Insys Therapeutics Inc Annual Report 2017

Plain-text annual report

Table of Contents 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, 2017OR☐☐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 or Organization) 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, a smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer☐ Accelerated filer☒Non-accelerated filer☐ Smaller reporting company☐Emerging growth company☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]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 $308 million as of June 30, 2017 based onthe closing sales price of the common stock on the NASDAQ Global Market.There were 73,764,390 shares of the registrant’s common stock issued and outstanding as of March 2, 2018.Documents Incorporated by ReferencePortions of the registrant's Proxy Statement relating to its 2018 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, 2017, are incorporated by reference in Part III of this Form 10-K.Table of Contents TABLE OF CONTENTS PageNumbers PART I Item 1. Business 1Item 1A. Risk Factors 25Item 1B. Unresolved Staff Comments 58Item 2. Properties 58Item 3. Legal Proceedings 58Item 4. Mine Safety Disclosures 58 PART II 59 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 59Item 6. Selected Financial Data 61Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 62Item 7A. Quantitative and Qualitative Disclosures About Market Risk 78Item 8. Financial Statements and Supplementary Data 79Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 122Item 9A. Controls and Procedures 122Item 9B. Other Information 126 PART III 127 Item 10. Directors, Executive Officers and Corporate Governance 127Item 11. Executive Compensation 127Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 127Item 13. Certain Relationships and Related Transactions, and Director Independence 127Item 14. Principal Accountant Fees and Services 127 PART IV 128 Item 15. Exhibits, Financial Statement Schedules 128Item 16. Form 10-K Summary 131SIGNATURES 132 Table of Contents 2017 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 AdministrationDOJ U.S. Department of JusticeDOJ Investigation HHS and HIPAA investigations, collectivelyERP 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 2009IND Investigational New Drug ApplicationInsys Pharma Insys Pharma, Inc.Insys Therapeutics Insys Therapeutics, Inc.IPO Initial public offeringIPR Inter Partes ReviewIQVIA IQVIA Holdings Inc. (formerly IMS Health, or “IMS”)IRB 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 drugTable of Contents Orange Book FDA's Approved Drug Products with Therapeutic Equivalence EvaluationsODOJ Oregon Department of JusticePBM Pharmacy Benefit ManagersPDEs Prescription Drug EventsPDMA Prescription Drug Marketing ActPDUFA Prescription Drug User Fee ActPK PharmacokineticsPPACA Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010QSR FDA's Quality System RegulationREMS Risk Evaluation and Mitigation StrategyRenaissance Renaissance Acquisition Holdings, LLC (formerly DPT Lakewood, LLC, or “DPT”)RLD 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 Table of Contents 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 twomarketed products: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and SYNDROS®, a proprietary, orallyadministered liquid formulation of dronabinol for the treatment of CINV and anorexia associated with weight loss in patients with AIDS.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 most advanced product candidate is a buprenorphine sublingual spray. Thisproduct candidate possesses unique pharmacological properties that may make it a safe and efficacious alternative to traditional opioids, especially outsideof a hospital setting. We filed an NDA with the FDA for this product candidate on September 29, 2017, and on December 6, 2017, the FDA accepted thefiling.SUBSYS®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% for TevaPharmaceutical Industries Ltd.’s Actiq®. Further, SUBSYS® offers the most complete range of dosage strengths in the TIRF class of products, consisting of100 to 1,600 microgram, or mcg, doses. Patients can administer SUBSYS® in less than one minute while Teva Pharmaceutical Industries Ltd.’s Actiq® andFentora®, the leading branded TIRF products, can require 15 to 30 minutes to administer. We launched SUBSYS® as a commercial product in March 2012. Upon launch, SUBSYS® was the fourth new branded product in the TIRF 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 2017, SUBSYS® was the most prescribedTIRF product, with 29% market share on a prescription basis according to IQVIA. Traditionally, the physician prescriber base for TIRF products isconcentrated, with approximately 1,300 physicians writing 90% of all TIRF product prescriptions in 2017, according to IQVIA. As a result, our commercialorganization has been able to promote SUBSYS® using a highly targeted approach designed to maximize impact with physicians who are TIRF REMSenrolled. In addition, our commercial organization continues to specifically target oncology health care providers and practices.SUBSYS® utilizes our proprietary sublingual spray technology consisting of a small, single-unit device that delivers our proprietary formulation ofdrug particles via a fine mist disbursed across a broad surface area of the1Table of Contents highly permeable membrane underneath the tongue. This delivery platform is suitable for other molecules for which there may be a benefit to a greater rateand extent of absorption, which could lead to a more rapid onset of action and enhanced bioavailability versus other oral preparations and routes ofadministration. We are developing our proprietary sublingual spray technology in other product applications in order to expand our portfolio of productcandidates.SYNDROS®SYNDROS®, a proprietary, orally administered liquid formulation of dronabinol, has demonstrated more rapidly detectable blood levels and a morereliable absorption profile than AbbVie, Inc.’s Marinol® in our clinical studies. In 2012, we completed a pre-NDA meeting with the FDA and a pivotalbioequivalence study. Our pivotal bioequivalence study measured the PK of SYNDROS® versus Marinol®. This PK study demonstrated that 100% ofsubjects receiving SYNDROS® achieved detectable plasma levels at 15 minutes compared to less than 25% of subjects receiving Marinol®. In this study,SYNDROS® also demonstrated a 44% decrease in the patient coefficient of variation for area under the curve, or AUC, which is indicative of greater patientexposure to drug after administration. 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. 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. The final labeling reflectingthe scheduling was approved by the FDA in May 2017 and we commercially launched SYNDROS® in July 2017.Other ProductsOur most advanced product candidate is buprenorphine sublingual spray. This product candidate possesses unique pharmacological properties thatmay make it a safe and efficacious alternative to traditional opioids, especially outside of a hospital setting. On September 29, 2017, we filed an NDA withthe FDA for this product candidate, and on December 6, 2017 the FDA accepted the filing.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.StrategyAdvance our synthetic cannabinoid product pipeline. We are evaluating a proprietary sublingual spray and inhaled formulations of dronabinol inpreclinical testing. We also have the capability to manufacture CBD and are pursuing clinical studies that could result in future commercial productscontaining CBD.SUBSYS® market share and revenues. We launched SUBSYS® as a commercial product in March 2012. As of December 31, 2017, there wereapproximately 6,100 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 1,300 physicians comprise 90% of TIRF prescriptions dispensed in 2017, according to IQVIA. Our sales andmarketing efforts have primarily targeted approximately 50% of these top 1,300 prescribing physicians with a focus on those prescribers with the highestnumber of BTCP patients.Continue to leverage our commercial organization to market SUBSYS® and SYNDROS®, and other complementary products. We commercializeSUBSYS® through our commercial sales organization. We also market SYNDROS® and will market other proprietary supportive care products, if approved,using this same commercial sales organization. We may also pursue opportunities to acquire commercial products or product candidates that could furtherleverage our supportive care commercial sales organization.2Table of Contents 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. Similarly, nasaladministration of select drug products can result in the same benefits as sublingual administration. Certain drug products delivered utilizing our sublingualand nasal spray technologies can be absorbed quickly and take effect more rapidly than many other forms of administration. We are developing severalproduct candidates, including buprenorphine, buprenorphine with naloxone, naloxone, epinephrine and rizatriptan, where we believe our proprietarysublingual and nasal spray technologies have the potential to provide a clinically meaningful therapeutic advantage over existing delivery methods.Use our core competencies and expertise to expand our dronabinol and cannabidiol manufacturing capabilities. Because dronabinol is difficult toimport, procure and produce, we have a U.S.-based, state-of-the-art dronabinol manufacturing facility, which was able to supply the API for initial launchquantities of SYNDROS®. In 2014, we completed construction of a second manufacturing facility that enables us to supply sufficient commercial quantitiesof dronabinol API for the commercialization of our proprietary synthetic cannabinoid product candidates. We received the DEA interim final ruling thatresulted in SYNDROS® being placed in Schedule II of the CSA and the FDA approved the final labeling reflecting the scheduling in May 2017, both ofwhich were 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 Pain in cancerpatients 18 years of age and older who arealready receiving and who are tolerant toaround-the-clock opioid therapy for theirunderlying persistent cancer pain.505(b)(2)MarketedSYNDROS® (dronabinol oral solution) 1. Breakthrough CINV in patients who havefailed to adequately respond toconventional antiemetic treatments.2. Anorexia associated weight loss in AIDSPatients505(b)(2)MarketedCannabidiol Oral Solution1.Pediatric Epilepsy2.West Syndrome (Infantile Spasms)3.Prader Willi4.Childhood Absence Epilepsy (CAE)505(b)(1)2•Pediatric study in refractory epilepsycomplete•Infantile Spasms Phase 3 planned for 1st halfof 2018•Prader Willi Phase 2 planned for 1st half of2018•FDA granted ‘Fast Track’ designation fortreatment of Prader Willi•CAE Phase 2 started in 1st half of 20183Table of Contents Buprenorphine Sublingual SprayAcute Pain505(b)(2) 1Phase 3 completed;NDA filed September 29, 2017; NDA acceptedDecember 6, 2017; PDUFA target date of July28, 2018Buprenorphine/Naloxone SublingualSprayOpioid Dependence505(b)(2) 1Formulation under developmentNaloxone Nasal SprayOpioid Antagonist505(b)(2) 1Proof of concept study completed; Meetingwith FDA in 1st half of 2018 to determine nextsteps 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.2Application is a complete NDA that contains all the studies conducted by the applicant necessary to demonstrate a drug’s safe and effective use.In 2019, we intend to develop SYNDROS® for additional indications that may include the treatment of agitation in Alzheimer's Disease and thetreatment 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 four products that utilize our proprietary spray technology platform with the goal of expanding our supportive care franchise: •Epinephrine (Type I allergic reactions including anaphylaxis) •Rizatriptan (for migraine headaches)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 – Infantile Spasms(Rare pediatric epilepsy)Cannabidiol7/23/2015Glioblastoma multiformeCannabidiol8/20/2014Pontine gliomaCannabidiol9/24/2014Pediatric SchizophreniaCannabidiol11/17/2014 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 actuation4Table of Contents of the device. 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.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 Inc.’s Lazanda®, a nasal spray. Although these existing therapies provide improvements over oral opioids, we believe thatthe market adoption of SUBSYS® to date demonstrates that the current treatment options have limitations and that there remains a significant unmet need fortherapies that provide faster pain relief, more convenient dose administration and a better PK profile. According to IQVIA, SUBSYS® prescriptions wereapproximately 29% and 43% of the TIRF market for the years ended December 31, 2017 and 2016, respectively.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 asit may take up to 15 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.5Table of Contents •Pharmacokinetic profile: Actiq® and its generic equivalents achieve bioavailability of approximately 51% and require 15 to 30 minutesfor absorption. Up to half of the delivered dose of competing TIRF treatments is swallowed and is absorbed slowly through the GI tract whichwe believe 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 15 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 2017 shows that approximately 176,000 prescriptions of SUBSYS® have beendispensed since launch in March 2012. In December 2017, SUBSYS® was the most prescribed branded TIRF product with 29% market share on aprescription basis according to IQVIA.The continuing and heightened publicity surrounding the national opioid epidemic continues to result in heightened sensitivity by many health careprofessionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by health care 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 health careprofessionals are prescribing, and pharmacies are dispensing, opioids. Other high-profile initiatives, such as President Trump’s declaration of the opioid crisisas a public health emergency will likely add to this sensitivity.6Table of Contents Moreover, ongoing state and federal investigations into our sales, marketing and other commercial practices and developments and media reports that mayarise in connection with such investigations may negatively affect our relationships with health care professionals and pharmacies and their prescribing ordispensing habits. Furthermore, widespread litigation focused on opioids, including multi-district litigation, has focused an enormous amount of scrutiny onthe prescribing of opioids. Consequently, these current and potential future events have affected, and will likely continue to affect, the manner in which, andthe situations when, SUBSYS® is being prescribed, dispensed and approved for coverage.Physician Prescriber Base: Approximately 1,300 physicians were responsible for 90% of all TIRF prescriptions dispensed in 2017, according toIQVIA. We have targeted our commercialization efforts towards approximately 50% of these top 1,300 prescribing physicians with a focus on thoseprescribers with the highest number of BTCP patients. During the year ended December 31, 2017, there were approximately 1,400 unique physicianprescribers 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 23,400 unique patients as of December 2017. Importantly, the proportion of SUBSYS® prescriptions written for repeatSUBSYS® patients has increased since July 2012 from 50% of prescriptions to over 91% of prescriptions as of December 2017. Generally, repeat SUBSYS®patients receive higher doses of SUBSYS® on average than first-time patients, as patients are titrated from a starter dose of SUBSYS® to their effective dosein accordance with the REMS protocol.Patient Access: SUBSYS® is a covered medication available under most major commercial health insurance plans formularies. Some third-partypayers require usage and failure on cheaper generic versions of Actiq® prior to providing reimbursement for SUBSYS® and other branded TIRF products.We concentrate on assisting physicians and payers with developing greater familiarity with both the differentiated features of SUBSYS® and the process toachieve patient access to the product from continued and broader usage of SUBSYS® by their patients. We offer patients a free trial of SUBSYS® to allow fortitration to their effective dose and bridge the prior authorization process. Once third-party payer reimbursement is in place, we may offer patients coupons toreduce out of pocket costs.Cannabinoid Product FamilySYNDROS® (dronabinol oral solution)Our lead proprietary dronabinol product is SYNDROS®. The DEA issued an interim final ruling that resulted in SYNDROS® being placed inSchedule II of the CSA and the FDA approved the final labeling reflecting the scheduling in May 2017. We commercially launched SYNDROS® in July2017. In addition, we are evaluating a proprietary sublingual spray and an inhaled formulation of dronabinol in preclinical studies. Dronabinol, the activeingredient in Marinol®, is a synthetic form of THC. THC is an orally active cannabinoid that, like other cannabinoids, has complex effects on the centralnervous system. Approved by the FDA in 1985, Marinol® is indicated for the treatment of CINV in patients who have failed to respond adequately toconventional treatments, as well as for the treatment of anorexia associated with weight loss in patients with AIDS. Marinol® is formulated in sesame oil andencapsulated in soft gelatin capsules and must be stored in cool storage conditions or in a refrigerator.7Table of Contents 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. 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 IQVIA, U.S. salesfor drugs treating CINV were $1.3 billion in 2013, though published reports suggest that current therapies are not entirely effective. A 2004 report publishedin Cancer estimated that approximately 35% of patients treated with CINV therapies continue to experience acute nausea, with 13% of CINV patientsexperiencing acute vomiting after first-line treatment.Limitations of Existing TherapiesWe believe that there are many underserved uses for our cannabinoid products 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.8Table of Contents •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. •Limited second-line therapy options: Currently, there are a limited number of different classes of medications approved for chemotherapy-induced nausea and vomiting that are unresponsive to initial therapy. The availability of dronabinol offers a different class of medicationthan more traditional first-line antiemetics.Our SolutionsWe believe our SYNDROS® product has the potential to address many of the limitations that exist in synthetic cannabinoid products by providing anumber of key advantages, including: •Faster absorption: SYNDROS® is a liquid solution and is absorbed faster than a capsule formulation that has to dissolve in the GI tract. Webelieve 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 its rapid deliveryinto systemic circulation, thus 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 have developed a Cannabidiol Oral Solution, a CBD, for childhood catastrophic epilepsy syndromes that includes West Syndrome(Infantile Spasms) and Childhood Absence Epilepsy, for which we have received Orphan Drug Designations.In addition to the above epilepsy indications, we have also received Orphan Drug Designations for CBD in the treatment of glioblastoma multiforme,pontine glioma, and pediatric schizophrenia.Early studies in animal models demonstrate that 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 an 84% reduction in their child’s seizures, 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 three completed studies in epilepsy. The ongoing study, a Phase 2 study in refractory Child Absence Epilepsy,is evaluating three different doses: 20 mg/kg/day, 30 mg/kg/day, and 40 mg/kg/day.The first completed study was a Phase 1b pharmacokinetic study that evaluated three different doses of CBD in pediatric patients with refractoryepilepsy: 10mg/kg/day, 20mg/kg/day and 40mg/kg/day in pediatric patients with refractory seizures. The second completed study was a long-term safetystudy of the children who completed the Phase 1b pharmacokinetic study and elected to continue treatment with CBD for an additional 48 weeks.The third completed study, a Phase 2 study to assess the efficacy and safety of Cannabidiol Oral Solution for the treatment of refractory InfantileSpasms, studied the effect of Cannabidiol Oral Solution in patients who have failed all approved treatments. This study has been completed and we areevaluating the development in Infantile Spasms in a less refractory population.9Table of Contents Further, we are exploring Cannabidiol Oral Solution for pediatric epilepsies and non-epilepsy indications. The initiation of these studies began in thesecond half of 2017 and will continue through the first half of 2018.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 chromosome region on 15q11-q13. While it presents with generalizedhypotonia and developmental delay in infancy, Prader-Willi Syndrome then manifests with uncontrollable appetite, hyperphagia, and excessive weight gainleading 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-Willi Syndrome is six timeshigher 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% of deaths in individuals with Prader-Willi Syndrome are reported due to thechoking, especially on hot dogs. Prader-Willi Syndrome patients also are known to eat discarded (contaminated) food and items that are not for humanconsumption 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.Buprenorphine Sublingual Spray. Our most advanced product candidate is buprenorphine sublingual spray. This product candidate possessesunique pharmacological properties that may make it a safe and efficacious alternative to traditional opioids, especially outside of a hospital setting. OnSeptember 29, 2017, we filed an NDA with the FDA for this product candidate, and on December 6, 2017, the FDA accepted the filing. In January 2018, Insyssubmitted in the 120-day Safety Update the results from a 7-day safety study demonstrating that the product can be administered for 7 days without untowardeffects.Future Cannabinoid Line Extensions. As described above, we plan to develop additional dronabinol delivery systems, including a proprietaryinhalation dronabinol formulation, with clinical development scheduled to begin in 2018. All of these product candidates are in preclinical development.We also have the capability to manufacture synthetic cannabidiol and intend to work with medical researchers to determine its viability.Sublingual Spray Product Candidates. As described above, we are conducting 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.10Table of Contents Nasal Spray Product Candidates. Two drug products are currently undergoing development for use as nasal spray devices, naloxone andepinephrine. Insys has completed the initial pharmacokinetic study for naloxone and the pharmacokinetic study for epinephrine is ongoing.Inhalation Product Candidates. Insys is currently beginning development of dronabinol for use in an inhalation device with the initiation of apharmacokinetic study in the second half of 2018.Sales and MarketingWe currently market SUBSYS® and SYNDROS® in the United States through our commercial sales organization. Our product detailing efforts focusprimarily on oncologists, pain specialists and centers that cater to supportive care.We do not currently have sales and marketing capabilities outside of the United States. We may evaluate opportunities to sell our productsinternationally, and if we decided to, would most likely enter into arrangements with third parties to pursue requisite regulatory approvals and market andsell our products.We believe some of the key factors in generating growth in SUBSYS® usage include taking market share from other competing TIRF products andincreasing access of the product to appropriate cancer patients suffering from BTCP. We also plan to increase awareness of the prevalence of BTCP amongoncologists and highlight the efficient benefits of SUBSYS®, which include rapid onset of analgesia, improved bioavailability, patient satisfaction and easeof administration relative to other TIRF products.We believe some of the key factors in generating growth in SYNDROS® usage include: (i) continuing to drive product awareness of the benefits ofSYNDROS® as the first FDA approved liquid cannabinoid with the appropriate health care professionals, (ii) increasing the education on the differentmechanism of action between SYNDROS® and other antiemetics, and (iii) converting branded and generic dronabinol usage by reducing financial and payerbarriers for the patient.As of December 31, 2017, there were approximately 6,100 physicians enrolled in the TIRF REMS program. Enrollment in this class-wide REMSprogram is required by the FDA as of March 2012 in order to prescribe TIRF products. Approximately 1,300 physicians comprise 90% of TIRF prescriptionsdispensed in 2017, according to IQVIA. Our sales and marketing efforts have primarily targeted approximately 50% of these top 1,300 prescribing physicianswith a focus on those prescribers with the highest number of BTCP patients.We believe that key factors for driving future SUBSYS® growth include increasing the number of prescriptions written by those physicians whocurrently prescribe SUBSYS®, increasing the number of TIRF REMS enrolled physicians and oncologists who prescribe SUBSYS®, and allowing sufficienttime for physicians and patients to identify their effective SUBSYS® dose among our broad spectrum of dosage strengths.The majority of our sales of SUBSYS® and SYNDROS® are to wholesale pharmaceutical distributors who, in turn, sell the products to pharmacies,hospitals and other customers. For the year ended December 31, 2017, three wholesale pharmaceutical distributors, AmerisourceBergen Corporation,McKesson Corporation, and Cardinal Health, Inc., individually comprised approximately 26%, 18%, and 11%, respectively, of our total gross sales ofSUBSYS® and SYNDROS®. For additional information, see “Risk Factors—Risks Related to Our Business and History—We depend on wholesalepharmaceutical distributors for retail distribution of SUBSYS® and SYNDROS®; if we lose any of our significant wholesale pharmaceutical distributors, ourbusiness could be harmed.” in Part I, Item 1A of this report.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 forSYNDROS®, as well as to support the continued development of our other cannabinoid product candidates in the near-term. We believe this facility11Table of Contents gives us a significant competitive advantage since dronabinol API is a Schedule I material and, consequently, is subject to annual production limits set byquota for each individual facility, cannot be readily procured, is difficult to import into the United States and has a limited number of suppliers domestically.For additional information, see “Risk Factors—Risks Related to Our Business and History—We may encounter manufacturing failures that could impede ordelay commercial production of SYNDROS®, or the preclinical and clinical development or regulatory approval of our dronabinol product candidates” inPart 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 SYNDROS® capacity byconstructing a second facility. We may encounter a number of challenges relating to the management and operation of such a facility, and we may neverrealize 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®, and thedevelopment and commercialization of our dronabinol-based 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. In addition,SUBSYS® is manufactured by contract manufacturers and sub-component fabricators. Aptar and Renaissance have been selected for their specificcompetencies in manufacturing, product design and materials. FDA regulations require that materials be produced under cGMPs or quality systemregulations, as required for the respective unit operation within the manufacturing process. We believe both key suppliers have sufficient capacity to meetour projected product requirements. Aptar Aptar, a dispensing system company based in Illinois, developed the sublingual spray device we use for SUBSYS®. We entered into a supplyagreement, effective as of March 7, 2011, with Aptar pursuant to which Aptar supplies us with the delivery system to administer SUBSYS®. We are requiredto provide Aptar with rolling quarterly forecasts of our requirement for SUBSYS® drug delivery systems. Under certain circumstances, such forecasts are non-binding; however, some portions of such forecasts may constitute a firm commitment to purchase delivery systems. The agreement has a term of five yearsfrom the effective date, subject to early termination clauses. On October 30, 2015, we entered into an amended and restated supply, development & exclusivelicensing agreement with Aptar, which, among other things, extended our exclusive supply rights to the current sublingual device, currently utilized bySUBSYS®, as well as any new device(s) jointly developed by the two companies for a period of seven years. In addition to extending the term, thisamendment added certain minimum purchase commitments and requires certain tiered royalties as a percentage of net revenue to be paid by us ranging fromless than one percent to the low single digits, commencing in March 2016 through the term of the agreement, from our sales of SUBSYS® and future productsthat use the Aptar spray device technology. In January 2016, we assigned our rights, title, duties and obligations of our supply, development & exclusive licensing agreement with Aptar fromour parent to our manufacturing subsidiary as part of a corporate restructuring. In April 2017, we, through our manufacturing subsidiary, entered into a further amendment to our Aptar supply, development and exclusive licensingagreement. This amendment effectively eliminated any prior minimum purchase obligations that had been set forth in the amendment, dated October 30,2015, and beginning in 2019, replaces them with a new annual flat fee of up to $500,000 if the quantity of devices purchased in a calendar year is less thanone million devices. As a result, the cumulative effect related to this amendment reduces our aggregated purchase commitment with Aptar from $20,790,000to $9,000,000 through December 21, 2022. 12Table of Contents Renaissance (formerly DPT) We entered into a manufacturing agreement effective as of May 24, 2011 with Renaissance pursuant to which we engaged Renaissance on anexclusive basis to provide processing and packaging services with respect to SUBSYS®. The contract requires us to provide rolling quarterly forecasts, aportion of which constitute firm purchase commitments. In April 2015, we entered into an amendment to our manufacturing and supply agreement withRenaissance, which extends our existing manufacturing and supply agreement to produce SUBSYS® until the end of 2020. In addition to extending the term,this amendment added certain minimum purchase commitments. In January 2016, we assigned our rights, title, duties and obligations of our manufacturing and supply agreement with Renaissance from our parent toour manufacturing subsidiary as part of a corporate restructuring. In July 2016, we, through our manufacturing subsidiary, entered into a further amendment to our Renaissance manufacturing and supply agreementdated May 24, 2011. This amendment effectively eliminated any prior minimum purchase (and batch) obligations that had been set forth in the amendment,dated April 30, 2015, and replaced it with a new annual purchase commitment of $4 million per calendar year commencing January 1, 2017 throughDecember 31, 2020. As a result, the cumulative effect related to this amendment reduces our aggregated minimum purchase commitments with Renaissancefrom $49,740,000 to $16,000,000 through December 31, 2020. During the year ended December 31, 2017, we recorded a loss of $1,035,000 in cost of revenue in our consolidated statements of comprehensiveincome (loss) for a portion of this commitment which represented firm, non-cancellable and unconditional purchase commitments for quantities in excess ofour current forecasts for future demand. For additional information, see “Risk Factors—Risks Related to Our Business and History—We are dependent on numerous third parties in oursupply chain for the commercial supply of SUBSYS®, and if we fail to maintain our supply and manufacturing relationships with these third parties or fail todevelop new relationships with other third parties, we may be unable to continue to commercialize SUBSYS® or to develop other product candidates.” inPart I, Item 1A of this report.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, DEA scheduling and intellectual property rights. Many of our potential competitors have substantially greater financial, scientific,technical, intellectual property, regulatory and human resources than we do, and greater experience than we do commercializing products and developingproduct candidates, including obtaining FDA and other regulatory approvals for product candidates. Consequently, our competitors may develop productsfor the treatment of BTCP, CINV and anorexia associated with weight loss in patients with AIDS, or other indications we pursue that are more effective, bettertolerated, more widely-prescribed or accepted, more useful and less costly, and they may also be more successful in manufacturing and marketing theirproducts. We also face competition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA quotas, recruiting andretaining qualified personnel, establishing clinical trial sites and enrolling patients for clinical trials and in identifying and acquiring or in-licensing newproducts and product candidates.SUBSYS®SUBSYS® competes against numerous branded and generic products already being marketed and potentially those which are or will be indevelopment. SUBSYS® is one of nine commercially available products in the TIRF market. 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®, Sentynl13Table of Contents Therapeutics’ Abstral®, Depomed Inc.’s Lazanda® and BioDelivery Science International, Inc.’s Onsolis®. Some generic fentanyl products against whichSUBSYS® competes are marketed by Mallinckrodt, Inc., Par Pharmaceutical Companies and Actavis, Inc. In addition, we are aware of numerous companiesdeveloping other treatments and technologies for rapid delivery of opioids to treat BTCP, including transmucosal, transdermal, nasal spray, inhaled deliverysystems 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 products that we may market from those of our competitors, successfully developor introduce 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 which SYNDROS® and our dronabinol product candidates are intended totreat. Specifically, SYNDROS®, and our other dronabinol product candidates, will compete against therapies and products such as AbbVie, Inc.’s Marinol®and Marinol® generics. Par Pharmaceutical Companies markets an approved generic version of Marinol®, and Actavis, Inc. markets an authorized genericversion of Marinol®. Moreover, our cannabinoid products may compete with non-synthetic cannabinoid drugs, including therapies such as GWPharmaceuticals plc’s Sativex® and Epidiolex®, especially in many countries outside of the United States where non-synthetic cannabinoids are legal. Inaddition, literature has been published arguing the benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that havealready enacted laws legalizing medicinal and recreational marijuana. There is some support in the United States for further legalization of marijuana. Wealso cannot assess the extent to which patients utilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approveddronabinol products. Furthermore, in the treatment of CINV, physicians typically offer conventional anti-nausea agents prior to initiating chemotherapy,such as Sanofi’s Anzemet®, Eisai Inc./Helsinn Group’s Aloxi®, Roche Holding AG’s Kytril®, Par Pharmaceutical Companies’ Zuplenz® andGlaxoSmithKline plc’s Zofran®, as well as Neurokinin 1 receptor antagonists on the market including Kyowa Hakko Kirin Co., Ltd.’s Sancuso® andMerck & Co., Inc.’s Emend®. To the extent that SYNDROS® and our dronabinol product candidates, if approved, compete in a broader segment of the CINVmarket, we will also face competition from these products.Additionally, we are aware of companies who have received approval for the commercialization of CINV products, including Heron Therapeutics,Inc.’s (formerly A.P. Pharma, Inc.) Sustrol®, Tesaro, Inc.’s Varubi®, and Roche Holding/Helsinn Group’s Akynzeo®. If these products are successfullymarketed over the next few years, they could represent significant competition for SYNDROS®. Additionally, Aphios Corp.’s Zindol® is in late stagedevelopment (Phase 3), and if successfully developed and approved, 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 January 31, 2018, we owned or licensed from third parties a total of thirty-five worldwide patents and one hundred and seven patentapplications including twenty-three issued U.S. utility patents and thirty-one pending U.S. utility patent applications. These U.S. patents and patentapplications will expire between 2018 and 2039. Some14Table of Contents of the issued patents and pending applications, if issued, may also be eligible for patent term adjustment and patent term restoration, thereby extending theirpatent terms.SUBSYS®Our SUBSYS® patent portfolio currently consists of eight Orange Book listed (with the FDA) U.S. Patent Nos. 8,486,972, 8,486,973, 8,835,459,8,835,460, 9,241,935, 9,289,387, 9,642,797 and 9,642,844 and four pending U.S. patent applications. These patents are directed to SUBSYS® brand fentanyland/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 eleven issuedforeign patents and five pending foreign patent applications covering formulations and methods of use relating to SUBSYS®. Any patents that issue from ourpending 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 two pending U.S. patent applications. 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, while theforth will expire in 2033. Any patents that issue from our pending patent application will likely expire between 2028 and 2039.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 SYNDROS® or our other product candidates, and cannot guarantee that the searches we have done were fully comprehensive and, therefore,whether SUBSYS®, SYNDROS® or any of our product candidates, delivery devices, or methods of using, making or delivering our15Table of Contents product candidates infringe the patents searched, or that other patents do not exist that cover SUBSYS®, SYNDROS® or our product candidates, deliverydevices or these methods. Interpreting patent claims involves complex legal and scientific questions and it is difficult to assess whether or not our productcandidates would infringe any patent. Likewise, it is difficult to predict whether or not third-party patent applications will issue and what claim scope theymay obtain. If we conclude that any identified patents, or patent applications once issued as patents, cover SUBSYS®, SYNDROS® or any of our productcandidates, we cannot guarantee that we will be able to formulate around such patents at all or without material delay or whether we can obtain reasonablelicense terms from the patent owners, if at all. There may also be other pending patent applications that are unknown to us and, if granted, may prevent usfrom making, using or selling SUBSYS®, SYNDROS® or our product candidates. Other product candidates that we may develop, either internally or incollaboration with others, could be subject to similar uncertainties. If a product is found to infringe a third-party patent, we could be prevented fromdeveloping and selling that product. Please see the section entitled “Risk Factors — Risks Relating 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-day16Table of Contents waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not placed a clinical holdon the IND within this 30-day period, the proposed clinical trial may begin.Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualifiedinvestigator. Clinical trials must be conducted in compliance with federal regulations, GCP, which include the requirement that all research 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 the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk tothe clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an IRB for approval.An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or mayimpose 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 for17Table of Contents three additional months to consider certain information or clarification regarding information already provided in the submission. The FDA may also referapplications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically comprised of apanel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA isnot bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. Additionally, theFDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the product unless the facility demonstratescompliance with cGMPs and the NDA contains data that provides substantial evidence that the drug is safe and effective for the indication sought in theproposed labeling. Additionally, the FDA will 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’ssatisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two to sixmonths depending on the type of information included.An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDAapproval, the FDA may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy and may impose 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.18Table of Contents 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.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 these19Table of Contents regulatory requirements may result in restrictions on the marketing or manufacturing of the product, recall or market withdrawal, fines, warning letters, refusalto approve pending applications, suspension or revocation of approvals, product seizure or detention, injunctions and/or the imposition of civil or criminalpenalties.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 program and surveillance to monitor the effects of an approved product or place conditionson 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 atthe federal 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 cancerwho routinely 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 required to enroll in the TIRF REMS Access Program. Similarly, patients who receive TIRF products in an inpatient setting are not required to enrollin the program. Long-term care and hospice patients who obtain their medications from outpatient pharmacies, however, must be enrolled.20Table of Contents Controlled Substances; Drug Enforcement AdministrationWe sell products that are “controlled substances” as defined in the CSA, which establishes registration, security, recordkeeping, reporting, storageand other requirements administered by the DEA. States impose similar requirements. The DEA regulates entities that handle controlled 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 considered to present the lowest relative risk of abuse among such substances.Fentanyl, the active ingredient in our SUBSYS® product, is listed by the DEA as a Schedule II substance under the CSA. Consequently, its manufacture,shipment, storage, sale and use are subject to a high degree of regulation. For example, manufacturing of fentanyl is subject to a DEA regulated quota system.In addition, generally all Schedule II drug prescriptions must be signed by a physician and physically presented to a pharmacist before filling and may not berefilled without 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 initiate21Table of Contents proceedings to restrict, suspend or revoke those registrations. In certain circumstances, violations could result in criminal proceedings.Individual states also regulate controlled substances, and we and our contract manufacturers will be subject to state regulation on distribution ofthese products, including licensing, recordkeeping and security.Controlled substances are also regulated pursuant to several international drug control treaties. These treaties are enforced by the United NationalCommission on Narcotic Drugs. The United States is a signatory to these treaties and thus must conform its laws and regulations to the internationalrequirements, which generally include licensing, recordkeeping and reporting requirements. Both fentanyl and dronabinol are currently 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. These laws include Anti-Kickback and False Claims statutes. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return forpurchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or otherfederally financed health care programs. The term “remuneration” has been broadly interpreted to include anything of value, including for example, gifts,discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything atless than its fair market value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the onehand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harborsprotecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and our practices may not in all cases meet all ofthe criteria for statutory exemptions or safe harbor protection. Practices that involve remuneration that may be alleged to be intended to induce prescribing,purchases, or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Several courts have interpreted the statute’sintent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal health care covered business,the statute has been violated. The reach of the Anti-Kickback Statute was also broadened by the PPACA which amends the intent requirement of the federalAnti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to havecommitted a violation. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of thefederal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below) or the civil monetarypenalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal healthprogram that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.The federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim to 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 health care 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 health care 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.22Table of Contents The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of health care companies to have to defend suchqui 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 health care 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 health care 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 health care 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.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 health care 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 health care reform, pharmaceutical reimbursement policies and pricing in general. The costcontainment measures that health care payers and providers are instituting and the effect of any health care 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.23Table of Contents 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 Health careResearch 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 health care 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 health care systems with the stated goals of containing health care 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 health care is financed by both governmental and private insurers.Health care 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 health care 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.24Table of Contents 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 $63.0 million, $73.9 million and $56.8 for the years ended December 31, 2017, 2016 and 2015, respectively. As ofDecember 31, 2017, we had 61 full-time research and development personnel. We expect research and development expenses to fluctuate with the timing ofour planned preclinical studies and clinical trials for our product candidates, particularly our proprietary cannabinoid product candidates and sublingualspray product candidates. We do not expect to realize net revenues from all of these research and development initiatives in the near term and may neverrealize net revenues from these investments. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Factors Affecting Our Performance—Product Development and Related Regulatory Processes.EmployeesAs of December 31, 2017, we employed 343 full-time employees, including 52 manufacturing employees, 180 sales and marketing employees,61 employees in research and development, and 50 employees in administration. None of our employees are covered under a collective bargaining agreementand we consider our relationship with our employees to be good.Scientific Advisory Board We have established a scientific advisory board consisting of industry experts with knowledge of our target markets. Our scientific advisors generallymeet twice a year as a group to assist us in formulating our research, development, clinical and sales and marketing strategies. Some individual scientificadvisors consult with and meet informally with us on a more frequent basis. Our scientific advisors are not our employees and may have commitments to, 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 two approved products, and although we have generated revenue and profit from salesof these products, we may not be able to continue to be profitable.We anticipate that in the near term our ability to maintain profitability will depend upon the continued commercial success of our two mainapproved products, SUBSYS® and SYNDROS®. In addition to the risks discussed elsewhere in this section, our ability to continue to generate revenues fromthese products will depend on a 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 our products;25Table of Contents •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 defend, expand and maintain intellectual property protection for our products; •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 heightened sensitivity by many health careprofessionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by health care 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 health careprofessionals are prescribing, and pharmacies are dispensing, opioids. Other high-profile initiatives, such as President Trump’s declaration of the opioid crisisas a public health emergency will likely add to this sensitivity. 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 withhealth care professionals and pharmacies and their prescribing or dispensing habits. Furthermore, widespread litigation focused on opioids, including multi-district litigation, has focused an enormous amount of scrutiny on the prescribing of opioids. Consequently, these current and potential future events haveaffected, and will likely continue to affect, the manner in which, and the situations when, SUBSYS® is being prescribed, dispensed and approved forcoverage.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 these products 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, health care 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;26Table of Contents •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 and in certaincircumstances the FDA might even consider action to remove or revoke a product’s approval. Controlled substances are classified by the DEA as Schedule Ithrough V substances, with Schedule I substances being prohibited for sale in the United States, Schedule II substances considered to present the highest riskof abuse and Schedule V substances being considered to present the lowest relative risk of abuse. SUBSYS® contains fentanyl, an opioid, and is regulated asa Schedule II controlled substance, and despite the strict regulations on the marketing, distributing, prescribing and dispensing of such substances, illicit useand abuse of controlled substances is well-documented. Thus, the marketing of SUBSYS®, SYNDROS® and, if approved, our product candidates that containcontrolled substances, may generate public controversy that may adversely affect market acceptance of SUBSYS®, SYNDROS® and, if approved, suchproduct candidates.Our efforts to educate the medical community and third-party payers on the benefits of SUBSYS®, SYNDROS® and any of our product candidatesfor which we obtain marketing approval from the FDA or other regulatory authorities, and gain broad market acceptance requires significant resources andmay not continue to be successful. If our products do not continue to receive an adequate level of acceptance by physicians, third-party payers and patients,we may not generate sufficient revenue from these products to be 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 SYNDROS® may not expand as we anticipate or may even decline based on numerous factors, including theintroduction of superior alternative products and regulatory action negatively impacting the dronabinol market. Moreover, there is no guarantee thatintroduction of SYNDROS® will result in expansion of the dronabinol market or permit us to gain share in that market or maintain or increase any marketshare we may capture. New dronabinol products that we introduce could potentially replace SYNDROS®, thus not impacting the overall size of the market orincreasing our overall share of that market. If we are unable to properly and compliantly 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 SYNDROS® depend in significant part on the coverage and reimbursement policies of third-partypayers, including government payers such as Medicare and Medicaid, and private health insurers. All third-party payers are sensitive to the cost of drugs andconsistently implement efforts to control these costs, which efforts include, but are not limited to, establishing excluded or preferred drug lists. SUBSYS® hasbeen, and will likely continue to be, subject to these restrictions and impediments from third-party payers, particularly PBMs and private health insurers.These PBMs, which administer prescription drug benefits for27Table of Contents employers and health plans and runs large mail-order pharmacies, have significant influence in the insurance industry. While most PBMs have an exceptionprocess that physicians may pursue to have an off-formulary, medically necessary drug covered for patients, being placed on an exclusion list makes itdifficult for many patients covered through a PBM administered plan to have SUBSYS® and SYNDROS® covered by insurance. In the future, we may not beable to work with other PBMs to evaluate price increases and to communicate with managed care and health-system decision-makers to ensure a balancedapproach which takes into account the clinical performance and efficacy of our products. Moreover, in the United States, there have been, and we expectthere will continue to be, a number of state and federal proposals that limit the amount that third-party payers may pay to reimburse the cost of drugs,particularly for state and federal government programs such as Medicare and Medicaid, as well as managed care providers and private insurance plans. Webelieve the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of SUBSYS® andSYNDROS®. Our ability to generate revenue is affected by the availability of third-party reimbursement for SUBSYS® and SYNDROS® and our results ofoperations will be negatively affected if we fail to manage adequate reimbursement levels for SUBSYS® and SYNDROS® from such third-party payers.In addition, we outsource administrative reimbursement support assistance for patients, which function is critical to patients obtaining insurancecoverage in connection with our products. The patient support assistance provided by third-parties, including specialty pharmacies, is subject to extensiveand complex federal and state laws and varied third-party payers standards, procedures, processes and conditions. These third parties’ compliance withapplicable laws, regulations and standards is expensive and time consuming and substantial governmental resources exist to enforce and prosecute theseapplicable laws, regulations and standards and companies that violate such laws, regulations and standards may face substantial penalties. The potentialsanctions include significant civil, criminal and administrative penalties, damages and fines and exclusion from participation in federal 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 is possible that some of thesethird parties’ business activities could be subject to challenge or penalty under one or more of these laws and could materially affect our business in someway, including potentially vicarious liability if our employees violate our existing policies and procedures. Moreover, we may be subject to liability andregulatory sanctions in connection with the prior actions of former employees that operated in our patient service hub before we began outsourcing suchfunction. Such aforementioned potential events could have a material adverse effect on our business, financial condition, results of operations and growthprospects.The manner by which we utilize our commercial sales force has evolved over time and may continue to evolve in the future. We or ourcollaborators may not be successful in executing sales and marketing strategies for SUBSYS®, SYNDROS®, or any additional product candidates forwhich we obtain regulatory approval. If such sales and marketing strategies are not successful, we may not be able to maintain or increase our revenues.Our commercial organization including sales, marketing, managed markets, trade and distribution functions, which is now focused exclusively onmarketing and selling SUBSYS® and SYNDROS® has evolved significantly since the launch of our first commercial product in March 2012. Our commercialorganization has not in the past, and may not in the future, perform over time as we currently anticipate. To the extent our commercial organization does notperform over time as we currently anticipate, we will need to consider alternatives that include significantly downsizing or eliminating our commercial salesforce or entering into arrangements with third parties to market and sell our products in the United States or foreign territories. Any third-party arrangementwould likely result in significantly greater sales and marketing expenses or lower revenues than our current estimates and there can be no assurance that anycurrent or future strategy will be successful.We may either increase or decrease the size of our sales force in the future based upon market conditions and actual sales performance, as well as inthe event that we obtain regulatory approval for any of our product candidates. In addition, we could lose sales personnel, and the performance of our salespersonnel as measured by actual sales has been, from time to time, and may in the future be disappointing.28Table of Contents Our business is subject to volatility and fluctuations in the number of employees we have across our enterprise. We may need to adjust the size andcomplexity of our organization in the future, depending upon the strategies we attempt to implement.Our company has evolved significantly since the launch of our first branded product in March 2012. Management and personnel, systems andfacilities currently in place may not be adequate and/or appropriate to support our business plan.Our need to effectively manage our operations and various business objectives requires that we adjust to ongoing challenges and needs and mayrequire us to do one or more of the following: •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® and SYNDROS® effectively and in a cost-effective manner; •manage our clinical trials effectively; •manage our internal dronabinol production operations effectively and in a cost effective manner; •manage our development efforts effectively while carrying out our contractual obligations to contractors and other third parties; and •continue to improve and expand our facilities.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. Our growth strategy may also entail expanding our use of consultants to implement these and other tasks going forward. Because we rely onconsultants for certain functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry outtheir contractual obligations and meet expected deadlines. There can be no assurance that we will be able to manage our existing consultants or find othercompetent outside consultants, as needed, on economically reasonable terms, or at all. If we are not able to effectively manage our organization including ouruse of consultants, we may be unable to successfully implement the tasks necessary to effectively execute on our planned research, development andcommercialization activities and, accordingly, may not achieve our research, development and commercialization goals.We may encounter manufacturing failures that could impede or delay commercial production of SYNDROS® or the preclinical and clinicaldevelopment or regulatory approval of our product candidates.Any failure in our internal manufacturing operations could cause us to be unable to meet demand for SYNDROS® and lose potential revenue, delaythe preclinical and clinical development or regulatory approval of our product candidates, and harm our reputation. Our internal manufacturing operationsmay encounter difficulties involving, among other things, production yields, regulatory compliance, contamination, quality control and quality assurance,obtaining DEA quotas which allow us to produce certain materials in the quantities needed to execute on our business plan, and shortages of qualifiedpersonnel. Our ability to support our existing product and our product candidates, could be impeded, delayed, limited or denied if we are unable to maintainthe approval of our manufacturing processes and facilities. In addition, we have limited experience producing SYNDROS® in commercial quantities and mayencounter difficulties with continuing to manufacture commercial quantities of SYNDROS® or the quantities of materials needed for our preclinical studiesor clinical trials. Such difficulties could result in a delay in the commercial launch of our product candidates and cause delays in our preclinical studies,clinical trials and regulatory submissions.We must comply with 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, product29Table of Contents seizure or recall, operating restrictions, criminal prosecutions or withdrawal of product approvals, any of which could significantly and adversely affect ourbusiness. If the safety of any product or product candidate or component is compromised due to a failure to adhere to applicable laws or for other reasons, wemay not be able to successfully commercialize or obtain regulatory approval for the affected product or product candidate, and we may be held liable for anyinjuries sustained as a result. Any of these factors could cause a delay or termination of commercialization, preclinical studies and clinical trials, regulatorysubmissions or approvals of our products or product candidates, entail higher costs or result in our being unable to effectively commercialize our approvedproducts. Certain changes in our manufacturing processes or procedures, including a change in the location where the material is manufactured, generallyrequire prior FDA, or foreign regulatory authority, review and/or approval. We may need to conduct additional preclinical studies and clinical trials tosupport approval of such changes. This review and approval process may be costly and time-consuming, and could impede, delay, limit or preventcommercialization of a product.We have expanded our SYNDROS® production capacity by constructing a second facility. We may encounter a number of challenges relating tothe management and operation of such a facility, and we may never realize a return on our investment.We have expanded our SYNDROS® 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. Thissecond facility requires the maintenance of additional regulatory approvals and costs.We cannot assure you that we will be able to successfully operate the second facility in a timely or profitable manner, or within the budget that wecurrently project. If the demand for SYNDROS® and any future related products never meets our expectations and forecasts, or if we do not produce theoutput we plan, we may not be able to realize the return on investment we anticipated, which would have a negative impact on our financial condition andresults 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.We are dependent on numerous third parties in our supply chain for the commercial supply of SUBSYS®, and if we fail to maintain our supply andmanufacturing relationships with these third parties or fail to develop new relationships with other third parties, we may be unable to continue tocommercialize SUBSYS® or to develop other product candidates.We rely on a number of third parties for the commercial supply of SUBSYS® and the clinical supply of certain of our product candidates. Our abilityto commercially supply SUBSYS® and to develop our product candidates depends, in part, on our ability to successfully obtain the API for SUBSYS® andthe materials for certain other of our product candidates, and outsource most if not all of the aspects of their manufacturing at competitive costs, inaccordance with regulatory requirements and in sufficient quantities for commercialization and clinical testing. If we fail to develop and maintain supplyrelationships with these third parties, we may be unable to continue to commercialize SUBSYS® or certain of our 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,30Table of Contents the replacement of any of these suppliers, particularly the supplier of the starting material for our dronabinol API that is difficult to produce, could lead tosignificant 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 Renaissance. If thereare problems 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® could be jeopardized. Any delay or interruption in our ability to commercially supply SUBSYS® will result in the loss ofpotential revenues and could adversely affect the market’s acceptance of these products. We cannot guarantee that we will not encounter other manufacturingissues in the future. In addition, any delay or interruption in the supply of preclinical study or clinical trial supplies could delay the completion of thosestudies or trials, increase the costs associated with maintaining our programs and, depending upon the period of delay, require us to commence new studies ortrials at additional expense or terminate studies or trials completely.Manufacturers and suppliers are subject to regulatory requirements including cGMPs, which cover, among other things, manufacturing, testing,quality control and recordkeeping relating to our products and product candidates, and are subject to ongoing inspections by FDA, DEA and other regulatoryagencies. Moreover, if we seek regulatory approval for any product candidate, the facilities to be used by us or our third-party manufacturers for themanufacture of the product candidate must be approved by the applicable regulatory authorities before the product candidate may be approved andmarketed. We do not control the manufacturing processes of third-party manufacturers, and we are dependent upon them in material ways. If any of our third-party manufacturers cannot successfully manufacture product that conforms to our specifications and the applicable regulatory authorities’ strict regulatoryrequirements, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the abilityof third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatoryauthorities do not approve these facilities for the manufacture of our products or product candidates or if they withdraw any such approval in the future, wemay need to find alternative manufacturing facilities, which would significantly impact our ability to commercially supply SUBSYS® or develop or obtainregulatory approval for certain of 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 certain of our product candidates would be impeded, delayed, limited or prevented, which couldhave a material adverse effect on our business, results of operations, financial condition and prospects.We may encounter delays in the manufacturing of SUBSYS® or fail to generate revenue if our supply of the components of our sublingual spraydelivery system is interrupted.Our sublingual spray drug delivery system is sourced, manufactured and assembled by multiple third parties across different geographic locations inthe United States and Europe. All contract manufacturers and component suppliers have been selected for their specific competencies in the manufacturingprocesses and materials that make31Table of Contents up the sublingual spray system. The components of the spray system include the actuator subassembly, vial subassembly, and the setting mechanism. Theactuator subassembly is comprised of nine individual components which are collectively supplied by six different third-party manufacturers. The vialsubassembly that houses the sterile drug formulation fentanyl is comprised of five different components supplied by four third-party manufacturers. Each ofthese third-party manufacturers is currently the single source of their respective components. If any of these manufacturers is unable to supply its respectivecomponent for any reason, including due to violations of cGMPs for medical devices, known as QSR, our ability to both have the finished sublingual spraydevice manufactured and to commercially supply SUBSYS® will be adversely affected and we would lose potential revenue. Accordingly, a failure in anypart of our supply chain may cause a material adverse effect on our ability to generate revenue from SUBSYS®, which in turn could have a material adverseeffect 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 one of ninecommercially available products in the TIRF market. 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 TevaPharmaceutical Industries Ltd.’s Fentora® and Actiq®, Sentynl Therapeutics’ Abstral®, Depomed Inc.’s Lazanda® and 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 for rapid delivery of opioids to treat BTCP,including transmucosal, transdermal, nasal spray, and inhaled sublingual delivery systems. If these treatments and technologies are successfully developedand approved, they could represent significant additional competition to SUBSYS®. With respect to SYNDROS® and our dronabinol product candidates, the market in which we intend to compete is challenging in part because genericproducts generally face greater price competition than branded products and the competition from generic products may have an effect on our product prices,market share, revenues and profitability. We may not be able to differentiate any products that we may market from those of our competitors, successfullydevelop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products paymentand other commercial terms as favorable as those offered by our competitors. In addition, there are a number of established therapies and products alreadycommercially available and under development by other companies that treat the indications that our dronabinol product candidates are intended to treat.Specifically, if approved, our dronabinol product candidates will compete, against therapies and products such as Abbvie, Inc.’s Marinol® and Marinol®generics. Par Pharmaceutical Companies markets an approved generic version of Marinol® and Actavis markets an authorized generic version of Marinol®.We cannot give any assurance that other companies will not obtain regulatory approval or acceptable DEA classification for, or commercialize additionalgeneric dronabinol products.Moreover, our dronabinol products may compete with non-synthetic cannabinoid drugs, including therapies such as GW Pharmaceuticals plc’sSativex®, especially in many countries outside of the United States where non-synthetic cannabinoids are legal. In addition, literature has been publishedarguing the benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted laws legalizing medicinal32Table of Contents and 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 receptorantagonists on the market including Kyowa Hakko Kirin Co., Ltd.’s Sancuso® and Merck & Co., Inc.’s Emend®. To the extent that SYNDROS® and ourdronabinol product candidates compete in the broader CINV market, we will also face competition from these products and their generic equivalents, asapplicable.Additionally, we are aware of companies who have received approval for the commercialization of CINV products, including Heron Therapeutics,Inc.’s (formerly A.P. Pharma, Inc.) Sustrol®, Tesaro, Inc.’s Varubi®, and Roche Holding/Helsinn Group’s Akynzeo®. If these products are successfullymarketed over the next few years, they could represent significant competition for SYNDROS®. Additionally, Aphios Corp.’s Zindol® is in late stagedevelopment (Phase 3), and if successfully developed and approved could represent significant competition for SYNDROS®.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® and SYNDROS® in the United States without using third-party sales ormarketing channels, but it is unclear what strategies we will utilize in the future in connection with our commercial organization in the United States for anyadditional proprietary product candidates that we may develop, and there can be no assurance that we can maintain and augment these capabilities in amanner that will be cost efficient and competitive with the sales and marketing efforts of our competitors, especially since some or all of those competitorscould expend greater economic resources than we do and/or employ third-party sales and marketing channels.If we are unable to achieve and maintain adequate levels of coverage and reimbursement from third-party payers for SUBSYS®, SYNDROS®, orany future products we may seek to commercialize, on reasonable pricing terms, their commercial success may be severely hindered.Successful sales of our products depend on the availability of adequate coverage and reimbursement from third-party payers. This requires us to overtime successfully navigate the managed care sector for our approved products including but not limited to negotiating managed care contracts and access tocertain drug formularies. Because of the challenges created by certain allegations against our former employees in connection with our interactions withthird-party payers, negotiating such contracts and access may be more difficult than it otherwise might have been and may not be possible in certaininstances. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payers to reimburse all or part of the costsassociated with their prescription drugs. Adequate coverage and reimbursement from governmental health care programs, such as Medicare and Medicaid,and commercial payers is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drugproducts when more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming we obtain coveragefor a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high.Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of 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. The33Table of Contents competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payers may refuseto include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or otheralternative is available. For example, many third-party payers require usage and failure on cheaper generic versions of Actiq® prior to providingreimbursement 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 controllinghealth care 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®, SYNDROS®, or any of our product candidates for which we may receiveregulatory approval may not be available or adequate in either the United States or international markets, which could have a material adverse effect on ourbusiness, results of operations, financial condition and prospects.We depend on wholesale pharmaceutical distributors for retail distribution of SUBSYS® and SYNDROS®; if we lose any of our significantwholesale pharmaceutical distributors, our business could be harmed.The majority of our sales of SUBSYS® and SYNDROS® are to wholesale pharmaceutical distributors who, in turn, sell the products to pharmacies,hospitals and other customers. For the year ended December 31, 2017, three wholesale pharmaceutical distributors, AmerisourceBergen Corporation,McKesson Corporation, and Cardinal Health, Inc., individually and collectively comprised a material portion of our total gross sales of SUBSYS® andSYNDROS®. The loss by us of any of these wholesale pharmaceutical distributors’ accounts or a material reduction in their purchases could have a materialadverse 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® and SYNDROS® can be greatly affected by the inventory levels our respective wholesalers carry. We monitor wholesalerinventory of SUBSYS® and SYNDROS® using a combination of methods. Pursuant to distribution service agreements with our three largest wholesalecustomers, we receive inventory level reports. For most other wholesalers where we do not receive inventory level reports, however, our estimates ofwholesaler inventories may differ significantly from actual inventory levels. Significant differences between actual and estimated inventory levels may resultin excessive production (requiring us to hold substantial quantities of unsold inventory), inadequate supplies of products in distribution channels, andinsufficient product available at the retail level. These changes may cause our revenues to fluctuate significantly from quarter to quarter, and in some casesmay cause our operating results for a particular quarter to be below our expectations or the expectations of securities analysts or investors. In addition, attimes, wholesaler purchases may exceed customer demand, resulting in reduced wholesaler purchases in later quarters, which may result in substantialfluctuations in our results of operations from period to period. If our financial results are below expectations for a particular period, the market price of ourcommon stock may drop significantly.34Table of Contents We rely on third parties to perform many necessary services for SUBSYS® and SYNDROS®, including services related to distribution, invoicing,storage and transportation, 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® and SYNDROS®,key aspects of which are out of our direct control. For example, we rely on Cardinal Health 105, Inc. (a/k/a Specialty Pharmaceutical Services) to provide keyservices related to logistics, warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivablemanagement and call center management, and, as a result, most of our SUBSYS® and SYNDROS® inventory is stored at a single warehouse maintained bythe service provider. We must rely on this provider as well as other third-party providers that perform services for us, including entrusting our inventories ofSUBSYS® and SYNDROS® to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meetexpected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical damage or natural disaster at their facilities, our abilityto deliver SUBSYS® and SYNDROS® to meet commercial demand would be significantly impaired. In addition, we utilize third parties to perform variousother services for us relating to sample accountability and regulatory monitoring, including adverse event reporting, safety database management and otherproduct maintenance services. If the quality or accuracy of the data maintained by these service providers is insufficient, our ability to continue to marketSUBSYS® and SYNDROS® could be jeopardized or we could be subject to regulatory sanctions. We do not currently have the internal capacity to performthese important commercial functions, and we may not be able to maintain commercial arrangements for these services on reasonable terms.In addition to the level of commercial success of our approved products, our future growth is also dependent on our ability to 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.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.35Table of Contents 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. Most of our product candidates are in preclinicaldevelopment. We estimate that clinical trials for these product candidates, if and when initiated, will continue for several years and may take significantlylonger than expected to complete. In addition, we, the FDA, an IRB, or other regulatory authorities, including state and local, may suspend, delay orterminate our clinical trials at any time, or the DEA could suspend or terminate the registrations and quota allotments we require in order to procure andhandle controlled substances, for various reasons, including: •lack of effectiveness of any product candidate during clinical trials; •discovery of serious or unexpected toxicities or side effects experienced by study participants or other safety issues; •slower than expected rates of subject recruitment and enrollment rates in clinical trials; •difficulty in retaining subjects who have initiated a clinical trial but may withdraw at any time due to adverse side effects from the therapy,insufficient efficacy, fatigue with the clinical trial process or for any other reason; •delays or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials, in particular obtaining sufficientquantities of dronabinol due to regulatory and manufacturing constraints; •inadequacy of or changes in our manufacturing process or product formulation;36Table of Contents •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 our approved product SYNDROS®.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.37Table of Contents 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 a Dronabinol Inhalation Device, for which we intend to seek FDAapproval through the Section 505(b)(2) regulatory pathway. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDA we submit to FDA torely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved compounds, which could expeditethe development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate in order to garnerFDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinicaltrials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resourcesrequired to obtain FDA approval for these product candidates, and complications and risks associated with these product candidates, would likelysubstantially increase. We could need to obtain more additional funding, which could result in significant dilution to the ownership interests of our thenexisting stockholders to the extent we issue equity securities or convertible debt. We cannot assure you that we would be able to obtain such additionalfinancing on terms acceptable to us, if at all. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway would likely result in new competitiveproducts reaching the market more quickly than our product candidates, which would likely materially adversely impact our competitive position andprospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive therequisite approvals for commercialization.38Table of Contents 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. For2018, we were allocated what we believe is a sufficient quantity of dronabinol to meet our currently anticipated production and testing needs through 2018.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 2019or 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 2018 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, we will need to receive from the DEA significantly increased allotments of dronabinol quotas over time and likely an increase in the aggregate annualquota. 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® , and any other dronabinol product candidate for which we obtain regulatory approval, as well 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 business plan, our financial position and results ofoperations, our prospects, and our ability to generate revenue to fund the development of our other product candidates.39Table of Contents 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 ofour 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.40Table of Contents 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 former and current employees, contractors or agents. Misconduct by our former orcurrent employees, contractors or agents could include intentional actions to circumvent our compliance protocols, intentional failures to comply with FDAregulations, provide accurate information by our employees, contractors and agents to the FDA, comply with applicable manufacturing standards, complywith federal and state health care privacy, fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorizedactivities to us. In particular, sales, marketing and business arrangements in the health care industry are subject to extensive laws and regulations intended toprevent fraud, misconduct, kickbacks, self-dealing, off-label promotion and other illegal or inappropriate practices. These laws and regulations may restrict orprohibit a wide range of pricing, false claims, discounting, marketing and promotion, sales commission, customer incentive programs and other businessarrangements. These laws also dictate the proper use of patient information and data which is subject to privacy laws such as HIPAA. Misconduct of ourformer or current employees could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drugproduct, or illegal promotion of a drug product for off-label use, which could result in regulatory sanctions and serious harm to our reputation. We haveadopted a Code of Business Conduct and Ethics and maintain a compliance program that strives to meet existing guidance from regulators, but it is notalways possible to identify and deter employee misconduct, and the precautions we currently take (or have taken) to detect and prevent this type of activitymay not be (or may not have been) effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental sanctions andcharges or third-party actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted againstus, we may be held accountable for the actions of bad actors that we may have employed and those actions could have a significant impact on our business,including the imposition of significant fines or other sanctions that could, among other things, significantly limit our ability to market our products.Our ability to utilize our net operating loss carryforwards, or NOLs, and research and development income tax credit carryforwards may belimited.Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, substantial changes in our ownership may limit the amount ofNOLs and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income, if any.Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Anysuch annual limitation, whether as the result of prior transactions, sales of common stock by our existing stockholders or additional sales of common stock byus, may significantly reduce the utilization of the NOLs before they expire and could have an adverse effect on our future results of operations.41Table of Contents 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, 2017. For state income tax purposes, we have $236.6 million ofstate NOLs. Based upon the Company’s recent tax loss and current projections for future taxable income, the Company does not believe realization of thesetax assets is more likely than not. As such, a full valuation allowance for the deferred tax assets has been established as of December 31, 2017.On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “2017 Tax Act” or “U.S. Tax Reform”), which, among otherthings, reduces the federal statutory income tax rate from 35% to 21% effective January 1, 2018, eliminates the ability to carryback NOLs arising after 2017and instead would permit such NOLs to be carried forward indefinitely, and reduces the orphan drug credit to 25% from 50% of qualified clinical testingexpenses. These provisions of the 2017 Tax Act may significantly alter the utilization of NOLs and orphan drug credits and could have an adverse effect onour future results of operations. See Note 10 of the Notes to our Consolidated Financial Statements for additional discussion related to the 2017 Tax Act.We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to ourmanagement, and which ultimately may not be successful.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, particularly those arrangements that seek to leverage other organizations’ internal platforms or competenciesfor the benefit of our products or potential products. Additional potential transactions that we may consider include a variety of different businessarrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any suchtransaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integrationchallenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions mayentail numerous operational and financial risks, including: •exposure to unknown or unanticipated liabilities, including foreign laws we are unfamiliar with; •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, which we may not be able to obtain onfavorable terms, if at all; •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; •entering into a long-term relationship with a partner that proves to be unreliable or counterproductive; •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 if we are unableto execute on the planned objectives or capitalize on the relationship in the manner that was originally contemplated.42Table of Contents We face potential product and other liability exposure, and if successful claims are brought against us, we may incur substantial liability if ourinsurance coverage for those claims is inadequate.All of the activities of our organization, including the commercial use of our products and clinical use of our product candidates expose us to the riskof liability claims. These risks are varied and difficult to predict. For instance, because SUBSYS® is an opioid, we face significant risk of product liability forthis product even though this product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Ourproducts and product candidates are designed to affect important bodily functions and processes, but side effects, manufacturing defects, misuse or abuseassociated with SUBSYS®, SYNDROS®, or our product candidates could result in injury to a patient or even death. For example, because our sublingualspray technology is designed 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 amanner that results in injury or death. In addition, SUBSYS® is an opioid pain reliever that contains fentanyl, and SYNDROS® is a synthetic cannabinoid,which are both regulated “controlled substances” under the CSA and could result in harm to patients relating to its potential for abuse. In addition, a liabilityclaim may be brought against us even if our products or product candidates merely appear to have caused an injury or because our commercial activities arealleged to have impaired a prescriber’s ability to independently act in the best interest of the patient. Product liability claims may be brought against us byconsumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products or product candidates,among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities. In addition, regardless of meritor 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.With the assistance of a reputable and prominent insurance broker, we have maintained product liability insurance coverage for our commercialproducts and clinical trials, which we believed to have appropriate aggregate coverage limits consistent with market practice at the time we obtainedcoverage. We also carry excess product liability insurance coverage for commercial product sales and clinical trials that was determined to be appropriate.However, identifying appropriate coverage is difficult to manage and our historic and future insurance coverage may not be sufficient to cover all of ourproduct liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becomingincreasingly expensive and has provisions that limit that coverage under certain circumstances that may apply to our company. In addition, in the future, wemay not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to, amongother things, the challenges we have had with respect to the commercial activities of former employees and the past legal actions that our company hasendured or may endure in the future. If we determine that it is prudent to increase our product liability coverage, we may be unable to obtain this increasedproduct liability insurance on commercially reasonable terms or at all and it is our understanding that insurance providers are increasingly putting limitationsaround coverage of opioid products and may not be willing to issue coverage at all. Large judgments have been awarded in class action, multi-district, andindividual lawsuits related to opioids and we anticipate that significant judgements or settlements will occur in the future. A large successful product liabilityclaim or a series of smaller successful claims brought against us could cause our stock price to decline and, if judgments or settlements exceed our insurancecoverage or result in significant dollar amounts, could decrease our cash and have a material adverse effect our business, results of operations and financialcondition.43Table of Contents 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 currently carry biological orhazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages andfines 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 SYNDROS® and conduct clinical trials, and similar eventsrelating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to resultin a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and thefurther commercialization 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. Accordingly, we do not carry earthquake insurance and an unexpected similar event in this region could be devastating to our business.However, other natural disasters or similar events, like hurricanes, fires or explosions or large-scale accidents or power outages, could severely disrupt ouroperations in Arizona or Texas, and may have a material adverse effect on our business, results of operations, financial condition and prospects.Our enterprise financial systems are located in our Chandler, Arizona headquarters. Our manufacturing facilities are in Round Rock, Texas. If adisaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters or our Round Rock facilities, thatdamaged critical infrastructure, such as enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwisedisrupted operations at either location, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. Forexample, Texas, from time to time experiences natural disasters like hurricanes or tornadoes. In addition, Arizona has in the past experienced flash flooding.Due to the inherently unpredictable nature of these events, the disaster recovery and business continuity plans we have in place currently are limited and areunlikely to prove adequate in the event of a serious disaster or similar event. We may incur44Table of Contents substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans which, particularly when taken together with ourlack 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. In addition, our revenue has been declining and it has been difficult forus to stabilize our product sales so that we can predictably forecast future revenue. We expect our operating and general and administrative expenses tocontinue to be significant and increase substantially in connection with our planned research, development and other necessary or desirable activities. Inparticular, our legal expenses are difficult to predict and manage as a result of the continued and varied legal challenges that not only our company has hadbut also our former employees that, in some instances, we are required to indemnify. In addition, as we have previously disclosed, we have taken a reserve ona potential settlement fine in connection with our DOJ investigation and we anticipate that the fine associated with this investigation and other state relatedinvestigations will be substantial.We believe that cash generated from operations and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fundour operations through at least the next 12 months from the issuance date of this Annual Report. We have based these estimates on factors that are difficult topredict and our assumptions may prove to be wrong and we could spend our available financial resources much faster than we currently expect. Accordingly,future revenue and cash may prove to be inadequate to meet our costs and expenses and we may need to raise additional capital to fund our operations andcontinue to support our planned research and development and other necessary or desirable activities.The amount and timing of our future funding requirements will depend on many factors, including, but not limited to: •the timing and amount of revenue from sales of our approved products, SUBSYS® and SYNDROS®, and any subsequently approved productcandidates that 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®, SYNDROS®, 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®,SYNDROS®, and our product candidates; •costs associated with prosecuting or defending any litigation and regulatory fines or sanctions as a result of governmental investigations thatwe are or may become involved in and any damages payable by us that result from such litigation or investigations; •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.45Table of Contents 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 health care 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 health care services or bill directly to Medicare, Medicaid orother third-party payers, certain federal and state health care laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicableto our business. As a result of our previously disclosed DOJ Investigation, we anticipate we will be subject to sanctions and fines by the federal governmentand we believe certain ongoing state investigations could result in future sanctions and fines. The laws that may affect our ability to operate and that may beimplicated in such foregoing sanctions or fines include: •the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies, and relationships withhealth care 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 health care 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 health care benefit program or makingfalse statements relating to health care 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 health46Table of Contents care programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations couldmaterially 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. The Office ofthe Inspector General also has the authority to exclude us from participation in healthcare programs funded by the government. In addition, management’sattention could be diverted and our reputation could be damaged. See Note 7 under the heading “Legal Matters” in the Notes to our Consolidated FinancialStatements for a discussion of these investigations by HHS, Office of Inspector General, the U.S. District Attorney’s Office for the District of Massachusettsand 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, particularly the risks related to the actions of our former employees. Any action against us for violation of these laws, even if we successfullydefend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover,achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.Our currently marketed products, SUBSYS® and SYNDROS®, and any of our product candidates that receive regulatory approval, will be subjectto ongoing and continued regulatory review, which may result in significant expense and limit our ability to commercialize such products.Even after we achieve U.S. regulatory approval for a product, the FDA may still impose significant restrictions on the approved indicated uses forwhich the product may be marketed or on the conditions of approval. For example, a product’s approval may contain requirements for potentially costly post-approval studies and surveillance, including Phase IV clinical trials, to monitor the safety and efficacy of the product. We are also subject to ongoing FDAobligations and continued regulatory review with respect to the manufacturing, processing, labeling, packaging, distribution, adverse event reporting,storage, advertising, promotion and recordkeeping for our product. These requirements include submissions of safety and other post-marketing informationand reports, registration, as well as continued compliance with cGMPs and with GCPs and GLPs, which are regulations and guidelines enforced by the FDAfor all of our products in clinical and pre-clinical development, and for any clinical trials that we conduct post-approval. To the extent that a product isapproved for sale in other countries, we may be subject to similar restrictions and requirements imposed by laws and government regulators in thosecountries.In the case of SUBSYS®, SYNDROS®, and any of our product candidates containing controlled substances, we and our contract manufacturers willalso be subject to ongoing DEA regulatory obligations, including, among other things, annual registration renewal, security, recordkeeping, theft and lossreporting, periodic inspection and annual quota allotments for the raw material for commercial production of our products. In addition, manufacturers of drugproducts and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance 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® and SYNDROS® are located outside the United States, they may be subject to foreign laws and regulations governing the manufacture of drugsand devices, and any failure by them to comply with those laws and regulations may delay or interrupt supplies of our products.47Table of Contents 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 attorneygenerals 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;48Table of Contents •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 health care 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.Furthermore, there have been and continue to be a number of initiatives at the federal and state levels that seek to reduce health care costs. Forexample, PPACA includes measures to significantly change the way health care is financed by both governmental and private insurers.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 Medicare 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 Medicare payments to several providers, includinghospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments toproviders from three to five years. These new laws may result in additional reductions in Medicare and other health care funding, which could have a materialadverse effect on our customers and accordingly, our financial operations. For instance, President Trump’s declaration of the opioid crisis as a public healthemergency is anticipated by many to spur potential legislation or executive branch actions that could materially affect the manner in which federalhealthcare programs operate.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 health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceuticalproducts and which suppliers will be included in their prescription drug and other49Table of Contents health care programs. This can reduce demand for our products or put pressure on our product pricing, which could negatively affect our business, results ofoperations, 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®, SYNDROS®, and our product candidates, if and when commercialized, will continue todepend, in part, upon the availability of coverage and reimbursement from third-party payers at the federal, state and private levels. Third-party payersinclude governmental programs such as Medicare or Medicaid, private insurance plans and managed care plans. These third-party payers may deny coverageor reimbursement for a product or therapy in whole or in part if they determine that the product or therapy was not medically appropriate or necessary. Also,third-party payers have attempted to control costs by limiting coverage through the use of formularies and other cost-containment mechanisms and theamount of reimbursement for particular procedures or drug treatments.Additionally, given recent federal and state government initiatives directed at lowering the total cost of health care, Congress and state legislatureswill likely continue to focus on health care 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 we cannot predict the review time for any ofour submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors, including budget and funding levels andstatutory, 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 our current President and agencies such as theHHS have expressed their belief that the United States is in the midst of a prescription opioid abuse epidemic. Common prescription drugs that containopioids are drugs such as oxycodone, hydrocodone, and fentanyl. Our product, SUBSYS®, is fentanyl based product in the TIRF class. To the extent that thehealth care community, regulatory bodies and governmental agencies associate us with, or determine that we are50Table of Contents a part of, this perceived opioid abuse epidemic then this may negatively affect our stock price and our business in various ways including from a marketing,sales and public relations standpoint and these perceptions may 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 varyfrom country to country. For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use of oursublingual spray technology.In addition, the only patent protection that we can expect will otherwise cover SUBSYS® and dronabinol products and product candidates 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 pending applications and issued patents in the United States and in many foreigncountries that pertain to either fentanyl or dronabinol formulations. We can give no assurances that any patents will issue, that if they do issue or have issued,they will provide sufficient protection against competitors, or that they would be valid and enforceable.Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability toobtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any patents we may 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.51Table of Contents 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.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, or52Table of Contents that our trade secrets and unpatented know-how will not otherwise become known or be independently discovered by our competitors. If trade secrets areindependently discovered, we would not be able to prevent their use. Enforcing a claim that a third-party illegally obtained and is using our trade secrets orunpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willingto protect trade secret information.Our products and the intellectual property related to such products face competition from lower cost generic or follow-on products.Manufacturers of generic drugs are seeking to compete with our drugs and will do so with our product candidates if they are approved. These genericdrug manufacturers present a significant challenge to us and they may challenge the scope, validity or enforceability of our patents in court, requiring us toengage in complex, lengthy and costly litigation. If any of our owned or licensed patents are infringed or challenged, we may not be successful in enforcingor defending those intellectual property rights and, as a result, may not be able to develop or market the relevant product exclusively, which would have amaterial adverse effect on our sales of that product.In addition, manufacturers of innovative drugs as well as generic drug manufacturers may be able to design their products around our owned orlicensed patents and compete with us using the resulting alternative technology. For more information concerning certain pending proceedings relating toour intellectual property rights, including a discussion on our Paragraph IV challenges, see Note 7 under the heading “Legal Matters” in the Notes to ourConsolidated Financial Statements.Upon the expiration or loss of patent protection for a product, or upon the “at-risk” launch (despite pending patent infringement litigation against thegeneric product) by a manufacturer of a generic version of one of our products, we could quickly lose a significant portion of our sales of that product and thevalue of that product line could be significantly reduced. In addition, if our branded products lose their market exclusivity, our products may face increasedcompetition or pricing pressure.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,53Table of Contents 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 patent applications in the United States may be maintained in secrecy until thepatents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing,and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications fortechnology covered by our own and in-licensed issued patents or our pending applications. Our competitors may have filed, and may in the future file, patentapplications covering our products, product candidates or technology similar to ours. Any such patent application may have priority over our own and in-licensed patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filedan U.S. patent application on inventions similar to those owned or in-licensed to us, we or, in the case of in-licensed technology, the licensor may have toparticipate, in the United States, in an interference proceeding to determine priority of invention.If another party has reason to assert a substantial new question of patentability against any of our claims in our own and in-licensed U.S. patents, thethird-party can request that the patent claims be reexamined, which may result in a loss of scope of some claims or a loss of the entire patent. In addition topotential infringement suits and, interference and reexamination proceedings, we may become a party to patent opposition proceedings where either thepatentability of the inventions subject of our patents are challenged, or we are challenging the patents of others. The costs of these proceedings could besubstantial, and it is possible that such efforts would be unsuccessful.We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that ourproducts and/or product candidates and/or proprietary technologies infringe their intellectual property rights. These lawsuits are costly and 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;54Table of Contents •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.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 principal stockholder has placed his shares in an independently controlled trust and the voting committee associated with such trust caneffectively control our direction and policies, and they may make decisions that are not in the best interests of us or our other stockholders.Effective as of February 27, 2018, our company entered into a voting trust agreement with Dr. John N. Kapoor (and certain of his beneficiaries) and anindependent trustee. During the term of this voting trust, Dr. John N. Kapoor (and certain of his beneficiaries) will not have control over voting decisions(except under limited circumstances) over the shares of the Company’s common stock beneficially owned by Kapoor and the beneficiaries. As of theeffective date of the voting trust agreement, the shares subject to the trust represented approximately 59% of the outstanding shares of common stock of theCompany. Until the voting trust agreement is terminated, the shares subject to the trust shall generally be voted on any matter by the trustee as directed by an55Table of Contents independent voting committee (the “Voting Committee”) whose members meet certain independence standards with respect to Kapoor. If at any time theshares subject to the trust represent less than 40% of the outstanding shares of common stock of the Company, such shares shall be voted on any matter by thetrustee in the same proportion that the shares of the Company’s common stock that are not subject to the trust are voted on such matter, which is commonlyreferred to as “mirror voting.” By virtue of this trust, the Voting Committee can and will be able to effectively control the election of the members of our Board of Directors, ourmanagement and our affairs and prevent corporate transactions, such as mergers, consolidations or the sale of all or substantially all of our assets, that may befavorable from our standpoint or that of our other stockholders or cause a transaction that we or our other stockholders may view as unfavorable. In addition,pursuant to an exception included in the voting trust agreement, Kapoor retains a veto right which permits him to veto change of controltransactions. 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 the voting committee of the trust has the ability to approve matterssubmitted to stockholders, including the election of directors, approval of significant transactions and the amendment of our certificate ofincorporation.In addition, the existence and nature of this voting trust could be viewed negatively by third parties and have a negative impact on our stock price.Moreover, if Kapoor’s ownership falls below 40% of the outstanding shares and the shares subject to the trust are now subject to “mirror voting,” it is possiblethat a group of shareholders representing a relatively small percentage of ownership in the company could work together to effectively control key decisions.Finally, upon Kapoor’s passing, we cannot assure you as to how these shares will be distributed and subsequently voted.Our common stock price has been volatile, which could result in substantial losses for stockholders.Our common stock is currently traded on The NASDAQ Global Market. We have in the past experienced, and may in the future experience, limiteddaily trading volume. The trading price of our common stock has been and may continue to be volatile. The market for pharmaceutical companies, inparticular, has at various times experienced extreme volatility that often has been unrelated to the operating performance of particular companies. Thesebroad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance. 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 securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price andtrading volume could decline.The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stockprice would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock coulddecrease, which could cause our stock price and trading volume to decline.56Table of Contents 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. The exercise of outstanding stock options could result in increased sales of our common stock in the market, which could exert significantdownward pressure on our stock price. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time andprice 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 may be a “controlled company” under Nasdaq’s rules and, as a result, may qualify for, and may rely on, exemptions from certain Nasdaqindependence rules, which could make our common stock less attractive to investors.As a result of the independent voting trust holding Kapoor’s shares and controlling the related voting power, we believe we are potentially a“controlled company” as defined in the Nasdaq Listing Rules and, therefore we may avail ourselves of certain exemptions under applicable Nasdaq rules,including exemptions from the rules that require us to have (i) a majority of independent directors on the Board; (ii) independent director oversight ofexecutive officer compensation; and (iii) independent director oversight of director nominations.57Table of Contents 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 88,000 square feet of office and lab space in Chandler, Arizona under lease agreements that expire between August2020 and June 2021. We believe that the Chandler, Arizona facilities are adequate to meet our current needs, and that suitable additional or alternative spacewill be available for our foreseeable future needs. Additionally, we lease a total of approximately 64,000 square feet for our U.S.-based, state-of-the-artdronabinol manufacturing facilities, which are both located in Round Rock, Texas under lease agreements that expire between January 2022 and March2024. We have the option to extend our primary manufacturing facility lease for two 5-year periods following March 2024. We believe that the Round Rock,Texas manufacturing facilities are adequate to meet our current needs and that suitable additional or alternative space will be available for our foreseeablefuture 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.58Table of Contents 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 2017 price range per share $9.95 $4.97 $13.51 $8.76 $14.70 $10.03 13.48 9.50 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 HoldersAs of March 2, 2018, there were approximately 36 holders of record of our common stock and 73,764,390 shares of our common stockoutstanding. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate thetotal number of stockholders represented by these record holders.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 SecuritiesStock 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, 2017, we had $17.4 million remaining under this program. There were no repurchases of our common stock during the year ended December31, 2017. Also see Note 8 of the Notes to our Consolidated Financial Statements for additional information on this repurchase program.59Table of Contents 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, 2017. 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.60Table of Contents 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, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013, were derived from our audited consolidated financial statementsnot included in this Annual Report on Form 10-K. Years Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except share and per share data) Consolidated Statements of Comprehensive Income (Loss) Data: Net revenue $140,693 $242,275 $330,323 $219,092 $99,289 Gross profit 120,050 216,882 301,469 196,514 86,624 Operating income (loss) (219,031) 7,326 90,456 60,990 32,559 Income tax expense (benefit) 10,820 834 32,941 25,089 (8,800)Net income (loss) (228,015) 7,590 58,053 36,054 40,377 Net income (loss) per common share: Basic $(3.16) $0.11 $0.81 $0.52 $0.78 Diluted $(3.16) $0.10 $0.77 $0.49 $0.70 Weighted average common shares outstanding Basic 72,259,063 71,618,793 71,592,581 68,759,070 51,839,536 Diluted 72,259,063 74,145,918 75,707,651 73,335,132 57,469,234 Dividends declared per common share $— $— $— $— $— December 31, 2017 2016 2015 2014 2013 (In thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $117,188 $182,880 $159,091 $82,863 $45,782 Total current assets 175,942 229,643 252,051 146,465 78,350 Total assets 279,080 356,136 351,285 215,635 100,558 Total current liabilities, including debt 207,179 78,614 90,436 48,709 21,081 Total liabilities 215,798 86,547 98,980 52,445 21,081 Total stockholders' equity 63,282 269,589 252,305 163,190 79,477 61Table of Contents 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 SYNDROS® may havea material impact on future net revenue; our intent to file an IND application for the treatment of epilepsy with cannabidiol; the sufficiency of ourmanufacturing capacity; the beneficial attributes of our dronabinol product candidates and delivery mechanisms; that our suppliers are equipped to supplyus with our current and future chemical needs; that pending dronabinol candidates will default to Schedule II classification; that changes in health carelaws will result in reduced Medicaid and Medicare payments for prescription drugs; that sales and marketing and research and development costs will beour largest categories of expenses; that sales and marketing expenses will fluctuate based on changes in SUBSYS® and SYNDROS® net revenue; ourdevelopment of different dronabinol delivery systems; that we can maintain or even grow market share and net revenue for SUBSYS® and SYNDROS® andour strategies relating thereto; that we may pursue strategies relating to synthetic cannabidiol; our sales and marketing strategy for future products anddelivery systems; that we may pursue strategic transactions such acquisitions or other companies, asset purchase out- or in-licensing of products, strategicpartnerships, joint ventures, divestitures, business combinations and investments; our ability to obtain foundation materials and manufacture dronabinol inlight of government quotas; our strategy of using Marinol® as a reference drug in future drug approval applications; the expected pathway of drugapplications we expect to file in the future; that physicians and payers will continue to gain familiarity about and accept the features of SUBSYS® andSYNDROS®; our plans and strategies for obtaining future international approvals; our plans and strategies to protect our intellectual property; ourintention of not paying dividends; possible capital raising transactions we may pursue; that we may avail ourselves of certain Nasdaq governanceprovisions because of our status as a controlled company; that research and development and operating costs will fluctuate; that our investments in oursales and research and development infrastructure will result in increased sales; accounting estimates and the impact of new or recently issued accountingpronouncements; that cash flows from operations will increase and/or stabilize as a result of sales of SUBSYS® and SYNDROS®; the source and sufficiencyof our liquidity and capital resources to fund our operations; trends in restrictions and impediments relating to reimbursement policies imposed byPBMs; 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; the effects of U.S. tax reform; and the potentialimpact of Section 382 limitations on our NOLs. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,”“would”62Table of Contents and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance onour forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-lookingstatements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligationto 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, 2017 and 2016 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. As ofDecember 31, 2017, we have two commercially marketed products: •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 bioequivalent to Marinol® in a fasted state, and is approved second-line treatment inbreakthrough CINV and anorexia associated with weight loss in patients with AIDS. We received FDA approval for SYNDROS® in July2016. In March 2017, the DEA issued an interim final ruling that would result in SYNDROS® being placed in Schedule II of the CSA. Wereceived final labeling approval by the FDA in May 2017 and commercially launched SYNDROS® in July 2017.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® and SYNDROS® through our U.S.-based field sales force focused on supportive care physicians. Consistent with mostpharmaceutical manufacturing companies, we sell and distribute SUBSYS® and SYNDROS® primarily to pharmaceutical wholesalers and collect salesproceeds from those wholesalers. For the year ended December 31, 2017, sales to our three largest wholesale customers accounted for 55% of gross revenue.We also sell SUBSYS® and SYNDROS® directly to certain specialty pharmaceutical retailers who distribute our product. For the year ended December 31,2017 direct sales to specialty pharmaceutical retailers accounted for 37% of gross revenue. We do not own or have any ownership stake in anypharmaceutical wholesaler or specialty pharmacy, nor do we have an option to acquire any wholesaler or specialty pharmacy. All pharmacies that fulfillSUBSYS® and SYNDROS® prescriptions are fully independent. Our relationships with every pharmacy that fulfills SUBSYS® and SYNDROS®prescriptions are non-exclusive in that each of these pharmacies may also fulfill prescriptions for other pharmaceutical manufacturers, including ourcompetitors. For the year ended December 31, 2017, over 490 independent pharmacies have fulfilled at least one SUBSYS® prescription.63Table of Contents Our sales of, and revenue from, SUBSYS® and SYNDROS® depend in significant part on the coverage and reimbursement policies of third-partypayers, including government payers such as Medicare and Medicaid, and private health insurers. All third-party payers are sensitive to the cost of drugs andconsistently implement efforts to control these costs, which efforts include, but are not limited to, establishing excluded or preferred drug lists. SUBSYS® hasbeen, and will likely continue to be, subject to these restrictions and impediments from third-party payers, particularly PBMs and private health insurers. Weprovide administrative reimbursement support assistance, in large part through our insurance reimbursement support group, which provides administrativesupport 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 SYNDROS®, and support the continued development of our other dronabinolproduct candidates in the near-term, we have opened and expanded a second dronabinol manufacturing facility, which we anticipate will enable us to supplysufficient commercial quantities of dronabinol API for the anticipated commercialization of 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.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. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must successfully address. Approved Product Sales. Our operating results will depend significantly upon our, and any of our third-party distributors’, sales of approvedproducts. During the year ended December 31, 2017, substantially all of our net revenues were generated from the sale of our approved product, SUBSYS®.We generated minimal revenues from the sale of SYNDROS® during the year ended December 31, 2017. Our results depend on prescription volumegenerally, which we believe will be driven primarily by achievement of broad market acceptance and coverage by third-party payers and effectiveness of themarketing and selling efforts with respect to SUBSYS® and SYNDROS®. Moreover, our gross margins improve on a unit-by-unit basis as we sell higherdosage strengths of our products. Importantly, the proportion of prescriptions written for repeat SUBSYS® patients has increased since July 2012 from 50%of prescriptions to approximately 91% of prescriptions as of December 31, 2017. Generally, repeat SUBSYS® patients receive significantly higher doses ofSUBSYS® on average than first-time patients as patients are titrated from a starter dose of SUBSYS® to their effective dose in accordance with the TIRFREMS protocol.According to IQVIA, the total market for TIRF products declined approximately 41% during the year ended December 31, 2017, to approximately43,000 prescriptions during the year ended December 31, 2017 from approximately 72,000 prescriptions during the year ended December 31,2016. SUBSYS® prescriptions were approximately 29% of the TIRF market on a prescription basis for the year ended December 31, 2017, compared to 43%market share for the year ended December 31, 2016.The continuing and heightened publicity surrounding the national opioid epidemic continues to result in heightened sensitivity by many health careprofessionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by health care 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 health careprofessionals are prescribing, and pharmacies are dispensing, opioids. Other high-profile initiatives, such as President Trump’s declaration of the opioid crisisas a public health emergency will likely add to this sensitivity.64Table of Contents Moreover, ongoing state and federal investigations into our sales, marketing and other commercial practices and developments and media reports that mayarise in connection with such investigations may negatively affect our relationships with health care professionals and pharmacies and their prescribing ordispensing habits. Furthermore, widespread litigation focused on opioids, including multi-district litigation, has focused an enormous amount of scrutiny onthe prescribing of opioids. Consequently, these current and potential future events have affected, and will likely continue to affect, the manner in which, andthe situations when, SUBSYS® is being prescribed, dispensed and approved for coverage. While we continue to sell directly into wholesalers and retailpharmacies for our revenue, the direct pressures discussed above related to the retail demand-side components of our business contributed to the decline infull-year 2017 SUBSYS® revenue when compared to 2016, and we expect this trend to continue during 2018.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. While SUBSYS® was removed from this listin 2017, other PBMs may take similar actions and these actions may have a material impact on our net revenue in the future. We have recently contractedwith several third-party payers to obtain preferred or exclusive status on health plan formularies, which may increase sales volumes while decreasing net salesprice. As we have in the past, we will continue working with PBMs to evaluate price increases and to communicate with managed care and health-systemdecision-makers to ensure a balanced approach, which takes into account the clinical performance and efficacy of our products.In addition, from time to time, our business may be affected by evolving or new governmental programs in the reimbursement landscape. Forinstance, CMS, which is part of the 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 growth, we may hire additional sales and marketingpersonnel and invest in marketing our products to our target physician prescriber base. During the year ended December 31, 2017, we had a reduction in oursales force due to market conditions. While this led to corresponding decreases in our sales and marketing expenses, the reduction in sales force may alsoresult in future decreased product sales and net revenues. We have constructed a second dronabinol manufacturing facility, which we anticipate will supplyus with sufficient commercial quantities of dronabinol API for the commercialization of our proprietary dronabinol product candidates, if approved. Thissecond facility has, and will continue to, increase our operating expenses.65Table of Contents 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 $63.0 million and $73.9 million for the years ended December31, 2017 and 2016, respectively. As of December 31, 2017, we had 61 full-time research and development personnel. We expect research and developmentexpenses to fluctuate with the timing of our planned preclinical studies and clinical trials for our product candidates, particularly our proprietary cannabinoidproduct candidates and sublingual spray product candidates. We do not expect to realize net revenues from all of these research and development initiativesin the near term and may never realize net revenues from these investments. Due to the risks inherent in conducting preclinical studies and clinical trials, theregulatory approval process and the costs of preparing, filing and prosecuting patent applications, our development completion dates and costs will varysignificantly for each product candidate and are very difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequentcompliance with applicable regulations require the expenditure of substantial additional resources. Any failure by us to obtain, or any delay in obtaining,regulatory approvals or acceptable DEA classifications for our product candidates, could cause our research and development expenditures to increasesignificantly and, in turn, have a material adverse effect on our results of operations.Basis of Presentation 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. We also sell SYNDROS® in multi-dose 30-mL bottles to ourcustomers on a wholesale basis. Sales to our customers are subject to specified rights of return. We currently defer recognition of revenue on productshipments of SYNDROS® to our customers until the right of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold tohealth care facilities or dispensed through patient prescriptions, or expiration of the right of return. Units dispensed are generally not subject to return, exceptin the rare cases where the product malfunctions or the product is damaged in transit. We estimate patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actual patient prescriptions dispensed for a given period, adjustments torevenue may be necessary in future periods. To date, such adjustments have not been material.Cost of Revenue, Gross Profit and Gross MarginCost of revenue consists primarily of materials, third-party manufacturing costs, freight in, direct and indirect personnel costs, and other overheadcosts based on units dispensed through patient prescriptions. Also included in cost of revenue are charges for reserves for excess, dated or obsoletecommercial inventories and production manufacturing variances. Gross profit is net revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of net revenue.Sales and Marketing 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® and SYNDROS®. As of December 31, 2017, we had 180 full-time sales and marketing personnel. Because we use an incentive-based compensation model for our sales professionals, we expect our sales and marketing expenses to fluctuate from period toperiod based on changes in SUBSYS® and SYNDROS® net revenue. We incurred expenses directly related to the launch of SYNDROS® during the yearended December 31, 2017.66Table of Contents 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.To date, our research and development efforts have been focused primarily on our fentanyl, dronabinol, buprenorphine and cannabidiol programs. Asof December 31, 2017, we had 61 full-time research and development personnel. We expect research and development expenses to fluctuate with the timingof our planned preclinical studies and clinical trials for our product candidates. We determine which research and development projects to pursue, as well asthe level of funding available for each project, based on the scientific and preclinical and clinical results of each product candidate and related regulatoryaction and the risk adjusted economic benefit to the company.The following table provides a breakdown of our research and development expenses (in millions): Years Ended December 31, 2017 2016 2015 Cannabidiol $15.0 $15.3 $16.3 Buprenorphine 8.6 9.4 3.4 Fentanyl 2.8 4.5 2.8 LEP-ETU and IL-13 0.2 2.3 2.5 Naloxone 2.4 3.0 2.2 Dronabinol 3.6 3.9 6.3 Ondansetron 0.3 1.2 1.4 Buprenorphine/Naloxone 0.9 1.0 4.6 Sildenafil 0.3 0.6 0.2 Internal research and development costs 25.9 29.5 15.9 Other 3.0 3.2 1.2 Total research and development expenses $63.0 $73.9 $56.8 General and Administrative ExpensesOur general and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting, businessdevelopment, regulatory fees for commercialized products, directors’ and officers’ insurance premiums, fees for investor relations services and internalsupport functions. In addition, general and administrative expenses include facility costs not otherwise included in research and development expenses, andprofessional fees for legal, consulting and accounting services. As of December 31, 2017, we had 50 full-time general and administrative personnel. Weexpect general and administrative expense to fluctuate as a result of legal expenses, as well as expanding or contracting our operating activities to adjust tomarket changes.67Table of Contents Charges Related to Litigation Award and SettlementsCharges related to litigation award and settlements for the year ended December 31, 2017 include a $150.0 million accrual in connection with theDOJ Investigation and $4.5 million in connection with the investigation by the State of Illinois. Charges related to litigation award and settlements for theyear ended December 31, 2016 include legal expense accruals of $3.4 million related to a settlement reached with the State of New Hampshire and $0.5million in connection with the investigation by the State of Massachusetts. See Note 7 of the Notes to our Consolidated Financial Statements for a discussionof our ongoing disputes 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. Based on theabove, we have estimated the amount of pre-NeoPharm merger federal NOLs that are available to offset post-NeoPharm merger income at approximately $1.1million as of December 31, 2017, which begin to expire in 2018. For state tax purposes, we had approximately $236.6 million of state NOLs at December 31,2017. Based upon the Company’s recent tax loss and current projections for future taxable income, the Company does not believe realization of these taxassets is more likely than not. As such, a full valuation allowance for the deferred tax assets has been established as of December 31, 2017.The 2017 Tax Act reduces the federal statutory income tax rate from 35% to 21% effective January 1, 2018, eliminates the ability to carryback NOLsarising after 2017 and instead would permit such NOLs to be carried forward indefinitely, and reduces the orphan drug credit to 25% from 50% of qualifiedclinical testing expenses, among other changes. As a result of the 2017 Tax Act, we remeasured our net deferred tax assets and recognized a provisional nettax expense of $7.5 million. See Note 10 of the Notes to our Consolidated Financial Statements for additional discussion related to the 2017 Tax Act.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® and SYNDROS® when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurredand 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 or 48months from the date of manufacture, depending on the manufacture date. We record revenue for SUBSYS® at the time the customer receives the shipment.68Table of Contents SYNDROS® was commercially launched in July 2017. We sell SYNDROS® in the United States to wholesale pharmaceutical distributors anddirectly to retail pharmacies, collectively our customers, subject to rights of return within a period beginning six months prior to, and ending 12 monthsfollowing, product expiration. SYNDROS® currently has a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture date.Given the limited sales history of SYNDROS®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment.Accordingly, the Company defers recognition of revenue on product shipments of SYNDROS® until the right of return no longer exists, which occurs at theearlier of the time SYNDROS® units are sold to health care facilities or dispensed through patient prescriptions, or expiration of the right of return. Unitsdispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. The Companyestimates patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actualpatient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. To date, such adjustments have not beenmaterial.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. With respect to SUBSYS®, we have monitored actual return history since product launch, which provides us with a basis to reasonablyestimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimateddistribution channel inventory levels, and consideration of the introduction of competitive products. Given the limited sales history of SYNDROS®, theCompany currently cannot reliably estimate expected returns of the product at the time of shipment.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. Wholesaler and Retailer Discounts. We offer discounts to certain wholesale distributors and specialty retailers based on contractually determinedrates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors andretail 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 and retailers upon shipment to the respective wholesale distributors and retail pharmacies.Patient Discount Programs. We offer discount card programs to patients, in which patients receive discounts on their prescriptions that arereimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a historical percentage of actual redemption applied toinventory in the distribution and retail channel. The allowance for patient discount programs is included in accrued sales allowances.69Table of Contents 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. Estimated chargebacks are recognized as a reduction of revenue in the same period the related revenue is recognized. Theallowance for chargebacks is included as a reduction to accounts receivable.A roll-forward of our product sales allowances for the years ended December 31, 2017 and 2016 is as follows (in thousands): WholesaleDiscounts (1) PatientDiscountPrograms Rebates Returns Total Balance at December 31, 2015 $7,556 $7,143 $24,692 $3,198 $42,589 Revenue allowances: 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 Provision related to current period sales 14,525 10,569 35,466 8,332 68,892 Provisions related to sales made in prior years — — (4,468) — (4,468)Payment and credits related to sales made in current period (10,793) (9,298) (23,871) — (43,962)Payment and credits related to sales made in prior periods (5,359) (10,120) (11,815) (7,460) (34,754)Balance at December 31, 2017 $3,832 $1,271 $11,595 $3,424 $20,122 (1)Includes wholesaler discounts, prompt pay discounts, stocking allowances and government chargebacks.Sales PracticesWe may, from time to time, offer to certain customers extended payment terms primarily in an effort to increase customer orders during that quarter,which may impact sales in subsequent quarterly periods. We believe this practice is consistent with industry practice. For all sales under which this incentivewas provided during the periods presented in this discussion and analysis, revenue received from such sales was properly accounted for in accordance withASC 605 — “Revenue Recognition” and was recognized in the proper applicable accounting period.Inventories, NetInventories 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 NRV.Non-current inventories are those that are not expected to be consumed or70Table of Contents sold within 12 months of the balance sheet date. In evaluating whether inventory should be classified as current or noncurrent, management considers factorssuch as historical and anticipated future sales compared to quantities on hand and the remaining shelf life of products on hand. Inventory costs arecapitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercial use and net realizable value ofthe inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatory process, our requiredinvestment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the risk ofmanufacturing 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. Inventories are reviewed periodically for potential excess, dated or obsolete status. Managementevaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared toquantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goodson hand. During the year ended December 31, 2017, the Company refined its estimate for inventory obsolescence. The new estimate more closely alignsremaining product shelf life with anticipated future production and sales. The Company evaluated this change in accordance with ASC 250, “AccountingChanges and Error Corrections” and, accordingly, accounted for this change as a change in estimate. As a result of this change, the Company increased theinventory reserves by approximately $2.1 million during the year ended December 31, 2017.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 in ourConsolidated Financial Statements as expense ratably over the employee’s requisite service period or vesting period, which is generally three to four years,on a straight-line basis. We account for forfeitures when they occur. Equity awards issued to non-employees are recorded at their fair value on the grant dateand are periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitable on thedate of grant. Expense recognized for consultant stock options was $0.6 million for the year ended December 31, 2017, and was immaterial for the year endedDecember 31, 2016.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: •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 incorporate the volatility of our own common stock share price in future periods as we begin tohave sufficient historical data 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 ofall of our awards is based on a simplified method allowed by the71Table of Contents SEC due to insufficient historical data, and defines the term as the average of the contractual term of the options and the weighted-averagevesting period for all open tranches. •Expected Dividend Yield — We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in theforeseeable future. Consequently, we used an expected dividend yield of zero.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 assessing the realizationof deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Therealization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences becomedeductible. The Company also considers the scheduled reversal of deferred tax liabilities, projected future taxable income or losses, and tax planningstrategies in making this assessment. Based upon the Company’s recent tax loss and current projections for future taxable income, the Company does notbelieve realization of these tax assets is more likely than not. As such, a full valuation allowance for the deferred tax assets has been established as ofDecember 31, 2017. 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.Results of Operations The following table presents certain selected consolidated financial data expressed as a percentage of net revenue: Years Ended December 31, 2017 2016 2015 Net revenue 100.0% 100.0% 100.0%Cost of revenue 14.7 10.5 8.7 Gross profit 85.3 89.5 91.3 Operating expenses: Sales and marketing 34.7 28.8 24.4 Research and development 44.7 30.5 17.2 General and administrative 48.1 25.6 19.2 Charges related to litigation award and settlements 113.5 1.6 3.2 Total operating expenses 241.0 86.5 64.0 Operating income (loss) (155.7) 3.0 27.3 Other income: Interest income 1.3 0.4 0.2 Other income — 0.1 — Total other income 1.3 0.5 0.2 Income (loss) before income taxes (154.4) 3.5 27.5 Less: income tax expense (benefit) 7.7 0.3 10.0 Net income (loss) (162.1)% 3.2% 17.5% Comparison of year ended December 31, 2017 to year ended December 31, 2016Net Revenue. Net revenue decreased $101.6 million, or 41.9%, to $140.7 million for the year ended December 31, 2017 compared to $242.3million for the year ended December 31, 2016. The decrease in net revenue72Table of Contents was attributable to a decrease in net revenue of SUBSYS®, which was the result of a 40.5% decrease in SUBSYS® shipments to pharmaceutical wholesalersand specialty pharmaceutical retailers for the year ended December 31, 2017 due primarily to reduced demand for SUBSYS®, as compared to the year endedDecember 31, 2016, combined with a 2.0% decrease in net sales price due to changes in mix of prescribed dosages and changes in provisions for wholesalerdiscounts, patient discounts, rebates and returns, partially offset by price increases in July 2016, January 2017, and August 2017. Provisions for patientdiscounts, wholesaler discounts, rebates and returns were $10.6 million, $14.5 million, $31.0 million and $8.3 million, respectively, or 31.4% on a combinedbasis of gross revenue from the sale of SUBSYS® for the year ended December 31, 2017, compared to $95.6 million, $28.0 million, $40.7 million and $0.7million, respectively, or 40.5% on a combined basis of gross revenue from the sale of SUBSYS® for the year ended December 31, 2016. The decrease inproduct sales allowances was primarily attributable to lower volumes of patient assistance. We generated minimal revenues from the sale of SYNDROS®during the year ended December 31, 2017. As described in “Factors Affecting Our Performance – Approved Product Sales”, the continuing sensitivity bysome health care professionals to prescribe, and pharmacies to dispense, opioids, scrutiny by third-party payers and governmental agencies, and ongoingstate and federal investigations, and media reports related thereto contributed to the decrease in full-year SUBSYS® revenue when compared to 2016.Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue decreased $4.8 million to $20.6 million for the year ended December 31, 2017compared to $25.4 million for the year ended December 31, 2016. The decrease in cost of revenue was primarily attributable to the decrease in sales ofSUBSYS® during the year ended December 31, 2017, partially offset by a loss of $1.0 million which represented firm, non-cancellable and unconditionalpurchase commitments for quantities in excess of our current forecasts for future demand. Gross profit decreased $96.8 million to $120.1 million for the yearended December 31, 2017 compared to $216.9 million for the year ended December 31, 2016 due primarily to the decrease in sales of SUBSYS®. Gross profitwas also impacted by a $6.2 million increase in our reserve for excess and obsolete inventory to $13.6 million for the year ended December 31, 2017compared to $7.4 million during the year ended December 31, 2016 related to SUBSYS®. Gross margin for the year ended December 31, 2017 wasapproximately 85% compared to approximately 90% for the year ended December 31, 2016.Sales and Marketing Expense. Sales and marketing expense decreased $20.8 million to $48.9 million for the year ended December 31, 2017compared to $69.7 million for the year ended December 31, 2016. 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® and correspondingreduction in sales force.Research and Development Expense. Research and development expense decreased $10.9 million to $63.0 million for the year ended December31, 2017 compared to $73.9 million for the year ended December 31, 2016. The decrease in research and development expense was due primarily to timing ofclinical and development expenses. Also contributing to the decrease in research and development expense was a charge of $2.4 million for product notcommercially viable during the year ended December 31, 2016 related to SYNDROS®. There was no similar charge for the year ended December 31, 2017. General and Administrative Expense. General and administrative expense increased $5.5 million to $67.6 million for the year ended December 31,2017 compared to $62.1 million for the year ended December 31, 2016. The increase in general and administrative expense was due primarily to charitablecontributions of $5.6 million and an increase in personnel costs due to increased headcount, partially offset by decreases in legal expense incurred inconnection with various ongoing government investigation and subpoena related matters and decreases in stock-based compensation costs of $4.9 million to$12.8 million for the year ended December 31, 2017 compared to $17.7 million for the year ended December 31, 2016. We expect to continue to incursignificant legal expense for the foreseeable future until government investigations and subpoena related matters are resolved. Such costs could materiallyexceed the amounts 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, 2017include a $150.0 million accrual in connection with the DOJ Investigation and $4.5 million in connection with the investigation by the State of Illinois.Charges related to litigation award and settlements for the year ended December 31, 2016 include 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 the73Table of Contents State of Massachusetts. See Note 7 of the Notes to our Consolidated Financial Statements for a discussion of these legal matters.Other Income. We reported other income of $1.8 million for the year ended December 31, 2017 and $1.1 million for the year ended December 31,2016 due primarily to higher returns from previously invested excess cash.Income Tax Expense (Benefit). Provision for income taxes was $10.8 million for the year ended December 31, 2017 representing an effective taxrate of (5.0)%. Provision for income taxes was $0.8 million for the year ended December 31, 2016 representing an effective tax rate of 9.9%. The increase inincome tax expense relates primarily to the increase in valuation allowance during the year ended December 31, 2017. The decrease in the effective tax ratefor the year ended December 31, 2017 was due primarily to the $150.0 million accrual related to the DOJ Investigation that does not currently meet the morelikely than not standard for recognizing a tax benefit, the re-measurement of our net deferred tax assets as a result of the 2017 Tax Act, and the increase in thevaluation allowance. See Note 10 of the Notes to our Consolidated Financial Statements for a discussion of the 2017 Tax Act.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 health care 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. 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 commercially74Table of Contents viable of $2.4 million for the year ended December 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 these 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 higher returns from previously invested 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.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 ourprincipal 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.75Table of Contents Cash FlowsThe following table shows a summary of our cash flows for the years indicated (in millions): Years Ended December 31, 2017 2016 2015 Net cash provided by (used in) operating activities $(60.6) $58.9 $102.3 Net cash used in investing activities (17.8) (22.0) (90.2)Net cash provided by (used in) financing activities 5.8 (11.8) 9.3 Net increase (decrease) in cash and cash equivalents (72.6) 25.1 21.4 Cash and cash equivalents, beginning of period 104.6 79.5 58.1 Cash and cash equivalents, end of period $32.0 $104.6 $79.5 Cash Flows from Operating Activities. Net cash used in operating activities was $60.6 million for the year ended December 31, 2017, compared tonet cash provided by operating activities of $58.9 million and $102.3 million for the years ended December 31, 2016 and 2015, respectively. The net cashused during the year ended December 31, 2017 primarily reflects the net loss for the period driven by a reduction in SUBSYS® net sales, adjusted in part bydepreciation and amortization and stock-based compensation expense, and is also impacted by changes in working capital and payments in connection withthe settlement of the investigations by the States of New Hampshire and Illinois, and the settlement with Dr. Kottayil. The decrease in net cash provided fromoperating activities from 2015 to 2016 primarily reflects the lower net income for the period driven by a reduction in SUBSYS® net sales, adjusted in part bydepreciation and amortization, stock-based compensation expense and is also impacted by changes in working capital. Cash Flows from Investing Activities. Net cash used in investing activities was $17.8 million, $22.0 million and $90.2 million for the years endedDecember 31, 2017, 2016, and 2015, respectively. During 2017, we invested $1.1 million of excess cash in short-term and long-term investments, net ofproceeds, and we also invested $16.7 million for purchases of equipment and leasehold improvements. During 2016, we invested $11.4 million of excesscash in short-term and long-term investments, net of proceeds, and we also invested $10.6 million for purchases of equipment and leasehold improvements.During 2015, we invested $76.4 million of excess cash in short-term and long-term investments, net of proceeds and we also invested $13.8 million forpurchases of equipment and leasehold improvements.Cash Flows from Financing Activities. Net cash provided by financing activities was $5.8 million for the year ended December 31, 2017, ascompared to net cash used in financing activities of $11.8 million for the year ended December 31, 2016. Net cash provided by financing activities was $9.3million for the year ended December 31, 2015. During the year ended December 31, 2017, we received proceeds of $4.5 million from the exercise of stockoptions and proceeds of $1.3 million from shares issued under our employee stock purchase plan. During the year ended December 31, 2016, we expendedapproximately $16.1 million to repurchase shares of our common stock and recognized $1.7 million due to tax deficiencies on stock options and awards,partially offset by proceeds from the exercise of stock options of $3.8 million and proceeds from shares issued under our employee stock purchase plan of$2.3 million. During the year ended December 31, 2015, we recognized $13.6 million of financing cash flows from excess tax benefits on stock options andawards, $9.5 million from the proceeds from exercise of stock options and $2.6 million of proceeds from shares issued under an employee stock purchaseplan, partially offset by $16.5 million expended to repurchase shares of our common stock.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 2018 and beyond will depend on a variety of factors, including sales of SUBSYS® and SYNDROS®, regulatory approvals,investments in manufacturing and production, capital equipment, and research and development. We expect our net cash flows from operating activities tofluctuate with the sales of SUBSYS® and SYNDROS®, partially offset by anticipated expansion in research and development, manufacturing, and generaland administrative expenses.76Table of Contents 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 from the issuance date of this Annual Report.Because of the numerous risks and uncertainties associated with commercialization of SUBSYS® and SYNDROS® and the development of our otherproduct candidates, we are unable to predict the amounts of increased capital outlays and operating expenditures associated with our current anticipatedproduct introduction, clinical trials and preclinical studies. The timing and amounts of our funding requirements will depend on numerous factors. See “RiskFactors—Risks Related to Our Financial Position and Capital Requirements – We have had significant and increasing operating expenses and may requireadditional funding.” in Part I, Item 1A of this report.In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges and proceedings. See Note 7under the heading “Legal Matters” in the Notes to our Consolidated Financial Statements for a discussion regarding these investigations. Our ability tosuccessfully defend ourselves against pending and future litigation may impact cash flows. The uncertainty of the timing of a settlement with the DOJ, if any,could impact our liquidity and require us to sell investments before the recovery of their amortized cost basis, particularly when aggregated with otherpotential state investigation settlements that may occur in the future, as well as potential future settlements related to ongoing litigation with insurancepayers or other third parties.We cannot guarantee that we will generate sufficient operating cash flows to fund our planned activities. We cannot be sure that additional financingwill be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds mayrequire us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates atan earlier stage of development or on less favorable terms than we would otherwise choose. If we raise additional funds by issuing equity or convertiblesecurities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring new debt obligations, the terms of the debtwill likely require significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. Contractual Obligations (in thousands) 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 $27,165 $3,310 $6,900 $3,809 $13,146 Purchase obligations 19,500 5,500 12,000 2,000 — $46,665 $8,810 $18,900 $5,809 $13,146 Off-Balance Sheet ArrangementsDuring the year ended December 31, 2017, 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.77Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAt December 31, 2017, $15.3 million of our cash equivalent investments was in money market securities that are reflected as cash equivalentsbecause all original maturities are within 90 days. Our money market securities may consist of commercial paper, Federal agency discount notes and moneymarket funds. We believe our interest rate risk with respect to these investments is limited due to the short-term duration of these arrangements and the yieldsearned, which approximate current interest rates.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 $136.4 million as of December 31, 2017 and $133.1million as of December 31, 2016. These securities, like all fixed income instruments, are subject to interest rate risk and would likely decline in value ifmarket interest rates increase. Currently, we have the ability to hold our fixed income investments until maturity and, therefore, we would not expect torecognize any material adverse impact in income or cash flows if market interest rates increase.The following table provides information about our available-for-sale securities that are sensitive to changes in interest rates. We have aggregatedour available-for-sale securities for presentation purposes since they are all very similar in nature (dollar amounts in millions):Interest Rate SensitivityPrincipal Amount by Expected Maturity as of December 31, 2017 Financial instruments mature during year ended: 2018 2019 2020 2021 2022 Thereafter CD's, commercial paper and available-for-sale securities $87.9 $38.5 $8.0 $— $— $2.0 Weighted-average yield rate 1.08% 0.52% 0.12% — — 0.02% 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.78Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageInsys Therapeutics, Inc. Report of Independent Registered Public Accounting Firm 80Consolidated Balance Sheets as of December 31, 2017 and 2016 82Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015 83Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 84Consolidated Statements of Cash Flows for the Years ended December 31, 2017, 2016 and 2015 85Notes to Consolidated Financial Statements 86 79Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of DirectorsInsys Therapeutics, Inc.Chandler, ArizonaOpinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Insys Therapeutics, Inc. (the “Company”) and subsidiaries as of December 31, 2017 andDecember 31, 2016, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 andDecember 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformitywith 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) (“PCAOB”), the Company'sinternal control over financial reporting as of December 31, 2017, 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 9, 2018, expressed an unqualified opinionthereon. Change in Accounting Method Related to Stock Compensation As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for stock compensation in 2017 due tothe adoption of Accounting Standards Update (“ASU”) 2016-09. Regulatory Action Uncertainty As described in Note 7, the Company has accrued $150,000,000 associated with the Department of Justice investigations representing its current bestestimate of the minimum liability exposure. There can be no assurance that these matters will be successfully resolved, and based on ongoing uncertaintiesover timing of these payments and potentially wide range of outcomes, the ultimate amount of potential liability may materially exceed the $150,000,000accrual recorded as of December 31, 2017. Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.80Table of Contents Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ BDO USA, LLPWe have served as the Company’s auditor since 2007.Phoenix, ArizonaMarch 9, 201881Table of Contents INSYS THERAPEUTICS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2017 2016 Assets Current Assets: Cash and cash equivalents $31,999 $104,642 Short-term investments 85,189 78,238 Accounts receivable, net of allowances of $3,832 and $6,144 at December 31, 2017 and 2016, respectively 21,513 20,654 Inventories, net 17,408 20,414 Prepaid expenses and other current assets 19,833 5,695 Total current assets 175,942 229,643 Property and equipment, net 55,174 43,172 Long-term investments 46,733 53,796 Deferred income tax assets, net - 23,243 Other assets 1,231 6,282 Total assets $279,080 $356,136 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $30,438 $27,359 Accrued compensation 8,808 8,833 Accrued sales allowances 16,290 28,955 Deferred revenue 1,109 — Accrued litigation awards and settlements 150,534 13,467 Total current liabilities 207,179 78,614 Uncertain income tax position 8,619 7,933 Total liabilities 215,798 86,547 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, 2017 and 2016, respectively) — — Common stock (par value $0.01 per share; 100,000,000 shares authorized; 73,612,052 and 71,923,550 shares issued and outstanding as of December 31, 2017 and 2016, respectively) 736 719 Additional paid in capital 278,356 256,529 Unrealized loss on available-for-sale securities, net of tax (438) (302)Notes receivable from stockholders (21) (21)Retained earnings (accumulated deficit) (215,351) 12,664 Total stockholders' equity 63,282 269,589 Total liabilities and stockholders' equity $279,080 $356,136 See accompanying notes to consolidated financial statements.82Table of Contents INSYS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(in thousands, except share and per share data) Years Ended December 31, 2017 2016 2015 Net revenue $140,693 $242,275 $330,323 Cost of revenue 20,643 25,393 28,854 Gross profit 120,050 216,882 301,469 Operating expenses: Sales and marketing 48,870 69,651 80,668 Research and development 62,954 73,913 56,781 General and administrative 67,573 62,092 62,948 Charges related to litigation award and settlements 159,684 3,900 10,616 Total operating expenses 339,081 209,556 211,013 Operating income (loss) (219,031) 7,326 90,456 Other income: Interest income 1,881 1,039 502 Other income (expense), net (45) 59 36 Total other income 1,836 1,098 538 Income (loss) before income taxes (217,195) 8,424 90,994 Income tax expense 10,820 834 32,941 Net income (loss) $(228,015) $7,590 $58,053 Unrealized loss on available-for-sale securities, net of tax (136) (150) (128)Total comprehensive income (loss) $(228,151) $7,440 $57,925 Net income (loss) per common share: Basic $(3.16) $0.11 $0.81 Diluted $(3.16) $0.10 $0.77 Weighted average common shares outstanding Basic 72,259,063 71,618,793 71,592,581 Diluted 72,259,063 74,145,918 75,707,651 See accompanying notes to consolidated financial statements. 83Table of Contents 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, 2014 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 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 Exercise of stock options 1,476,448 15 4,530 — — — 4,545 Issuance of common stock- employee stock purchase plan 202,597 2 1,324 — — — 1,326 Stock based compensation - stock options and awards — — 16,015 — — — 16,015 Unrealized loss on available-for-sale securities, net oftax — — — (136) — — (136)Vesting of restricted stock units 14,000 — — — — — — Shares withheld for future payment of employees' withholding tax liability (4,543) — (42) (42)Net loss — — — — — (228,015) (228,015)Balance at December 31, 2017 73,612,052 $736 $278,356 $(438) $(21) $(215,351) $63,282 See accompanying notes to consolidated financial statements. 84Table of Contents INSYS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2017 2016 2015 Cash flows from operating activities: Net income (loss) $(228,015) $7,590 $58,053 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Inventory obsolescence reserve 6,186 7,397 (336)Depreciation and amortization 7,337 6,249 5,291 Stock-based compensation 16,015 21,589 21,882 Deferred income tax benefit 23,243 (5,636) (4,914)Loss on disposal of assets — — 41 Excess tax benefits (tax deficiency) on stock options and awards — 1,729 (13,596)Amortization of investment discount 1,125 2,029 1,431 Changes in operating assets and liabilities: Accounts receivable (859) 26,618 (23,770)Inventories 2,251 7,647 (3,280)Prepaid expenses and other current and noncurrent assets (14,518) (1,721) 1,345 Accounts payable, accrued expenses and other current and noncurrent liabilities (11,603) (18,487) 50,708 Deferred revenue 1,109 — — Accrued litigation award and settlements 137,067 3,900 9,423 Net cash provided by (used in) operating activities (60,662) 58,904 102,278 Cash flows from investing activities: Purchase of investments (132,068) (115,375) (138,470)Proceeds from sales of investments 32,471 7,948 25,492 Proceeds from maturities of investments 98,448 96,009 36,643 Purchases of property and equipment (16,661) (10,614) (13,842)Net cash used in investing activities (17,810) (22,032) (90,177)Cash flows from financing activities: Proceeds from issuance of common stock 1,326 2,280 2,647 Excess tax benefits (tax deficiency) on stock options and awards — (1,729) 13,596 Shares withheld for future payment of employees' withholding tax liability (42) — — Proceeds from exercise of stock options 4,545 3,803 9,524 Repurchase of common stock — (16,099) (16,459)Net cash provided by (used in) financing activities 5,829 (11,745) 9,308 Change in cash and cash equivalents (72,643) 25,127 21,409 Cash and cash equivalents, beginning of period 104,642 79,515 58,106 Cash and cash equivalents, end of period $31,999 $104,642 $79,515 Supplemental cash flow disclosures: Cash paid for income taxes $2,110 $10,742 $15,351 Non-cash capital expenditures $2,678 $425 $— See accompanying notes to consolidated financial statements. 85Table of Contents 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 twocommercially marketed products: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and SYNDROS®, aproprietary, orally administered liquid formulation of dronabinol for the treatment of CINV and anorexia associated with weight loss in patients with AIDS. 2.Significant Accounting PoliciesPrinciples 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 certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accruedexpenses approximate their fair value due to the short-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; 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® and SYNDROS®. Revenue is recognized when (i) persuasive evidence of an arrangement exists,(ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.86Table of Contents 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 or 48 months from thedate of manufacture, depending on the manufacture date. We record revenue for SUBSYS® at the time the customer receives the shipment.SYNDROS® was commercially launched in July 2017. We sell SYNDROS® in the United States to wholesale pharmaceutical distributors anddirectly to retail pharmacies, collectively our customers, subject to rights of return within a period beginning six months prior to, and ending 12 monthsfollowing, product expiration. SYNDROS® currently has a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture date.Given the limited sales history of SYNDROS®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment.Accordingly, the Company defers recognition of revenue on product shipments of SYNDROS® until the right of return no longer exists, which occurs at theearlier of the time SYNDROS® units are sold to health care facilities or dispensed through patient prescriptions, or expiration of the right of return. Unitsdispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. The Companyestimates patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actualpatient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. To date, such adjustments have not beenmaterial.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. With respect to SUBSYS®, we have monitored actual return history since product launch, which provides us with a basis to reasonably estimate futureproduct returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channelinventory levels, and consideration of the introduction of competitive products. Given the limited sales history of SYNDROS®, the Company currentlycannot reliably estimate expected returns of the product at the time of shipment.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 and Retailer Discounts. We offer discounts to certain wholesale distributors and specialty retailers based on contractually determinedrates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors andretail 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 and retailers upon shipment to the respective wholesale distributors and retail pharmacies.87Table of Contents Patient Discount Programs. We offer discount card programs to patients, in which patients receive discounts on their prescriptions that arereimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a historical percentage of actual redemption applied toinventory in 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 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. Estimated chargebacks are recognized as a reduction of revenue in the same period the related revenue is recognized. Theallowance 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 discontinued sales of Dronabinol SG Capsule in 2015 and do not have any current plans tomanufacture 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 current FDIC coverage limits of $250,000.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 fairvalue with unrealized gains and losses reported in stockholders’ equity, net of related tax effects. There were no reclassifications on available-for-salesecurities during the year ended December 31, 2017. Reclassifications on available-for-sale securities were insignificant during the year ended December 31,2016. A decline 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 fairvalue of the investment. We did not have any realized gains or losses or decline in values judged to be other than temporary during the years endedDecember 31, 2017, 2016 and 2015. If we had realized gains and losses and declines in value judged to be other than temporary, we would have beenrequired to include those changes in other expense in the consolidated statements of comprehensive income (loss). Premiums and discounts are amortized oraccreted over the life of the related available-for-sale security. The cost of securities sold is calculated using the specific identification method. At December31, 2017, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $4,499,000,$85,189,000 and $46,733,000 in cash and cash equivalents, short-term investments and long-term investments, respectively. 88Table of Contents Accounts Receivable, NetTrade accounts receivable are recorded at the invoice amount net of allowances for wholesaler discounts, prompt pay discounts, stocking allowances,chargebacks and doubtful accounts. See “Revenue Recognition” above for a description of our wholesaler discounts, prompt pay discounts, stockingallowances and chargebacks. In the ordinary course of business, and consistent with industry practices, we may from time to time offer extended paymentterms to our customers as an incentive for new product launches or in other circumstances. These extended payment terms do not represent a significant riskto the collectability of accounts receivable as of the period-end and are evaluated in accordance with ASC 605, “Revenue Recognition” as applicable. Weevaluate the collectability of our accounts receivable based on a variety of factors including the length of time the receivables are past due, the financialhealth of the customer and historical experience. We write off accounts receivable against the allowance when a balance is determined to be uncollectable.Inventories, NetInventories 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 NRV. Non-current inventories are those that are not expected to be consumed or sold within 12 months of the balance sheet date. In evaluating whether inventoryshould be classified as current or noncurrent, management considers factors such as historical and anticipated future sales compared to quantities on hand andthe remaining shelf life of products on hand. Inventory costs are capitalized prior to regulatory approval and product launch based on management’sjudgment of probable future commercial use and net realizable value of the inventory. Such judgment incorporates our knowledge and best estimate of wherethe relevant product is in the regulatory process, our required investment in the product, market conditions, competing products and our economicexpectations for the product post-approval relative to the risk of manufacturing the product prior to approval. In evaluating the recoverability of inventoriesproduced in preparation for product launches, we consider the probability that revenue will be obtained from the future sale of the related inventory togetherwith the status of the product within the regulatory approval process, as well as the market for the product in its current state. We could be required topermanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial ordelay of approval by regulatory bodies, a delay in commercialization, or other potential factors including product expiration. Inventories are reviewedperiodically for potential excess, dated or obsolete status. Management evaluates the carrying value of inventories on a regular basis, taking into accountsuch factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective marketscompared with historical cost, and the remaining shelf life of products on hand. During the year ended December 31, 2017, the Company refined its estimatefor inventory obsolescence. The new estimate more closely aligns remaining product shelf life with anticipated future production and sales. The Companyevaluated this change in accordance with ASC 250, “Accounting Changes and Error Corrections” and, accordingly, accounted for this change as a change inestimate. As a result of this change, the Company increased the inventory reserves by approximately $2.1 million during the year ended December 31, 2017.Property and Equipment, NetProperty 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 differences89Table of Contents are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.We record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making suchdeterminations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected futuretaxable income, tax planning strategies and recent financial operating results.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 (benefit) in the consolidated statements ofcomprehensive income (loss).Research and Development ExpensesResearch and development (“R&D”) costs are expensed when incurred. These costs consist of: (i) external research and development expensesincurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;(ii) employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drugdevelopment activities; (iii) facilities expense, depreciation and other allocated expenses; and (iv) equipment and laboratory supplies.Advertising and MarketingAdvertising and marketing costs are expensed as incurred. Advertising expense totaled $993,000, $1,572,000 and $1,166,000 for the years endedDecember 31, 2017, 2016 and 2015, 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 is reported in general and administrative expenses, and totaled $20,328,000, $22,840,000 and $19,448,000 for theyears ended December 31, 2017, 2016 and 2015, 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 service or vesting period, which is generally three to four years, on a straight-line basis. We account for forfeitures when they occur. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options using the following assumptions: •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. We intend to incorporate the volatility of our own common stock share price in future periods as we begin to have sufficient historicaldata available. •Expected term - The expected term is based on a simplified method allowed by the SEC due to insufficient historical data, and defines theterm as the average of the contractual term of the options and the weighted-average vesting period for all open employee awards.90Table of Contents •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.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. On an on-going basis, weevaluate our estimates, including those related to revenue recognition (which is affected by prescriptions dispensed, wholesaler discounts, patient discountprograms, rebates, and chargebacks), inventories, legal liabilities and settlements, stock-based compensation expense, and deferred tax valuation allowances.We base our estimates on historical experience and on various other assumptions that are believed by management to be reasonable under the circumstances.Actual results could materially differ 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.Recently Adopted Accounting PronouncementsEffective January 1, 2017, we adopted ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. Among other requirements, the new guidance requires all tax effects related to share-based payments at settlement (orexpiration) to be recorded through the income statement. Previously, tax benefits in excess of compensation cost ("windfalls") were recorded in equity, andtax deficiencies ("shortfalls") were recorded in equity to the extent of previous windfalls, and then to the income statement. As required, this change wasapplied prospectively to all excess tax benefits and tax deficiencies resulting from settlements.Under the new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations. Excess taxbenefits that were not previously recognized because the related tax deduction had not reduced current taxes payable were recorded through a cumulativeeffect adjustment as of the date of the adoption. As required, upon adoption, this change was applied on a modified retrospective basis, with a cumulativeeffect adjustment of a change in accounting principle of approximately $368,000 as a deferred tax asset with a corresponding valuation allowance of$368,000, which were offset in retained earnings. Additionally, our consolidated statement of cash flows now presents excess tax benefits as an operatingactivity, adjusted prospectively with no adjustments made to prior periods.Additionally, ASU No. 2016-09 addressed the presentation of employee taxes paid on the statement of cash flows. We are now required to present thecost of shares withheld from the employee to satisfy the employees’ income tax liability as a financing activity on the consolidated statement of cash flowsrather than as an operating cash flow. This change was applied on a retrospective basis, as required, but did not impact the consolidated statement of cashflows for year ended December 31, 2017.ASU 2016-09 also permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation costfor stock-based compensation to either estimate the total number of awards for which the requisite service period will not be rendered, as currently required,or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as theyoccur. As required, this change was applied on a modified retrospective basis; however, as of December 31,91Table of Contents 2016, we had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was required.Going forward, the adoption of ASU 2016-09 could cause volatility in the effective tax rate, as the excess tax benefits associated with the exercise ofstock options could generate a significant discrete income tax benefit in a particular interim period, potentially creating volatility in net income and netincome per share period-to-period and period-over-period.Effective January 1, 2017, we adopted ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. Prior to January 1,2017, we measured inventory at the lower of cost or market. This guidance requires us to measure inventory at the lower of cost and NRV, which eliminatesthe need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). Theguidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, andtransportation.” The adoption of this guidance did not have a material impact on our consolidated financial statements.Recent Accounting Pronouncements In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, toprovide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting inTopic 718. Specifically, the ASU requires modification accounting to a share-based payment award unless all of the following are the same immediatelybefore and after the change: the award’s fair value; the award’s vesting conditions; and the award’s classification as an equity instrument or a liabilityinstrument. The amendments should be applied prospectively to an award modified on or after the adoption date, and are effective for fiscal years beginningafter December 15, 2017. We will adopt the new guidance on January 1, 2018. The adoption of this guidance will not have a material impact on ourconsolidated financial statements. The actual impact is subject to change prior to the filing of our 2018 first quarter results.In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortizationon Purchased Callable Debt Securities”, to amend the amortization period for certain purchased callable debt securities held at a premium. The ASU shortensthe amortization period for the premium to the earliest call date. Under current U.S. GAAP, entities generally amortize the premium as an adjustment of yieldover the contractual life of the instrument. The amendments should be applied on a modified retrospective basis and are effective for fiscal years beginningafter December 15, 2018. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of this amendment onour consolidated financial statements.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. We will adopt the new guidance on January 1, 2018. The adoption ofthis guidance will not have a material impact on our consolidated financial statements. The actual impact is subject to change prior to the filing of our 2018first quarter results.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. The amendments should be applied using a retrospective transition method to each period presented. We will adopt the newguidance on January 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements. The actual impact issubject to change prior to the filing of our 2018 first quarter results.92Table of Contents 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 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. While the effect of the pronouncement has not yet been quantified, the Company is continuing to evaluate the impactof recording the right-of-use-assets and liabilities on its financial position. The Company anticipates it will be required to record assets and liabilities forleases currently classified as operating leases. See Note 7, Commitments and Contingencies, for information about our lease commitments.In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement ofFinancial Assets and Financial Liabilities”, which 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 interim periods within those fiscal years, and early adoption is not permitted. These amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readilydeterminable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. Wewill adopt the new guidance on January 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements. Theactual impact is subject to change prior to the filing of our 2018 first quarter results.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 and93Table of Contents licensing, respectively. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”, which provides clarificationon assessing 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). The evaluation of the impact of ASU 2014-09, and the related ASUs, on existing contracts with our customers is complete.The change in accounting standard primarily affects our recognition of revenue from the sale of SYNDROS®, which was commercially launched in July2017. Under current guidance, given the limited sales history of SYNDROS®, we defer recognition of revenue on product shipments of SYNDROS® until theright of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold to health care facilities or dispensed through patientprescription, or expiration of the right of return. We will adopt ASU 2014-09 effective January 1, 2018, using the modified retrospective transition method.The modified retrospective method requires that the cumulative effect of initially applying this guidance be recognized as an adjustment to the openingbalance of retained earnings or accumulated deficit in the annual period that includes the date of initial application. We currently expect to record a decreasein accumulated deficit and a corresponding decrease to deferred revenue of approximately $0.8 million, net of tax, as of the adoption date. This cumulativeadjustment is primarily attributable to the transition from deferring revenue until the right of return no longer exists to recognizing revenue when weconclude that it is probable that there is not a risk of significant revenue reversal in future periods. The actual impact is subject to change prior to the filingof our 2018 first quarter results. Additional quantitative and qualitative presentations and disclosures will be required on identified revenue streams andperformance obligations. We have identified changes to our business processes and internal controls relating to review of variable consideration, contractsand disclosures, that are needed upon the adoption of the new guidance.3.Short-Term and Long-Term Investments Investments consisted of the following at December 31, 2017 (in thousands): December 31, 2017 Cost UnrealizedGains UnrealizedLosses Other-Than-TemporaryImpairmentLosses FairValue Cash andCashEquivalents Short-termInvestments Long-termInvestments Cash and cash equivalents $12,183 $— $— $— $12,183 $12,183 $— $— Money market securities 15,317 — — — 15,317 15,317 — — Marketable securities: Certificates of deposit 18,447 — — — 18,447 — 7,474 10,973 Commercial paper 10,560 — — — 10,560 1,499 9,061 — Corporate securities 59,613 — (206) — 59,407 1,500 39,622 18,285 Federal agency securities 37,793 — (203) — 37,590 1,500 20,015 16,075 Municipal securities 10,446 — (29) — 10,417 — 9,017 1,400 Total marketable securities 136,859 — (438) — 136,421 4,499 85,189 46,733 $164,359 $— $(438) $— $163,921 $31,999 $85,189 $46,733 94Table of Contents 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 and cash equivalents $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 agencysecurities 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 The amortized cost and estimated fair value of the marketable securities, by maturity, are shown below (in thousands): December 31, 2017 December 31, 2016 AmortizedCost FairValue AmortizedCost FairValue Marketable securities: Due in one year or less $90,071 $89,937 $80,092 $80,027 Due after one year through 5 years 46,788 46,484 53,540 53,303 Due after 5 years through 10 years — — — — Due after 10 years — — — — $136,859 $136,421 $133,632 $133,330 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, 2017 December 31, 2016 Less Than12 Months Greater Than12 Months Less Than12 Months Greater Than12 Months FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss Marketable securities: Corporate securities $245 $(153) $7,839 $(52) $38,027 $(134) $401 $(1)Federal agency securities 26,244 (89) 11,346 (114) 26,449 (91) 1,217 (1)Municipal securities 50,537 (18) 1,145 (12) 30,373 (81) 100 — $77,026 $(260) $20,330 $(178) $94,849 $(306) $1,718 $(2) 95Table of Contents As of December 31, 2017 and 2016, 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.4.Fair Value Measurement At December 31, 2017 and 2016, 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. We had no assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2017 and 2016. Substantially allavailable-for-sale investments held by us at December 31, 2017 and 2016, have been valued based on Level 2 inputs. Available-for-sale securities classifiedwithin Level 2 of the fair value hierarchy are valued utilizing reports from an independent third-party public quotation service based on closing prices on thelast business day of the period presented. In addition, we use the public quotation service to perform price testing by comparing quoted prices listed inreports provided by the asset managers that hold our investments to quotes listed through the public quotation service. These asset managers utilize anindependent pricing source to obtain quotes for most fixed income securities, and utilize internal procedures to validate the prices obtained. Our Level 3asset represents our investment in a long-term corporate convertible promissory note and a warrant to purchase shares issued in connection with theconvertible promissory note, which converted to convertible preferred stock as of December 31, 2016. This stock is not listed on any security exchange. Thefair value of the preferred stock approximates its carrying value at December 31, 2017Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2017 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 $18,447 $— $18,447 $— Commercial paper 10,560 — 10,560 — Corporate securities 59,407 — 58,889 518 Federal agency securities 37,590 — 37,590 — Municipal securities 10,417 — 10,417 — Total assets measured at fair value $136,421 $— $135,903 $518 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 96Table of Contents 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, 2017 and 2016 (in thousands): December 31, 2017 2016 Convertible stock Balance, beginning of period $500 $— Change in fair value 18 — Purchases — 500 Balance, end of period $518 $500 5.Inventories, NetInventories are stated at lower of cost or NRV. Cost, which includes amounts related to materials and costs incurred by our contract manufacturers, isdetermined on a first-in, first-out basis. Inventories are reviewed periodically for potential excess, dated or obsolete status. Management evaluates thecarrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, theprice we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.The components of inventories, net of allowances, are as follows (in thousands): December 31,2017 December 31,2016 Finished goods $4,709 $8,408 Work-in-process 5,752 6,183 Raw materials and supplies 6,947 5,823 Total inventories 17,408 20,414 Plus: non-current raw materials and finished goods 826 6,257 $18,234 $26,671 As of December 31, 2017 and 2016, raw materials inventories consisted of raw materials used in the manufacture of the dronabinol API for SYNDROS® in ourU.S.-based, state-of-the-art dronabinol manufacturing facility, the fentanyl API for SUBSYS®, and component parts and packaging materials used in themanufacture of both SUBSYS® and SYNDROS®. Work-in-process consists of actual production costs, including facility overhead and tooling costs of in-process dronabinol, SUBSYS® and SYNDROS® products. Finished goods inventories consisted of finished SUBSYS® and SYNDROS® products anddeferred SYNDROS® cost of revenue of $59,000 and $0 as of December 31, 2017 and 2016, respectively. Non-current raw materials and finished goodsrepresent those inventories not expected to be consumed or sold within 12 months of the balance sheet date and are included in other assets in ourconsolidated balance sheets. As of December 31, 2017, all work-in-process inventory is expected to be used within 12 months of the balance sheet date and,therefore, is classified as current inventory. We maintain an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of itsNRV. Inventories at December 31, 2017 and 2016 were reported net of these reserves of $13,664,000 and $7,478,000, respectively. During the year endedDecember 31, 2017, we increased these reserves by $6,186,000, inclusive of an allowance of $2,100,000 resulting from a change in estimate as described inNote 2. During the year ended December 31, 2016, we increased reserves by $7,397,000. During the year ended December 31, 2015, we decreased thesereserves by $336,000.97Table of Contents 6.Property and EquipmentProperty and equipment are comprised of the following (in thousands): EstimatedUseful Life As of December 31, (in years) 2017 2016 Computer equipment 3 — 7 $3,523 $3,462 Scientific equipment 3 — 10 14,962 12,930 Furniture 3 — 10 3,446 3,128 Manufacturing equipment 7 — 10 25,159 20,583 Leasehold improvements * 35,595 23,243 Less: accumulated depreciation and amortization (27,511) (20,174)Total fixed assets $55,174 $43,172 *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, 2017, 2016 and 2015 was $7,337,000, $6,249,000 and $5,291,000,respectively. As of December 31, 2017 and 2016, respectively, there was $9,663,000 and $6,857,000 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, 2017, with a remaining non-cancelable lease term in excess of one year, are as follows (in thousands): Years ending December 31, 2018 $3,310 2019 3,405 2020 3,495 2021 2,526 2022 1,283 Thereafter 13,146 Total $27,165 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 $3,237,000 as of December 31, 2017 and $3,003,000 as of December 31, 2016. Rent expense underoperating leases for the years ended December 31, 2017, 2016 and 2015 was approximately $3,335,000, $2,757,000, and $2,445,000, respectively.Letters of CreditAs of December 31, 2017, we had a $400,000 unused letter of credit related to the requirements of our facility lease agreement.98Table of Contents Material AgreementsAptarIn 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 as any newdevice(s) jointly developed by the two companies for a period of seven years. In addition to extending the term, this amendment added certain minimumpurchase commitments and requires certain tiered royalties as a percentage of net revenue to be paid by us ranging from less than one percent to the lowsingle digits, commencing in March 2016 through the term of this agreement, from our sales of SUBSYS® and future products that use the Aptar spray devicetechnology. In January 2016, we assigned our rights, title, duties and obligations of supply, development & exclusive licensing agreement with Aptar from ourparent to our manufacturing subsidiary as part of a corporate restructuring.In April 2017, we, through our manufacturing subsidiary, entered into a further amendment to our Aptar supply, development and exclusive licensingagreement. This amendment effectively eliminates any prior minimum purchase obligations that had been set forth in the amendment dated October 30,2015, and beginning in 2019, replaces them with a new annual flat fee of up to $500,000 if the quantity of devices purchased in a calendar year is less thanone million devices. As a result, the cumulative effect related to this amendment reduces our aggregated purchase commitment with Aptar from $20,790,000to $9,000,000 through December 21, 2022. As of December 31, 2017, our remaining estimated annual contractual obligation under our agreement with Aptarwas $7,500,000. All purchase commitments required under our agreements with Aptar were met during the year ended December 31, 2017.Renaissance (formerly DPT)In April 2015, we entered into an amendment to our manufacturing and supply agreement with Renaissance, which extends our existingmanufacturing and supply agreement to produce SUBSYS® until the end of 2020. In addition to extending the term, this amendment added certain minimumpurchase commitments.In January 2016, we assigned our rights, title, duties and obligations of our manufacturing and supply agreement with Renaissance from our parent toour manufacturing subsidiary as part of a corporate restructuring. In July 2016, we, through our manufacturing subsidiary, entered into a further amendment to our Renaissance manufacturing and supply agreementdated May 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 withRenaissance from $49,740,000 to $16,000,000 through December 31, 2020. As of December 31, 2017, our remaining estimated annual contractual obligationunder our agreement with Renaissance was $12,000,000.During the year ended December 31, 2017, we recorded a loss of $1,035,000 in cost of revenue in these consolidated statements of comprehensiveincome (loss) for a portion of this commitment which represented firm, non-cancellable and unconditional purchase commitments for quantities in excess ofour current forecasts for future demand. 99Table of Contents The following table sets forth our aggregate minimum purchase commitments with Renaissance and Aptar under these agreements (in thousands): Years ending December 31, 2018 $5,500 2019 6,000 2020 6,000 2021 2,000 2022 — Thereafter — Total $19,500 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, 2017, 2016, and 2015, matching contribution plan expenses totaled approximately $647,000, $730,000 and $670,000,respectively.Legal 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 and 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 outside accounting experts and are based on analyses of potential outcomes. As legal and governmental proceedings,disputes and investigations are inherently unpredictable and in part, beyond our control, unless otherwise indicated, we cannot reasonably predict theoutcome 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 ourliability in connection with certain claims cannot be currently estimated, the resolution in any reporting period of one or more of these matters could have asignificant impact on our consolidated financial condition, results of operations and cash flows for that future period, could ultimately have a materialadverse effect on our consolidated financial position and could cause the market value of our common shares to decline. While we believe we have validdefenses in these matters, litigation and governmental and regulatory investigations are inherently uncertain, and we may in the future incur materialjudgments or enter into material settlements of claims.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 that 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, deferred prosecution agreement, or similar government mandated compliance document that institutes significant restrictions or obligations,could result for us from any government investigation or proceeding. In addition, even certain investigations that are not discussed below and which we do100Table of Contents not deem to be material at this time could be determined to be material and could have a material adverse effect on our financial condition, results ofoperations and cash flows.HHS Investigation. We received a subpoena, dated December 9, 2013, from the Office of Inspector General of the HHS in connection with aninvestigation of potential violations involving HHS programs. This subpoena was issued in connection with an investigation by the U.S. Attorney’s Officefor the Central District of California and requested documents regarding our business, including the commercialization of SUBSYS®. We continue tocooperate with this investigation and have produced substantial documents in response to the subpoena and have provided other requested information.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 requested documents regarding SUBSYS®, including our sales and marketing practices related to this product. Thisinvestigation also relates to activities in our patient services hub. We continue to cooperate with this investigation and have produced substantial documentsin response to the subpoena and have provided other requested information.DOJ Investigation Accrual. We collectively refer to the HHS and HIPAA investigations discussed above as the “DOJ Investigation”. In connectionwith our cooperation, we have been engaged in discussions with the DOJ about these matters, including a resolution of potential liability exposure.Management accrued, as of September 30, 2017, an aggregate of $150,000,000, which represents our current best estimate of the minimum liability exposurewhich we expect to be paid out over five years in connection with the DOJ Investigation. This current best estimate, on the terms reflected in the foregoingsentence, reflects a minimum exposure at which management has determined a willingness to settle these matters. The accrual was recorded in accruedlitigation award and settlements on our consolidated balance sheets and as an operating expense on our consolidated statements of comprehensive income(loss). There can be no assurance that future discussions with the government to resolve these matters will be successful, that the approvals we need will beobtained or that any potential settlement will be agreed to on terms and conditions acceptable to us or the DOJ. We are unable to predict when these matterswill be resolved or what further action, if any, the government will take in connection with them. In addition, there are ongoing discussions related tocontingency based payments to the government associated with future events, that if triggered, would require payments of up to $75,000,000 in theaggregate. At this time, we are unable to predict if these future events are probable and as a result, no accrual has been recorded. Based on the ongoinguncertainties and potentially wide range of outcomes and contingencies associated with any potential resolution of the matter under investigation by theDOJ, the ultimate amount of potential liability may materially exceed the $150,000,000 accrual we have established. This accrual does not currently meet themore likely than not standard for tax deductibility; therefore, we have recognized no tax benefit for it in these consolidated financial statements. Due to theuncertainty around the ultimate outcome of this matter, it is possible that some or all of this accrual may meet the more likely than not standard in the future,at which time the benefit would be recognized.Health Care Professionals and Former Employees Related Investigations. Investigations of Health Care Professionals. A number of health care practitioners who formerly interacted with our company are underinvestigation or have been charged in criminal proceedings. In addition to the below investigations that are specifically directed at us, we have receivedgovernmental agency requests for information, including subpoenas, from at least the following governmental bodies: the USAO and/or HHS OIG ofCalifornia (Los Angeles), Connecticut, Eastern District of Michigan, Florida (Jacksonville), Kansas, Middle District of Pennsylvania, New Hampshire, NewJersey, Northern District of California, Northern District of Texas, Rhode Island, Southern District of Alabama, Southern District of New York, SouthernDistrict of Ohio, Western District of New York, and the States of Maryland and Delaware, regarding specific health care professionals that we have interactedwith in those states. In addition, at least the following health care practitioners formerly interacting with our company have been charged as follows: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. 101Table of Contents On February 23, 2017, two Alabama health care professionals, who served on our speaker bureau were convicted on 19 of 20 counts brought againstthem, which included charges related to distribution of a controlled substance, drug conspiracy, health care fraud conspiracy and money laundering.On or about March 22, 2017, the U.S. Attorney’s Office for the District of New Hampshire filed an indictment against a physician assistant, whoserved on our speaker bureau, charging him with violating the federal Anti-Kickback Statute and conspiring to violate the federal Anti-Kickback Statute inconnection with payments received for serving as an Insys promotional speaker. The physician assistant pled not guilty.On or about October 20, 2017, a health care professional in Rhode Island, who served on our speaker bureau pled guilty to health care fraud andconspiracy to receive kickbacks in connection with payments of approximately $188,000 from us.Investigations of Former Employees. A number of our former employees have been charged in criminal proceedings related to our federalinvestigations and the following is certain information related thereto.On or about February 18, 2016, one of our former sales employees located in Alabama pled guilty to a conspiracy to violate the federal Anti-Kickback Statute in connection with the two convicted Alabama health care professionals mentioned above.On or about June 19, 2016, a former district sales manager in New York and a former sales representative in New Jersey were charged in a federal courtin Manhattan, New York, with violating the federal Anti-Kickback Statute in connection with interacting with health care professionals who prescribed ourproduct and served on our speaker bureau.On June 1, 2017, the former district sales manager was charged in a superseding indictment with additional charges of honest services wire fraud andaggravated identity theft in connection with falsifying sign-in sheets for our speaker programs. Both of these former employees in New York and New Jerseyhave pled not guilty. On or about December 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 wire fraud, conspiracy to violate the Anti-Kickback Statute and forfeiture (the “Original Indictment”). On or about February 8, 2017, a former district sales manager in the Northeast was charged in federal court in New Haven, Connecticut, with violatingthe federal Anti-Kickback Statute in connection with interacting with health care professionals who prescribed our product and served on our speaker bureau.On April 5, 2017, the U.S. Attorney’s Office for the District of Massachusetts filed information charging a former prior authorization specialist andmanager of our patient services hub with one count of wire fraud conspiracy; the former employee pled guilty to that information on June 19, 2017. On or about July 11, 2017, a former district sales manager pled guilty to conspiring to violate the federal Anti-Kickback Statute related to heractivities in the Southern District of Alabama, as well as the Middle and Southern Districts of Florida, including in connection with the two convictedAlabama health care professionals mentioned above.On or about October 26, 2017, the U.S. Attorney’s Office for the District of Massachusetts issued a superseding indictment in connection with theOriginal Indictment and added charges against our former President, CEO and director, Dr. John N. Kapoor. After Dr. Kapoor’s indictment, he agreed to puthis ownership in our common stock in a trust to be controlled independently, which was executed on February 27, 2018 and filed with the Securities andExchange Commission on a Current Report of Form 8-K filed on February 28, 2018. Except as otherwise indicated, we understand that each of these indicted individuals have entered pleas of not guilty to the charges against them. 102Table of Contents Given the ongoing investigations related to our company and our current and former employees, as well as other individuals associated with ourcompany, including health care professionals, it is possible that additional individual or company criminal charges and convictions and pleas could resultfrom our ongoing federal and state government investigations and related proceedings and the foregoing disclosure and the disclosure below is merelyintended to provide general insight into the comprehensive nature of the scope and breadth of investigations that are being conducted related to ourcompany and is not, nor is it intended to be, an exhaustive listing of every charge, conviction or pleading in connection with our company. We continue toassess these matters to ensure we have an effective compliance program.Ongoing State Related Investigations. We have received CIDs or subpoenas, as the case may be, from at least each of the following state’s Office ofthe Attorney General (or similarly named and authorized office) which have ongoing investigations directed at our company: Arizona, Colorado, Florida,Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Virginia and Washington. Moreover,we have received an administrative subpoena from the California Insurance Commissioner. In addition, we understand that numerous physicians practicingwithin several of the aforementioned states have received subpoenas from certain state Attorney General or Department of Justice offices in connection withinteractions with us. Generally, these CIDs and subpoenas request documents regarding SUBSYS®, including our sales and marketing practices related toSUBSYS® in the applicable state, as well as our patient services hub. We are cooperating with each of these investigations and have produced documents inresponse to these CIDs, subpoenas and related requests for information from each office.Resolved State Related Investigations. Our company has resolved investigations conducted by certain states’ Office of the Attorney General (orsimilarly named and authorized office) as follows:In connection with the investigation by the ODOJ, we entered into a settlement agreement with the ODOJ, referred to as an AVC, and made monetarypayments totaling approximately $1,100,000. The AVC requires us to maintain certain controls and processes around our promotional and sales activityrelated to SUBSYS® in Oregon. This AVC expressly provides that we do not admit any violation of law or regulation. This settlement was reached as a resultof our cooperation with the ODOJ's investigation and after producing documents in response to certain CIDs and related requests for information from theODOJ. All monetary payments in connection with this settlement were made prior to December 31, 2015.In connection with the investigation by the Illinois Office of the Attorney General, such office filed a complaint against us on behalf of the State ofIllinois on August 25, 2016 in the Circuit Court of Cook County, Illinois, Chancery Division, asserting a claim for violation of the Illinois Consumer Fraudand Deceptive Business Practices Act in connection with the sales and marketing of SUBSYS®. On August 18, 2017, the Circuit Court of Cook Countyentered a Final Judgment and Consent Decree, which, among other things, provided for a monetary payment of $4,450,000 by Insys and requires us tomaintain certain controls and processes around our promotional and sales activity related to SUBSYS® in Illinois. The Final Judgment and Consent Decreeexpressly provides that we do not admit any violation of law or regulation. All monetary payments in connection with this Final Judgment and ConsentDecree were accrued in the consolidated balance sheet as of June 30, 2017 and the payments in connection with this settlement were made prior to September30, 2017.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 as aresult of our cooperation with the State of New Hampshire investigation and after producing documents in response to certain requests for information by theState of New Hampshire. These amounts were accrued in the consolidated balance sheet as of December 31, 2016 and the payments in connection with thissettlement were made during the three months ended March 31, 2017.103Table of Contents In connection with the investigation by the State of Massachusetts, we entered into a settlement with the State of Massachusetts, which was enteredby the Superior Court of the Commonwealth of Massachusetts in a Final Judgment by Consent on October 5, 2017. The Final Judgment by Consentprovided for a monetary payment of $500,000 and requires us to maintain certain controls and processes around our promotional and sales activity related toMassachusetts. The Final Judgment by Consent expressly provides that we do not admit any liability or wrongdoing. The amount of the monetary paymentwas accrued in the consolidated balance sheet as of September 30, 2017 and the payments in connection with this settlement were made after September 30,2017.Ongoing Complaints filed in connection with State AG Investigations. Our company has several ongoing legal proceedings related to complaintsfiled in connection with investigations conducted by certain states’ Office of the Attorney General (or similarly named and authorized office) as follows:In connection with the investigation by the State of Arizona, on August 30, 2017, the Arizona Attorney General filed a complaint on behalf of theState of Arizona against us in the Maricopa County, Arizona Superior Court. The complaint asserts claims for violations of the Arizona Consumer Fraud Actin connection with the sales and marketing of SUBSYS® in Arizona and in connection with our patient services hub. The complaint seeks a permanentinjunction preventing us from engaging in practices in violation of the Arizona Consumer Fraud Act, restitution to consumers and other persons,disgorgement of profits, civil penalties, and investigative costs. On or about November 10, 2017, we filed a motion to dismiss. On January 17, 2018, theCourt dismissed, based upon preemption by the federal Sunshine Act, the State’s claim to the extent related to remedies that are based upon the payment anddisclosure of speaker fees, but did not dismiss the rest of the complaint. The State filed a motion for leave to amend its complaint, which the Courtgranted. Our response to the amended complaint is due 10 days after the State files and serves its amended complaint. In connection with the investigation by the State of New Jersey, on October 5, 2017, the New Jersey Attorney General, on behalf of the State of NewJersey, and the Acting Director of the New Jersey Division of Consumer Affairs filed a complaint against us in the Superior Court of New Jersey, ChanceryDivision, Middlesex Vicinage. The complaint asserts claims for violations of the New Jersey Consumer Fraud Act and for violations of the New Jersey FalseClaims Act in connection with the sales and marketing of SUBSYS® in New Jersey and in connection with our patient services hub. The complaint seeks apermanent injunction preventing us from engaging in practices in violation of the New Jersey Consumer Fraud Act, disgorgement of profits, civil penalties,treble damages for alleged violations of the New Jersey False Claims Act, and costs and attorneys’ fees. On November 16, 2017, the New Jersey AttorneyGeneral filed an Amended Complaint, which we moved to dismiss on January 8, 2018. The New Jersey Attorney General’s response to our motion is due onMarch 28, 2018. On December 21, 2017, Attorney General of the State of North Carolina filed a complaint in Wake County, North Carolina Superior Court againstus. The complaint asserts claims related to alleged violations of the North Carolina Consumer Protection Act. Our response to this complaint is due March22, 2018. On February 1, 2018, the Attorney General of the State of New York, filed a complaint against us in the Supreme Court of the State of New York,County of New York. The complaint asserts claims related to alleged deceptive acts and practices. Our response to this complaint is due on April 4, 2018.On February 5, 2018, the Consumer Protection Division, Office of the Attorney General of Maryland, filed a petition to enforce an administrativesubpoena against us. Our response to this petition is due on April 2, 2018.104Table of Contents Multi-District Prescription Opioid Litigation. We have been named along with various other opioid manufacturers, opioid distributors, prescribersand others in complaints focused on the national opioid epidemic filed by various cities, counties, states, and third-party payers in many state and federalcourts in Alabama, Connecticut, Florida, Georgia, Kentucky, Louisiana, Maryland, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, NewYork, Ohio, Oregon, Tennessee, Texas and West Virginia. We are involved in more than 100 of these cases, over 70 of which have been consolidated intomulti-district litigation (No. 2804) in the Northern District of Ohio. The cases in the multi-district litigation are presently stayed while the Court seeks tofacilitate a resolution. On March 1, 2018, the United States filed a statement of interest in the multi-district litigation, in which it requested a period of thirtydays to evaluate whether to participate in the multi-district litigation proceedings at this stage.Congressional and Other Inquiries. Many federal agencies and branches are focused on the abuse of opioids in the United States and agencies suchas the HHS have expressed their belief that the United States is in the midst of a prescription opioid abuse epidemic. Moreover, President Trump has declaredthe opioid crisis to be a public health emergency and has made it a priority to address this crisis.Members of our U.S. Congress have been conducting hearings and other inquiries into causes and solutions to the national opioid epidemic that haveinvolved inquiries in our company’s practices. For example, on March 28, 2017, the Ranking Member of the Committee on Homeland Security andGovernmental Affairs of the United States Senate distributed a letter to five manufacturers of opioid products, including us, requesting documents andinformation intended to aid such committee in understanding the challenges industry practices pose to efforts to curb opioid addiction and stem risingprescription drug costs for the federal government. This letter requests documents regarding our business, including the commercialization of SUBSYS®.This inquiry continues and has resulted in at least two reports that mention or address our company. We continue to cooperate with this inquiry.With the exception of the investigations by the ODOJ, the State of New Hampshire, the State of Illinois, the State of Massachusetts, and the DOJ,which we have quantified above, we believe a loss from an unfavorable outcome of these federal and state governmental proceedings is reasonably possibleand an estimate of the amount or range of loss from an unfavorable outcome is not determinable at these stages. We believe we have meritorious legalpositions and will continue to represent our interests vigorously in these matters. However, responding to government investigations has and could continueto burden us with substantial legal costs in connection with defending any claims raised. Any potential resulting fines, restitution, damages and penalties,settlement payments, pleas or exclusion from federal health care programs or other administrative actions, as well as any related actions brought bystockholders or other third parties, could have a material adverse effect on our financial position, results of operations or cash flows. Additionally, thesematters could also have a negative impact on our reputation and divert the attention of our management from operating our business.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 laws 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 employeeof Insys 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. Oral arguments were heard by the Court on July 28, 2017 and the Court granted the motion in part and denied it in part. The plaintiffsubsequently moved for leave to further amend the complaint, which we opposed. The parties await a ruling on the motion to amend. The plaintiff seeksunspecified monetary damages and other relief. We continue to vigorously defend this matter.105Table of Contents 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 current and former officers. The complaint was brought as a purportedclass action on behalf of purchasers of our securities between February 23, 2016 and March 15, 2017. In general, the plaintiffs allege that the defendantsviolated the anti-fraud provisions of the federal securities laws by making materially false and misleading statements regarding our business and financialresults during the class period, thereby artificially inflating the price of our securities. On or about March 28, 2017, a second complaint making similarallegations (captioned Hans E. Erdmann v. Insys Therapeutics, Inc., et al., Case 1:17-cv-02225-PAC) was filed in the same Court. On May 31, 2017, theCourt consolidated the first and second complaint and appointed lead counsel in the consolidated action. On July 31, 2017, the lead counsel filed aconsolidated complaint. On October 11, 2017, the Court held a pre-motion conference, at which the Court granted leave to plaintiffs to again amend thecomplaint. The amendment was filed on October 27, 2017, and we moved to dismiss. The Motion to Dismiss remains pending. The plaintiffs in both actionsseek unspecified monetary damages and other relief. We continue to vigorously defend this matter.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 laws 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 of Directors;Michael L. Babich; Franc Del Fosse, our General Counsel; and Sanga Emmanuel, our Vice President and Chief Compliance Officer. The Bourque derivativecomplaint contains similar claims as the other derivative complaint. All parties stipulated to consolidate the two actions, and the consolidated action iscaptioned In re Insys Therapeutics, Inc. Derivative Litigation, C.A. No. 12696-VCMR. Following the submission of motions for appointment as lead 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 counsel is required todesignate an operative complaint or file a consolidated complaint. The plaintiffs seek unspecified monetary damages and other relief derivatively on behalfof Insys Therapeutics, Inc.On or about April 28, 2017, lead counsel filed a consolidated and amended complaint which maintained the original defendants this lead counselhad included in its original complaint and did not include any additional defendants included in the Bourque complaint. On May 31, 2017, wesubsequently moved to stay or to dismiss the complaint and, on or about July 28, 2017, lead counsel filed an answering brief in opposition to our motion tostay or dismiss. On November 30, 2017, the Court granted our motion to stay but has required us to provide certain discovery to the plaintiffs. On February 8,2018, in response to the plaintiffs’ motion to alter or clarify judgment, the Court ordered us to provide additional discovery to the plaintiffs. We continue tovigorously defend this matter.Paragraph IV ChallengesOn June 26, 2017, we received a Paragraph IV Notice Letter from Par Pharmaceutical related to SYNDROS®. The letter asserts that (i) the FDAreceived an ANDA from Par Pharmaceutical, and (ii) that Par Pharmaceutical’s formulation does not infringe SYNDROS® patents and/or that our patents forSYNDROS® are invalid. On August 3, 2017, we filed suit in United States District Court for the District of Delaware, in which we claim the ANDA was notsufficiently complete and allege patent infringement. On September 1, 2017, Par Pharmaceutical filed an answer and counterclaims, to which we havereplied. On March 6, 2018, we provided to Par Pharmaceutical a covenant not to sue. We intend to represent our interests vigorously in this matter.On November 7, 2017, we submitted to the FDA a citizen petition under sections 505(j) and 505(q) of the Federal Food, Drug, and Cosmetic Act(“FDC Act”) and the related regulations, 21 C.F.R. §§ 10.30-31, to request that the Commissioner of Food and Drugs (i) decline to receive or approve anyANDA application for generic106Table of Contents dronabinol oral solution that relies on SYNDROS® as the Reference Listed Drug if the ANDA relies on a waiver in lieu of establishing in vivobioequivalence to SYNDROS® and (ii) require that ANDA applicants for generic versions of SYNDROS® include federal and fasted state bioequivalencestudies. We intend to represent our interests vigorously in this matter.On or about August 2, 2017, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SUBSYS® 0.4mg. The letter assertsthat (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS® patents and/or that our patents forSUBSYS® are invalid. On September 13, 2017, we filed suit in United States District Court for the District of Delaware, in which we allege patentinfringement. On January 15, 2018, TEVA USA filed an answer and counterclaims, to which we have replied. We intend to represent our interests vigorouslyin this matter.On or about August 31, 2017, we received a Paragraph IV Notice Letter from counsel for Alkem Pharmaceuticals (“Alkem”) related toSYNDROS®. The letter asserts that (i) the FDA received an ANDA from Alkem Pharmaceuticals and (ii) Alkem Pharmaceuticals’ formulation does notinfringe SYNDROS® patents and/or that our patents for SYNDROS® are invalid. On October 10, 2017, we filed suit in the United States District Court forthe District of Delaware, in which we allege patent infringement. On November 22, 2017, Alkem Pharmaceuticals filed a motion to dismiss Insys’s complaint,which the Court subsequently denied. Alkem filed its answer and counterclaims, and Insys filed its answer to Alkem’s counterclaims on February 27,2018. We intend to represent our interests vigorously in this matter.On or about December 6, 2017, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SYNDROS®. The letter asserts that(i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SYNDROS® patents and/or that our patents forSYNDROS® are invalid. We intend to represent our interests vigorously in this matter.On or about January 31, 2018, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SUBSYS® 0.1mg, 0.2mg, 0.6mg,1.2mg and 1.6mg. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS®patents and/or that our patents for SUBSYS® are invalid. The deadline to file a patent infringement lawsuit is March 17, 2018. We intend to represent ourinterests vigorously in this matter.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 resulting fractional shares, including the fractional shareheld by Dr. Kottayil, and offered a cash payment in lieu of the fractional shares. The complaint also brought causes of action for breach of fiduciary duty,fraud and negligent misrepresentation in the defendants’ dealings with Dr. Kottayil on the subject of his compensation and stock ownership in Insys Pharma.In January 2010, the plaintiffs added claims seeking to rescind Dr. Kottayil’s assignment to Insys Pharma of his interest in all of the fentanyl and dronabinolpatent applications previously assigned to Insys Pharma and to recover the benefits of those interests. Dr. Kottayil was seeking, among other relief, the fairvalue of his Insys Pharma common stock as of June 2, 2009, compensatory and punitive damages, and rescission of all assignments to Insys Pharma of hisinterest in the patent applications, as well as attorneys’ fees, costs and interest.In February 2010, Insys Pharma and the other defendants answered and filed counter-claims to Dr. Kottayil’s amended complaint. The counter-claimsinclude actions for breach of fiduciary duty, fraud and negligent107Table of Contents misrepresentations and omissions with respect to the time during which Dr. Kottayil was employed 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 this final ruling, we accrued $9,567,000 during the year ended December 31, 2015, including $2,249,000 of estimated pre-judgementinterest.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.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 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 this time; however, we believe that that it is reasonably possible that there may be amaterial loss associated with this claim and we currently estimate the range of the reasonably possible loss to be between $0 and the $3,630,000 claimed.On or about August 1, 2016, plaintiffs filed opening and reply and cross response briefs and we filed our answering and cross-appeal brief and ourreply in support of our cross-appeal.On Wednesday, April 5, 2017, the Arizona Court of Appeals conducted oral argument on the plaintiffs’ appeal and on our cross-appeal. On August29, 2017, the Arizona Court of Appeals affirmed the trial court’s ruling. The108Table of Contents parties subsequently agreed to settle the case, which resulted in an additional liability of $850,000, and the payments in connection with this settlement weremade prior to September 30, 2017.Insurance Litigation. On June 23, 2017, Aetna, Inc. and a subsidiary filed an action against us and a number of former employees in thePennsylvania Court of Common Pleas, Philadelphia County (captioned Aetna Inc. v. Insys Therapeutics, Inc., Case No. 170602779). Plaintiffs brought claimsagainst us for: (1) insurance fraud; (2) civil conspiracy; (3) common law fraud; (4) unjust enrichment; (5) negligent misrepresentation; and (6)negligence. Through all of the claims, Aetna seeks recovery of millions of dollars paid for SUBSYS® prescriptions that, allegedly, were not properlycovered. It also seeks punitive damages, investigative expenses and costs of suit, reasonable attorneys’ fees and expenses, and prejudgment and post-judgment interest. Plaintiffs served their complaint on September 25, 2017. On October 25, 2017, we removed this matter to federal court. Aetnasubsequently moved to remand the case to state court. On January 6, 2018, the district court denied Aetna’s motion to remand. We moved to dismiss Aetna’sclaims and the motion has been fully briefed since November 30, 2017. We intend to vigorously defend this matter. On July 12, 2017, numerous subsidiaries of Anthem, Inc. filed a complaint in the U.S. District Court for the District Court for the District Court for theDistrict of Arizona against us (captioned Blue Cross of California, Inc. d/b/a Anthem Blue Cross of California v. Insys Therapeutics, Inc., Case No. 2:17-cv-02286-DLR). Plaintiffs bring claims against us for: (1) violation of various state laws prohibiting deceptive, unfair, and unlawful business practices (i.e.,consumer fraud); (2) fraud; (3) negligent misrepresentation; (4) unjust enrichment; and (5) civil conspiracy to commit fraud and unfair businesspractices. Through all of the claims, Anthem seeks recovery of more than $19,000,000 paid for SUBSYS® prescriptions that, allegedly, were not properlycovered. It also seeks punitive damages and an injunction to prevent Insys from continuing to engage in the conduct underlying its claims. Plaintiffs servedtheir complaint on July 14, 2017. On August 4, 2017, we filed an answer to such complaint. On February 2, 2018, Plaintiffs filed a motion for leave to file asecond amended complaint and on February 16, 2018 we filed (i) an opposition to Plaintiff’s motion to file a second amended complaint and (ii) a motion tostay the case. We intend to vigorously defend this matter.On August 30, 2017, Humana Inc. filed an action against us and a number of former employees in Pike County, Kentucky Circuit Court (captionedAetna Inc. v. Insys Therapeutics, Inc., Case No. 17-CI-971). Plaintiff brought claims against us for (1) insurance fraud, (2) conspiracy to commit insurancefraud, (3) common law fraud, and (4) unjust enrichment. Through all of the claims, Humana sought recovery of millions of dollars paid for SUBSYS®prescriptions that, allegedly, were not properly covered. It also sought punitive damages, disgorgement, prejudgment and post-judgment interest, costs andexpenses of suit, and reasonable attorneys’ fees and expert fees and expenses. This matter was resolved and the case was dismissed with prejudice onDecember 4, 2017. On October 31, 2017, we received correspondence from Horizon Blue Cross Blue Shield of New Jersey requesting reimbursement for allegedlyfraudulently induced off-label purchases of SUBSYS® in connection with alleged claim value of approximately $4,000,000. We intend to vigorously defendthis matter.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 Insys Therapeutics, Inc. The complaint states that it is a wrongful death productsliability action brought pursuant to Section 768.16, et seq. under Florida law in connection with a death occurring in July 2014 and includes a claim ofnegligent marketing. The lawsuit seeks unspecified damages for past expenses and costs, pain and suffering and loss of consortium and earnings. On August4, 2016, we removed this case to U.S. District Court in the Middle District of Florida. On September 2, 2016, we filed a motion to dismiss. The Court grantedour motion on September 15, 2017. The plaintiff subsequently filed a notice of appeal, and the opening brief on appeal is due on March 9, 2018, with ouranswering brief due on April 9, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe anyresolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.109Table of Contents Buchalter. On September 9, 2016, Jeffrey Buchalter filed a complaint in the Circuit Court for Anne Arundel County, Maryland, Case No. C-02-cv-16-002718, against Dr. William Tham, Physical Medicine & Pain Management Associates, Maryland Neurological Institute, various physician assistants, andInsys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Insys related to negligent misrepresentation, failure to warn and fraudunder state laws. The lawsuit seeks unspecified compensatory and punitive damages. We have filed a motion to dismiss and on or about May 6, 2017, theCourt denied the motion to dismiss. We continue to vigorously defend this matter and based on currently available information, we do not believe anyresolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.Colby. On or about January 25, 2017, Mackenzie Colby filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No.219-2017-CV-00040, against Christopher Clough, PA, 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 respondeat superior claims, andagainst Insys Therapeutics, Inc. for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion todismiss/strike on April 5, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the Court dismissed the complaintwith leave to refile. The complaint was refiled on June 21, 2017, and we again moved to dismiss. On October 21, 2017, the Court denied our motion todismiss, and we filed an answer. The parties recently agreed to resolve this case, and are in the process of finalizing such agreement.Perusse. On or about February 21, 2017, John Perusse filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No.219-2017-CV-00067, against Christopher Clough, 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 injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc.for respondeat superior claims, and against Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecifiedcompensatory and punitive damages. We filed a motion to dismiss/strike on April 20, 2017 and plaintiff filed a motion to amend the complaint on April 25,2017. On June 16, 2017, the Court dismissed the complaint with leave to refile, and we again moved to dismiss. The complaint was refiled on June 21, 2017and we again moved to dismiss. On October 21, 2017, the Court denied our motion to dismiss, and we filed an answer. The parties are in the discovery phaseof the case. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter willhave a material adverse effect on our business, financial position, or future results of operations.Cassell. On or about March 8, 2017, Jerome Cassell filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00085, against Christopher Clough, PA, Dr. John J. Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’scomplaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeatsuperior claims, and against Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatoryand punitive damages. We filed a motion to dismiss/strike on April 18, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June16, 2017, the Court dismissed the complaint with leave to refile. The complaint was refiled on June 21, 2017, and we again moved to dismiss. On October21, 2017, the Court denied our motion to dismiss, and we filed an answer. The parties are in the discovery phase of the case. We continue to vigorouslydefend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on ourbusiness, financial position, or future results of operations.Fuller. On or about March 23, 2017, Deborah Fuller & David Fuller, as Administrators Ad Prosequendum for the Estate of Sarah A. Fuller, deceased,and Deborah Fuller and David Fuller, individually, filed a complaint in the Superior Court of New Jersey Law Division, Middlesex County, Case No. L1859-17, against Vivienne Matalon, M.D., TLC Healthcare 2, LLC, Linden Care and Insys Therapeutics, Inc. The plaintiff’s complaint alleges negligenceviolations under the Wrongful Death Act pursuant to N.J.S.A 2A:31, et seq. and also brings claims for fraud and negligent misrepresentation. We filed amotion to dismiss the complaint on May 19, 2017 and the Court held oral argument on the motion on June 29, 2017. On July 27, 2017, the Court issued aruling on the multi-party motion to dismiss. The Court dismissed some claims but denied the motion to dismiss on certain of plaintiffs’ claims. We answeredthe complaint, and, after plaintiffs dismissed the treating physician, on October 4, 2017, we removed the case to U.S. District Court for the District of NewJersey. Plaintiffs subsequently filed a motion to remand the case to state court on October 11, 2017. On January 19, 2018, the Magistrate Judge issued aReport and110Table of Contents Recommendation, recommending that the District Court deny plaintiffs’ motion to remand. On February 5, 2018, the District Court adopted the Report andRecommendation. On February 6, 2018, plaintiffs filed a motion for leave to amend, seeking to add as defendants certain former Insys officers and a formeremployee. Insys filed its opposition to the motion for leave to amend on February 21, 2018. We continue to vigorously defend this matter and based oncurrently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, orfuture results of operations.Cantone. On or about June 15, 2017, we received service of a complaint filed by Angela Mistrulli Cantone and Philip L. Cantone in the State Courtof South Carolina, County of Greenville, C.A. No.: 2017-CP-23 against Insys Therapeutics, Inc., Linden Care, LLC, Aathirayen Thiyagarajah, M.D. and Spineand Pain, LLC. The plaintiffs’ complaint alleges medical negligence, negligence, negligent misrepresentation, unjust enrichment, common law fraud, unfairand deceptive trade practices, aiding and abetting and loss of consortium. We filed a motion to dismiss, which the Court denied. We filed our answer onNovember 14, 2017. We continue 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 our business, financial position, or future results of operations.Ballou. On or about September 1, 2017, Carey Ballou filed a complaint in the circuit Court of Johnson County, Kansas, Case No. 17CV05004,against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon M.D., Donna Ruck, Pharma ConsultantsKC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. The plaintiffs bring claims against Insys for negligence, common law fraud,negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, conspiracy, and aiding and abetting. On December 26, 2017, Plaintifffiled a second amended complaint, which added as defendants certain former officers and employees. Insys moved to dismiss the second amended complainton February 26, 2018. 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 our business, financial position, or future results of operations.Whitham. On or about September 1, 2017, James “Mike” Whitham and Ashley Whitham filed a complaint in the Circuit Court of Johnson County,Kansas, Case No. 17CV05005, against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon M.D.,Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. The plaintiff brings claims against Insys fornegligence, common law fraud, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, loss of consortium, conspiracy, andaiding and abetting. On December 26, 2017, Plaintiff filed a second amended complaint, which added as defendants certain former officers andemployees. Insys moved to dismiss the second amended complaint on February 26, 2018. 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 our business, financial position, or future resultsof operations.Hartsfield. On or about October 4, 2017, Cheryl Hartsfield filed a complaint in the Circuit Court of Pulaski County, Arkansas, Case No. 60CV-17-5581, against Insys Therapeutics, Inc., Linden Care, LLC, Mahmood Ahmad, and United Pain Care, Ltd. The plaintiff brings claims against Insys for commonlaw fraud and deceit, breach of fiduciary duty, violations of the Arkansas deceptive trade practices act, civil conspiracy, acting in concert, andnegligence. Insys filed its answer to the complaint on November 27, 2017. We intend to vigorously defend this matter and based on currently availableinformation, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results ofoperations.Matalon. On September 15, 2017, Vivienne Matalon, M.D. filed a complaint in the Superior Court of New Jersey, Law Division, Camden County,Case No. L-3224-17, against Insys Therapeutics, Inc., Linden Care, LLC, and Melina Ebu-Isaac. The action was subsequently transferred to MiddlesexCounty Superior Court, Law Division. The plaintiff brings claims against Insys for fraudulent misrepresentation and negligent misrepresentation. We filed amotion to dismiss on December 20, 2017. On March 2, 2018, the Court dismissed the case without prejudice for lack of prosecution. We intend to vigorouslydefend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on ourbusiness, financial position, or future results of operations.Breitenbach. On December 18, 2017, Michelle Breitenbach filed a complaint in the Superior Court of New Jersey, Chancery Division, MonmouthCounty, against Insys Therapeutics, Inc. The plaintiff brings claims against111Table of Contents Insys for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory estoppel. On January 5, 2018, we removed the caseto U.S. District Court for the District of New Jersey. The parties have agreed to resolve this case, and are in the process of finalizing such agreement.Jordan. On January 5, 2018, Bobby Ray Jordan, individually and as Special Administrator of the Estate of Doris L. Jordan, deceased, filed acomplaint in the District Court of Leavensworth County, Kansas against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-AmericaPhysiatrist, P.A., Steven Simon, M.D., Donna Ruck, Pharma Consultants KC, LLC, John N. Kapoor, Michael L. Babich, and Alec Burlakoff. The plaintiffbrings claims against Insys for negligence, conspiracy to commit fraud and breach of fiduciary duty, negligent misrepresentation, unfair and deceptive tradepractices, unjust enrichment, survival action, and wrongful death action. On January 31, 2018, Insys moved to consolidate this case with the Ballou andWitham actions, which were previously consolidated for pre-trial purposes. Plaintiff opposed Insys’s motion, and the motion remains pending. 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 our business, financial position, or future results of operations.Menucci. On February 23, 2018, Lisa Mencucci and Angelo Mencucci filed a complaint in the Superior Court of Providence, Rhode Island againstInsys Therapeutics, Inc. and Jerrold Rosenberg, M.D. Plaintiffs bring claims against Insys for common law fraud, common law fraud and misrepresentation –punitive damages, conscious misrepresentation involving risk of physical harm, conscious misrepresentation involving risk of physical harm – punitivedamages, Rhode Island General Law 9-1-2, Rhode Island General Law 9-1-2 – punitive damages, negligent misrepresentation, negligent misrepresentationinvolving risk of physical harm, negligence, and violation of the Rhode Island Deceptive trade practices act. We have not yet responded to thecomplaint. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter willhave a material adverse effect on our business, financial position, or future results of operations.Except as it pertains to (i) the final settlements addressed above, (ii) the accrual of $150,000,000 related to the DOJ Investigation, and (iii) thepotential for damages in the federal securities litigation and derivative action that we believe should be sufficiently covered by our director and officersinsurance policies (once we have met any applicable retainage requirement under the applicable policy), we believe that the probability of unfavorableoutcome or loss related to all of the above litigation matters and an estimate of the amount or range of loss, if any, from an unfavorable outcome are notdeterminable at this time. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters but therange of possible outcomes on these matters is very broad and we are not able to provide a reasonable estimate of our potential liability, if any, nor are weable to predict the outcome of each litigation matter.Responding to each of these litigation matters, defending any claims raised, and any resulting fines, restitution, damages and penalties, or 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”).112Table of Contents 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 share equal to 100 times the aggregate amountto be distributed per share to holders of common stock. Each Preferred Share has 100 votes, voting together with the common 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.113Table of Contents 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, and any shares acquired will be retired as repurchased. This program was effective immediately and has no planned expiration date. Thefollowing table summarizes our share repurchase activity for our share repurchase program: Number ofSharesPurchased Cost of SharePurchases 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 Shares purchased during 2017 — — Shares purchased at December 31, 2017 1,403,275 $32,558,000 As of December 31, 2017, 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 authorized 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 on December 31 of the preceding calendar year, (b) 600,000 shares (200,000on a pre-split basis), or (c) a number determined by our Board of Directors that is less than (a) and (b). The ESPP is intended to qualify as an “employee stockpurchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2017, 1,667,773shares 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, 2017, options topurchase 6,332,415 shares of common stock were outstanding and 6,232,807 shares remained available for future grant.114Table of Contents Amounts recognized in the consolidated statements of comprehensive income (loss) with respect to our stock-based compensation plans were asfollows (in thousands): Years Ended December 31, 2017 2016 2015 Research and development $3,217 $3,931 $2,133 General and administrative 12,798 17,658 19,749 Total cost of stock-based compensation $16,015 $21,589 $21,882 Included in stock-based compensation for the years ended December 31, 2017, 2016 and 2015 was approximately $1,450,000, $3,878,000 and$4,867,000, 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, 2017: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm (in years) AggregateIntrinsicValue(in millions) 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 Outstanding as of December 31, 2016 7,300,873 $12.36 Granted 2,577,650 $10.73 Cancelled (2,059,826) $17.76 Expired (9,834) $20.13 Exercised (1,476,448) $3.08 $10.6 Outstanding as of December 31, 2017 6,332,415 $12.10 7.4 $12.0 Vested and exercisable as of December 31, 2017 3,499,957 $11.43 6.1 $10.2 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, 2017, we expect to recognize $21,748,000 of stock-based compensation forour outstanding options over a weighted-average period of 2.61 years.The total fair value of shares vested for the years ended December 31, 2017, 2016, and 2015 was $14,511,000, $19,970,000 and $25,392,000,respectively.Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2017, 2016 and 2015 was$4,545,000, $3,803,000 and $9,524,000, respectively. For the years ended December 31, 2016 and 2015, we recorded net reductions of $122,000 and$13,593,000 respectively, of our federal and state income tax liability, with an offsetting credit to additional paid-in capital resulting from the excess taxbenefits related to exercised stock options. No such amounts were recognized during the year ended December 31, 2017, due to the implementation of ASU2016-09.115Table of Contents 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: 2017 2016 2015 Expected volatility 57.8% 63.3% 69.9%Risk-free interest rate 2.2% 1.6% 1.9%Expected term (in years) 6.9 7.0 7.0 Expected dividend yield 0.0% 0.0% 0.0% For the years ended December 31, 2017, 2016, and 2015, the weighted-average estimated fair value per option granted was $6.32, $9.20 and $19.20,respectively.Restricted Stock UnitsFrom time to time we grant restricted stock units to certain employees and directors. Restricted stock units are valued at the closing market price ofour common stock on the day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grants. The followingtable summarizes restricted stock unit activity during the year ended December 31, 2017: Number ofShares WeightedAverageGrant-DateFair ValuePer Unit Outstanding as of December 31, 2016 — $— Granted 481,250 $10.74 Cancelled (85,350) $12.54 Exercised (14,000) $12.65 Outstanding as of December 31, 2017 381,900 $10.27 As of December 31, 2017, we expect to recognize $2,897,000 of stock-based compensation for outstanding restricted stock units over a weighted-average period of 2.06 years.10.Income TaxesIncome tax expense (benefit) consists of the following (in thousands): Years Ended December 31, 2017 2016 2015 Current income taxes: Federal $(12,474) $5,916 $31,383 State and local 51 554 6,473 Total current income tax (12,423) 6,470 37,856 Deferred income taxes: Federal 20,178 (7,762) (3,759)State and local 3,065 2,126 (1,156)Total deferred income tax 23,243 (5,636) (4,915)Income tax expense $10,820 $834 $32,941 On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act. The 2017 Tax Act makes broad and complex changes to the U.S. taxcode, including, but not limited to: reduces the federal statutory income tax rate from 35% to 21% effective January 1, 2018, eliminates the ability tocarryback NOLs arising after 2017 and instead would permit such NOLs to be carried forward indefinitely, repeals the domestic production deduction,116Table of Contents further limits deductions for executive compensation and legal settlements, accelerates expensing for capital expenditures, and reduces the orphan drugcredit to 25% from 50% of qualified clinical testing expenses. We recognized, as a provisional estimate, a $7.5 million non-cash tax expense through income from continuing operations for the re-measurement ofdeferred tax assets and liabilities due to changes in tax laws included in the 2017 Tax Act. This re-measurement of deferred taxes had no impact on cashflows.On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which addresses income tax accounting implications of the2017 Tax Act. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting periodin which the 2017 Tax Act was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the 2017 Tax Actupon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to berecorded if it is a reasonable estimate of the impact of the 2017 Tax Act. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the2017 Tax Act, not to extend beyond one year from the date of enactment.Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, we have made reasonable estimatesfor certain effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and preparenecessary data, and interpret the 2017 Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-settingbodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax ratein the period in which the adjustments are made. We expect to complete our accounting for the tax effects of the 2017 Tax Act in 2018.Estimates were used in determining the balance of deferred tax assets and liabilities subject to changes in tax laws included in the 2017 Tax Act. Inaddition, estimates were used in determining the timing of reversals of deferred tax assets and liabilities in assessing the ability to realize certain deferred taxassets, which impacted the valuation allowance adjustment we recorded as part of the effects of the 2017 Tax Act. Additional information and analysis isrequired to accurately determine the deferred tax assets and liabilities affected by the 2017 Tax Act, as well as determine the reversal pattern of such deferredtax assets and liabilities in assessing the ability to realize deferred tax assets. Deferred Income Taxes The tax effects of temporary differences and carry forwards that give rise to the deferred tax assets and liabilities are comprised of the following as ofDecember 31 (in thousands): 2017 2016 Deferred income tax assets: NOLs and credits $38,858 $27,046 Start-up expenditures 1,480 2,604 Stock-based compensation 6,439 11,727 Allowances 931 1,264 Expenses currently not deductible for tax purposes 6,838 10,652 Deferred revenue 251 — Other 1,167 1,963 Gross deferred tax assets 55,964 55,256 Deferred income tax asset valuation allowance (50,339) (23,508)Deferred income tax assets 5,625 31,748 Deferred income tax liabilities: Federal impact of state taxes (643) (1,073)Property and equipment (4,058) (6,246)Prepaid expenses (924) (1,186)Net deferred income tax assets $- $23,243117Table of Contents As of December 31, 2017, we had approximately $1.1 million of Federal NOLs and $236.6 million of state NOLs. A portion of both of these NOLswill begin to expire in 2018. As of December 31, 2017, we had approximately $11.4 million of Federal tax credits and $5.6 million of state tax credits. Aportion of both the Federal and state tax credits will begin to expire in 2030. We record valuation allowances to reduce the book value of our deferred tax assets to amounts that are estimated on a more likely than not basis to berealized. In assessing the realization of deferred tax assets, we evaluate both positive and negative evidence with greater weight given to information that isobjectively verifiable. Based on this evidence, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not berealized. 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. As a result of this evaluation, we increased the valuation allowance for deferred taxes by $26.8 million forthe period ended December 31, 2017. The establishment of a valuation allowance does not impact cash, nor does it preclude us from using our tax credits,loss carryforwards and other deferred tax assets in the future. Effective Tax Rate Reconciliation:Our federal statutory tax rate is 35.0%, while our effective tax rate was (5.0)% for the year ended December 31, 2017, as set forth below: 2017 2016 2015 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 0.7% (0.1)% 2.3%Non-deductible litigation expense — 3.4% 3.5%Non-deductible and includible items (0.9)% 7.5% 0.7%Non-deductible lobbying expense — 8.3% — Research and other credits 1.1% (63.5)% (5.4)%Uncertain tax positions (0.1)% 4.2% 2.7%Domestic manufacturing deduction — (14.6)% (3.0)%Stock based compensation (1.3)% 5.1% 0.4%Tax exempt interest income — (1.5)% — Non-deductible settlement expenses (24.3)% — — Adjustment of net deferred tax assets for U.S. tax reform (3.5)% — — Other — 0.6% — Change in valuation allowance (11.7)% 25.5% (0.1)%Total provision for income taxes (5.0)% 9.9% 36.1% The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits (in thousands): Years Ended December 31, 2017 2016 Beginning balance $9,800 $8,920 Additions based on current year's tax positions 555 758 Deductions based on prior year's tax positions (239) — Additions based on prior year's tax positions 18 122 Ending balance $10,134 $9,800 118Table of Contents 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 $10.1 million as ofDecember 31, 2017, mostly related to tax credits of $2.8 million, state and local income tax filing positions of $5.4 million, and $1.9 million of otherpermanent differences. If recognized, $10.1 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 $1.3 million of interest has been included in income taxes and accounted for on the balance sheet related to unrecognized tax positions as ofDecember 31, 2017.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.11.Net Income (Loss) per ShareBasic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common sharesoutstanding during the period. The diluted income (loss) per share further includes any common shares available to be issued upon exercise of outstandingstock options if such inclusion would be dilutive.The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts): Years Ended December 31, 2017 2016 2015 Historical net income (loss) per share - Basic Numerator: Net income (loss) $(228,015) $7,590 $58,053 Denominator: Weighted average number of common shares outstanding 72,259,063 71,618,793 71,592,581 Basic net income (loss) per common share $(3.16) $0.11 $0.81 Historical net income (loss) per share - Diluted Numerator: Net income (loss) $(228,015) $7,590 $58,053 Denominator: Weighted average number of common shares outstanding 72,259,063 71,618,793 71,592,581 Effect of dilutive stock options — 2,527,125 4,115,070 Weighted average number of common shares outstanding 72,259,063 74,145,918 75,707,651 Diluted net income (loss) per common share $(3.16) $0.10 $0.77 The calculation of diluted net income (loss) per common share excludes the effects of 1,677,040, 2,596,324 and 1,460,986 outstanding stock optionsfor the years ended December 31, 2017, 2016, and 2015, 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 2017, we have two product lines, SUBSYS® and SYNDROS®.Our CODM evaluates revenues based on product lines.119Table of Contents 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, 2017 2016 2015 SUBSYS ® $139,250 $242,275 $329,040 SYNDROS ® 1,443 — — Dronabinol SG Capsule — — 1,283 Total net revenue $140,693 $242,275 $330,323 Percent of Revenue by Route to Market Years Ended December 31, 2017 2016 2015 Pharmaceutical wholesalers 63% 67% 95%Specialty pharmaceutical retailers 37% 33% 5% 100% 100% 100% All our products are sold in the United States of America.Product shipments to our three largest pharmaceutical wholesaler customers accounted for 26%, 18% and 11% of total shipments and productshipments to two specialty pharmaceutical retailers accounted for 23% and 14% of total shipments for the year ended December 31, 2017. Product shipmentsto our four largest pharmaceutical wholesaler customers accounted for 17%, 16%, 15% and 14% of total shipments and product shipments to one specialtypharmaceutical retailer accounted for 32% of total shipments for the year ended December 31, 2016. Product shipments to our four largest pharmaceuticalwholesaler customers accounted for 32%, 20%, 17% and 14% of total shipments for the year ended December 31, 2015. Three pharmaceutical wholesalers’accounts receivable balances accounted for 44%, 18% and 10% of gross accounts receivable as of December 31, 2017, and two specialty pharmaceuticalretailers’ accounts receivable balances accounted for 13% and 12% of gross accounts receivable as of December 31, 2017. Four pharmaceutical wholesalers’accounts receivable balances accounted for 36%, 23%, 21% and 13% of gross accounts receivable as of December 31, 2016.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.120Table of Contents 13.Supplemental Financial InformationA summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2017, 2016 and 2015 areas follows (in thousands): Balance atBeginningof Year Charged toCosts andExpenses Utilization Balance atEnd ofYear Allowance for doubtful accounts: Year ended December 31, 2017 $685 $— $(685) $— Year ended December 31, 2016 $811 $(96) $(30) $685 Year ended December 31, 2015 $398 $413 $— $811 Allowance for sales wholesaler discounts, prompt pay discounts, stocking allowances, and chargebacks: Year ended December 31, 2017 $5,459 $14,525 $(16,152) $3,832 Year ended December 31, 2016 $7,556 $27,968 $(30,065) $5,459 Year ended December 31, 2015 $5,418 $38,036 $(35,898) $7,556 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, 2017. We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have been prepared on substantiallythe same basis as the audited consolidated financial statements contained elsewhere in this report and include all normal recurring adjustments necessary fora fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with ourconsolidated financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of theresults that may be expected for any future period (in thousands, except per share data). Quarter Ended 12/31/17 9/30/17 6/30/17 3/31/17 Net revenue $31,485 $30,670 $42,576 $35,962 Gross profit (1) $26,874 $23,198 $38,655 $31,323 Net loss (2) (3) $(46,987) $(166,320) $(8,184) $(6,524)Net loss per common share: Basic $(0.65) $(2.30) $(0.11) $(0.09)Diluted $(0.65) $(2.30) $(0.11) $(0.09) Quarter Ended 12/31/16 9/30/16 6/30/16 3/31/16 Net revenue $54,860 $57,773 $69,221 $60,421 Gross profit (4) 45,055 53,096 62,948 55,783 Net income (loss) (5) (3,652) 2,925 6,027 2,290 Net income (loss) per common share: Basic $(0.05) $0.04 $0.08 $0.03 Diluted $(0.05) $0.04 $0.08 $0.03 (1)The fourth quarter of 2017 includes an allowance of $2,100,000 for excess and obsolete inventory as the result of a change in estimate.(2)The third quarter of 2017 includes an accrual of $150,000,000 related to the DOJ Investigation.(3)The fourth quarter of 2017 includes a provisional tax expense of $7,500,000 related to the 2017 Tax Act, and an increase in tax expense associatedwith the accrual of $22,600,000 related to the valuation allowance of deferred tax assets.(4)The fourth quarter of 2016 includes an allowance of $5,800,000 for excess and obsolete SUBSYS® inventory.121Table of Contents (5)The fourth quarter of 2016 includes charges related to litigation award and settlements of $3,900,000. 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 the Company’sdisclosure controls and procedures were effective as of December 31, 2017.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, 2017. In making this assessment, weused the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control — IntegratedFramework. Based on our assessment using those criteria, our management concluded that our internal control over financial reporting was effective as ofDecember 31, 2017.Our independent registered public accounting firm, BDO USA, LLP, has audited the effectiveness of our internal controls over financial reporting asof December 31, 2017, as stated in its audit report which is included herein. Previously Reported Material Weaknesses Relating to Product Sales Allowances and the Allowance for Excess and Obsolete InventoryAs previously reported, we did not have effective policies and procedures, and effective reviews by personnel at an appropriate level, for accountingfor the rebates component of our product sales allowances and the allowance for excess and obsolete inventory in accordance with U.S. GAAP. Specifically,we did not have controls designed to validate the completeness and accuracy of underlying data used in the determination of these significant estimates.Overall the management in the finance and accounting group did not display adequate tone at the top with respect to judgment and rigor required to resolvethe accounting for the rebates component of our product sales allowances and the allowance for excess and obsolete inventory matters. With the oversight of our Audit Committee, we took corrective steps during 2017 to remediate the underlying causes of the material internal controlweakness relating to the accounting for the rebates component of our product sales allowances and the allowance for excess and obsolete inventory inaccordance with U.S GAAP. The corrective steps we have taken, which are intended to ensure that we have effective policies and procedures, and effectivereviews by personnel at an appropriate level, for accounting for the rebates component of our product sales allowances and the allowance for excess andobsolete inventory in accordance with U.S. GAAP, include: •We have increased resources within our organization, including some key hires in the finance department to develop and implementcontinued improvements and enhancements to address the overall deficiencies that led to the material weaknesses. More specifically, withthe oversight of the audit122Table of Contents committee, significant personnel changes were made including the hiring of a new President and Chief Executive Officer (on April 17, 2017)and a new Chief Financial Officer (on August 7, 2017). In addition, a new Vice President of Managed Markets was hired with expertisearound industry practices in rebates and managed care contracts. We have also hired a Director of Pricing and Contracting in the managedcare organization. All of these executives have significant pharmaceutical industry experience and these hires resulted from a comprehensivenational search process conducted by an outside recruiting firm. In addition to the above executive hires, since April 2017, we created a newposition for an accounting manager within the finance department, who we hired along with two senior accountants to ensure that we have asufficient complement of finance personnel within the accounting function responsible for the completeness and accuracy of underlying dataused in the determination of significant estimates. As these employees have integrated into our organization, we have reviewed our policiesand procedures around internal controls. We believe these personnel changes were overarching remedial measures that assisted us with eachof the material weaknesses by establishing effective policies and procedures, accomplishing timely and effective reviews by personnel at anappropriate level, and ensuring that we have addressed tone at the top with respect to judgment and appropriate rigor. •With respect to maintaining and establishing effective policies and procedures, we have also taken additional steps of engaging externalaccounting consultants to review and assist with the documentation of policies and procedures related to our product sales allowances and anexternal legal consultant to review our managed care contracts with oversight of the managed care review by our new Vice President ofManaged Markets. We implemented a cross-functional review process that includes communication with, and sign-off by, the finance,managed markets and business intelligence departments to ensure proper process and accounting for rebates and other managed marketsconcepts. •We have hired a Cost Accounting Manager to oversee and monitor plant accounting and financial reporting activities including maintainingeffective policies and procedures. We have implemented a cross-functional review process between finance, the manufacturing departmentand our sales group to facilitate the timely receipt of information related to our current and future inventory levels, current business trends,projected sales and the resulting inventory allowance requirements. •As we have integrated our new personnel, we have added additional reviews of the underlying data used to develop significant estimatesrelated to accounting for the rebate component of our product sales allowances and the allowance for excess and obsolete inventory inaccordance with U.S. GAAP. We have implemented a cross-functional review processes with respect to rebates and other similar managedmarkets concepts and inventory obsolescence. We have implemented a sales and operations planning process on a monthly basis withfinance, manufacturing, sales, and managed care to review product sales allowances and the allowance for excess and obsolete inventory.As of December 31, 2017, 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 these new processes and controls, we concluded that the above identified materialweaknesses relating to the accounting for the rebates component of our product sales allowances and the allowance for excess and obsolete inventory in ourinternal controls over financial reporting have now been fully remediated and the controls were operating effectively as of December 31, 2017.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 materialweaknesses related to accounting for product sales allowances and the allowance for excess and obsolete inventory described above, there were no otherchanges in our internal control over financial reporting that occurred during the quarter ended December 31, 2017, that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.123Table of Contents 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.124Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of DirectorsInsys Therapeutics, Inc.Chandler, ArizonaOpinion on Internal Control over Financial ReportingWe have audited Insys Therapeutic Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria establishedin Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSOcriteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, basedon the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidatedbalance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income (loss),stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated March 9,2018 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become125Table of Contents inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ BDO USA, LLPPhoenix, ArizonaMarch 9, 2018 ITEM 9B.OTHER INFORMATION Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of CertainOfficers. On March 8, 2018, the Company executed an employment agreement with Andy Long, the Company’s Chief Financial Officer. This employment agreementis effective as of Mr. Long’s start date, which was August 7, 2017. In connection with his employment, the Board had previously designated Mr. Long as an“officer” for purposes of Section 16 of the Securities Exchange Act of 1934 and an “executive officer” of the Company for purposes of disclosure in theCompany's annual report on Form 10-K and proxy statement in accordance with Rule 3b-7 under the Exchange Act and Item 401(b) of Regulation S-K. As set forth in his employment agreement, Mr. Long (i) receives a base salary at the annualized rate of $350,000 (three hundred fifty thousand U.S. dollars), tobe paid consistent with Company’s payroll policies and protocols; (ii) is eligible for a performance-based, cash bonus as set by the compensation committeeof the Board as a percentage of his base salary at “target,” and (iii) is eligible to participate in any additional officer incentive program of the Companyadopted by the Board and/or the compensation committee of the Board. Any base salary and cash bonus earned by Mr. Long pursuant to any such programwill be subject to standard payroll deductions and applicable tax withholdings. Mr. Long has received and will continue to receive customary benefits suchas relocation assistance, health and life insurance and retirement benefits. The foregoing summary does not purport to be complete and is qualified in itsentirety by reference to the complete terms of this employment agreement, a copy of which is filed herewith as Exhibit 10.19 and which is incorporatedherein by reference. The Company also entered into the Company’s director and officer indemnity agreement with Mr. Long, the form of which has beenpreviously filed with the Securities and Exchange Commission.126Table of Contents 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, 2017 in connection with our 2018 Annual Meeting of Stockholders, or the 2018 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 2018 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 2018 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 2018 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 2018 Proxy Statement and is incorporated herein by reference.127Table of Contents 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.128Table of Contents 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 May 24, 2011 by and between the Registrant and DPT Lakewood, LLC, as amended on October29, 2013 and April 30, 2015 (15) 10.11Ω Letter Agreement dated April 23, 2012, amending the DPT Lakewood, LLC Manufacturing Agreement dated as of May 24, 2011 (16) 10.12 Amendment to Manufacturing and Supply Agreement, dated as of July 14, 2016 by and between the Registrant and DPT Lakewood, LLC(20) 10.13Ω Amended and Restated Supply, Development & Exclusive Licensing Agreement dated as of October 30, 2015 by and between theRegistrant and AptarGroup, Inc. (24) 10.14 Amendment to Restated Supply, Development & Exclusive Licensing Agreement dated as of April 6, 2017, by and between theRegistrant and AptarGroup, Inc. (22) 10.15+ Non-Employee Director Compensation Policy (17) 10.16+ Employment Offer Statement effective January 31, 2014 by and between Registrant and Franc Del Fosse (18) 10.17+ Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Grant Agreement thereunder (21) 129Table of Contents ExhibitNumber Description of Document 10.18+ Executive Employment Agreement, dated as of April 17, 2017, by and between the Registrant and Saeed Motahari (23) 10.19+ Executive Employment Agreement, dated as of August 7, 2017, by and between the Registrant and Andrew Long (furnished herewith) 21.1 Subsidiaries of the Registrant (25) 23.1* Consent of BDO USA, LLP, Independent Registered Public Accounting Firm 24.1 Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K) 31.1* Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith) 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 (furnished herewith) 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/A Registration Statement (No. 333-173154) on April 25, 2013.130Table of Contents (12)Previously filed as Exhibit 10.8 to the Company’s Form S-1/A Registration Statement (No. 333-173154) on April 25, 2013.(13)Previously filed as Exhibit 10.12 to the Company’s Form S-1/A Registration Statement (No. 333-173154) on July 15, 2011.(14)Previously filed as Exhibit 10.13 to the Company’s Form S-1/A Registration Statement (No. 333-173154) on February 27, 2013.(15)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.(16)Previously filed as Exhibit 10.17 to the Company’s Form S-1/A Registration Statement (No. 333-173154) on February 27, 2013.(17)Previously filed as Exhibit 10.22 to the Company’s Form S-1/A Registration Statement (No. 333-173154) on April 15, 2013.(18)Previously filed as 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014. (19)Previously filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.(20)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.(21)Previously filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.(22)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.(23)Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017.(24)Previously filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.(25)Previously filed as Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. ITEM 16.FORM 10-K SUMMARYNone.131Table of Contents 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 9, 2018. Insys Therapeutics, Inc. By/s/ Saeed Motahari Saeed Motahari President and Chief Executive Officer (Principal Executive Officer) By/s/ Andrew G. Long Andrew G. Long Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 132Table of Contents POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew G. Long 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/ Saeed Motahari President, Chief Executive Officer and Member of the Board ofDirectors(Principal Executive Officer) March 9, 2018Saeed Motahari /s/ Andrew G. Long Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer) March 9, 2018Andrew G. Long /s/ Steven Meyer Executive Chairman of the Board of Directors March 9, 2018Steven Meyer /s/ Pierre Lapalme Member of the Board of Directors March 9, 2018Pierre Lapalme /s/ Vaseem Mahboob Member of the Board of Directors March 9, 2018Vaseem Mahboob Member of the Board of Directors Brian Tambi /s/ Dr. Rohit Vishnoi Member of the Board of Directors March 9, 2018Dr. Rohit Vishnoi 133Exhibit 10.19 EMPLOYMENT AGREEMENTThis Employment Agreement (this “Agreement”) is made and entered into as of August 7, 2017, (the “Effective Date”), byand among Insys Therapeutics, Inc. (the “Company”) and Andrew Long (“Executive”) (the Company and Executive, collectively, the“Parties”).WITNESSETH:WHEREAS, Executive is currently employed by the Company as its Executive Vice President and Chief Financial Officer;andWHEREAS, the Company has determined that it is in the best interests of the Company to assure that the Company willhave the continued dedication of Executive and, in order to accomplish this objective, the Company and Executive are entering intothis Agreement; andWHEREAS, Executive desires to serve in such position pursuant to the terms and conditions set forth in this Agreement.NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations hereinafter set forth, theCompany and Executive hereby agree as follows:1.Employment. Subject to the terms set forth herein, the Company agrees to employ Executive as Executive VicePresident & Chief Financial Officer of the Company, and Executive hereby accepts such employment. As Executive Vice President &Chief Financial Officer of the Company, Executive shall have such authority, perform such duties, and fulfill such responsibilitiescommonly incident to such position, as well as those that are delegated to Executive by the President & CEO of the Company (the“CEO”) and the Chairman of the Audit Committee of the Board of Directors. While employed, Executive shall report to the CEO,and Executive shall devote Executive’s full business time and attention to the business and affairs of the Company and shall useExecutive’s reasonable best efforts to advance the interests of the Company; provided that, Executive may engage in outside activitiesin accordance with Section 5.2.Employment Period. (a)Duration. Executive’s period of employment with the Company under this Agreement shallbegin on the Effective Date and shall continue until terminated by either the Company or Executive in accordance with Section 6hereof (such period of employment being the “Employment Period”).3.Compensation. In exchange for the on-going services of Executive hereunder, the Company shall provide thefollowing:(a)Base Salary. In consideration for the services performed by Executive during the EmploymentPeriod, the Company shall pay to Executive an annual salary (“Base Salary”) of $350,000. The Base Salary shall be paid inapproximately equal installments in accordance with the Company’s customary payroll practices. Executive’s Base Salary shall bereviewed at least annually during the Employment Period for possible adjustment but in no event010-8594-3010/5/AMERICAS shall be less than an annual salary of $350,000 (other than such a reduction which affects all of the Company’s senior executiveemployees on a substantially equal or proportionate basis). The term Base Salary, as utilized in this Agreement, shall refer to BaseSalary as it may be adjusted.(b)Annual Bonus. For each fiscal year of the Company during the Employment Period,Executive shall be eligible to participate in the Company’s Short-Term Incentive Plan (or any successor thereto) (the “Annual BonusPlan”). Executive’s target annual bonus under the Annual Bonus Plan shall be determined by the Compensation Committee of theBoard (the “Compensation Committee”) and shall be commensurate with the target annual bonus opportunity available to othersimilarly situated senior executives of the Company generally (the “Target Bonus”). The actual amount of Executive’s annual bonusshall depend upon the achievement of performance goals established by the Compensation Committee, with the actual bonus to bedetermined by the Compensation Committee. The terms and conditions of the Annual Bonus Plan and the payments to Executivethereunder shall be applied on a basis not less favorable to Executive than to other similarly situated senior executives of the Companygenerally. The Compensation Committee shall periodically review Executive’s Target Bonus percentage and may in its discretionadjust Executive’s annual bonus opportunity. The term Target Bonus, as utilized in this Agreement, shall refer to the Target Bonus asit may be adjusted. Annual bonuses awarded to Executive under the Annual Bonus Plan are referred to herein as “AnnualBonuses.” The payment of any such Annual Bonus shall be subject to all the terms and conditions of the applicable Annual BonusPlan. (c)Long-Term Compensation. During the Employment Period, Executive shall be eligible toparticipate in any equity and/or other long-term compensation programs established by the Company from time to time for seniorexecutive officers. Executive’s target annual equity award opportunity shall be determined by the Compensation Committee and shallbe no less favorable than the target equity award opportunity available to other similarly situated senior executives of the Companygenerally, with the actual award to be determined by the Compensation Committee on a basis not less favorable to Executive than toother similarly situated senior executives of the Company generally.(d)Employee Benefit Plans; Paid Time Off.(i)Benefit Plans. During the Employment Period, Executive shall be an employee of theCompany and shall be entitled to participate, on terms and conditions not less favorable to Executive than other similarly situated seniorexecutives of the Company generally, in the Company’s (A) tax-qualified defined contribution retirement plans (currently, theCompany’s 401(k) and Profit Sharing Plan); (B) group life, health and disability insurance plans; and (C) any other employee benefitplans and programs and perquisites in accordance with the Company’s customary practices with respect to other similarly situatedsenior executives of the Company generally; provided that Executive’s participation shall be subject to the terms of such plans andprograms (including being a member of the class of employees currently eligible to commence participation in the plan or program);and provided, further, that nothing herein shall limit the Company’s right to amend or terminate any such plans or programs.(ii)Paid Time Off. Executive shall be entitled to three (3) weeks of paid vacation time each yearduring the Employment Period (measured on a fiscal- or calendar--2-010-8594-3010/5/AMERICAS year basis, in accordance with the Company’s usual practices), as well as sick leave, holidays and other paid absences in accordancewith the Company’s policies and procedures for senior executives. Any unused paid time off during an annual period may be carriedforward into the following year to the extent permitted under the Company’s policies and procedures, and Executive shall becompensated for any unused paid time off to the extent provided for under the Company’s policies and procedures as applicable toother similarly situated senior executives of the Company generally.(e)Expenses. The Company shall reimburse Executive for Executive’s ordinary and necessarybusiness expenses and travel and entertainment expenses incurred in connection with the performance of Executive’s duties under thisAgreement upon presentation to the Company of an itemized account of such expenses in such form as the Company may reasonablyrequire.(f)Moving Expenses. In accordance with the Company’s relocation policy in effect, theCompany shall reimburse or pay Executive for reasonable moving and relocation costs incurred in connection with moving Executiveand Executive’s family to Chandler, Arizona.4.Principal Place of Employment. Executive’s principal place of employment during the Employment Period shallbe at the Company’s principal executive offices or at such other location upon which the Company and Executive may mutually agree,and subject to travel to such other locations as shall be necessary to fulfill the employment duties.5.Outside Activities and Board Memberships. During the Employment Period, Executive shall not provide serviceson behalf of any other entity or business that competes with the Company or any of its affiliates (each, a “competitive business”), orany subsidiary or affiliate of any such competitive business, as an employee, consultant, independent contractor, agent, sole proprietor,partner, joint venturer, corporate officer or director; nor shall Executive acquire, by reason of purchase during the Employment Period,the ownership of more than one percent (1%) of the outstanding equity interest in any such competitive business. In addition, duringthe Employment Period, Executive shall not, directly or indirectly, acquire a beneficial interest, or engage in any joint venture in realestate with the Company. Subject to the foregoing, Executive may serve on boards of directors of unaffiliated corporations, subject toapproval by the Board, which shall not be unreasonably withheld, and boards of directors of not-for-profit organizations and tradeassociations, subject to approval by the Company in accordance with the Company’s policies and procedures. Except as specificallyset forth herein, Executive may engage in personal business and investment activities, including real estate investments and personalinvestments in the stocks, securities and obligations of other financial institutions (or their holding companies). Notwithstanding theforegoing, in no event shall Executive’s outside activities, services, personal business and investments materially interfere with theperformance of Executive’s duties under this Agreement. Nothing in this Section 5 shall limit any of Executive’s obligations underSection 9 hereof.-3-010-8594-3010/5/AMERICAS 6.Termination of Employment.(a)Termination by the Company without Cause.(i) The Company shall have the right to terminate Executive’s employment at any time duringthe Employment Period without Cause by giving notice to Executive as described in Section 6(d). For sake of clarity, termination ofExecutive’s employment pursuant to Section 6(c) shall constitute a termination without Cause for purposes of this Section 6.(ii)In the event that The Company terminates Executive’s employment during the EmploymentPeriod without Cause:(A)The Company shall pay or provide to Executive any Accrued Obligations; and(B)Subject to Section 6(e), the Company shall pay to Executive within sixty (60) daysfollowing the date of termination, a lump sum cash payment in an amount equal to twelve (12) months of Executive’s Base Salary asof the Termination Date (as defined below) and an amount equal to Executive’s non-prorated Target Bonus attributable to the fiscalyear during which the Termination Date occurs if such bonus would have been earned and paid but for the termination of Employee’semployment (the “Severance Payment”); andSubject to Section 6(e), effective as of the Termination Date, the vesting and exercisability of all then outstanding equity awards(excluding such portion of any equity awards (A) whose vesting is based on performance-based criteria and (B) that is intended toconstitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code of 1986,as amended (the “Code”) (other than options granted at fair market value) (each, a “Performance-Based Award”)) held by Executiveshall accelerate in full. The time-based vesting and exercisability (if any) of all Performance-Based Awards held by Executive shallaccelerate effective as of the Termination Date. Any Performance-Based Award shall become vested and exercisable only if theapplicable performance-based criteria are satisfied at the end of the applicable period relating to such award, at which time suchPerformance-Based Award shall become vested and exercisable on a pro-rated basis by multiplying such Performance-Based Awardby a fraction, the numerator of which is the number of full months Executive was employed by the Company during the applicableperformance period, and the denominator of which is the total number of months in such performance period. The term of any optionthat is treated as a Performance-Based Award shall include any period referred to in the preceding sentence during which the optionshall not be terminated. Any Performance-Based Award for which the performance criteria are not satisfied within the applicableperformance period shall terminate at the end of such period.(b)Termination by the Company for Cause. The Company shall have the right to terminateExecutive’s employment at any time during the Employment Period for Cause by giving notice to Executive as provided inSection 6(d) hereof. In the event Executive’s employment is terminated for Cause, the Company’s sole obligation shall be to pay orprovide to Executive any Accrued Obligations.-4-010-8594-3010/5/AMERICAS (c)Termination by Reason of Death or Disability of Executive.(i)In the event of Executive’s death during the Employment Period, the Company’s soleobligation shall be to pay to Executive’s legal representatives any Accrued Obligations(ii)The Company shall be entitled to terminate Executive’s employment due to Executive’sDisability. If Executive’s employment hereunder is terminated due to Executive’s Disability, the Company’s sole obligation shall be topay or provide to Executive any Accrued Obligations.(d)Notice; Effective Date of Termination. Notice of termination of employment under thisAgreement shall be communicated by or to Executive (on one hand) or the Company (on the other hand) in writing in accordance withSection 14. Termination of Executive’s employment pursuant to this Agreement (the “Termination Date”) shall be effective on theearliest of:(i)immediately after the Company gives notice to Executive of Executive’s termination withoutCause, unless the parties agree to a later date, in which case, termination shall be effective as of such later date;(ii)immediately upon approval by the Board of termination of Executive’s employment forCause;(iii)immediately upon Executive’s death;(iv)in the case of termination by reason of Executive’s Disability, the date on which Executive isdetermined to be permanently disabled for purposes of the Company’s long-term disability plan or policy that covers Executive; or(v)thirty (30) days after Executive gives written notice to the Company of Executive’sresignation from employment under this Agreement (including for Good Reason), provided that the Company may set an earliertermination date at any time prior to the date of termination of employment, in which case Executive’s resignation shall be effective asof such other date.(e)General Release of Claims. Executive shall not be entitled to any payment or benefit pursuantto Section 6(a)(ii)(B) or (C) (the “Severance Benefits”) in the event Executive’s employment terminates without Cause, unless(i) Executive has executed and delivered to the Company a general release of claims (in the form attached hereto as Exhibit A) (the“Release”) and (ii) such Release has become irrevocable under the Age Discrimination in Employment Act not later than sixty (60)days after the Termination Date. Executive’s entitlement to the Severance Benefits is further conditioned upon complying with theterms of Sections 6(i), 8, 9(a) and 9(b) hereof, subject to written notice by the Company and a reasonable opportunity for Executive tocure, if subject to cure. The Company shall deliver to Executive a copy of the Release not later than three (3) days after theTermination Date pursuant to Section 6(a) hereof. In the event that the sixty (60) day period referenced above begins and ends indifferent taxable years of Executive, any payments or benefits under this Agreement that-5-010-8594-3010/5/AMERICAS constitute nonqualified deferred compensation under Section 409A of the Code and the payment or settlement of which is conditionedon the effectiveness of the Release shall be paid in the later taxable year.(f)No Other Severance Benefits. Executive acknowledges and agrees the Severance Benefits,and other rights and benefits provided under this Agreement upon termination are in lieu of, and not in addition to, any paymentsand/or benefits to which Executive may otherwise be entitled under any severance plan, policy or program of the Company, except asmay be provided in any change of control agreement between Executive and the Company.(g)Payment of Obligations. Notwithstanding anything to the contrary herein, any paymentobligation of the Company under this Agreement may be satisfied in whole or in part by payment by the Company, the Company orany affiliate, and any such payment shall, for purposes of this Agreement, be treated as if made by the Company.(h)Resignation from Positions. Upon termination of Executive’s employment for any reason,Executive shall promptly (i) resign from all positions (including, without limitation, any management, officer or director position) withthe Company and its affiliates and (ii) relinquish any power of attorney, signing authority, trust authorization or Company accountsignatory authorization that Executive may hold on behalf of the Company or its affiliates. Executive’s execution of this Agreementshall be deemed the grant by Executive to the officers of the Company and the Company of a limited power of attorney to sign inExecutive’s name and on Executive’s behalf such documentation as may be necessary or appropriate for the limited purposes ofeffectuating such resignations and relinquishments.(i)Return of Property. On or before the Termination Date, Executive shall return to the Companyany and all Company property, including but not limited to any computer or other electronic equipment, and any documents, files,computer records, or other materials belonging to, or containing confidential or proprietary information obtained from, the Companythat are in Executive’s possession, custody, or control, including but not limited to any such materials that may be at Executive’s homeor that may be stored on any electronic devices not belonging to the Company. Upon the Company’s request, Executive shall destroyany copies, including electronic copies, of any Company information, including any Company confidential information, as described inSection 8 of this Agreement.(j)Golden Parachute Tax Reimbursement. Notwithstanding any other provision of thisAgreement, in the event that any portion of any payment or benefit received or to be received by Executive in connection with a“change in ownership or control” (within the meaning of Section 280G of the Code) (“Change in Control”) of the Company occurringfollowing the Effective Date (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement)(collectively, the “Total Benefits”) would be subject to the excise tax imposed under Section 4999 of the Code (the “Excise Tax”), theCompany shall pay to Executive an additional amount (the “Tax Reimbursement Payment”) such that after payment by Executive ofall taxes (including taxes imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the TaxReimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Total Benefits, and (ii) without-6-010-8594-3010/5/AMERICAS duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or Social Security andMedicare tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive’s adjusted gross income, and (B) thehighest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the TaxReimbursement Payment is made. The intent of this Section 6(j) is that Executive, after paying his (aa) federal, state and local incometax and (bb) Social Security and Medicare taxes, will be in the same position as if he was not subject to the Excise Tax and did notreceive the Tax Reimbursement Payment. All determinations required to be made under this Section 6(j) shall be made by tax counselor a nationally recognized certified public accounting firm or other professional organization that is a certified public accounting firmrecognized as an expert in determinations and calculations for purposes of Section 280G of the Code selected by the Company prior toa Change in Control and reasonably acceptable to Executive (“Tax Counsel”), which determinations shall be conclusive and bindingon Executive and the Company absent manifest error. All fees and expenses of Tax Counsel shall be borne solely by theCompany. For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed to pay federal,state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax ReimbursementPayment is made. In connection with making determinations under this Section 6(j), the Tax Counsel shall take into account the valueof any reasonable compensation for services to be rendered by Executive before or after the Change in Control, including anynoncompetition provisions that may apply to Executive, and the Company shall cooperate in the valuation of any such services,including any noncompetition provisions. Subject to Section 10, the Tax Reimbursement Payment shall be paid by the Company toExecutive in a lump sum within sixty (60) days following the date of the Change in Control of the Company (provided, however, thatis such sixty (60) day period begins in one calendar year and ends in the next calendar year, Executive shall not designate, nor have theright to designate, the calendar year of payment).7.Certain Definitions.(a)“Accrued Obligations” means (i) any accrued and unpaid Base Salary of Executive throughthe date of termination of employment, payable pursuant to the Company’s standard payroll policies, (ii) any earned and unpaid bonusof Executive under the Annual Bonus Plan for any completed fiscal year prior to the date of termination of employment, (iii) anycompensation and benefits to the extent payable to Executive based on Executive’s participation in any compensation or benefit plan,program or arrangement of the Company through the date of termination of employment, payable in accordance with the terms of suchplan, program or arrangement, and (iv) any expense reimbursement to which Executive is entitled under the Company’s standardexpense reimbursement policy (as applicable) and Sections 3(e) and 10 hereof.(b)“Cause” means Executive’s failure or refusal to substantially perform Executive’s dutieshereunder, personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, breach of theCompany’s code of ethics, breach of the Company’s code of conduct, breach of the Company’s compliance policies, material violationof the Sarbanes-Oxley requirements for officers of public companies that in the reasonable opinion of the Board will likely causesubstantial financial harm or substantial injury to the reputation of the Company, willfully engaging in actions that in the reasonableopinion of the Board will likely-7-010-8594-3010/5/AMERICAS cause substantial financial harm or substantial injury to the business reputation of the Company, willful violation of any law, rule orregulation (other than routine traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision ofthis Agreement. The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have beendelivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entiremembership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to Executiveand Executive is given an opportunity, together with counsel for Executive, to be heard before the Board), finding that, in the goodfaith opinion of the Board, Executive is guilty of the conduct described in first sentence of this Section 7(b), and specifying theparticulars thereof in detail. For purposes hereof, no act or failure to act, on the part of Executive, shall be considered “willful” unlessit is done, or omitted to be done, by Executive in bad faith or without an objectively reasonable belief that Executive’s action oromission was in the best interests of the Company. Any act, or failure to act, based upon the direction of the Board based upon theadvice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith andin the best interests of the Company.(c)“Disability” means that Executive is deemed disabled for purposes of the Company’s long-termdisability plan or policy that covers Executive.8.Confidentiality. In the course of Executive’s employment with and involvement with the Company and itsaffiliates, Executive has obtained, or may obtain, secret or confidential information, knowledge or data concerning the Company’s andits affiliates’ businesses, strategies, operations, clients, customers, prospects, financial affairs, organizational and personnel matters,policies, procedures and other nonpublic matters, or concerning those of third parties. Executive shall hold in a fiduciary capacity forthe benefit of the Company and its affiliates, all secret or confidential information, knowledge or data relating to the Company or anyof its affiliated companies, and their respective businesses, which shall have been obtained by Executive during Executive’semployment by the Company or any of its affiliates and which shall not be or become public knowledge (other than by acts byExecutive or representatives of Executive in violation of this Agreement). All records, files, memoranda, reports, customer lists,documents and the like (whether in paper or electronic format) that Executive has used or prepared during Executive’s employmentshall remain the sole property of the Company and shall be promptly returned to the Company’s premises upon any termination ofemployment. After termination of Executive’s services with the Company, Executive shall not, without the prior written consent of theCompany or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or datato anyone other than the Company and those designated by it. The confidentiality provision contained herein is in addition to and notin limitation of Executive’s duties as an officer and director under applicable law. For purposes of this Section 8 and Section 9,references to the Company and its affiliates shall include their predecessor and any successor entities. Notwithstanding the foregoing,Executive will not be held criminally or civilly liable under any federal or state trade secret law for a disclosure of a trade secret that (a)is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely forthe purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuitor other proceeding, if such filing is made under seal and protected from public disclosure. Further, nothing in this Agreementprohibits Executive from reporting-8-010-8594-3010/5/AMERICAS possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department ofJustice, the Securities and Exchange Commission, Congress, and any federal Inspector General, or from making other disclosures thatare protected under the whistleblower provisions of federal law or regulation. Executive does not need the prior authorization of theCompany to make any such reports or disclosures and is not required to notify the Company that he has made such reports ordisclosures.9.Nonsolicitation; Noncompetition; Post-Termination Cooperation.(a)Executive hereby covenants and agrees that, while employed and for a period oftwelve (12) months following his termination of employment with the Company for any reason, Executive shall not, without the priorwritten consent of the Company, either directly or indirectly, (i) induce or attempt to induce any employee or independent contractor ofthe Company, the Company or any of their respective affiliates to leave the Company, the Company or any such affiliate, (ii) hire anyperson who was an employee or independent contractor of the Company, the Company or any of their respective affiliates until six (6)months after such individual’s relationship with the Company, the Company or such affiliate has been terminated, (iii) induce orattempt to induce any client, customer or other business relation (whether (A) current, (B) former, within the six (6) months after suchrelationship has been terminated or (C) prospective, provided that there are demonstrable efforts or plans to establish such relationship)of the Company, the Company or any of their respective affiliates to cease doing business or to reduce the amount of business theyhave customarily done or contemplate doing with the Company, the Company or any such affiliate, whether or not the relationshipbetween the Company, the Company or any such affiliate and such client, customer or other business relation was originallyestablished, in whole or in part, through Executive’s efforts, or in any way interfere with the relationship between any such client,customer or business relation, on the one hand, and the Company, the Company or any such affiliate, on the other hand.(b)Executive acknowledges that, in the course of Executive’s employment with the Company, theCompany and their respective affiliates (including their predecessor and any successor entities), Executive has become familiar, or willbecome familiar, with the Company’s, the Company’s and their respective affiliates’ trade secrets and with other confidentialinformation, knowledge or data concerning the Company, the Company, their respective affiliates and their respective predecessors,and that Executive’s services have been and will be of special, unique and extraordinary value to the Company, the Company and theirrespective affiliates. Therefore, Executive agrees that, while employed and for a period of twelve (12) months following Executive’stermination of employment with the Company for any reason (the “Noncompetition Period”), Executive shall not, directly or indirectly,own, manage, operate, control, be employed by (whether as an employee, director consultant, independent contractor or otherwise, andwhether or not for compensation) or render services in any capacity to a Competing Business (as defined below), in any country inwhich the Company, the Company or any of their respective affiliates conducts business. For purposes of this Agreement, a“Competing Business” shall mean any person, firm, corporation or other entity, in whatever form, engaged in the business in which theCompany or its affiliates engage, including the development, manufacture, or marketing of products incorporatingtetrahydrocannabinol (THC) or derivatives or synthetic versions thereof, spray technologies for use in drug delivery of painmedication, or any new molecules which were in development by the Company as of the-9-010-8594-3010/5/AMERICAS Termination Date. Nothing herein shall prohibit Executive from being a passive owner of not more than one percent (1%) of theoutstanding equity interest in any entity which is publicly traded, so long as Executive has no active participation in the business ofsuch entity.(c)Executive hereby agrees that prior to accepting employment with any other person or entityduring the Noncompetition Period, Executive shall provide such prospective employer with written notice of this Section 9, with acopy of such notice delivered promptly to the Company.(d)During the Employment Period and following the cessation of Executive’s employment forany reason, Executive shall, upon reasonable notice, (i) furnish such information and assistance to the Company, the Company and/ortheir respective affiliates, as may reasonably be requested by the Company, the Company or such affiliates, with respect to any matter,project, initiative or effort for which Executive is or was responsible or has relevant knowledge or had substantial involvement in whileemployed by the Company under this Agreement, and (ii) cooperate with the Company, the Company and their respective affiliatesduring the course of all third-party proceedings arising out of the Company, the Company and their respective affiliates’ business aboutwhich Executive has knowledge or information.(e)Executive acknowledges and agrees that: (i) the purposes of the foregoing covenants,including without limitation the noncompetition covenant of Section 9(b), are to protect the goodwill, legitimate business interests, andtrade secrets and confidential information of the Company and its affiliates; and (ii) because of the nature of the business in which theCompany and its affiliates are engaged, and because of the nature of the trade secrets and confidential information to which Executivehas access, it would be impractical and excessively difficult to determine the actual damages of the Company and its affiliates in theevent Executive breached any of the covenants of Section 8 or this Section 9. Executive understands that the covenants may limitExecutive’s ability to earn a livelihood in a Competing Business during the Noncompetition Period. Executive acknowledges that theCompany would be irreparably injured by a violation of Section 8 or this Section 9, and that it is impossible to measure in money thedamages that will accrue to the Company by reason of a failure by Executive to perform any of Executive’s obligations underSection 8 or this Section 9. Accordingly, if the Company or its affiliates institutes any action or proceeding to enforce any of theprovisions of Section 8 or this Section 9, to the extent permitted by applicable law, Executive hereby waives the claim or defense thatthe Company or its affiliates have an adequate remedy at law, and Executive shall not urge in any such action or proceeding thedefense that any such remedy exists at law. Furthermore, in addition to other remedies that may be available (including, withoutlimitation, termination of the obligation for the Company and the Company to pay compensation or benefits hereunder due toExecutive’s failure to comply in all material respects with the restrictive covenants in Section 8, 9(a) or 9(b), subject to written noticeby the Company and a reasonable opportunity for Executive to cure, if subject to cure), the Company and its affiliates shall be entitledto specific performance and other injunctive relief, without the requirement to post a bond. If any of the covenants set forth inSection 8 or this Section 9 are finally held to be invalid, illegal or unenforceable (whether in whole or in part), such covenant shall bedeemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining covenantsshall not be affected thereby. Any termination of-10-010-8594-3010/5/AMERICAS Executive’s services or of this Agreement shall have no effect on the continuing operation of Section 8 and this Section 9, which shallsurvive in accordance with their terms. 10.Section 409A of the Code. This Agreement is intended to comply with the requirements of Section 409A of theCode (including the exceptions thereto), to the extent applicable, and the Company shall administer and interpret this Agreement inaccordance with such requirements. If any provision contained in this Agreement conflicts with the requirements of Section 409A ofthe Code (or the exemptions intended to apply under this Agreement), this Agreement shall be deemed to be reformed to comply withthe requirements of Section 409A of the Code (or the applicable exemptions thereto). Notwithstanding anything to the contrary herein,for purposes of determining Executive’s entitlement to the payment or receipt of amounts or benefits that constitute nonqualifieddeferred compensation within the meaning of Section 409A of the Code, Executive’s employment shall not be deemed to haveterminated unless and until Executive incurs a “separation from service” as defined in Section 409A of the Code. Reimbursement ofany expenses provided for in this Agreement shall be made promptly upon presentation of documentation in accordance with theCompany’s policies with respect thereto as in effect from time to time (but in no event later than the end of the calendar year followingthe year such expenses were incurred); provided, however, that in no event shall the amount of expenses eligible for reimbursementhereunder during a calendar year affect the expenses eligible for reimbursement in any other taxable year. Notwithstanding anything tothe contrary herein, if a payment or benefit under this Agreement that constitutes nonqualified deferred compensation within themeaning of Section 409A of the Code is payable or provided due to a “separation from service” for purposes of the rules under Treas.Reg. § 1.409A-3(i)(2) (payments to specified employees upon a separation from service) and Executive is determined to be a“specified employee” (as determined under Treas. Reg. § 1.409A-1(i) and related Company procedures), such payment shall, to theextent necessary to comply with the requirements of Section 409A of the Code, be made on the date that is six (6) months after the dateof Executive’s separation from service (or, if earlier, the date of Executive’s death). Any installment payments that are delayedpursuant to this Section 10 shall be accumulated and paid in a lump sum on the first day of the seventh month following the date ofExecutive’s separation from service (or, if earlier, upon Executive’s death), and the remaining installment payments shall begin on suchdate in accordance with the schedule provided in this Agreement. The Severance Benefits are intended not to constitute deferredcompensation subject to Section 409A of the Code to the extent such Severance Benefits are covered by (a) the “short-term deferralexception” set forth in Treas. Reg. § 1.409A-1(b)(4), (b) the “two times severance exception” set forth in Treas. Reg. § 1.409A-1(b)(9)(iii), or (c) the “limited payments exception” set forth in Treas. Reg. § 1.409A-1(b)(9)(v)(D). The short-term deferral exception, thetwo times severance exception and the limited payments exception shall be applied to the Severance Benefits in order of payment insuch manner as results in the maximum exclusion of such Severance Benefits from treatment as deferred compensation underSection 409A of the Code. Each installment of the Severance Benefits and any other payments or benefits that constitute nonqualifieddeferred compensation within the meaning of Section 409A of the Code shall be deemed to be a separate payment for purposes ofSection 409A of the Code. In no event may Executive, directly or indirectly, designate the calendar year of any payment under thisAgreement. -11-010-8594-3010/5/AMERICAS 11.Additional Termination and Suspension Provisions. (a)If, after the Effective Date, any regulation applicable to the Company is amended or modified, or if any newregulation applicable to the Company becomes effective, and such amended, modified, or new regulation requires the inclusion in thisAgreement of a provision not presently included in this Agreement, then the foregoing provisions of this Section shall be deemedamended to the extent necessary to give effect in this Agreement to any such amended, modified or new regulation.(b)If, after the Effective Date, any regulation applicable to the Company is amended or modified, or if any newregulation applicable to the Company becomes effective, and such amended, modified, or new regulation permits the exclusion of alimitation in this Agreement on the payment to Executive of an amount or benefit provided for presently in this Agreement, then theforegoing provisions of this Section shall be deemed amended to the extent permissible to exclude from this Agreement any suchlimitation previously required to be included in this Agreement by a regulation prior to its amendment, modification or repeal.12.Arbitration. Any dispute or controversy arising out of, under, in connection with, or relating to this Agreement orany amendment hereof shall be submitted to binding arbitration before one arbitrator in Phoenix, Arizona, in accordance with theEmployment Arbitration Rules of the American Arbitration Association, and any judgment upon the award rendered by the arbitratormay be entered in any court having jurisdiction thereof.13.Indemnification and Insurance. The Parties acknowledge that the Parties have executed an IndemnificationAgreement, which shall not be superseded by this Agreement. To the extent that the Company provides its senior executive officerswith coverage under a directors’ and officers’ liability insurance policy, the Company shall provide such coverage to Executive onsubstantially the same basis. 14.Notices. The persons or addresses to which notices, mailings or deliveries shall be made may change from timeto time by notice given pursuant to the provisions of this Section. Any notice or other communication given pursuant to the provisionsof this Section shall be deemed to have been given (a) if sent by messenger, upon personal delivery to the party to whom the notice isdirected; (b) if sent by reputable overnight courier, one business day after delivery to such courier; (c) if sent by facsimile or email, onthe date it is actually received; and (d) if sent by mail, three business days following deposit in the United States mail, properlyaddressed, postage prepaid, certified or registered mail with return receipt requested. All notices required or permitted to be givenhereunder shall be addressed as follows (except as may be provided by written notice from one party to the other):If to Executive:Andrew Long106 Regal Pine CourtCary, NC 27518-12-010-8594-3010/5/AMERICAS If to the Company:Insys Therapeutics, Inc.1333 South Spectrum BoulevardSuite 100Chandler, Arizona 85286Attention: General Counsel 15.Amendment. No modifications of this Agreement shall be valid unless made in writing and signed by the Parties.16.Miscellaneous.(a)Successors and Assigns. This Agreement shall inure to the benefit of and be binding uponExecutive, his legal representatives and estate and intestate distributees, and the Company and its successors and assigns, including anysuccessor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially allof the assets and business of the Company may be sold or otherwise transferred. Any such successor of the Company shall be deemedto have assumed this Agreement and to have become obligated hereunder to the same extent as the Company and Executive’sobligations hereunder shall continue in favor of such successor.(b)Severability. A determination that any provision of this Agreement is invalid or unenforceableshall not affect the validity or enforceability of any other provision hereof.(c)Waiver. Failure to insist upon strict compliance with any terms, covenants or conditions hereofshall not be deemed a waiver of such term, covenant or condition. A waiver of any provision of this Agreement must be made inwriting, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of anyright or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any othertime or times.(d)Counterparts. This Agreement may be executed in two or more counterparts by originalsignature, facsimile or any generally accepted electronic means (including transmission of a pdf containing executed signature pages),each of which shall be deemed an original, and all of which shall constitute one and the same Agreement.(e)Governing Law. This Agreement shall be governed by and construed and enforced inaccordance with the laws of the State of Arizona, without reference to conflicts of law principles, except to the extent governed byfederal law in which case federal law shall govern. (f)Withholding. The Company may withhold from any amounts payable to Executive hereunderall federal, state, city or other taxes that the Company may reasonably determine are required to be withheld pursuant to any applicablelaw or regulation (it being understood, that Executive shall be responsible for payment of all taxes in respect of the payments andbenefits provided herein).-13-010-8594-3010/5/AMERICAS (g)Headings and Construction. The headings of sections in this Agreement are for convenienceof reference only and are not intended to qualify the meaning of any Section. Any reference to a Section number shall refer to aSection of this Agreement, unless otherwise specified.(h)Entire Agreement. Except as specifically provided herein, this Agreement contains the entire agreementof the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings orrepresentations relating to the subject matter hereof.[Signature Page Follows] -14-010-8594-3010/5/AMERICAS IN WITNESS WHEREOF, the Company has caused this Agreement to be executed, and Executive has hereunto setExecutive’s hand, all as of the Effective Date specified above.INSYS THERAPEUTICS, INC.By: ___________________________________ Name: Franc Del Fosse Title: EVP, General CounselEXECUTIVE_____________________________________Andrew Long -16-010-8594-3010/5/AMERICAS Exhibit ARELEASE AGREEMENTTHIS RELEASE AGREEMENT (hereinafter “Agreement”) is made and entered into on the [_____] day of[____________________], 20[__] by and between Insys Therapeutics, Inc. (the “Company”) and Andrew Long (“Executive”).WHEREAS, the Company and Executive are parties to an Employment Agreement, dated as of_______________ ___, 201__ (the “Employment Agreement”), pursuant to which Executive is eligible, subject to the terms andconditions set forth in the Employment Agreement, to receive certain compensation and benefits in connection with certainterminations of Executive’s services to the Company.NOW, THEREFORE, in consideration of the Company agreeing to provide the compensation and benefits underSection 6(ii) (B) of the Employment Agreement to Executive and of other good and valuable consideration, the sufficiency and receiptof which are hereby acknowledged by the parties, it is agreed as follows:1.In exchange for the consideration referenced above, Executive hereby completely, irrevocably, andunconditionally releases and forever discharges the Company, and any of its predecessor or affiliated companies, and each and all oftheir officers, agents, directors, supervisors, employees, representatives, and their successors and assigns, and all persons acting by,through, under, for, or in concert with them, or any of them, in any and all of their capacities (hereinafter individually or collectively,the “Released Parties”), from any and all charges, complaints, claims, and liabilities of any kind or nature whatsoever, known orunknown, suspected or unsuspected (hereinafter referred to as “claim” or “claims”) which Executive at any time heretofore had orclaimed to have or which Executive may have or claim to have regarding events that have occurred as of the Effective Date of thisAgreement, including, without limitation, those based on: any employee welfare benefit or pension plan governed by the EmployeeRetirement Income Security Act of 1974, as amended (provided that this release does not extend to any vested benefits of Executiveunder Company’s pension and welfare benefit plans as of the date of Executive’s termination of services); the Civil Rights Act of1964, as amended (race, color, religion, sex and national origin discrimination and harassment); the Civil Rights Act of 1966 (42U.S.C. § 1981) (discrimination); the Age Discrimination in Employment Act of 1967, as amended (hereinafter “ADEA”); the OlderWorkers Benefit Protection Act, as amended; the Americans With Disabilities Act, as amended ; § 503 of the Rehabilitation Act of1973; the Fair Labor Standards Act, as amended (wage and hour matters); the Family and Medical Leave Act, as amended (familyleave matters); the Genetic Information Non-Discrimination Act; the Uniformed Service Employment and Reemployment Rights Act;the Worker Adjustment and Retraining Notification Act; any other federal, state, or local laws or regulations regarding employmentdiscrimination or harassment, wages, insurance, leave, privacy or any other matter, including those of the State of Arizona or any otherstate, city or municipality; any negligent or intentional tort; any contract, policy or practice (implied, oral, or written); or any othertheory of recovery under federal, state, or local law, including, but not limited to, any and all claims which Executive may now have ormay have had, arising from or- 1 - 010-8594-3010/5/AMERICAS in any way whatsoever connected with Executive’s employment, service, or contacts, or termination of Executive’s employment, withthe Company or any other of the Released Parties; as well as any and all claims for compensatory or punitive damages, back pay, frontpay, fringe benefits, attorneys’ fees, costs, expenses or other equitable relief. Notwithstanding the foregoing, the released claims do not include, and this Agreement does not release, any: (a) rights tocompensation and benefits provided under Section 6 (ii) (B) of the Employment Agreement; and (b) rights to indemnificationExecutive may have under applicable law, the bylaws or certificate of incorporation of the Company, any applicable director andofficer liability policy or under the Employment Agreement, as a result of having served as an officer or director of the Company orany of its affiliates. The Parties also agree that the release provided by Executive in this Agreement does not include a release for (i)any rights or claims that arise after Executive signs this Agreement; (ii) any claim to challenge the release under the ADEA; or (iii) anyrights that cannot be waived by operation of law.Executive further acknowledges and agrees that Executive has not filed, assigned to others the right to file, reported, or providedinformation to a government agency, nor are there pending, any complaints, charges, or lawsuits by or on his behalf against theCompany or any Released Party with any governmental agency or any court, except for any filings, reports or information Executivemay have made or provided pursuant to Section 21F of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) orother applicable whistleblower laws or regulations. In addition, Executive understands that nothing contained in this Agreement limitsExecutive’s ability to report (by way of filing a charge or complaint, or otherwise) possible violations of law or regulation, or makeother legally-protected disclosures under applicable whistleblower laws or regulations (including pursuant to Section 21F of theExchange Act), without notice to or consent from the Company, to the Equal Employment Opportunity Commission (“EEOC”), theNational Labor Relations Board, the Occupational Safety and Health Administration, the Department of Justice, the Securities andExchange Commission (the “SEC”) or any other federal, state or local governmental agency or commission (“GovernmentAgencies”). Executive further understands that this Agreement does not limit Executive’s ability to participate in any investigation orproceeding that may be conducted by any Government Agency, including providing documents or other information to suchGovernment Agencies, without notice to the Company. To the extent permitted by law, Executive agrees that Executive will not cause or encourage any future legal proceedings to bemaintained or instituted against any of the Released Parties. To the extent permitted by law, Executive agrees that Executive will notaccept any monetary remedy or recovery arising from any charge filed or proceedings or investigation conducted by the EEOC or byany state or local human rights or employment rights enforcement agency relating to any of the matters released in this Agreement.However, nothing in this Agreement prohibits or shall be construed to prohibit Executive from receiving a reward from the SECpursuant to Section 21F of the Exchange Act and the regulations thereunder or, to the extent required by law, from anothergovernment agency pursuant to another applicable whistleblower law or regulation in connection therewith. - 2 - 010-8594-3010/5/AMERICAS 2.Older Workers Benefit Protection Act /ADEA Waiver:(a)Executive acknowledges that the Company has advised Executive in writing to consult with an attorneyof Executive’s choice before signing this Agreement, and Executive has been given the opportunity to consult with an attorney ofExecutive’s choice before signing this Agreement.(b)Executive acknowledges that Executive has been given the opportunity to review and consider thisAgreement for a full forty-five (45) days before signing it, and that, if Executive has signed this Agreement in less than that time,Executive has done so voluntarily in order to obtain sooner the benefits of this Agreement.(c)Executive further acknowledges that Executive may revoke this Agreement within seven (7) days aftersigning it, provided that this Agreement will not become effective until such seven (7) day period has expired. To be effective, anysuch revocation must be in writing and delivered to Company’s principal place of business by the close of business on the seventh(7th) day after signing the Agreement and must expressly state Executive’s intention to revoke this Agreement. Provided thatExecutive does not timely revoke this Agreement, the eighth (8th) day following Executive’s execution hereof shall be deemed the“Effective Date” of this Agreement.3.This Agreement shall not in any way be construed as an admission by the Company of any acts of unlawfulconduct, wrongdoing or discrimination against Executive, and the Company specifically disclaims any liability to Executive on the partof itself, its employees, and its agents.4.This Agreement cannot be amended, modified, or supplemented in any respect except by written agreemententered into and signed by the parties hereto.5.The Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, withoutregard to the principles of conflict of laws. Any disputes arising hereunder shall be resolved in accordance with Section 12 of theEmployment Agreement.6.Executive hereby acknowledges that Executive has read and understands the terms of this Agreement and thatExecutive signs it voluntarily and without coercion. Executive further acknowledges that Executive was given an opportunity toconsider and review this Agreement and the waivers contained in this Agreement, that Executive has done so and that the waiversmade herein are knowing, conscious and with full appreciation that Executive is forever foreclosed from pursing any of the rights sowaived.7.The Agreement may be signed in counterparts, and each counterpart shall be considered an original for allpurposes. - 3 - 010-8594-3010/5/AMERICAS PLEASE READ THIS AGREEMENT CAREFULLY; IT INCLUDES A RELEASE OF ALL KNOWNAND UNKNOWN CLAIMS.IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorizedofficer, and Executive has executed this Agreement, as of the date first written above. _/s/ Andrew Long____________________Andrew Long INSYS THERAPEUTICS, INC.By: _/s/ Franc Del Fosse__________________ Name: Franc Del Fosse Title: EVP, General Counsel - 4 - 010-8594-3010/5/AMERICAS Exhibit 23.1 Consent of Independent Registered Public Accounting Firm Insys Therapeutics, Inc.Chandler, ArizonaWe hereby consent to the incorporation by reference in the Registration Statements on Form S8 (No. 333-188306, 333-194374, 333-202472, 333-210064,and 333-223084) of Insys Therapeutics, Inc. of our reports dated March 9, 2018, relating to the consolidated financial statements, and the effectiveness ofInsys Therapeutics, Inc.’s internal control over financial reporting, which appear in this Form 10-K. /s/ BDO USA, LLPPhoenix, ArizonaMarch 9, 2018 Exhibit 31.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO RULES 13a-14(a) AND 15d-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934I, Saeed Motahari, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 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 this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin 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 most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant'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 are reasonablylikely 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 internal controlover financial reporting. Date: March 9, 2018 /s/ Saeed MotahariSaeed MotahariPresident and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO RULES 13a-14(a) AND 15d-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934I, Andrew G. Long, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 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 this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin 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 most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant'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 are reasonablylikely 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 internal controlover financial reporting. Date: March 9, 2018 /s/ Andrew G. LongAndrew G. LongChief Financial Officer(Principal Financial Officer) Exhibit 32CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Form 10-K of Insys Therapeutics, Inc. (the “Company”), for the year ended December 31, 2017, as filed with the Securities andExchange Commission on the date hereof (the “Report”), each of the undersigned, Saeed Motahari, principal executive officer of the Company, and AndrewG. Long, principal financial officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By:/s/ Saeed Motahari Saeed Motahari President and Chief Executive Officer (Principal Executive Officer) Dated March 9, 2018 By:/s/ Andrew G. Long Andrew G. Long Chief Financial Officer (Principal Financial Officer) Dated March 9, 2018

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