dronabinol products. Furthermore, in the treatment ofCINV, physicians typically offer conventional anti-nausea drugs prior to initiating chemotherapy, such as Sanofi’s Anzemet, Eisai Inc./Helsinn Group’sAloxi, Roche Holding AG’s Kytril, Par Pharmaceutical Companies’ Zuplenz and GlaxoSmithKline plc’s Zofran, as well as Neurokinin 1 receptor antagonistson the market including Kyowa Hakko Kirin Co., Ltd.’s Sancuso and Merck & Co., Inc.’s Emend. To the extent that SYNDROS™ and our dronabinol productcandidates compete in the broader CINV market, we will also face competition from these products 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.We also face competition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA annual quotas, recruiting andretaining qualified personnel, establishing clinical trial sites and enrolling patients in clinical trials, and in identifying and acquiring or in-licensing newproducts and product candidates.Our competitors may also develop products that are more effective, better tolerated, subject to fewer or less severe side effects, more useful, morewidely-prescribed or accepted, or less costly than ours. For each product we commercialize, sales and marketing efficiency are likely to be significantcompetitive factors. We have built a commercial organization to market SUBSYS® in the United States without using third-party sales or marketingchannels, and expect to expand and utilize this commercial organization in the United States for any additional proprietary product candidates that wedevelop, and there can be no assurance that we can maintain and augment these capabilities in a manner that will be cost efficient and competitive with thesales and marketing efforts of our competitors, especially since some or all of those competitors could expend greater economic resources than we do and/oremploy third-party sales and marketing channels.32If we are unable to achieve and maintain adequate levels of coverage and reimbursement from third-party payers 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 payers. Patients who areprescribed medicine for the treatment of their conditions generally rely on third-party payers 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 commercial payersis critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when moreestablished or lower cost therapeutic alternatives are already available or subsequently become available. Assuming we obtain coverage for a given product,the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely touse our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.In addition, the market for our products will depend significantly on access to third-party payers’ drug formularies, or lists of medications for whichthird-party payers provide coverage and reimbursement. The competition to be included in such formularies often leads to downward pricing pressures onpharmaceutical companies. Also, third-party payers may refuse to include a particular branded drug in their formularies or otherwise restrict patient access toa branded drug when a less costly generic equivalent or other alternative is available. For example, many third-party payers require usage and failure oncheaper generic versions of Actiq prior to providing reimbursement for SUBSYS® and other branded TIRF products, which limits SUBSYS®’ use as a first-line treatment option.Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controllinghealthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payers.Therefore, coverage and reimbursement for drug products can differ significantly from payer to payer. As a result, the coverage determination process is oftena time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payer separately, with noassurance 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 regulatory approvalmay not be available or adequate in either the United States or international markets, which could have a material adverse effect on our business, results ofoperations, 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, 2016, four wholesale pharmaceutical distributors, Rochester Drug Cooperative, Inc., AmerisourceBergenCorporation, McKesson Corporation, and Cardinal Health, Inc., individually comprised approximately 15%, 17%, 16% and 14%, respectively, of our totalgross sales of SUBSYS®. The loss by us of any of these wholesale pharmaceutical distributors’ accounts or a material reduction in their purchases could havea material adverse effect on our business, results of operations, financial condition and prospects.In addition, these wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the United States. Thisdistribution network has undergone, and may continue to undergo, significant consolidation marked by mergers and acquisitions. As a result, a small numberof large wholesale distributors control a significant share of the market. Consolidation of drug wholesalers has increased, and may continue to increase,competitive and pricing pressures on pharmaceutical products. We cannot assure you that we can manage these pricing pressures or that wholesaler purchaseswill 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 ofSUBSYS® using a combination of methods. Pursuant to distribution service33agreements with our three largest wholesale customers, we receive inventory level reports. For most other wholesalers where we do not receive inventory levelreports, however, our estimates of wholesaler inventories may differ significantly from actual inventory levels. Significant differences between actual andestimated inventory levels may result in excessive production (requiring us to hold substantial quantities of unsold inventory), inadequate supplies ofproducts in distribution channels, and insufficient product available at the retail level. These changes may cause our revenues to fluctuate significantly fromquarter to quarter, and in some cases may cause our operating results for a particular quarter to be below our expectations or the expectations of securitiesanalysts or investors. In addition, at times, wholesaler purchases may exceed customer demand, resulting in reduced wholesaler purchases in later quarters,which may result in substantial fluctuations in our results of operations from period to period. If our financial results are below expectations for a particularperiod, the market price of our common stock may drop significantly.We rely on third parties to perform many necessary services for SUBSYS®, including services related to distribution, invoicing, storage andtransportation, and expect to do so for any future branded proprietary products, if approved.We have retained third-party service providers to perform a variety of functions related to the sale and distribution of SUBSYS®, key aspects ofwhich are out of our direct control. For example, we rely on Cardinal Health 105, Inc. (a/k/a Specialty Pharmaceutical Services) to provide key servicesrelated to logistics, warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivablemanagement and call center management, and, as a result, most of our SUBSYS® inventory is stored at a single warehouse maintained by the serviceprovider. We must rely on this provider as well as other third-party providers that perform services for us, including entrusting our inventories of SUBSYS®to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines, orotherwise do not carry out their contractual duties to us, or encounter physical damage or natural disaster at their facilities, our ability to deliver SUBSYS® tomeet commercial demand would be significantly impaired. In addition, we utilize third parties to perform various other services for us relating to sampleaccountability and regulatory monitoring, including adverse event reporting, safety database management and other product maintenance services. If thequality or accuracy of the data maintained by these service providers is insufficient, our ability to continue to market SUBSYS® could be jeopardized or wecould be subject to regulatory sanctions. We do not currently have the internal capacity to perform these important commercial functions, and we may not beable 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 successfully developa pipeline of product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory approval or acceptableDEA classification, if applicable, or that any approved products will be successfully commercialized.Our long-term growth will be limited unless we can successfully develop a pipeline of additional product candidates. We do not have internal newdrug discovery capabilities, and our primary focus is on developing improved formulations and delivery methods for existing FDA-approved products.The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products containing controlled substances, amongother things, are subject to extensive regulation by the FDA, the DEA and other regulatory authorities in the United States. Obtaining approval of an NDA is alengthy, expensive and uncertain process. The FDA also has substantial discretion in the drug approval process, including the ability to delay, limit or denyapproval 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.34Any of our product candidates may fail to achieve their specified endpoints in clinical trials. Furthermore, product candidates may not be approvedeven if they achieve their specified endpoints in clinical trials. The FDA may disagree with our trial design and our interpretation of data from clinical trials,or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. The FDA may also approve aproduct candidate for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approvalclinical trials (i.e., Phase IV trials). In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successfulcommercialization of our product candidates.If we are unable to expand our pipeline and obtain regulatory approval for our product candidates on the timelines we anticipate, we will not be ableto execute our business strategy effectively and our ability to substantially grow our revenues will be limited, which would have a material adverse impact onour long-term business, results of operations, financial condition and prospects.Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy of any of our product candidates, which could prevent orsignificantly delay their regulatory approval.Our product candidates are prone to the risks of failure inherent in drug development. Before obtaining U.S. regulatory approval for the commercialsale of any product candidate, we must gather substantial evidence from well-controlled clinical trials that demonstrate to the satisfaction of the FDA that theproduct candidate is safe and effective for its proposed indication, and similar regulatory approvals would be necessary to commercialize the productcandidate in other countries.In light of widely publicized events concerning the safety risk of certain drug products, particularly drug products that contain controlled substances,regulatory authorities, members of Congress, the GAO, medical professionals and the general public have raised concerns about potential drug safety issues.These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of riskmanagement programs that may, for instance, restrict distribution of drug products after approval. In addition, the FDCA authorizes the FDA to, among otherthings, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect new safety information and require a REMS for certaindrugs, including certain currently approved drugs. Under the FDCA, companies that violate these and other provisions of the law are subject to substantialcivil 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 from clinicaltrials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trialsbefore completion, or require longer or additional clinical trials that may result in a delay or failure in obtaining approval or approval for a more limitedindication than originally sought.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 other regulatoryauthorities, including state and local, may suspend, delay or terminate our clinical trials at any time, or the DEA could suspend or terminate the registrationsand 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;35 •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 astudy by a regulatory 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 thesite’s controlled 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 ina timely or acceptable manner; •failure by us, our employees, our CROs or their employees to comply with all applicable FDA, DEA or other regulatory requirements relatingto the conduct of clinical trials or the handling, storage, security and recordkeeping for controlled substances; •scheduling conflicts with participating clinicians and clinical institutions; •failure to design appropriate clinical trial protocols; •insufficient data to support regulatory approval; •inability or unwillingness of medical investigators to follow our clinical protocols; •difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data; or •regulatory concerns with cannabinoid or opioid products generally and the potential for abuse of the drugs.Generally, there is a high rate of failure for drug candidates proceeding through clinical trials. We may suffer significant setbacks in our clinical trialssimilar to the experience of a number of other companies in the pharmaceutical and biotechnology industries, even after receiving promising results in earliertrials. Further, even if we view the results of a clinical trial to be positive, the FDA or other regulatory authorities may disagree with our interpretation of thedata. In the event that we abandon or are delayed in our clinical development efforts related to our product candidates, we may not be able to execute on ourbusiness plan effectively, we may not be able to become profitable, our reputation in the industry and in the investment community would likely besignificantly 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, we contractedwith Worldwide Clinical Trials to conduct and oversee our pivotal bioequivalence study for SYNDROS™.36We also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinicalprotocols and all applicable regulatory requirements, including the FDA’s good clinical practice regulations and DEA and state regulations governing thehandling, storage, security and recordkeeping for controlled substances. These CROs and third parties play a significant role in the conduct of these trials andthe subsequent collection and analysis of data from the clinical trials. We rely heavily on these parties for the execution of our clinical and preclinicalstudies, 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 trial site. Inaddition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash or equitycompensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, theintegrity of the data generated at the applicable clinical trial site may be questioned by the FDA.We have conducted and may in the future conduct clinical trials for our products or product candidates outside the United States and the FDA maynot accept data from such trials.We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States. For example, our Phase 3SUBSYS® safety trial was conducted at 46 sites in the United States and ten sites in India. Although the FDA may accept data from clinical trials conductedoutside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example, the study must be well designed andconducted and performed by qualified investigators in accordance with ethical principles. The study population must also adequately represent the U.S.population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. Generally,the patient population for any clinical studies conducted outside of the United States must be representative of the population for whom we intend to labelthe product in the United States. In addition, such studies would be subject to the applicable local laws and FDA acceptance of the data would be dependentupon its determination that the studies also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data fromtrials conducted outside of the United States. If the FDA does not accept any such data, it would likely result in the need for additional trials, which would becostly and time-consuming and delay aspects of our business plan.Since the starting materials we utilize to manufacture dronabinol are sourced out of India, we are exposed to a number of risks and uncertaintiesassociated with that geographic region.The suppliers of the starting materials we utilize to manufacture dronabinol are located in India. This exposes us to a number of risks anduncertainties outside our control. India has suffered political instability in the past due to various factors. There have also been armed conflicts between Indiaand neighboring Pakistan. Moreover, extremist groups within India and neighboring Pakistan have from time to time targeted Western interests. In addition,India is susceptible to natural disasters such as earthquakes and floods. Political instability, future hostilities with countries such as Pakistan, targeting of ourinterests by extremist attacks, and earthquakes or other natural disasters in India could harm our operations and impede our ability to produce dronabinol onour 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 ineither case may not be successful.We are developing several proprietary dronabinol product candidates, including SYNDROS™ and Dronabinol Inhalation Device, for which weintend to 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 approved compounds,which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need togenerate in order to garner FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need toconduct additional clinical trials, provide37additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required toobtain FDA approval for these product candidates, and complications and risks associated with these product candidates, would likely substantially increase.We could need to obtain more additional funding, which could result in significant dilution to the ownership interests of our then existing stockholders tothe extent we issue equity securities or convertible debt. We cannot assure you that we would be able to obtain such additional financing on terms acceptableto us, if at all. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway would likely result in new competitive products reaching the marketmore quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowed topursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals forcommercialization.In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, certain brand-namepharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) issuccessfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approvingany 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 tospecial requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. Theserequirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome ofany litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or imposeadditional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of thenew product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to thepetition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to acceleratedproduct development or earlier approval.Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses forwhich the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance tomonitor the safety or efficacy of the products.Annual DEA quotas on the amount of dronabinol allowed to be produced in the United States and our specific allocation of dronabinol by theDEA could significantly limit the production or sale of 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 an aggregatequota for the amount of dronabinol that may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimatescientific and medicinal needs. This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States each year is allocatedamong individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. We are required toobtain an annual quota from the DEA in order to manufacture and produce dronabinol. The DEA may adjust aggregate production quotas and individualproduction and procurement quotas from time to time during the year and has substantial discretion in deciding whether or not to make such adjustments. For2017, we were allocated what we believe is a sufficient quantity of dronabinol to meet our currently anticipated production and testing needs through 2017.However, we may need additional amounts of dronabinol in future years to implement our business plan.We do not know what amounts of dronabinol other companies developing or marketing dronabinol product candidates may have requested for 2018or will request in future years. The DEA, in assessing factors such as medical need, abuse potential and other policy considerations, may have chosen to setthe aggregate dronabinol quota for 2017 lower than the total amount requested by the companies, and may do so in the future. Though companies arepermitted to petition the DEA to increase the aggregate quota for dronabinol in a given year after it is initially established, there is no guarantee the DEAwould act promptly or favorably upon such a petition. The success of our business plan will depend in part on our being able to expand the overall market forthe medical use of dronabinol by introducing new dronabinol formulations, and to sell significant amounts of our approved dronabinol products. In order todo so, we38will need to receive from the DEA significantly increased allotments of dronabinol quotas over time 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 our business plan could negatively impact our ability tosell SYNDROS™, if finalization of labeling by the FDA is obtained, and any other dronabinol product candidate for which we obtain regulatory approval, aswell as our preclinical studies and clinical trials, which would in turn have a material adverse effect on our business, our ability to execute on our businessplan, our financial position and results of operations, our prospects, and our ability to generate revenue to fund the development of our other productcandidates.Our failure to successfully develop, acquire and market additional product candidates or approved products would impair our ability to grow ourbusiness.As part of our growth strategy we intend to seek to expand our product pipeline by developing or exploring acquisition or in-licensing opportunitiesof proven drugs that can be paired with our sublingual spray drug delivery system. Some of these drugs may require reformulation to accommodate theapproved doses in smaller volumes that are compatible with our delivery system. Any reformulation may increase the risk of failure during development,extend the development timelines, increase development costs and add complexity to the regulatory approval process and in some cases reformulation maynot be possible. If we are not able to identify additional drug compounds that can be delivered via the current version of our sublingual spray technology, orif we are unable to successfully develop higher dose versions of this technology, our ability to develop additional product candidates and grow our businesswould 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, academicscientists and other researchers to license or sell products or technology to us. The success of this strategy depends partly upon our ability to identify andselect promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their current owners and finance thesearrangements.The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex.Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with us for the license or acquisitionof product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products,businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or licensingopportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additionalproduct candidates on terms that we find acceptable, or at all.Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including pre-clinical or clinicaltesting and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceuticalproduct development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatoryauthorities. In addition, we cannot provide assurance that any approved products that we acquire will be manufactured or sold profitably or achieve marketacceptance.If we fail to attract and keep management and other key personnel, as well as our board members, we may be unable to continue to successfullycommercialize SUBSYS® or SYNDROS™, develop our product candidates or otherwise implement our business plan.Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highlyqualified managerial, scientific, medical and other personnel. We are highly dependent on our management, scientific and medical personnel, as well as ourboard members. The loss of the services of any of these individuals could impede, delay or prevent the continuing commercialization of SUBSYS® orSYNDROS™ and the development of our product candidates and could negatively impact our ability to successfully implement our business plan. If we losethe services of any of these individuals, we may not be able to find suitable replacements on a timely basis or at all, and our business would likely be harmedas a result. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ all of39our executive officers and key personnel on an at-will basis and their employment can be terminated by us or them at any time, for any reason and withoutnotice; 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 be significantlyaffected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract offers from other companies.We may not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses, particularly in the Chandler, Arizona area where we are headquartered. Our industryhas experienced a high rate of turnover of management personnel in recent years. As such, we could have difficulty attracting experienced personnel to ourcompany and may be required to expend significant financial resources in our employee recruitment and retention efforts. Many of the other biotechnologyand pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longerhistories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of thesecharacteristics may be more appealing to high quality candidates than that which we have to offer. If we are not able to attract and retain the necessarypersonnel to accomplish our business objectives, we may experience constraints that will impede significantly our ability to implement our business strategyand achieve our business objectives.In addition, we have scientific and clinical advisors who assist us in formulating our development and clinical strategies. These advisors are not ouremployees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability or loyalty to us. Inaddition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete withours.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 the FDA,comply with applicable manufacturing standards, comply with federal and state healthcare privacy, fraud and abuse laws and regulations, report financialinformation or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industryare subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws andregulations may restrict or prohibit a wide range of pricing, false claims, discounting, marketing and promotion, sales commission, customer incentiveprograms and other business arrangements. These laws also dictate the proper use of patient information and data which is subject to privacy laws such asHIPAA. Misconduct could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product,or illegal promotion of a drug product for off-label use, which could result in regulatory sanctions and serious harm to our reputation. We have adopted aCode of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect andprevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or otheractions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are notsuccessful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition ofsignificant fines or other sanctions.Our ability to utilize our net operating loss carryforwards, or NOLs, and research and development income tax credit carryforwards may belimited.Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, substantial changes in our ownership may limit the amount ofNOLs and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income, if any.Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Anysuch annual limitation, whether as the result of prior transactions, sales of common stock by our existing stockholders or additional40sales of common 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.On November 8, 2010, we entered into the NeoPharm merger. The NeoPharm merger was accounted for as a reverse acquisition and resulted in achange of 50% or more of the ownership of NeoPharm. Based on the above, we have estimated the amount of pre-merger federal NOLs that are available tooffset our post-merger income is limited to an aggregate of $1.1 million as of December 31, 2016. For state income tax purposes, we have $268.1 million ofstate NOLs, all of which relate to Illinois state NOLs, which are available to offset future Illinois taxable income. We have placed a valuation allowance on asignificant portion of our Illinois state NOLs because it is not more likely than not that such amounts will be realized due to current levels of activity inIllinois.We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to ourmanagement.From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing ofproducts, product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements,including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction mayrequire us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges ordisrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerousoperational 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 candidatesor technologies; •incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions; •higher than expected acquisition and integration costs; •write-downs of assets or goodwill or impairment charges; •increased amortization expenses; •difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel; •impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and •inability to retain key employees of any acquired businesses.Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, anytransactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects.We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurancecoverage for those claims is inadequate.The commercial use of our products and clinical use of our product candidates expose us to the risk of product liability claims. This risk exists even ifa product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA, such as the case with SUBSYS®,SYNDROS™ 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® SYNDROS™, orDronabinol SG Capsule or our product candidates could result in injury to a patient or even death. For example, because our sublingual spray technology isdesigned to 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 resultsin injury or death. In addition, SUBSYS® is an opioid pain reliever that contains fentanyl, and41SYNDROS™ and our discontinued Dronabinol SG Capsule are synthetic cannabinoids, which are regulated “controlled substances” under the CSA and couldresult in harm to patients relating to its potential for abuse. In addition, a liability claim may be brought against us even if our products or product candidatesmerely appear to have caused an injury. Product liability claims may be brought against us by consumers, health care providers, pharmaceutical companies orothers selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves againstproduct liability claims, we will incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in: •the inability to commercialize our products or, if approved, our product candidates; •decreased demand for our products or, if approved, product candidates; •impairment of our business reputation; •product recall or withdrawal from the market; •withdrawal of clinical trial participants; •costs of related litigation; •distraction of management’s attention from our primary business; •substantial monetary awards to patients or other claimants; or •loss of revenues.We have obtained product liability insurance coverage for commercial product sales and clinical trials with a $10.0 million per occurrence and a$10.0 million annual aggregate coverage limit. We also carry excess product liability insurance coverage for commercial product sales and clinical trials withan additional $10.0 million per occurrence and an additional $10.0 million annual aggregate coverage limit. Our insurance coverage may not be sufficient tocover 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 isbecoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or uponadequate terms to protect us against losses due to product liability. If we determine that it is prudent to increase our product liability coverage based on salesof SUBSYS® and of other product candidates or otherwise, we may be unable to obtain this increased product liability insurance on commercially reasonableterms or at all. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects, including sideeffects that are less severe than those associated with SUBSYS®, our discontinued Dronabinol SG Capsule and our product candidates. A successful productliability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decreaseour cash and have a material 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 and disposalof hazardous materials owned by us, including the components of our products and product candidates and other hazardous compounds. We and ourmanufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials.In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending use anddisposal. We cannot completely eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research anddevelopment efforts and business operations, injury to our employees and others, environmental damage resulting in costly clean-up and liabilities underapplicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe thatthe safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribedby these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. Insuch an event, we may be held liable for any resulting damages and such liability could exceed our resources. We do not currently42carry biological or hazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coveragefor damages and fines arising from biological or hazardous waste exposure or contamination.Our business and operations would suffer in the event of system failures.Despite the implementation of security measures, our internal computer systems and those of our current and any future partners, contractors andconsultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electricalfailures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and causeinterruptions in our operations, it could result in a material disruption of our commercialization activities, drug development programs and our businessoperations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data. Likewise, we rely on a large number of third parties to supply components for andmanufacture our products and product candidates, warehouse and distribute SUBSYS® and conduct clinical trials, and similar events relating to theircomputer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, ordamage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the furthercommercialization and development of our products and product candidates could be delayed.We may be adversely affected by natural disasters or other events that disrupt our business operations and our business continuity and disasterrecovery plans may not adequately protect us from a serious disaster.Our corporate headquarters and other facilities are located in Chandler, Arizona and Round Rock, Texas, which are not areas that have experiencedsevere earthquakes. We do not carry earthquake insurance. However, other natural disasters or similar events, like fires or explosions or large-scale accidentsor power outages, could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition andprospects.Our enterprise financial systems are located in our Chandler, Arizona headquarters. Our dronabinol API manufacturing facilities are in Round Rock,Texas. If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters or our Round Rockfacilities, that damaged critical infrastructure, such as enterprise financial systems or manufacturing resource planning and enterprise quality systems, or thatotherwise disrupted operations at either location, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period oftime. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a seriousdisaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans which,particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.Risks Related to Our Financial Position and Capital RequirementsWe 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. We believe thatcash generated from operations and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through atleast the next 12 months from the issuance of this Annual Report. We have based these estimates, however, on assumptions that may prove to be wrong, andwe could spend our available financial resources much faster than we currently expect. Further, we may need to raise additional capital to fund our operationsand continue to support our planned research and development and commercialization activities.43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 candidatesthat are commercialized; •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 productcandidates and any 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® andour product candidates; •costs associated with prosecuting or defending any litigation that we are or may become involved in and any damages payable by us thatresult from such litigation; •costs of operating as a public company; •the effect of competing technological and market developments; •our ability to acquire or in-license products and product candidates, technologies or businesses; •personnel, facilities and equipment requirements; and •the terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish.We may also need to raise additional funds to finance future cash needs through public or private equity offerings, debt financings, receivables orroyalty financings or corporate collaboration and licensing arrangements. We cannot be certain that additional funding will be available on acceptable terms,or at all. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be diluted. Any future debtfinancing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additionaldebt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. In addition, if we raiseadditional funds through corporate collaboration and licensing arrangements, it may be necessary to relinquish potentially valuable rights to products orproduct candidates, or grant licenses on terms that are not favorable to us.If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinueone or more of our product development programs or commercialization efforts, or other aspects of our business plan. We also may be required to relinquish,license or otherwise dispose of rights to products or product candidates that we would otherwise seek to commercialize or develop ourselves on terms that areless favorable than might otherwise be available. In addition, our ability to achieve profitability or to respond to competitive pressures would be significantlylimited.Risks Related to Regulation of our Products and Product CandidatesIf we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we couldface substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid orother third-party payers, certain federal and state healthcare laws and regulations44pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patientprivacy regulation by both the federal government and the states 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 payers that are false or fraudulent; •HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or makingfalse statements relating to healthcare matters; •HIPAA, as amended by the HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, securityand transmission 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 applyto items or services reimbursed by any third-party payer, 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 preemptedby HIPAA, 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-KickbackStatute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. To the extent that any product wemake is sold in a foreign country, we may be subject to similar foreign laws and regulations. If we or our operations are found to be in violation of any of thelaws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages,fines, exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our operations. Any penalties,damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial results.The FDA provides guidelines with respect to appropriate drug and product promotion, product labeling, and continuing medical and healtheducation activities. Although we endeavor to follow these guidelines, the FDA or the Office of the Inspector General: U.S. Department of Health and HumanServices may disagree, and we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. In addition,management’s attention could be diverted and our reputation could be damaged. See Note 7 under the heading “Legal Matters” in the Notes to ourConsolidated Financial Statements for a discussion of ongoing investigations by HHS, Office of Inspector General, the U.S. District Attorney’s Office for theDistrict of Massachusetts and other attorney generals from several states, of potential violations involving our SUBSYS® marketing activities.Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirelyeliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses anddivert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and stateprivacy, 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,45a product’s approval may contain requirements for potentially costly post-approval studies and surveillance, including Phase IV clinical trials, to monitor thesafety and efficacy of the product. We are also subject to 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 requirementsinclude submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and with GCPsand GLPs, which are regulations and guidelines enforced by the FDA for all of our products in clinical and pre-clinical development, and for any clinicaltrials that we conduct post-approval. To the extent that a product is approved for sale in other countries, we may be subject to similar restrictions andrequirements imposed 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 drug productsand their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPregulations, QSR requirements for medical device components or similar requirements, if applicable. If we or a regulatory agency discovers previouslyunknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where, or processes by which,the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturer or us, including requiring product recall, noticeto physicians, withdrawal of the product from the market or suspension of manufacturing. In that regard, because certain of our contract manufacturers forSUBSYS® are located outside the United States, they may be subject to foreign laws and regulations governing the manufacture of drugs and devices, andany failure by them to comply with those laws and regulations may delay or interrupt supplies of our products.If we, our products or product candidates or the manufacturing facilities for our products or product candidates fail to comply with applicableregulatory requirements, a regulatory agency may: •impose restrictions on the marketing or manufacturing of the product, suspend or withdraw product approvals or revoke necessary licenses; •issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available; •commence criminal investigations and prosecutions; •impose injunctions, suspensions or revocations of necessary approvals or other licenses; •impose fines or other civil or criminal penalties; •suspend any ongoing clinical trials; •deny or reduce quota allotments for the raw material for commercial production of our controlled substance products; •delay or refuse to approve pending applications or supplements to approved applications filed by us; •refuse to permit drugs or precursor chemicals to be imported or exported to or from the United States; •suspend or impose restrictions on operations, including costly new manufacturing requirements; or •seize or detain products or require us to initiate a product recall.In addition, our product labeling, advertising and promotion are subject to regulatory requirements and continuing regulatory review. The FDAstrictly regulates the promotional claims that may be made about prescription drug products. In particular, a drug product may not be promoted for uses thatare not approved by the FDA as reflected in the product’s approved labeling, although the FDA does not regulate the prescribing practices of physicians. TheFDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to haveimproperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution. For example,we have received subpoenas from the HHS, Office of Inspector General, the U.S. District Attorney’s Office for the District of Massachusetts and other attorney46generals from several states. The subpoenas primarily request documents relating to the marketing of SUBSYS®. We are cooperating in responding to thesubpoenas. See Note 7 under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion regarding these ongoinginvestigations.The FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could preventor delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature orextent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are notable to achieve and maintain regulatory compliance, we may not be permitted to market our products, which would adversely affect our ability to generaterevenue and achieve or maintain profitability.Our products and our product candidates may cause undesirable side effects or have other unexpected properties that could result in post-approvalregulatory action.If we or others identify undesirable side effects, or other previously unknown problems, caused by our products, other products with the same orrelated active ingredients or our product candidates, after obtaining U.S. regulatory approval, a number of potentially significant negative consequencescould result, including: •regulatory authorities may withdraw their approval of the product; •regulatory authorities may require us to recall product; •regulatory authorities may require the addition of warnings in the product label or narrowing of the indication in the product label; •we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients; •we may be required to change the way the product is administered or modify the product in some other way; •the FDA may require us to conduct additional clinical trials or costly post-marketing testing and surveillance to monitor the safety orefficacy of the 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.Health care reform measures and changes in policies, funding, staffing and leadership at the FDA and other agencies could hinder or prevent thecommercial success of our products and any of our product candidates that may be approved by the FDA.In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our futureresults of operations and the future results of operations of our potential customers. For example, the MMA established a new Part D prescription drug benefit,which became effective January 1, 2006. Under the prescription drug benefit, Medicare beneficiaries can obtain prescription drug coverage from privatesector plans that are permitted to limit the number of prescription drugs that are covered in each therapeutic category and class on their formularies. IfSUBSYS® or any of our product candidates that are approved by the FDA are not widely included on the formularies of these plans, our ability to market ourproducts to the Medicare population could suffer.47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 the provisionsof 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 offnegotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’soutpatient drugs to 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 providersand reporting any ownership and investment interests held by physicians and their immediate family members and applicable grouppurchasing organizations during the preceding calendar year, with data collection to be required and reporting to the CMS by the 90th dayof each subsequent 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 effectivenessresearch, 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 onthe recommendations; and •establishment of a Center for Medicare Innovation at the CMS to test innovative payment and service delivery models to lower Medicare andMedicaid spending, potentially including prescription drug spending.In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, the Budget Control Act of2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommendinga targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’sautomatic reduction to several government programs. This includes aggregate reductions to Medicare48payments to providers of up to 2% per fiscal year, starting in 2013. On January 2, 2013, President Obama signed into law the ATRA which reduced Medicarepayments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for thegovernment to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations.Additionally, individual states have become increasingly aggressive in passing legislation and implementing regulations designed to controlpharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing costdisclosure and transparency measures, and to encourage importation from other countries and bulk purchasing. Legally-mandated price controls on paymentamounts by third-party payers or other restrictions could harm our business, results of operations, financial condition and prospects.In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceuticalproducts and which suppliers will be included in their prescription drug and other healthcare programs. This can reduce demand for our products or putpressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.In certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement and may, in some cases, beunavailable. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirementsgoverning drug pricing vary widely from country to country. For example, the European Union 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 for human use. Amember state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of thecompany placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations forpharmaceutical 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 payers at the federal, state and private levels. Third-party payers include governmental programssuch as Medicare or Medicaid, private insurance plans and managed care plans. These third-party payers may deny coverage or reimbursement for a productor therapy in whole or in part if they determine that the product or therapy was not medically appropriate or necessary. Also, third-party payers haveattempted to control costs by limiting coverage through the use of formularies and other cost-containment mechanisms and the amount of reimbursement forparticular procedures or drug treatments.Additionally, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatureswill likely continue to focus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid programs. While we cannotpredict the full outcome of any such legislation, it may result in decreased reimbursement for prescription drugs, which may further exacerbate industry-widepressure to reduce prescription drug prices. This could harm our ability to market our products and generate revenues or could result in lower margins. Inaddition, legislation has been introduced in Congress that, if enacted, would permit more widespread importation or re-importation of pharmaceuticalproducts from foreign countries into the United States, including from countries where the products are sold at lower prices than in the United States. Suchlegislation, or similar regulatory changes, could lead to a decision to decrease our prices to better compete, which, in turn, could adversely affect ourbusiness, results of operations, financial condition and prospects. Alternatively, in response to legislation such as this, we might elect not to seek approval foror market our products in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we generate from ourproduct sales. It is also possible that other legislative proposals having similar effects will be adopted.Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and can beaffected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing andleadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects. For example,average review times at the FDA for marketing approval applications have fluctuated over the last ten years, and we49cannot predict the review time for any of our submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors,including budget and funding levels and statutory, regulatory and policy changes.Heightened attention on the use of opioids, including government litigation changes in policies, legislation and leadership at the federal and statelevel could hinder or prevent the commercial success of SUBSYS® and any potential future opioid product candidates.Many federal and governmental agencies are focused on the abuse of opioids in the United States and agencies such as the HHS have expressed theirbelief that the United States is in the midst of a prescription opioid abuse epidemic. Common prescription drugs that contain opioids are drugs such asoxycodone, hydrocodone, and fentanyl. Our product, SUBSYS®, is fentanyl based product in the TIRF class. To the extent that the healthcare community,regulatory bodies and governmental agencies associate us with, or determine that we are a part of, this perceived opioid abuse epidemic then this maynegatively affect our stock price and our business in various ways including from a marketing, sales and public relations standpoint and these perceptionsmay also negatively affect our ongoing governmental investigations.Risks Related to Intellectual PropertyWe may not be able to obtain and enforce patent rights or other intellectual property rights that cover our products or product candidates, such asSUBSYS®, 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 inpart on 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 from unauthorized orinfringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents. Fentanyl and dronabinol havebeen approved for many years and therefore our ability to obtain any patent protection is limited. Composition of matter patents on APIs are a particularlyeffective form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use. However, we will not beable to obtain composition of matter patents or methods of use patents that cover the APIs in any of our products or product candidates. As a result,competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our products or product candidates so long asthe competitors do not infringe any formulation patents that we may obtain or license, if any.Our patent portfolio related to our sublingual spray technology that is used in SUBSYS® includes patents and patent applications in the UnitedStates, Australia, Brazil, Canada, China, Europe, India Japan, Mexico, New Zealand and Russia. The covered technology and the scope of coverage vary fromcountry to country. For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use of our sublingualspray 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. Formulation patentspreclude competitors from using a similar formulation. Manufacturing or packaging patents preclude competitors from using the same manufacturing orpackaging methods. However, these type of patents do not preclude a competitor from making and marketing the same composition of matter unless they usethe same formulation or manufacturing or packaging methods. Any patents that we may obtain may be too narrow in scope and thus easily circumvented bycompetitors.Further, in countries where we do not have granted patents directed to our formulations or manufacturing or packaging, third parties may be able tomake, use, or sell products identical to, or substantially similar to, SUBSYS®, our dronabinol products or product candidates.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 pending50applications and issued patents in the United States and in many foreign countries that pertain to either fentanyl or dronabinol formulations. We can give noassurances that any patents will issue, that if they do issue or have issued, they will provide sufficient protection against competitors, or that they would bevalid and enforceable.Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability toobtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any patents we may obtain orlicense may not provide us with sufficient protection for our products and product candidates to afford a commercial advantage against competitive productsor processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guarantee that any patents will issue from anypending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, we cannot guarantee that the claims of thesepatents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products or otherwise becommercially valuable to us.Patent applications in the United States are generally maintained in confidence for up to 18 months after their filing. Similarly, publication ofdiscoveries in scientific or patent literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors were the first toinvent, 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. patent applicationrelating to our drug product or a similar invention, we may have to participate in interference proceedings declared by the USPTO to determine priority ofinvention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a lossof our U.S. patent position.In addition, third parties may challenge our in-licensed patents and any of our own patents that we may obtain, which could result in the invalidationor unenforceability of some or all of the relevant patent claims. Litigation or other proceedings to enforce or defend intellectual property rights is verycomplex, expensive, and may divert our management’s attention from our core business and may result in unfavorable results that could adversely affect ourability to prevent third parties from competing with us.The laws of some foreign jurisdictions do not provide intellectual property rights to the same extent as in the United States and many companieshave encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or areotherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantially harmed. Thepatent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for whichimportant legal principles remain evolving or unresolved. Changes in either the patent laws or in the interpretations of patent laws in the United States andother countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced inour patents or in third-party patents.The degree of future protection of our proprietary rights is uncertain. Patent protection may be unavailable or severely limited in some cases and maynot adequately protect our rights or permit us to gain or keep our competitive advantage. For example: •we might not have been the first to invent or the first to file the inventions covered by each of our pending patent applications and issuedpatents; •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 anycompetitive advantages, 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.51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 and sellingcompeting products. This failure to properly protect the intellectual property rights relating to our products or product candidates could have a materialadverse effect on our business, financial condition and results of operation. Moreover, our competitors may independently develop equivalent 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 trade secretsand unpatented know-how, by entering into confidentiality agreements with third parties, and proprietary information and invention agreements with certainemployees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. We also have limited controlover the protection of trade secrets used by our licensors, collaborators and suppliers. There can be no assurance that binding agreements will not bebreached, that we would have adequate remedies for any breach, or that our trade secrets and unpatented know-how will not otherwise become known or beindependently discovered by our competitors. If trade secrets are independently discovered, we would not be able to prevent their use. Enforcing a claim thata third-party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. Inaddition, courts outside the United States may be less willing to protect trade secret information.We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and we maybe unable to protect our rights to our products and technology.If we or our collaborators or licensors choose to go to court to stop a third-party from using the inventions claimed in our own or in-licensed patents,that third-party may ask the court to rule that the patents are invalid and/or should not be enforced against that third-party. These lawsuits are expensive andwould consume time and other resources even if we or they, as the case may be, were successful in stopping the infringement of these patents. 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 the right to stop others from usingthe inventions.There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the third-party on the ground that such third-party’s activities do not infringe our owned or in-licensed patents. In addition, our own or in-licensed patents may be subject to challenge and subsequentinvalidation or significant narrowing of claim scope in a reexamination or opposition proceeding before a governmental patent agency, or during 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 manufacturing orformulation products. While we intend to take actions reasonably necessary to enforce our patent rights, we depend, in part, on our licensors andcollaborators to protect a substantial portion of our proprietary rights.If we are sued for alleged infringement of intellectual property rights of third parties, it will be costly and time consuming, and an unfavorableoutcome in that litigation would have a material adverse effect on our business.Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our products andproduct candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patentsand pending patent applications, which are owned by third parties, exist in the fields relating to our products and product candidates. As the medical device,biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert our products or product candidatesinfringe the patent rights of others. Moreover, it is not always clear to industry participants, including us, which patents cover various types of medicaldevices, drugs, products or their methods of use. Thus, because of the large number of patents issued and patent applications filed in our fields, there may be arisk that third parties may allege they have patent rights encompassing our products, product candidates, technology or methods.In addition, there may be issued patents of third parties of which we are currently unaware, that are infringed or are alleged to be infringed by ourproducts, product candidates or proprietary technologies. Because some patent52applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreignjurisdictions are typically not published until 18 months after filing, and because publications in the scientific literature often lag behind actual discoveries,we cannot be certain that others have not filed patent applications for technology covered by our own and in-licensed issued patents or our pendingapplications. Our competitors may have filed, and may in the future file, patent applications covering our products, product candidates or technology similarto ours. Any such patent application may have priority over our own and in-licensed patent applications or patents, which could further require us to obtainrights to issued patents covering such technologies. If another party has filed an U.S. patent application on inventions similar to those owned or in-licensedto us, we or, in the case of in-licensed technology, the licensor may have to participate, in the United States, in an interference proceeding to determinepriority of invention.If another party has reason to assert a substantial new question of patentability against any of our claims in our own and in-licensed U.S. patents, thethird-party can request that the patent claims be reexamined, which may result in a loss of scope of some claims or a loss of the entire patent. In addition topotential infringement suits and, interference and reexamination proceedings, we may become a party to patent opposition proceedings where either thepatentability of the inventions subject of our patents are challenged, or we are challenging the patents of others. The costs of these proceedings could besubstantial, and it is possible that such efforts would be unsuccessful.We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that ourproducts and/or product candidates and/or proprietary technologies infringe their intellectual property rights. These lawsuits are costly and could adverselyaffect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we or ourcommercialization partners are infringing the third-party’s patents and would order us or our partners to stop the activities covered by the patents. In addition,there is a risk that a court will order us or our collaborators to pay the other party damages for having violated the other party’s patents.If a third-party’s patents was found to cover our products and/or product candidates, proprietary technologies or their uses, we or our collaboratorscould be enjoined by a court and required to pay damages and could be unable to continue to commercialize our products or our product candidates or useour proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our collaborators on acceptable terms,if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit 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 and pharmaceuticalindustries generally. If a third-party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, butnot limited to: •infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and maydivert our 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’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’sattorneys’ 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 todo; •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 expendituresand time.Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantiallygreater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on ourability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.53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 currently providingconsulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claimsthat these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their formeremployers or their former or current customers. For example, we have in the past received letters from third parties asserting that one of our employees mayhave used proprietary information of his former employers in connection with our prior regulatory filings. Litigation may be necessary to defend againstthese types of claims. Even if we are successful in defending against any such claims, any such litigation would likely be protracted, expensive, a distractionto our management team, not viewed favorably by investors and other third parties, and may potentially result in an unfavorable outcome.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and otherrequirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements.Periodic maintenance fees on our own and in-licensed patents are due to be paid to the governmental patent agencies over the lifetime of the patents.Future maintenance fees will also need to be paid on other patents which may be issued to us. We have systems in place to remind us to pay these fees, and weemploy outside firms to remind us or our licensor to pay annuity fees due to patent agencies on our patents and pending patent applications. The variousgovernmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patentapplication process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules.However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or completeloss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have amaterial adverse effect on our business.Risks Relating to an Investment in Our StockOur founder and principal stockholder can individually control our direction and policies, and his interests may be adverse to the interests of ourstockholders.As of December 31, 2016, our founder and principal stockholder, Dr. John N. Kapoor, beneficially owned approximately 67% of our outstanding,publicly-traded common stock. By virtue of his holdings, Dr. Kapoor can and will continue to be able to effectively control the election of the members ofour Board of Directors, our management and our affairs and prevent corporate transactions such as mergers, consolidations or the sale of all or substantiallyall of our assets that may be favorable from our standpoint or that of our other stockholders or cause a transaction that we or our other stockholders may viewas unfavorable. Accordingly, this concentration of ownership may harm the market price of our common stock by: •delaying, deferring or preventing a change in control; •impeding a merger, consolidation, takeover or other business combination involving us; •discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us; or •otherwise effectively limiting the rights of other stockholders because Dr. Kapoor has the ability to approve matters submitted tostockholders, including the election of directors, approval of significant transactions and the amendment of our certificate of incorporation.In addition, sales of shares of our common stock beneficially owned by Dr. Kapoor could be viewed negatively by third parties and have a negativeimpact on our stock price. Moreover, upon his passing, we cannot assure you as to how these shares will be distributed and subsequently voted.54Our common stock price has been volatile, which could result in substantial losses for stockholders.Our common stock is currently traded on The NASDAQ Global Market. We have in the past experienced, and may in the future experience, limiteddaily trading volume. The trading price of our common stock has been and may continue to be volatile. The market for pharmaceutical companies, inparticular, has at various times experienced extreme volatility that often has been unrelated to the operating performance of particular companies. Thesebroad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance. Thetrading price of our common stock could be affected by a number of factors, including, but not limited to, changes in expectations of our future performance,changes in estimates by securities analysts (or failure to meet such estimates), quarterly fluctuations in our sales and financial results and a variety of riskfactors, including the ones described elsewhere in this report. Periods of volatility in the market price of a company’s securities sometimes result in securitiesclass action litigation, which regardless of the merit of the claims, can be time-consuming, costly and divert management’s attention. In addition, if weneeded to raise equity funds under adverse conditions, it would be difficult to sell a significant amount of our stock without causing a significant decline inthe 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 stock pricemay decline materially as a result.In connection with the audit of our consolidated financial statements for the year ended December 31, 2016, our management and independentregistered public accounting firm concluded that there were material weaknesses 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 weaknesses we and ourindependent registered public accounting firm identified related specifically to the lack of effective policies and procedures, or timely and effective reviewsby personnel at an appropriate level, for accounting for the rebate component of our product sales allowances and the allowance for excess and obsoleteinventory in accordance with U. S. GAAP. We did not have controls designed to validate the completeness and accuracy of underlying data used in thedetermination of these significant estimates. Overall the management in the finance and accounting group did not display adequate tone at the top withrespect to judgment and rigor required to resolve the accounting for the rebates component of our product sales allowances and the allowance for excess andobsolete inventory matters.While we expect to take the measures necessary to address the underlying causes of these material weaknesses, we cannot at this time estimate howlong it will take and our efforts may not prove to be successful in remediating these material weaknesses. While we have not incurred and do not expect toincur material expenses specifically related to the remediation of these material weaknesses, 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 may bematerial.We cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. If we are unable tosuccessfully remediate any material weakness in our internal control over financial reporting, or identify any additional material weaknesses that may exist,the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirementsregarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, and our stock price may decline materially as aresult.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price andtrading volume could decline.The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stockprice would likely decline. If one or55more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stockprice and trading volume to decline.Future sales of our common stock or securities convertible into our common stock may depress our stock price.Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market could occur at anytime. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of ourcommon stock. As of December 31, 2016, we had (i) 71,923,550 outstanding shares of common stock; (ii) 7,300,873 shares of common stock issuable uponthe exercise of stock options under our 2013 Equity Incentive Plan and other existing stock option plans; and (iii) 4,259,755 shares were available for futureissuance under our 2013 Equity Incentive Plan. The exercise of outstanding stock options could result in increased sales of our common stock in the market,which could exert significant downward pressure on our stock price. These sales also might make it more difficult for us to sell equity or equity-relatedsecurities 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 you mightconsider favorable.On August 15, 2014, after approval by our stockholders, we entered into a rights agreement traditionally referred to as a poison pill. This rightsagreement will have certain anti-takeover effects which will cause substantial dilution to a person or group that attempts to acquire the Company on termsnot approved by our Board. In addition, our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisitionof 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 bystockholders at stockholder meetings.In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Lawwhich, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us.These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control ofour company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you andother 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) amajority of independent directors on the Board;56(ii) independent director oversight of executive officer compensation; and (iii) independent director oversight of director nominations.We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.The continued operation and expansion of our business may require substantial funding. Accordingly, we do not anticipate that we will pay any cashdividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board ofDirectors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors ourBoard of Directors deems relevant.ITEM 1B.UNRESOLVED STAFF COMMENTSNot applicable.ITEM 2.PROPERTIESWe 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 90,000 square feet for our U.S.-based,state-of-the-art dronabinol manufacturing facilities, which are both located in Round Rock, Texas under lease agreements that expire between January 2018and March 2024. We have the option to extend our primary manufacturing facility lease for two 5-year periods following March 2024. We believe that theRound Rock, Texas manufacturing facilities are adequate to meet our current needs and that suitable additional or alternative space will be available for ourforeseeable 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 DISCLOSURESNot applicable.57PART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OFEQUITY SECURITIESBeginning 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 2016 price range per share $15.06 $8.70 $19.96 $11.55 $18.65 $11.45 28.91 14.18 Fourth Quarter Third Quarter Second Quarter First Quarter 2015 price range per share $33.88 $20.15 $46.17 $26.07 $42.69 (1) $25.67 (1) 31.24 (1) 20.79 (1) (1)Share price adjusted to reflect a 2-for-1 stock split that occurred on June 8, 2015.HoldersAs of March 28, 2017, there were approximately 37 holders of record of our common stock and 71,957,343 shares of our common stock outstanding.DividendsSince 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 SecuritiesShare Repurchase ProgramOn November 5, 2015, we announced a stock repurchase program which authorizes up to $50 million in repurchases of common stock. As ofDecember 31, 2016, we had $17.4 million remaining under this program. There were no repurchases of our common stock during the three months endedDecember 31, 2016. Also see Note 8 of the Notes to our Consolidated Financial Statements for additional information on this repurchase program.58 Company Stock PerformanceThe 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, 2016. Total shareholder return assumes $100.00invested at the beginning of the period in our common stock, the stocks represented by the NASDAQ Composite Index and the NASDAQ PharmaceuticalIndex, 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, asamended, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.59ITEM 6.SELECTED FINANCIAL DATAThe 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 Condition andResults of Operations” and other information contained elsewhere in this Annual Report on Form 10-K. The selected financial data in the table below as ofDecember 31, 2014, 2013 and 2012 and for the years ended December 31, 2013 and 2012, were derived from our audited consolidated financial statementsnot included in this Annual Report on Form 10-K. Years Ended December 31, 2016 2015 2014 2013 2012 (In thousands, except share and per share data) (As Revised) (As Revised) Consolidated Statement of Comprehensive Income Data: Net revenue $242,275 $330,323 $219,092 $99,289 $15,476 Gross profit 216,882 301,469 196,514 86,624 7,849 Operating income (loss) 7,326 90,456 60,990 32,559 (23,440)Income tax expense (benefit) 834 32,941 25,089 (8,800) — Net income (loss) 7,590 58,053 36,054 40,377 (24,378)Net income (loss) per common share: Basic $0.11 $0.81 $0.52 $0.78 $(0.87)Diluted $0.10 $0.77 $0.49 $0.70 $(0.87)Weighted average common shares outstanding Basic 71,618,793 71,592,581 68,759,070 51,839,536 27,948,102 Diluted 74,145,918 75,707,651 73,335,132 57,469,234 27,948,102 Dividends declared per common share $— $— $— $— $— December 31, 2016 2015 2014 2013 2012 (In thousands) (As Revised) (As Revised) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $182,880 $159,091 $82,863 $45,782 $361 Total current assets 230,972 252,051 146,465 78,350 11,889 Total assets 356,136 351,285 215,635 100,558 18,741 Total current liabilities, including debt 78,614 90,436 48,709 21,081 83,419 Total liabilities 86,547 98,980 52,445 21,081 83,419 Total stockholders' equity (deficit) 269,589 252,305 163,190 79,477 (64,678) Refer to Note 2 of the Consolidated Financial Statement for a summary of the amounts and financial statement line items impacted by the revision ofpreviously issued financial statements for the correction of immaterial errrors. 60ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSForward-Looking StatementsThe information in this Annual Report on Form 10-K, or this Form 10-K, including this discussion in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, or MD&A, contains forward-looking statements and information within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safeharbor” created by those sections. All statements, other than statements of historical facts, included or incorporated in this Form 10-K could be deemedforward-looking statements, particularly statements about our plans, strategies and prospects under this MD&A heading and under the heading “Business.” Insome cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology, although not allforward-looking statements contain these identifying words. All forward-looking statements in this Form 10-K are made based on our current expectations,forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from thoseexpressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks thatcould affect our future results or operations as described from time to time in our SEC reports, including those risks outlined under the heading “Risk Factors”in Part I, Item 1A of this Form 10-K. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statementset forth in this Form 10-K. You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K andsubsequent reports filed with or furnished to the SEC before making any investment decision with respect to our securities. All forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.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; PBM formulary changes relative to SUBSYS® or established forSYNDROS™ (once commercially launched, if at all) may have a material impact on future net revenue; our intent to file an IND application for thetreatment of epilepsy with cannabidiol; the sufficiency of our manufacturing capacity; the beneficial attributes of our dronabinol product candidates anddelivery mechanisms; that our suppliers are equipped to supply us with our current and future chemical needs; that pending dronabinol candidates willdefault to Schedule II classification; that changes in healthcare laws will result in reduced Medicaid and Medicare payments for prescription drugs; thatsales and marketing and research and development costs will be our largest categories of expenses; that sales and marketing expenses will fluctuate basedon changes in SUBSYS® net revenue; our development of different dronabinol delivery systems; our anticipated timing of the commercial launch ofSYNDROS™; our ability to obtain finalization of labeling by the FDA as the final approval prior to commercial launch of SYNDROS™; that we canmaintain or even grow market share and net revenue for SUBSYS® and our strategies relating thereto; that we may pursue strategies relating to syntheticcannabidiol; our sales and marketing strategy for future products and delivery systems; that we may pursue strategic transactions such acquisitions orother companies, asset purchase out- or in-licensing of products, strategic partnerships, joint ventures, divestitures, business combinations and investments;our ability to obtain foundation materials and manufacture dronabinol in light of government quotas; our strategy of using Marinol as a reference drug infuture drug approval applications; the expected pathway of drug applications we expect to file in the future; that physicians and payers will continue togain familiarity about and accept the features of SUBSYS®; our plans and strategies for obtaining future international approvals; our plans and strategiesto protect our intellectual property; our intention of not paying dividends; possible capital raising transactions we may pursue; that we may avail ourselvesof certain Nasdaq governance provisions because of our status as a controlled company; that research and development and operating costs will increase;that our investments in our sales and research and development infrastructure will result in increased sales; accounting estimates and the impact of new orrecently issued accounting pronouncements; that cash flows from operations will increase and/or stabilize as a result of sales of SUBSYS®; the source andsufficiency of our liquidity and capital resources to fund our operations; trends in restrictions and impediments relating to reimbursement policies imposedby PBMs; the impact of pending litigation and our strategy relating thereto; that we will not recognize revenue in the near term from current research anddevelopment initiatives; our exposure to interest rate changes and market risks related to our investment; and the potential impact of Section 382limitations on our NOLs. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similarexpressions are intended to identify61forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentionsor expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results orevents could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-lookingstatements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. The following discussion and analysis of the results of operations and financial condition of Insys Therapeutics, Inc. for the years ended December31, 2016 and 2015 should be read in conjunction with the consolidated financial statements and the notes thereto, and other financial information containedelsewhere in this Form 10-K.OverviewWe are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have onecommercially marketed product and one product awaiting final labeling approval by the FDA, prior to commercial launch, after receiving FDA approval inJuly 2016 and DEA scheduling in March 2017: •SUBSYS® — a proprietary, single-use product that delivers fentanyl, an opioid analgesic, for transmucosal absorption underneath thetongue, offered in 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 received FDA approval for SUBSYS® in January 2012 and commercially launched SUBSYS® in March 2012. •SYNDROS™ — a dronabinol oral solution that is equivalent to Marinol, an approved second-line treatment for CINV and anorexiaassociated with weight loss in patients with AIDS. We received FDA approval for SYNDROS™ in July 2016. In March 2017, the DEA issuedan interim final ruling that would result in SYNDROS™ being placed in Schedule II of the CSA. We are currently awaiting the finalizationof labeling by the FDA as the final approval prior to commercial launch.We also have one discontinued product: •Dronabinol SG Capsule — a dronabinol soft gelatin capsule that is a generic equivalent to Marinol, an approved second-line treatment forCINV and anorexia associated with weight loss in patients with AIDS, offered in 2.5, 5.0 and 10.0 milligram dosages. We received FDAapproval for Dronabinol SG Capsule in August 2011. We commercially launched Dronabinol SG Capsule through our former exclusivedistribution partner, Mylan Pharmaceuticals, Inc., in December 2011. We do not have any current plans to manufacture or market this productin the future.We market SUBSYS® through our U.S.-based field sales force focused on supportive care physicians. Consistent with most pharmaceuticalmanufacturing companies, we sell and distribute SUBSYS® primarily to pharmaceutical wholesalers and collect sales proceeds from those wholesalers. Forthe year ended December 31, 2016, sales to our four largest wholesale customers accounted for 67% of gross revenue. We also sell SUBSYS® directly tocertain specialty pharmaceutical retailers who distribute our product. For the year ended December 31, 2016 direct sales to specialty pharmaceutical retailersaccounted for 33% of gross revenue. We do not own or have any ownership stake in any pharmaceutical wholesaler or specialty pharmacy, nor do we have anoption to acquire any wholesaler or specialty pharmacy. All pharmacies that fulfill SUBSYS® prescriptions are fully independent. Our relationships withevery pharmacy that fulfills SUBSYS® prescriptions are non-exclusive in that each of these pharmacies may also fulfill prescriptions for other pharmaceuticalmanufacturers, including our competitors. For the year ended December 31, 2016, over 920 independent pharmacies have fulfilled at least one SUBSYS®prescription.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. We provideadministrative reimbursement support assistance, in large part through our62insurance reimbursement support hub, which provides administrative support assistance to help patients coordinate with their insurance companies.We are also developing other product candidates, such as cannabinoid line extensions and sublingual spray product candidates.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 final approvals are obtained, andsupport the continued development of our other dronabinol product candidates in the near-term, we have opened and expanded a second dronabinolmanufacturing facility, which we anticipate will enable us to supply sufficient commercial quantities of dronabinol API for the anticipated commercializationof our proprietary dronabinol product candidates, if approved.We have the capability to manufacture pharmaceutical CBD, an over 99.5% pure form of cannabidiol, in our Round Rock, Texas manufacturingfacility. On April 23, 2015, we announced that we had commenced dosing of epilepsy patients in a Phase I PK study in pediatric subjects. We intend to file anIND application with the FDA for the treatment of epilepsy.Factors Affecting Our PerformanceWe 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, our abilityto ensure that our products, policies and practices adhere to the extensive national, state and local regulations applicable to our industry is critical to oursuccess, particularly as our operations and product opportunities continue to grow at a rapid pace. While each of these areas presents significant opportunitiesfor us, they also pose significant risks and challenges that we must successfully address. Approved Product Sales. Our operating results will depend significantly upon our, and any of our third-party distributors’, sales of approvedproducts. During the year ended December 31, 2016, all of our net revenues were generated from the sale of our approved product, SUBSYS®. We will notgenerate any revenue from the sale of our discontinued Dronabinol SG Capsule in future periods. Our results will depend on prescription volume generally,which we believe will be driven primarily by achievement of broad market acceptance and coverage by third-party payers and effectiveness of the marketingand selling efforts with respect to SUBSYS®. Moreover, our gross margins improve on a unit-by-unit basis as we sell higher dosage strengths of our products.Importantly, the proportion of prescriptions written for repeat SUBSYS® patients has continued to increase since July 2012 from 50% of prescriptions toapproximately 92% of prescriptions as of December 31, 2016. Generally, repeat SUBSYS® patients receive significantly higher doses of SUBSYS® onaverage than first-time patients as patients are titrated from a starter dose of SUBSYS® to their effective dose in accordance with the TIRF REMS protocol.According to IMS, the total market for TIRF products for the year ended December 31, 2016 was approximately 72,000 prescriptions and we estimateSUBSYS® prescriptions were approximately 43% of the TIRF market, compared to a total market for TIRF products of approximately 94,000 prescriptionsand approximately 46% SUBSYS® market share for the year ended December 31, 2015.The continuing and heightened publicity surrounding the national opioid epidemic continues to result in sensitivity by some healthcareprofessionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by healthcare professionals and pharmacies is the result of third-partypayers, such as insurance companies, and regulatory and government agencies increasingly scrutinizing the indications and uses for which healthcareprofessionals are prescribing, and pharmacies are dispensing, opioids. Moreover, ongoing state and federal investigations into our sales, marketing and othercommercial practices and developments and media reports that may arise in connection with such investigations may negatively affect our relationships withhealthcare professionals and pharmacies and their prescribing or dispensing habits. Consequently, these current and potential future events have and willlikely continue to affect the manner in which, and the situations when, SUBSYS® is being prescribed, dispensed and approved for coverage. While wecontinue to sell directly into wholesalers and retail pharmacies for63our revenue, the direct pressures discussed above related to the retail demand-side components of our business contributed to the decline in full-year 2016SUBSYS® revenue when compared to 2015.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. Byway of example, from time to time, third-party payers modify which drugs they choose to reimburse. For instance, on or around August 1, 2014, ESI officiallyreleased its exclusion list of drugs, effective January 1, 2015, in connection with its national preferred formulary. Other PBMs may take similar actions andthese actions may have a material impact on our net revenue in the future. As we have in the past, we will continue working with PBMs to evaluate priceincreases and to communicate with managed care and health-system decision-makers to ensure a balanced approach, which takes into account the clinicalperformance 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 HHS, has instituted The Recovery Audit Program. The program’s mission is to identify and correct improper Medicarepayments through the efficient detection and collection of overpayments made on claims of health care services provided to Medicare beneficiaries, and theidentification of underpayments to providers so that CMS can implement actions that will prevent future improper payments in all 50 states. We are awarethat in January 2016, certain specialty pharmacies received written correspondence from Humana indicating that as a result of a CMS audit, Humana wasinitiating a deletion of certain PDEs related to SUBSYS® which will result in a reversal and recovery of identified claims paid to certain pharmacies. Thisaudit by CMS may have been part of The Recovery Audit Program or a similar initiative of CMS. Based upon information available to us, all of these claimsinvolve Medicare Part D patients whose prescriptions were in connection with off-label indications and related to approximately $5.6 million in SUBSYS®claims in the aggregate. Upon our inquiry for more information about these matters, Humana notified us that these deletions of certain PDEs resulting fromthe CMS audit also involve TIRF medications other than SUBSYS® and Humana intends to resolve these matters with the pharmacies. We believe that someaffected pharmacies may alter their processes and or protocols related to dispensing off label TIRF prescriptions to Medicare patients as a result of these andsimilar events. 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, 2016, we had 274 full-time sales and marketing personnel. This will lead to corresponding increases in our operating expenses, although we anticipate that these investments willresult in increased product sales and net revenue. In addition, we have constructed a second dronabinol manufacturing facility, which we anticipate willsupply us with sufficient commercial quantities of dronabinol API for the commercialization of our proprietary dronabinol product candidates, if approved.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 $75.4 million and $55.3 million for the years ended December31, 2016 and 2015, respectively. As of December 31, 2016, we had 59 full-time research and development personnel. We expect research and developmentexpenses to increase as we continue our planned preclinical studies and clinical trials for our product candidates, particularly our proprietary cannabinoidproduct candidates, including SYNDROS™, and sublingual spray product candidates. We do not expect to realize net revenues from all of these research anddevelopment initiatives in the near term and may never realize net revenues from these investments. Due to the risks inherent in conducting preclinicalstudies and clinical trials, the regulatory approval process and the costs of preparing, filing and prosecuting patent applications, our development completiondates and costs will vary significantly for each product candidate and are very difficult to estimate. The lengthy process of seeking regulatory approvals andthe subsequent compliance with applicable regulations require the expenditure of substantial additional resources. Any failure by us to obtain, or any delayin obtaining, regulatory approvals or acceptable DEA classifications for our product candidates, in particular those related to SYNDROS™, could cause ourresearch and development expenditures to increase significantly and, in turn, have a material adverse effect on our results of operations.64Basis of Presentation Revision of Previously issued Financial Statements for Correction of Immaterial ErrorsDuring September 2016, we identified an error related to the accounting for the rebates component of our product sales allowances since 2014. Wedetermined that we had miscalculated our rebate obligations on government payer and managed care contracts. In addition, we recorded out-of-periodadjustments that resulted in an increase in operating expenses of $1,500,000 related to stock option modifications during the three months ended March 31,2016 and a decrease in income tax expense of $834,000 related to the deductible interest expense portion of accrued litigation award and settlementsrecorded during 2016. We concluded that the errors were not material to previously issued annual financial statements. However, to correctly present netrevenue, operating expenses and income tax expense in the appropriate annual period, management has revised the 2015 and 2014 financial statements.Refer to Note 2 of the Consolidated Financial Statements for a summary of the amounts and financial statement line items impacted by the revision. Allamounts set forth in the discussion and analysis of the results of operations and financial condition for the years ended December 31, 2015 and 2014 havebeen adjusted to reflect these revisions. Net RevenueWe sell SUBSYS® in packages of various sized single-dose units in dosage strengths of 100, 200, 400, 600, 800, 1,200 and 1,600 mcg, to wholesalepharmaceutical distributors and specialty retail pharmacies, collectively, our customers, on a wholesale basis. Sales to our customers are subject to specifiedrights of return. We record revenue for SUBSYS® at the time the customer receives the shipment.Cost of Revenue, Gross Profit and Gross MarginCost of revenue consists primarily of materials, third-party manufacturing costs, freight in, indirect personnel costs, and other overhead costs basedon units dispensed through patient prescriptions. Also included in cost of revenue are charges for reserves for excess, dated or obsolete commercialinventories 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 ExpensesOur 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, 2016, we had 274 full-time sales and marketing personnel. We expect our salesand marketing expenses, along with our research and development expenses, to be our largest categories of operating expenses for the foreseeable future. Inaddition, because we use an incentive-based compensation model for our sales professionals, we expect our sales and marketing expenses to fluctuate fromperiod to period based on changes in SUBSYS® net revenue. We will also incur expenses directly related to the launch of SYNDROS™, if finalization oflabeling by the FDA is obtained.Research and Development ExpensesResearch and development expenses consist of costs associated with our preclinical studies and clinical trials, and other expenses related to our drugdevelopment efforts. Our research and development expenses consist primarily of: •external research and development expenses incurred under agreements with third-party CROs and investigative sites, third-partymanufacturers and consultants; •employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical andclinical drug development activities; and •facilities, depreciation and other allocated expenses, equipment and laboratory supplies.65To date, our research and development efforts have been focused primarily on our fentanyl, dronabinol and cannabidiol programs. As of December31, 2016, we had 59 full-time research and development personnel. We expect research and development expenses to increase as we continue our plannedpreclinical studies and clinical trials for our product candidates. We determine which research and development projects to pursue, as well as the level offunding available for each project, 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, 2016 2015 2014 (As Revised) Cannabidiol $15.3 $16.3 $5.8 Buprenorphine 9.4 3.4 3.4 Fentanyl 4.5 2.8 2.8 LEP-ETU and IL-13 2.3 2.5 1.1 Naloxone 3.0 2.2 0.2 Dronabinol 3.9 6.3 1.6 Ondansetron 1.2 1.4 0.7 Buprenorphine/Naloxone 1.0 4.6 0.8 Sildenafil 0.6 0.2 0.8 Internal research and development costs 29.5 15.9 15.9 Other 3.2 1.2 - Total research and development expenses $73.9 $56.8 $33.1 General and Administrative ExpensesOur general and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting, businessdevelopment and internal support functions. In addition, general and administrative expenses include facility costs not otherwise included in research anddevelopment expenses, and professional fees for legal, consulting and accounting services. As of December 31, 2016, we had 46 full-time general andadministrative personnel. We expect general and administrative expense to modestly increase as a result of expanding our operating activities and the costswe incur operating as a public company. We expect these increases to include salaries and related expenses, legal and consultant fees, regulatory fees as newproducts are commercialized, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services, andenhanced business and accounting systems.Charges Related to Litigation Award and SettlementsCharges related to litigation award and settlements for the year ended December 31, 2016 represent legal expense accruals of $3.4 million related to asettlement reached with the State of New Hampshire and $0.5 million in connection with the investigation by the State of Massachusetts. Charges related tolitigation award and settlements for the year ended December 31, 2015 represent a $9.5 million accrual associated with our dispute with Dr. Kottayil and a$1.1 million legal settlement with the ODOJ related to sales of SUBSYS® in Oregon. See Note 7 of the Notes to our Consolidated Financial Statements for adiscussion on our ongoing dispute with Dr. Kottayil and other legal matters.Income Taxes, Net Operating Loss CarryforwardsUnder 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 reduce theutilization of these NOLs before they expire. Our ability to utilize federal NOLs created prior to the NeoPharm merger is significantly limited.66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 $1.1 million as of December 31, 2016, which begin to expire in 2018.For state tax purposes, we had approximately $268.1 million of state NOLs at December 31, 2016, all of which relate to Illinois. Based on projectionsand our limited activity in Illinois, we estimate that approximately $266.1 million of these Illinois NOLs will not be utilized. For this reason, we recorded avaluation allowance for the estimated tax benefit relating to this amount, or $20.6 million. A portion of the Illinois NOLs not utilized began expiring in2015.Significant Accounting Polices and EstimatesOur 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 U.S. 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 thisdocument, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financialstatements.Revenue RecognitionWe recognize revenue from the sale of SUBSYS®. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery hasoccurred and title has passed, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured.SUBSYS® was commercially launched in March 2012 and is monitored by an FDA mandated REMS program known as the TIRF REMS. We sellSUBSYS® in the United States to wholesale pharmaceutical distributors and directly to retail pharmacies (collectively, our customers) subject to rights ofreturn within a period beginning six months prior to, and ending 12 months following, product expiration. SUBSYS® currently has a shelf life of 36 monthsfrom the date of manufacture. We record revenue for SUBSYS® at the time the customer receives the shipment.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 payers and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, suchas patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future resultsvary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowancesinclude:Product Returns. We allow customers to return product for credit beginning six months prior to, and ending 12 months following, the productexpiration date. The shelf life of SUBSYS® is currently 36 months from the date of manufacture. We have monitored actual return history since productlaunch, which provides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time ofshipment, shipment and 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 the product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits onreturned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment.The allowance for product returns is included in accrued sales allowances. 67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 the discount asa 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 prescriptionsthat are 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 to therebate 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 products fromthe wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail price and theprice the entity paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels, current contract prices andhistorical chargeback activity. The allowance for chargebacks is included as a reduction to accounts receivable.A roll-forward of our product sales allowances for the years ended December 31, 2016 and 2015 is as follows (in thousands): WholesaleDiscounts (1) PatientDiscountPrograms Rebates Returns Total Balance at December 31, 2014 (As Revised) $5,418 $2,227 $10,943 $1,159 $19,747 Revenue allowances: Provision related to current period sales 38,036 60,991 62,689 3,158 164,874 Provisions related to sales made in prior years — — (367) 138 (229)Payment and credits related to sales made in current period (30,480) (53,848) (41,030) — (125,358)Payment and credits related to sales made in prior periods (5,418) (2,227) (7,543) (1,257) (16,445)Balance at December 31, 2015 (As Revised) $7,556 $7,143 $24,692 $3,198 $42,589 Provision related to current period sales 27,968 95,609 41,703 626 165,906 Provisions related to sales made in prior years — — (962) — (962)Payment and credits related to sales made in current period (23,696) (85,489) (27,740) — (136,925)Payment and credits related to sales made in prior periods (6,369) (7,143) (21,410) (1,272) (36,194)Balance at December 31, 2016 $5,459 $10,120 $16,283 $2,552 $34,414 68(1)Includes wholesaler discounts, prompt pay discounts, stocking allowances and government chargebacks.Sales PracticesWe have, from time to time, late in a fiscal quarter, offered to certain customers extended payment terms primarily in an effort to increase customerorders during that quarter, which may have impacted sales in subsequent quarterly periods. We believe this practice is consistent with industry practice. Forall sales under which this incentive was provided during the periods presented in this discussion and analysis, revenue received from such sales was properlyaccounted for in accordance with ASC 605 — “Revenue Recognition” and was recognized in the proper applicable accounting period.InventoriesInventories consist of raw materials, work-in-process and finished product and are valued at the lower of cost (first-in, first-out cost method) or market.Inventory costs are capitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercial use and netrealizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatory process, ourrequired investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the riskof manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation for product launches, we consider theprobability that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approvalprocess, as well as the market for the product in its current state. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization,or other potential factors including product expiration.Stock-Based CompensationStock-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 periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitable on the date of grant. Expenserecognized for consultant stock options was immaterial for the years ended December 31, 2016 and 2015.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 inherent uncertainties andthe application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materiallydifferent in the future. These assumptions are estimated as follows: •Fair Value of Our Common Stock — Because our stock was not publicly traded prior to our initial public offering, we previously estimatedthe fair value 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 our common stock. •Expected Volatility — Prior to our IPO, we did not have a reliable history of market prices for our common stock. Following our IPO, whilewe have an active trading market, we do not have sufficient historical data to accurately estimate volatility for the period equivalent to theexpected term of the stock option grants. Accordingly, we estimate the expected stock price volatility for our common stock by taking themedian historical stock price volatility for industry peers based on daily price observations over a period equivalent to the expected term ofthe stock option grants. Industry peers consist of other public companies in the pharmaceutical industry that are similar in size, stage of lifecycle and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until69 a sufficient amount of historical information regarding the volatility of 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 ourawards. The risk-free interest rate assumption is based on the yields of U.S. Treasury securities with maturities similar to the expected term ofthe options for each option group. •Expected Term — The expected term represents the period that our stock-based awards are expected to be outstanding. The expected terms ofthe awards are based on a simplified method which defines the term as the average of the contractual term of the options and the weighted-average vesting 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 theforeseeable future. 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 Comprehensive Income includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis ofour actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employeeturnover and other factors. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulativeeffect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimatedforfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financialstatements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in our consolidated financial statements.Deferred Tax Valuation AllowanceWe 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. As of December 31, 2016, we have recorded a valuation allowance of $23.5 million, related to Arizona research and development credits and IllinoisNOLs expiring before being used. Recently Issued Accounting PronouncementsRecent 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 8.70Results of Operations The following table presents certain selected consolidated financial data expressed as a percentage of net revenue: Years Ended December 31, 2016 2015 2014 (As Revised) (As Revised) Net revenue 100.0% 100.0% 100.0%Cost of revenue 10.5 8.7 10.3 Gross profit 89.5 91.3 89.7 Operating expenses: Sales and marketing 28.8 24.4 26.5 Research and development 30.5 17.2 15.1 General and administrative 25.6 19.1 20.2 Charges related to litigation award and settlements 1.6 3.2 - Total operating expenses 86.5 63.9 61.8 Operating income 3.0 27.4 27.9 Other income: Interest income 0.4 0.2 0.1 Other income 0.1 - - Total other income 0.5 0.2 0.1 Income before income taxes 3.5 27.5 28.0 Less: income tax expense 0.3 10.0 11.5 Net income 3.2% 17.5% 16.5% Comparison of year ended December 31, 2016 to year ended December 31, 2015Net Revenue. Net revenue decreased $88.0 million, or 26.7%, to $242.3 million for the year ended December 31, 2016 compared to $330.3 millionfor the year ended December 31, 2015. The decrease in net revenue was attributable to a decrease in net revenue of SUBSYS®, which was the result of a24.5% decrease in SUBSYS® shipments to pharmaceutical wholesalers and specialty pharmaceutical retailers for the year ended December 31, 2016, ascompared to the year ended December 31, 2015, partially offset by a 1.2% increase in net sales price, which was impacted by price increases in January 2015,July 2015, January 2016 and July 2016 combined with changes in mix of prescribed dosages and changes in provisions for wholesaler discounts, patientdiscounts, rebates and returns. Provisions for patient discounts, wholesaler discounts, rebates and returns were $95.6 million, $28.0 million, $40.7 million and$0.7 million, respectively, or 40.5% on a combined basis of gross revenue from the sale of SUBSYS® for the year ended December 31, 2016, compared to$61.0 million, $38.0 million, $62.3 million and $3.3 million, respectively, or 33.3% on a combined basis of gross revenue from the sale of SUBSYS® for theyear ended December 31, 2015. The increase in product sales allowances was primarily attributable to higher volumes of patient assistance. As described in“Factors Affecting Our Performance – Approved Product Sales”, the continuing sensitivity by some healthcare professionals to prescribe, and pharmacies todispense, opioids, scrutiny by third-party payers and governmental agencies, and ongoing state and federal investigations, and media reports related theretocontributed to the decrease in full-year SUBSYS® revenue when compared to 2015.There was no net revenue from the sales of Dronabinol SG Capsule during the year ended December 31, 2016, compared to $1.3 million during theyear ended December 31, 2015. 71Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue decreased $3.5 million to $25.4 million for the year ended December 31, 2016compared to $28.9 million for the year ended December 31, 2015. The decrease in cost of revenue was primarily attributable to the decrease in sales ofSUBSYS® during the year ended December 31, 2016. Gross profit decreased $84.6 million to $216.9 million for the year ended December 31, 2016compared to $301.5 million for the year ended December 31, 2015 due primarily to the decrease in sales of SUBSYS®. Gross profit was also impacted by a$6.7 million increase in our reserve for excess and obsolete inventory to $6.8 million for the year ended December 31, 2016 compared to $0.1 million duringthe year ended December 31, 2015 related to SUBSYS®. Gross margin for the year ended December 31, 2016 was approximately 90% compared toapproximately 91% for the year ended December 31, 2015.Sales and Marketing Expense. Sales and marketing expense decreased $11.0 million to $69.7 million for the year ended December 31, 2016compared to $80.7 million for the year ended December 31, 2015. The decrease in sales and marketing expense was due primarily to lower salescompensation expense and incremental product selling and marketing expense associated with the decrease in sales of SUBSYS®.Research and Development Expense. Research and development expense increased $17.1 million to $73.9 million for the year ended December31, 2016 compared to $56.8 million for the year ended December 31, 2015. 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 2016 related to our growing product pipeline.Also contributing to the increase in research and development expense was a charge for product not commercially viable of $2.4 million for the year endedDecember 31, 2016 related to SYNDROS™. There was no similar charge for the year ended December 31, 2015. General and Administrative Expense. General and administrative expense decreased $0.8 million to $62.1 million for the year ended December 31,2016 compared to $62.9 million for the year ended December 31, 2015. The decrease in general and administrative expense was due primarily to decreases inlegal expense incurred in connection with various ongoing government investigation and subpoena related matters and decreases in stock-basedcompensation costs of $2.1 million to $17.7 million for the year ended December 31, 2016 compared to $19.8 million for the year ended December 31, 2015.The decrease in legal expense was offset by an increase in general and administrative personnel costs. We expect to continue to incur significant legalexpense for the foreseeable future until government investigations and subpoena related matters are resolved. Such costs could materially exceed theamounts we have historically incurred in connection with government investigations and subpoena related matters on an annual basis.Charges Related to Litigation Award and Settlements. Charges related to litigation award and settlements for the year ended December 31, 2016represent accruals of $3.4 million related to a settlement reached with the State of New Hampshire and $0.5 million in connection with the investigation bythe State of Massachusetts. Charges related to litigation award and settlements for the year ended December 31, 2015 represent a $9.5 million accrualassociated with our dispute with Dr. Kottayil and a $1.1 million legal settlement with the ODOJ related to sales of SUBSYS® in Oregon. See Note 7 of theNotes to our Consolidated Financial Statements for a discussion of ongoing legal matters.Other Income. We reported other income of $1.1 million for the year ended December 31, 2016 and $0.5 million for the year ended December 31,2015 due primarily to the result of our investing excess cash.Income Tax Expense. Provision for income taxes was $0.8 million for the year ended December 31, 2016 representing an effective tax rate of 9.9%.Provision for income taxes was $32.9 million for the year ended December 31, 2015 representing an effective tax rate of 36.1%. The decrease in income taxexpense and corresponding decrease in the effective tax rate for the year ended December 31, 2016 was due primarily to our utilization of available researchand development and orphan drug tax credits in excess of pre-tax income.Comparison of year ended December 31, 2015 to year ended December 31, 2014Net Revenue. Net revenue increased $111.2 million, or 50.8%, to $330.3 million for the year ended December 31, 2015 compared to $219.1 millionfor the year ended December 31, 2014. The increase in net revenue was primarily attributable to the $112.5 million, or 52.0%, increase in net revenue ofSUBSYS® to $329.0 million for the year ended December 31, 2015 compared to $216.5 million for the year ended December 1, 2014. The increase inSUBSYS®72revenue is primarily a result of a 30% increase in shipments to pharmaceutical wholesalers and retailers for the year ended December 31, 2015 as compared tothe 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, July2014, January 2015 and July 2015, combined with changes in mix of prescribed dosages and changes in provisions for wholesaler discounts, patientdiscounts, rebates and returns. Provisions for wholesaler discounts, patient discounts, rebates and returns increased to $38.0 million, $61.0 million, $62.3million and $3.3 million, respectively, or 33.8% on a combined basis of gross revenue from the sale of SUBSYS® for the year ended December 31, 2015,compared to $22.4 million, $36.5 million, $24.4 million and $2.8 million, respectively, or 39.2% on a combined basis of gross revenue from the sale ofSUBSYS® for the year ended December 31, 2014. The increase in revenue provisions as a percentage of gross revenue was primarily attributable to anincrease in the issuance of patient discount credits and rebate claims from managed care organizations and government programs. The increase in sales ofSUBSYS® was partially offset by a decrease in sales of Dronabinol 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 intermination of our former distribution agreement with Mylan. Accordingly, we will not generate any meaningful revenue from the sale of Dronabinol SGCapsule in future periods.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 $105.0 million to $301.5 million for the year ended December 31, 2015compared to $196.5 million for the year ended December 31, 2014. Gross margin for the year ended December 31, 2015 was approximately 91% compared toapproximately 90% for the year ended December 31, 2014. 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, and the effects of the 2014 inventory expiry issue described below. SUBSYS® gross marginwas approximately 92% and 91% for the years ended December 31, 2015 and 2014, respectively. This increase in 2015 is attributable to a shift in sales mixto 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 of non-refundable deposits for amounts paid by Mylan for this inventory, and a corresponding $1.4 million charge to cost of revenue for the second quarter of 2014.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 higher salescompensation expense and incremental product marketing expense associated with the increase in sales of SUBSYS®.Research and Development Expense. Research and development expense increased $23.7 million to $56.8 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 product pipeline. General and Administrative Expense. General and administrative expense increased $18.6 million to $62.9 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 to increasesin legal expense incurred in connection with various ongoing government investigation and subpoena related matters, which increased $6.8 million to $12.7million for the year ended December 31, 2015 compared to $5.9 million for the year ended December 31, 2014. Legal expenses associated with litigation andother matters decreased $5.4 million to $5.6 million for the year ended December 31, 2015 compared to $11.0 million for the year ended December 31,2014. Also contributing to the increase in general and administrative expense was an increase in stock-based compensation costs of $10.0 million to $19.8million for the year ended December 31, 2015 compared to $9.8 million for the year ended December 31, 2014. The other increases in general andadministrative expense resulted from growth in administrative infrastructure to support the growth of the business. 73Charges Related to Litigation Award and Settlements. Charges related to litigation award and settlements for the year ended December 31, 2015represent a $9.5 million accrual associated with our dispute with Dr. Kottayil and a $1.1 million legal settlement with the ODOJ related to sales of SUBSYS®in Oregon. See Note 7 of the Notes to our Consolidated Financial Statements for a discussion of ongoing legal matters. There was no similar expense for theyear ended December 31, 2014.Other Income. We reported interest income of $0.5 million for the year ended December 31, 2015 and $0.2 million for the year ended December 31,2014 primarily the result of our investing excess cash.Income Tax Expense. Provision for income taxes was $32.9 million for the year ended December 31, 2015 representing an effective tax rate of36.1%. Provision for income taxes was $25.1 million for the year ended December 31, 2014 representing an effective tax rate of 41.1%.Liquidity and Capital ResourcesSources of LiquidityWe 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 and principal stockholder, Dr. John Kapoor. 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 a totalof $32.5 million in net proceeds after deducting underwriting discounts and commissions of $2.6 million and offering expenses of $1.8 million. These costshave been recorded as a reduction of the proceeds received in arriving at the amount recorded in additional paid-in capital. Upon completion of the IPO, alloutstanding shares of our preferred stock were converted into 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.Cash FlowsThe following table shows a summary of our cash flows for the years indicated (in millions): Years Ended December 31, 2016 2015 2014 (As Revised) (As Revised) Net cash provided by operating activities $58.9 $102.3 $50.6 Net cash used in investing activities (22.0) (90.2) (70.3)Net cash provided by (used in) financing activities (11.8) 9.3 32.4 Net increase in cash and cash equivalents 25.1 21.4 12.7 Cash and cash equivalents, beginning of period 79.5 58.1 45.4 Cash and cash equivalents, end of period $104.6 $79.5 $58.1 Cash Flows from Operating Activities. Net cash provided by operating activities was $58.9 million and $102.3 million for the years ended December31, 2016 and 2015, compared to $50.6 million for the year ended December 31, 2014. The decrease in net cash provided from operating activities from 2015to 2016 primarily reflects the lower net income for the period driven by a reduction in SUBSYS® net sales, adjusted in part by depreciation and amortization,stock-based compensation expense and is also impacted by changes in working capital. The increase in net cash from operating activities from 2014 to 2015primarily reflects higher net income driven primarily by the growth in SUBSYS® net sales, adjusted in part by depreciation and amortization, stock-basedcompensation expense, deferred income taxes, excess tax benefits on stock options and awards and non-cash interest expense and is also impacted bychanges in working capital.74Cash Flows from Investing Activities. Net cash used in investing activities was $22.0 million and $90.2 million for the years ended December 31,2016 and 2015, compared to $70.3 million for the year ended December 31, 2014. During 2016, we invested $11.4 million of excess cash in short-term andlong-term investments, net of proceeds and we also invested $10.7 million for purchases of equipment and leasehold improvements. During 2015, weinvested $76.3 million of excess cash in short-term and long-term investments, net of proceeds and we also invested $13.8 million for purchases of equipmentand leasehold improvements. During 2014, we invested $48.4 million of excess cash in short-term and long-term investments, net of proceeds and we alsoinvested $22.2 million for purchases of equipment and leasehold improvements, including $18.0 million in connection with the construction of our seconddronabinol facility.Cash Flows from Financing Activities. Net cash used in financing activities was $11.8 million for the year ended December 31, 2016, as comparedto net cash provided by financing activities of $9.3 million and $32.4 million for the years ended December 31, 2015 and 2014. During the year endedDecember 31, 2016, we expended approximately $16.1 million to repurchase shares of our common stock and recognized $1.7 million due to tax deficiencieson stock options and awards, partially offset by proceeds from the exercise of stock options of $3.8 million and proceeds from shares issued under ouremployee stock purchase plan of $2.3 million. During the year ended December 31, 2015, we recognized $13.6 million of financing cash flows from excesstax benefits on stock options and awards, $9.5 million from the proceeds from exercise of stock options and $2.6 million of proceeds from shares issued underan employee stock purchase plan, partially offset by $16.5 million expended to repurchase shares of our common stock. During the year ended December 31,2014, we recognized $21.4 million of financing cash flows from excess tax benefits on stock options and awards, $9.0 million from the proceeds fromexercise of stock options and $2.0 million of proceeds from shares issued under an employee stock purchase plan.We invoice pharmaceutical wholesalers and specialty pharmaceutical retailers upon shipment of SUBSYS®. To date, our customers have typicallypaid us 30 to 60 days from their applicable invoice dates.Our cash flows for 2017 and beyond will depend on a variety of factors, including sales of SUBSYS® and our anticipated launch of SYNDROS™,regulatory approvals, investments in manufacturing and production, capital equipment, and research and development. We expect our net cash flows fromoperating activities to fluctuate with the sales of SUBSYS® and, if applicable, SYNDROS™, partially offset by anticipated expansion in research anddevelopment, manufacturing, and general and administrative expenses.Funding RequirementsWe 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.Because of the numerous risks and uncertainties associated with commercialization of SUBSYS® and the development of our other productcandidates, 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 but notlimited 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 product candidates that wemay 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;75 •costs and judgements of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated withour 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, 2016 and we expect to continue to fund our operationsprimarily from operating activities, we cannot guarantee that we will generate sufficient operating cash flows to fund our planned activities. We cannot besure that additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders.Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or allrights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. If we raise additional funds byissuing equity or convertible securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring new debtobligations, the terms of the debt will likely require significant cash payment obligations as well as covenants and specific financial ratios that may restrictour ability to operate our business. Contractual Obligations Contractual Obligations Total Payments Duein Less Than1 Year Payments Duein 1-3 Years Payments Duein 3-5 Years Payments Duein More Than5 Years Operating leases $30,278 $3,113 $6,715 $6,021 $14,429 Purchase obligations 36,290 7,500 15,910 12,880 — $66,568 $10,613 $22,625 $18,901 $14,429 Off-Balance Sheet ArrangementsDuring the year ended December 31, 2016, 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.76ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAt December 31, 2016, $54.0 million of our cash equivalent investments was in money market securities that are reflected as cash equivalentsbecause all maturities are within 90 days. Our money market securities may consist of 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 yields earned,which approximate current interest rates.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 investment portfolio,consisting of fixed income securities that we hold on an available-for-sale basis, was approximately $133.1 million as of December 31, 2016 and $122.8million as of December 31, 2015. These securities, like all fixed income instruments, are subject to interest rate risk and would likely decline in value ifmarket interest rates increase. We have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize anymaterial 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, 2016 Financial instruments mature during year ended: 2017 2018 2019 2020 2021 Thereafter CD's, commercial paper and available-for-sale securities $80.0 $32.4 $20.7 $— $— $— Weighted-average yield rate 0.61% 0.29% 0.23% — — — 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 risks andhave established policies and procedures to protect against the adverse effects of these and other potential exposures. Although we do not anticipate anymaterial losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.77ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageInsys Therapeutics, Inc. Report of Independent Registered Public Accounting Firm 79Consolidated Balance Sheets as of December 31, 2016 and 2015 80Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014 81Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014 82Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 83Notes to Consolidated Financial Statements 84 78Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersInsys Therapeutics, Inc.Chandler, ArizonaWe have audited the accompanying consolidated balance sheets of Insys Therapeutics, Inc. (the “Company”) as of December 31, 2016 and 2015 and therelated consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31,2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insys Therapeutics, Inc.at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, inconformity with accounting principles generally accepted in the United States of America.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, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 31, 2017 expressed an adverse opinionthereon. /s/ BDO USA, LLPPhoenix, ArizonaMarch 31, 201779INSYS THERAPEUTICS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2016 2015 (As Revised) Assets Current Assets: Cash and cash equivalents $104,642 $79,515 Short-term investments 78,238 79,576 Accounts receivable, net of allowances of $6,144 and $8,367 at December 31, 2016 and 2015, respectively 20,654 47,272 Inventories 21,743 41,715 Prepaid expenses and other current assets 5,695 3,973 Total current assets 230,972 252,051 Property and equipment, net 43,172 38,382 Long-term investments 53,796 43,219 Deferred income tax assets, net 23,243 17,607 Other assets 4,953 26 Total assets $356,136 $351,285 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $27,359 $35,611 Accrued compensation 8,833 10,225 Accrued sales allowances 28,955 35,033 Accrued litigation awards and settlements 13,467 9,567 Total current liabilities 78,614 90,436 Uncertain income tax position 7,933 8,544 Total liabilities 86,547 98,980 Commitments and Contingencies (Note 7) Stockholders' Equity: Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively) — — Common stock (par value $0.01 per share; 100,000,000 shares authorized; 71,923,550 and 71,907,858 shares issued and outstanding as of December 31, 2016 and 2015, respectively) 719 719 Additional paid in capital 256,529 246,685 Unrealized loss on available-for-sale securities, net of tax (302) (152)Notes receivable from stockholders (21) (21)Retained earnings 12,664 5,074 Total stockholders' equity 269,589 252,305 Total liabilities and stockholders' equity $356,136 $351,285 See accompanying notes to consolidated financial statements.80INSYS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands, except share and per share data) Years Ended December 31, 2016 2015 2014 (As Revised) (As Revised) Net revenue $242,275 $330,323 $219,092 Cost of revenue 25,393 28,854 22,578 Gross profit 216,882 301,469 196,514 Operating expenses: Sales and marketing 69,651 80,668 58,105 Research and development 73,913 56,781 33,136 General and administrative 62,092 62,948 44,283 Charges related to litigation award and settlements 3,900 10,616 — Total operating expenses 209,556 211,013 135,524 Operating income 7,326 90,456 60,990 Other income: Interest income 1,039 502 151 Other income, net 59 36 2 Total other income 1,098 538 153 Income before income taxes 8,424 90,994 61,143 Less: income tax expense 834 32,941 25,089 Net income $7,590 $58,053 $36,054 Unrealized loss on available-for-sale securities, net of tax (150) (128) (24)Total comprehensive income $7,440 $57,925 $36,030 Net income per common share: Basic $0.11 $0.81 $0.52 Diluted $0.10 $0.77 $0.49 Weighted average common shares outstanding Basic 71,618,793 71,592,581 68,759,070 Diluted 74,145,918 75,707,651 73,335,132 See accompanying notes to consolidated financial statements. 81INSYS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share amounts) Common Stock UnrealizedLoss on Notes Retained Shares Amount AdditionalPaid inCapital Available-For-SaleSecurities ReceivableFromStockholders Earnings(AccumulatedDeficit) Total Balance at December 31, 2013 66,369,784 $664 $167,867 $— $(21) $(89,033) $79,477 Exercise of stock options 3,616,790 36 8,920 — — — 8,956 Issuance of common stock- employee stock purchase plan 716,114 7 1,982 — — — 1,989 Excess tax benefits on stock options and awards — — 21,449 — — — 21,449 Stock based compensation - stock options and awards — — 15,289 — — — 15,289 Unrealized loss on available-for-sale securities, net oftax — — — (24) — — (24)Net income — — — — — 36,054 36,054 Balance at December 31, 2014 (As Revised) 70,702,688 707 215,507 (24) (21) (52,979) 163,190 Exercise of stock options 1,607,683 16 9,508 — — — 9,524 Issuance of common stock- employee stock purchase plan 151,906 2 2,645 — — — 2,647 Excess tax benefits on stock options and awards — — 13,596 — — — 13,596 Stock based compensation - stock options and awards 5,781 — 21,882 — — — 21,882 Unrealized loss on available-for-sale securities, net oftax — — — (128) — — (128)Repurchase of common stock (560,200) (6) (16,453) — — — (16,459)Net income — — — — — 58,053 58,053 Balance at December 31, 2015 (As Revised) 71,907,858 719 246,685 (152) (21) 5,074 252,305 Exercise of stock options 637,721 6 3,797 — — — 3,803 Issuance of common stock- employee stock purchase plan 221,046 2 2,278 — — — 2,280 Tax deficiency on stock options and awards — — (1,729) — — — (1,729)Stock based compensation - stock options and awards — — 21,589 — — — 21,589 Unrealized loss on available-for-sale securities, net oftax — — — (150) — — (150)Repurchase of common stock (843,075) (8) (16,091) — — — (16,099)Net income — — — — — 7,590 7,590 Balance at December 31, 2016 71,923,550 $719 $256,529 $(302) $(21) $12,664 $269,589 See accompanying notes to consolidated financial statements. 82INSYS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2016 2015 2014 (As Revised) (As Revised) Cash flows from operating activities: Net income $7,590 $58,053 $36,054 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,249 5,291 2,500 Stock-based compensation 21,589 21,882 15,289 Deferred income tax benefit (5,636) (4,914) (655)Loss on disposal of assets - 41 — Excess tax benefits on stock options and awards 1,729 (13,596) (21,449)Amortization of investment discount 2,029 1,431 367 Changes in operating assets and liabilities: Accounts receivable 26,618 (23,770) (7,796)Inventories 15,044 (3,616) (23,571)Prepaid expenses and other current assets (1,721) 1,345 (2,967)Accounts payable, accrued expenses and other current liabilities (18,487) 50,708 52,813 Accrued litigation award and settlements 3,900 9,423 — Net cash provided by operating activities 58,904 102,278 50,585 Cash flows from investing activities: Change in restricted cash — — 400 Purchase of investments (115,375) (138,470) (56,605)Proceeds from sales of investments 7,948 25,492 — Proceeds from maturities of investments 96,009 36,643 8,195 Purchases of property and equipment (10,614) (13,842) (22,245)Net cash used in investing activities (22,032) (90,177) (70,255)Cash flows from financing activities: Proceeds from issuance of common stock 2,280 2,647 1,989 Excess tax benefits on stock options and awards (1,729) 13,596 21,449 Proceeds from exercise of stock options 3,803 9,524 8,956 Repurchase of common stock (16,099) (16,459) — Net cash provided by (used in) financing activities (11,745) 9,308 32,394 Change in cash and cash equivalents 25,127 21,409 12,724 Cash and cash equivalents, beginning of period 79,515 58,106 45,382 Cash and cash equivalents, end of period $104,642 $79,515 $58,106 Supplemental cash flow disclosures: Cash paid for income taxes $10,742 $15,351 $2,975 Non-cash capital expenditures $425 $— $— See accompanying notes to consolidated financial statements. 83INSYS THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.Nature of BusinessInsys 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 commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have onecommercially marketed product: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and one product:SYNDROS™, awaiting final labeling approval by the FDA, prior to commercial launch, after receiving FDA approval in July 2016 and DEA scheduling inMarch 2017.2.Significant Accounting PoliciesRevision of Previously Issued Financial Statements for Correction of Immaterial ErrorsDuring the three months ended September 30, 2016, we identified an error related to the accounting for the rebates component of our product salesallowances since 2014.. We determined that we had incorrectly applied the accounting guidance in Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) No. 605, “Revenue Recognition” by miscalculating our rebate obligations on government payer and managedcare contracts. In addition, we recorded out-of-period adjustments that resulted in an increase in operating expenses of $1,500,000 related to stock optionmodifications during the three months ended March 31, 2016 and a decrease in income tax expense of $834,000 related to the deductible interest expenseportion of the accrued litigation award and settlements recorded during 2016. We assessed the materiality of these errors on our prior annual financialstatements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No.108 and concluded that the errors were not material to our consolidated financial statements for the years ended December 31, 2015 and 2014. However, tocorrectly present net revenue, operating expenses and income tax expense in the appropriate periods, management revised its previously issued financialstatements for the years ended December 31, 2015 and 2014. Certain amounts in prior periods as previously reported have been reclassified to conform to thecurrent period presentation.The following tables summarize the impact and financial statement line items impacted by the revision adjustments as of and for the years endedDecember 31, 2015 and 2014 : As of December 31, 2015 (in thousands) Consolidated Balance Sheet: As previously reported Adjustments As revised Deferred income tax assets, net 16,331 1,276 17,607 Total assets 350,009 1,276 351,285 Accounts payable and accrued expenses 36,354 (743) 35,611 Accrued sales allowances 31,526 3,507 35,033 Total current liabilities 87,672 2,764 90,436 Uncertain income tax position 8,635 (91) 8,544 Total liabilities 96,307 2,673 98,980 Additional paid in capital 245,736 949 246,685 Retained earnings 7,420 (2,346) 5,074 Total stockholders' equity 253,702 (1,397) 252,305 Total liabilities and stockholders' equity $350,009 $1,276 $351,28584 Year Ended December 31, 2015(in thousands, except per share data) Consolidated Statement of Comprehensive Income: As previously reported Adjustments As revised Net revenue $330,797 $(474) $330,323 Gross profit 301,943 (474) 301,469 Operating expenses: Research and development 55,281 1,500 56,781 Total operating expenses 209,513 1,500 211,013 Operating income 92,430 (1,974) 90,456 Income before income taxes 92,968 (1,974) 90,994 Less: income tax expense 34,492 (1,551) 32,941 Net income 58,476 (423) 58,053 Total comprehensive income $58,348 $(423) $57,925 Net income per common share: Basic $0.82 $(0.01) $0.81 Diluted $0.77 $(0.00) $0.77 Year Ended December 31, 2015 (in thousands) Consolidated Statement of Cash Flows: As previously reported Adjustments As revised Cash flows from operating activities: Stock-based compensation $20,382 $1,500 $21,882 Deferred income tax benefit (4,118) (796) (4,914)Excess tax benefits on stock options and awards (13,593) (3) (13,596)Prepaid expenses and other current assets 1,311 34 1,345 Accounts payable, accrued expenses and other current liabilities 51,023 (315) 50,708 Net cash provided by operating activities 102,281 (3) 102,278 Cash flows from financing activities: Excess tax benefits on stock options and awards 13,593 3 13,596 Net cash provided by financing activities $9,305 $3 $9,308 As of December 31, 2014 (in thousands) Consolidated Statement of Stockholders' Equity: As previously reported Adjustments As revised Additional paid in capital 216,061 (554) 215,507 Retained earnings (51,056) (1,923) (52,979)Total stockholders' equity 165,667 (2,477) 163,190 Total liabilities and stockholders' equity $215,121 $514 $215,63585 Year Ended December 31, 2014 (in thousands) Consolidated Statement of Comprehensive Income: As previously reported Adjustments As revised Net revenue $222,125 $(3,033) $219,092 Gross profit 199,547 (3,033) 196,514 Operating income 64,023 (3,033) 60,990 Income before income taxes 64,176 (3,033) 61,143 Less: income tax expense 26,199 (1,110) 25,089 Net income 37,977 (1,923) 36,054 Total comprehensive income $37,953 $(1,923) $36,030 Net income per common share: Basic $0.55 $(0.03) $0.52 Diluted $0.52 $(0.03) $0.49 Year Ended December 31, 2014 (in thousands) Consolidated Statement of Cash Flows: As previously reported Adjustments As revised Cash flows from operating activities: Deferred income tax benefit (175) (480) (655)Excess tax benefits on stock options and awards (22,003) 554 (21,449)Prepaid expenses and other current assets (2,933) (34) (2,967)Accounts payable, accrued expenses and other current liabilities 50,376 2,437 52,813 Net cash provided by operating activities 50,031 554 50,585 Cash flows from financing activities: Excess tax benefits on stock options and awards 22,003 (554) 21,449 Net cash provided by financing activities $32,948 $(554) $32,394 Principles of ConsolidationThe consolidated financial statements include the accounts of Insys Therapeutics, Inc. and its wholly-owned subsidiaries. All significantintercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.ReclassificationCertain amounts in prior periods have been reclassified to conform to the current period presentation.Fair Value of Financial InstrumentsThe 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.FASB ASC No. 820, “Fair Value Measurement” defines fair value as the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement 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;86 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 RecognitionWe recognize revenue from the sale of SUBSYS®. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery hasoccurred 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 to wholesale pharmaceutical distributors and directly to specialty retail pharmacies (collectively, our customers) subject to rights of return within aperiod beginning six months prior to, and ending 12 months following, product expiration. SUBSYS® currently has a shelf life of 36 months from the date ofmanufacture. We record revenue for SUBSYS® at the time the customer receives the shipment.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 payers and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, suchas patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future resultsvary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowancesinclude:Product Returns. We allow customers to return product for credit within six months before and up to 12 months following its product expiration date.The shelf life of SUBSYS® is currently 36 months from the date of manufacture. We have monitored actual return history since product launch, whichprovides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment andprescription trends, estimated distribution channel inventory levels, and consideration of the introduction of competitive products.Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits onreturned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.The allowance for product returns is included in 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 of the discount.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 the discount asa reduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies.87Patient Discount Programs. We offer discount card programs to patients for SUBSYS® in which patients receive discounts on their prescriptionsthat are 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 channels. 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 to therebate 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 FSS of the General Services Administration under an FSS contract negotiated bythe Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These entities purchase products from the wholesaledistributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail price and the price the entitypaid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels, current contract prices and historical chargebackactivity. The allowance for chargebacks is included as a reduction to accounts receivable.Dronabinol SG CapsuleOur Dronabinol SG Capsule product was commercially launched in December 2011, and we sold Dronabinol SG Capsule exclusively to Mylan in theUnited States under a supply and distribution agreement. We do not have any current plans to manufacture or market this product in the future.Cash and Cash EquivalentsWe 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 InvestmentsOur policy for short-term and long-term investments is to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoidsinappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Short-term and long-terminvestments consist of corporate, various government agency and municipal debt securities, as well as certificates of deposit that have maturity dates that aregreater than 90 days. Certificates of deposit and commercial paper are carried at cost which approximates fair value. We classify our marketable securities asavailable-for-sale in accordance with FASB ASC Topic 320, Investments — Debt and Equity Securities. Available-for-sale securities are carried at fair valuewith unrealized gains and losses reported in stockholders’ equity, net of related tax effects. There were no reclassifications on available-for-sale securitiesduring the year ended December 31, 2016. Reclassifications on available-for-sale securities were insignificant during the year ended December 31, 2015. Adecline in the market value of any available-for-sale security below cost that is deemed to be other than temporary, results in impairment of the fair value ofthe investment. We did not have any realized gains or losses or decline in values judged to be other than temporary during the years ended December 31,2016, 2015 and 2014. If we had realized gains and losses and declines in value judged to be other than temporary, we would have been required to includethose changes in other expense in the consolidated statements of comprehensive income. Premiums and discounts are amortized or accreted over the life ofthe related available-for-sale security. The cost of securities sold is calculated using the specific identification method. At December 31, 2016, our certificatesof deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $1,296,000, $78,238,000 and$53,796,000 in cash and cash equivalents, short-term investments and long-term investments, respectively. 88Accounts Receivable, NetTrade accounts receivable are recorded at the invoice amount net of allowances for wholesaler discounts, prompt pay discounts, stocking allowances,and doubtful accounts. See “Revenue Recognition” above for a description of our wholesaler discounts, prompt pay discounts, stocking allowances andchargebacks. In the ordinary course of business, and consistent with industry practices, we may from time to time offer extended payment terms to ourcustomers as an incentive for new product launches or in other circumstances. These extended payment terms do not represent a significant risk to thecollectability of accounts receivable as of the period-end and are evaluated in accordance with ASC 605 —Revenue Recognition as applicable. We evaluatethe collectability of our accounts receivable based on a variety of factors including the length of time the receivables are past due, the financial health of thecustomer and historical experience. We write off accounts receivable against the allowance when a balance is determined to be uncollectable.InventoriesInventories consist of raw materials, work-in-process and finished product and are valued at the lower of cost (first-in, first-out cost method) or market.Inventory costs are capitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercial use and netrealizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatory process, ourrequired investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the riskof manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation for product launches, we consider theprobability that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approvalprocess, as well as the market for the product in its current state. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization,or other potential factors including product expiration.Property and EquipmentProperty and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Maintenance and repairsthat do not extend the life of assets are charged to expense when incurred. When property and equipment is disposed of, the related costs and accumulateddepreciation 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 undiscounted cashflows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognizedby the amount by which the carrying amount exceeds the fair value of the asset.Income TaxesWe 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 losses (“NOLs”) and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that will be ineffect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period thatincludes the enactment date.We record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making suchdeterminations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected futuretaxable income, tax planning strategies and recent financial operating results.89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 consolidated statements ofcomprehensive income.Research and Development ExpensesResearch 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 MarketingAdvertising and marketing costs are expensed as incurred. Advertising expense totaled $1,572,000, $1,166,000 and $800,000 for the years endedDecember 31, 2016, 2015 and 2014, respectively.Legal FeesLegal 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 $22,840,000, $19,448,000 and $16,926,000 for the years ended December 31, 2016, 2015 and 2014,respectively.Stock-Based Compensation ExpensesStock-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, which is generally three to four years, on a straight-line basis. We use the Black-Scholes option pricing model for estimating the grant datefair value of stock options using the following assumptions: •Exercise price - Prior to May 7, 2013, we determined the exercise price based on valuations using the best information available tomanagement at the time of the valuations. Subsequent to our initial public offering of common stock (“IPO”) on May 7, 2013, the exerciseprice is equal to the fair market value of the stock on the grant date which is determined based on quoted market prices. •Volatility - Prior to our IPO, we did not have a reliable history of market prices for our common stock. Following our IPO, while we have anactive trading market, we do not have sufficient historical data to accurately estimate volatility for the period equivalent to the expected termof the stock option grants. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historicalstock price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock optiongrants. •Expected term - The expected term is based on a simplified method which defines the term as the average of the contractual term of theoptions and 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.90Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”)requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could materiallydiffer from those estimates.Segment InformationFASB ASC No. 280, “Segment Reporting” establishes standards for reporting information about reportable segments. Operating segments are definedas components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, ordecision-making group (“CODM”), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profitsbased on product lines and routes to market. Based on our integration and management strategies, we operate in a single reportable segment.Recent Accounting Pronouncements In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to improvethe accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U. S. GAAP prohibits the recognition ofcurrent and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, which is an exception to the principle ofcomprehensive recognition of current and deferred income taxes in U. S. GAAP. The amendments in this update eliminate the exception for an intra-entitytransfer of an asset other than inventory. The amendments should be applied on a modified retrospective transition basis, and are effective for fiscal yearsbeginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating theimpact of these amendments on our consolidated financial statements.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and CashPayments. The amendments affect entities required to present a statement of cash flows and provides specific guidance on a variety of cash flow issues toreduce current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, and interimperiods within those fiscal years, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period.The amendments should be applied using a retrospective transition method to each period presented. We are currently evaluating the impact of theseamendments on our consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income,and are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. ASU2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result inthe timelier recognition of losses. We are currently evaluating the impact of these amendments on our consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based paymenttransactions, including (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification in the statement ofcash flows. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periodswithin those fiscal years.Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsicvalue should be applied using a modified retrospective transition, amendments related to the presentation of employee taxes paid on the statement of cashflows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively, amendments requiring91recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be appliedprospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospectivetransition method or a retrospective transition method. We will adopt the new guidance in the first quarter of 2017. Under the new guidance, excess taxbenefits related to equity compensation will be recognized in the provision for income taxes in the consolidated statements of comprehensive income ratherthan in additional paid-in capital in the consolidated balance sheets and will be applied on a prospective basis. We have not yet determined our selectedmethod of transition for changes to the statements of cash flows related to the classification of excess tax benefits and employee taxes paid for share-basedpayment arrangements. The related financial statement impacts of adopting the above aspects of this ASU are not expected to be material. However,depending on several factors such as the market price of our common stock, employee exercise behavior and corporate income tax rates, the excess taxbenefits associated with the exercise of stock options could generate a significant discrete income tax benefit in a particular interim period potentiallycreating volatility in net income and net income per share period-to-period and period-over-period.In February 2016, the FASB issued ASU No. 2016-02, Leases: (Topic 842), to provide guidance on recognizing lease assets and lease liabilities onthe balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principleof Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expensesand cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP guidance. There continues to be a differentiationbetween finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising fromoperating leases should be recognized in the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous U.S.GAAP guidance. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years,and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presentedusing a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect toapply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs forleases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase theunderlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective datein accordance with previous U.S. GAAP guidance unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a leaseliability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosedunder previous U.S. GAAP guidance. We are currently evaluating the impact of these amendments on our consolidated financial statements and relateddisclosures; however, based on our current operating leases, we do not expect that the adoption of this guidance will have a material impact on theconsolidated financial statements. See Note 7, Commitments and Contingencies, for information about our lease commitmentsIn January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of FinancialAssets and Financial Liabilities, which amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement,presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interimperiods within those fiscal years, and early adoption is not permitted. These amendments should be applied by means of a cumulative-effect adjustment to thebalance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values(including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are currently evaluatingthe impact of these amendments on our consolidated financial statements.In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The guidance requires entitiesto measure most inventory at the lower of cost and NRV, thereby simplifying the current guidance under which an entity must measure inventory at the lowerof cost or market. Under the new guidance, inventory is measured at the lower of cost and NRV, which eliminates the need to determine replacement cost andevaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated sellingprices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annualperiods beginning after92December 15, 2016, and interim periods therein. We will adopt the new guidance in the first quarter of 2017. We do not believe that the adoption of thisguidance will have a material impact on our consolidated financial statements.In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard aims to achieve aconsistent application of revenue recognition within the United States, resulting in a single revenue model to be applied by reporting companies under U.S.GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reportingcompanies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is requiredto be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized atthe date of initial application. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which further clarifiedthe implementation guidance on principal versus agent considerations contained in ASU No. 2014-09 and the identification of performance obligations andlicensing, respectively. In May 2016, the FASB issued ASU 2016-12, narrow-scope improvements and practical expedients which provides clarification onassessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. Thesestandards will be effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transitionmethods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practicalexpedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includesadditional footnote disclosures). Early adoption is permitted, but not before December 15, 2016, the original effective date of the standard. We are currentlyanalyzing ASU 2014-09, and the related ASU's, to evaluate the impact of the new standard on existing contracts with our customers. This includes reviewingcurrent accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. Weinitiated a contract review process during 2016 and expect to complete the contract evaluations and validate results by the end of the second quarter of 2017.We have also started evaluating our existing accounting policies and the new disclosure requirements and expect to complete our evaluation of the impactsof the accounting and disclosure requirements on our business processes, controls and systems by the end of the second quarter of 2017. Full implementationwill be completed by the end of 2017. We have not yet determined our selected method of transition.3.Short-Term and Long-Term Investments Investments consisted of the following at December 31, 2016 (in thousands): December 31, 2016 Cost UnrealizedGains UnrealizedLosses Other-Than-TemporaryImpairmentLosses FairValue Cash andCashEquivalents Short-termInvestments Long-termInvestments Cash $49,331 $— $— $— $49,331 $49,331 $— $— Money market securities 54,015 — — — 54,015 54,015 — — Marketable securities: Certificates of deposit 26,114 — — — 26,114 — 13,855 12,259 Commercial paper 1,485 — — — 1,485 — 1,485 — Corporate securities 39,562 — (135) — 39,427 500 25,681 13,246 Federal agency securities 30,660 4 (92) — 30,572 — 10,854 19,718 Municipal securities 35,811 2 (81) — 35,732 796 26,363 8,573 Total marketable securities 133,632 6 (308) — 133,330 1,296 78,238 53,796 $236,978 $6 $(308) $— $236,676 $104,642 $78,238 $53,796 93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 — — Marketable securities: Certificates of deposit 26,223 — — — 26,223 — 16,637 9,586 Commercial paper Corporate securities 27,186 — (68) — 27,118 1,621 19,181 6,316 Federal agency securities 18,823 — (65) — 18,758 — 10,129 8,629 Municipal securities 53,870 16 (35) — 53,851 1,534 33,629 18,688 Total marketable securities 126,102 16 (168) — 125,950 3,155 79,576 43,219 $202,462 $16 $(168) $— $202,310 $79,515 $79,576 $43,219 The amortized cost and estimated fair value of the marketable securities, by maturity, are shown below (in thousands): December 31, 2016 December 31, 2015 AmortizedCost FairValue AmortizedCost FairValue Marketable securities: Due in one year or less $80,092 $80,027 $82,785 $82,731 Due after one year through 5 years 53,540 53,303 43,317 43,219 Due after 5 years through 10 years — — — — Due after 10 years — — — — $133,632 $133,330 $126,102 $125,950 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, 2016 December 31, 2015 Less Than12 Months Greater Than12 Months Less Than12 Months Greater Than12 Months FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss Marketable securities: Corporate securities $38,027 $(134) $401 $(1) $25,137 $(68) $— $— Federal agency securities 26,449 (91) 1,217 (1) 18,759 (65) — — Municipal securities 30,373 (81) 100 — 22,981 (35) — — $94,849 $(306) $1,718 $(2) $66,877 $(168) $— $— As of December 31, 2016 and 2015, 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, we donot 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.944.Fair Value Measurement At December 31, 2016 and 2015, 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, 2016 and 2015, 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 an independent third-party public quotation service basedon closing prices on the last business day of the period presented. In addition, we use the public quotation service to perform price testing by comparingquoted prices listed in reports provided by the asset managers that hold our investments to quotes listed through the public quotation service. These assetmanagers utilize an independent pricing source to obtain quotes for most fixed income securities, and utilize internal procedures to validate the pricesobtained. Our Level 3 asset represents our investment in a long-term corporate convertible promissory note and a warrant to purchase shares issued inconnection with the convertible promissory note, which converted to convertible preferred stock as of December 31, 2016. This stock is not listed on anysecurity exchange. The fair value of the preferred stock approximates its carrying value at December 31, 2016.Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2016 were as follows(in thousands): Fair Value Measurement at Reporting Date Total QuotedPrices inactiveMarkets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Marketable securities: Certificates of deposit $26,114 $— $26,114 $— Commercial paper 1,485 — 1,485 — Corporate securities 39,427 — 38,927 500 Federal agency securities 30,572 — 30,572 — Municipal securities 35,732 — 35,732 — Total assets measured at fair value $133,330 $— $132,830 $500 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: Certificates of deposit $26,223 $— $26,223 $— Commercial paper — — — — 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 $125,950 $— $125,950 $— 95The following table presents additional information about assets measured at fair value on a recurring basis and for which we utilize Level 3 inputs todetermine fair value for the years ended December 31, 2016 and 2015 (in thousands): December 31, 2016 2015 Convertible stock Balance, beginning of period $— $— Change in fair value — — Purchases 500 — Balance, end of period $500 $— 5.InventoriesInventories 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, theprice we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.The components of inventories, net of allowances, are as follows (in thousands): December 31,2016 December 31,2015 Finished goods $8,408 $28,216 Work-in-process 6,183 7,018 Raw materials and supplies 7,152 6,481 Total inventories 21,743 41,715 Plus: non-current finished goods 4,928 — $26,671 $41,715 As of December 31, 2016 and 2015, raw materials inventories consisted of raw materials used in the manufacture of the API in our U.S.-based, state-of-the-art dronabinol manufacturing facility and component parts and packaging materials used in the manufacture of SUBSYS®. Work-in-process consists ofactual production costs, including facility overhead and tolling costs of in-process dronabinol and SUBSYS® products. Finished goods inventories consistedof finished SUBSYS® products. Non-current finished goods represent those inventories not expected to be sold within 12 months of the balance sheet dateand are included in other assets in our consolidated balance sheets. As of December 31, 2016, all work-in-process inventory is expected to be used within 12months of the balance sheet date and, therefore, is classified as current inventory. We maintain an allowance for excess and obsolete inventory, as well asinventory where its cost is in excess of its net realizable value. Inventory at December 31, 2016 and 2015 were reported net of these reserves of $6,793,000and $100,000, respectively.966.Property and EquipmentProperty and equipment are comprised of the following (in thousands): EstimatedUseful Life As of December 31, (in years) 2016 2015 Computer equipment 3 — 7 $3,462 $2,798 Scientific equipment 3 — 10 12,930 9,283 Furniture 3 — 10 3,128 2,022 Manufacturing equipment 7 — 10 20,583 19,536 Leasehold improvements * 23,243 16,771 Less: accumulated depreciation and amortization (20,174) (12,028)Total fixed assets $43,172 $38,382 *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, 2016, 2015 and 2014 was $6,249,000, $5,291,000 and $2,500,000,respectively. As of December 31, 2016 and 2015, respectively, there was $6,857,000 and $7,391,000 of construction in progress included in total fixed assets thathad not been placed into service and was not subject to depreciation.7.Commitments and ContingenciesLease CommitmentsWe lease facilities under non-cancelable operating lease agreements. Future minimum commitments for these operating leases in place as ofDecember 31, 2016, with a remaining non-cancelable lease term in excess of one year, are as follows (in thousands): Years ending December 31, 2017 $3,113 2018 3,310 2019 3,405 2020 3,495 2021 2,526 Thereafter 14,429 Total $30,278 The terms of certain lease agreements provide for rental payments on a graduated basis. We recognize rent expense on the straight-line basis over thelease period and have accrued for rent expense incurred but not paid. Landlord incentives are recorded as deferred rent and amortized on a straight-line basisover the lease term. Deferred rent was approximately $3,003,000 as of December 31, 2016 and $3,160,000 as of December 31, 2015. Rent expense underoperating leases for the years ended December 31, 2016, 2015 and 2014 was approximately $2,757,000, $2,445,000, and $1,698,000, respectively.Letters of CreditAs of December 31, 2016, we had a $400,000 unused letter of credit related to the requirements of our facility lease agreement.97Material AgreementsIn April 2015, we entered into an amendment to our manufacturing and supply agreement with DPT, which extends our existing manufacturing andsupply agreement to produce SUBSYS® until the end of 2020. In addition to extending the term, this amendment added certain minimum purchasecommitments.In October 2015, we entered into an amended and restated supply, development & exclusive licensing agreement with Aptargroup, Inc. (“Aptar”)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 single digits,commencing in March 2016 through the term of this agreement, from our sales of SUBSYS® and future products that use the Aptar spray device technology.As of December 31, 2016, our remaining estimated annual contractual obligation under our agreement with Aptar was $20,290,000.In January 2016, we assigned our rights, title, duties and obligations of our manufacturing and supply agreement with DPT and our supply,development & exclusive licensing agreement with Aptar from our parent to our manufacturing subsidiary as part of a corporate restructuring.In July 2016, we, through our manufacturing subsidiary, entered into a further amendment to our DPT manufacturing and supply agreement datedMay 24, 2011, as amended. This amendment effectively eliminates any prior minimum purchase (and batch) obligations that had been set forth in theamendment dated April 30, 2015 and replaces it with a new annual purchase commitment of $4,000,000 per calendar year commencing January 1, 2017through December 31, 2020. As a result, the cumulative effect related to this amendment reduces our aggregated minimum purchase commitments with DPTfrom $49,740,000 to $16,000,000 through December 31, 2020. As of December 31, 2016, our remaining estimated annual contractual obligation under ouragreement with DPT was $16,000,000.All purchase commitments required under our agreements with DPT and Aptar were met during the years ended December 31, 2016 and 2015.The following table sets forth our aggregate minimum purchase commitments with DPT and Aptar under these agreements (in thousands): Years ending December 31, 2017 $7,500 2018 7,500 2019 8,410 2020 8,550 2021 4,330 Thereafter — Total $36,290 Defined Contribution Retirement Plans (401(k) Plan)We sponsor a 401(k) plan covering all full-time employees. Participants may contribute up to the legal limit. The 401(k) plan provides for employeecontributions, and beginning October 2014, our matching contribution is 50 percent of the first 6 percent of earnings contributed by each participant. Duringthe years ended December 31, 2016 and 2015, matching contribution plan expenses totaled approximately $730,000 and $670,000, respectively. Matchingcontributions for the year ended December 31, 2014 were nominalLegal MattersOther than the matters that we have disclosed below, we from time to time become involved in various ordinary course legal and administrativeproceedings, which include intellectual property, commercial, governmental and98regulatory investigations, employee related issues and private litigation, which we do not currently 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 a range,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 cannot bereasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters. Our loss estimates are generally developed inconsultation with outside counsel and are based on analyses of potential outcomes. As legal and governmental proceedings, disputes and investigations areinherently unpredictable and, in part, beyond our control, unless otherwise indicated, we cannot reasonably predict the outcome of these legal proceedings,nor can we estimate the amount of loss, or range of loss, if any, that may result from these proceedings. While our liability in connection with certain claimscannot be currently estimated, the resolution in any reporting period of one or more of these matters could have a significant impact on our financialcondition, results of operations and cash flows for that future period and could ultimately have a material adverse effect on our consolidated financialposition and could cause the market value of our common shares to decline. While we believe we have valid defenses in these matters, litigation andgovernmental and regulatory investigations are inherently uncertain and we may in the future incur material judgments or enter into material settlements ofclaims.Government ProceedingsLike other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies in theUnited States. As a result, interaction with government agencies occurs in the normal course of our operations. The following is a brief description of pendinggovernmental investigations which we believe are potentially or actually material at this time. It is possible that criminal charges and substantial payments,fines and/or civil penalties or damages or exclusion from federal health care programs or other administrative actions, as well as a corporate integrityagreement or similar government mandated compliance document that institutes significant restrictions or obligations, could result for us from anygovernment investigation or proceeding. In addition, even certain investigations that are not discussed below and which we do not deem to be material atthis time could be determined to be material 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 General ofthe HHS in connection with an investigation of potential violations involving HHS programs. This subpoena was issued in connection with an investigationby 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. We believe a loss is probable with respect to this investigation, but we are not in a position to estimate a range of such loss orother scope and outcome associated with this investigation.HIPAA Investigation. On September 8, 2014, we received a subpoena issued pursuant to HIPAA from the U.S. Attorney’s Office for the District ofMassachusetts. The subpoena requests documents regarding SUBSYS®, including our sales and marketing practices related to this product. Thisinvestigation also relates to activities in our patient services hub. We are cooperating with this investigation and have produced documents in response to thesubpoena and have provided other requested information. We believe a loss is probable with respect to this investigation, but we are not in a position toestimate a range of such loss or other scope and outcome associated with this investigation.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-Kickback Statutein connection with payments of approximately $83,000 from us. Several of our former employees have been charged in criminal proceedings. On or about February 18, 2016, one of our former sales employeeslocated in Alabama pled guilty to a conspiracy to violate the federal Anti-Kickback99Statute in regards to two Alabama health care professionals who prescribed our product SUBSYS®. These two Alabama health care professionals, who servedon our speaker bureau in connection with our speaker programs designed to educate and promote product awareness and safety for external health careproviders, were charged by the U.S. Attorney’s Office for the Southern District of Alabama, and on or about February 23, 2017, were convicted on 19 of 20counts brought against them which included charges related to distribution of a controlled substance, drug conspiracy, healthcare fraud conspiracy andmoney laundering. Moreover, on or about June 19, 2016, a former district sales manager in New York and a former sales representative in New Jersey werecharged in a federal court in Manhattan, New York with violating the federal Anti-Kickback Statute in connection with interacting with health careprofessionals who prescribed our product and served on our speaker bureau. Both of these employees have pled not guilty. On or about October 13, 2016, aformer prior authorization specialist and manager of our patient services hub was charged by the U.S. Attorney’s Office for the District of Massachusetts withconspiracy to commit wire fraud in connection with the Company’s provision of prior authorization support related to our patient services hub. On or aboutDecember 8, 2016, the U.S. Attorney’s Office for the District of Massachusetts issued an indictment against six former employees, including Michael L.Babich, our former President, CEO and director, on charges including racketeering conspiracy, conspiracy to commit mail fraud, conspiracy to commit wirefraud, conspiracy to violate the Anti-Kickback Statute and forfeiture. Other than the former Alabama sales employee, each of these indicted individuals haveentered pleas of not guilty to the charges against them. It is possible that additional individual criminal charges and convictions and pleas could result fromour ongoing federal and state government investigations and related proceedings. We continue to assess these matters to ensure we have an effectivecompliance program.State Related Investigations. We have received Civil Investigative Demands (“CIDs”) or subpoenas, as the case may be, from each of the Office ofthe Attorney General (or similarly named and authorized office) of the State of Arizona, Colorado, Florida, Illinois, Massachusetts, Maryland, Minnesota,New Hampshire, New Jersey, New York, Oregon, Pennsylvania and Washington. Moreover, we have received an administrative subpoena from the CaliforniaInsurance Commissioner. In addition, we understand that numerous physicians practicing within several of the aforementioned states have receivedsubpoenas from each applicable state Attorney General or Department of Justice office in connection with interactions with us. Generally, these CIDs andsubpoenas request documents regarding SUBSYS®, including our sales and marketing practices related to SUBSYS® in the applicable state, as well as ourpatient services hub. We are cooperating with each of these investigations and have produced documents in response to these CIDs, subpoenas and relatedrequests for information from each office.In connection with the investigation by the Oregon Department of Justice (“ODOJ”) we entered into a settlement agreement with the ODOJ referred toas an Assurance of Voluntary Compliance (“AVC”), and made monetary payments totaling approximately $1,100,000. The AVC requires us to maintaincertain controls and processes around our promotional and sales activity related to SUBSYS® in Oregon. This AVC expressly provides that we do not admitany violation of law or regulation. This settlement was reached as result of our cooperation with the ODOJ's investigation and after producing documents inresponse to certain CIDs and related requests for information from the ODOJ. All monetary payments in connection with this settlement were made prior toDecember 31, 2015.In connection with the investigation by the State of Illinois, on August 25, 2016, the Illinois Office of the Attorney General filed a complaint onbehalf of the State of Illinois against the Company in the Circuit Court of Cook County, Illinois, Chancery Division. The complaint asserts a claim forviolation of the Illinois Consumer Fraud and Deceptive Business Practices Act in connection with the sales and marketing of SUBSYS® in Illinois. Thecomplaint seeks injunctive relief, including a permanent injunction preventing us from engaging in commerce in the State of Illinois and civil penalties. TheCircuit Court of Cook County extended the time for us to answer or otherwise respond to the complaint and the next status hearing is April 7, 2017. Wecontinue to cooperate with this investigation and to engage in discussion with the Illinois Office of the Attorney General.In connection with the investigation by the State of New Hampshire, we entered into a settlement agreement with the State of New Hampshire referredto as an assurance of discontinuance, and made monetary payments totaling approximately $2,900,000 to the State of New Hampshire and a charitablecontribution of $500,000 to be used by a New Hampshire charitable foundation in preventing or remediating problems related to abuse, misuse ormisprescribing of opioid drugs. The assurance of discontinuance expressly provides that we do not admit any violation of law or regulation and requires us tomaintain certain controls and processes around our promotional and sales activity related to SUBSYS® in New Hampshire. This settlement was reached asresult of our cooperation with the State of New Hampshire investigation and after producing documents in response to certain requests for information100by the State of New Hampshire. These amounts have been accrued in the consolidated balance sheet as of December 31, 2016 and the payments inconnection with this settlement were made after December 31, 2016.In connection with the investigation by the State of Massachusetts, we have made a reasonable estimate of a probable loss of approximately$500,000. We continue to cooperate with the State of Massachusetts investigation, including producing documents in response to certain requests forinformation. This estimated amount has been accrued in the consolidated balance sheet as of December 31, 2016.Investigations of Physicians. In addition to the above investigations that are specifically directed at our company, we have received governmentalagency requests for information, including subpoenas, from the USAO of Connecticut, Eastern District of Michigan, Florida (Jacksonville), Kansas, NewHampshire, Rhode Island, Southern District of New York, Southern District of Alabama and Western District of New York regarding specific physicians thatwe 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 contain opioids aredrugs such as oxycodone, hydrocodone and fentanyl. Our product, SUBSYS®, is a fentanyl-based product in the TIRF class. Certain stakeholders in thehealthcare community, regulatory bodies and governmental agencies may associate us with, or determine that we are a part of, this perceived opioid abuseepidemic. Like all TIRF products, our product is part of the mandatory TIRF REMS program which is designed “to ensure informed risk-benefit decisionsbefore initiating treatment, and while patients are treated to ensure appropriate use of TIRF medicines” and “to mitigate the risk of misuse, 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 inlitigation or investigations that are directed at the abuse of opioids in the United States.For example, in May 2014, Santa Clara and Orange Counties in California filed a complaint in state court in Orange County, California againstnumerous pharmaceutical manufacturers alleging claims related to opioid marketing practices, including false advertising, unfair competition, and publicnuisance. Despite the fact that we are not named specifically in the complaint and this lawsuit was recently stayed, we have received a preservation noticeletter from the Office of the County Counsel for the County of Santa Clara. From time to time, we may be included in these types of litigations as a result ofthe fact that we market an opioid product. In addition, on March 28, 2017, the Ranking Member of the Committee on Homeland Security and Governmental Affairs of the United States Senatedistributed a letter to five manufacturers of opioid products, including the Company, requesting documents and information intended to aid such committeein understanding the challenges industry practices pose to efforts to curb opioid addiction and stem rising prescription drug costs for the federalgovernment. This letter requests documents regarding our business, including the commercialization of SUBSYS®. We intend to cooperate with this inquiry.With the exception of the investigations by the ODOJ, the State of New Hampshire and the State of Massachusetts which we have quantified above,and the investigations by the Department of Health and Human Services and HIPAA for which we have responded to subpoenas as requested, we believe aloss from an unfavorable outcome of these governmental proceedings is reasonably possible and an estimate of the amount or range of loss from anunfavorable outcome is not determinable at these stages. We believe we have meritorious legal positions and will continue to represent our interestsvigorously in these matters. However, responding to government investigations has and could continue to burden us with substantial legal costs inconnection with defending any claims raised. Any potential resulting fines, restitution, damages and penalties, settlement payments, pleas or exclusion fromfederal health care programs or other administrative actions, as well as any related actions brought by shareholders or other third parties, could have amaterial adverse effect on our financial position, results of operations or cash flows. Additionally, these matters could also have a negative impact on ourreputation and divert the attention of our management from operating our business.101Federal Securities Litigation and Derivative ComplaintsFederal Securities Litigation. On or about February 2, 2016, a complaint (captioned Richard Di Donato v. Insys Therapeutics, Inc., et al., Case 2:16-cv-00302-NVW) was filed in the United States District Court for the District of Arizona, against us and certain of our current and former officers. Thecomplaint was brought as a purported class action on behalf of purchasers of our common stock between March 3, 2015 and January 25, 2016. In general, theplaintiffs allege that the defendants violated the anti-fraud provisions of the federal securities laws by making materially false and misleading statementsregarding our business, operations and compliance with law during the class period, thereby artificially inflating the price of our common stock. On June 3,2016, the court appointed Clark Miller to serve as lead plaintiff. On June 24, 2016, the plaintiff filed a first amended complaint naming a former employee ofInsys Therapeutics, Inc. as an additional defendant and extending the class period. On December 22, 2016, the plaintiff filed a second amended complaint,primarily to add allegations relating to an indictment of Michael L. Babich and certain of our former employees announced on December 8, 2016 and toextend the class period from August 12, 2014 through December 8, 2016. On January 12, 2017, the defendants moved to dismiss the second amendedcomplaint. The plaintiff seeks unspecified monetary damages and other relief. We intend to vigorously defend against this claim.On or about March 17, 2017, a complaint (captioned Kayd Currier v. Insys Therapeutics, Inc., et al., Case 1:17-cv-01954-PAC) was filed in UnitedStates District Court for the Southern District of New York, against us and certain of our officers. The complaint was brought as a purported class action onbehalf of purchasers of our securities between February 23, 2016 and March 15, 2017. In general, the plaintiffs allege that the defendants violated the anti-fraud provisions of the federal securities laws by making materially false and misleading statements regarding our business and financial results during theclass period, thereby artificially inflating the price of our securities. On or about March 28, 2017, a second complaint making similar allegations (captionedHans E. Erdmann v. Insys Therapeutics, Inc., et al., Case 1:17-cv-02225-PAC) was filed in the same Court. The plaintiffs in both actions seek unspecifiedmonetary damages and other relief. We intend to vigorously defend against these claims.Derivative Litigation. On or about August 26, 2016, Gary Hirt and Precieux Art Jewelers Inc. filed a derivative complaint in the Court of Chancery ofDelaware against members of our Board of Directors and Michael L. Babich. The plaintiffs allege, among other things, that the defendants breached theirfiduciary duties by (a) knowingly overseeing the implementation of an illegal sales and marketing program, (b) consciously disregarding their duty ofoversight of our compliance with law and (c) trading on the basis of material non-public information. On November 8, 2016, the plaintiffs filed an amendedderivative complaint, and on January 26, 2017 the plaintiffs supplemented the amended derivative complaint, primarily to add allegations relating to theindictment of Michael L. Babich and certain of our former employees announced on December 8, 2016. On November 22, 2016, the defendants moved todismiss the action. On or about February 2, 2017, Michael Bourque filed a derivative complaint in the Court of Chancery against members of our Board ofDirectors; Michael L. Babich; Franc Del Fosse, our General Counsel; and Sanga Emmanuel, our Vice President and Chief Compliance Officer. The Bourquederivative complaint contains similar claims as the other derivative complaint. All parties stipulated to consolidate the two actions, and the consolidatedaction is captioned In re Insys Therapeutics, Inc. Derivative Litigation, C.A. No. 12696-VCMR. Following the submission of motions for appointment aslead counsel, the Court held a hearing on March 23, 2017, and appointed counsel for Gary Hirt and Precieux Art Jewelers Inc. as lead counsel. Lead counselis required to designate an operative complaint or file a consolidated complaint. The plaintiffs seek unspecified monetary damages and other reliefderivatively on behalf of the company. We intend to vigorously defend against these claims.General Litigation and DisputesKottayil vs. Insys Pharma, Inc. On September 29, 2009, Insys Pharma, Inc., our wholly owned subsidiary, and certain of our officers and the fivedirectors who comprised the Insys Pharma board of directors as of June 2009, as well as their spouses, were named as defendants in a lawsuit in the SuperiorCourt of the State of Arizona, Maricopa County, or the Arizona Superior Court, brought by Santosh Kottayil, Ph.D., certain of his family members and a trustof which Dr. Kottayil is the trustee. Dr. Kottayil formerly served as President, Chief Scientific Officer and a director of Insys Pharma, among other positions.The complaint brought a cause of action for statutory and common law appraisal of Dr. Kottayil’s Insys Pharma common stock. The cause of action forappraisal relates to a reverse stock split that Insys Pharma effected in June 2009, which resulted in Dr. Kottayil’s ownership position becoming a fractionalshare of Insys Pharma common stock. Following the reverse stock split, Insys Pharma cancelled all resulting102fractional shares, including the fractional share held by Dr. Kottayil, and offered a cash payment in lieu of the fractional shares. The complaint also broughtcauses of 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 Insys Pharmaof his interest in all of the fentanyl and dronabinol patent applications previously assigned to Insys Pharma and to recover the benefits of those interests.Dr. Kottayil was seeking, among other relief, the fair value of his Insys Pharma common stock as of June 2, 2009, compensatory and punitive damages, andrescission 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-claimsinclude actions for breach of fiduciary duty, fraud and negligent misrepresentations and omissions with respect to the time during which Dr. Kottayil wasemployed at Insys Pharma. The counter-claims, among other relief, sought compensatory and punitive damages.On January 29, 2014, the plaintiffs filed a second amended complaint in the Arizona Superior Court in which Insys Therapeutics, Inc. was also namedas defendant in this lawsuit. This amended complaint filed by plaintiffs re-alleged substantially the same claims set forth in the prior complaint, except thatplaintiffs also alleged that they were entitled to rescissory damages, added our majority stockholder, a private trust, as a defendant to the breach of fiduciaryduty claim and revised their fraud claim against the Insys Pharma director defendants.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 breach offiduciary 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-judgment andpost-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 2009 andagainst plaintiffs on plaintiffs’ breach of fiduciary duty claims, (iv) found in favor of Insys Pharma and against plaintiff (Kottayil) on his claim for rescissionof the patent application assignments that he entered in favor of Insys Pharma before and after his employment terminated, (v) found in favor of InsysTherapeutics, Inc. and against plaintiff on plaintiffs' claims of successor liability and fraudulent transfer, and (vi) found in favor of Kottayil and against InsysPharma on Insys Pharma’s counterclaims of breach of fiduciary duty, fraud, and negligent misrepresentation.On October 2, 2015, the court entered a final judgment, awarding plaintiffs the amount of $7,317,450, along with pre-judgment interest from June 2,2009, 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 Kottayil’s request to submit an application for attorneys’ fees for his defense of the Insys Pharma counterclaims, findingthat the request was premature.As a result of the final ruling, we have accrued $9,567,000 at December 31, 2016, including $2,249,000 of estimated pre-judgement interest, whichrepresents our current best estimate of this contingent liability. The final outcome of the appeal could cause this estimate to vary materially from the finalaward.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.On or around November 1, 2015, we received a notice from the Plaintiff’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 responded tothese demands by, among other things, requesting for supporting documents and information from the Plaintiffs’ counsel which we have not received yet.Accordingly, we are still in the process of assessing the merit of such claims as well as evaluating the basis for the costs claimed. Because of the uncertaintysurrounding the ultimate outcome we have not accrued for this claim at this103time; however, we believe that that it is reasonably possible that there may be a material loss associated with this claim and we currently estimate the range ofthe reasonably possible loss to be between $0 and the $3,630,000 claimed.As of August 1, 2016, Plaintiffs have filed opening and reply and cross response briefs and we have filed our answering and cross-appeal brief and ourreply in support of our cross-appeal. The court has granted but not yet scheduled oral argument.Markland. On July 1, 2016, Robert N. Markland, as the Personal Representative of the Estate of Carolyn S. Markland filed a complaint in the CircuitCourt, Fourth Judicial Circuit, in and for Duval County Florida against our parent, Insys Therapeutics, Inc. The complaint states it is a wrongful deathproducts liability action brought pursuant to Section 768.16, et seq. under Florida law in connection with a death occurring in July 2014 and includes aclaim of negligent marketing. The lawsuit seeks unspecified damages for past expenses and costs, pain and suffering and loss of consortium and earnings. OnAugust 4, 2016, we removed this case to federal district court in the Middle District of Florida. On September 2, 2016, we filed a motion to dismiss and areawaiting the court’s ruling. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of thismatter will have a material adverse effect on the Company's business, financial position, or future results of operations.Buchalter. On September 9, 2016, Jeffrey Buchalter filed a complaint in the Circuit Court for Anne Arundel County, Maryland against Dr. WilliamTham, Physical Medicine & Pain Management Associates, Maryland Neurological Institute, various physician assistants, and Insys Therapeutics,Inc. Plaintiff’s complaint states it is a personal injury action against Insys related to negligent misrepresentation, failure to warn and fraud under state laws.The lawsuit seeks unspecified compensatory and punitive damages. We have filed a motion to sismiss and are awaiting the court’s ruling We intend tovigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effecton the Company's business, financial position, or future results of operations.Colby. On or about January 25, 2017, Mackenzie Colby filed a complaint in the Superior Court in the State of New Hampshire against ChristopherClough, PA, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Cloughrelated to medical negligence against O’Connell’s Pain Care Centers, Inc. for respondent superior claims and against Insys Therapeutics, Inc. for negligence,all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We intend to vigorously defend this matter and based on currentlyavailable information, we do not believe any resolution of this matter will have a material adverse effect on the Company's business, financial position, orfuture results of operations.Perusse. On or about February 21, 2017, Mackenzie Colby filed a complaint in the Superior Court in the State of New Hampshire againstChristopher Clough, PA, Dr. John J Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is apersonal injury action against Mr. Clough related to medical negligence against O’Connell’s Pain Care Centers, Inc. for respondent superior claims andagainst Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages.We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a materialadverse effect on the Company's business, financial position, or future results of operations.Cassell. On or about March 8, 2017, Jerome Cassell filed a complaint in the Superior Court in the State of New Hampshire against ChristopherClough, PA, Dr. John J Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injuryaction against Mr. Clough related to medical negligence against O’Connell’s Pain Care Centers, Inc. for respondent superior claims and against InsysTherapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We intend tovigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effecton the Company's business, financial position, or future results of operations.Carver. On or about March 20, 2017, a qui tam complaint entitled United States ex rel. Lori L. Carver v. Physicians Pain Specialists of Alabama,P.C., Xiulu Ruan, M.D., John Patrick Couch, M.D., C&R Pharmacy, LLC, Castle Medical, LLC, Insys Therapeutics, Inc., Industrial Pharmacy Management,LLC and Christopher Manfuso; Civil Action No. 13-392, that had been filed under seal with the U.S. District Court For the Southern District of104Alabama Southern Division, was ordered unsealed by the court. The U.S. Department of Justice declined to intervene in this action. The complaint wasoriginally brought by Ms. Carver, a former employee of Physician Pain Specialists of Alabama, PC, as a private party qui tam relator on behalf of the federalgovernment. The action alleges civil violations of the federal False Claims Act committed by the defendants related to fraudulent claims by defendants forpayment in connection with federally-funded Medicare programs as well as other federally-funded health care programs as a result of alleged illegal activityunder the Stark Law and Federal Anti-Kickback Laws. We intend to vigorously defend this claim.Except as it pertains to the $9,567,000 accrued for the dispute with Dr. Kottayil and the potential for damages in the federal securities litigation andderivative action that we believe should be sufficiently covered by our director and officers insurance policies (once we have met any applicable retainagerequirement under the applicable policy), we believe that the probability of unfavorable outcome or loss related to all of the above litigation matters and anestimate of the amount or range of loss, if any, from an unfavorable outcome are not determinable at this time. We believe we have meritorious legal positionsand will continue to represent our interests vigorously in these matters but the range possible outcomes on these matters is very broad and we are not able toprovide a reasonable estimate of our potential liability, if any, nor are we able 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 settlementpayments as well as any related actions brought by shareholders or other third parties, could have a material impact on our reputation, business and financialcondition and divert the attention of our management from operating our business. 8.EquityPreferred StockIn August 2014, we entered into a Rights Agreement with respect to a newly-designated Series A Junior Participating Preferred Stock. In connectionwith the Rights Agreement, our Board of Directors declared a dividend distribution of the right to purchase one one-hundredth of one share of our Series AJunior 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 bythe stockholders of the Company at the close of business on September 1, 2014 (the “Record Date”).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 one one-hundredth of a Preferred Share has the designations, powers, privileges, preferences, rights, qualifications, limitations and restrictions that are designed tomake 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 “AcquiringPerson”) or (ii) the tenth business day (or such later date as may be determined by action of the Board prior to such time as any person or entity becomes anAcquiring Person) following the date of commencement of, or the first announcement of, an intention to commence, a tender offer or exchange offer, theconsummation of which would result in any person or entity or group of persons or entities acting in concert becoming an Acquiring Person (the earlier ofsuch dates being called the “Distribution Date”). Until the Distribution Date, the Rights will be transferable with and only with our Common Shares. TheRights 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 share105equal to 100 times the aggregate amount to be distributed per share to holders of common stock. Each Preferred Share has 100 votes, voting together with thecommon stock. Common StockOn February 26, 2014, our Board of Directors approved a three-for-two stock split of our common stock effected through a stock dividend. The recorddate for the stock split was the close of business on March 17, 2014, with share distribution occurring on March 28, 2014. As a result of the dividend,shareholders received one additional share of Insys Therapeutics, Inc. common stock, par value $0.0002145, for each two shares they held as of the recorddate. All share and per share amounts were retroactively restated for the effects of this stock split.On May 6, 2014, our shareholders approved an amendment to our certificate of incorporation to increase the authorized shares of common stock from50,000,000 to 100,000,000 and an amendment to increase the par value for our common stock to $0.01 per share. Our consolidated financial statements andnotes herein were 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 effected through a stock dividend. The record datefor 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, shareholdersreceived 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 pershare amounts were retroactively restated for the effects of this stock split.Stock Repurchase ProgramOn November 5, 2015, we announced a stock repurchase program. The stock repurchase program authorizes up to $50 million in repurchases ofcommon stock. This program was effective immediately and has no planned expiration date. The following table summarizes our share repurchase activity forour share repurchase program: Number ofSharesPurchased Cost of SharePurchases Shares purchased at December 31, 2014 — $— Shares purchased during 2015 560,200 $16,459,000 Shares purchased at December 31, 2015 560,200 $16,459,000 Shares purchased during 2016 843,075 16,099,000 Shares purchased at December 31, 2016 1,403,275 $32,558,000 As of December 31, 2016, we had $17,442,000 remaining under this program.9.Stock-based CompensationWe currently have the following stock-based incentive plans:2013 Employee Stock Purchase PlanThe 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 to purchaseshares of our common stock that cannot exceed 15% of their earnings, nor exceed the Board of Director defined limits on the number of our common sharesthat can be offered under the ESPP. The purchase right entitles the eligible employee to purchase shares at the lesser of an amount equal to 85% of the fairmarket value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. The ESPP authorizes the issuance of530,400 shares of common stock pursuant to purchase rights granted to our employees or to employees of any of our designated affiliates. The number ofshares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 through January 1, 2023,by the least of (a) 1% of the total number of shares of common stock outstanding on106December 31 of the 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 isless 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 Codeof 1986, as amended (the “Code”). As of December 31, 2016, 1,465,176 shares of common stock have been purchased under the ESPP.2013 Equity Incentive PlanThe 2013 Equity Incentive Plan (the “2013 Plan”) is the successor to and continuation of the 2006 Equity Incentive Plan and the Insys Pharma, Inc.,Amended and Restated Equity Incentive Plan. The 2013 Plan was adopted by our Board of Directors and approved by our stockholders, and became effectivein connection with our initial public offering in May 2013. The 2013 Plan provides for the grant of stock awards, including stock options, restricted stock,stock appreciation rights, performance units, performance shares and other stock awards, to our employees, directors and consultants. The number of shares ofcommon stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 through January 1, 2023, by thelesser of (a) 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; or (b) a number of shares ofcommon stock that may be determined each year by our Board of Directors that is less than the preceding clause (a). As of December 31, 2016, options topurchase 7,300,873 shares of common stock were outstanding and 4,259,755 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 (inthousands): Years Ended December 31, 2016 2015 2014 (As Revised) Research and development $3,931 $2,133 $5,498 General and administrative 17,658 19,749 9,791 Total cost of stock-based compensation $21,589 $21,882 $15,289 Included in stock-based compensation for the years ended December 31, 2016, 2015 and 2014 was approximately $3,878,000, $4,867,000 and$4,016,000, respectively, of expense associated with the accelerated vesting of option awards related to terminated employees.The following table summarizes stock option activity during the year ended December 31, 2016: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm (in years) AggregateIntrinsicValue(in millions) Outstanding as of December 31, 2013 8,994,978 $1.06 Granted 3,397,198 $4.86 Cancelled (1,068,224) $2.86 Exercised (3,616,790) $1.15 Outstanding as of December 31, 2014 7,707,162 $2.90 Granted 1,733,671 $14.57 Cancelled (695,061) $7.71 Exercised (1,607,683) $2.48 Outstanding as of December 31, 2015 7,138,089 $7.57 Granted 2,337,043 $14.86 Cancelled (1,536,538) $18.67 Exercised (637,721) $5.96 $7.0 Outstanding as of December 31, 2016 7,300,873 $12.36 7.3 $18.7 Vested and exercisable as of December 31, 2016 4,474,906 $9.05 6.4 $18.0107 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, 2016, we expect to recognize $31,171,000 of stock-based compensation forour outstanding options over a weighted-average period of 2.6 years.The total fair value of shares vested for the years ended December 31, 2016, 2015, and 2014 was $19,970,000, $25,392,000 and $14,572,000,respectively.Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2016, 2015 and 2014 was$3,803,000, $9,524,000 and $8,956,000, respectively. For the years ended December 31, 2016, 2015 and 2014, we recorded net reductions of $122,000,$13,593,000 and $22,003,000 respectively, of our federal and state income tax liability, with an offsetting credit to additional paid-in capital resulting fromthe excess tax benefits related to exercised stock options.Stock Option Valuation InformationThe weighted-average assumptions used to estimate the fair value of employee stock options granted during the periods presented are as follows: 2016 2015 2014 Expected volatility 63.3% 69.9% 69.3%Risk-free interest rate 1.6% 1.9% 1.7%Expected term (in years) 7.0 7.0 6.0 Expected dividend yield 0.0% 0.0% 0.0% For the years ended December 31, 2016, 2015, and 2014, the weighted-average estimated fair value per option granted was $9.20, $19.20 and $10.53,respectively.10.Income TaxesIncome tax expense consists of the following (in thousands): Years Ended December 31, 2016 2015 2014 (As Revised) (As Revised) Current income taxes: Federal $5,916 $31,383 $21,949 State and local 554 6,473 3,794 Total current income tax 6,470 37,856 25,743 Deferred income taxes: Federal (7,762) (3,759) 465 State and local 2,126 (1,156) (1,119)Total deferred income tax (5,636) (4,915) (654)Income tax expense $834 $32,941 $25,089 As of December 31, 2016, we had approximately $1.1 million of federal NOLs all of which are subject to a significant Section 382 limitation. UnderSection 382 of the Code, substantial changes in our ownership may limit the amount of NOLs that can be utilized annually in the future to offset taxableincome, 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-yearperiod as determined under the Code, which we refer to as an ownership change. Any such annual limitation may significantly reduce the utilization of theseNOLs before they expire. Our ability to utilize federal NOLs created prior to the NeoPharm merger is significantly limited. For federal tax purposes, theSection 382 NOL carryforward is limited on an annual basis and begins expiring in 2018.108For state tax purposes, we had approximately $268.1 million of state NOLs at December 31, 2016, all of which relate to Illinois. This $268.1 millionof state NOLs excludes $0.6 million of NOLs under ASC Topic 718 that have not been benefitted. Based on projections, we estimate that approximately$266.1 million of these Illinois NOLs will not be utilized. For this reason, we recorded a valuation allowance for the estimated tax benefit relating to thisamount, or $20.6 million. The Illinois NOLs began expiring in 2015 if not utilized.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): 2016 2015 (As Revised) Deferred income tax assets: NOLs and credits $27,046 $26,910 Start-up expenditures 2,604 2,896 Stock-based compensation 11,727 8,578 Allowances 1,264 1,581 Expenses currently not deductible for tax purposes 10,652 6,129 Other 1,963 1,142 Gross deferred tax assets 55,256 47,236 Deferred income tax asset valuation allowance (23,508) (20,203)Deferred income tax assets 31,748 27,033 Deferred income tax liabilities: Federal impact of state taxes (1,073) (1,817)Property and equipment (6,246) (6,189)Prepaid expenses (1,186) (1,420)Net deferred income tax assets $23,243 $17,607 In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets willnot be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which thosetemporary differences become deductible. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income or losses, andtax planning strategies in making this assessment. Based upon our current net income and projections for future taxable income over the periods in which thedeferred tax assets are deductible, we believe that, with the exception of the Arizona research and development credit and the Illinois NOL discussed above,the realization of these tax assets is more likely than not. As such, with the exception of the valuation allowance that has been placed on the future tax benefitrelating to a portion of our Arizona research and development credit and our Illinois NOLs of $23.5 million, no other valuation allowance exists on ourdeferred tax assets at December 31, 2016. We have increased the valuation allowance by $3.3 million from December 31, 2015.109Effective Tax Rate Reconciliation:Our federal statutory tax rate is 35.0%, while our effective tax rate was 9.9% for the year ended December 31, 2016, as set forth below: 2016 2015 2014 (As Revised) (As Revised) 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 (0.1)% 2.3% 4.1%Non-deductible litigation expense 3.4% 3.5% 3.2%Non-deductible and includible items 7.5% 0.7% 0.7%Non-deductible lobbying expense 8.3% — — Research and other credits (63.5)% (5.4)% (3.6)%Uncertain tax positions 4.2% 2.7% 1.9%Domestic manufacturing deduction (14.6)% (3.0)% (0.3)%Stock based compensation 5.1% 0.4% 0.1%Tax exempt interest income (1.5)% — — Other 0.6% — — Change in valuation allowance 25.5% (0.1)% — Total provision for income taxes 9.9% 36.1% 41.1% The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits (in thousands): Years Ended December 31, 2016 2015 (As Revised) Beginning balance $8,920 $5,323 Additions based on current year's tax positions 758 3,837 Additions based on prior year's tax positions 122 (240)Ending balance $9,800 $8,920 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 $9,800,000 as ofDecember 31, 2016, mostly related to tax credits of $2,610,000, state and local income tax filing positions of $5,412,000, and $1,778,000 of other permanentdifferences. If recognized, $9.8 million would affect our effective tax rate.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 to theresults of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months.Approximately $706,000 of interest has been included in income taxes and accounted for on the balance sheet related to unrecognized tax positions as ofDecember 31, 2016.We are currently under examination in the U.S. for tax years 2014 and 2015. Because of NOLs and research credit carryovers, substantially all of ourtax years remain open to examination.11011.Net Income per ShareBasic net income per common share is computed by dividing the net income by the weighted average number of common shares outstanding duringthe period. The diluted income per share further includes any common shares available to be issued upon exercise of outstanding stock options if suchinclusion would be dilutive.The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts): Years Ended December 31, 2016 2015 2014 (As Revised) (As Revised) Historical net income per share - Basic Numerator: Net income $7,590 $58,053 $36,054 Denominator: Weighted average number of common shares outstanding 71,618,793 71,592,581 68,759,070 Basic net income per common share $0.11 $0.81 $0.52 Historical net income per share - Diluted Numerator: Net income $7,590 $58,053 $36,054 Denominator: Weighted average number of common shares outstanding 71,618,793 71,592,581 68,759,070 Effect of dilutive stock options 2,527,125 4,115,070 4,576,062 Weighted average number of common shares outstanding 74,145,918 75,707,651 73,335,132 Diluted net income per common share $0.10 $0.77 $0.49 The calculation of diluted net income per common share excludes the effects of 2,596,324, 1,460,986 and 1,780,372 outstanding stock options forthe year ended December 31, 2016, 2015, 2014, respectively, as the impact of these options was anti-dilutive.12.Product Lines, Concentration of Credit Risk and Significant CustomersWe are engaged in the business of developing and selling pharmaceutical products. In 2016, we have one product line, SUBSYS®. Our chiefoperating 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, 2016 2015 2014 (As Revised) (As Revised) Subsys $242,275 $329,040 $216,497 Dronabinol SG Capsule — 1,283 2,595 Total net revenue $242,275 $330,323 $219,092111 Percent of Revenue by Route to Market Years Ended December 31, 2016 2015 2014 Pharmaceutical wholesalers 67% 95% 99%Specialty pharmaceutical retailers 33% 5% 0%Generic pharmaceutical distributors 0% 0% 1% 100% 100% 100% All our products are sold in the United States of America.Product shipments to our four largest pharmaceutical wholesaler customers accounted for 17%, 16%, 15% and 14% of total shipments and productshipments to one specialty pharmaceutical retailer accounted for 32% of total shipments for the year ended December 31, 2016. Product shipments to our fourlargest pharmaceutical wholesaler customers accounted for 32%, 20%, 17% and 14% of total shipments for the year ended December 31, 2015. Productshipments to our four largest pharmaceutical wholesaler customers accounted for 38%, 22%, 14% and 14% of shipments of SUBSYS® for the year endedDecember 31, 2014. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 36%, 23%, 21% and 13% of gross accounts receivable asof December 31, 2016. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 20%, 19%, 17% and 14% of gross accounts receivableas of December 31, 2015.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 are exposed tocredit risk in the event of a default by the institutions holding our cash to the extent recorded on the consolidated balance sheet. We perform ongoing creditevaluations of our customers’ financial condition but do not typically require collateral to support customer receivables. We established an allowance fordoubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.13.Supplemental Financial InformationA summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2016, 2015 and 2014 areas follows (in thousands): Balance atBeginningof Year Charged toCosts andExpenses Utilization Balance atEnd ofYear Allowance for doubtful accounts: Year ended December 31, 2016 $811 $(96) $(30) $685 Year ended December 31, 2015 $398 $413 $— $811 Year ended December 31, 2014 $— $398 $— $398 Allowance for sales wholesaler discounts, prompt pay discounts, stocking allowances, and chargebacks: Year ended December 31, 2016 $7,556 $27,968 $(30,065) $5,459 Year ended December 31, 2015 (As Revised) $5,418 $38,036 $(35,898) $7,556 Year ended December 31, 2014 (As Revised) $2,748 $22,395 $(19,725) $5,418 112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 period ended December31, 2016. We have derived this data from our unaudited condensed consolidated interim financial statements that, in our opinion, have been prepared onsubstantially the same basis as the audited consolidated financial statements contained elsewhere in this report and include all normal recurring adjustmentsnecessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction withour consolidated financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative ofthe results that may be expected for any future period.As discussed in Note 2, our management concluded that the errors related to the miscalculation of rebate obligations on government payer andmanaged care contracts in addition to the out-of-period adjustments related to stock option modifications during the three months ended March 31, 2016 andthe accounting for tax benefits associated with accrued litigation award and settlements recorded during 2016, were not material to our consolidated financialstatements for the years ended December 31, 2015 and 2014. However, to correctly present net revenue in the appropriate period during 2016 and 2015, ourunaudited condensed consolidated interim financial statements as of and for the quarters ended September 30, June 30, and March 31, 2016 and 2015 will berestated in Quarterly Reports on Form 10-Q/A to make the necessary accounting adjustments in the corresponding quarterly periods. The adjustments shownbelow represent the impact of the correction of errors to previously issued unaudited condensed consolidated interim financial information as described inNote 2 (in thousands, except per share data). 113 Quarter Ended 12/31/16 9/30/16 6/30/16 3/31/16 Net revenue - as originally reported $54,860 $55,180 $67,121 $61,962 Adjustment - prior period underestimation of sales allowances — 2,593 2,100 (1,541)Net revenue (As Restated) $54,860 $57,773 $69,221 $60,421 Gross profit (1) - as originally reported $45,055 $50,503 $60,848 $57,324 Adjustment - prior period underestimation of sales allowances — 2,593 2,100 (1,541)Gross profit (1) (As Restated) $45,055 $53,096 $62,948 $55,783 Total operating expenses - as originally reported $48,688 $50,831 $56,504 $55,033 Adjustment - prior period stock option modification — — — (1,500)Total operating expenses (As Restated) $48,688 $50,831 $56,504 $53,533 Income (loss) before income taxes - as originally reported $(3,341) $(47) $4,595 $2,565 Adjustment — 2,593 2,100 (41)Income before income taxes (As Restated) $(3,341) $2,546 $6,695 $2,524 Income tax expense (benefit) - as originally reported $311 $(237) $240 $131 Adjustment — (142) 428 103 Income tax expense (benefit) (As Restated) $311 $(379) $668 $234 Net income (loss) (2) - as originally reported $(3,652) $190 $4,355 $2,434 Adjustment — 2,735 1,672 (144)Net income (loss) (2) (As Restated) $(3,652) $2,925 $6,027 $2,290 Total comprehensive income (loss) - as originally reported $(3,880) $32 $4,425 $2,600 Adjustment — 2,735 1,672 (144)Total comprehensive income (loss) (As Restated) $(3,880) $2,767 $6,097 $2,456 Net income (loss) per common share: Basic - as originally reported $(0.05) $— $0.06 $0.03 Adjustment — 0.04 0.02 0.00 Basic (As Restated) $(0.05) $0.04 $0.08 $0.03 Diluted - as originally reported $(0.05) $— $0.06 $0.03 Adjustment — 0.04 0.02 0.00 Diluted (As Restated) $(0.05) $0.04 $0.08 $0.03114 Quarter Ended 12/31/15 9/30/15 6/30/15 3/31/15 Net revenue - as originally reported $91,135 $91,259 $77,633 $70,770 Adjustment - prior period underestimation of sales allowances 2,779 (2,742) 2,567 (3,078)Net revenue (As Restated) $93,914 $88,517 $80,200 $67,692 Gross profit - as originally reported $84,668 $83,552 $69,328 $64,395 Adjustment - prior period underestimation of sales allowances 2,779 (2,742) 2,567 (3,078)Gross profit (As Restated) $87,447 $80,810 $71,895 $61,317 Total operating expenses - as originally reported $54,948 $44,431 $57,370 $52,764 Adjustment - prior period stock option modification 1,500 — — — Total operating expenses (As Restated) $56,448 $44,431 $57,370 $52,764 Income before income taxes - as originally reported $29,907 $39,212 $12,093 $11,756 Adjustment 1,279 (2,742) 2,567 (3,078)Income before income taxes (As Restated) $31,186 $36,470 $14,660 $8,678 Income tax expense - as originally reported $12,896 $13,084 $4,779 $3,733 Adjustment 147 (1,244) 468 (922)Income tax expense (As Restated) $13,043 $11,840 $5,247 $2,811 Net income - as originally reported $17,011 $26,128 $7,314 $8,023 Adjustment 1,132 (1,498) 2,099 (2,156)Net income (As Restated) $18,143 $24,630 $9,413 $5,867 Total comprehensive income - as originally reported $16,826 $26,178 $7,293 $8,051 Adjustment 1,132 (1,498) 2,099 (2,156)Total comprehensive income (As Restated) $17,958 $24,680 $9,392 $5,895 Net income per common share: Basic - as originally reported $0.24 $0.36 $0.10 $0.11 Adjustment 0.01 (0.02) 0.03 (0.03)Basic (As Restated) $0.25 $0.34 $0.13 $0.08 Diluted - as originally reported $0.22 $0.34 $0.10 $0.11 Adjustment 0.02 (0.02) 0.02 (0.03)Diluted (As Restated) $0.24 $0.32 $0.12 $0.08 (1)The fourth quarter of 2016 includes an allowance of $5,800,000 for excess and obsolete SUBSYS® inventory. (2)The fourth quarter of 2016 includes charges related to litigation award and settlements of $3,900,000. 115ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur 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 a materialweakness in our internal control over financial reporting, as further described below, our disclosure controls and procedures were not effective as of December31, 2016.Management’s Annual Report on Internal Control Over Financial ReportingOur 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 in conditions,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, 2016. 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 material weaknesses in our internal controls over financial reporting.Specifically, we did not have effective policies and procedures, or timely and effective reviews by personnel at an appropriate level, for accounting for therebates component of our product sales allowances and the allowance for excess and obsolete inventory in accordance with U.S. GAAP. We did not havecontrols designed to validate the completeness and accuracy of underlying data used in the determination of these significant estimates. Overall themanagement in the finance and accounting group did not display adequate tone at the top with respect to judgment and rigor required to resolve theaccounting for the rebates component of our product sales allowances and the allowance for excess and obsolete inventory matters. As a result, we concludedthat our internal control over financial reporting was not effective as of December 31, 2016.Our independent registered public accounting firm, BDO USA, LLP, has audited the effectiveness of our internal controls over financial reporting asof December 31, 2016, as stated in its audit report which is included herein. Previously Reported Material Weakness Relating to Stock Option AwardsAs previously reported, we did not have effective policies and procedures, and effective reviews by personnel at an appropriate level, for accountingfor stock option awards in accordance with U.S. GAAP. Specifically, the design of our control relating to the review of stock option award exercises (the“review control”) was not modified in light of the complex nature of the accounting for modifications resulting in accelerating vesting. The controldeficiency did not result in a material misstatement in the consolidated financial statements; however, we previously concluded a material weakness existedin the controls in 2015 over the accounting for stock option awards because such a misstatement could have occurred. 116With the oversight of our audit committee, we took corrective steps during 2016 to remediate the underlying causes of the material internal controlweakness relating to the review of stock option award exercises. The corrective steps we have taken, which are intended to ensure that we have effectivepolicies and procedures, and effective reviews by personnel at an appropriate level, for accounting for stock option awards in accordance with U.S. GAAP,include: •We added an experienced director of SEC reporting and compliance during 2016 and will continue to evaluate the structure of the financeorganization and add resources as needed. •We redesigned the “review control” over the accounting for stock option award modifications. The redesigned control includes the timelyreview and documentation of all modified awards by personnel with U.S. GAAP and public company accounting experience.As of December 31, 2016, we have completed documentation and implementation of the new and revised internal controls described above. Aftercompleting our testing of the design and operating effectiveness of this new procedure, we concluded that the above identified material weakness relating tothe review of stock option award exercises in our internal controls over financial reporting has now been fully remediated.Change in Internal Controls Over Financial ReportingDuring the quarterly period ending December 31, 2016, we identified a material weakness in our internal control over financial reporting regardingthe accounting for product sales allowances and the allowance for excess and obsolete inventory. Other than remediating the previously disclosed materialweakness related to accounting for stock option awards described above, there were no other changes in our internal control over financial reporting thatoccurred during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control overfinancial 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 company havebeen detected.117Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersInsys Therapeutics, Inc.Chandler, ArizonaWe have audited Insys Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2016, 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 Over FinancialReporting. 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 maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch 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 recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial 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 the degreeof 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. Materialweaknesses regarding management’s failure to design and maintain controls over the accounting for the rebate component of the Company’s product salesallowances and the allowance for excess and obsolete inventory have been identified and described in management’s assessment. Overall the management inthe finance and accounting group did not display adequate tone at the top with respect to judgment and rigor required to resolve the accounting for therebates component of the Company’s product sales allowances and the allowance for excess and obsolete inventory matters. These material weaknesses wereconsidered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect ourreport dated March 31, 2017 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, 2016, 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, 2016 and 2015, and the related consolidated statements of comprehensive income,stockholders’ equity, and cash flows for each of the118three years in the period ended December 31, 2016 and our report dated March 31, 2017 expressed an unqualified opinion thereon./s/ BDO USA, LLPPhoenix, ArizonaMarch 31, 2017 Item 5.02Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements ofCertain officers.ITEM 9B.OTHER INFORMATIONOn February 20, 2017, the Compensation Committee of our Board of Directors approved a 2017 Corporate Annual Cash Bonus Plan (the “BonusPlan”) for the Company with parameters related to the payment of bonuses established for corporate employees including our named executive officers, Dr.Santosh Vetticaden, Darryl S. Baker and Franc Del Fosse. While the Compensation Committee determined that it would approve specific goals andobjectives at a later date, the Bonus Plan sets forth a bonus component distribution providing that each of the above mentioned named executive officers’bonus will be distributed 70% on Company performance and 30% on individual performance, at target level. The bonus of the Company’s President andChief Executive Officer (the “CEO”), who will commence employment in mid-April, will be distributed 90% on the Company’s performance and 10% on theindividual performance, at target level; provided that separate from this Bonus Plan the CEO’s offer included a guarantee of a cash bonus for the fiscal yearended December 31, 2017 of a minimum of 80% ($540,000) of his annual base salary. The Bonus Plan also sets forth a bonus pay-out matrix whichestablishes that once goals are set, named executive officers may earn a threshold (80% of their bonus potential), target (100% of their bonus potential) andmaximum (150% of their bonus potential) based upon the achievement of the combination of Company and individual goals. 119PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe 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, 2016 in connection with our 2017 Annual Meeting of Stockholders, or the 2017 Proxy Statement, and is incorporated herein byreference.Code of Business Conduct and EthicsWe 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, provisions ofthe Code of Business Conduct and Ethics by posting such information on our website.ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this Item will be included in the 2017 Proxy Statement and is incorporated herein by reference. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.120PART IVITEM 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 consolidated 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.121EXHIBIT INDEX ExhibitNumber 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) 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. 10.13 Amendment to Manufacturing and Supply Agreement, dated as of July 14, 2016 by and between the Registrant and DPT Lakewood,LLC (22) 10.14+ Non-Employee Director Compensation Policy (17) 10.15+ Employment Offer Statement effective January 31, 2014 by and between Registrant and Franc Del Fosse. (18) 10.17+* Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Grant Agreement thereunder 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) 122ExhibitNumber Description of Document 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 May 9, 2016.(4)Previously filed as 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 18, 2014. (5)Previously filed as 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 18, 2014. (6)Previously filed as Exhibit 10.1 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011.(7)Previously filed as Exhibit 10.3 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011.(8)Previously filed as Exhibit 10.4 to the Company’s Form S-1 Registration Statement (No. 333-173154) on March 30, 2011.(9)Previously filed as Exhibit 99.3 to the Company’s Form S-8 Registration Statement (No. 333-188306) on May 2, 2013.(10)Previously filed as Exhibit 99.4 to the Company’s Form S-8 Registration Statement (No. 333-188306) on May 2, 2013.(11)Previously filed as Exhibit 10.6 to the Company’s Form S-1 Registration Statement (No. 333-173154) on April 25, 2013.(12)Previously filed as Exhibit 10.8 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, 2014.123(20)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. ITEM 16.FORM 10-K SUMMARY None. 124SIGNATURESPursuant 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 March 31, 2017. Insys Therapeutics, Inc. By/s/ Dr. Santosh Vetticaden Dr. Santosh Vetticaden Interim Chief Executive Officer and Chief Medical Officer (Principal Executive Officer) By/s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 125POWER OF ATTORNEYKNOW 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 this AnnualReport on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dr. Santosh Vetticaden Interim Chief Executive Officer and Chief Medical Officer March 31, 2017Dr. Santosh Vetticaden /s/ Darryl S. Baker Chief Financial Officer March 31, 2017Darryl S. Baker /s/ Patrick P. Fourteau Director March 31, 2017Patrick P. Fourteau /s/ Steven Meyer Director March 31, 2017Steven Meyer /s/ Brian Tambi Director March 31, 2017Brian Tambi /s/ Pierre Lapalme Director March 31, 2017Pierre Lapalme /s/ Theodore H. Stanley, M.D. Director March 31, 2017Theodore H. Stanley, M.D. /s/ Dr. John N. Kapoor Director March 31, 2017Dr. John N. Kapoor 126 Exhibit 10.18 INSYS THERAPEUTICS, INC.RESTRICTED STOCK UNIT GRANT NOTICE(2013 EQUITY INCENTIVE PLAN)Insys Therapeutics, Inc. (the “Company”), pursuant to Section 6(b) of the Company’s 2013 Equity Incentive Plan (the “Plan”), herebyawards to Participant a Restricted Stock Unit Award for the number of shares of the Company’s Common Stock (“Restricted StockUnits”) set forth below (the “Award”). The Award is subject to all of the terms and conditions as set forth in this notice of grant (this“Restricted Stock Unit Grant Notice”) and in the Plan and the Restricted Stock Unit Award Agreement (the “Award Agreement”), bothof which are attached hereto and incorporated herein in their entirety. Capitalized terms not otherwise defined herein shall have themeanings set forth in the Plan or the Award Agreement. In the event of any conflict between the terms in the Award and the Plan, theterms of the Plan shall control.Participant:Date ofGrant:GrantNumber:Vesting Commencement Date:Number of Restricted StockUnits: Vesting Schedule:[One-third of the Restricted Stock Units will vest on each of the first, second, and third anniversaries ofthe Vesting Commencement Date, subject to the Participant’s Continuous Service through each suchvesting date.] [The Restricted Stock Units will vest in full on the first anniversary of the VestingCommencement Date, subject to the Participant’s Continuous Service through each such vesting date]. Issuance Schedule:Subject to any Capitalization Adjustment, one share of Common Stock (or its cash equivalent, at thediscretion of the Company) will be issued for each Restricted Stock Unit that vests at the time set forth inSection 6 of the Award Agreement.Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Restricted Stock UnitGrant Notice, the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Restricted StockUnit Grant Notice, the Award Agreement and the Plan set forth the entire understanding between Participant and the Companyregarding the acquisition of the Common Stock pursuant to the Award specified above and supersede all prior oral and writtenagreements on the terms of this Award with the exception, if applicable, of (i) the written employment agreement, offer letter or otherwritten agreement entered into between the Company and Participant specifying the terms that should govern this specific Award, (ii)restricted stock unit awards or options previously granted and delivered to Participant, and (iii) any compensation recovery policy thatis adopted by the Company or is otherwise required by applicable law.By accepting this Award, Participant acknowledges having received and read the Restricted Stock Unit Grant Notice, the AwardAgreement and the Plan and agrees to all of the terms and conditions set forth in142444544 v2 these documents. Participant consents to receive Plan documents by electronic delivery and to participate in the Plan through an on-lineor electronic system established and maintained by the Company or another third party designated by the Company.INSYS THERAPEUTICS, INC.PARTICIPANTBy:SignatureSignatureTitle: Date:Date:ATTACHMENTS:Award Agreement and 2013 Equity Incentive Plan 142444544 v2 Insys Therapeutics, Inc.2013 Equity Incentive PlanRestricted Stock Unit Award Agreement Pursuant to the Restricted Stock Unit Grant Notice (the “Grant Notice”) and this Restricted Stock Unit Award Agreement(the “Agreement”), Insys Therapeutics, Inc. (the “Company”) has awarded you (“Participant”) a Restricted Stock Unit Award (the“Award”) pursuant to Section 6(b) of the Company’s 2013 Equity Incentive Plan (the “Plan”) for the number of Restricted StockUnits/shares indicated in the Grant Notice. Capitalized terms not explicitly defined in this Agreement or the Grant Notice shall have thesame meanings given to them in the Plan. The terms of your Award, in addition to those set forth in the Grant Notice, are as follows.1.Grant of the Award. This Award represents the right to be issued on a future date one (1) share ofCommon Stock for each Restricted Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3below) as indicated in the Grant Notice. As of the Date of Grant, the Company will credit to a bookkeeping account maintained by theCompany for your benefit (the “Account”) the number of Restricted Stock Units/shares of Common Stock subject to the Award.Notwithstanding the foregoing, the Company reserves the right to issue you the cash equivalent of Common Stock, in part or in fullsatisfaction of the delivery of Common Stock in connection with the vesting of the Restricted Stock Units, and, to the extentapplicable, references in this Agreement and the Grant Notice to Common Stock issuable in connection with your Restricted StockUnits will include the potential issuance of its cash equivalent pursuant to such right. This Award was granted in consideration of yourservices to the Company.2.Vesting. Subject to the limitations contained herein, your Award will vest, if at all, in accordance with thevesting schedule provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.Upon such termination of your Continuous Service, the Restricted Stock Units/shares of Common Stock credited to the Account thatwere not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title orinterest in or to such underlying shares of Common Stock.3.Number of Shares. The number of Restricted Stock Units/shares subject to your Award may be adjustedfrom time to time for Capitalization Adjustments, as provided in the Plan. Any additional Restricted Stock Units, shares, cash or otherproperty that becomes subject to the Award pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, tothe same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other RestrictedStock Units and shares covered by your Award. Notwithstanding the provisions of this Section 3, no fractional shares or rights forfractional shares of Common Stock shall be created pursuant to this Section 3. Any fraction of a share will be rounded down to thenearest whole share.4.Securities Law Compliance. You may not be issued any Common Stock under your Award unless theshares of Common Stock underlying the Restricted Stock Units are either (i) then registered under the Securities Act, or (ii) theCompany has determined that such1.142444544 v2 issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with otherapplicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines thatsuch receipt would not be in material compliance with such laws and regulations.5.Transfer Restrictions. Prior to the time that shares of Common Stock have been delivered to you, you may nottransfer, pledge, sell or otherwise dispose of this Award or the shares issuable in respect of your Award, except as expressly providedin this Section 5. For example, you may not use shares that may be issued in respect of your Restricted Stock Units as security for aloan. The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Restricted StockUnits.(a)Death. Your Award is transferable by will and by the laws of descent and distribution.At your death, vesting of your Award will cease and your executor or administrator of your estate shall be entitled to receive, on behalfof your estate, any Common Stock or other consideration that vested but was not issued before your death.(b)Domestic Relations Orders. Upon receiving written permission from the Board or itsduly authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by theCompany, you may transfer your right to receive the distribution of Common Stock or other consideration hereunder, pursuant to adomestic relations order, marital settlement agreement or other divorce or separation instrument as permitted by applicable law thatcontains the information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms of anydivision of this Award with the Company General Counsel prior to finalizing the domestic relations order or marital settlementagreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domesticrelations order or marital settlement agreement.6.Date of Issuance.(a)The issuance of shares in respect of the Restricted Stock Units is intended to complywith Treasury Regulations Section 1.409A-1(b)(4) and will be construed and administered in such a manner.Subject to the satisfaction of the Withholding Taxes set forth in Section 11 of this Agreement, in the event one ormore Restricted Stock Units vests, the Company shall issue to you one (1) share of Common Stock for each Restricted Stock Unit thatvests on the applicable vesting date(s) (subject to any adjustment under Section 3 above). Each issuance date determined by thisparagraph is referred to as an “Original Issuance Date”.(b)If the Original Issuance Date falls on a date that is not a business day, delivery shallinstead occur on the next following business day. In addition, if:(i)the Original Issuance Date does not occur (1) during an “open windowperiod” applicable to you, as determined by the Company in accordance with the Company’s then-effective policy on trading inCompany securities, or (2) on a date when you are otherwise permitted to sell shares of Common Stock on an established stockexchange or stock2.142444544 v2 market (including but not limited to under a previously established written trading plan that meets the requirements of Rule 10b5-1under the Exchange Act and was entered into in compliance with the Company's policies (a “10b5-1 Plan”)), and(ii)either (1) Withholding Taxes do not apply, or (2) Withholding Taxesapply and the Company decides, prior to the Original Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares ofCommon Stock from the shares otherwise due, on the Original Issuance Date, to you under this Award, and (B) not to permit you tothen effect a sale on the market under a 10b5-1 Plan and (C) not to permit you to pay your Withholding Taxes in cash,then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such OriginalIssuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company’sCommon Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original IssuanceDate occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in amanner that complies with Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendarmonth of the applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a“substantial risk of forfeiture” within the meaning of Treasury Regulations Section 1.409A-1(d).(c)The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares)shall be determined by the Company.7.Dividends. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stockdividend or other distribution that does not result from a Capitalization Adjustment.8.Restrictive Legends. The shares of Common Stock issued under your Award shall be endorsed withappropriate legends as determined by the Company.9.Execution of Documents. You hereby acknowledge and agree that the manner selected by the Companyby which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of thisAgreement. You further agree that such manner of indicating consent may be relied upon as your signature for establishing yourexecution of any documents to be executed in the future in connection with your Award.10.Award not a Service Contract.(a)Nothing in this Agreement (including, but not limited to, the vesting of your Award orthe issuance of the shares in respect of your Award), the Plan or any covenant of good faith and fair dealing that may be found implicitin this Agreement or the Plan shall: (i) confer upon you any right to continue in the employ or service of, or affiliation with, theCompany or an Affiliate; (ii) constitute any promise or commitment by the Company or an Affiliate regarding the fact or nature offuture positions, future work assignments, future compensation or any other term or condition of employment or affiliation; (iii) conferany right or benefit under this Agreement or the Plan unless such right or benefit has specifically accrued3.142444544 v2 under the terms of this Agreement or Plan; or (iv) deprive the Company of the right to terminate you at will and without regard to anyfuture vesting opportunity that you may have.(b)By accepting this Award, you acknowledge and agree that the right to continue vestingin the Award pursuant to the vesting schedule provided in the Grant Notice may not be earned unless (in addition to any otherconditions described in the Grant Notice and this Agreement) you continue as an employee, director or consultant at the will of theCompany and affiliate, as applicable (not through the act of being hired, being granted this Award or any other award or benefit) andthat the Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its businesses or Affiliates at anytime or from time to time, as it deems appropriate (a “reorganization”). You acknowledge and agree that such a reorganization couldresult in the termination of your Continuous Service, or the termination of Affiliate status of your employer and the loss of benefitsavailable to you under this Agreement, including but not limited to, the termination of the right to continue vesting in the Award. Youfurther acknowledge and agree that this Agreement, the Plan, the transactions contemplated hereunder and the vesting schedule setforth herein or any covenant of good faith and fair dealing that may be found implicit in any of them do not constitute an express orimplied promise of continued engagement as an employee or consultant for the term of this Agreement, for any period, or at all, andshall not interfere in any way with the Company’s right to terminate your Continuous Service at any time, with or without your causeor notice, or to conduct a reorganization.11.Withholding Taxes.(a)On each vesting date, and on or before the time you receive a distribution of the sharesof Common Stock in respect of your Restricted Stock Units, and at any other time as reasonably requested by the Company inaccordance with applicable tax laws, you hereby authorize any required withholding from the Common Stock issuable to you and/orotherwise agree to make adequate provision, including in cash, for any sums required to satisfy the federal, state, local and foreign taxwithholding obligations of the Company or any Affiliate that arise in connection with your Award (the “WithholdingTaxes”). Additionally, the Company or any Affiliate may, in its sole discretion, satisfy all or any portion of the Withholding Taxesobligation relating to your Award by any of the following means or by a combination of such means (and by accepting this Award youhereby authorize any of the following methods of satisfying the Withholding Taxes): (i) withholding from any compensation otherwisepayable to you by the Company or an Affiliate; (ii) causing you to tender a cash payment; (iii) permitting or requiring you to enter intoa “same day sale” commitment, if applicable, with a broker-dealer that is a member of the Financial Industry Regulatory Authority (a“FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered in connection with your RestrictedStock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessaryto satisfy the Withholding Taxes directly to the Company and/or its Affiliates; or (iv) withholding shares of Common Stock from theshares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value (measured as ofthe date shares of Common Stock are issued pursuant to Section 6) equal to the amount of such Withholding Taxes; provided,however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy theWithholding Taxes using the minimum statutory withholding rates for federal, state, local and foreign tax purposes, including payrolltaxes, that are applicable to supplemental taxable income;4.142444544 v2 and provided, further, that to the extent necessary to qualify for an exemption from application of Section 16(b) of the Exchange Act, ifapplicable, such share withholding procedure will be subject to the express prior approval of the Board or the Company’sCompensation Committee. (b)Unless the Withholding Taxes are satisfied, the Company shall have no obligation todeliver to you any Common Stock or any other consideration pursuant to this Award.(c)In the event the Withholding Taxes arise prior to the delivery to you of Common Stockor it is determined after the delivery of Common Stock to you that the amount of the Withholding Taxes was greater than the amountwithheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold theproper amount.12.Tax Consequences. The Company has no duty or obligation to minimize the tax consequences to you ofthis Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You arehereby advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Awardand by signing the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. Youunderstand that you (and not the Company) shall be responsible for your own tax liability that may arise as a result of this investmentor the transactions contemplated by this Agreement.13.Unsecured Obligation. Your Award is unfunded, and as a holder of a vested Award, you shall beconsidered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares or other propertypursuant to this Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares tobe issued pursuant to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance,you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action takenpursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and theCompany or any other person.14.Notices. Any notice or request required or permitted hereunder shall be given in writing (includingelectronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you,five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.The Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this Award byelectronic means or to request your consent to participate in the Plan by electronic means. By accepting this Award, you consent toreceive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established andmaintained by the Company or another third party designated by the Company.15.Headings. The headings of the Sections in this Agreement are inserted for convenience only and shall notbe deemed to constitute a part of this Agreement or to affect the meaning of this Agreement.5.142444544 v2 16.Miscellaneous.(a)The rights and obligations of the Company under your Award shall be transferable bythe Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and beenforceable by, the Company’s successors and assigns.(b)You agree upon request to execute any further documents or instruments necessary ordesirable in the sole determination of the Company to carry out the purposes or intent of your Award.(c)You acknowledge and agree that you have reviewed your Award in its entirety, havehad an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions ofyour Award.(d)This Agreement shall be subject to all applicable laws, rules, and regulations, and tosuch approvals by any governmental agencies or national securities exchanges as may be required.(e)All obligations of the Company under the Plan and this Agreement shall be binding onany successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger,consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.17.Governing Plan Document. Your Award is subject to all the provisions of the Plan, the provisions ofwhich are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which mayfrom time to time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued underyour Award) is subject to recoupment in accordance with The Dodd–Frank Wall Street Reform and Consumer Protection Act and anyimplementing regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwiserequired by applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right tovoluntarily terminate employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term underany plan of or agreement with the Company.18.Effect on Other Employee Benefit Plans. The value of the Award subject to this Agreement shall not beincluded as compensation, earnings, salaries, or other similar terms used when calculating benefits under any employee benefit plan(other than the Plan) sponsored by the Company or any Affiliate except as such plan otherwise expressly provides. The Companyexpressly reserves its rights to amend, modify, or terminate any or all of the employee benefit plans of the Company or any Affiliate.19.Severability. If all or any part of this Agreement or the Plan is declared by any court or governmentalauthority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan notdeclared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid6.142444544 v2 shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extentpossible while remaining lawful and valid.20.Other Documents. You hereby acknowledge receipt or the right to receive a document providing theinformation required by Rule 428(b)(1) promulgated under the Securities Act. In addition, you acknowledge receipt of the Company’spolicy permitting certain individuals to sell shares only during certain "window" periods and the Company's insider trading policy, ineffect from time to time.21.Amendment. This Agreement may not be modified, amended or terminated except by an instrument in writing,signed by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may beamended solely by the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of suchamendment is delivered to you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materiallyadversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Boardreserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisableto carry out the purpose of the Award as a result of any change in applicable laws or regulations or any future law, regulation, ruling,or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Award which is thensubject to restrictions as provided herein.22.Section 409A of the Code. This Award is intended to be exempt from the application of Section 409A ofthe Code, including but not limited to by reason of complying with the “short-term deferral” rule set forth in Treasury RegulationSection 1.409A-1(b)(4) and any ambiguities herein shall be interpreted accordingly. Notwithstanding the foregoing, if it is determinedthat the Award fails to satisfy the requirements of the short-term deferral rule and is otherwise not exempt from, and determined to bedeferred compensation subject to Section 409A of the Code, this Award shall comply with Section 409A to the extent necessary toavoid adverse personal tax consequences and any ambiguities herein shall be interpreted accordingly. If it is determined that theAward is deferred compensation subject to Section 409A and you are a “Specified Employee” (within the meaning set forth in Section409A(a)(2)(B)(i) of the Code) as of the date of your “Separation from Service” (within the meaning of Treasury Regulation Section1.409A-1(h) and without regard to any alternative definition thereunder), then the issuance of any shares that would otherwise be madeupon the date of your Separation from Service or within the first six (6) months thereafter will not be made on the originally scheduleddate(s) and will instead be issued in a lump sum on the date that is six (6) months and one day after the date of the Separation fromService, with the balance of the shares issued thereafter in accordance with the original vesting and issuance schedule set forth above,but if and only if such delay in the issuance of the shares is necessary to avoid the imposition of adverse taxation on you in respect ofthe shares under Section 409A of the Code. Each installment of shares that vests is intended to constitute a “separate payment” forpurposes of Treasury Regulation Section 1.409A-2(b)(2).* * * * * 7.142444544 v2 This Restricted Stock Unit Award Agreement shall be deemed to be signed by the Company and the Participant upon thesigning by the Participant of the Restricted Stock Unit Grant Notice to which it is attached. 8.142444544 v2Exhibit 21.1Subsidiaries of Insys Therapeutics, Inc.: NAME: JURISDICTION OF ORGANIZATION:Insys Pharma, Inc. DelawareInsys Development Company, Inc. DelawareInsys Manufacturing, LLC TexasIPSC, LLC Arizona Exhibit 23.1Consent of Independent Registered Public Accounting FirmInsys Therapeutics, Inc.Chandler, ArizonaWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-188306 333-194374, 333-202472 and 333-210064) of Insys Therapeutics, Inc. (“Company”) of our reports dated March 31, 2017, relating to the consolidated financial statements and the effectivenessof Insys Therapeutics, 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, 2016./s/ BDO USA, LLPPhoenix, ArizonaMarch 31, 2017 Exhibit 31.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Dr. Santosh Vetticaden, 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 respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor 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 about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 31, 2017 /s/ Dr. Santosh Vetticaden Dr. Santosh Vetticaden Interim Chief Executive Officer and Chief Medical Officer Exhibit 31.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Darryl S. Baker, certify that: 1.I have reviewed this Annual Report on Form 10-K of Insys Therapeutics, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to 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 respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor 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 about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 31, 2017 /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer  Exhibit 32.2Certification Pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002For 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, 2016 (“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, thefinancial condition and results of operations of the Company. Dated: March 31, 2017 /s/ Dr. Santosh Vetticaden Dr. Santosh Vetticaden Interim Chief Executive Officer and Chief Medical Officer Dated: March 31, 2017 /s/ Darryl S. Baker Darryl S. Baker Chief Financial Officer 

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