VIVUS, Inc
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10‑K☒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 001‑33389VIVUS, INC.(Exact name of Registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization)94‑3136179(IRS employeridentification number)900 E. Hamilton Avenue, Suite 550Campbell, California(Address of principal executive office)95008(Zip Code)Registrant’s telephone number, including area code: (650) 934‑5200Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, $.001 Par Value(Title of class)The NASDAQ Global Select MarketPreferred Share Purchase Rights(Title of class) Securities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod 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 (§229.405) is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or anyamendment to 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 oran emerging growth company. 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 ☐(Do not check if a smallerreporting company)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 anynew or revised financial accounting 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 common equity held by non‑affiliates of the Registrant as of June 30, 2017, totaled approximately $128,175,791based on the closing stock price as reported by the NASDAQ Global Select Market.As of February 28, 2018, there were 106,021,055 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEDocument Description10‑K Portions of the Registrant’s notice of annual meeting of stockholders and proxy statement tobe filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end ofDecember 31, 2017, are incorporated by reference into Part III of this report.Part III - ITEMS 10, 11, 12, 13, 14 Table of ContentsVIVUS, INC.FISCAL 2017 FORM 10‑KINDEX PART I Item 1: Business 5Item 1A: Risk Factors 30Item 1B: Unresolved Staff Comments 64Item 2: Properties 64Item 3: Legal Proceedings 64Item 4: Mine Safety Disclosures 66 PART II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 67Item 6: Selected Financial Data 69Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 69Item 7A: Quantitative and Qualitative Disclosures about Market Risk 86Item 8: Financial Statements and Supplementary Data 87Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 123Item 9A: Controls and Procedures 123Item 9B: Other Information 124 PART III Item 10: Directors, Executive Officers and Corporate Governance 125Item 11: Executive Compensation 125Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 125Item 13: Certain Relationships and Related Transactions, and Director Independence 126Item 14: Principal Accountant Fees and Services 126 PART IV Item 15: Exhibits and Financial Statement Schedules 126Signatures 133Power of Attorney 134Exhibit Index 127Certification of Interim Chief Executive Officer Certification of Chief Financial Officer Certification of Interim Chief Executive Officer and Chief Financial Officer 2 Table of ContentsFORWARD‑LOOKING STATEMENTSThis Form 10-K contains “forward looking” statements that involve risks and uncertainties. These statementstypically may be identified by the use of forward-looking words or phrases such as “may,” “believe,” “expect,” “forecast,”“intend,” “anticipate,” “predict,” “should,” “planned,” “likely,” “opportunity,” “estimated,” and “potential,” the negativeuse of these words or other similar words. All forward-looking statements included in this document are based on our currentexpectations, and we assume no obligation to update any such forward-looking statements. The Private Securities LitigationReform Act of 1995 provides a “safe harbor” for such forward-looking statements. In order to comply with the terms of thesafe harbor, we note that a variety of factors could cause actual results and experiences to differ materially from theanticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that mayaffect the operations, performance, development, and results of our business include but are not limited to:Risks and uncertainties related to Qsymia® (phentermine and topiramate extended release):·the timing of initiation and completion of the post-approval clinical studies required as part of the approval ofQsymia by the U.S. Food and Drug Administration, or FDA;·the response from FDA to any data and/or information relating to post-approval clinical studies required forQsymia;·our ability to work with FDA to significantly reduce or remove the requirements of the clinical post-approvalcardiovascular outcomes trial, or CVOT;·the impact of the indicated uses and contraindications contained in the Qsymia label and the Risk Evaluationand Mitigation Strategy, or REMS, requirements;·our ability to sell through the Qsymia retail pharmacy network;·whether the Qsymia retail pharmacy network will simplify and reduce the prescribing burden for physicians,improve access and reduce waiting times for patients seeking to initiate therapy with Qsymia;·that we may be required to provide further analysis of previously submitted clinical trial data;·our dialog with the European Medicines Agency, or EMA, relating to the U.S.-based CVOT for Qsymia, and theresubmission of an application for the grant of a marketing authorization to the EMA, the timing of suchresubmission, if any, the results of any required CVOT, the assessment by the EMA of the application formarketing authorization, and their agreement with the data from any required CVOT;·our or our current or potential partners’ ability to successfully seek and gain approval for Qsymia in otherterritories outside the U.S. and EU;·whether healthcare providers, payors and public policy makers will recognize the significance of the AmericanMedical Association officially recognizing obesity as a disease, or the new American Association of ClinicalEndocrinologists guidelines;·our, or our current or potential partners’, ability to successfully commercialize Qsymia including risks anduncertainties related to expansion to retail distribution, the broadening of payor reimbursement, the expansionof Qsymia’s primary care presence, and the outcomes of our discussions with pharmaceutical companies and ourstrategic and franchise-specific pathways for Qsymia;·our ability to focus our promotional efforts on health-care providers and on patient education that, along withincreased access to Qsymia and ongoing improvements in reimbursement, will result in the accelerated adoptionof Qsymia;·our ability to ensure that the entire supply chain for Qsymia efficiently and consistently delivers Qsymia to ourcustomers and partners;·our ability to accurately forecast Qsymia demand;·the number of Qsymia prescriptions dispensed;·the impact of promotional programs for Qsymia on our net product revenue and net income (loss) in futureperiods;3 Table of ContentsRisks and uncertainties related to STENDRA® (avanafil) or SPEDRA™ (avanafil):·our ability to manage the supply chain for STENDRA/SPEDRA for our current or potential collaborators;·risks and uncertainties related to the timing, strategy, tactics and success of the launches and commercializationof STENDRA/SPEDRA by our current or potential collaborators;·our ability to successfully complete on acceptable terms and on a timely basis, avanafil partnering discussionsfor territories under our license with Mitsubishi Tanabe Pharma Corporation in which we do not have acommercial collaboration;·Sanofi Chimie’s ability to undertake manufacturing of the avanafil active pharmaceutical ingredient and SanofiWinthrop Industrie’s ability to undertake manufacturing of the avanafil tablets;·the ability of our partners to maintain regulatory approvals to manufacture and adequately supply our productsto meet demand;Risks and uncertainties related to our business:·our history of losses and variable quarterly results;·substantial competition;·our ability to minimize expenses that are not essential to expanding the use of STENDRA/SPEDRA and Qsymiaor that are not related to product development;·risks related to our ability to protect our intellectual property and litigation in which we are involved or maybecome involved;·uncertainties of government or third-party payor reimbursement;·our reliance on sole-source suppliers, third parties and our collaborative partners;·our ability to successfully develop or acquire a proprietary formulation of tacrolimus as a precursor to initiatingour clinical development process;·our ability to identify and acquire development and cash flow generating assets;·risks related to the failure to obtain or retain federal or state controlled substances registrations andnoncompliance with Drug Enforcement Administration, or DEA, or state controlled substances regulations;·risks related to the failure to obtain FDA or foreign authority clearances or approvals and noncompliance withFDA or foreign authority regulations;·our ability to develop a proprietary formulation and to demonstrate through clinical testing the quality, safety,and efficacy of our current and future investigational drug candidates;·the timing of initiation and completion of clinical trials and submissions to U.S. and foreign authorities;·the results of post-marketing studies are not favorable;·compliance with post-marketing regulatory standards, post-marketing obligations or pharmacovigilance rules isnot maintained;·the volatility and liquidity of the financial markets;·our liquidity and capital resources;·our expected future revenues, operations and expenditures;·potential change in our business strategy to enhance long-term stockholder value;·our ability to address or potentially reduce our outstanding debt balances, specifically the $250 million ofconvertible notes due in 2020:·the impact, if any, of changes to our Board of Directors or senior management team; and·other factors that are described from time to time in our periodic filings with the Securities and ExchangeCommission, or the SEC, including those set forth in this filing as “Item 1A. Risk Factors.” When we refer to “we,” “our,” “us,” the “Company” or “VIVUS” in this document, we mean the current Delawarecorporation, or VIVUS, Inc., and its California predecessor, as well as all of our consolidated subsidiaries.4 Table of Contents PART I Item 1. BusinessOverviewVIVUS is a biopharmaceutical company developing and commercializing innovative, next-generation therapies toaddress unmet medical needs in human health. We have two approved therapies and one product candidate in active clinicaldevelopment. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronic weight management.STENDRA® (avanafil) is approved for erectile dysfunction, or ED, by FDA and by the EC under the trade name SPEDRA inthe EU. Tacrolimus is in active clinical development for the treatment of patients with pulmonary arterial hypertension, orPAH.Business Strategy ReviewIn 2016, we initiated a business strategy review to maximize long-term stockholder value. The result of this reviewwas for us to focus our efforts in three areas moving forward: (i) build our portfolio of development and cash flow generatingassets, (ii) maximize the value of and monetizing our legacy assets (Qsymia and STENDRA/SPEDRA), and (iii) identifyopportunities to address our outstanding debt balances. In 2017, we acquired tacrolimus and ascomycin for the treatment ofPAH, we licensed Qsymia in South Korea, and we reacquired the rights for SPEDRA in Africa, the Middle East, Turkey, andthe Commonwealth of Independent States, or CIS, including Russia. We are continuing our evaluation of alternatives foraddressing our outstanding debt, specifically the $250 million of convertible notes due in 2020.Development ProgramsPulmonary Arterial Hypertension - TacrolimusPAH is a chronic, life-threatening disease characterized by elevated blood pressure in the pulmonary arteries, whichare the arteries between the heart and lungs, due to pathologic proliferation of epithelial and vascular smooth muscle cells inthe lining of these blood vessels and excess vasoconstriction. Pulmonary blood pressure is normally between 8 and 20 mmHgat rest as measured by right heart catheterization. In patients with PAH, the pressure in the pulmonary artery is greater than 25mmHg at rest or 30 mmHg during physical activity. These high pressures make it difficult for the heart to pump bloodthrough the lungs to be oxygenated.The current medical therapies for PAH involve endothelin receptor antagonists, PDE5 inhibitors, prostacyclinanalogues, selective prostaglandin I2 receptor agonists, and soluble guanate cyclase stimulators, which aim to reducesymptoms and improve quality of life. All currently approved products treat the symptoms of PAH, but do not address theunderlying disease. We believe that tacrolimus can be used to enhance reduced bone morphogenetic protein receptor type 2,or BMPR2, signaling that is prevalent in PAH patients and may therefore address a fundamental cause of PAH.The prevalence of PAH varies among specific populations, but it is estimated at between 15 and 50 cases per millionadults. PAH usually develops between the ages of 20 and 60 but can occur at any age, with a mean age of diagnosis around45 years. Idiopathic PAH is the most common type, constituting approximately 40% of the total diagnosed PAH cases, andoccurs two to four times more frequently in females.On January 6, 2017, we entered into a Patent Assignment Agreement with Selten Pharma, Inc., or Selten, whereby wereceived exclusive, worldwide rights for the development and commercialization of BMPR2 activators for the treatment ofPAH and related vascular diseases. As part of the agreement, Selten assigned to us its license to a group of patents owned bythe Board of Trustees of the Leland Stanford Junior University, or Stanford, which cover uses of tacrolimus and ascomycin totreat PAH. Under this agreement, we paid Selten an upfront payment of $1.0 million, and we will pay additional milestonepayments based on global development status and future sales milestones, as well as tiered royalty payments on future salesof these compounds. The total potential milestone payments are $39.0 million to Selten. We have assumed fullresponsibility for the development and commercialization of the licensed compounds for the treatment of PAH and relatedvascular diseases.5 Table of ContentsIn October 2017, we held a pre-IND meeting with FDA for our proprietary formulation of tacrolimus for the treatmentof PAH. FDA addressed our questions related to preclinical, nonclinical and clinical data and the planned design of clinicaltrials of tacrolimus in class III and IV PAH patients, and clarified the requirements needed to file an IND to initiate a clinicaltrial in this indication. As discussed with FDA, we currently intend to design and conduct clinical trials that could qualify forFast Track and/or Breakthrough Therapy designation.Tacrolimus for the treatment of PAH has received Orphan Drug Designation from FDA in the United States and theEMA in the EU. We are focusing on the development of a proprietary oral formulation of tacrolimus to be used in a clinicaldevelopment program and for commercial use. We anticipate completing the development of our proprietary formulation oftacrolimus, filing an IND with FDA, and initiating enrollment in a Phase 2 clinical trial during 2018.Qsymia for Additional IndicationsWe are currently considering further development of Qsymia for the treatment of various diseases, including (i)obstructive sleep apnea, (ii) diabetes, (iii) nonalcoholic steatohepatitis, or NASH, (iv) nonalcoholic fatty liver disease, orNAFLD, also known as fatty liver disease, (v) hyperlipidemia, or an elevation of lipids, or fats, in the bloodstream, and (vi)hypertension in patients who do not respond well to typical antihypertensive medications. We expect no future developmentuntil we have concluded our discussions with FDA regarding our CVOT for Qsymia.Additional OpportunitiesWe will continue to evaluate potential in-licensing opportunities to build our portfolio of product and productcandidates, with a primary focus in 2018 on cash flow generating assets.Commercial ProductsQsymiaFDA approved Qsymia in July 2012, as an adjunct to a reduced calorie diet and increased physical activity forchronic weight management in adult obese or overweight patients in the presence of at least one weight related comorbidity,such as hypertension, type 2 diabetes mellitus or high cholesterol, or dyslipidemia. Qsymia incorporates a proprietaryformulation combining low doses of the active ingredients from two previously approved drugs, phentermine and topiramate.Although the exact mechanism of action is unknown, Qsymia is believed to suppress appetite and increase satiety, or thefeeling of being full, the two main mechanisms that impact eating behavior.We commercialize Qsymia in the U.S. through a small specialty sales force who promote Qsymia to physicians. Oursales efforts are focused on maintaining a commercial presence with high volume prescribers of anti-obesity products. Ourmarketing efforts have focused on rolling out unique programs to encourage targeted prescribers to gain more experiencewith Qsymia with their obese or overweight patient population. We continue to invest in digital media in order to amplifyour messaging to information-seeking consumers. The digital messaging encourages those consumers most likely to takeaction to speak with their physicians about obesity treatment options. We believe our enhanced digital strategies deliverclear and compelling communications to potential patients. We utilize a patient savings plan to further drive Qsymia brandpreference at the point of prescription and to encourage long-term use of the brand.In September 2017, we entered into a license and commercialization agreement, or the Alvogen License Agreement,and a commercial supply agreement, or the Alvogen Supply Agreement, with Alvogen Malta Operations (ROW) Ltd, orAlvogen. Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for obtaining andmaintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. We received an upfrontpayment of $2.5 million in September 2017 and are eligible to receive additional payments upon Alvogen achievingmarketing authorization, commercial launch and reaching a sales milestone. Additionally, we will receive a royalty onAlvogen’s Qsymia net sales in South Korea. Under the Alvogen Supply Agreement, the Company will supply product toAlvogen.6 Table of ContentsSTENDRA/SPEDRASTENDRA is an oral phosphodiesterase type 5, or PDE5, inhibitor that we have licensed from Mitsubishi TanabePharma Corporation, or MTPC. FDA approved STENDRA in April 2012 for the treatment of ED in the United States. In June2013, the EC adopted a decision granting marketing authorization for SPEDRA, the approved trade name for avanafil in theEU, for the treatment of ED in the EU.In July 2013, we entered into a license and commercialization agreement, or the Menarini License Agreement, withthe Menarini Group, through its subsidiary Berlin Chemie AG, or Menarini, under which Menarini received an exclusivelicense to commercialize and promote SPEDRA for the treatment of ED in over 40 countries, including the EU, Australia andNew Zealand. Menarini commenced its commercialization launch of the product in the EU in early 2014. As of the date ofthis filing, SPEDRA is commercially available in 31 countries within the territory granted to Menarini pursuant to theMenarini License Agreement. In addition, Menarini licensed rights directly from MTPC to commercialize avanafil in certainAsian territories. We are entitled to receive potential milestone payments based on certain net sales targets, plus royalties onSPEDRA sales. Menarini will also reimburse us for payments made to cover various obligations to MTPC during the term ofthe Menarini License Agreement. Menarini obtains SPEDRA exclusively from us.In September 2016, we entered into a license and commercialization agreement, or the Metuchen LicenseAgreement, and a commercial supply agreement, or the Metuchen Supply Agreement, with Metuchen Pharmaceuticals LLC,or Metuchen. Under the terms of the Metuchen License Agreement, Metuchen received an exclusive license to develop,commercialize and promote STENDRA in the United States, Canada, South America and India, or the Metuchen Territory,effective October 1, 2016. Metuchen will reimburse us for payments made to cover royalty and milestone obligations toMTPC during the term of the Metuchen License Agreement, but will otherwise owe us no future royalties. Metuchen obtainsSTENDRA exclusively from us.In December 2013, we entered into a license and commercialization agreement with Sanofi, or the Sanofi LicenseAgreement, under which Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use inhumans in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, or CIS, including Russia, or theSanofi Territory. Sanofi was responsible for obtaining regulatory approval in its territories. In March 2017, we and Sanofientered into the Termination, Rights Reversion and Transition Services Agreement, or the Transition Agreement, effectiveFebruary 28, 2017. Under the Transition Agreement, effective upon the thirtieth day following February 28, 2017, the SanofiLicense Agreement terminated for all countries in the Sanofi Territory. In addition, under the Transition Agreement, Sanofiprovided us with certain transition services in support of ongoing regulatory approval efforts while we seek to obtain a newcommercial partner or partners for the Sanofi Territory. We pay certain transition service fees to Sanofi as part of theTransition Agreement.We are currently in discussions with potential collaboration partners to develop, market and sell STENDRA forterritories in which we do not currently have a commercial collaboration, including Africa, the Middle East, Turkey, the CIS,including Russia, Mexico and Central America.VIVUS was incorporated in California in 1991 and reincorporated in Delaware in 1996. Our corporate headquartersis located at 900 E. Hamilton Avenue, Suite 550, Campbell, California 95008, and our telephone number is (650) 934‑5200.7 Table of ContentsProducts and Development ProgramsOur approved drugs and investigational drug candidates are summarized as follows:Drug Indication Status Commercial rightsQsymia Obesity United States Commercially available Worldwide rights available, except forSouth Korea EUMarketing AuthorizationApplication, or MAA, denied in2014 South KoreaNot yet commercially available South Korea commercial rights licensed toAlvogen Qsymia Obstructive SleepApnea Phase 2 study completed Worldwide rights availableQsymia Diabetes Phase 2 study completed Worldwide rights available STENDRA/SPEDRA(avanafil) Erectile dysfunction United States Commercially available Worldwide license from MTPC(excluding certain Asian markets). U.S.,Canada, South America and Indiacommercial rights licensed to Metuchen EUCommercially available EU, Australia and New Zealandcommercial rights licensed to MenariniGroup Tacrolimus PAH Phase 2a study completedIND to be filed in 2018 Worldwide rights availableQsymia for the Treatment of ObesityMany factors contribute to excess weight gain. These include environmental factors, genetics, health conditions,certain medications, emotional factors and other behaviors. All this contributes to more than 110 million Americans beingobese or overweight with at least one weight‑related comorbidity. Excess weight increases the risk of cardiometabolic andother conditions including type 2 diabetes, high cholesterol, high blood pressure, heart disease, sleep apnea, stroke andosteoarthritis. According to the National Institutes of Health, or NIH, losing just 10% of body weight may help obese patientsreduce the risk of developing other weight‑related medical conditions, while making a meaningful difference in health andwell‑being.Qsymia for the treatment of obesity was approved as an adjunct to a reduced‑calorie diet and increased physicalactivity for chronic weight management in adult patients with an initial BMI of 30 or greater, or obese patients, or with aBMI of 27 or greater, or overweight patients, in the presence of at least one weight‑related comorbidity, such as hypertension,type 2 diabetes mellitus or high cholesterol, or dyslipidemia. Qsymia incorporates low doses of active ingredients from twopreviously approved drugs, phentermine and topiramate. Although the exact mechanism of action is unknown, Qsymia isbelieved to target appetite and satiety, or the feeling of being full, the two main mechanisms that impact eating behavior.Qsymia was approved with a REMS with a goal of informing prescribers and patients of reproductive potentialregarding an increased risk of orofacial clefts in infants exposed to Qsymia during the first trimester of pregnancy, theimportance of pregnancy prevention for females of reproductive potential receiving Qsymia and the need to discontinueQsymia immediately if pregnancy occurs. The Qsymia REMS program includes a medication guide, patient brochure,8 Table of Contentshealthcare provider training, distribution through certified home delivery and retail pharmacies, an implementation systemand a time‑table for assessments.Upon receiving approval to market Qsymia, FDA required that we perform additional studies of Qsymia including aCVOT. To date, there have been no indications throughout the Qsymia clinical development program nor post-marketingexperience of any increase in adverse cardiovascular, or CV, events. Given this historical information, along with theestablished safety profiles of phentermine and topiramate, we continue to believe that Qsymia poses no true cardiovascularsafety risk. We have held several meetings with FDA to discuss alternative strategies for obtaining CV outcomes data thatwould be substantially more feasible and that ensure timely collection of data to better inform on the CV safety ofQsymia. We worked with cardiovascular and epidemiology experts in exploring alternate solutions to demonstrate the long-term cardiovascular safety of Qsymia. After reviewing a summary of Phase 3 data relevant to CV risk and post-marketingsafety data, the cardiology experts noted that they believe there was an absence of an overt CV risk signal and indicated thatthey did not believe a randomized placebo-controlled CVOT would provide additional information regarding the CV risk ofQsymia. The epidemiology experts maintained that a well-conducted retrospective observational study could provide data tofurther inform on potential CV risk. We worked with the expert group to develop a protocol and conduct a retrospectiveobservational study. We have submitted information from this study to FDA in support of a currently pending supplementalNew Drug Application (sNDA) seeking changes to the Qsymia label. Although we and consulted experts believe there is noovert signal for CV risk to justify the CVOT, we are committed to working with FDA to reach a resolution. There is noassurance, however, that FDA will accept any measures short of those specified in the CVOT to satisfy this requirement.In May 2013, the EC issued a decision refusing the grant of marketing authorization in the EU for Qsiva™, theapproved trade name for Qsymia in the EU. In September 2013, we submitted a request to the EMA for Scientific Advice, aprocedure similar to the U.S. Special Protocol Assessment process, regarding use of a pre-specified interim analysis from theCVOT to assess the long-term treatment effect of Qsymia on the incidence of major adverse CV events in overweight andobese subjects with confirmed CV disease. Our request was to allow this interim analysis to support the resubmission of anapplication for a marketing authorization for Qsiva for the treatment of obesity in accordance with the EU centralizedmarketing authorization procedure. We received feedback in 2014 from the EMA and the various competent authorities ofthe EU Member States associated with review of the CVOT protocol. As for the EU, even if FDA were to accept aretrospective observational study in lieu of a CVOT, there would be no assurance that the EMA would accept the same.We have granted an exclusive license to Alvogen to commercialize and promote Qsymia for the treatment of obesityin South Korea.Foreign regulatory approvals, including EC marketing authorization to market Qsiva in the EU, may not beobtained on a timely basis, or at all, and the failure to receive regulatory approvals in a foreign country would prevent usfrom marketing our products that have failed to receive such approval in that market, which could have a material adverseeffect on our business, financial condition and results of operations.STENDRA/SPEDRA for the Treatment of Erectile DysfunctionED affects an estimated 52% of men between the ages of 40 and 70. Prevalence increases with age and can be causedby a variety of factors, including medications (anti‑hypertensives, histamine receptor antagonists); lifestyle (tobacco, alcoholuse); diseases (diabetes, cardiovascular conditions, prostate cancer); and spinal cord injuries. Left untreated, ED cannegatively impact relationships and self‑esteem, causing feelings of embarrassment and guilt.STENDRA is an oral PDE5 inhibitor we have licensed from MTPC. STENDRA was approved in the U.S. by FDA onApril 27, 2012, for the treatment of ED.On September 18, 2014, FDA approved a supplemental New Drug Application, or sNDA, for STENDRA. STENDRAis now indicated to be taken as early as approximately 15 minutes before sexual activity. On January 23, 2015, the ECadopted the commission implementing decision amending the marketing authorization for SPEDRA. SPEDRA is nowapproved in the EU to be taken as needed approximately 15 to 30 minutes before sexual activity.We have granted an exclusive license to Menarini to commercialize and promote SPEDRA for the treatment of EDin over 40 European countries, including the EU, plus Australia and New Zealand. We have granted an exclusive license toMetuchen to market STENDRA in the United States, Canada, South America and India. We have also granted9 Table of Contentsan exclusive license to Sanofi to commercialize avanafil in Africa, the Middle East, Turkey, and the CIS, including Russia.We are currently in discussions with potential partners to commercialize STENDRA in other territories where we do notcurrently have a commercial collaboration under our license with MTPC, including Mexico and Central America.On January 3, 2017, we granted Hetero a license to manufacture and commercialize the generic version ofSTENDRA described in its ANDA filing in the United States as of the date that is the later of (a) October 29, 2024, which is180 days prior to the expiration of the last to expire of the patents-in-suit, or (b) the date that Hetero obtains final approvalfrom FDA of the Hetero ANDA. The settlement agreement provides for a full settlement of all claims that were asserted in thesuit.Tacrolimus for the Treatment of Pulmonary Arterial HypertensionPAH is a chronic, life-threatening disease characterized by elevated blood pressure in the pulmonary arteries, whichare the arteries between the heart and lungs, due to pathologic proliferation of epithelial and vascular smooth muscle cells inthe lining of these blood vessels and excess vasoconstriction. Pulmonary blood pressure is normally between 8 and 20 mmHgat rest as measured by right heart catheterization. In patients with PAH, the pressure in the pulmonary artery is greater than 25mmHg at rest or 30 mmHg during physical activity. These high pressures make it difficult for the heart to pump bloodthrough the lungs to be oxygenated.The prevalence of PAH varies among specific populations, but it is estimated at between 15 and 50 cases per millionadults. PAH usually develops between the ages of 20 and 60 but can occur at any age, with a mean age of diagnosis around45 years. Idiopathic PAH is the most common type, constituting approximately 40% of the total diagnosed PAH cases, andoccurs two to four times more frequently in females. Risk factors for PAH include a family history of PAH, congenital heartdisease, connective tissue disease, portal hypertension, sickle cell disease, thyroid disease, HIV infection, and use of certaindrugs and toxins. PAH patients are classified by the World Health Organization (WHO) as class I, II, III, or IV, with the mostimpaired patients being class IV.The symptoms of PAH are non-specific and thus are unfortunately most frequently diagnosed when patients havereached an advanced stage of the disease. Early symptoms may include shortness of breath during routine activity, fatigue,chest pain, racing heartbeat, pain in upper right side of abdomen, and decreased appetite. As PAH progresses and worsens,symptoms may include feeling light-headed (especially during physical activity), fainting, swelling in the ankles or legs, andbluish lips or skin. At its worse point, the patient develops right heart failure and is routinely hospitalized to manage theirprogressing disease which may ultimately lead to death. Currently, lung transplantation is the only option for patients whoare not responsive to medical therapy.The current medical therapies for PAH involve endothelin receptor antagonists, or ERA, phosphodiesterase-5, orPDE5, inhibitors, prostacyclin analogues, selective IP receptor agonists, and soluble guanylate cyclase, or sGC stimulators,which aim to reduce symptoms and improve quality of life. All currently approved products treat the symptoms of PAH, butdo not address the underlying disease. According to LifeSci Capital (Feb 2016 Analysis), the U.S. and worldwide markets forPAH pharmaceutical treatments in 2015 exceeded $2.7 billion and $4.5 billion, respectively.We believe that bone morphogenic protein receptor 2, or BMPR2, signaling could inhibit vascular smooth muscleproliferation. Reduced BMPR2 expression, including loss-of-function mutations in BMPR2, is prevalent in PAH patientsand may contribute to smooth muscle proliferation. Studies have shown that low doses of tacrolimus have restored BMPR2signaling and reversed proliferative effects in animal models. We believe that enhancement of BMPR2 signaling withtacrolimus may address a fundamental cause of PAH.On March 16, 2015, tacrolimus for the treatment of PAH received an Orphan Drug Designation. An Orphan DrugDesignation can provide benefits to us, such as: tax credits on clinical research, simplification of administrative procedures(reduction of the waiting period and reduction of the amount of registration fees), and marketing exclusivity of seven yearsafter the marketing approval is granted for the approved orphan indication.Stanford completed a randomized, double-blind Phase 2a with 23 class I and II PAH patients titrated to target bloodlevels. All target blood levels were well tolerated with no drug related serious adverse events, nephrotoxicity or incidentdiabetes. In addition, Stanford provided tacrolimus for compassionate use in three class III or IV PAH patients. Thecompassionate use demonstrated dramatically reduced rates of hospitalizations and functional class improvements wereobserved.10 Table of ContentsOn January 6, 2017, we entered into a Patent Assignment Agreement with Selten, whereby we received exclusive,worldwide rights for the development and commercialization of BMPR2 activators for the treatment of PAH and relatedvascular diseases. As part of the agreement, Selten assigned to us its license to a group of patents owned by Stanford whichcover uses of tacrolimus and ascomycin to treat PAH. We are responsible for future financial obligations to Stanford underthat license.We have also assumed full responsibility for the development and commercialization of the licensed compounds forthe treatment of PAH and related vascular diseases. We paid Selten an upfront payment of $1.0 million, and we will payadditional milestone payments based on global development status and future sales milestones, as well as tiered royaltypayments on future sales of these compounds. The total potential milestone payments are $39.0 million to Selten and$550,000 to Stanford. The majority of the milestone payments to Selten may be paid, at our sole option, either in cash or ourcommon stock, provided that in no event shall the payment of common stock exceed fifty percent of the aggregate amount ofsuch milestone payments.In October 2017, we held a pre-IND meeting with FDA for our proprietary formulation of tacrolimus for the treatmentof PAH. FDA addressed our questions related to preclinical, nonclinical and clinical data and the planned design of clinicaltrials of tacrolimus in class III and IV PAH patients, and clarified the requirements needed to file an IND to initiate a clinicaltrial in this indication. As discussed with FDA, we currently intend to design and conduct clinical trials that could qualify forFast Track and/or Breakthrough Therapy designation.Tacrolimus for the treatment of PAH has received Orphan Drug Designation from FDA in the United States and theEuropean Medicines Agency in the EU. We are currently focusing on the development of a proprietary formulation oftacrolimus to be used in a clinical development program and for commercial use and filing an IND with FDA.Other ProgramsWe have licensed and will evaluate opportunities to license from third parties the rights to other investigationaldrug candidates to treat various diseases and medical conditions. We expect to continue to use our expertise in designingand conducting clinical trials, formulation and investigational drug candidate development to commercializepharmaceuticals for unmet medical needs or for disease states that are underserved by currently approved drugs. We intend todevelop products with a proprietary position or that complement our other products currently under development, althoughthere can be no assurance that any of these investigational product candidates will be successfully developed and approvedby regulatory authorities.Government RegulationsFDA RegulationPrescription pharmaceutical products are subject to extensive pre‑ and post‑marketing regulation by FDA. TheFederal Food, Drug, and Cosmetic Act, and its implementing regulations govern, among other things, requirements for thetesting, development, manufacturing, quality control, safety, efficacy, approval, labeling, storage, recordkeeping, reporting,distribution, import, export, advertising and promotion of drug products.The activities required before a pharmaceutical agent may be marketed in the U.S. begin with pre‑clinical testing.Pre‑clinical tests generally include laboratory evaluation of potential products and animal studies to assess the potentialsafety and efficacy of the product and its formulations. The results of these studies and other information must be submittedto FDA as part of an investigational new drug application, or IND, which must be reviewed by FDA before proposed clinicaltesting in human volunteers can begin. Clinical trials involve the administration of the investigational new drug to healthyvolunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted inaccordance with good clinical practices, or GCP, which establishes standards for conducting, recording data from, andreporting results of, clinical trials, and are intended to assure that the data and reported results are credible, accurate, and thatthe rights, safety and well‑being of study participants are protected. Clinical trials must be under protocols that detail theobjectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocolmust be submitted to FDA as part of the IND. Further, each clinical study must be conducted under the auspices of anindependent institutional review board, or IRB. The IRB will consider, among other things, regulations and guidelines forobtaining informed consent from study subjects, as well as other ethical factors and11 Table of Contentsthe safety of human patients. The sponsoring company, FDA, or the IRB may suspend or terminate a clinical trial at any timeon various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.Typically, human clinical trials are conducted in three phases that may overlap. In Phase 1, clinical trials areconducted with a small number of patients to determine the early safety profile and pharmacology of the new therapy. InPhase 2, clinical trials are conducted with groups of patients afflicted with a specific disease or medical condition in order todetermine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase 3, large‑scale, multicenterclinical trials are conducted with patients afflicted with a target disease or medical condition in order to provide substantialevidence of efficacy and safety required by FDA and others.The results of the pre‑clinical and clinical testing, together with chemistry and manufacturing information, aresubmitted to FDA in the form of a New Drug Application, or NDA, for a pharmaceutical product in order to obtain approval tocommence commercial sales. In responding to an NDA, FDA may grant marketing approvals, may request additionalinformation or further research or studies, or may deny the application if it determines that the application does not satisfy itsregulatory approval criteria. FDA approval for a pharmaceutical product may not be granted on a timely basis, if at all. Underthe goals and policies agreed to by FDA under the Prescription Drug User Fee Act, or PDUFA, FDA has approximately twelvemonths in which to complete its initial review of a standard NDA and respond to the applicant, and approximately eightmonths for a priority NDA. FDA does not always meet its PDUFA goal dates and in certain circumstances, the review processand the PDUFA goal date may be extended. A subsequent application for approval of an additional indication must also bereviewed by FDA under the same criteria as apply to original applications, and may be denied as well. In addition, even ifFDA approval is granted, it may not cover all the clinical indications for which approval is sought or may contain significantlimitations in the form of warnings, precautions or contraindications with respect to conditions of use. In addition, FDA mayrequire the development and implementation of a REMS to address specific safety issues at the time of approval or aftermarketing of the product. A REMS may, for instance, restrict distribution and impose burdensome implementationrequirements. Our approved product Qsymia is subject to a REMS program.Satisfaction of FDA premarket approval requirements for new drugs typically takes several years and the actual timerequired may vary substantially based upon the type, complexity and novelty of the product or targeted disease. Governmentregulation may delay or prevent marketing of potential products for a considerable period of time and may impose costlyprocedures upon our activities. Success in early‑stage clinical trials or with prior versions of products does not assure successin later stage clinical trials. Data obtained from clinical activities are not always conclusive and may be susceptible tovarying interpretations that could delay, limit or prevent regulatory approval.Once approved, products are subject to continuing regulation by FDA. FDA may withdraw the product approval ifcompliance with post‑marketing regulatory standards is not maintained or if problems occur after the product reaches themarketplace. In addition, FDA may require companies to conduct post‑marketing studies or trials, referred to as PMRs, toevaluate safety issues related to the approved product, and may withdraw approval or impose marketing restrictions based onthe results of PMR studies or trials or other relevant data. FDA has required us to perform PMR studies and trials for both ofour approved products, Qsymia and STENDRA. FDA has broad post‑market regulatory and enforcement powers, includingthe ability to levy civil monetary penalties, suspend or delay issuance of approvals, seize or recall products, or withdrawapprovals. Additionally, the Food and Drug Administration Amendments Act of 2007 requires all applicable clinical trialswe conduct for our investigational drug candidates, both before and after approval, and the results of those applicableclinical trials when available, to be included in a clinical trials registry database that is available and accessible to the publicvia the Internet. Our failure to properly participate in the clinical trial database registry may subject us to significant civilpenalties.Facilities used to manufacture drugs are subject to periodic inspection by FDA, and other authorities whereapplicable, and must comply with FDA’s current Good Manufacturing Practice, or cGMP regulations. Compliance withcGMP includes adhering to requirements relating to organization of personnel, buildings and facilities, equipment, control ofcomponents and drug product containers and closures, production and process controls, packaging and labeling controls,holding and distribution, laboratory controls, and records and reports. Failure to comply with the statutory and regulatoryrequirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure ofproduct or voluntary recall of a product.12 Table of ContentsFDA imposes a number of complex regulations on entities that advertise and promote pharmaceuticals, whichinclude, among other things, standards and regulations relating to direct‑to‑consumer advertising, off‑label promotion,industry‑sponsored scientific and educational activities, and promotional activities involving the Internet. A product cannotbe commercially promoted before it is approved. After approval, product promotion can include only those claims relating tosafety and effectiveness that are consistent with the labeling approved by FDA. FDA has very broad enforcement authority.Failure to abide by these regulations can result in adverse publicity, and/or enforcement actions, including the issuance of awarning letter directing the entity to correct deviations from FDA standards, and state and federal civil and criminalinvestigations and prosecutions. This could subject a company to a range of penalties that could have a significantcommercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a companypromotes or distributes drug products.Companies that manufacture or distribute drug products or that hold approved NDAs must comply with otherregulatory requirements, including submitting annual reports, reporting information about adverse drug experiences, andmaintaining certain records. In addition, we are subject to various laws and regulations regarding the use and disposal ofhazardous or potentially hazardous substances in connection with our manufacture and research. In each of these areas, asnoted above, the government has broad regulatory and enforcement powers, including the ability to levy fines and civilpenalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of whichcould have a material adverse effect upon us.Other Government RegulationsIn addition to laws and regulations enforced by FDA, we are also subject to regulation under NIH guidelines as wellas under the Controlled Substances Act (CSA) and implementing regulations from the Drug Enforcement Administration(DEA), the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, theResource Conservation and Recovery Act and other present and potential future federal, state or local laws and regulations,as our research and development may involve the controlled use of hazardous materials, chemicals, viruses and variousradioactive compounds. As a Schedule IV controlled substance under the CSA, Qsymia is subject to DEA and stateregulations relating to controlled substances including prescription procedures and limitations on prescription refills. Inaddition, the parties who perform our clinical and commercial manufacturing, distribution, dispensing and clinical studies forQsymia are required to maintain necessary DEA registrations and state licenses. The DEA periodically inspects facilities forcompliance with its rules and regulations.In addition to regulations in the U.S., we or our partners are subject to a variety of foreign regulations governingclinical trials, commercial sales, and distribution of our investigational drug candidates. We or our partners must obtainseparate approvals by the comparable regulatory authorities of foreign countries before we or our partners can commencemarketing of the product in those countries. For example, in the EU, the conduct of clinical trials is governed by Directive2001/20/EC which imposes obligations and procedures that are similar to those provided in applicable U.S. laws. TheEuropean Union Good Clinical Practice rules, or GCP, and EU Good Laboratory Practice, or GLP, obligations must also berespected during conduct of the trials. Clinical trials must be approved by the competent authorities and the competentEthics Committees in the EU Member States in which the clinical trials take place. A clinical trial application, or CTA, mustbe submitted to each EU Member State’s national health authority. Moreover, an application for a positive opinion must besubmitted to the competent Ethics Committee prior to commencement of clinical trials of a medicinal product. Thecompetent authorities of the EU Member States in which the clinical trial is conducted must authorize the conduct of the trialand the competent Ethics Committees must grant their positive opinion prior to commencement of a clinical trial in an EUMember State. The approval process varies from country to country, and the time may be longer or shorter than that requiredfor FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursementvary greatly from country to country.To obtain marketing approval of a medicinal product in the EU, we would be required to submit marketingauthorization applications based on the ICH Common Technical Document to the competent authorities, and mustdemonstrate the quality, safety and efficacy of our medicinal products. This would require us to conduct human clinical trialsto generate the necessary clinical data. Moreover, we would be required to demonstrate in our application that studies havebeen conducted with the medicinal product in the pediatric population as provided by a Pediatric Investigation Plan, or PIP,approved by the Pediatric Committee of the EMA. Alternatively, confirmation that we have been granted a waiver or deferralfrom the conduct of these studies must be provided.13 Table of ContentsMedicinal products are authorized in the EU in one of two ways, either by the competent authorities of the EUMember States through the decentralized procedure or mutual recognition procedure, or through the centralized procedureby the European Commission following a positive opinion by the EMA. The authorization process is essentially the sameirrespective of which route is used.The centralized procedure provides for the grant of a single marketing authorization that is valid for all EU MemberStates. The centralized procedure is compulsory for medicinal products produced by certain biotechnological processes,products designated as orphan medicinal products, and products with a new active substance indicated for the treatment ofcertain diseases. It is optional for those products that are highly innovative or for which a centralized process is in the interestof patients. Under the centralized procedure in the EU, the maximum timeframe for the evaluation of a marketingauthorization application is 210 days (excluding clock stops, when additional written or oral information is to be providedby the applicant in response to questions asked by the CHMP). Accelerated evaluation may be granted by the CHMP inexceptional cases. These are defined as circumstances in which a medicinal product is expected to be of a “major publichealth interest.” Three cumulative criteria must be fulfilled in such circumstances: the seriousness of the disease, such asheavy disabling or life‑threatening diseases, to be treated; the absence or insufficiency of an appropriate alternativetherapeutic approach; and anticipation of high therapeutic benefit. In these circumstances, the EMA ensures that the opinionof the CHMP is given within 150 days.The decentralized procedure provides for approval by one or more other (“concerned”) EU Member States of anassessment of an application for marketing authorization conducted by one EU Member State, known as the reference EUMember State. In accordance with this procedure, an applicant submits an application for marketing authorization to thereference EU Member State and the concerned EU Member States. This application is identical to the application that wouldbe submitted to the EMA for authorization through the centralized procedure. The reference EU Member State prepares adraft assessment and drafts of the related materials within 120 days after receipt of a valid application. The resultingassessment report is submitted to the concerned EU Member States who, within 90 days of receipt must decide whether toapprove the assessment report and related materials. If a concerned EU Member State cannot approve the assessment reportand related materials due to concerns relating to a potential serious risk to public health, disputed elements may be referredto the European Commission, whose decision is binding on all EU Member States. In accordance with the mutual recognitionprocedure, the sponsor applies for national marketing authorization in one EU Member State. Upon receipt of thisauthorization the sponsor can then seek the recognition of this authorization by other EU Member States. Authorization inaccordance with either of these procedures will result in authorization of the medicinal product only in the reference EUMember State and in the other concerned EU Member States.Innovative medicinal products authorized in the EU on the basis of a full marketing authorization application (asopposed to an application for marketing authorization that relies on data available in the marketing authorization dossier foranother, previously approved, medicinal product) are entitled to eight years’ data exclusivity. During this period, applicantsfor authorization of generics or biosimilars of these innovative products cannot rely on data contained in the marketingauthorization dossier submitted for the innovative medicinal product. Innovative medicinal products are also entitled to tenyears’ market exclusivity. During this ten year period no generic or biosimilar of this medicinal product can be placed on theEU market. The ten‑year period of market exclusivity can be extended to a maximum of 11 years if, during the first eightyears of those ten years, the Marketing Authorization Holder for the innovative product obtains an authorization for one ormore new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring asignificant clinical benefit in comparison with existing therapies.Similarly to the U.S., marketing authorization holders and manufacturers of medicinal products are subject tocomprehensive regulatory oversight by the EMA and/or the competent authorities of the EU Member States. This oversightapplies both before and after grant of manufacturing and marketing authorizations. It includes control of compliance with EUGMP rules and pharmacovigilance rules. We cannot guarantee that we would be able to comply with the post‑marketingobligations imposed as part of the marketing authorization for SPEDRA. Failure to comply with these requirements may leadto the suspension, variation or withdrawal of the marketing authorization for SPEDRA in the EU.In the EU, the advertising and promotion of our products will also be subject to EU Member States’ laws concerningpromotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfaircommercial practices, as well as other EU Member State legislation that may apply to the advertising and promotion ofmedicinal products. These laws require that promotional materials and advertising in relation to medicinal products complywith the product’s Summary of Product Characteristics, or SmPC, as approved by the competent14 Table of Contentsauthorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of themedicinal product. It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product.Promotion of a medicinal product that does not comply with the SmPC is considered to constitute off‑label promotion. Theoff‑label promotion of medicinal products is prohibited in the EU. The applicable laws at the EU level and in the individualEU Member States also prohibit the direct‑to‑consumer advertising of prescription‑only medicinal products. Violations of therules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines andimprisonment. These laws may further limit or restrict communications concerning the advertising and promotion of ourproducts to the general public and may also impose limitations on our promotional activities with healthcare professionals.Failure to comply with the EU Member State laws implementing the Community Code on medicinal products, andEU rules governing the promotion of medicinal products, interactions with physicians, misleading and comparativeadvertising and unfair commercial practices, with the EU Member State laws that apply to the promotion of medicinalproducts, statutory health insurance, bribery and anti‑corruption or with other applicable regulatory requirements can resultin enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment,orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issuepublic warnings, or to conduct a product recall.Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations,industry self‑regulation codes of conduct and physicians’ codes of professional conduct in the individual EU Member States.The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation,endorsement, purchase, supply, order or use of medicinal products is prohibited in the EU. The provision of benefits oradvantages to physicians is also governed by the national anti‑bribery laws of the EU Member States. One example is the UKBribery Act 2010. This Act applies to any company incorporated in or “carrying on business” in the UK, irrespective ofwhere in the world the alleged bribery activity occurs. This Act could have implications for our interactions with physiciansin and outside the UK. Violation of these laws could result in substantial fines and imprisonment.Payments made to physicians in certain EU Member States must be publically disclosed. Moreover, agreements withphysicians must often be the subject of prior notification and approval by the physician’s employer, his/her competentprofessional organization, and/or the competent authorities of the individual EU Member States. These requirements areprovided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States. Failureto comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines orimprisonment.United States Healthcare ReformIn March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010, collectively referred to in this report as the Affordable Care Act, was adopted in the UnitedStates. This law substantially changed the way healthcare is financed by both governmental and private insurers andsignificantly impacted the pharmaceutical industry. The Affordable Care Act contains a number of provisions that areexpected to impact our business and operations. Changes that may affect our business include those governing enrollment infederal healthcare programs, reimbursement changes, rules regarding prescription drug benefits under the health insuranceexchanges, expansion of the 340B program, and fraud and abuse and enforcement. These changes will impact existinggovernment healthcare programs and will result in the development of new programs, including Medicare payment forperformance initiatives and improvements to the physician quality reporting system and feedback program.The Affordable Care Act made significant changes to the Medicaid Drug Rebate program. Effective March 23, 2010,rebate liability expanded from fee‑for‑service Medicaid utilization to include the utilization of Medicaid managed careorganizations as well. With regard to the amount of the rebates owed, the Affordable Care Act increased the minimumMedicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13%for non‑innovator products; changed the calculation of the rebate for certain innovator products that qualify as lineextensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturerprice. In addition, the Affordable Care Act and subsequent legislation changed the definition of average manufacturer price.The Centers for Medicare and Medicaid Services, or CMS, the federal agency that administers Medicare and the MedicaidDrug Rebate program, issued final regulations that became effective on April 1, 2016 to15 Table of Contentsimplement the changes to the Medicaid Drug Rebate program under the Affordable Care Act. In addition, the Affordable CareAct requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federalgovernment beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share of the brandedprescription drug fee of $4.1 billion in 2018, based on the dollar value of its branded prescription drug sales to certain federalprograms identified in the law.Additional provisions of the Affordable Care Act may negatively affect our revenues in the future. For example, aspart of the Affordable Care Act’s provisions closing a coverage gap that currently exists in the Medicare Part D prescriptiondrug program, or the donut hole, manufacturers are required to provide a 50% discount on branded prescription drugsdispensed to beneficiaries within this donut hole. We currently do not have coverage under Medicare Part D for our drugs,but this could change in the future.Moreover, certain legislative changes to and regulatory changes under the Affordable Care Act have occurred in the115th U.S. Congress and under the Trump Administration. For example, the Tax Cuts and Jobs Act enacted on December 22,2017, eliminated the shared responsibility payment for individuals who fail to maintain minimum essential coverage undersection 5000A of the Internal Revenue Code of 1986, commonly referred to as the individual mandate, beginning in 2019.Additional legislative changes to and regulatory changes under the Affordable Care Act remain possible. We expect that theAffordable Care Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures thatmay be adopted in the future, could have a material adverse effect on our industry generally and on our ability to maintain orincrease sales of our existing products or to successfully commercialize our product candidates, if approved.The Affordable Care Act also expanded the Public Health Service’s 340B drug pricing program. The 340B pricingprogram requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B“ceiling price” for the manufacturer’s covered outpatient drugs. The Affordable Care Act expanded the 340B program toinclude additional types of covered entities: certain free‑standing cancer hospitals, critical access hospitals, rural referralcenters and sole community hospitals, each as defined by the Affordable Care Act, but exempts “orphan drugs” from theceiling price requirements for these covered entities. The Affordable Care Act also obligates the Secretary of the Departmentof Health and Human Services to update the agreement that manufacturers must sign to participate in the 340B program toobligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any otherpurchaser at any price and to report to the government the ceiling prices for its drugs. The Health Resources and ServicesAdministration, or HRSA, the agency that administers the 340B program, recently updated the agreement with participatingmanufacturers. The Affordable Care Act also obligates the Secretary of the Department of Health and Human Services tocreate regulations and processes to improve the integrity of the 340B program. On January 5, 2017, HRSA issued a finalregulation regarding the calculation of 340B ceiling price and the imposition of civil monetary penalties on manufacturersthat knowingly and intentionally overcharge covered entities. The effective date of the regulation has been delayed untilJuly 1, 2018. Implementation of this final rule and the issuance of any other final regulations and guidance could affect ourobligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed,would further expand the 340B program to additional covered entities or would require participating manufacturers to agreeto provide 340B discounted pricing on drugs used in an inpatient setting.Some states have elected not to expand their Medicaid programs by raising the income limit to 133% of the federalpoverty level as permitted under the Affordable Care Act. For each state that does not choose to expand its Medicaidprogram, there may be fewer insured patients overall, which could impact our sales, business and financial condition.Coverage and ReimbursementIn both U.S. and foreign markets, our ability to commercialize our products successfully and to attractcommercialization partners for our products, depends in significant part on the availability of adequate financial coverageand reimbursement from third‑party payors, including, in the United States, governmental payors such as Medicare andMedicaid, as well as managed care organizations, private health insurers and other organizations. Third‑party payors decidewhich drugs they will pay for and establish reimbursement and co‑pay levels. Third‑party payors are increasinglychallenging the prices charged for medicines and examining their cost‑effectiveness, in addition to their safety and efficacy.We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the16 Table of Contentscost‑effectiveness of our products. Even with studies, our products may be considered less safe, less effective or lesscost‑effective than existing products, and third‑party payors may not provide coverage and reimbursement for our productcandidates, in whole or in part.Political, economic and regulatory influences are subjecting the healthcare industry in the United States tofundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals tochange the healthcare system in ways that could impact our ability to sell our products profitably. We anticipate that theUnited States Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policiesintended to curb rising healthcare costs. These cost‑containment measures include: controls on government fundedreimbursement for drugs; new or increased requirements to pay prescription drug rebates to government healthcare programs;controls on healthcare providers; challenges to the pricing of drugs or limits or prohibitions on reimbursement for specificproducts through other means; requirements to try less expensive products or generics before a more expensive brandedproduct; changes in drug importation laws; expansion of use of managed care systems in which healthcare providers contractto provide comprehensive healthcare for a fixed cost per person; and public funding for cost‑effectiveness research, whichmay be used by government and private third‑party payors to make coverage and payment decisions. Further, federalbudgetary concerns could result in the implementation of significant federal spending cuts, including cuts in Medicare andother health related spending in the near‑term. For example, beginning April 1, 2013, Medicare payments for all items andservices, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions)required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. Subsequentlegislation extended the 2% reduction, on average, to 2025. These cuts reduce reimbursement payments related to ourproducts, which could potentially negatively impact our revenue.Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as average salesprice, average manufacturer price and Actual Acquisition Cost. CMS surveys and publishes retail community pharmacyacquisition cost information in the form of National Average Drug Acquisition Cost, or NADAC, files to provide stateMedicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates. It is difficultto project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products.We participate in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. Under the Medicaid DrugRebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that aredispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds beingmade available to the states for our drugs under Medicaid and Medicare Part B. Those rebates are based on pricing datareported by us on a monthly and quarterly basis to CMS. These data include the average manufacturer price and, in the caseof innovator products, the best price for each drug, which, in general, represents the lowest price available from themanufacturer to any entity in the U.S. in any pricing structure, calculated to include all sales and associated rebates,discounts and other price concessions. Our failure to comply with these price reporting and rebate payment options couldnegatively impact our financial results.Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in thePublic Health Service’s 340B drug pricing discount program in order for federal funds to be available for the manufacturer’sdrugs under Medicaid and Medicare Part B. The 340B drug pricing program requires participating manufacturers to agree tocharge statutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatientdrugs. These 340B covered entities include a variety of community health clinics and other entities that receive healthservices grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low‑income patients.The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebateamount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. Changes to the definition ofaverage manufacturer price and the Medicaid Drug Rebate amount under the Affordable Care Act or otherwise also couldaffect our 340B ceiling price calculations and negatively impact our results of operations.Pricing and rebate calculations vary among products and programs. The calculations are complex and are oftensubject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount is computedeach quarter based on our submission to CMS of our current average manufacturer prices and best prices for the quarter. If webecome aware that our reporting for a prior quarter was incorrect or has changed as a result of recalculation of the pricingdata, we are obligated to resubmit the corrected data for a period not to exceed 12 quarters17 Table of Contentsfrom the quarter in which the data originally were due. Such restatements and recalculations increase our costs for complyingwith the laws and regulations governing the Medicaid Drug Rebate program. Any corrections to our rebate calculationscould result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction.Price recalculations also may affect the ceiling price at which we are required to offer our products to certain covered entities,such as safety-net providers, under the 340B drug pricing program.We are liable for errors associated with our submission of pricing data. In addition to retroactive rebates and thepotential for 340B program refunds, if we are found to have knowingly submitted false average manufacturer price or bestprice information to the government, we may be liable for civil monetary penalties in the amount of $181,071 per item offalse information. Our failure to submit monthly/quarterly average manufacturer price and best price data on a timely basiscould result in a civil monetary penalty of $18,107 per day for each day the information is late beyond the due date. Suchfailure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate inthe Medicaid program. In the event that CMS terminates our rebate agreement, no federal payments would be available underMedicaid or Medicare Part B for our covered outpatient drugs.In September 2010, CMS and the Office of the Inspector General indicated that they intend to pursue moreaggressively companies that fail to report these data to the government in a timely manner. Governmental agencies may alsomake changes in program interpretations, requirements or conditions of participation, some of which may have implicationsfor amounts previously estimated or paid. We cannot assure you that our submissions will not be found by CMS to beincomplete or incorrect.In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part Bprograms and purchased by certain federal agencies and certain federal grantees, we participate in the Department of VeteransAffairs, or VA, Federal Supply Schedule, or FSS, pricing program, established by Section 603 of the Veterans Health Care Actof 1992. Under this program, we are obligated to make our product available for procurement on an FSS contract and charge aprice to four federal agencies—VA, Department of Defense, Public Health Service, and Coast Guard—that is no higher thanthe statutory Federal Ceiling Price, or FCP. The FCP is based on the non‑federal average manufacturer price, or Non‑FAMP,which we calculate and report to the VA on a quarterly and annual basis. We also participate in the Tricare Retail Pharmacyprogram, established by Section 703 of the National Defense Authorization Act for FY 2008, and related regulations, underwhich we pay quarterly rebates on utilization of innovator products that are dispensed to Tricare beneficiaries throughTricare retail network pharmacies. The rebates are calculated as the difference between Annual Non‑FAMP and FCP.We expect to experience pricing pressures in the United States in connection with the sale of our products due to thetrend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislativeproposals. In various EU countries, we expect to be subject to continuous cost‑cutting measures, such as lower maximumprices, lower or lack of reimbursement coverage and incentives to use cheaper, usually generic, products as an alternative.We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcareindustry or third‑party coverage and reimbursement may be enacted in the future or what effect such legislation, regulationsor policies would have on our business. Any cost‑containment measures, including those listed above, or other healthcaresystem reforms that are adopted, could have a material adverse effect on our ability to operate profitably.Once an applicant receives marketing authorization in an EU Member State, through any application route, theapplicant is then required to engage in pricing discussions and negotiations with a separate pricing authority in that country.The legislators, policymakers and healthcare insurance funds in the EU Member States continue to propose and implementcost‑containing measures to keep healthcare costs down, due in part to the attention being paid to healthcarecost‑containment and other austerity measures in the EU. Certain of these changes could impose limitations on the pricespharmaceutical companies are able to charge for their products. The amounts of reimbursement available from governmentalagencies or third‑party payors for these products may increase the tax obligations on pharmaceutical companies such as ours,or may facilitate the introduction of generic competition with respect to our products. Furthermore, an increasing number ofEU Member States and other foreign countries use prices for medicinal products established in other countries as “referenceprices” to help determine the price of the product in their own territory. Consequently, a downward trend in prices ofmedicinal products in some countries could contribute to similar downward trends elsewhere. In addition, the ongoingbudgetary difficulties faced by a number of EU Member States, including18 Table of ContentsGreece and Spain, have led and may continue to lead to substantial delays in payment and payment partially withgovernment bonds rather than cash for medicinal products, which could negatively impact our revenues and profitability.Moreover, in order to obtain reimbursement of our medicinal products in some countries, including some EU Member States,we may be required to conduct Health Technology Assessments, or HTAs, that compare the cost‑effectiveness of our productsto other available therapies. There can be no assurance that our medicinal products will obtain favorable reimbursementstatus in any country.In the EU, the sole legal instrument at the EU level governing the pricing and reimbursement of medicinal productsis Council Directive 89/105/EEC, or the Price Transparency Directive. The aim of this Directive is to ensure that pricing andreimbursement mechanisms established in the EU Member States are transparent and objective, do not hinder the freemovement and trade of medicinal products in the EU and do not hinder, prevent or distort competition on the market. ThePrice Transparency Directive does not provide any guidance concerning the specific criteria on the basis of which pricingand reimbursement decisions are to be made in individual EU Member States. Neither does it have any direct consequencefor pricing nor reimbursement levels in individual EU Member States. The EU Member States are free to restrict the range ofmedicinal products for which their national health insurance systems provide reimbursement and to control the prices and/orreimbursement levels of medicinal products for human use. An EU Member State may approve a specific price or level ofreimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability ofthe company responsible for placing the medicinal product on the market, including volume‑based arrangements andreference pricing mechanisms.Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of thepricing and reimbursement procedures in some EU Member States. These EU Member States include the United Kingdom,France, Germany and Sweden. The HTA process in the EEA Member States is governed by the national laws of thesecountries. HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and theeconomic and societal impact of use of a given medicinal product in the national healthcare systems of the individualcountry is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost‑effectiveness ofindividual medicinal products as well as their potential implications for the healthcare system. Those elements of medicinalproducts are compared with other treatment options available on the market.The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursementstatus granted to these medicinal products by the competent authorities of individual EU Member States. The extent to whichpricing and reimbursement decisions are influenced by the HTA of the specific medicinal product vary between EU MemberStates.In 2011, Directive 2011/24/EU was adopted at the EU level. This Directive concerns the application of patients’rights in cross‑border healthcare. The Directive is intended to establish rules for facilitating access to safe and high‑qualitycross‑border healthcare in the EU. It also provides for the establishment of a voluntary network of national authorities orbodies responsible for HTA in the individual EU Member States. The purpose of the network is to facilitate and support theexchange of scientific information concerning HTAs. This could lead to harmonization between EU Member States of thecriteria taken into account in the conduct of HTA and their impact on pricing and reimbursement decisions.Fraud and Abuse and Privacy and Data Security Laws and RegulationsThe healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation.Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and theirprovisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change. Bothfederal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, includingheightened civil and criminal enforcement efforts.The restrictions under applicable federal and state healthcare fraud and abuse and privacy and data security laws andregulations that may affect our ability to operate include, but are not limited to:·the federal Anti‑Kickback Statute, which prohibits, among other things, knowingly or willingly offering,paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward thepurchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcareitems or service for which payment may be made, in whole or in part, by federal healthcare19 Table of Contentsprograms such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements betweenpharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other.Liability under the Anti-Kickback Statute may be established without proving actual knowledge of the statuteor specific intent to violate it. In addition, the government may assert that a claim including items or servicesresulting from a violation of the federal Anti‑Kickback Statute constitutes a false or fraudulent claim forpurposes of the federal civil False Claims Act. Although there are a number of statutory exemptions andregulatory safe harbors to the federal Anti‑Kickback Statute protecting certain common business arrangementsand activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly,and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny. We seek tocomply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet allof the criteria for safe harbor protection from anti‑kickback liability;·the federal civil False Claims Act, which imposes civil penalties against individuals and entities for, amongother things, knowingly presenting, or causing to be presented, a false or fraudulent claim for payment ofgovernment funds or knowingly making, using or causing to be made or used, a false record or statementmaterial to an obligation to pay money to the government or knowingly concealing or knowingly andimproperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. Manypharmaceutical and other healthcare companies have been investigated and have reached substantial financialsettlements with the federal government under the civil False Claims Act for a variety of alleged impropermarketing activities, including providing free product to customers with the expectation that the customerswould bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits tophysicians to induce them to prescribe the company’s products; and inflating prices reported to private pricepublication services, which are used to set drug payment rates under government healthcare programs. Inaddition, in recent years the government has pursued civil False Claims Act cases against a number ofpharmaceutical companies for causing false claims to be submitted as a result of the marketing of their productsfor unapproved, and thus non‑reimbursable, uses. More recently, federal enforcement agencies are and havebeen investigating certain pharmaceutical companies’ product and patient assistance programs, includingmanufacturer reimbursement support services, relationships with specialty pharmacies, and grants toindependent charitable foundations. Pharmaceutical and other healthcare companies also are subject to otherfederal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutesthat extend to non‑government health benefit programs;·the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health InformationTechnology for Economic and Clinical Health Act, or HIPAA, imposes criminal and civil liability for executinga scheme to defraud any healthcare benefit program and also imposes obligations, with respect to safeguardingthe privacy, security and transmission of individually identifiable health information;·numerous U.S. federal and state laws and regulations, including state data breach notification laws, state healthinformation privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure,and protection of personal information. In addition, most healthcare providers who prescribe our products andfrom whom we obtain patient health information are subject to privacy and security requirements under theHealth Insurance Portability and Accountability Act of 1996 and the Health Information Technology forEconomic and Clinical Health Act, or HITECH, which are collectively referred to as HIPAA. We are not aHIPAA‑covered entity and we do not operate as a business associate to any covered entities. Therefore, theHIPAA privacy and security requirements do not apply to us (other than potentially with respect to providingcertain employee benefits). However, we could be subject to criminal penalties if we knowingly obtainindividually identifiable health information from a covered entity in a manner that is not authorized orpermitted by HIPAA or for aiding and abetting and/or conspiring to commit a violation of HIPAA. We areunable to predict whether our actions could be subject to prosecution in the event of an impermissibledisclosure of health information to us. Other countries also have, or are developing, laws governing thecollection, use, disclosure and protection of personal information. The collection and use of personal healthdata and other personal data in the EU is governed by the provisions of the Data Protection Directive asimplemented into national laws by the EU Member States. This20 Table of ContentsDirective imposes restrictions on the processing (e.g., collection, use, disclosure) of personal data, including anumber of requirements relating to the consent of the individuals to whom the personal data relates, theinformation provided to the individuals prior to processing their personal data, notification of data processingobligations to the competent national data protection authorities and the security and confidentiality of thepersonal data. The Data Protection Directive also imposes strict restrictions on the transfer of personal data outof the EU to the United States. Failure to comply with the requirements of the Data Protection Directive and therelated national data protection laws of the EU Member States may result in fines and other administrativepenalties. The General Data Protection Regulation (GDPR), an EU-wide regulation that will be fully enforceableby May 25, 2018, will introduce new data protection requirements in the EU and substantial fines for violationsof the data protection rules. The GDPR will increase our responsibility and liability in relation to EU personaldata that we process and we may be required to put in place additional mechanisms ensuring compliance withthe new EU data protection rules. This may be onerous and increase our cost of doing business. The legislativeand regulatory landscape for privacy and data security continues to evolve, and there has been an increasingamount of focus on privacy and data security issues with the potential to affect our business. These privacy anddata security laws and regulations could increase our cost of doing business, and failure to comply with theselaws and regulations could result in government enforcement actions (which could include civil or criminalpenalties), private litigation and/or adverse publicity and could negatively affect our operating results andbusiness. Moreover, patients about whom we or our partners obtain information, as well as the providers whoshare this information with us, may have contractual rights that limit our ability to use and disclose theinformation. Claims that we have violated individuals' privacy rights or breached our contractual obligations,even if we are not found liable, could be expensive and time-consuming to defend and could result in adversepublicity that could harm our business;·analogous state laws and regulations, such as state anti‑kickback and false claims laws, may apply to items orservices reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payor.Some state laws also require pharmaceutical companies to report expenses relating to the marketing andpromotion of pharmaceutical products and to report gifts and payments to certain health care providers in thestates. Other states prohibit providing meals to prescribers or other marketing‑related activities. the federalHealth Insurance Portability and Accountability Act of 1996, as amended by the Health InformationTechnology for Economic and Clinical Health Act, or HIPAA, imposes criminal and civil liability for executinga scheme to defraud any healthcare benefit program and also imposes obligations, with respect to safeguardingthe privacy, security and transmission of individually identifiable health information; In addition, California,Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programsor marketing codes of conduct. Foreign governments often have similar regulations, which we also will besubject to in those countries where we market and sell products;·the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requirescertain pharmaceutical manufacturers to engage in extensive tracking of payments and other transfers of valueto physicians and teaching hospitals, and to submit such data to Centers for Medicare and Medicaid Serviceswithin the U.S. Department of Health and Human Services, or CMS, which will then make all of this datapublicly available on the CMS website. Pharmaceutical manufacturers with products for which payment isavailable under Medicare, Medicaid or the State Children’s Health Insurance Program must submit a report toCMS on or before the 90th day of each calendar year disclosing reportable payments made in the previouscalendar year; and·the federal Foreign Corrupt Practices Act of 1977 and other similar anti‑bribery laws in other jurisdictionsgenerally prohibit companies and their intermediaries from providing money or anything of value to officials offoreign governments, foreign political parties, or international organizations with the intent to obtain or retainbusiness or seek a business advantage. Recently, there has been a substantial increase in anti‑bribery lawenforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcementproceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. Adetermination that our operations or activities are not, or were not, in compliance with United States or foreignlaws or regulations could result in the imposition of substantial fines, interruptions21 Table of Contentsof business, loss of supplier, vendor or other third‑party relationships, termination of necessary licenses andpermits, and other legal or equitable sanctions. Other internal or government investigations or legal orregulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence.If our operations are found to be in violation of any of the laws or regulations described above or any othergovernmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties,imprisonment, damages, fines, exclusion from government‑funded healthcare programs, like Medicare and Medicaid, and thecurtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operationscould adversely affect our ability to operate our business and our financial results. Although compliance programs canmitigate the risk of investigation and prosecution for violations of these laws and regulations, the risks cannot be entirelyeliminated. Any action against us for violation of these laws or regulations, even if we successfully defend against it, couldcause 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, data security and fraud laws andregulations may prove costly.Collaboration AgreementsMitsubishi Tanabe Pharma CorporationIn January 2001, we entered into an exclusive development, license and clinical trial and commercial supplyagreement with MTPC for the development and commercialization of avanafil, a PDE5 inhibitor compound for the oral andlocal treatment of male and female sexual dysfunction. Under the terms of the agreement, MTPC agreed to grant an exclusivelicense to us for products containing avanafil outside of Japan, North Korea, South Korea, China, Taiwan, Singapore,Indonesia, Malaysia, Thailand, Vietnam and the Philippines. We agreed to grant MTPC an exclusive, royalty‑free licensewithin those countries for oral products that we develop containing avanafil. In addition, we agreed to grant MTPC anexclusive option to obtain an exclusive, royalty‑bearing license within those countries for non‑oral products that we developcontaining avanafil. MTPC agreed to manufacture and supply us with avanafil for use in clinical trials, which were ourprimary responsibility. The MTPC agreement contains a number of milestone payments to be made by us based on varioustriggering events.The term of the MTPC agreement is based on a country‑by‑country and on a product‑by‑product basis. The termshall continue until the later of 10 years after the date of the first sale for a particular product or the expiration of thelast‑to‑expire patents within the MTPC patents covering such product in such country. In the event that our product isdeemed to be insufficiently effective or insufficiently safe relative to other PDE5 inhibitor compounds based on publishedinformation or not economically feasible to develop due to unforeseen regulatory hurdles or costs as measured by standardscommon in the pharmaceutical industry for this type of product, we have the right to terminate the agreement with MTPCwith respect to such product.In August 2012, we entered into an amendment to our agreement with MTPC that permits us to manufacture theactive pharmaceutical ingredient, or API, and tablets for STENDRA ourselves or through third parties. In 2015, we transferredthe manufacturing of the API and tablets for STENDRA to Sanofi.On February 21, 2013, we entered into the third amendment to our agreement with MTPC which, among otherthings, expands our rights, or those of our sublicensees, to enforce the patents licensed under the MTPC agreement againstalleged infringement, and clarifies the rights and duties of the parties and our sublicensees upon termination of the MTPCagreement. In addition, we were obligated to use our best commercial efforts to market STENDRA in the U.S. byDecember 31, 2013, which was achieved by our former commercialization partner, Auxilium.On July 23, 2013, we entered into the fourth amendment to our agreement with MTPC which, among other things,changes the definition of net sales used to calculate royalties owed by us to MTPC.Menarini GroupOn July 5, 2013, we entered into a license and commercialization agreement, or the Menarini License Agreement,and a supply agreement, or the Menarini Supply Agreement, with the Menarini Group through its subsidiary Berlin‑ChemieAG, or Menarini.22 Table of ContentsUnder the terms of the Menarini License Agreement, Menarini received an exclusive license to commercialize andpromote our drug SPEDRA for the treatment of ED in over 40 countries, including the EU, plus Australia and New Zealand.Additionally, we agreed to transfer to Menarini ownership of the marketing authorization for SPEDRA in the EU for thetreatment of ED, which was granted by the EC in June 2013. Each party agreed not to develop, commercialize, or in‑licenseany other product that operates as phosphodiesterase type‑5 inhibitor for the treatment of ED for a limited time period,subject to certain exceptions.Under the Menarini License Agreement, we have received payments of $52.4 million relating to license andmilestone payments through December 31, 2017. Additionally, we are entitled to receive potential milestone payments basedon certain net sales targets, plus royalties on SPEDRA sales. Menarini will also reimburse us for payments made to covervarious obligations to MTPC during the term of the Menarini License Agreement. The Menarini License Agreement willterminate on a country‑by‑country basis in the relevant territories upon the latest to occur of the following: (i) the expirationof the last‑to‑expire valid VIVUS patent covering SPEDRA; (ii) the expiration of data protection covering SPEDRA; or(iii) 10 years after the SPEDRA product launch. In addition, Menarini may terminate the Menarini License Agreement ifcertain additional regulatory obligations are imposed on SPEDRA, and we may terminate the Menarini License Agreement ifMenarini challenges our patents covering SPEDRA or if Menarini commits certain legal violations. Either party mayterminate the Menarini License Agreement for the other party’s uncured material breach or bankruptcy.Under the terms of the Menarini Supply Agreement, we will supply Menarini with STENDRA drug product untilDecember 31, 2018. Menarini also has the right to manufacture STENDRA independently, provided that it continues tosatisfy certain minimum purchase obligations to us. Following the expiration of the Menarini Supply Agreement, Menariniwill be responsible for its own supply of STENDRA. Either party may terminate the Menarini Supply Agreement for the otherparty’s uncured material breach or bankruptcy, or upon the termination of the Menarini License Agreement.SanofiOn December 11, 2013, we entered into the Sanofi License Agreement with Sanofi. Under the terms of the SanofiLicense Agreement, Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use inhumans in the Sanofi Territory.In December 2013, we received an upfront license fee of $5.0 million and a $1.5 million manufacturing milestonepayment, and in February 2014, we received an additional $3.5 million in manufacturing milestone payments. We were alsoeligible to receive up to $6.0 million in regulatory milestone payments, and up to $45.0 million in sales milestone payments,plus royalties on avanafil sales based on tiered percentages of the aggregate annual net sales in the Sanofi Territory.On July 31, 2013, we entered into a Commercial Supply Agreement with Sanofi Chimie to manufacture and supplythe API for our drug avanafil on an exclusive basis in the United States and other territories and on a semi‑exclusive basis inEurope, including the EU, Latin America and other territories. On November 18, 2013, we entered into a Manufacturing andSupply Agreement with Sanofi Winthrop Industrie to manufacture and supply the avanafil tablets on an exclusive basis inthe United States and other territories and on a semi‑exclusive basis in Europe, including the EU, Latin America and otherterritories. We have obtained approval from FDA and the EMA for Sanofi Chimie to be a qualified supplier of avanafil APIand of Sanofi Winthrop Industrie as a qualified supplier of the avanafil tablets.In March 2017, we and Sanofi entered into the Termination, Rights Reversion and Transition Services Agreement,or the Transition Agreement, effective February 28, 2017. Under the Transition Agreement, effective upon the thirtieth dayfollowing February 28, 2017, the Sanofi License Agreement terminated for all countries in the Sanofi Territory as atermination by Sanofi for convenience notwithstanding any notice requirements contained in the Sanofi License Agreement.The Commercial Supply Agreement and the Manufacturing and Supply Agreement will continue in effect. In addition, underthe Transition Agreement, Sanofi will provide us with certain transition services in support of ongoing regulatory approvalefforts while we seek to obtain a new commercial partner or partners for the Sanofi Territory. We will pay certain transitionservice fees to Sanofi as part of the Transition Agreement.23 Table of ContentsMetuchen Pharmaceuticals, LLCOn September 30, 2016, we entered into the Metuchen License Agreement and the Metuchen Supply Agreementwith Metuchen. Under the terms of the Metuchen License Agreement, Metuchen received an exclusive, license to develop,commercialize and promote STENDRA in the Metuchen Territory, effective October 1, 2016. We and Metuchen have agreednot to develop, commercialize, or in-license any other product that operates as a PDE-5 inhibitor in the Metuchen Territoryfor a limited time period, subject to certain exceptions. The license agreement will terminate upon the expiration of the last-to-expire payment obligations under the license agreement; upon expiration of the term of the license agreement, theexclusive license granted under the license agreement shall become fully paid-up, royalty-free, perpetual and irrevocable asto us but not certain trademark royalties due to MTPC.Metuchen will obtain STENDRA exclusively from us for a mutually agreed term pursuant to the supply agreement.Metuchen may elect to transfer the control of the supply chain for STENDRA for the Metuchen Territory to itself or itsdesignee by assigning to Metuchen our agreements with the contract manufacturer. For 2016 and each subsequent calendaryear during the term of the supply agreement, if Metuchen fails to purchase an agreed minimum purchase amount ofSTENDRA from us, it will reimburse us for the shortfall as it relates to our out of pocket costs to acquire certain raw materialsneeded to manufacture STENDRA. Upon the termination of the supply agreement (other than by Metuchen for our uncuredmaterial breach or upon completion of the transfer of the control of the supply chain), Metuchen’s agreed minimum purchaseamount of STENDRA from us shall accelerate for the entire then current initial term or renewal term, as applicable. The initialterm under the Supply Agreement will be for a period of five years, with automatic renewal for successive two-year periodsunless either party provides a termination notice to the other party at least two years in advance of the expiration of the thencurrent term. On September 30, 2016, we received $70 million from Metuchen under the license agreement. Metuchen willalso reimburse us for payments made to cover royalty and milestone obligations to MTPC during the term of the licenseagreement, but will otherwise owe us no future royalties.Selten Pharma, Inc.On January 6, 2017, we entered into a Patent Assignment Agreement with Selten, whereby we received exclusive,worldwide rights for the development and commercialization of BMPR2 activators for the treatment of PAH and relatedvascular diseases. As part of the agreement, Selten assigned to us its license to a group of patents owned by Stanford, whichcover uses of tacrolimus and ascomycin to treat PAH. We are responsible for future financial obligations to Stanford underthat license.We have also assumed full responsibility for the development and commercialization of the licensed compounds forthe treatment of PAH and related vascular diseases. We paid Selten an upfront payment of $1.0 million, and we will payadditional milestone payments based on global development status and future sales milestones, as well as tiered royaltypayments on future sales of these compounds. The total potential milestone payments are $39.0 million to Selten and$550,000 to Stanford. The majority of the milestone payments to Selten may be paid, at our sole option, either in cash or ourcommon stock, provided that in no event shall the payment of common stock exceed fifty percent of the aggregate amount ofsuch milestone payments.Alvogen Malta Operations (ROW) LtdIn September 2017, we entered into a license and commercialization agreement, or the Alvogen License Agreement,and a commercial supply agreement, or the Alvogen Supply Agreement, with Alvogen Malta Operations (ROW) Ltd, orAlvogen. Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for obtaining andmaintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. We received an upfrontpayment of $2.5 million in September 2017, which was recorded in license and milestone revenue in the third quarter of2017, and are eligible to receive additional payments upon Alvogen achieving marketing authorization, commercial launchand reaching a sales milestone for a potential total of $7.5 million. Additionally, we will receive a royalty on Alvogen’sQsymia net sales in South Korea. Under the Alvogen Supply Agreement, we will supply product to Alvogen.24 Table of ContentsOtherIn October 2001, we entered into an assignment agreement, or the Assignment Agreement, with Thomas Najarian,M.D., for a combination of pharmaceutical agents for the treatment of obesity and other disorders, or the CombinationTherapy, that became the focus of our development program for Qsymia. The Combination Therapy and all related patentapplications, or the Patents, were transferred to us with worldwide rights to develop and commercialize the CombinationTherapy and exploit the Patents. In addition, the Assignment Agreement requires us to pay royalties on worldwide net salesof a product for the treatment of obesity that is based upon the Combination Therapy and Patents until the last‑to‑expire ofthe assigned Patents. To the extent that we decide not to commercially exploit the Patents, the Assignment Agreement willterminate and the Combination Therapy and Patents will be assigned back to Dr. Najarian. In 2006, Dr. Najarian joined theCompany as a part‑time employee and served as a Principal Scientist. In November 2013, Dr. Najarian’s employment with theCompany ended, and he continues to be available as a consultant.Patents, Proprietary Technology and Data ExclusivityWe own or are the exclusive licensee of more than 30 patents and numerous published patent applications in theU.S. and Canada. We intend to develop, maintain and secure intellectual property rights and to aggressively defend andpursue new patents to expand upon our current patent base. Our portfolio of patents, which primarily relates to Qsymia, ourFDA‑approved drug for the treatment of obesity, STENDRA, our FDA‑approved drug for the treatment of ED, and tacrolimusis summarized as follows:QSYMIA U.S. Patent No. 7,056,890Expiring 06/14/2020U.S. Patent No. 7,553,818Expiring 06/14/2020U.S. Patent No. 7,659,256Expiring 06/14/2020U.S. Patent No. 7,674,776Expiring 06/14/2020U.S. Patent No. 8,802,636Expiring 06/14/2020U.S. Patent No. 8,580,299Expiring 06/14/2029*U.S. Patent No. 8,895,058Expiring 06/09/2028U.S. Patent No. 9,011,905Expiring 06/09/2028U.S. Patent Application No. 15/172,448PendingU.S. Patent Application No. 15/333,059PendingU.S. Patent No. 8,580,298Expiring 05/15/2029*U.S. Patent No. 8,895,057Expiring 06/09/2028U.S. Patent No. 9,011,906Expiring 06/09/2028U.S. Patent Application No. 15/203,601PendingU.S. Patent Publication No. 2016/0250180 A1PendingCanadian Patent No. 2,377,330Expiring 06/14/2020Canadian Patent No. 2,727,313Expiring 06/09/2029Canadian Patent No. 2,727,319Expiring 06/09/2029STENDRA U.S. Patent No. 6,656,935Expiring 04/26/2025U.S. Patent No. 7,501,409Expiring 05/05/2023Canadian Patent No. 2,383,466Expiring 09/13/2020ERECTILE DYSFUNCTION U.S. Patent No. 6,495,154Expiring 11/21/2020U.S. Patent No. 6,946,141Expiring 11/21/2020Canadian Patent No. 2,305,394Expiring 10/28/2018TACROLIMUS U.S. Patent No. 9,474,745Expiring 04/30/2032U.S. Patent Application No. 15/782,153PendingPCT/US16/12694PendingPCT/US16/30737PendingPCT/US16/47148Pending25 Table of Contents *These expiration dates are based on the number of days of patent term adjustment, or PTA, calculated by the U.S. Patent and TrademarkOffice, or USPTO. An independent calculation of PTA suggested that the patents may be entitled to fewer days of PTA than determinedby the USPTO.The EU has adopted a harmonized approach to data and marketing exclusivity under Regulation (EC) No. 726/2004and Directive 2001/83/EC. The exclusivity scheme applies to products that have been authorized in the EU by either theEuropean Commission, through the centralized procedure, or the competent authorities of the Member States of the EuropeanEconomic Area, or EEA, under the Decentralized or Mutual Recognition procedures. The approach (known as the 8+2+1formula) permits eight years of data exclusivity and 10 years of marketing exclusivity. Within the first eight years of the10 years, a generic applicant is not permitted to cross refer to the preclinical and clinical trial data relating to the referenceproduct. Even if the generic product is authorized after expiry of the eight years of data exclusivity, it cannot be placed onthe market until the full 10‑year market exclusivity has expired. This 10‑year market exclusivity may be extendedcumulatively to a maximum period of 11 years if during the first eight years of those 10 years, the marketing authorizationholder obtains an authorization for a new (second) therapeutic indication which, during the scientific evaluation prior to itsauthorization, is held to bring a significant clinical benefit in comparison with existing therapies.In addition to the Canadian patents identified in the table, we also hold foreign counterparts, patents and patentapplications in major foreign jurisdictions related to our U.S. patents. We have developed and acquired exclusive rights topatented technology in support of our development and commercialization of our approved drugs and investigational drugcandidates, and we rely on trade secrets and proprietary technologies in developing potential drugs. We continue to placesignificant emphasis on securing global intellectual property rights and are aggressively pursuing new patents to expandupon our strong foundation for commercializing investigational drug candidates in development.ManufacturingOur commercial products, Qsymia and STENDRA, together with their respective APIs and finished products, as wellas our clinical supplies, are manufactured on a contract basis. In addition, packaging for the commercial distribution of theQsymia product capsules and the STENDRA product tablets is performed by contract packaging companies. We expect tocontinue to contract with other third‑party providers for manufacturing services, including APIs, finished products, andpackaging operations as needed. We believe that our current agreements and purchase orders with third‑party manufacturersprovide for sufficient operating capacity to support the anticipated commercial demand for Qsymia and STENDRA and ourclinical supplies. However, if we are unable to obtain a sufficient supply of Qsymia or STENDRA for our commercial sales, orthe clinical supplies to support our clinical trials, or if we should encounter delays or difficulties in our relationships with ourmanufacturers or packagers, we may lose potential sales, have difficulty entering into collaboration agreements for thecommercialization of STENDRA for territories in which we do not have a commercial collaboration or our clinical trials maybe delayed.Catalent Pharma Solutions, LLC, or Catalent, manufactures our clinical and commercial supplies for Qsymia.Catalent has been successful in validating the commercial manufacturing process for Qsymia at a scale that has been able tosupport the launch of Qsymia in the U.S. market.On July 31, 2013, we entered into a Commercial Supply Agreement with Sanofi Chimie, a wholly owned subsidiaryof Sanofi, pursuant to which Sanofi Chimie manufactures and supplies the API for STENDRA. On November 18, 2013, weentered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie, a wholly owned subsidiary of Sanofi,pursuant to which Sanofi Winthrop Industrie manufactures and supplies the tablets for avanafil.We currently do not have any manufacturing facilities and intend to continue to rely on third parties for the supplyof the starting materials, API and finished dosage forms (tablets and capsules). However, we cannot be certain that we will besuccessful in entering into additional supplier agreements or that we will be able to obtain the necessary regulatory approvalsfor any suppliers in a timely manner or at all.We attempt to prevent disruption of supplies through supply agreements, purchase orders, appropriate forecasting,maintaining stock levels and other strategies. In the event we are unable to manufacture our products, either26 Table of Contentsdirectly or indirectly through others or on commercially acceptable terms, if at all, we may not be able to commercialize ourproducts as planned. Although we are taking these actions to avoid a disruption in supply, we cannot provide assurance thatwe may not experience a disruption in the future.Marketing and SalesWe commercialize Qsymia in the U.S. primarily through a small specialty sales force, supported by an internalcommercial team. Our efforts to expand the appropriate use of Qsymia include scientific publications, participation andpresentations at medical conferences, and development and implementation of patient-directed support programs. We haverolled out marketing programs to encourage targeted prescribers to gain more experience with Qsymia. We have increasedour investment in digital media in order to amplify our messaging to information-seeking consumers. The digital messagingencourages those consumers most likely to take action to speak with their physicians about obesity treatment options. Webelieve our enhanced web-based strategies will deliver clear and compelling communications to potential patients. We alsoprovide the Q and Me® Patient Support Program online which supports Qsymia patients make the behavioral changesneeded for sustained weight-loss.Qsymia Distribution and REMSWe rely on Cardinal Health 105, Inc., or Cardinal Health, a third‑party distribution and supply‑chain managementcompany, to warehouse Qsymia and distribute it to the certified home delivery pharmacies and wholesalers that thendistribute Qsymia directly to patients and certified retail pharmacies. Cardinal Health provides billing, collection and returnsservices. Cardinal Health is our exclusive supplier of distribution logistics services, and accordingly we depend on CardinalHealth to satisfactorily perform its obligations under our agreement with them.Pursuant to the REMS program applicable to Qsymia, our distribution network is through a broader network ofcertified retail pharmacies and through a small number of certified home delivery pharmacies and wholesalers. We havecontracted through a third‑party vendor to certify the retail pharmacies and collect required data to support the QsymiaREMS program. In addition to providing services to support the distribution and use of Qsymia, each of the certifiedpharmacies has agreed to comply with the REMS program requirements and, through our third‑party data collection vendor,will provide us with the necessary patient and prescribing HCP data. In addition, we have contracted with third‑party datawarehouses to store this patient and HCP data and report it to us. We rely on this third‑party data in order to recognizerevenue and comply with the REMS requirements for Qsymia, such as data analysis. This distribution and data collectionnetwork requires significant coordination with our sales and marketing, finance, regulatory and medical affairs teams, in lightof the REMS requirements applicable to Qsymia.CompetitionCompetition in the pharmaceutical and medical products industries is intense and is characterized by costly andextensive research efforts and rapid technological progress. We are aware of several pharmaceutical companies also activelyengaged in the development of therapies for the treatment of obesity, diabetes and sexual health and medical devicecompanies engaged in the development of therapies for the treatment of sleep apnea. Many of these companies havesubstantially greater research and development capabilities as well as substantially greater marketing, financial and humanresources than VIVUS. Our competitors may develop technologies and products that are more effective than those we arecurrently marketing or researching and developing. Some of the drugs that may compete with Qsymia may not have a REMSrequirement and the accompanying complexities such a requirement presents. Such developments could render Qsymia andSTENDRA less competitive or possibly obsolete.Qsymia for the treatment of chronic weight management competes with several approved anti‑obesity drugsincluding, Belviq (lorcaserin), an anti‑obesity compound being marketed by Eisai Inc., Eisai Co., Ltd.’s U.S. subsidiary;Contrave (naltrexone/bupropion), Orexigen Therapeutics’ anti‑obesity product; Xenical (orlistat), marketed by Roche;alli, the over‑the‑counter version of orlistat, marketed by GlaxoSmithKline; and Novo Nordisk A/S’ Saxenda (liraglutide)3.0 mg.Agents approved for type 2 diabetes that have demonstrated weight loss in clinical studies may also compete withQsymia. These agents include Victoza (liraglutide; approved for diabetes at 1.2mg and 1.8mg dosage strengths)27 ®®®®®®Table of Contentsfrom Novo Nordisk A/S, a GLP‑1 receptor agonist approved January 25, 2010, Invokana (canaglifozin) from Johnson &Johnson’s Janssen Pharmaceuticals, an SGLT2 inhibitor, approved March 29, 2013; Farxiga™ (dapagliflozin) fromAstraZeneca and Bristol‑Myers Squibb, an SGLT2 inhibitor, approved January 8, 2014; Jardiance (empagliflozin) fromBoehringer Ingelheim, an SGLT2 inhibitor, approved August 1, 2014; and Glyxambi (empagliflozin/linagliptin) fromBoehringer Ingelheim and Eli Lilly, an SGLT2 inhibitor and DPP‑4 inhibitor combination product, approved January 30,2015. On January 14, 2015, FDA approved the Maestro Rechargeable System for certain obese adults, the first weight losstreatment device that targets the nerve pathway between the brain and the stomach that controls feelings of hunger andfullness. The Maestro Rechargeable System is approved to treat patients aged 18 and older who have not been able to loseweight with a weight loss program, and who have a body mass index of 35 to 45 with at least one other obesity‑relatedcondition, such as type 2 diabetes.In addition, there are several other investigational drug candidates in Phase 2 clinical trials. Zafgen’s beloranib,currently in Phase 2 for severe obesity, is a methionine aminopeptidase 2 (MetAP2) inhibitor, which is believed to work byre‑establishing balance to the ways the body packages and metabolizes fat. In January 2013, Rhythm Pharmaceuticals, orRhythm, announced the initiation of a Phase 2 clinical trial with RM‑493, a small‑peptide melanocortin 4 receptor, orMC4R, agonist, for the treatment of obesity. Rhythm announced in September 2013, that RM‑493 is being studied inPhase 1B for the treatment of obesity in individuals with a genetic deficiency in the MC4R pathway. There are a number ofgeneric pharmaceutical drugs that are prescribed for obesity, predominantly phentermine, which is sold at much lower pricesthan we charge for Qsymia and is also widely available in retail pharmacies. The availability of branded prescription drugs,generic drugs and over‑the‑counter drugs could limit the demand and the price we are able to charge for Qsymia.We may also face competition from the off‑label use of the generic components in our drugs. In particular, it ispossible that patients will seek to acquire phentermine and topiramate, the generic components of Qsymia. Neither of thesegeneric components has a REMS program. Although these products have not been approved by FDA for use in the treatmentof chronic obesity, the off‑label use of the generic components in the U.S. or the importation of the generic components fromforeign markets could adversely affect the commercial potential for our drugs and adversely affect our overall business,financial condition and results of operations.Qsymia may also face challenges and competition from newly developed generic products. Under the U.S. DrugPrice Competition and Patent Term Restoration Act of 1984, known as the Hatch‑Waxman Act, newly approved drugs andindications may benefit from a statutory period of non‑patent marketing exclusivity. The Hatch‑Waxman Act stimulatescompetition by providing incentives to generic pharmaceutical manufacturers to introduce non‑infringing forms of patentedpharmaceutical products and to challenge patents on branded pharmaceutical products. We received two notifications underparagraph IV of the Hatch-Waxman Act challenging certain of our Qsymia patents, and we filed suit against both challengers.In June 2017, the Company entered into a settlement agreement with Actavis Laboratories FL, Inc., Actavis, Inc., and ActavisPLC, collectively referred to as Actavis, and in August 2017, the Company entered into a settlement agreement with Dr.Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL. The settlement agreementwith Actavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, or earlier under certaincircumstances. The settlement with DRL will permit DRL to begin selling a generic version of Qsymia on June 1, 2025, orearlier under certain circumstances. It is possible that one or more additional companies may file an Abbreviated New DrugApplication, or ANDA, and could receive FDA approval to market a generic version of Qsymia before the entry datesspecified in our settlement agreements with Actavis and DRL. If a generic version of Qsymia is launched, our business will benegatively impacted.There are also surgical approaches to treat severe obesity that are becoming increasingly accepted. Two of the mostwell‑established surgical procedures are gastric bypass surgery and adjustable gastric banding, or lap bands. In February2011, FDA approved the use of a lap band in patients with a BMI of 30 (reduced from 35) with comorbidities. The loweringof the BMI requirement will make more obese patients eligible for these types of bariatric procedures. In addition, otherpotential approaches that utilize various implantable devices or surgical tools are in development. Some of these approachesare in late‑stage development and may be approved for marketing.STENDRA for the treatment of ED competes with PDE5 inhibitors in the form of oral medications including Viagra(sildenafil citrate), marketed by Pfizer, Inc. and now available in generic form; Cialis (tadalafil), marketed by Eli Lilly andCompany; Levitra (vardenafil), co‑marketed by GlaxoSmithKline plc and Schering‑Plough Corporation in the U.S.; andSTAXYN (vardenafil in an oral disintegrating tablet, or ODT), co‑promoted by GlaxoSmithKline plc and Merck & Co., Inc.28 ®®®®®®®Table of ContentsNew developments, including the development of other drug technologies and methods of preventing the incidenceof disease, occur in the pharmaceutical and medical technology industries at a rapid pace. These developments may renderour drugs and future investigational drug candidates obsolete or noncompetitive. Compared to us, many of our potentialcompetitors have substantially greater:·research and development resources, including personnel and technology;·regulatory experience;·investigational drug candidate development and clinical trial experience;·experience and expertise in exploitation of intellectual property rights; and·access to strategic partners and capital resources.As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we ormay obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize ourinvestigational drug candidates. Our competitors may also develop drugs or surgical approaches that are more effective, moreuseful and less costly than ours and may also be more successful in manufacturing and marketing their products. In addition,our competitors may be more effective in commercializing their products. We currently outsource our manufacturing andtherefore rely on third parties for that competitive expertise. There can be no assurance that we will be able to develop orcontract for these capabilities on acceptable economic terms, or at all.Avanafil qualifies as an innovative medicinal product in the EU. Innovative medicinal products authorized in theEU on the basis of a full marketing authorization application (as opposed to an application for marketing authorization thatrelies on data in the marketing authorization dossier for another, previously approved medicinal product) are entitled to eightyears’ data exclusivity. During this period, applicants for approval of generics of these innovative products cannot rely ondata contained in the marketing authorization dossier submitted for the innovative medicinal product. Innovative medicinalproducts are also entitled to 10 years’ market exclusivity. During this 10‑year period no generic medicinal product can beplaced on the EU market. The 10‑year period of market exclusivity can be extended to a maximum of 11 years if, during thefirst eight years of those 10 years, the Marketing Authorization Holder for the innovative product obtains an authorizationfor one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held tobring a significant clinical benefit in comparison with existing therapies. If we do not obtain extended patent protection anddata exclusivity for our product candidates, our business may be materially harmed.Research and DevelopmentWe incurred $5.3 million, $5.6 million and $10.1 million in 2017, 2016 and 2015, respectively, in research anddevelopment expenses, primarily to support the approval efforts, post‑marketing requirements, and clinical programs forQsymia and STENDRA/SPEDRA and the development of tacrolimus for pulmonary arterial hypertension.EmployeesAs of February 28, 2018, we had 52 employees located at our corporate headquarters in Campbell, California and inthe field. None of our current employees are represented by a labor union or are the subject of a collective bargainingagreement. We believe that our relations with our employees are good, and we have never experienced a work stoppage atany of our facilities.InsuranceWe maintain product liability insurance for our clinical trials and commercial sales and general liability anddirectors’ and officers’ liability insurance for our operations. Insurance coverage is becoming increasingly expensive and noassurance can be given that we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts toprotect us against losses due to liability. Although we have obtained product liability insurance coverage, we may be unableto maintain this product liability coverage for our approved drugs in amounts or scope sufficient to provide us with adequatecoverage against all potential risks.29 Table of ContentsFinancial Information About Geographic AreasFor financial information concerning the geographic areas in which we operate, see Note 18: “Segment Informationand Concentration of Customers and Suppliers—Geographic Information” to our Consolidated Financial Statementsincluded elsewhere in this Annual Report on Form 10‑K.Available InformationOur Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendmentsto reports filed pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available on ourwebsite at www.vivus.com, when such reports are available on the SEC website. Copies of our Annual Report will be madeavailable, free of charge, upon written request.The public may read and copy any materials filed by VIVUS with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Roomby calling the SEC at 1‑800‑SEC‑0330. The SEC maintains an Internet site that contains reports, proxy and informationstatements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contentsof these websites are not incorporated into this filing. Further, VIVUS’s references to the URLs for these websites are intendedto be inactive textual references only.In addition, information regarding our code of ethics and the charters of our Audit, Compensation, Nominating andGovernance, and Corporate Development Committees are available free of charge on our website listed above. Item 1A. Risk FactorsSet forth below and elsewhere in this Annual Report on Form 10‑K and in other documents we file with theSecurities and Exchange Commission, or the SEC, are risks and uncertainties that could cause actual results to differmaterially from the results contemplated by the forward‑looking statements contained in this Annual Report on Form 10‑K.These are not the only risks and uncertainties facing VIVUS. Additional risks and uncertainties not presently known to us orthat we currently deem immaterial may also impair our business operations.Risks Relating to our BusinessOur success will depend on our ability and that of our current or future collaborators to effectively and profitablycommercialize Qsymia® and STENDRA/SPEDRA.Our success will depend on our ability and that of our current or future collaborators to effectively and profitablycommercialize Qsymia and STENDRA/SPEDRA, which will include our ability to:·expand the use of Qsymia through targeted patient and physician education;·obtain marketing authorization by the EC for Qsiva™ in the EU;·manage our alliances with MTPC, Menarini and Metuchen to help ensure the commercial success of avanafil;·manage costs;·improve third-party payor coverage, lower out-of-pocket costs to patients with discount programs, and obtaincoverage for obesity under Medicare Part D;·create market demand for Qsymia through patient and physician education, marketing and sales activities;·achieve market acceptance and generate product sales;·comply with the post-marketing requirements established by FDA, including Qsymia’s Risk Evaluation andMitigation Strategy, or REMS, any future changes to the REMS, and any other requirements established byFDA in the future;30 Table of Contents·efficiently conduct the post-marketing studies required by FDA;·comply with other healthcare regulatory requirements;·comply with state and federal controlled substances requirements;·maintain and defend our patents, if challenged;·ensure that the active pharmaceutical ingredients, or APIs, for Qsymia and STENDRA/SPEDRA and the finishedproducts are manufactured in sufficient quantities and in compliance with requirements of FDA and DEA andsimilar foreign regulatory agencies and with an acceptable quality and pricing level in order to meetcommercial demand;·ensure that the entire supply chain for Qsymia and STENDRA/SPEDRA, from APIs to finished products,efficiently and consistently delivers Qsymia and STENDRA/SPEDRA to customers; and·effectively and efficiently manage our sales force and commercial team for the promotion of Qsymia.If we are unable to successfully commercialize Qsymia and STENDRA/SPEDRA, our ability to generate productsales will be severely limited, which will have a material adverse impact on our business, financial condition, and results ofoperations.We may not be able to successfully develop, launch and commercialize tacrolimus or any other potential futuredevelopment programs.We may not be able to effectively develop and profitably launch and commercialize tacrolimus or any otherpotential future development programs which we may undertake, which will include our ability to:·successfully develop or acquire a proprietary formulation of tacrolimus as a precursor to the clinicaldevelopment process;·effectively conduct phase 2 and phase 3 clinical testing on tacrolimus, which could be delayed by slow patientenrollment, long treatment time required to demonstrate effectiveness, disruption of operations at clinical trialsites, adverse medical events or side effects in treated patients, failure of patients taking the placebo to continueto participate in the clinical trials, and insufficient clinical trial data to support effectiveness of tacrolimus;·obtain regulatory approval and market authorization for tacrolimus in the U.S., EU and other territories;·develop, validate and maintain a commercially viable manufacturing process that is compliant with cGMP;·establish and effectively manage a supply chain for tacrolimus and future development programs to ensure thatthe API and the finished products are manufactured in sufficient quantities and in compliance with regulatoryrequirements and with acceptable quality and pricing in order to meet commercial demand;·effectively determine and manage the appropriate commercialization strategy;·manage costs;·achieve market acceptance by patients, the medical community and third-party payors and generate productsales;·effectively compete with other therapies;·maintain a continued acceptable safety profile for tacrolimus following approval;·comply with healthcare regulatory requirements; and·maintain and defend our patents, if challenged.31 Table of ContentsIf we are unable to successfully develop, launch and commercialize tacrolimus, our ability to generate product saleswill be severely limited, which will have a material adverse impact on our business, financial condition, and results ofoperations.Changes to our strategic business plan may cause uncertainty regarding the future of our business, and may adverselyimpact employee hiring and retention, our stock price, and our revenue, operating results, and financial condition.In 2016, we initiated a business strategy review with an outside advisor. These changes, and the potential foradditional changes to our management, organizational structure and strategic business plan, may cause speculation anduncertainty regarding our future business strategy and direction. These changes may cause or result in:·disruption of our business or distraction of our employees and management;·difficulty in recruiting, hiring, motivating and retaining talented and skilled personnel;·stock price volatility; and·difficulty in negotiating, maintaining or consummating business or strategic relationships or transactions.If we are unable to mitigate these or other potential risks, our revenue, operating results and financial condition maybe adversely impacted.We depend on our collaboration partners to gain or maintain approval, market, and sell Qsymia and STENDRA/SPEDRAin their respective licensed territories.We rely on our collaboration partners, including Alvogen, MTPC, Menarini and Metuchen, to successfullycommercialize Qsymia and STENDRA/SPEDRA in their respective territories, including obtaining any necessary approvalsand we cannot assure you that they will be successful. Our dependence on our collaborative arrangements for thecommercialization of Qsymia and STENDRA/SPEDRA, including our license agreements with Alvogen, MTPC, Menariniand Metuchen, subject us to a number of risks, including the following:·we may not be able to control the commercialization of our drug products in the relevant territories, includingthe amount, timing and quality of resources that our collaborators may devote to our drug products;·our collaborators may experience financial, regulatory or operational difficulties, which may impair their abilityto commercialize our drug products;·our collaborators may be required under the laws of the relevant territories to disclose our confidentialinformation or may fail to protect our confidential information;·as a requirement of the collaborative arrangement, we may be required to relinquish important rights withrespect to our drug products, such as marketing and distribution rights;·business combinations or significant changes in a collaborator’s business strategy may adversely affect acollaborator’s willingness or ability to satisfactorily complete its commercialization or other obligations underany collaborative arrangement;·legal disputes or disagreements may occur with one or more of our collaborators;·a collaborator could independently move forward with a competing investigational drug candidate developedeither independently or in collaboration with others, including with one of our competitors; and·a collaborator could terminate the collaborative arrangement, which could negatively impact the continuedcommercialization of our drug products. For example, in September 2016, Auxilium terminated its agreementwith us to commercialize STENDRA in the U.S. and Canada and, in March 2017, Sanofi terminated itsagreement with us to commercialize STENDRA/SPEDRA in Africa, the Middle East, Turkey, and the CIS,including Russia.32 Table of ContentsIn addition, under our license agreement with MTPC, we are obligated to ensure that Menarini, Metuchen, and anyfuture sublicensees comply with the terms and conditions of our license agreement with MTPC, and MTPC has the right toterminate our license rights to avanafil upon any uncured material breach. Consequently, failure by Menarini, Metuchen, orany future sublicensees to comply with these terms and conditions could result in the termination of our license rights toavanafil on a worldwide basis, which would delay, impair, or preclude our ability to commercialize avanafil.If any of our collaboration partners fail to successfully commercialize Qsymia or STENDRA/SPEDRA, our businessmay be negatively affected and we may receive limited or no revenues under our agreements with them.There have been substantial changes to the Internal Revenue Code, some of which could have an adverse effect on ourbusiness.The Tax Cuts and Jobs Act made substantial changes to the Internal Revenue Code, effective January 1, 2018, someof which could have an adverse effect on our business. In addition to reducing the top corporate income tax rate, changes thatcould impact our business in the future include (i) eliminating the ability to utilize net operating losses, or NOLs, to reduceincome in prior tax years and limiting the utilization of NOLs generated after December 31, 2017 to 80% of future taxableincome, which could affect the timing of our ability to utilize NOLs, and (ii) limiting the amount of business interestexpenses that can be deducted to 30% of earnings before interest, taxes, depreciation and amortization.We currently rely on reports from our commercialization partners in determining our royalty revenues, and these reportsmay be subject to adjustment or restatement, which may materially affect our financial results.We have royalty and milestone-bearing license and commercialization agreements for STENDRA/SPEDRA withMenarini and, prior to October 1, 2016, with Auxilium. In determining our royalty revenue from such agreements, we rely onour collaboration partners to provide accounting estimates and reports for various discounts and allowances, includingproduct returns. As a result of fluctuations in inventory, allowances and buying patterns, actual sales and product returns ofSTENDRA/SPEDRA in particular reporting periods may be affected, resulting in the need for our commercialization partnersto adjust or restate their accounting estimates set forth in the reports provided to us. For example, in April 2015, we wereinformed by Endo, upon their purchase of Auxilium, that Endo had revised its accounting estimate for STENDRA returnreserve related to sales made in 2014. Under the terms of our license and commercialization agreement, adjustments to thereturn reserve can be deducted from reported net revenue. As a result, in the year ended December 31, 2015, we recorded anadjustment of $1.2 million to reduce our royalty revenue on net sales of STENDRA. The reduction in royalty revenueresulted in an increase to net loss of $1.2 million, or $0.01 per share, for the year ended December 31, 2015. Suchadjustments or restatements may materially and negatively affect our financial position and results of operations. BeginningOctober 1, 2016, we ceased earning royalty revenue from U.S. sales as a result of the termination of our license andcommercialization agreement with Auxilium. Our new license agreement with Metuchen is royalty-free as to us.If we are unable to enter into agreements with collaborators for the territories that are not covered by our existingcommercialization agreements, our ability to commercialize STENDRA/SPEDRA in these territories may be impaired.We intend to enter into collaborative arrangements or a strategic alliance with one or more pharmaceutical partnersor others to commercialize STENDRA/SPEDRA in territories that are not covered by our current commercial collaborationagreements, such as Africa, the Middle East, Turkey, the CIS, Mexico and Central America. We may be unable to enter intoagreements with third parties for STENDRA/SPEDRA for these territories on favorable terms or at all, which could delay,impair, or preclude our ability to commercialize STENDRA/SPEDRA in these territories.33 Table of ContentsFailure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.In order to market products in many foreign jurisdictions, we, or our partners, must obtain separate regulatoryapprovals. Approval by FDA in the U.S. does not ensure approval by regulatory authorities in other countries, and approvalby one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. Forexample, while our drug STENDRA/SPEDRA has been approved in both the U.S. and the EU, our drug Qsymia has beenapproved in the U.S. but Qsiva (the intended trade name for Qsymia in the EU) was denied a marketing authorization by theEC due to concerns over the potential cardiovascular and central nervous system effects associated with long-term use,teratogenic potential and use by patients for whom Qsiva would not have been indicated. We intend to seek approval, eitherdirectly or through our collaboration partners, for Qsymia and STENDRA in other territories outside the U.S. and the EU.However, we have had limited interactions with foreign regulatory authorities, and the approval procedures vary amongcountries and can involve additional testing. Foreign regulatory approvals may not be obtained, by us or our collaborationpartners responsible for obtaining approval, on a timely basis, or at all, for any of our products. The failure to receiveregulatory approvals in a foreign country would prevent us from marketing and commercializing our products in thatcountry, which could have a material adverse effect on our business, financial condition and results of operations.We, together with Alvogen, Menarini, Metuchen and any potential future collaborators in certain territories, intend tomarket Qsymia and STENDRA/SPEDRA outside the U.S., which will subject us to risks related to conducting businessinternationally.We, through Alvogen, Menarini, Metuchen and any potential future collaborators in certain territories, intend tomanufacture, market, and distribute Qsymia and STENDRA/SPEDRA outside the U.S. We expect that we will be subject toadditional risks related to conducting business internationally, including:·different regulatory requirements for drug approvals in foreign countries;·differing U.S. and foreign drug import and export rules;·reduced protection for intellectual property rights in some foreign countries;·unexpected changes in tariffs, trade barriers and regulatory requirements;·different reimbursement systems;·economic weakness, including inflation, or political instability in particular foreign economies and markets;·compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;·foreign taxes, including withholding of payroll taxes;·foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, andother obligations incidental to doing business in another country;·workforce uncertainty in countries where labor unrest is more common than in the U.S.;·production shortages resulting from events affecting raw material supply or manufacturing capabilities abroad;·potential liability resulting from development work conducted by these distributors; and·business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.We have significant inventories on hand and, for the year ended December 31, 2015, we recorded inventory impairmentand commitment fees totaling $29.5 million, primarily to write off excess inventory related to Qsymia.We maintain significant inventories and evaluate these inventories on a periodic basis for potential excess andobsolescence. During the year ended December 31, 2015, we recognized total charges of $29.5 million, primarily for Qsymiainventories on hand in excess of projected demand. The inventory impairment charges were based on our34 Table of Contentsanalysis of the then-current Qsymia inventory on hand and remaining shelf life, in relation to our projected demand for theproduct. The current FDA-approved commercial product shelf life for Qsymia is 36 months. STENDRA is approved in theU.S. and SPEDRA is approved in the EU for 48 months of commercial product shelf life.Our write-down for excess and obsolete inventory is subjective and requires forecasting of the future market demandfor our products. Forecasting demand for Qsymia, a drug in the obesity market in which there had been no new FDA-approved medications in over a decade prior to 2012, and for which reimbursement from third-party payors had previouslybeen non-existent, has been difficult. Forecasting demand for STENDRA/SPEDRA, a drug that is new to a crowded andcompetitive market and has limited sales history, is also difficult. We will continue to evaluate our inventories on a periodicbasis. The value of our inventories could be impacted if actual sales differ significantly from our estimates of future demandor if any significant unanticipated changes in future product demand or market conditions occur. Any of these events, or acombination thereof, could result in additional inventory write-downs in future periods, which could be material.Our failure to manage and maintain our distribution network for Qsymia or compliance with certain requirements,including requirements of the Qsymia REMS program, could compromise the commercialization of this product.We rely on Cardinal Health 105, Inc., or Cardinal Health, a third-party distribution and supply-chain managementcompany, to warehouse Qsymia and distribute it to the certified home delivery pharmacies and wholesalers that thendistribute Qsymia directly to patients and certified retail pharmacies. Cardinal Health provides billing, collection and returnsservices. Cardinal Health is our exclusive supplier of distribution logistics services, and accordingly we depend on CardinalHealth to satisfactorily perform its obligations under our agreement with them, including compliance with relevant state andfederal laws.Pursuant to the REMS program applicable to Qsymia, our distribution network is through a small number ofcertified home delivery pharmacies and wholesalers and through a broader network of certified retail pharmacies. We havecontracted through a third-party vendor to certify the retail pharmacies and collect required data to support the QsymiaREMS program. In addition to providing services to support the distribution and use of Qsymia, each of the certifiedpharmacies has agreed to comply with the REMS program requirements and, through our third-party data collection vendor,will provide us with the necessary patient and prescribing healthcare provider, or HCP, data. In addition, we have contractedwith third-party data warehouses to store this patient and HCP data and report it to us. We rely on this third-party data inorder to recognize revenue and comply with the REMS requirements for Qsymia, such as data analysis. This distribution anddata collection network requires significant coordination with our sales and marketing, finance, regulatory and medicalaffairs teams, in light of the REMS requirements applicable to Qsymia.We rely on the certified pharmacies to implement a number of safety procedures and report certain information toour third-party REMS data collection vendor. Failure to maintain our contracts with Cardinal Health, our third-party REMSdata collection vendor, or with the third-party data warehouses, or the inability or failure of any of them to adequatelyperform under our contracts with them, could negatively impact the distribution of Qsymia, or adversely affect our ability tocomply with the REMS applicable to Qsymia. Failure to comply with a requirement of an approved REMS can result in,among other things, civil penalties, imposition of additional burdensome REMS requirements, suspension or revocation ofregulatory approval and criminal prosecution. Failure to coordinate financial systems could also negatively impact ourability to accurately report and forecast product revenue. If we are unable to effectively manage the distribution and datacollection process, sales of Qsymia could be severely compromised and our business, financial condition and results ofoperations would be harmed.If we are unable to enter into agreements with suppliers or our suppliers fail to supply us with the APIs for our products orfinished products or if we rely on single-source suppliers, we may experience delays in commercializing our products.We currently do not have supply agreements for topiramate or phentermine, which are the APIs used in Qsymia. Wecannot guarantee that we will be successful in entering into supply agreements on reasonable terms or at all or that we or oursuppliers will be able to obtain or maintain the necessary regulatory approvals or state and federal controlled substancesregistrations for current or potential future suppliers in a timely manner or at all.35 Table of ContentsWe anticipate that we will continue to rely on single-source suppliers for phentermine and topiramate for theforeseeable future. Any production shortfall on the part of our suppliers that impairs the supply of phentermine or topiramatecould have a material adverse effect on our business, financial condition and results of operations. If we are unable to obtaina sufficient quantity of these compounds, there could be a substantial delay in successfully developing a second sourcesupplier. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions orrequirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labordisputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for Qsymia,which could adversely affect our product sales and operating results materially, which could significantly harm our business.We currently do not have any manufacturing facilities and intend to continue to rely on third parties for the supplyof the API and tablets, as well as for the supply of starting materials. However, we cannot be certain that we or our supplierswill be able to obtain or maintain the necessary regulatory approvals or registrations for these suppliers in a timely manner orat all.Sanofi Chimie manufactures and supplies the API for avanafil on an exclusive basis in the United States and otherterritories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. Sanofi WinthropIndustrie manufactures and supplies the avanafil tablets on an exclusive basis in the United States and other territories and ona semi-exclusive basis in Europe, including the EU, Latin America and other territories. We have entered into supplyagreements with Menarini and Metuchen under which we are obligated to supply them with avanafil tablets. If we are unableto maintain a reliable supply of avanafil API or tablets from Sanofi Chimie and/or Sanofi Winthrop Industrie, we may beunable to satisfy our obligations under these supply agreements in a timely manner or at all, and we may, as a result, be inbreach of one or both of these agreements.We have in-licensed all or a portion of the rights to Qsymia and STENDRA from third parties. If we default on any of ourmaterial obligations under those licenses, we could lose rights to these drugs.We have in-licensed and otherwise contracted for rights to Qsymia and STENDRA, and we may enter into similarlicenses in the future. Under the relevant agreements, we are subject to commercialization, development, supply,sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwisebreach these license agreements, the licensor may have the right to terminate the license in whole or to terminate theexclusive nature of the license. Loss of any of these licenses or the exclusive rights provided therein could harm our financialcondition and operating results.In particular, we license the rights to avanafil from MTPC, and we have certain obligations to MTPC in connectionwith that license. We license the rights to Qsymia from Dr. Najarian. We believe we are in compliance with the material termsof our license agreements with MTPC and Dr. Najarian. However, there can be no assurance that this compliance willcontinue or that the licensors will not have a differing interpretation of the material terms of the agreements. If the licenseagreements were terminated early or if the terms of the licenses were contested for any reason, it would have a materialadverse impact on our ability to commercialize products subject to these agreements, our ability to raise funds to finance ouroperations, our stock price and our overall financial condition. The monetary and disruption costs of any disputes involvingour agreements could be significant despite rulings in our favor.Our ability to gain market acceptance and generate revenues will be subject to a variety of risks, many of which are out ofour control.Qsymia and STENDRA/SPEDRA may not gain market acceptance among physicians, patients, healthcare payors orthe medical community. We believe that the degree of market acceptance and our ability to generate revenues from suchdrugs will depend on a number of factors, including:·our ability to expand the use of Qsymia through targeted patient and physician education;·our ability to find the right partner for expanded Qsymia commercial promotion to a broader primary carephysician audience;·our ability to obtain marketing authorization by the EC for Qsiva in the EU;36 Table of Contents·contraindications for Qsymia and STENDRA/SPEDRA;·competition and timing of market introduction of competitive drugs;·quality, safety and efficacy in the approved setting;·prevalence and severity of any side effects, including those of the components of our drugs;·emergence of previously unknown side effects, including those of the generic components of our drugs;·results of any post-approval studies;·potential or perceived advantages or disadvantages over alternative treatments, including generics;·the relative convenience and ease of administration and dosing schedule;·the convenience and ease of purchasing the drug, as perceived by potential patients;·strength of sales, marketing and distribution support;·price, both in absolute terms and relative to alternative treatments;·the effectiveness of our or our current or any future collaborators’ sales and marketing strategies;·the effect of current and future healthcare laws;·availability of coverage and reimbursement from government and other third-party payors;·the level of mandatory discounts required under federal and state healthcare programs and the volume of salessubject to those discounts;·recommendations for prescribing physicians to complete certain educational programs for prescribing drugs;·the willingness of patients to pay out-of-pocket in the absence of government or third-party coverage; and·product labeling, product insert, or new REMS or post-market safety study or trial requirements of FDA or otherregulatory authorities.Our drugs may fail to achieve market acceptance or generate significant revenue to achieve sustainable profitability.In addition, our efforts to educate the medical community and third-party payors on the safety and benefits of our drugs mayrequire significant resources and may not be successful.We are required to complete post-approval studies and trials mandated by FDA for Qsymia, and such studies and trials areexpected to be costly and time consuming. If the results of these studies and trials reveal unacceptable safety risks, Qsymiamay be required to be withdrawn from the market.Upon receiving approval to market Qsymia, FDA required that we perform additional studies of Qsymia including acardiovascular outcome trial, or CVOT. We estimate the cost of a CVOT as currently designed to be between $180 millionand $220 million incurred over a period of approximately five years. We have held several meetings with FDA to discussalternative strategies for obtaining cardiovascular, or CV, outcomes data that would be substantially more feasible and thatensure timely collection of data to better inform on the CV safety of Qsymia. In September 2013, we submitted a request tothe EMA for Scientific Advice, a procedure similar to the U.S. Special Protocol Assessment process, regarding use of a pre-specified interim analysis from the CVOT to assess the long-term treatment effect of Qsymia on the incidence of majoradverse cardiovascular events in overweight and obese subjects with confirmed cardiovascular disease. Our request was toallow this interim analysis to support the resubmission of an application for a marketing authorization for Qsiva for treatmentof obesity in accordance with the EU centralized marketing authorization procedure. We received feedback in 2014 from theEMA and the various competent authorities of the EU Member States. We worked with cardiovascular and epidemiologyexperts in exploring alternate solutions to demonstrate the long-term cardiovascular safety of Qsymia. After reviewing asummary of Phase 3 data relevant to CV risk and post-marketing safety data, the cardiology experts noted that they believethere was an absence of an overt CV37 Table of Contentsrisk signal and indicated that they did not believe a randomized placebo-controlled CVOT would provide additionalinformation regarding the CV risk of Qsymia. The epidemiology experts maintained that a well-conducted retrospectiveobservational study could provide data to further inform on potential CV risk. We worked with the expert group to develop aprotocol and conduct a retrospective observational study. We have submitted information from this study to FDA in supportof a currently pending supplemental New Drug Application (sNDA) seeking changes to the Qsymia label. Although we andconsulted experts believe there is no overt signal for CV risk to justify the CVOT, we are committed to working with FDA toreach a resolution. There is no assurance, however, that FDA will accept any measures short of those specified in the CVOTto satisfy this requirement.As for the EU, even if FDA were to determine that a CVOT is no longer necessary, there would be no assurance thatthe EMA would reach the same conclusion. There can be no assurance that we will be successful in obtaining FDA or EMAagreement that we have demonstrated the long-term cardiovascular safety of Qsymia. Furthermore, there can be no assurancethat FDA or EMA will not request or require us to provide additional information or undertake additional preclinical studiesand clinical trials or retrospective observational studies.In addition to these studies, FDA may also require us to perform other lengthy post-approval studies or trials, forwhich we would have to expend significant additional resources, which could have an adverse effect on our operating results,financial condition and stock price. Failure to comply with the applicable regulatory requirements, including the completionof post-marketing studies and trials, can result in, among other things, civil monetary penalties, suspensions of regulatoryapprovals, operating restrictions and criminal prosecution. The restriction, suspension or revocation of regulatory approvalsor any other failure to comply with regulatory requirements could have a material adverse effect on our business, financialcondition, results of operations and stock price. We have not complied with all the regulatory timelines for the required post-marketing trials and studies, and this may be considered a violation of the statute if FDA does not find good cause.We may not be able to maintain compliance with the continued listing requirements of The Nasdaq Stock Market.On October 4, 2017, we received a letter from The Nasdaq Stock Market, or Nasdaq, indicating that, based upon theclosing bid price of our common stock for the preceding 30 consecutive business days, we no longer meet the continuedlisting requirement of maintaining a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). Asprovided in the Nasdaq rules, we have 180 calendar days, or until April 2, 2018, to regain compliance with the continuedlisting requirement. In order to regain compliance, the closing bid price of our common stock on The Nasdaq Global SelectMarket must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. If we fail toregain compliance with the continued listing requirement noted above during the applicable compliance period, we mayapply for an additional 180-day cure period. If we fail to regain compliance during the additional cure period, our commonstock will be subject to delisting by Nasdaq. If Nasdaq delists our common stock, the delisting could adversely affect themarket liquidity of our common stock and the price of our common stock.We depend upon consultants and outside contractors extensively in important roles within our company.We outsource many key functions of our business and therefore rely on a substantial number of consultants, and wewill need to be able to effectively manage these consultants to ensure that they successfully carry out their contractualobligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if thequality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials or otherdevelopment activities may be extended, delayed or terminated, and we may not be able to complete our post-approvalclinical trials for Qsymia and STENDRA, obtain regulatory approval for our future investigational drug candidates,successfully commercialize our approved drugs or otherwise advance our business. There can be no assurance that we will beable to manage our existing consultants or find other competent outside contractors and consultants on commerciallyreasonable terms, or at all.Qsymia is a combination of two active ingredient drug products approved individually by FDA that are commerciallyavailable and marketed by other companies, although the specific dose strengths differ. As a result, Qsymia may be38 Table of Contentssubject to substitution by prescribing physicians, or by pharmacists, with individual drugs contained in the Qsymiaformulation, which would adversely affect our business.Although Qsymia is a once-a-day, proprietary extended-release formulation, both of the approved APIs(phentermine and topiramate) that are combined to produce Qsymia are commercially available as drug products at pricesthat together are lower than the price at which we sell Qsymia. In addition, the distribution and sale of these drug products isnot limited under a REMS program, as is the case with Qsymia. Further, the individual drugs contained in the Qsymiaformulation are available in retail pharmacies. We cannot be sure that physicians will view Qsymia as sufficiently superior toa treatment regimen of Qsymia’s individual APIs to justify the significantly higher cost for Qsymia, and they may prescribethe individual generic drugs already approved and marketed by other companies instead of our combination drug. Althoughour U.S. and European patents contain composition, product formulation and method-of-use claims that we believe protectQsymia, these patents may be ineffective or impractical to prevent physicians from prescribing, or pharmacists fromdispensing, the individual generic constituents marketed by other companies instead of our combination drug. Phentermineand topiramate are currently available in generic form, although the doses used in Qsymia are currently not available. In thethird quarter of 2013, Supernus Pharmaceuticals, Inc. launched Trokendi XR™ and in the second quarter of 2014, Upsher-Smith Laboratories, Inc. launched Qudexy™. Both products provide an extended-release formulation of the generic drugtopiramate that is indicated for certain types of seizures and migraines. Topiramate is not approved for obesity treatment, andphentermine is only approved for short-term treatment of obesity. However, because the price of Qsymia is significantlyhigher than the prices of the individual components as marketed by other companies, physicians may have a greaterincentive to write prescriptions for the individual components outside of their approved indication, instead of for ourcombination drug, and this may limit how we price or market Qsymia. Similar concerns could also limit the reimbursementamounts private health insurers or government agencies in the U.S. are prepared to pay for Qsymia, which could also limitmarket and patient acceptance of our drug and could negatively impact our revenues.In many regions and countries where we may plan to market Qsymia, the pricing of reimbursed prescription drugs iscontrolled by the government or regulatory agencies. The government or regulatory agencies in these countries coulddetermine that the pricing for Qsymia should be based on prices for its APIs when sold separately, rather than allowing us tomarket Qsymia at a premium as a new drug, which could limit our pricing of Qsymia and negatively impact our revenues.Once an applicant receives authorization to market a medicinal product in an EU Member State, through anyapplication route, the applicant is required to engage in pricing discussions and negotiations with a separate pricingauthority in that country. The legislators, policymakers and healthcare insurance funds in the EU Member States continue topropose and implement cost-containing measures to keep healthcare costs down, due in part to the attention being paid tohealthcare cost containment and other austerity measures in the EU. Certain of these changes could impose limitations on theprices pharmaceutical companies are able to charge for their products. The amounts of reimbursement available fromgovernmental agencies or third-party payors for these products may increase the tax obligations on pharmaceuticalcompanies such as ours, or may facilitate the introduction of generic competition with respect to our products. Furthermore,an increasing number of EU Member States and other foreign countries use prices for medicinal products established in othercountries as “reference prices” to help determine the price of the product in their own territory. Consequently, a downwardtrend in the price of medicinal products in some countries could contribute to similar downward trends elsewhere. Inaddition, the ongoing budgetary difficulties faced by a number of EU Member States, including Greece and Spain, have ledand may continue to lead to substantial delays in payment and payment partially with government bonds rather than cash formedicinal products, which could negatively impact our revenues and profitability. Moreover, in order to obtainreimbursement of our medicinal products in some countries, including some EU Member States, we may be required toconduct clinical trials that compare the cost-effectiveness of our products to other available therapies. There can be noassurance that our medicinal products will obtain favorable reimbursement status in any country.If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage.Qsymia and STENDRA/SPEDRA, like all pharmaceutical products, are subject to heightened risk for productliability claims due to inherent potential side effects. For example, because topiramate, a component of Qsymia, may39 Table of Contentsincrease the risk of congenital malformation in infants exposed to topiramate during the first trimester of pregnancy and alsomay increase the risk of suicidal thoughts and behavior, such risks may be associated with Qsymia as well. Other potentialrisks involving Qsymia may include, but are not limited to, an increase in resting heart rate, acute angle closure glaucoma,cognitive and psychiatric adverse events, metabolic acidosis, an increase in serum creatinine, hypoglycemia in patients withtype 2 diabetes, kidney stone formation, decreased sweating and hypokalemia, or lower-than-normal amount of potassium inthe blood.Although we have obtained product liability insurance coverage for Qsymia, we may be unable to maintain thisproduct liability coverage for Qsymia or any other of our approved drugs in amounts or scope sufficient to provide us withadequate coverage against all potential risks. A product liability claim in excess of, or excluded from, our insurance coveragewould have to be paid out of cash reserves and could have a material adverse effect upon our business, financial conditionand results of operations. Product liability insurance is expensive even with large self-insured retentions or deductibles,difficult to maintain, and current or increased coverage may not be available on acceptable terms, if at all.In addition, we develop, test, and manufacture through third parties, approved drugs and future investigational drugcandidates that are used by humans. We face an inherent risk of product liability exposure related to the testing of ourapproved drugs and investigational drug candidates in clinical trials. An individual may bring a liability claim against us ifone of our approved drugs or future investigational drug candidates causes, or merely appears to have caused, an injury.If we cannot successfully defend ourselves against a product liability claim, whether involving Qsymia,STENDRA/SPEDRA or a future investigational drug candidate or product, we may incur substantial liabilities. Regardless ofmerit or eventual outcome, liability claims may result in:·injury to our reputation;·withdrawal of clinical trial patients;·costs of defending the claim and/or related litigation;·cost of any potential adverse verdict;·substantial monetary awards to patients or other claimants; and·the inability to commercialize our drugs.Damages awarded in a product liability action could be substantial and could have a negative impact on ourfinancial condition. Whether or not we were ultimately successful in product liability litigation, such litigation wouldconsume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of whichwould impair our business. In addition, product liability claims could result in an FDA investigation of the safety or efficacyof our product, our third-party manufacturing processes and facilities, or our marketing programs. An FDA investigationcould also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications forwhich they may be used, or suspension or withdrawal of approval.The markets in which we operate are highly competitive and we may be unable to compete successfully against newentrants or established companies.Competition in the pharmaceutical and medical products industries is intense and is characterized by costly andextensive research efforts and rapid technological progress. We are aware of several pharmaceutical companies also activelyengaged in the development of therapies for the treatment of obesity and erectile dysfunction. Many of these companies havesubstantially greater research and development capabilities as well as substantially greater marketing, financial and humanresources than we do. Some of the drugs that may compete with Qsymia may not have a REMS requirement and theaccompanying complexities such a requirement presents. Our competitors may develop technologies and products that aremore effective than those we are currently marketing or researching and developing. Such developments could renderQsymia and STENDRA less competitive or possibly obsolete.Qsymia for the treatment of chronic weight management competes with several approved anti-obesity drugsincluding, Belviq (lorcaserin), Arena Pharmaceutical’s approved anti-obesity compound marketed by Eisai Inc., Eisai40 ®Table of ContentsCo., Ltd.’s U.S. subsidiary; Xenical (orlistat), marketed by Roche; alli, the over-the-counter version of orlistat, marketed byGlaxoSmithKline; Contrave (naltrexone/bupropion), Orexigen Therapeutics, Inc.’s anti-obesity compound; and Saxenda(liraglutide), an anti-obesity compound marketed by Novo Nordisk A/S. Agents that have been approved for type 2 diabetesthat have demonstrated weight loss in clinical studies may also compete with Qsymia. These include Farxiga™(dapagliflozin) from AstraZeneca and Bristol-Myers Squibb, an SGLT2 inhibitor; Jardiance (empagliflozin) from BoehringerIngelheim, an SGLT2 inhibitor; Victoza (liraglutide) from Novo Nordisk A/S, a GLP-1 receptor agonist; Invokana(canaglifozin) from Johnson & Johnson’s Janssen Pharmaceuticals, an SGLT2 inhibitor and Glyxambi(empagliflozin/linagliptin) from Boehringer Ingelheim and Eli Lilly, an SGLT2 inhibitor and DPP-4 inhibitor combinationproduct. Also, EnteroMedics® Inc. markets the Maestro Rechargeable System for certain obese adults, the first weight losstreatment device that targets the nerve pathway between the brain and the stomach that controls feelings of hunger andfullness.There are also several other investigational drug candidates in Phase 2 clinical trials for the treatment of obesity.There are also a number of generic pharmaceutical drugs that are prescribed for obesity, predominantly phentermine.Phentermine is sold at much lower prices than we charge for Qsymia. The availability of branded prescription drugs, genericdrugs and over-the-counter drugs could limit the demand for, and the price we are able to charge for, Qsymia.We also may face competition from the off-label use of the generic components in our drugs. In particular, it ispossible that patients will seek to acquire phentermine and topiramate, the generic components of Qsymia. Neither of thesegeneric components has a REMS program and both are available at retail pharmacies. Although the dose strength of thesegeneric components has not been approved by FDA for use in the treatment of obesity, the off-label use of the genericcomponents in the U.S. or the importation of the generic components from foreign markets could adversely affect thecommercial potential for our drugs and adversely affect our overall business, financial condition and results of operations.There are also surgical approaches to treat severe obesity that are becoming increasingly accepted. Two of the mostwell established surgical procedures are gastric bypass surgery and adjustable gastric banding, or lap bands. InFebruary 2011, FDA approved the use of a lap band in patients with a BMI of 30 (reduced from 35) with comorbidities. Thelowering of the BMI requirement will make more obese patients eligible for these types of bariatric procedures. In addition,other potential approaches that utilize various implantable devices or surgical tools are in development. Some of theseapproaches are in late-stage development and may be approved for marketing.Qsymia may also face challenges and competition from newly developed generic products. Under the U.S. DrugPrice Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, newly approved drugs andindications may benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act stimulatescompetition by providing incentives to generic pharmaceutical manufacturers to introduce non-infringing forms of patentedpharmaceutical products and to challenge patents on branded pharmaceutical products. We received two notifications underparagraph IV of the Hatch-Waxman Act challenging certain of our Qsymia patents, and we filed suit against bothchallengers. In June 2017, the Company entered into a settlement agreement with Actavis Laboratories FL, Inc., Actavis,Inc., and Actavis PLC, collectively referred to as Actavis, and in August 2017, the Company entered into a settlementagreement with Dr. Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL. Thesettlement agreement with Actavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, orearlier under certain circumstances. The settlement with DRL will permit DRL to begin selling a generic version of Qsymiaon June 1, 2025, or earlier under certain circumstances. It is possible that one or more additional companies may file anAbbreviated New Drug Application, or ANDA, and could receive FDA approval to market a generic version of Qsymia beforethe entry dates specified in our settlement agreements with Actavis and DRL. If a generic version of Qsymia is launched, thiswill harm our business. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on FDA’sfinding that the innovator’s product is safe and effective. Additionally, generic drug companies generally do not expendsignificant sums on sales and marketing activities, instead relying on physicians or payors to substitute the generic form of adrug for the branded form. Thus, generic manufacturers can sell their products at prices much lower than those charged by theinnovative pharmaceutical or biotechnology companies who have incurred substantial expenses associated with the researchand development of the drug product and who must spend significant sums marketing a new drug.The FDCA provides that an ANDA holder and an innovator drug with a REMS with Elements to Assure Safe use,like Qsymia, must use a single shared REMS system to assure safe use unless FDA waives this requirement and41 ®®®®®®®®Table of Contentspermits the ANDA holder to implement a separate but comparable REMS. We cannot predict the outcome or impact on ourbusiness of any future action that we may take with regard to sharing our REMS program or if FDA grants a waiver allowingthe generic competitor to market a generic drug with a separate but comparable REMS.STENDRA for the treatment of ED competes with PDE5 inhibitors in the form of oral medications includingViagra® (sildenafil citrate), marketed by Pfizer, Inc.; Cialis® (tadalafil), marketed by Eli Lilly and Company; Levitra®(vardenafil), co marketed by GlaxoSmithKline plc and Schering Plough Corporation in the U.S.; and STAXYN® (vardenafilin an oral disintegrating tablet, or ODT), co-promoted by GlaxoSmithKline plc and Merck & Co., Inc.New developments, including the development of other drug technologies and methods of preventing the incidenceof disease, occur in the pharmaceutical and medical technology industries at a rapid pace. These developments may renderour drugs and future investigational drug candidates obsolete or noncompetitive. Compared to us, many of our potentialcompetitors have substantially greater:·research and development resources, including personnel and technology;·regulatory experience;·investigational drug candidate development and clinical trial experience;·experience and expertise in exploitation of intellectual property rights; and·access to strategic partners and capital resources.As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we ormay obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our futureinvestigational drug candidates. Our competitors may also develop drugs or surgical approaches that are more effective, moreuseful and less costly than ours and may also be more successful in manufacturing and marketing their products. In addition,our competitors may be more effective in commercializing their products. We currently outsource our manufacturing andtherefore rely on third parties for that competitive expertise. There can be no assurance that we will be able to develop orcontract for these capabilities on acceptable economic terms, or at all.We may participate in new partnerships and other strategic transactions that could impact our liquidity, increase ourexpenses and present significant distractions to our management.From time to time, we consider strategic transactions, such as out-licensing or in-licensing of compounds ortechnologies, acquisitions of companies and asset purchases. Most recently, on September 30, 2016, we entered into a licenseand commercialization agreement and a commercial supply agreement with Metuchen. Under the terms of the agreements,Metuchen received an exclusive license to develop, commercialize and promote STENDRA in the United States, Canada,South America and India, or the Territory, effective October 1, 2016. Additionally, on January 6, 2017, we entered into aPatent Assignment Agreement with Selten, whereby we received exclusive, worldwide rights for the development andcommercialization of tacrolimus for the treatment of PAH and related vascular diseases. Further potential transactions wemay consider include a variety of different business arrangements, including strategic partnerships, joint ventures, spin-offs,restructurings, divestitures, business combinations and investments. In addition, another entity may pursue us as anacquisition target. Any such transactions may require us to incur non-recurring or other charges, may increase our near- andlong-term expenditures and may pose significant integration challenges, require additional expertise or disrupt ourmanagement or business, any of which could harm our operations and financial results.As part of an effort to enter into significant transactions, we conduct business, legal and financial due diligence withthe goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may beunsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the expected benefits of thetransaction. If we fail to realize the expected benefits from any transaction we may consummate, whether as a result ofunidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations andfinancial condition could be adversely affected.42 Table of ContentsOur failure to successfully identify, acquire, develop and market additional investigational drug candidates or approveddrugs would impair our ability to grow.As part of our growth strategy, we may acquire, in-license, develop and/or market additional products andinvestigational drug candidates. Most recently, on January 6, 2017, we entered into a Patent Assignment Agreement withSelten, whereby we received exclusive, worldwide rights for the development and commercialization of tacrolimus for thetreatment of PAH and related vascular diseases. Because our internal research capabilities are limited, we may be dependentupon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products ortechnology to us. The success of this strategy depends partly upon our ability to identify, select and acquire promisingpharmaceutical investigational drug candidates and products.The process of proposing, negotiating and implementing a license or acquisition of an investigational drugcandidate or approved product is lengthy and complex. Other companies, including some with substantially greaterfinancial, marketing and sales resources, may compete with us for the license or acquisition of investigational drugcandidates 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 devoteresources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize theanticipated benefits of such efforts. We may not be able to acquire the rights to additional investigational drug candidates onterms that we find acceptable, or at all.In addition, future acquisitions may entail numerous operational and financial risks, including:·exposure to unknown liabilities;·disruption of our business and diversion of our management’s time and attention to develop acquired productsor technologies;·incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;·higher than expected acquisition, integration and maintenance costs;·increased amortization expenses;·difficulty and cost in combining the operations and personnel of any acquired businesses with our operationsand personnel;·impairment of relationships with key suppliers or customers of any acquired businesses due to changes inmanagement and ownership; and·inability to retain key employees of any acquired businesses.Further, any investigational drug candidate that we acquire may require additional development efforts prior tocommercial sale, including extensive clinical testing and obtaining approval by FDA and applicable foreign regulatoryauthorities. All investigational drug candidates are prone to certain failures that are relatively common in the field of drugdevelopment, including the possibility that an investigational drug candidate will not be shown to be sufficiently safe andeffective for approval by regulatory authorities. In addition, we cannot be certain that any drugs that we develop or approvedproducts that we may acquire will be commercialized profitably or achieve market acceptance.If we fail to retain our key personnel and hire, train and retain qualified employees, we may not be able to competeeffectively, which could result in reduced revenues or delays in the development of our investigational drug candidates orcommercialization of our approved drugs.Our success is highly dependent upon the skills of a limited number of key management personnel. To reach ourbusiness objectives, we will need to retain and hire qualified personnel in the areas of manufacturing, commercial operations,research and development, regulatory and legal affairs, business development, clinical trial design, execution and analysis,and pre-clinical testing. There can be no assurance that we will be able to retain or hire such personnel, as we must competewith other companies, academic institutions, government entities and other agencies. The loss of any of our key personnel orthe failure to attract or retain necessary new employees could have an adverse effect on our43 Table of Contentsresearch programs, investigational drug candidate development, approved drug commercialization efforts and businessoperations.We rely on third parties and collaborative partners to manufacture sufficient quantities of compounds within productspecifications as required by regulatory agencies for use in our pre-clinical and clinical trials and commercial operationsand an interruption to this service may harm our business.We do not have the ability to manufacture the materials we use in our pre-clinical and clinical trials and commercialoperations. Rather, we rely on various third parties to manufacture these materials and there may be long lead times to obtainmaterials. There can be no assurance that we will be able to identify, contract with, qualify and obtain prior regulatoryapproval for additional sources of clinical materials. If interruptions in this supply occur for any reason, including a decisionby the third parties to discontinue manufacturing, technical difficulties, labor disputes, natural or other disasters, or a failureof the third parties to follow regulations, we may not be able to obtain regulatory approvals for our investigational drugcandidates and may not be able to successfully commercialize these investigational drug candidates or our approved drugs.Our third-party manufacturers and collaborative partners may encounter delays and problems in manufacturing ourapproved drugs or investigational drug candidates for a variety of reasons, including accidents during operation, failure ofequipment, delays in receiving materials, natural or other disasters, political or governmental changes, or other factorsinherent in operating complex manufacturing facilities. Supply-chain management is difficult. Commercially availablestarting materials, reagents, excipients, and other materials may become scarce, more expensive to procure, or not meetquality standards, and we may not be able to obtain favorable terms in agreements with subcontractors. Our third-partymanufacturers may not be able to operate manufacturing facilities in a cost-effective manner or in a time frame that isconsistent with our expected future manufacturing needs. If our third-party manufacturers, cease or interrupt production or ifour third-party manufacturers and other service providers fail to supply materials, products or services to us for any reason,such interruption could delay progress on our programs, or interrupt the commercial supply, with the potential for additionalcosts and lost revenues. If this were to occur, we may also need to seek alternative means to fulfill our manufacturing needs.For example, Catalent Pharma Solutions, LLC, or Catalent, is our sole source of clinical and commercial supplies forQsymia. While Catalent has significant experience in commercial scale manufacturing, there is no assurance that Catalentwill be successful in continuing to supply Qsymia at current levels or increasing the scale of the Qsymia manufacturingprocess, should the market demand for Qsymia expand beyond the level supportable by the current validated manufacturingprocess. Such a failure by Catalent to meet current demand or to further scale up the commercial manufacturing process forQsymia could have a material adverse impact on our ability to realize commercial success with Qsymia in the U.S. market,and have a material adverse impact on our plan, market price of our common stock and financial condition.For avanafil, Sanofi Chimie manufactures and supplies the API for avanafil on an exclusive basis in the UnitedStates and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories.Sanofi Winthrop Industrie manufactures and supplies the avanafil tablets for STENDRA and SPEDRA on an exclusive basisin the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and otherterritories. Sanofi is responsible for all aspects of manufacture, including obtaining the starting materials for the productionof API. If Sanofi is unable to manufacture the API or tablets in sufficient quantities to meet projected demand, future salescould be adversely affected, which in turn could have a detrimental impact on our financial results, our license,commercialization, and supply agreements with our collaboration partners, and our ability to enter into a collaborationagreement for the commercialization in other territories.Any failure of current or future manufacturing sites, including those of Sanofi Chimie and Sanofi WinthropIndustrie, to receive or maintain approval from FDA or foreign authorities, obtain and maintain ongoing FDA or foreignregulatory compliance, or manufacture avanafil API or tablets in expected quantities could have a detrimental impact on ourability to commercialize STENDRA under our agreements with Menarini and Metuchen and our ability to enter into acollaboration agreement for the commercialization of STENDRA in our other territories not covered by our agreements withMenarini and Metuchen.44 Table of ContentsWe rely on third parties to maintain appropriate levels of confidentiality of the data compiled during clinical, pre-clinicaland retrospective observational studies and trials.We seek to maintain the confidential nature of our confidential information through contractual provisions in ouragreements with third parties, including our agreements with clinical research organizations, or CROs, that manage ourclinical studies for our investigational drug candidates. These CROs may fail to comply with their obligations ofconfidentiality or may be required as a matter of law to disclose our confidential information. As the success of our clinicalstudies depends in large part on our confidential information remaining confidential prior to, during and after a clinicalstudy, any disclosure or breach affecting that information could have a material adverse effect on the outcome of a clinicalstudy, our business, financial condition and results of operations.The collection and use of personal health data and other personal data in the EU is governed by the provisions ofthe Data Protection Directive as implemented into national laws by the EU Member States. This Directive imposesrestrictions on the processing (e.g., collection, use, disclosure) of personal data, including a number of requirements relatingto the consent of the individuals to whom the personal data relates, the information provided to the individuals prior toprocessing their personal data, notification of data processing obligations to the competent national data protectionauthorities and the security and confidentiality of the personal data. The Data Protection Directive also imposes strictrestrictions on the transfer of personal data out of the EU to the United States. Failure to comply with the requirements of theData Protection Directive and the related national data protection laws of the EU Member States may result in fines and otheradministrative penalties. The General Data Protection Regulation, or GDPR, an EU-wide regulation that will be fullyenforceable by May 25, 2018, will introduce new data protection requirements in the EU and substantial fines for violationsof the data protection rules. The GDPR will increase our responsibility and liability in relation to EU personal data that weprocess and we may be required to put in place additional mechanisms ensuring compliance with the new EU data protectionrules. This may be onerous and increase our cost of doing business.If we fail to comply with applicable healthcare and privacy and data security laws and regulations, we could facesubstantial penalties, liability and adverse publicity and our business, operations and financial condition could beadversely affected.Our arrangements with third-party payors, patients and customers expose us to broadly applicable federal and statehealthcare laws and regulations pertaining to fraud and abuse. In addition, our operations expose us to privacy and datasecurity laws and regulations. The restrictions under applicable federal and state healthcare laws and regulations, and privacyand data security laws and regulations, that may affect our ability to operate include, but are not limited to:·the federal Anti-Kickback Statute, which prohibits, among other things, knowingly or willingly offering,paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward thepurchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcareitems or service for which payment may be made, in whole or in part, by federal healthcare programs such asMedicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceuticalcompanies on one hand and prescribers, purchasers and formulary managers on the other. Liability under theAnti-Kickback Statute may be established without proving actual knowledge of the statute or specific intent toviolate it. In addition, the government may assert that a claim including items or services resulting from aviolation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federalcivil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors to thefederal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecutionor regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fitsquarely within an exemption or safe harbor may be subject to scrutiny. We seek to comply with the exemptionsand safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harborprotection from anti-kickback liability;·the federal civil False Claims Act, which imposes civil penalties against individuals and entities for, amongother things, knowingly presenting, or causing to be presented, a false or fraudulent claim for payment ofgovernment funds or knowingly making, using, or causing to be made or used, a false record or statementmaterial to an obligation to pay money to the government or knowingly concealing, or knowingly andimproperly avoiding, decreasing, or concealing an obligation to pay money to the federal government.45 Table of ContentsMany pharmaceutical and other healthcare companies have been investigated and have reached substantialfinancial settlements with the federal government under the civil False Claims Act for a variety of allegedimproper marketing activities, including providing free product to customers with the expectation that thecustomers would bill federal programs for the product; providing consulting fees, grants, free travel, and otherbenefits to physicians to induce them to prescribe the company’s products; and inflating prices reported toprivate price publication services, which are used to set drug payment rates under government healthcareprograms. In addition, in recent years the government has pursued civil False Claims Act cases against a numberof pharmaceutical companies for causing false claims to be submitted as a result of the marketing of theirproducts for unapproved, and thus non-reimbursable, uses. More recently, federal enforcement agencies are andhave been investigating certain pharmaceutical companies’ product and patient assistance programs, includingmanufacturer reimbursement support services, relationships with specialty pharmacies, and grants toindependent charitable foundations. Pharmaceutical and other healthcare companies also are subject to otherfederal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutesthat extend to non-government health benefit programs;·The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health InformationTechnology for Economic and Clinical Health Act, or HIPAA, imposes criminal and civil liability for executinga scheme to defraud any healthcare benefit program and also imposes obligations, with respect to safeguardingthe privacy, security and transmission of individually identifiable health information;·numerous U.S. federal and state laws and regulations, including state data breach notification laws, state healthinformation privacy laws and federal and state consumer protection laws, govern the collection, use, disclosureand protection of personal information. Other countries also have, or are developing, laws governing thecollection, use, disclosure and protection of personal information. In addition, most healthcare providers whoprescribe our products and from whom we obtain patient health information are subject to privacy and securityrequirements under the Health Insurance Portability and Accountability Act of 1996 and by the HealthInformation Technology for Economic and Clinical Health Act, or HITECH, which are collectively referred to asHIPAA. We are not a HIPAA-covered entity and we do not operate as a business associate to any coveredentities. Therefore, the HIPAA privacy and security requirements do not apply to us (other than potentially withrespect to providing certain employee benefits). However, we could be subject to criminal penalties if weknowingly obtain individually identifiable health information from a covered entity in a manner that is notauthorized or permitted by HIPAA or for aiding and abetting and/or conspiring to commit a violation of HIPAA.We are unable to predict whether our actions could be subject to prosecution in the event of an impermissibledisclosure of health information to us. The legislative and regulatory landscape for privacy and data securitycontinues to evolve, and there has been an increasing amount of focus on privacy and data security issues withthe potential to affect our business. These privacy and data security laws and regulations could increase our costof doing business, and failure to comply with these laws and regulations could result in governmentenforcement actions (which could include civil or criminal penalties), private litigation and/or adversepublicity and could negatively affect our operating results and business;·analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items orservices reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payor.Some state laws also require pharmaceutical companies to report expenses relating to the marketing andpromotion of pharmaceutical products and to report gifts and payments to certain health care providers in thestates. Other states prohibit providing meals to prescribers or other marketing-related activities. Some statesrestrict the ability of manufacturers to offer co-pay support to patients for certain prescription drugs. Otherstates and cities require identification or licensing of state representatives. In addition, California, Connecticut,Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketingcodes of conduct. Foreign governments often have similar regulations, which we also will be subject to in thosecountries where we market and sell products;·the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requirescertain pharmaceutical manufacturers to engage in extensive tracking of payments and other transfers of46 Table of Contentsvalue to physicians and teaching hospitals, and to submit such data to Centers for Medicare and MedicaidServices within the U.S. Department of Health and Human Services, or CMS, which will then make all of thisdata publicly available on the CMS website. Pharmaceutical manufacturers with products for which payment isavailable under Medicare, Medicaid or the State Children’s Health Insurance Program must submit a report toCMS on or before the 90th day of each calendar year disclosing reportable payments made in the previouscalendar year; and·the federal Foreign Corrupt Practices Act of 1977 and other similar anti-bribery laws in other jurisdictionsgenerally prohibit companies and their intermediaries from providing money or anything of value to officials offoreign governments, foreign political parties, or international organizations with the intent to obtain or retainbusiness or seek a business advantage. Recently, there has been a substantial increase in anti-bribery lawenforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcementproceedings by both the Department of Justice and the SEC. A determination that our operations or activitiesare not, or were not, in compliance with United States or foreign laws or regulations could result in theimposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-partyrelationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Otherinternal or government investigations or legal or regulatory proceedings, including lawsuits brought by privatelitigants, may also follow as a consequence.If our operations are found to be in violation of any of the laws and regulations described above or any othergovernmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties,imprisonment, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid, and thecurtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations, orassociated adverse publicity, could adversely affect our ability to operate our business and our financial results. Althoughcompliance programs can mitigate the risk of investigation and prosecution for violations of these laws and regulations, therisks cannot be entirely eliminated. Any action against us for violation of these laws or regulations, even if we successfullydefend against it, could cause us to incur significant legal expenses and divert our management’s attention from theoperation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy data,security and fraud laws and regulations may prove costly.In the EU, the advertising and promotion of our products will also be subject to EU Member States’ laws concerningpromotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfaircommercial practices, as well as other EU Member State legislation governing statutory health insurance, bribery and anti-corruption. Failure to comply with these rules can result in enforcement action by the EU Member State authorities, whichmay include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supplyto the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.Significant disruptions of information technology systems or security breaches could adversely affect our business.We are increasingly dependent upon information technology systems, infrastructure and data to operate ourbusiness. In the ordinary course of business, we collect, store and transmit large amounts of confidential information(including but not limited to trade secrets or other intellectual property, proprietary business information and personalinformation). It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidentialinformation. We also have outsourced elements of our operations to third parties, and as a result we manage a number of thirdparty vendors who may or could have access to our confidential information. The size and complexity of our informationtechnology systems, and those of third party vendors with whom we contract, and the large amounts of confidentialinformation stored on those systems, make such systems potentially vulnerable to service interruptions or to securitybreaches from inadvertent or intentional actions by our employees, third party vendors, and/or business partners, or fromcyber-attacks by malicious third parties. Cyber-attacks are increasing in their frequency, sophistication, and intensity, andhave become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity andavailability of information.Significant disruptions of our information technology systems or security breaches could adversely affect ourbusiness operations and/or result in the loss, misappropriation and/or unauthorized access, use or disclosure of, or the47 Table of Contentsprevention of access to, confidential information (including but not limited to trade secrets or other intellectual property,proprietary business information and personal information), and could result in financial, legal, business and reputationalharm to us. For example, any such event that leads to unauthorized access, use or disclosure of personal information,including personal information regarding patients or employees, could harm our reputation, require us to comply with federaland/or state breach notification laws and foreign law equivalents, and otherwise subject us to liability under laws andregulations that protect the privacy and security of personal information. Security breaches and other inappropriate accesscan be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. Whilewe have implemented security measures to protect our information technology systems and infrastructure, there can be noassurance that such measures will prevent service interruptions or security breaches that could adversely affect our business.Marketing activities for our approved drugs are subject to continued governmental regulation.FDA, and third-country authorities, including the competent authorities of the EU Member States, have theauthority to impose significant restrictions, including REMS requirements, on approved products through regulations onadvertising, promotional and distribution activities. After approval, if products are marketed in contradiction with FDA lawsand regulations, FDA may issue warning letters that require specific remedial measures to be taken, as well as an immediatecessation of the impermissible conduct, resulting in adverse publicity. FDA may also require that all future promotionalmaterials receive prior agency review and approval before use. Certain states have also adopted regulations and reportingrequirements surrounding the promotion of pharmaceuticals. Qsymia and STENDRA are subject to these regulations. Failureto comply with state requirements may affect our ability to promote or sell pharmaceutical drugs in certain states. This, inturn, could have a material adverse impact on our financial results and financial condition and could subject us to significantliability, including civil and administrative remedies as well as criminal sanctions.We are subject to ongoing regulatory obligations and restrictions, which may result in significant expense and limit ourability to commercialize our drugs.We are required to comply with extensive regulations for drug manufacturing, labeling, packaging, adverse eventreporting, storage, distribution, advertising, promotion and record keeping in connection with the marketing of Qsymia andSTENDRA. Regulatory approvals may also be subject to significant limitations on the indicated uses or marketing of theinvestigational drug candidates or to whom and how we may distribute our products. Even after FDA approval is obtained,FDA may still impose significant restrictions on a drug’s indicated uses or marketing or impose ongoing requirements forREMS or potentially costly post-approval studies. For example, the labeling approved for Qsymia includes restrictions onuse, including recommendations for pregnancy testing, level of obesity and duration of treatment. We are subject to ongoingregulatory obligations and restrictions that may result in significant expense and limit our ability to commercialize Qsymia.FDA has also required the distribution of a Medication Guide to Qsymia patients outlining the increased risk ofteratogenicity with fetal exposure and the possibility of suicidal thinking or behavior. In addition, FDA has required a REMSthat may act to limit access to the drug, reduce our revenues and/or increase our costs. FDA may modify the Qsymia REMS inthe future to be more or less restrictive.In addition, Qsymia is a controlled substance and subject to DEA and state regulations relating to manufacturing,storage, record keeping, reporting, distribution and prescription procedures and requirements related to necessary DEAregistrations and state licenses. The DEA periodically inspects facilities for compliance with its rules andregulations. Failure to comply with current and future regulations of the DEA, relevant state authorities or any comparableinternational requirements could lead to a variety of sanctions, including revocation or denial of renewal of DEAregistrations, fines, injunctions, or civil or criminal penalties, and could result in, among other things, additional operatingcosts to us or delays in distribution of Qsymia and could have an adverse effect on our business and financial condition.Even if we maintain FDA approval, or receive a marketing authorization from the EC, and other regulatoryapprovals, if we or others identify adverse side effects after any of our products are on the market, or if manufacturingproblems occur, regulatory approval or EU marketing authorization may be varied, suspended or withdrawn andreformulation of our products, additional clinical trials, changes in labeling and additional marketing applications may berequired, any of which could harm our business and cause our stock price to decline.48 Table of ContentsWe and our contract manufacturers are subject to significant regulation with respect to manufacturing of our products.All of those involved in the preparation of a therapeutic drug for clinical trials or commercial sale, including ourexisting supply contract manufacturers, and clinical trial investigators, are subject to extensive regulation. Components of afinished drug product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordancewith current Good Manufacturing Practices, or cGMP. These regulations govern quality control of the manufacturingprocesses and documentation policies and procedures, and the implementation and operation of quality systems to controland assure the quality of investigational products and products approved for sale. Our facilities and quality systems and thefacilities and quality systems of our third-party contractors must be inspected routinely for compliance. If any suchinspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications orapplicable regulation occurs independent of such an inspection or audit, we or FDA may require remedial measures that maybe costly and/or time consuming for us or a third party to implement and that may include the issuance of a warning letter,temporary or permanent suspension of a clinical trial or commercial sales, recalls, market withdrawals, seizures, or thetemporary or permanent closure of a facility. Any such remedial measures would be imposed upon us or third parties withwhom we contract until satisfactory cGMP compliance is achieved. FDA could also impose civil penalties. We must alsocomply with similar regulatory requirements of foreign regulatory agencies.We obtain the necessary raw materials and components for the manufacture of Qsymia and STENDRA as well ascertain services, such as analytical testing packaging and labeling, from third parties. In particular, we rely on Catalent tosupply Qsymia capsules and Packaging Coordinators, Inc., or PCI, for Qsymia packaging services. We rely on Sanofi Chimieand Sanofi Winthrop to supply avanafil API and tablets. We and these suppliers and service providers are required to followcGMP requirements and are subject to routine and unannounced inspections by FDA and by state and foreign regulatoryagencies for compliance with cGMP requirements and other applicable regulations. Upon inspection of these facilities, FDAor foreign regulatory agencies may find the manufacturing process or facilities are not in compliance with cGMPrequirements and other regulations. Because manufacturing processes are highly complex and are subject to a lengthyregulatory approval process, alternative qualified supply may not be available on a timely basis or at all.Difficulties, problems or delays in our suppliers and service providers’ manufacturing and supply of raw materials,components and services could delay our clinical trials, increase our costs, damage our reputation and cause us to loserevenue or market share if we are unable to timely meet market demands.If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or othergovernmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions andfines, which could have a material adverse effect on our business, financial condition, results of operations and growthprospects.We participate in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. Under the Medicaid DrugRebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that aredispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds beingmade available to the states for our drugs under Medicaid and Medicare Part B. Those rebates are based on pricing datareported by us on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebateprogram. These data include the average manufacturer price and, in the case of innovator products, the best price for eachdrug, which, in general, represents the lowest price available from the manufacturer to any entity in the U.S. in any pricingstructure, calculated to include all sales and associated rebates, discounts and other price concessions. Our failure to complywith these price reporting and rebate payment options could negatively impact our financial results.The Affordable Care Act made significant changes to the Medicaid Drug Rebate program. Effective in March 2010,rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed careorganizations as well. With regard to the amount of the rebates owed, the Affordable Care Act increased the minimumMedicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13%for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as lineextensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the49 Table of Contentsaverage manufacturer price. In addition, the Affordable Care Act and subsequent legislation changed the definition ofaverage manufacturer price. Finally, the Affordable Care Act requires pharmaceutical manufacturers of branded prescriptiondrugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceuticalmanufacturer pays a prorated share of the branded prescription drug fee of $4.1 billion in 2018, based on the dollar value ofits branded prescription drug sales to certain federal programs identified in the law.CMS issued final regulations that became effective on April 1, 2016 to implement the changes to the Medicaid DrugRebate program under the Affordable Care Act. Moreover, certain legislative changes to and regulatory changes under theAffordable Care Act have occurred in the 115th United States Congress and under the Trump Administration. For example,the Tax Cuts and Jobs Act enacted on December 22, 2017, eliminated the individual mandate, beginning in 2019. Additionallegislative changes to and regulatory changes under the Affordable Care Act remain possible. We expect that the AffordableCare Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may beadopted in the future, could have a material adverse effect on our industry generally and on our ability to maintain orincrease sales of our existing products or to successfully commercialize our product candidates, if approved. The issuance ofregulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program hasand will continue to increase our costs and the complexity of compliance, has been and will be time consuming, and couldhave a material adverse effect on our results of operations.Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in thePublic Health Service’s 340B drug pricing program in order for federal funds to be available for the manufacturer’s drugsunder Medicaid and Medicare Part B. The 340B drug pricing program requires participating manufacturers to agree to chargestatutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs.These 340B covered entities include a variety of community health clinics and other entities that receive health servicesgrants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebateamount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. Changes to the definition ofaverage manufacturer price and the Medicaid rebate amount under the Affordable Care Act and CMS’s issuance of finalregulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact ourresults of operations.The Affordable Care Act expanded the 340B program to include additional entity types: certain free-standingcancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by theAffordable Care Act, but exempts “orphan drugs” from the ceiling price requirements for these covered entities. TheAffordable Care Act also obligates the Secretary of the U.S. Department of Health and Human Services, or HHS, to update theagreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B priceto covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to thegovernment the ceiling prices for its drugs. The Health Resources and Services Administration, or HRSA, the agency thatadministers the 340B program, recently updated the agreement with participating manufacturers. The Affordable Care Actalso obligates the Secretary of HHS to create regulations and processes to improve the integrity of the 340B program. OnJanuary 5, 2017, HRSA issued a final regulation regarding the calculation of 340B ceiling price and the imposition of civilmonetary penalties on manufacturers that knowingly and intentionally overcharge covered entities. The effective date of theregulation has been delayed until July 1, 2018. Implementation of this final rule and the issuance of any other finalregulations and guidance could affect our obligations under the 340B program in ways we cannot anticipate. In addition,legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or wouldrequire participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.Pricing and rebate calculations vary among products and programs. The calculations are complex and are oftensubject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount is computedeach quarter based on our submission to CMS of our current average manufacturer prices and best prices for the quarter. If webecome aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricingdata, we are obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the dataoriginally were due. Such restatements and recalculations increase our costs for complying with the laws and regulationsgoverning the Medicaid Drug Rebate program. Any corrections to our rebate calculations could result in an overage orunderage in our rebate liability for past quarters, depending on the nature of the50 Table of Contentscorrection. Price recalculations also may affect the ceiling price at which we are required to offer our products to certaincovered entities, such as safety-net providers, under the 340B drug discount program.We are liable for errors associated with our submission of pricing data. In addition to retroactive rebates and thepotential for 340B program refunds, if we are found to have knowingly submitted false average manufacturer price or bestprice information to the government, we may be liable for civil monetary penalties in the amount of $181,071 per item offalse information. Our failure to submit monthly/quarterly average manufacturer price and best price data on a timely basiscould result in a civil monetary penalty of $18,107 per day for each day the information is late beyond the due date. Suchfailure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate inthe Medicaid program. In the event that CMS terminates our rebate agreement, no federal payments would be available underMedicaid or Medicare Part B for our covered outpatient drugs.In September 2010, CMS and the Office of the Inspector General indicated that they intend to pursue moreaggressively companies that fail to report these data to the government in a timely manner. Governmental agencies may alsomake changes in program interpretations, requirements or conditions of participation, some of which may have implicationsfor amounts previously estimated or paid. We cannot assure you that our submissions will not be found by CMS to beincomplete or incorrect.If we misstate Non-FAMPs or FCPs, we must restate these figures. Additionally, pursuant to the VHCA, knowingprovision of false information in connection with a Non-FAMP filing can subject us to penalties of $181,071 for each item offalse information. If we overcharge the government in connection with our FSS contract or the Tricare Retail PharmacyProgram, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure tomake necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False ClaimsAct and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation orenforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business,financial condition, results of operations and growth prospects.Changes in reimbursement procedures by government and other third-party payors, including changes in healthcare lawand implementing regulations, may limit our ability to market and sell our approved drugs, or any future drugs, ifapproved, may limit our product revenues and delay profitability, and may impact our business in ways that we cannotcurrently predict. These changes could have a material adverse effect on our business and financial condition.In the U.S. and abroad, sales of pharmaceutical drugs are dependent, in part, on the availability of reimbursement tothe consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasinglychallenging the prices charged for medical products and services. Some third-party payor benefit packages restrictreimbursement, charge co-pays to patients, or do not provide coverage for specific drugs or drug classes.In addition, certain healthcare providers are moving towards a managed care system in which such providerscontract to provide comprehensive healthcare services, including prescription drugs, for a fixed cost per person. We areunable to predict the reimbursement policies employed by third-party healthcare payors.Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as average salesprice, average manufacturer price and Actual Acquisition Cost. CMS, the federal agency that administers Medicare and theMedicaid Drug Rebate program, surveys and publishes retail community pharmacy acquisition cost information in the formof National Average Drug Acquisition Cost, or NADAC, files to provide state Medicaid agencies with a basis of comparisonfor their own reimbursement and pricing methodologies and rates. It is difficult to project the impact of these evolvingreimbursement mechanics on the willingness of payors to cover our products.The healthcare industry in the U.S. and abroad is undergoing fundamental changes that are the result of political,economic and regulatory influences. The levels of revenue and profitability of pharmaceutical companies may be affected bythe continuing efforts of governmental and third-party payors to contain or reduce healthcare costs through various means.Reforms that have been and may be considered include mandated basic healthcare benefits, controls on healthcare spendingthrough limitations on the increase in private health insurance premiums and the types of drugs eligible for reimbursementand Medicare and Medicaid spending, the creation of large insurance purchasing groups, and fundamental changes to thehealthcare delivery system. These proposals include measures that would limit or prohibit payments for some medicaltreatments or subject the pricing of drugs to government control and regulations51 Table of Contentschanging the rebates we are required to provide. Further, federal budgetary concerns could result in the implementation ofsignificant federal spending cuts, including cuts in Medicare and other health related spending in the near-term. For example,beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2%under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by theAmerican Taxpayer Relief Act of 2012. Subsequent legislation extended the 2% reduction, on average, to 2025. These cutsreduce reimbursement payments related to our products, which could potentially negatively impact our revenue.In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Careand Education Reconciliation Act of 2010, collectively referred to in this report as the Affordable Care Act. The AffordableCare Act substantially changed the way healthcare is financed by both governmental and private insurers, and could have amaterial adverse effect on our future business, cash flows, financial condition and results of operations, including byoperation of the following provisions:·Effective in March 2010, rebate liability expanded from fee-for-service Medicaid utilization to include theutilization of Medicaid managed care organizations as well. This expanded eligibility affects rebate liability forthat utilization.·With regard to the amount of the rebates owed, the Affordable Care Act increased the minimum Medicaid rebatefrom 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% fornon-innovator products; changed the calculation of the rebate for certain innovator products that qualify as lineextensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the averagemanufacturer price.·Effective in January 2011, pharmaceutical companies must provide a 50% discount on branded prescriptiondrugs dispensed to beneficiaries within the Medicare Part D coverage gap or “donut hole,” which is a coveragegap that currently exists in the Medicare Part D prescription drug program. We currently do not have coverageunder Medicare Part D for our drugs, but this could change in the future.·Effective in January 2011, the Affordable Care Act requires pharmaceutical manufacturers of brandedprescription drugs to pay a branded prescription drug fee to the federal government. Each individualpharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $4.1 billion in 2018,based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.·Some states have elected to expand their Medicaid programs by raising the income limit to 133% of the federalpoverty level. For each state that does not choose to expand its Medicaid program, there may be fewer insuredpatients overall, which could impact our sales, business and financial condition. We expect any Medicaidexpansion to impact the number of adults in Medicaid more than children because many states have already settheir eligibility criteria for children at or above the level designated in the Affordable Care Act. An increase inthe proportion of patients who receive our drugs and who are covered by Medicaid could adversely affect ournet sales.CMS issued final regulations that became effective on April 1, 2016 to implement the changes to the Medicaid DrugRebate Program under the Affordable Care Act.There can be no assurance that future healthcare legislation or other changes in the administration or interpretationof government healthcare or third-party reimbursement programs will not have a material adverse effect on us. Healthcarereform is also under consideration in other countries where we intend to market Qsymia. Moreover, certain legislativechanges to and regulatory changes under the Affordable Care Act have occurred in the 115th United States Congress andunder the Trump Administration. For example, the Tax Cuts and Jobs Act enacted on December 22, 2017, eliminated theindividual mandate, beginning in 2019. Additional legislative changes to and regulatory changes under the Affordable CareAct remain possible. We expect that the Affordable Care Act, as currently enacted or as it may be amended in the future, andother healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industrygenerally and on our ability to maintain or increase sales of our existing products or to successfully commercialize ourproduct candidates, if approved.52 Table of ContentsWe expect to experience pricing and reimbursement pressures in connection with the sale of Qsymia, STENDRA andour investigational drug candidates, if approved, due to the trend toward managed healthcare, the increasing influence ofhealth maintenance organizations and additional legislative proposals. In addition, we may confront limitations in insurancecoverage for Qsymia, STENDRA and our investigational drug candidates. For example, the Medicare program generally doesnot provide coverage for drugs used to treat erectile dysfunction or drugs used to treat obesity. Similarly, other insurers maydetermine that such products are not covered under their programs. If we fail to successfully secure and maintainreimbursement coverage for our approved drugs and investigational drug candidates or are significantly delayed in doing so,we will have difficulty achieving market acceptance of our approved drugs and investigational drug candidates and ourbusiness will be harmed. Congress has enacted healthcare reform and may enact further reform, which could adversely affectthe pharmaceutical industry as a whole, and therefore could have a material adverse effect on our business.Both of the active pharmaceutical ingredients in Qsymia, phentermine and topiramate, are available as singleingredient generic products and do not have a REMS requirement. The exact doses of the active ingredients in Qsymia aredifferent than those currently available for the generic components. State pharmacy laws prohibit pharmacists fromsubstituting drugs with differing doses and formulations. The safety and efficacy of Qsymia is dependent on the titration,dosing and formulation, which we believe could not be easily duplicated, if at all, with the use of generic substitutes.However, there can be no assurance that we will be able to provide for optimal reimbursement of Qsymia as a treatment forobesity or, if approved, for any other indication, from third-party payors or the U.S. government. Furthermore, there can be noassurance that healthcare providers would not actively seek to provide patients with generic versions of the activeingredients in Qsymia in order to treat obesity at a potential lower cost and outside of the REMS requirements.An increasing number of EU Member States and other foreign countries use prices for medicinal productsestablished in other countries as “reference prices” to help determine the price of the product in their own territory.Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downwardtrends elsewhere. In addition, the ongoing budgetary difficulties faced by a number of EU Member States, including Greeceand Spain, have led and may continue to lead to substantial delays in payment and payment partially with governmentbonds rather than cash for medicinal products, which could negatively impact our revenues and profitability. Moreover, inorder to obtain reimbursement of our medicinal products in some countries, including some EU Member States, we may berequired to conduct clinical trials that compare the cost effectiveness of our products to other available therapies. There canbe no assurance that our medicinal products will obtain favorable reimbursement status in any country.Setbacks and consolidation in the pharmaceutical and biotechnology industries, and our, or our collaborators’, inabilityto obtain third-party coverage and adequate reimbursement, could make partnering more difficult and diminish ourrevenues.Setbacks in the pharmaceutical and biotechnology industries, such as those caused by safety concerns relating tohigh-profile drugs like Avandia®, Vioxx® and Celebrex®, or investigational drug candidates, as well as competition fromgeneric drugs, litigation, and industry consolidation, may have an adverse effect on us. For example, pharmaceuticalcompanies may be less willing to enter into new collaborations or continue existing collaborations if they are integrating anew operation as a result of a merger or acquisition or if their therapeutic areas of focus change following a merger. Moreover,our and our collaborators’ ability to commercialize any of our approved drugs or future investigational drug candidates willdepend in part on government regulation and the availability of coverage and adequate reimbursement from third-partypayors, including private health insurers and government payors, such as the Medicaid and Medicare programs, increases ingovernment-run, single-payor health insurance plans and compulsory licenses of drugs. Government and third-party payorsare increasingly attempting to contain healthcare costs by limiting coverage and reimbursement levels for new drugs. Giventhe continuing discussion regarding the cost of healthcare, managed care, universal healthcare coverage and other healthcareissues, we cannot predict with certainty what additional healthcare initiatives, if any, will be implemented or the effect anyfuture legislation or regulation will have on our business. These efforts may limit our commercial opportunities by reducingthe amount a potential collaborator is willing to pay to license our programs or investigational drug candidates in the futuredue to a reduction in the potential revenues from drug sales. Adoption of legislation and regulations could limit pricingapprovals for, and reimbursement53 Table of Contentsof, drugs. A government or third-party payor decision not to approve pricing for, or provide adequate coverage andreimbursements of, our drugs could limit market acceptance of these drugs.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 contract salesorganization, or CSO, CROs, safety monitoring company and other contractors and consultants are vulnerable to damagefrom computer viruses, unauthorized access, natural disasters, accidents, terrorism, war and telecommunication and electricalfailures. While we have not experienced any such system failure, accident or security breach to date, if such an event were tooccur and cause interruptions in our operations, it could result in a material disruption of our investigational drug candidatedevelopment programs and drug manufacturing operations. For example, the loss of clinical trial data from completed orongoing clinical trials for our investigational drug candidates could result in delays in our regulatory approval efforts withFDA, the EC, or the competent authorities of the EU Member States, and significantly increase our costs to recover orreproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data orapplications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the furtherdevelopment of our investigational drug candidates, or commercialization of our approved drugs, could be delayed. If we areunable to restore our information systems in the event of a systems failure, our communications, daily operations and theability to develop our investigational drug candidates and approved drug commercialization efforts would be severelyaffected.Natural disasters or resource shortages could disrupt our investigational drug candidate development and approved drugcommercialization efforts and adversely affect results.Our ongoing or planned clinical trials and approved drug commercialization efforts could be delayed or disruptedindefinitely upon the occurrence of a natural disaster. For example, Hurricane Sandy in October 2012, hindered our Qsymiasales efforts. In 2005, our clinical trials in the New Orleans area were interrupted by Hurricane Katrina. In addition, our officesare located in the San Francisco Bay Area near known earthquake fault zones and are therefore vulnerable to damage fromearthquakes. In October 1989, a major earthquake in our area caused significant property damage and a number of fatalities.We are also vulnerable to damage from other disasters, such as power loss, fire, floods and similar events. If a significantdisaster occurs, our ability to continue our operations could be seriously impaired and we may not have adequate insuranceto cover any resulting losses. Any significant unrecoverable losses could seriously impair our operations and financialcondition. Risks Relating to our Intellectual PropertyObtaining intellectual property rights is a complex process, and we may be unable to adequately protect our proprietarytechnologies.We hold various patents and patent applications in the U.S. and abroad targeting obesity and morbidities related toobesity, including sleep apnea and diabetes, and sexual health, among other indications. The procedures for obtaining apatent in the U.S. and in most foreign countries are complex. These procedures require an analysis of the scientifictechnology related to the invention and many sophisticated legal issues. Consequently, the process for having our pendingpatent applications issue as patents will be difficult, complex and time consuming. We do not know when, or if, we willobtain additional patents for our technologies, or if the scope of the patents obtained will be sufficient to protect ourinvestigational drug candidates or products, or be considered sufficient by parties reviewing our patent positions pursuant toa potential licensing or financing transaction.In addition, we cannot make assurances as to how much protection, if any, will be provided by our issued patents.Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing ourtechnologies or from developing competing products. Others may independently develop similar or alternative technologiesor design around our patented technologies or products. These companies would then be able to54 Table of Contentsdevelop, manufacture and sell products that compete directly with our products. In that case, our revenues and operatingresults could decline.Other entities may also challenge the validity or enforceability of our patents and patent applications in litigation oradministrative proceedings. The sponsor of a generic application seeking to rely on one of our approved drug products as thereference listed drug must make one of several certifications regarding each listed patent. A “Paragraph III” certification is thesponsor’s statement that it will wait for the patent to expire before obtaining approval for its product. A “Paragraph IV”certification is a challenge to the patent; it is an assertion that the patent does not block approval of the later product, eitherbecause the patent is invalid or unenforceable or because the patent, even if valid, is not infringed by the new product. OnceFDA accepts for filing a generic application containing a Paragraph IV certification, the applicant must within 20 daysprovide notice to the reference listed drug, or RLD, NDA holder and patent owner that the application with patent challengehas been submitted, and provide the factual and legal basis for the applicant’s assertion that the patent is invalid or notinfringed. If the NDA holder or patent owner file suit against the generic applicant for patent infringement within 45 days ofreceiving the Paragraph IV notice, FDA is prohibited from approving the generic application for a period of 30 months fromthe date of receipt of the notice. If the RLD has new chemical entity exclusivity and the notice is given and suit filed duringthe fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval. FDA may approve theproposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed or if the courtshortens the period because the parties have failed to cooperate in expediting the litigation. If a competitor or a genericpharmaceutical provider successfully challenges our patents, the protection provided by these patents could be reduced oreliminated and our ability to commercialize any approved drugs would be at risk. In addition, if a competitor or genericmanufacturer were to receive approval to sell a generic or follow-on version of one of our products, our approved productwould become subject to increased competition and our revenues for that product would be adversely affected.We also may rely on trade secrets and other unpatented confidential information to protect our technology,especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult toprotect. We seek to protect our trade secrets and other confidential information by entering into confidentiality agreementswith employees, collaborators, vendors (including CROs and our CSO), consultants and, at times, potential investors.Nevertheless, employees, collaborators, vendors, consultants or potential investors may still disclose or misuse our tradesecrets and other confidential information, and we may not be able to meaningfully protect our trade secrets. In addition,others may independently develop substantially equivalent information or techniques or otherwise gain access to our tradesecrets. Disclosure or misuse of our confidential information would harm our competitive position and could cause ourrevenues and operating results to decline.If we believe that others have infringed or misappropriated our proprietary rights, we may need to institute legalaction to protect our intellectual property rights. Such legal action may be expensive, and we may not be able to afford thecosts of enforcing or defending our intellectual property rights against others.We may receive additional notices of ANDA filings for Qsymia submitted by generic drug companies asserting that genericforms of Qsymia would not infringe on our issued patents. As a result of these potential filings, we may commenceadditional litigation to defend our patent rights, which would result in additional litigation costs and, depending on theoutcome of the litigation, might result in competition from lower cost generic or follow-on products earlier thananticipated.Qsymia is approved under the provisions of the Federal Food, Drug and Cosmetic Act, or FDCA, which renders itsusceptible to potential competition from generic manufacturers via the Hatch-Waxman Act and ANDA process. The ANDAprocedure includes provisions allowing generic manufacturers to challenge the innovator’s patent protection by submitting“Paragraph IV” certifications to FDA in which the generic manufacturer claims that the innovator’s patent is invalid,unenforceable and/or will not be infringed by the manufacture, use, or sale of the generic product. A patent owner whoreceives a Paragraph IV certification may choose to sue the generic applicant for patent infringement.We received a Paragraph IV certification notice from Actavis Laboratories FL, Inc. contending that our patents listedin the Orange Book for Qsymia (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, and 8,580,299) areinvalid, unenforceable and/or will not be infringed by the manufacture, use, or sale of a generic form of Qsymia. In responseto this notice, we filed suit against Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC, collectively referred to asActavis, to defend our patent rights. We received a second Paragraph IV certification notice55 Table of Contentsfrom Actavis contending that two additional patents listed in the Orange Book for Qsymia (U.S. Patents 8,895,057 and8,895,058) are invalid, unenforceable and/or will not be infringed by the manufacture, use, or sale of a generic form ofQsymia. In response to this second notice, we filed a second lawsuit against Actavis. We received a third Paragraph IVcertification notice from Actavis contending that two additional patents listed in the Orange Book for Qsymia (U.S. Patents9,011,905 and 9,011,906) are invalid, unenforceable and/or will not be infringed by the manufacture, use, or sale of a genericform of Qsymia. In response to this third notice, we filed a third lawsuit against Actavis. The lawsuits were consolidated intoa single suit.On June 29, 2017, the Company entered into a settlement agreement with Actavis resolving the suit againstActavis. On July 5, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit. Inaccordance with legal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission andthe U.S. Department of Justice for review.We received a Paragraph IV certification notice from Teva Pharmaceutical USA, Inc. and Teva PharmaceuticalIndustries, Ltd. (collectively, Teva) contending that eight of our patents listed in the Orange Book for Qsymia (U.S. Patents7,056,890, 7,533,818, 7,659,256, 7,674,776, 8,580,298, 8,580,299, 8,895,057, and 8,895,058) are invalid, unenforceableand/or will not be infringed by the manufacture, use or sale of a generic form of Qsymia. In response to this notice, we filedsuit against Teva to defend our patent rights. We received a second Paragraph IV certification notice from Teva contendingthat two additional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid,unenforceable and/or will not be infringed by the manufacture, use, or sale of a generic form of Qsymia. In response to thissecond notice, we filed a second lawsuit against Teva. The lawsuits were consolidated into a single suit. On September 27,2016, Dr. Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL, were substituted forTeva as defendants in the lawsuit.On August 28, 2017, the Company entered into a settlement agreement with DRL resolving the suit against DRL.On September 6, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit. Inaccordance with legal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission andthe U.S. Department of Justice for review.The settlement agreements with Actavis and DRL resolve all patent litigation brought by VIVUS against genericpharmaceutical companies that have filed ANDAs seeking approval to market generic versions of Qsymia.The settlement agreement with Actavis will permit Actavis to begin selling a generic version of Qsymia onDecember 1, 2024, or earlier under certain circumstances. The settlement with DRL will permit DRL to begin selling ageneric version of Qsymia on June 1, 2025, or earlier under certain circumstances. It is possible that one or more additionalcompanies may file an ANDA and could receive FDA approval to market a generic version of Qsymia before the entry datesspecified in our settlement agreements with Actavis and DRL, including if it is determined that the generic product does notinfringe our patents, or that our patents are invalid or unenforceable. Although we intend to vigorously enforce ourintellectual property rights relating to Qsymia, in the event there is a future ANDA filer, there can be no assurance that wewill prevail in a future defense of our patent rights. If a generic version of Qsymia is introduced, Qsymia would becomesubject to increased competition and our revenue would be adversely affected.We may be sued for infringing the intellectual property rights of others, which could be costly and result in delays ortermination of our future research, development, manufacturing and sales activities.Our commercial success also depends, in part, upon our ability to develop future investigational drug candidates,market and sell approved drugs and conduct our other research, development and commercialization activities withoutinfringing or misappropriating the patents and other proprietary rights of others. There are many patents and patentapplications owned by others that could be relevant to our business. For example, there are numerous U.S. and foreign issuedpatents and pending patent applications owned by others that are related to the therapeutic areas in which we have approveddrugs or future investigational drug candidates as well as the therapeutic targets to which these drugs and candidates aredirected. There are also numerous issued patents and patent applications covering chemical compounds or syntheticprocesses that may be necessary or useful to use in our research, development, manufacturing or commercialization activities.Because patent applications can take many years to issue, there may be currently pending applications, unknown to us,which may later result in issued patents that our approved drugs, future investigational drug candidates or technologies mayinfringe. There also may be existing patents, of which we are not56 Table of Contentsaware, that our approved drugs, investigational drug candidates or technologies may infringe. Further, it is not always clearto industry participants, including us, which patents cover various types of products or methods. The coverage of patents issubject to interpretation by the courts, and the interpretation is not always uniform. We cannot assure you that others holdingany of these patents or patent applications will not assert infringement claims against us for damages or seek to enjoin ouractivities. If we are sued for patent infringement, we would need to demonstrate that our products or methods do not infringethe patent claims of the relevant patent and/or that the patent claims are invalid or unenforceable, and we may not be able todo this.There can be no assurance that approved drugs or future investigational drug candidates do not or will not infringeon the patents or proprietary rights of others. In addition, third parties may already own or may obtain patents in the futureand claim that use of our technologies infringes these patents.If a person or entity files a legal action or administrative action against us, or our collaborators, claiming that ourdrug discovery, development, manufacturing or commercialization activities infringe a patent owned by the person or entity,we could incur substantial costs and diversion of the time and attention of management and technical personnel in defendingourselves against any such claims. Furthermore, parties making claims against us may be able to obtain injunctive or otherequitable relief that could effectively block our ability to further develop, commercialize and sell any current or futureapproved drugs, and such claims could result in the award of substantial damages against us. In the event of a successfulclaim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. Wemay not be able to obtain these licenses at a reasonable cost, if at all. In that case, we could encounter delays in productintroductions while we attempt to develop alternative investigational drug candidates or be required to ceasecommercializing any affected current or future approved drugs and our operating results would be harmed.Furthermore, because of the substantial amount of pre-trial document and witness discovery required in connectionwith intellectual property litigation, there is a risk that some of our confidential information could be compromised bydisclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be publicannouncements of the results of hearings, motions or other interim proceedings or developments. If securities analysts orinvestors perceive these results to be negative, it could have a substantial adverse effect on the trading price of our commonstock.We may face additional competition outside of the U.S. as a result of a lack of patent coverage in some territories anddifferences in patent prosecution and enforcement laws in foreign countries.Filing, prosecuting, defending and enforcing patents on all of our drug discovery technologies and all of ourapproved drugs and potential investigational drug candidates throughout the world would be prohibitively expensive. Whilewe have filed patent applications in many countries outside the U.S., and have obtained some patent coverage for approveddrugs in certain foreign countries, we do not currently have widespread patent protection for these drugs outside the U.S. andhave no protection in many foreign jurisdictions. Competitors may use our technologies to develop their own drugs injurisdictions where we have not obtained patent protection. These drugs may compete with our approved drugs or futureinvestigational drug candidates and may not be covered by any of our patent claims or other intellectual property rights.Even if international patent applications ultimately issue or receive approval, it is likely that the scope of protectionprovided by such patents will be different from, and possibly less than, the scope provided by our corresponding U.S. patents.The success of our international market opportunity is dependent upon the enforcement of patent rights in various othercountries. A number of countries in which we have filed or intend to file patent applications have a history of weakenforcement and/or compulsory licensing of intellectual property rights. Moreover, the legal systems of certain countries,particularly certain developing countries, do not favor the aggressive enforcement of patents and other intellectual propertyprotection, particularly those relating to biotechnology and/or pharmaceuticals, which make it difficult for us to stop theinfringement of our patents. Even if we have patents issued in these jurisdictions, there can be no assurance that our patentrights will be sufficient to prevent generic competition or unauthorized use.Attempting to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our effortsand attention from other aspects of our business. 57 Table of ContentsRisks Relating to our Financial Position and Need for FinancingWe may require additional capital for our future operating plans and debt servicing requirements, and we may not be ableto secure the requisite additional funding on acceptable terms, or at all, which would force us to delay, reduce or eliminatecommercialization or development efforts.We expect that our existing capital resources combined with future anticipated cash flows will be sufficient tosupport our operating activities at least through the next twelve months. However, we anticipate that we will be required toobtain additional financing to fund our commercialization efforts, additional clinical studies for approved products, thedevelopment of our research and development pipeline and the servicing requirements of our debt. Our future capitalrequirements will depend upon numerous factors, including:·our ability to expand the use of Qsymia through targeted patient and physician education;·our ability to obtain marketing authorization by the EC for Qsiva in the EU;·our ability to manage costs;·the cost required to maintain the REMS program for Qsymia;·the cost, timing and outcome of the post-approval clinical studies FDA has required us to perform as part of theapproval for Qsymia;·our ability, along with our collaboration partners, to successfully commercialize STENDRA/SPEDRA;·our ability to successfully commercialize STENDRA/SPEDRA through a third party in other territories in whichwe do not currently have a commercial collaboration;·the progress and costs of our research and development programs;·the scope, timing, costs and results of pre-clinical, clinical and retrospective observational studies and trials;·the cost of access to electronic records and databases that allow for retrospective observational studies;·patient recruitment and enrollment in future clinical trials;·the costs involved in seeking regulatory approvals for future drug candidates;·the costs involved in filing and pursuing patent applications, defending and enforcing patent claims;·the establishment of collaborations, sublicenses and strategic alliances and the related costs, includingmilestone payments;·the cost of manufacturing and commercialization activities and arrangements;·the level of resources devoted to our future sales and marketing capabilities;·the cost, timing and outcome of litigation, if any;·the impact of healthcare reform, if any, imposed by the federal government; and·the activities of competitors.Future capital requirements will also depend on the extent to which we acquire or invest in additional businesses,products and technologies. On January 6, 2017, we entered into a Patent Assignment Agreement with Selten whereby wereceived exclusive, worldwide rights for the development and commercialization of BMPR2 activators for the treatment ofPAH and related vascular diseases. We paid Selten an upfront payment of $1.0 million, and we will pay additional milestonepayments based on global development status and future sales milestones, as well as tiered royalty payments on future salesof these compounds. The total potential milestone payments are $39.6 million.To obtain additional capital when needed, we will evaluate alternative financing sources, including, but not limitedto, the issuance of equity or debt securities, corporate alliances, joint ventures and licensing agreements.58 Table of ContentsHowever, there can be no assurance that funding will be available on favorable terms, if at all. We are continually evaluatingour existing portfolio and we may choose to divest, sell or spin-off one or more of our drugs and/or investigational drugcandidates at any time. We cannot assure you that our drugs will generate revenues sufficient to enable us to earn a profit. Ifwe are unable to obtain additional capital, management may be required to explore alternatives to reduce cash used byoperating activities, including the termination of research and development efforts that may appear to be promising to us, thesale of certain assets and the reduction in overall operating activities. If adequate funds are not available, we may be requiredto delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts.Raising additional funds by issuing securities will cause dilution to existing stockholders and raising funds throughlending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership willbe diluted. We have financed our operations, and we expect to continue to finance our operations, primarily by issuingequity and debt securities. Moreover, any issuances by us of equity securities may be at or below the prevailing market priceof our common stock and in any event may have a dilutive impact on your ownership interest, which could cause the marketprice of our common stock to decline. To raise additional capital, we may choose to issue additional securities at any timeand at any price.As of December 31, 2017, we have $250.0 million in 4.5% Convertible Senior Notes due May 1, 2020, which werefer to as the Convertible Notes. The Convertible Notes are convertible into approximately 16,826,000 shares of ourcommon stock under certain circumstances prior to maturity at a conversion rate of 67.3038 shares per $1,000 principalamount of Convertible Notes, which represents a conversion price of approximately $14.858 per share, subject to adjustmentunder certain conditions. On October 8, 2015, IEH Biopharma LLC, a subsidiary of Icahn Enterprises L.P., announced that ithad received tenders for $170,165,000 of the aggregate principal amount of our Convertible Notes in its previouslyannounced cash tender offer for any and all of the outstanding Convertible Notes. The Convertible Notes are convertible atthe option of the holders under certain conditions at any time prior to the close of business on the business day immediatelypreceding November 1, 2019. Investors in our common stock will be diluted to the extent the Convertible Notes areconverted into shares of our common stock, rather than being settled in cash.We may also raise additional capital through the incurrence of debt, and the holders of any debt we may issue wouldhave rights superior to our stockholders’ rights in the event we are not successful and are forced to seek the protection ofbankruptcy laws.In addition, debt financing typically contains covenants that restrict operating activities. For example, on March 25,2013, we entered into the Purchase and Sale Agreement with BioPharma Secured Investments III Holdings Cayman LP, orBioPharma, which provides for the purchase of a debt-like instrument. Under the BioPharma Agreement, we may not (i) incurindebtedness greater than a specified amount, (ii) pay a dividend or other cash distribution on our capital stock, unless wehave cash and cash equivalents in excess of a specified amount, (iii) amend or restate our certificate of incorporation orbylaws unless such amendments or restatements do not affect BioPharma’s interests under the BioPharma Agreement,(iv) encumber the collateral, or (v) abandon certain patent rights, in each case without the consent of BioPharma. Any futuredebt financing we enter into may involve similar or more onerous covenants that restrict our operations.If we raise additional capital through collaboration, licensing or other similar arrangements, it may be necessary torelinquish potentially valuable rights to our drugs or future investigational drug candidates, potential products or proprietarytechnologies, or grant licenses on terms that are not favorable to us. If adequate funds are not available, our ability to achieveprofitability or to respond to competitive pressures would be significantly limited and we may be required to delay,significantly curtail or eliminate the commercialization of one or more of our approved drugs or the development of one ormore of our future investigational drug candidates.59 Table of ContentsThe investment of our cash balance and our available-for-sale securities are subject to risks that may cause losses andaffect the liquidity of these investments.At December 31, 2017, we had $226.3 million in cash, cash equivalents and available-for-sale securities. While atDecember 31, 2017, our excess cash balances were invested in money market, U.S. Treasury securities and corporate debtsecurities, our investment policy as approved by our Board of Directors, also provides for investments in debt securities ofU.S. government agencies, corporate debt securities and asset-backed securities. Our investment policy has the primaryinvestment objectives of preservation of principal. However, there may be times when certain of the securities in our portfoliowill fall below the credit ratings required in the policy. These factors could impact the liquidity or valuation of our available-for-sale securities, all of which were invested in U.S. Treasury securities or corporate debt securities as of December 31, 2017.If those securities are downgraded or impaired we would experience losses in the value of our portfolio which would have anadverse effect on our results of operations, liquidity and financial condition. An investment in money market mutual funds isnot insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although moneymarket mutual funds seek to preserve the value of the investment at $1 per share, it is possible to lose money by investing inmoney market mutual funds.Our involvement in securities-related class action and shareholder litigation could divert our resources and management’sattention and harm our business.The stock markets have from time to time experienced significant price and volume fluctuations that have affectedthe market prices for the common stock of pharmaceutical companies. These broad market fluctuations may cause the marketprice of our common stock to decline. In the past, securities-related class action litigation has often been brought against acompany following a decline in the market price of its securities. This risk is especially relevant for us becausebiotechnology and biopharmaceutical companies often experience significant stock price volatility in connection with theirinvestigational drug candidate development programs, the review of marketing applications by regulatory authorities andthe commercial launch of newly approved drugs. We were a defendant in federal and consolidated state shareholderderivative lawsuits. These securities-related class action lawsuits generally alleged that we and our officers misled theinvesting public regarding the safety and efficacy of Qsymia and the prospects for FDA’s approval of the Qsymia NDA as atreatment for obesity. Securities-related class action litigation often is expensive and diverts management’s attention and ourfinancial resources, which could adversely affect our business.For example, on March 27, 2014, Mary Jane and Thomas Jasin, who purport to be purchasers of VIVUS commonstock, filed an Amended Complaint in Santa Clara County Superior Court alleging securities fraud against us and three of ourformer officers and directors. In that complaint, captioned Jasin v. VIVUS, Inc., Case No. 114 cv 261427, plaintiffs assertedclaims under California’s securities and consumer protection securities statutes. Plaintiffs alleged generally that defendantsmisrepresented the prospects for our success, including with respect to the launch of Qsymia, while purportedly sellingVIVUS stock for personal profit. Plaintiffs alleged losses of “at least” $2.8 million, and sought damages and other relief. OnJuly 18, 2014, the same plaintiffs filed a complaint in the United States District Court for the Northern District of California,captioned Jasin v. VIVUS, Inc., Case No. 5:14 cv 03263. The Jasins’ federal complaint alleges violations of Sections 10(b)and 20(a) of the Securities Exchange Act of 1934, as amended, based on facts substantially similar to those alleged in theirstate court action. On September 15, 2014, pursuant to an agreement between the parties, plaintiffs voluntarily dismissedtheir state court action with prejudice. Defendants moved to dismiss the federal action and moved to dismiss again afterplaintiffs amended their complaint to include additional factual allegations and to add seven new claims under Californialaw. The court granted the latter motion on June 18, 2015, dismissing the seven California claims with prejudice anddismissing the two federal claims with leave to amend. Plaintiffs filed a Second Amended Complaint on August 17, 2015.Defendants moved to dismiss that complaint as well. On April 19, 2016, the court granted defendants’ motion to dismiss withprejudice and entered judgment in favor of defendants. Plaintiffs filed a notice of appeal to the Ninth Circuit Court ofAppeals on May 18, 2016. The Ninth Circuit issued a decision on January 16, 2018, affirming the district court’s dismissal ofthe action. The deadline for Plaintiffs to seek rehearing in the Ninth Circuit has now expired, and unless Plaintiffs elect to filea petition for certiorari in the Supreme Court, the matter is concluded.We maintain directors’ and officers’ liability insurance that we believe affords coverage for much of the anticipatedcost of the remaining Jasin action, subject to the use of our financial resources to pay for our self-insured retention and thepolicies’ terms and conditions.60 Table of ContentsWe have an accumulated deficit of $843.6 million as of December 31, 2017, and we may continue to incur substantialoperating losses for the future.We have generated a cumulative net loss of $843.6 million for the period from our inception through December 31,2017, and we anticipate losses in future years due to continued investment in our research and development programs. Therecan be no assurance that we will be able to achieve or maintain profitability or that we will be successful in the future.Our ability to utilize our net operating loss carryforwards and other tax attributes to offset future taxable income may belimited.As of December 31, 2017, we had approximately $640.4 million and $276.2 million of net operating loss, or NOL,carryforwards with which to offset our future taxable income for federal and state income tax reporting purposes, respectively.Utilization of our net operating loss and tax credit carryforwards, or tax attributes, may be subject to substantial annuallimitations provided by the Internal Revenue Code and similar state provisions to the extent certain ownership changes aredeemed to occur. Such an annual limitation could result in the expiration of the tax attributes before utilization. The taxattributes reflected above have not been reduced by any limitations. To the extent it is determined upon completion of theanalysis that such limitations do apply, we will adjust the tax attributes accordingly. We face the risk that our ability to useour tax attributes will be substantially restricted if we undergo an “ownership change” as defined in Section 382 of the U.S.Internal Revenue Code, or Section 382. An ownership change under Section 382 would occur if “5-percent shareholders,”within the meaning of Section 382, collectively increased their ownership in the Company by more than 50 percentagepoints over a rolling three-year period. We have not completed a recent study to assess whether any change of control hasoccurred or whether there have been multiple changes of control since the Company’s formation, due to the significantcomplexity and cost associated with the study. We have completed studies through December 31, 2016 and concluded noadjustments were required. If we have experienced a change of control at any time since our formation, our NOLcarryforwards and tax credits may not be available, or their utilization could be subject to an annual limitation underSection 382. A full valuation allowance has been provided against our NOL carryforwards, and if an adjustment is required,this adjustment would be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on theconsolidated balance sheet or statement of operations.We may have exposure to additional tax liabilities that could negatively impact our income tax provision, net income, andcash flow.We are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we currentlyoperate or have historically operated. The determination of our worldwide provision for income taxes and current anddeferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are manytransactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit byU.S. tax authorities as well as subject to the prospective and retrospective effects of changing tax regulations and legislation.Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amountsrecorded in our consolidated financial statements and may materially affect our income tax provision, net income, or cashflows in the period or periods for which such determination and settlement is made. 61 Table of ContentsRisks Relating to an Investment in our Common StockOur stock price has been and may continue to be volatile.The market price of our common stock has been volatile and is likely to continue to be so. The market price of ourcommon stock may fluctuate due to factors including, but not limited to:·our ability to meet the expectations of investors related to the commercialization of Qsymia and STENDRA;·our ability to find the right partner for expanded Qsymia commercial promotion to a broader primary carephysician audience;·our ability to obtain marketing authorization for our products in foreign jurisdictions, including authorizationfrom the EC for Qsiva in the EU;·the costs, timing and outcome of post-approval clinical studies which FDA has required us to perform as part ofthe approval for Qsymia and STENDRA;·the cost required to maintain the REMS program for Qsymia;·results within the clinical trial programs for Qsymia and STENDRA or other results or decisions affecting thedevelopment of our investigational drug candidates;·announcements of technological innovations or new products by us or our competitors;·approval of, or announcements of, other anti-obesity compounds in development;·publication of generic drug combination weight loss data by outside individuals or companies;·actual or anticipated fluctuations in our financial results;·our ability to obtain needed financing;·sales by insiders or major stockholders;·economic conditions in the U.S. and abroad;·the volatility and liquidity of the financial markets;·comments by or changes in assessments of us or financial estimates by security analysts;·negative reports by the media or industry analysts on various aspects of our products, our performance and ourfuture operations;·the status of the CVOT and our related discussions with FDA;·adverse regulatory actions or decisions;·any loss of key management;·deviations in our operating results from the estimates of securities analysts or other analyst comments;·discussions about us or our stock price by the financial and scientific press and in online investor communities;·investment activities employed by short sellers of our common stock;·developments or disputes concerning patents or other proprietary rights;·reports of prescription data by us or from independent third parties for our products;·licensing, product, patent or securities litigation; and62 Table of Contents·public concern as to the safety or efficacy of our drugs or future investigational drug candidates developed byus.These factors and fluctuations, as well as political and other market conditions, may adversely affect the marketprice of our common stock. Additionally, volatility or a lack of positive performance in our stock price may adversely affectour ability to retain or recruit key employees, all of whom have been or will be granted equity awards as an important part oftheir compensation packages.Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securitiesanalysts or investors, the trading price of our stock could decline.Our operating results will likely fluctuate from fiscal quarter to fiscal quarter, and from year to year, and are difficultto predict. Product sales of Qsymia may never increase or become profitable. In addition, although we have entered intolicense and commercialization agreements with Menarini to commercialize and promote SPEDRA for the treatment of ED inover 40 countries, including the EU, plus Australia and New Zealand and with Metuchen to commercialize STENDRA in theU.S., Canada, South America and India, we and they may not be successful in commercializing avanafil in these territories.Our operating expenses are largely independent of sales in any particular period. We believe that our quarterly and annualresults of operations may be negatively affected by a variety of factors. These factors include, but are not limited to, the levelof patient demand for Qsymia and STENDRA, the ability of our distribution partners to process and ship product on a timelybasis, the success of our third-party’s manufacturing efforts to meet customer demand, fluctuations in foreign exchange rates,investments in sales and marketing efforts to support the sales of Qsymia and STENDRA, investments in the research anddevelopment efforts, and expenditures we may incur to acquire additional products.Future sales of our common stock may depress our stock price.Sales of our stock by our executive officers or directors, or the perception that such sales may occur, could adverselyaffect the market price of our stock. We have also registered all common stock that we may issue under our employee benefitsplans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under thesecurities laws. Any of our executive officers or directors may adopt trading plans under SEC Rule 10b5-1 to dispose of aportion of their stock. If any of these events cause a large number of our shares to be sold in the public market, the sales couldreduce the trading price of our common stock and impede our ability to raise future capital.Our charter documents and Delaware law could make an acquisition of our company difficult, even if an acquisition maybenefit our stockholders.On November 8, 2016, our Board of Directors adopted an amendment and restatement of our Preferred Stock RightsPlan, which was originally adopted on March 26, 2007. As amended and restated, the Preferred Stock Rights Plan is designedto protect stockholder value by mitigating the likelihood of an “ownership change” that would result in significantlimitations to our ability to use our NOLs or other tax attributes to offset future income. As amended and restated, thePreferred Stock Rights Plan will continue in effect until November 9, 2019, unless earlier terminated or the rights are earlierexchanged or redeemed by our Board of Directors. We submitted the plan to a vote at the 2017 annual meeting ofstockholders, and stockholders ratified the plan at the 2017 annual meeting of stockholders. The Preferred Stock Rights Planhas the effect of causing substantial dilution to a person or group that acquires more than 4.9% of our shares without theapproval of our Board of Directors. The existence of the Preferred Stock Rights Plan could limit the price that certaininvestors might be willing to pay in the future for shares of our common stock and could discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable.Some provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylawscould delay or prevent a change in control of our Company. Some of these provisions:·authorize the issuance of preferred stock by the Board without prior stockholder approval, commonly referred toas “blank check” preferred stock, with rights senior to those of common stock;63 Table of Contents·prohibit stockholder actions by written consent;·specify procedures for director nominations by stockholders and submission of other proposals forconsideration at stockholder meetings; and·eliminate cumulative voting in the election of directors.In addition, we are governed by the provisions of Section 203 of Delaware General Corporation Law. Theseprovisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, frommerging or combining with us. These and other provisions in our charter documents could reduce the price that investorsmight be willing to pay for shares of our common stock in the future and result in the market price being lower than it wouldbe without these provisions. Item 1B. Unresolved Staff CommentsNone. Item 2. PropertiesIn August 2016, we entered into a lease for new principal executive offices, consisting of approximately 13,981square feet of office space at 900 East Hamilton Avenue, Campbell, California, or the Campbell Lease. The Campbell Leasehas an initial term of approximately 58 months, commencing on December 27, 2016, with a beginning annual rental rate of$3.10 per rentable square foot, subject to agreed-upon increases. We received an abatement of the monthly rent for the firstfour months on the lease term. We have one option to extend the lease term for two years at the fair market rental rate thenprevailing as detailed in the Campbell Lease.In general, our existing facilities are in good condition and adequate for all present and near‑term uses.For additional information regarding obligations under operating leases, see Note 16: “Commitments” to ourConsolidated Financial Statements included elsewhere in this Annual Report on Form 10‑K. Item 3. Legal ProceedingsShareholder LawsuitOn March 27, 2014, Mary Jane and Thomas Jasin, who purport to be purchasers of VIVUS common stock, filed anAmended Complaint in Santa Clara County Superior Court alleging securities fraud against the Company and three of itsformer officers and directors. In that complaint, captioned Jasin v. VIVUS, Inc., Case No. 114 cv 261427, plaintiffs assertedclaims under California’s securities and consumer protection securities statutes. Plaintiffs alleged generally that defendantsmisrepresented the prospects for the Company’s success, including with respect to the launch of Qsymia, while purportedlyselling VIVUS stock for personal profit. Plaintiffs alleged losses of “at least” $2.8 million, and sought damages and otherrelief. On July 18, 2014, the same plaintiffs filed a complaint in the United States District Court for the Northern District ofCalifornia, captioned Jasin v. VIVUS, Inc., Case No. 5:14 cv 03263. The Jasins’ federal complaint alleges violations ofSections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, based on facts substantially similar to thosealleged in their state court action. On September 15, 2014, pursuant to an agreement between the parties, plaintiffsvoluntarily dismissed their state court action with prejudice. Defendants moved to dismiss the federal action and moved todismiss again after plaintiffs amended their complaint to include additional factual allegations and to add seven new claimsunder California law. The court granted the latter motion on June 18, 2015, dismissing the seven California claims withprejudice and dismissing the two federal claims with leave to amend. Plaintiffs filed a Second Amended Complaint onAugust 17, 2015. Defendants moved to dismiss that complaint as well. On April 19, 2016, the court granted defendants’motion to dismiss with prejudice and entered judgment in favor of defendants. Plaintiffs filed a notice of appeal to the NinthCircuit Court of Appeals on May 18, 2016. The Ninth Circuit issued a decision on January 16, 2018, affirming the districtcourt’s dismissal of the action. The deadline for Plaintiffs to seek rehearing in the Ninth Circuit has now expired, and unlessPlaintiffs elect to file a petition for certiorari in the64 Table of ContentsSupreme Court, the matter is concluded. The Company maintains directors’ and officers’ liability insurance that it believesaffords coverage for much of the anticipated cost of the remaining Jasin action, subject to the use of our financial resourcesto pay for our self-insured retention and the policies’ terms and conditions.Qsymia ANDA LitigationOn May 7, 2014, the Company received a Paragraph IV certification notice from Actavis Laboratories FL indicatingthat it filed an abbreviated new drug application, or ANDA, with the U.S. Food and Drug Administration, or FDA, requestingapproval to market a generic version of Qsymia and contending that the patents listed for Qsymia in FDA Orange Book at thetime the notice was received (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, and 8,580,299)(collectively “patents in suit”) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offerfor sale of a generic form of Qsymia as described in their ANDA. On June 12, 2014, the Company filed a lawsuit in the U.S.District Court for the District of New Jersey against Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC, collectivelyreferred to as Actavis. The lawsuit (Case No. 14 3786 (SRC)(CLW)) was filed on the basis that Actavis’ submission of theirANDA to obtain approval to manufacture, use, sell or offer for sale generic versions of Qsymia prior to the expiration of thepatents in suit constitutes infringement of one or more claims of those patents.On January 21, 2015, the Company received a second Paragraph IV certification notice from Actavis contendingthat two additional patents listed in the Orange Book for Qsymia (U.S. Patents 8,895,057 and 8,895,058) are invalid,unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. OnMarch 4, 2015, the Company filed a second lawsuit in the U.S. District Court for the District of New Jersey against Actavis(Case No. 15-1636 (SRC)(CLW)) in response to the second Paragraph IV certification notice on the basis that Actavis’submission of their ANDA constitutes infringement of one or more claims of the patents-in-suit.On July 7, 2015, the Company received a third Paragraph IV certification notice from Actavis contending that twoadditional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid, unenforceableand/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. On August 17, 2015,the Company filed a third lawsuit in the U.S. District Court for the District of New Jersey against Actavis (Case No. 15-6256(SRC)(CLW)) in response to the third Paragraph IV certification notice on the basis that Actavis’ submission of their ANDAconstitutes infringement of one or more claims of the patents-in-suit. The three lawsuits against Actavis were consolidatedinto a single suit (Case No. 14-3786 (SRC)(CLW)).On June 29, 2017, the Company entered into a settlement agreement with Actavis resolving the suit against Actavis.On July 5, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit. In accordance withlegal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S.Department of Justice for review.On March 5, 2015, the Company received a Paragraph IV certification notice from Teva Pharmaceuticals USA, Inc.indicating that it filed an ANDA with FDA, requesting approval to market a generic version of Qsymia and contending thateight patents listed for Qsymia in the Orange Book at the time of the notice (U.S. Patents 7,056,890, 7,553,818, 7,659,256,7,674,776, 8,580,298, 8,580,299, 8,895,057 and 8,895,058) (collectively “patents-in-suit”) are invalid, unenforceable and/orwill not be infringed by the manufacture, use or sale of a generic form of Qsymia as described in their ANDA. On April 15,2015, the Company filed a lawsuit in the U.S. District Court for the District of New Jersey against Teva Pharmaceutical USA,Inc. and Teva Pharmaceutical Industries, Ltd., collectively referred to as Teva. The lawsuit (Case No. 15-2693 (SRC)(CLW))was filed on the basis that Teva’s submission of their ANDA to obtain approval to manufacture, use, sell, or offer for salegeneric versions of Qsymia prior to the expiration of the patents-in-suit constitutes infringement of one or more claims ofthose patents.On August 5, 2015, the Company received a second Paragraph IV certification notice from Teva contending thattwo additional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid,unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. OnSeptember 18, 2015, the Company filed a second lawsuit in the U.S. District Court for the District of New Jersey against Teva(Case No. 15-6957(SRC)(CLW)) in response to the second Paragraph IV certification notice on the basis that Teva’ssubmission of their ANDA constitutes infringement of one or more claims of the patents-in-suit. The two lawsuits againstTeva were consolidated into a single suit (Case No. 15-2693 (SRC)(CLW)). On September 27, 2016,65 Table of ContentsDr. Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL, were substituted for Tevaas defendants in the lawsuit.On August 28, 2017, the Company entered into a settlement agreement with DRL resolving the suit against DRL.On September 6, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit. Inaccordance with legal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission andthe U.S. Department of Justice for review.The settlement agreement with DRL resolves all patent litigation brought by VIVUS against generic pharmaceuticalcompanies that have filed ANDAs seeking approval to market generic versions of Qsymia.STENDRA ANDA LitigationOn June 20, 2016, the Company received a Paragraph IV certification notice from Hetero USA, Inc. and Hetero LabsLimited, collectively referred to as Hetero, indicating that it filed an ANDA with FDA, requesting approval to market ageneric version of STENDRA and contending that patents listed for STENDRA in the Orange Book at the time of the notice(U.S. Patents 6,656,935, and 7,501,409) (collectively “patents-in-suit”) are invalid, unenforceable and/or will not beinfringed by the manufacture, use or sale of a generic form of STENDRA as described in their ANDA. On July 27, 2016, theCompany filed a lawsuit in the U.S. District Court for the District of New Jersey against Hetero (Case No. 16-4560 (KSH)(CLW)). On January 3, 2017, we entered into a settlement agreement with Hetero. Under the settlement agreement, Heterowas granted a license to manufacture and commercialize the generic version of STENDRA described in its ANDA filing in theUnited States as of the date that is the later of (a) October 29, 2024, which is 180 days prior to the expiration of the last toexpire of the patents-in-suit, or (b) the date that Hetero obtains final approval from FDA of the Hetero ANDA. The settlementagreement provides for a full settlement of all claims that were asserted in the suit.The Company is not aware of any other asserted or unasserted claims against it where it believes that an unfavorableresolution would have an adverse material impact on the operations or financial position of the Company. Item 4. Mine Safety Disclosures.None.66 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.VIVUS’s common stock trades publicly on the NASDAQ Global Select Market under the symbol “VVUS.” Thefollowing table sets forth for the periods indicated the quarterly high and low sales prices of our common stock as reported onthe NASDAQ Global Select Market. Three Months Ended March 31 June 30 September 30 December 312017 High$1.30 $1.38 $1.32 $1.01Low 1.04 0.99 0.86 0.482016 High$1.42 $1.85 $1.32 $1.47Low 0.92 1.02 0.93 1.03StockholdersAs of February 28, 2018, there were 106,021,055 shares of outstanding common stock that were held by 2,775stockholders of record and no outstanding shares of preferred stock. On February 28, 2018, the last reported sales price of ourcommon stock on the NASDAQ Global Select Market was $0.43 per share.DividendsWe have not paid any dividends since our inception and we do not intend to declare or pay any dividends on ourcommon stock in the foreseeable future. Declaration or payment of future dividends, if any, will be at the discretion of ourBoard of Directors after taking into account various factors, including VIVUS’s financial condition, operating results andcurrent and anticipated cash needs.Stock Performance GraphThe following graph shows a comparison of total stockholder return for holders of our common stock fromDecember 31, 2012 through December 31, 2017 compared with the NASDAQ Composite Index and the RDG SmallCapPharmaceutical Index. Total stockholder return assumes $100 invested at the beginning of the period in our common stock,the stock represented in the NASDAQ Composite Index and the stock represented by the RDG SmallCap PharmaceuticalIndex, respectively. This graph is presented pursuant to SEC rules. We believe that while total stockholder return can be animportant indicator of corporate performance, the stock prices of small cap pharmaceutical stocks like VIVUS are subject to anumber of market‑related factors other than company performance, such as competitive announcements, mergers andacquisitions in the industry, the general state of the economy, and the performance of other medical technology stocks.67 $$$$Table of ContentsCOMPARISON OF 5‑YEAR CUMULATIVE TOTAL RETURN*Among VIVUS, Inc., the NASDAQ Composite Index, and the RDG SmallCap Pharmaceutical Index *$100 invested on 12/31/2012 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.Issuer Purchases of Equity Securities Period(a)Total number ofshares (or units)purchased(b)Average pricepaid per share(or unit)(c)Total number of shares (orunits) purchased as part ofpublicly announced plans orprograms(d)Maximum number (or approximatedollar value) of shares (or units) thatmay yet be purchased under the plans orprogramsOctober 201721,4960.7121,496 November 20171,0210.661,021 December 20171,0210.531,021 Total23,5380.7023,5389,189 (a)In the fourth quarter of 2017, restricted stock unit awards held by certain non-employee directors of theCompany vested. These restricted stock units were settled by issuing to each non-employee director shares inthe amount due to the director upon vesting, less the portion required to satisfy the estimated income taxliability based on the published stock price at the close of market on the settlement date or the next trading day,which the Company issued to the non-employee director in cash. 68 Table of Contents Item 6. Selected Financial DataThe following selected financial data have been derived from our audited financial statements. The information setforth below is not necessarily indicative of the results of future operations and should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements andnotes thereto included elsewhere in this Annual Report on Form 10‑K. The selected data is not intended to replace thefinancial statements.Selected Financial Data(In thousands, except per share data)Selected Annual Financial Data Year Ended December 31, 2017 2016 2015 2014 2013Income Statement Data: Total revenue$65,373 $124,258 $95,430 $114,181 $81,082Total operating expenses$62,580 $68,573 $155,707 $164,892 $235,696Income (loss) from operations$2,793 $55,685 $(60,277) $(50,711) $(154,614)(Loss) income from continuing operations$(30,511) $23,302 $(93,107) $(82,647) $(174,946)Net (loss) income$(30,511) $23,302 $(93,107) $(82,647) $(174,456)Basic net (loss) income per share—Continuing operations$(0.29) $0.22 $(0.90) $(0.80) $(1.72)Diluted net (loss) income per share—Continuingoperations$(0.29) $0.22 $(0.90) $(0.80) $(1.72)Balance Sheet Data: Working capital$224,643 $255,159 $214,143 $301,789 $371,934Total assets$264,968 $305,776 $277,202 $366,938 $431,796Long-term debt$235,683 $241,318 $231,390 $227,783 $213,106Accumulated deficit$(843,565) $(813,054) $(836,356) $(743,249) $(660,602)Stockholders’ (deficit) equity$(9,338) $18,185 $(7,085) $82,518 $153,369 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsAll percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for theyear ended December 31, 2017, are not necessarily indicative of the results that may be expected for future fiscal years. Thefollowing discussion and analysis should be read in conjunction with our historical financial statements and the notes tothose financial statements that are included in Item 8 of Part II of this Form 10‑K.OverviewVIVUS is a biopharmaceutical company developing and commercializing innovative, next-generation therapies toaddress unmet medical needs in human health. We have two approved therapies and one product candidate in active clinicaldevelopment. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronic weight management. STENDRA® (avanafil) is approved for erectile dysfunction, or ED, by FDA and by the EC under the trade name SPEDRA inthe EU. Tacrolimus is in active clinical development for the treatment of patients with pulmonary arterial hypertension, orPAH.Business Strategy ReviewIn 2016, we initiated a business strategy review to maximize long-term stockholder value. The result of this reviewwas for us to focus our efforts in three areas moving forward: (i) build our portfolio of development and cash flow generatingassets, (ii) maximize the value of and monetizing our legacy assets (Qsymia and STENDRA/SPEDRA), and (iii) identifyopportunities to address our outstanding debt balances. In 2017, we acquired tacrolimus and ascomycin for the treatment ofPAH, we licensed Qsymia in South Korea, and we reacquired the rights for SPEDRA in Africa, the Middle East, Turkey, andthe Commonwealth of Independent States, or CIS, including Russia. We are continuing our69 Table of Contentsevaluation of alternatives for addressing our outstanding debt, specifically the $250 million of convertible notes due in2020.Development ProgramsPulmonary Arterial Hypertension - TacrolimusPAH is a chronic, life-threatening disease characterized by elevated blood pressure in the pulmonary arteries, whichare the arteries between the heart and lungs, due to pathologic proliferation of epithelial and vascular smooth muscle cells inthe lining of these blood vessels and excess vasoconstriction. Pulmonary blood pressure is normally between 8 and 20 mmHgat rest as measured by right heart catheterization. In patients with PAH, the pressure in the pulmonary artery is greater than 25mmHg at rest or 30 mmHg during physical activity. These high pressures make it difficult for the heart to pump bloodthrough the lungs to be oxygenated.The current medical therapies for PAH involve endothelin receptor antagonists, PDE5 inhibitors, prostacyclinanalogues, selective prostaglandin I2 receptor agonists, and soluble guanate cyclase stimulators, which aim to reducesymptoms and improve quality of life. All currently approved products treat the symptoms of PAH, but do not address theunderlying disease. We believe that tacrolimus can be used to enhance reduced bone morphogenetic protein receptor type 2,or BMPR2, signaling that is prevalent in PAH patients and may therefore address a fundamental cause of PAH.The prevalence of PAH varies among specific populations, but it is estimated at between 15 and 50 cases per millionadults. PAH usually develops between the ages of 20 and 60 but can occur at any age, with a mean age of diagnosis around45 years. Idiopathic PAH is the most common type, constituting approximately 40% of the total diagnosed PAH cases, andoccurs two to four times more frequently in females.On January 6, 2017, we entered into a Patent Assignment Agreement with Selten Pharma, Inc., or Selten, whereby wereceived exclusive, worldwide rights for the development and commercialization of BMPR2 activators for the treatment ofPAH and related vascular diseases. As part of the agreement, Selten assigned to us its license to a group of patents owned bythe Board of Trustees of the Leland Stanford Junior University, or Stanford, which cover uses of tacrolimus and ascomycin totreat PAH. Under this agreement, we paid Selten an upfront payment of $1.0 million, and we will pay additional milestonepayments based on global development status and future sales milestones, as well as tiered royalty payments on future salesof these compounds. The total potential milestone payments are $39.0 million to Selten. We have assumed fullresponsibility for the development and commercialization of the licensed compounds for the treatment of PAH and relatedvascular diseases.In October 2017, we held a pre-IND meeting with FDA for our proprietary formulation of tacrolimus for the treatmentof PAH. FDA addressed our questions related to preclinical, nonclinical and clinical data and the planned design of clinicaltrials of tacrolimus in class III and IV PAH patients, and clarified the requirements needed to file an IND to initiate a clinicaltrial in this indication. As discussed with FDA, we currently intend to design and conduct clinical trials that could qualify forFast Track and/or Breakthrough Therapy designation.Tacrolimus for the treatment of PAH has received Orphan Drug Designation from FDA in the United States and theEuropean Medicines Agency in the EU. We are focusing on the development of a proprietary oral formulation of tacrolimusto be used in a clinical development program and for commercial use. We anticipate filing an IND with FDA, completing thedevelopment of our proprietary formulation of tacrolimus and initiating enrollment in a Phase 2 clinical trial during 2018.Commercial ProductsQsymiaFDA approved Qsymia in July 2012, as an adjunct to a reduced calorie diet and increased physical activity forchronic weight management in adult obese or overweight patients in the presence of at least one weight related comorbidity,such as hypertension, type 2 diabetes mellitus or high cholesterol, or dyslipidemia. Qsymia incorporates a proprietaryformulation combining low doses of the active ingredients from two previously approved drugs, phentermine and topiramate.Although the exact mechanism of action is unknown, Qsymia is believed to suppress appetite and increase satiety, or thefeeling of being full, the two main mechanisms that impact eating behavior.70 Table of ContentsWe commercialize Qsymia in the U.S. through a small specialty sales force who promote Qsymia to physicians. Oursales efforts are focused on maintaining a commercial presence with high volume prescribers of anti-obesity products. Ourmarketing efforts have focused on rolling out unique programs to encourage targeted prescribers to gain more experiencewith Qsymia with their obese or overweight patient population. We continue to invest in digital media in order to amplifyour messaging to information-seeking consumers. The digital messaging encourages those consumers most likely to takeaction to speak with their physicians about obesity treatment options. We believe our enhanced digital strategies deliverclear and compelling communications to potential patients. We utilize a patient savings plan to further drive Qsymia brandpreference at the point of prescription and to encourage long-term use of the brand.In September 2017, we entered into a license and commercialization agreement, or the Alvogen License Agreement,and a commercial supply agreement, or the Alvogen Supply Agreement, with Alvogen Malta Operations (ROW) Ltd, orAlvogen. Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for obtaining andmaintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. We received an upfrontpayment of $2.5 million in September 2017 and are eligible to receive additional payments upon Alvogen achievingmarketing authorization, commercial launch and reaching a sales milestone. Additionally, we will receive a royalty onAlvogen’s Qsymia net sales in South Korea. Under the Alvogen Supply Agreement, the Company will supply product toAlvogen.STENDRA/SPEDRASTENDRA is an oral phosphodiesterase type 5, or PDE5, inhibitor that we have licensed from Mitsubishi TanabePharma Corporation, or MTPC. FDA approved STENDRA in April 2012 for the treatment of ED in the United States. In June2013, the EC adopted a decision granting marketing authorization for SPEDRA, the approved trade name for avanafil in theEU, for the treatment of ED in the EU.In July 2013, we entered into a license and commercialization agreement, or the Menarini License Agreement, withthe Menarini Group, through its subsidiary Berlin Chemie AG, or Menarini, under which Menarini received an exclusivelicense to commercialize and promote SPEDRA for the treatment of ED in over 40 countries, including the EU, Australia andNew Zealand. Menarini commenced its commercialization launch of the product in the EU in early 2014. As of the date ofthis filing, SPEDRA is commercially available in 31 countries within the territory granted to Menarini pursuant to its licenseand commercialization agreement. In addition, Menarini licensed rights directly from MTPC to commercialize avanafil incertain Asian territories. We are entitled to receive potential milestone payments based on certain net sales targets, plusroyalties on SPEDRA sales. Menarini will also reimburse us for payments made to cover various obligations to MTPC duringthe term of the Menarini License Agreement. Menarini obtains SPEDRA exclusively from us.In September 2016, we entered into a license and commercialization agreement, or the Metuchen LicenseAgreement, and a commercial supply agreement, or the Metuchen Supply Agreement, with Metuchen Pharmaceuticals LLC,or Metuchen. Under the terms of the Metuchen License Agreement, Metuchen received an exclusive license to develop,commercialize and promote STENDRA in the United States, Canada, South America and India, or the Metuchen Territory,effective October 1, 2016. Metuchen will reimburse us for payments made to cover royalty and milestone obligations toMTPC during the term of the Metuchen License Agreement, but will otherwise owe us no future royalties. Metuchen obtainsSTENDRA exclusively from us.In December 2013, we entered into a license and commercialization agreement with Sanofi, or the Sanofi LicenseAgreement, under which Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use inhumans in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, or CIS, including Russia, or theSanofi Territory. Sanofi was responsible for obtaining regulatory approval in its territories. In March 2017, we and Sanofientered into the Termination, Rights Reversion and Transition Services Agreement, or the Transition Agreement, effectiveFebruary 28, 2017. Under the Transition Agreement, effective upon the thirtieth day following February 28, 2017, the SanofiLicense Agreement terminated for all countries in the Sanofi Territory as a termination by Sanofi for conveniencenotwithstanding any notice requirements contained in the Sanofi License Agreement. In addition, under the TransitionAgreement, Sanofi will provide us with certain transition services in support of ongoing regulatory approval efforts while weseek to obtain a new commercial partner or partners for the Sanofi Territory. We will pay certain transition service fees toSanofi as part of the Transition Agreement.71 Table of ContentsWe are currently in discussions with potential collaboration partners to develop, market and sell STENDRA forterritories in which we do not currently have a commercial collaboration, including Africa, the Middle East, Turkey, the CIS,including Russia, Mexico and Central America.NOL Rights PlanOn November 8, 2016, our Board of Directors approved an amendment and restatement of our stockholder rightsplan originally adopted on March 26, 2007. The amended plan was approved by our stockholders at our annual meeting ofstockholders held on October 27, 2017 and is designed to protect stockholder value by mitigating the likelihood of an“ownership change” that would result in significant limitations to our ability to use our net operating losses or other taxattributes to offset future income. The amended plan is similar to rights plans adopted by other public companies withsignificant net operating loss carryforwards.In connection with the original adoption of the rights plan, one right was distributed for each share of our commonstock outstanding as of the close of business on April 13, 2007 and one right was distributed with each share of our commonstock that was issued after such date. The amended rights plan provides, subject to certain exceptions, that if any person orgroup acquires 4.9% or more of our outstanding common stock, there would be a triggering event potentially resulting insignificant dilution in the voting power and economic ownership of that person or group. Existing stockholders who hold4.9% or more of our outstanding common stock as of the date of the amended rights plan will trigger a dilutive event only ifthey acquire an additional 1% of the outstanding shares of our common stock.As extended and amended, the rights plan will continue in effect until November 9, 2019, unless earlier terminatedor the rights are earlier exchanged or redeemed by our Board of Directors. Critical Accounting Policies and EstimatesThe discussion and analysis of our financial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. Thepreparation of these financial statements requires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including thoserelated to available‑for‑sale securities, research and development expenses, income taxes, inventories, revenues, includingrevenues from multiple‑element arrangements, contingencies and litigation and share‑based compensation. We base ourestimates on historical experience, information received from third parties and on various market specific and other relevantassumptions that are believed to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual resultsmay differ significantly from these estimates under different assumptions or conditions. Our significant accounting policiesare more fully described in Note 1 to our Consolidated Financial Statements included elsewhere in this report.We believe the following critical accounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements:Revenue RecognitionProduct RevenueWe recognize product revenue when:(i)persuasive evidence that an arrangement exists,(ii)delivery has occurred and title has passed,(iii)the price is fixed or determinable, and(iv)collectability is reasonably assured.Revenue from sales transactions where the customer has the right to return the product is recognized at the time ofsale only if: (i) our price to the customer is substantially fixed or determinable at the date of sale, (ii) the customer has72 Table of Contentspaid us, or the customer is obligated to pay us and the obligation is not contingent on resale of the product, (iii) thecustomer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product,(iv) the customer acquiring the product for resale has economic substance apart from that provided by us, (v) we do not havesignificant obligations for future performance to directly bring about resale of the product by the customer, and (vi) theamount of future returns can be reasonably estimated.Product Revenue AllowancesWe ship units of Qsymia through a distribution network that includes certified retail pharmacies. Qsymia has a 36–month shelf life and we grant rights to our customers to return unsold product six months prior to and up to 12 months afterproduct expiration and issue credits that may be applied against existing or future invoices. Given our limited history ofselling Qsymia and the duration of the return period, prior to the first quarter of 2017, we did not have sufficient informationto reliably estimate expected returns of Qsymia at the time of shipment, and therefore revenue was recognized when unitswere dispensed to patients through prescriptions, at which point, the product is not subject to return.Beginning in the first quarter of 2017, with 48 months of returns experience, we now believe that we have sufficientdata and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of2017, we began recognizing revenue from the sales of Qsymia upon shipment and recording a reserve for expected returns atthe time of shipment.In accordance with this change in accounting estimate, we recognized a one-time adjustment of $7.3 million ofrevenues, net of expected returns reserve and gross-to-net charges, in the first quarter of 2017 relating to products that hadbeen previously shipped.Product revenue is recognized net of consideration paid to our customers, wholesalers and certified pharmacies forservices rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy servicesnetwork agreements, and includes a fixed rate per prescription shipped and monthly program management and data fees.These services are not deemed sufficiently separable from the customers’ purchase of the product; therefore, they are recordedas a reduction of revenue at the time of revenue recognition.Other product revenue allowances include reserves for product returns, certain prompt pay discounts and allowancesoffered to our customers, program rebates and chargebacks. These product revenue allowances are estimated and recognizedas a reduction of revenue at the time of product shipment. We also offer discount programs to patients. Calculating thesereserves and allowances involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates,new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actualrebates or chargebacks. We review the adequacy of product revenue reserves and allowances on a quarterly basis. Amountsaccrued for product revenue allowances are adjusted to reflect actual experience and when trends or significant eventsindicate that adjustment is appropriate.73 Table of ContentsThe following table summarizes the activity in the accounts related to Qsymia product revenue allowances (inthousands): Wholesaler/ Product Discount Pharmacy Cash Rebates/ returns programs fees discounts Chargebacks TotalBalance at January 1, 2015$ — $(863) $(1,004) $(150) $(437) $(2,454)Current provision related to sales made duringcurrent period* — (19,044) (6,958) (1,934) (2,706) (30,642)Payments — 18,935 6,802 1,920 2,663 30,320Balance at December 31, 2015 — (972) (1,160) (164) (480) (2,776)Current provision related to sales made duringcurrent period* — (18,919) (7,153) (1,679) (871) (28,622)Payments — 18,884 7,033 1,630 1,250 28,797Balance at December 31, 2016 — (1,007) (1,280) (213) (101) (2,601)Current provision related to sales made duringcurrent period* (9,251) (20,806) (6,673) (1,344) (1,174) (39,248)Payments 1,397 17,429 6,870 1,362 991 28,049Balance at December 31, 2017$(7,854) $(4,384) $(1,083) $(195) $(284) $(13,800) *Current provision related to sales made during current period includes $38.7 million, $27.2 million and $28.7 million for product revenueallowances related to revenue recognized during the years ended December 31, 2017, 2016 and 2015, respectively. The remainingamounts for the respective years were recorded on the consolidated balance sheets as deferred revenue at the end of each period.Supply RevenueWe recognize supply revenue from the sales of STENDRA or SPEDRA when the four basic revenue recognitioncriteria described above are met. We produce STENDRA or SPEDRA through a contract manufacturing partner and then sellit to our commercialization partners. We are the primary responsible party in the commercial supply arrangements and bearsignificant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory complianceand quality assurance, as well as inventory, financial and credit loss. As such, we recognize supply revenue on a gross basisas the principal party in the arrangements. Under our product supply agreements, as long as the product meets specifiedproduct dating criteria at the time of shipment to the partner, our commercialization partners do not have a right of return orcredit for expired product. As such, we recognize revenue for products that meet the dating criteria at the time of shipment.Revenue from Multiple‑Element ArrangementsWe account for multiple element arrangements, such as license and commercialization agreements in which acustomer may purchase several deliverables, in accordance with ASC Topic 605-25, Revenue Recognition —MultipleElement Arrangements, or ASC 605-25. We evaluate if the deliverables in the arrangement represent separate units ofaccounting. In determining the units of accounting, management evaluates certain criteria, including whether thedeliverables have value to its customers on a stand-alone basis. Factors considered in this determination include whether thedeliverable is proprietary to us, whether the customer can use the license or other deliverables for their intended purposewithout the receipt of the remaining elements, whether the value of the deliverable is dependent on the undelivered items,and whether there are other vendors that can provide the undelivered items. Deliverables that meet these criteria areconsidered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accounted for as asingle unit of accounting.When deliverables are separable, we allocate non-contingent consideration to each separate unit of accountingbased upon the relative selling price of each element. When applying the relative selling price method, we determine theselling price for each deliverable using vendor specific objective evidence, or VSOE, of selling price, if it exists, or thirdparty evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exists for a deliverable, we74 Table of Contentsuse best estimated selling price, or BESP, for that deliverable. Significant management judgment may be required todetermine the relative selling price of each element. Revenue allocated to each element is then recognized based on when thefollowing four basic revenue recognition criteria are met for each element: (i) persuasive evidence of an arrangement exists;(ii) delivery has occurred or services have been rendered; (iii) the price is fixed or determinable; and (iv) collectability isreasonably assured.Determining whether and when some of these criteria have been satisfied often involves assumptions and judgmentsthat can have a significant impact on the timing and amount of revenue we report. Changes in assumptions or judgments, orchanges to the elements in an arrangement, could cause a material increase or decrease in the amount of revenue reported in aparticular period.ASC Topic 605-28, Revenue Recognition — Milestone Method or (ASC 605-28), established the milestone methodas an acceptable method of revenue recognition for certain contingent, event based payments under research anddevelopment arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantivemilestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event: (i) that canbe achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from ourperformance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will beachieved, and (iii) that would result in additional payments being due to us. The determination that a milestone issubstantive requires judgment and is made at the inception of the arrangement. Milestones are considered substantive whenthe consideration earned from the achievement of the milestone is: (i) commensurate with either our performance to achievethe milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from ourperformance to achieve the milestone, (ii) relates solely to past performance, and (iii) is reasonable relative to all deliverablesand payment terms in the arrangement.Other contingent, event based payments received for which payment is either contingent solely upon the passage oftime or the results of a collaborative partner’s performance are not considered milestones under ASC 605-28. In accordancewith ASC 605, such payments will be recognized as revenue when all of the four basic revenue recognition criteria are met.Revenues recognized for royalty payments are recognized when the four basic revenue recognition criteriadescribed above are met.InventoriesInventories are valued at the lower of cost or market. Cost is determined using the first in, first out method using aweighted average cost method calculated for each production batch. Inventory includes the cost of the active pharmaceuticalingredients, or API, raw materials and third party contract manufacturing and packaging services. Indirect overhead costsassociated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventorybased on the units produced or distributed, assuming normal capacity, in the applicable period.Inventory costs of product shipped to customers, but not yet recognized as revenue, are recorded within inventorieson the consolidated balance sheets and are subsequently recognized to cost of goods sold when revenue recognition criteriahave been met.Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of itsexpected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities issubjective and primarily dependent on our estimates of future demand for a particular product. If the estimate of futuredemand is inaccurate based on lower actual sales, we may increase the write down for excess inventory for that product andrecord a charge to inventory impairment. We periodically evaluate the carrying value of inventory on hand for potentialexcess amount over demand.Research and Development ExpensesResearch and development, or R&D, expenses include license fees, related compensation, consultants’ fees,facilities costs, administrative expenses related to R&D activities and clinical trial costs incurred by clinical researchorganizations or CROs, and research institutions under agreements that are generally cancelable, among other related R&Dcosts. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred75 Table of Contentsby CRO and clinical sites and include advertising for clinical trials and patient recruitment costs. These costs are recorded asa component of R&D expenses and are expensed as incurred. Under our agreements, progress payments are typically made toinvestigators, clinical sites and CROs. We analyze the progress of the clinical trials, including levels of patient enrollment,invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments andestimates must be made and used in determining the accrued balance in any accounting period. Actual results could differfrom those estimates under different assumptions. Revisions are charged to expense in the period in which the facts that giverise to the revision become known.In addition, we have obtained rights to patented intellectual properties under several licensing agreements for use inresearch and development activities. Non-refundable licensing payments made for intellectual properties that have noalternative future uses are expensed to research and development as incurred.Share‑Based PaymentsCompensation expense is recognized for share-based payments, including stock options, restricted stock units andshares issued under the employee stock purchase plan, using a fair value based method. We estimate the fair value of sharebased payment awards on the date of the grant using the Black Scholes option pricing model, which requires us to estimatethe expected term of the award, the expected volatility, the risk-free interest rate and the expected dividends. The expectedterm, which represents the period of time that options granted are expected to be outstanding, is derived by analyzing thehistorical experience of similar awards, giving consideration to the contractual terms of the share based awards, vestingschedules and expectations of future employee behavior. Expected volatilities are estimated using the historical share priceperformance over the expected term of the option, which are adjusted as necessary for any other factors which mayreasonably affect the volatility of VIVUS’s stock in the future. The risk-free interest rate is based on the U.S. Treasury yield ineffect at the time of the grant for the expected term of the award. We do not anticipate paying any dividends in the nearfuture. We develop pre-vesting forfeiture assumptions based on an analysis of historical data.Share‑based compensation expense is allocated among cost of goods sold, research and development and selling,general and administrative expenses, or included in the inventory carrying value and absorbed into inventory, based on thefunction of the related employee.Fair Value MeasurementsFair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in theprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. Three levels of inputs are used to measure fair value. The three levels are as follows: Level 1, defined asobservable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices inactive markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs inwhich little or no market data exists.Our financial instruments include cash equivalents, available for sale securities, accounts receivable, accountspayable, accrued liabilities and debt. Available-for-sale securities are carried at fair value. The carrying value of cashequivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relativelyshort-term nature of these instruments. Debt instruments are initially recorded at face value, with stated interest andamortization of debt issuance discounts and costs recognized as interest expense.Our convertible notes contain a conversion option that is classified as equity. We determined the fair value of theliability component of the debt instrument and allocated the excess amount of $95.3 million from the initial proceeds to theconversion option in additional paid-in capital. The fair value of the debt component was determined by estimating a riskadjusted interest rate, or market yield, at the time of issuance for similar notes that do not include the conversion feature. Thisexcess is reported as a debt discount and is amortized as non-cash interest expense, using the effective-interest method, overthe expected life of the convertible notes. The convertible notes are recorded in the balance sheet as a component of long-term debt.Issuance costs related to the conversion feature of the convertible notes were charged to additional paid in capital.The portion of the issuance costs related to the debt component is being amortized and recorded as additional interestexpense over the expected life of the convertible notes. In connection with the issuance of the convertible notes,76 Table of Contentsthe Company entered into capped call transactions with certain counterparties affiliated with the underwriters. The fair valueof the purchased capped calls of $34.7 million was recorded to additional paid-in capital.Concentration of Credit RiskFinancial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cashequivalents, available for sale securities, and accounts receivable. We have established guidelines to limit its exposure tocredit risk by placing investments in high credit quality money market funds, U.S. Treasury securities or corporate debtsecurities and by placing investments with maturities that maintain safety and liquidity within our liquidity needs. We havealso established guidelines for the issuance of credit to existing and potential customers.Accounts Receivable, Allowances for Doubtful Accounts and Cash DiscountsWe extend credit to our customers for product sales resulting in accounts receivable. Customer accounts aremonitored for past due amounts. Amounts that are determined to be uncollectible are written off against the allowance fordoubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses andexisting economic factors, and are adjusted periodically. Historically, we have not had any significant uncollected accounts.We offer cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The estimate ofcash discounts is recorded at the time of sale. We account for the cash discounts by reducing revenue and accounts receivableby the amount of the discounts it expects the customers to take. The accounts receivable are reported in the consolidatedbalance sheets, net of the allowances for doubtful accounts and cash discounts. There is no allowance for doubtful accountsat December 31, 2017 or 2016.Inventory Impairment and Other Non‑Recurring ChargesOur inventory impairment and other non-recurring charges consist of inventory impairment charges, proxy contestexpenses and charges from cost reduction plans, including employee severance, one time termination benefits and ongoingbenefits related to the reduction of our workforce, facilities and other facility exit costs. Liabilities for costs associated withthe cost reduction plan are recognized when the liability is incurred. In addition, liabilities associated with cost reductionactivities are measured at fair value. One-time termination benefits are expensed at the date the entity notifies the employee,unless the employee must provide future service, in which case the benefits are expensed ratably over the future serviceperiod. Ongoing benefits are expensed when cost reduction activities are probable and the benefit amounts are estimable.Other costs primarily consist of legal, consulting, and other costs related to employee terminations and are expensed whenincurred. Termination benefits are calculated in accordance with the various agreements with certain of our employees.Income TaxesWe make certain estimates and judgments in determining income tax expense for financial statement purposes.These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in thetiming of recognition of revenue and expense for tax and financial statement purposes.As part of the process of preparing our consolidated financial statements, we are required to estimate our incometaxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure under themost recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence,both positive and negative, including historical levels of income, expectations and risks associated with estimates of futuretaxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If itis not more likely than not that we will recover its deferred tax assets, we will increase our provision for taxes by recording avaluation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As a result of ouranalysis of all available evidence, both positive and negative, as of December 31, 2017, it was considered more likely thannot that our deferred tax assets would not be realized. However, should there be a77 Table of Contentschange in our ability to recover its deferred tax assets, we would recognize a benefit to our tax provision in the period inwhich we determine that it is more likely than not that we will recover its deferred tax assets.We recognize interest and penalties accrued on any unrecognized tax benefits as a component of our provision forincome taxes.Contingencies and LitigationWe are periodically involved in disputes and litigation related to a variety of matters. When it is probable that wewill experience a loss, and that loss is quantifiable, we record appropriate reserves. We record legal fees and costs as anexpense when incurred.RESULTS OF OPERATIONSRevenuesYear Ended December 31, 2017 2016 2015Net product revenue$44,983$48,501$54,622License and milestone revenue7,50069,40011,574Supply revenue10,4072,29126,674Royalty revenue2,4834,0662,560 Total revenue$65,373$124,258$95,430 Net Qsymia product revenueNet product revenue for 2016 and 2015 was recognized when units were dispensed to patients through prescriptions.Beginning in the first quarter of 2017, we began recognizing revenue from the sales of Qsymia upon shipment and recordinga reserve for expected returns at the time of shipment. Net product revenue for 2017 includes a one-time adjustment of $7.3million related to shipments which had previously been deferred. Currently, Qsymia is only approved for sale in the U.S.;therefore, all net product revenue for Qsymia to date has been earned in the U.S.The following table reconciles gross Qsymia product revenue to net Qsymia product revenue (in thousands): Year Ended December 31, 2017 2016 2015 Gross Qsymia product revenue$85,044 $73,689 $83,338 Returns & allowances (9,251) — — Discount programs (20,129) (15,994) (18,441) Wholesaler/Pharmacy fees (7,728) (6,849) (5,913) Cash discounts (1,697) (1,474) (1,656) Rebates/Chargebacks (1,256) (871) (2,706) Net product revenue$44,983 $48,501 $54,622 Prescriptions are as follows: Year Ended December 31, 2017 2016 2015Prescriptions dispensed (in thousands) 395 442 566 Units shipped (in thousands) 441 442 526 Units shipped represent our direct shipments into the sales channel. We expect Qsymia net product revenue in 2018to remain flat or decrease from 2017 levels due to market conditions.78 Table of ContentsLicense and milestone revenueLicense and milestone revenue for 2017 consisted of a one-time $5.0 million payment earned for a license to certainclinical data related to phentermine and $2.5 million of license fees earned under the Alvogen License Agreement. Licenseand milestone revenue for 2016 consisted of the $69.4 million earned for the granting of the license under the MetuchenLicense Agreement. License and milestone revenue for 2015 consisted of $11.6 million in license and milestone revenuewith respect to STENDRA/SPEDRA, primarily attributable to the achievement of milestones under the Menarini agreementrelated to the approval of the Time‑to‑Onset Claim in the EU.License and milestone revenues are dependent on the timing of entering into new collaborations and the timing ofour collaborators meeting certain milestone events. As a result, our license and milestone revenue will fluctuate materiallybetween periods.Net STENDRA/SPEDRA supply revenueWe supply STENDRA/SPEDRA to our collaborations partners on a cost-plus basis. The variations in supply revenueare a result of the timing of orders placed by our partners and may or may not reflect end user demand forSTENDRA/SPEDRA. The timing of purchases by our commercialization partners will be affected by, among other items, theirminimum purchase commitments, end user demand, and distributor inventory levels. As a result, supply revenue has and willcontinue to fluctuate materially between reporting periods.Royalty revenueRoyalty revenue was attributable to commercialization agreements with Menarini and Auxilium for which we earnroyalties based on a certain percentage of net sales reported by commercialization partners. We record royalty revenue relatedto STENDRA based on reports provided by our partners. One of our partners, Auxilium, returned the U.S. and Canadiancommercial rights for STENDRA to us on September 30, 2016. Also, on September 30, 2016, we entered into the MetuchenLicense Agreement and the Metuchen Supply Agreement, providing Metuchen with, among other rights, commercial rightsto sell STENDRA/SPEDRA in the U.S., Canada, South America, and India. The Metuchen License Agreement does notinclude future royalties to us on the sales of STENDRA/SPENDRA in the Metuchen Territory. Our former partner, Auxilium,was acquired by Endo in January 2015. In April 2015, Endo revised its accounting estimate for its return reserve forSTENDRA sold in 2014. As a result, in the first quarter of 2015, we recorded an adjustment of $1.2 million to reduce ourroyalty revenue. We expect royalty revenue in 2018 to continue approximately at 2017 levels.Cost of goods soldYear Ended December 31, 2017 2016 2015Qsymia cost of goods sold$7,537$7,523$8,720STENDRA/SPEDRA cost of goods sold9,6503,07925,437Cost of goods sold$17,187$10,602$34,157 Cost of goods sold for Qsymia dispensed to patients includes the inventory costs of API, third‑party contractmanufacturing and packaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storage costs,and overhead costs of the employees involved with production. Cost of goods sold for STENDRA/SPEDRA shipped to ourcommercialization partners includes the inventory costs of API and tableting. Cost of goods sold increased overall in 2017 ascompared to 2016 due primarily to increased STENDRA/SPEDRA supply revenue. The change in cost of goods sold as apercentage of net product and supply revenue was due to the sales mix between Qsymia and STENDRA/SPEDRA during theperiods. The decrease in cost of goods sold in 2016 as compared to 2015 is due primarily to the decrease in both Qsymiaproduct revenue and STENDRA/SPEDRA supply revenue.79 Table of ContentsSelling, general and administrative % Change Years Ended December 31, Increase/(Decrease) 2017 2016 2015 2017 vs 2016 2016 vs 2015 (In thousands, except percentages) Selling and marketing$16,638 $21,775 $52,988 (24)% (59)%General and administrative 23,492 30,604 26,399 (23)% 16%Total selling, general and administrative expenses$40,130 $52,379 $79,387 (23)% (34)% The decrease in selling and marketing expenses for 2017 compared to 2016 was due primarily to the cost savingefforts to reduce marketing programs and lower promotional activities for Qsymia. The decrease in selling and marketingexpenses in 2016 as compared to 2015 was primarily due to the full year impact of cost saving efforts to reduce marketingprograms and the reduction in the number of territories from 150 to approximately 50 effective in 2015.The decrease in general and administrative expenses in 2017 compared to 2016 was primarily due to the results ofour continuing efforts to cut costs and lower spending for corporate activities. The increase in general and administrativeexpenses in 2016 as compared to 2015 was primarily due to higher consultant and legal fees related to our business strategyreview, partially offset by the full year impact of corporate restructuring plan begun in July 2015 as well as our continuingefforts to cut costs and lower spending for corporate activities.We expect selling and marketing expenses in general to remain flat or decrease in 2018 from 2017 as we continueour efforts to commercialize Qsymia in an efficient manner. General and administrative expenses could fluctuatesignificantly due to the timing of activities within and outcomes of our business strategy review.Research and development % Change Years Ended December 31, Increase/(Decrease) Drug Indication/Description2017 2016 2015 2017 vs 2016 2016 vs 2015 (In thousands, except percentages) Qsymia for obesity$31 $1,335 $3,328 (98)% (60)%STENDRA for ED 127 147 840 (14)% (83)%PAH 2,189 — — N/A N/A Share-based compensation 345 493 398 (30)% 24%Overhead costs* 2,571 3,617 5,536 (29)% (35)%Total research and development expenses$5,263 $5,592 $10,102 (6)% (45)% *Overhead costs include compensation and related expenses, consulting, legal and other professional services fees relating to research anddevelopment activities, which we do not allocate to specific projects.The overall decrease in total research and development expenses in 2017 as compared to 2016 was primarily due tolower overhead costs as a result of our efforts to reduce discretionary spending and reductions in share-based compensationexpense, partially offset by increases in spending for the development of tacrolimus for the treatment of PAH. The decrease intotal research and development expenses in 2016 as compared to 2015 was due primarily to lower headcount resulting fromour corporate restructuring plan begun in July 2015 as well as the timing of studies associated with our post-marketingrequirements for STENDRA and Qsymia.We expect that our research and development expenses will increase in 2018 as we continue to complete our post-marketing requirements for Qsymia, specifically an adolescent safety and efficacy trial, and increase development activitiesfor tacrolimus for the treatment of PAH. In addition, our research and development expenses could increase materially if webegin development of any additional product candidates.80 Table of ContentsInventory impairment and other non‑recurring chargesInventory impairment and other non‑recurring charges consist of (in thousands): Years Ended December 31, 2017 2016 2015Inventory impairment$ — $ — $29,522Employee severance and related costs — — 2,503Share-based compensation — — 36Total inventory impairment and other non-recurring expense$ — $ — $32,061 In 2015, we recorded inventory impairment charges primarily for Qsymia API inventory in excess of expecteddemand. Also in 2015, we recorded employee severance and related costs and share-based compensation related to the July2015 corporate restructuring plan, which reduced our workforce by approximately 60 full time equivalents.Interest and other expense (income)Interest and other expense (income) consists primarily of interest expense and the amortization of issuance costsfrom our Convertible Notes and Senior Secured Notes and the amortization of the debt discount on the Convertible Notes.Other expense and income were not significant. We expect interest and other expense (income) for 2018 to remain relativelyconsistent with the levels from 2017.Provision for (Benefit from) income taxesWe recorded a net provision for income taxes of $2,000 for the year ended December 31, 2017, as compared to$70,000 for the year ended December 31, 2016, and $3,000 for the year ended December 31, 2015. The tax provisions for allyears are the result of certain state tax liabilities.We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, bothpositive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient futuretaxable income during periods prior to the expiration of tax attributes to fully utilize these assets. We weighed both positiveand negative evidence and determined that there is a continued need for a full valuation allowance on our deferred tax assetsin the U.S. as of December 31, 2017.LIQUIDITY AND CAPITAL RESOURCESCash. Cash, cash equivalents and available‑for‑sale securities totaled $226.3 million at December 31, 2017, ascompared to $269.5 million at December 31, 2016. The decrease is primarily due to cash used in the funding of ouroperations, partially offset by cash received for product sales and license and milestone payments. We received payments forlicense and milestone revenue of $7.5 million, $70.0 million and $11.6 million in 2017, 2016 and 2015, respectively. Sinceinception, we have financed operations primarily from the issuance of equity, debt and debt‑like securities.We invest our excess cash balances in money market, U.S. government securities and corporate debt securities inaccordance with our investment policy. Our investment policy has the primary investment objectives of preservation ofprincipal; however, there may be times when certain of the securities in our portfolio will fall below the credit ratingsrequired in the policy. If those securities are downgraded or impaired, we would experience realized or unrealized losses inthe value of our portfolio, which would have an adverse effect on our results of operations, liquidity and financial condition.Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associatedwith certain investment securities and the level of uncertainty related to changes in the value of investment securities, it ispossible that changes in these risk factors in the near term could have an adverse material impact on our results of operationsor stockholders’ equity.Accounts Receivable. We extend credit to our customers for product sales resulting in accounts receivable.Customer accounts are monitored for past due amounts. Past due accounts receivable, determined to be uncollectible, are81 Table of Contentswritten off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past dueamounts, historical losses and existing economic factors, and are adjusted periodically. Historically, we have had nosignificant uncollectable accounts receivable. We offer cash discounts to our customers, generally 2% of the sales price as anincentive for prompt payment.Accounts receivable (net of allowance for cash discounts) at December 31, 2017, was $12.2 million, as compared to$9.5 million at December 31, 2016. Currently, we do not have any significant concerns related to accounts receivable orcollections. As of February 28, 2018, we had collected 90% of the accounts receivable outstanding at December 31, 2017.Liabilities. Total liabilities were $274.3 million at December 31, 2017, compared to $287.6 million atDecember 31, 2016. The increase in total liabilities was primarily due to timing differences in our various liability accounts.Summary Cash Flows Years Ended December 31, 2017 2016 2015 (in thousands)Cash provided by (used for): Operating activities$(16,364) $38,165 $(46,332)Investing activities 24,012 (40,078) 67,404Financing activities (26,039) (8,699) (8,851) Operating Activities. The decrease in cash from operating activities in 2017 as compared to 2016 was primarily dueto the cash received in 2016 from the license agreement with Metuchen in addition to increases in accounts receivablebalances, partially offset by increases in accounts payable and accrued liabilities. The increase in cash from operatingactivities in 2016 as compared to cash used for operating activities in 2015 was primarily due to cash from the licenseagreements with Metuchen, in addition to decreased spending on inventory, partially offset by increases in accountsreceivable.Investing Activities. Cash used or provided by investing activities primarily relates to the purchases and maturitiesof investment securities. The fluctuations from period to period are due primarily to the timing of purchases, sales andmaturities of these investment securities and were impacted in 2016 due primarily to the investment of portions of the cashreceived from the Metuchen License Agreement.Financing Activities. Cash used in financing activities for the years ended December 31, 2017, 2016 and 2015consist primarily of our repayments of $26.1 million, $8.7 million and $9.0 million, respectively, under our Senior SecuredNotes.We anticipate that our existing capital resources combined with anticipated future cash flows will be sufficient tosupport our operating needs at least for the next twelve months. However, we anticipate that we may require additionalfunding to pursue development and commercial opportunities, which could come in the form of a license, a co-developmentagreement, a merger or acquisition or in some other form, or to create a pathway for centralized approval of the marketingauthorization application for Qsiva in the EU, conduct post-approval clinical studies for Qsymia, conduct non-clinical andclinical research and development work to support regulatory submissions and applications for our current and futureinvestigational drug candidates, finance the costs involved in filing and prosecuting patent applications and enforcing ordefending our patent claims, if any, to fund operating expenses and manufacture quantities of our investigational drugcandidates and to make payments under our existing license agreements and supply agreements.If we require additional capital, we may seek any required additional funding through collaborations, public andprivate equity or debt financings, capital lease transactions or other available financing sources. Additional financing maynot be available on acceptable terms, or at all. If additional funds are raised by issuing equity securities, substantial dilutionto existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of oreliminate one or more of our commercialization or development programs or obtain funds through82 Table of Contentscollaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of ourtechnologies, product candidates or products that we would otherwise seek to develop on our own.Contractual ObligationsThe following table summarizes our contractual obligations at December 31, 2017, excluding amounts alreadyrecorded on our consolidated balance sheet as accounts payable or accrued liabilities, and the effect such obligations areexpected to have on our liquidity and cash flow in future fiscal years. This table includes our enforceable, non‑cancelable,and legally binding obligations and future commitments as of December 31, 2017. The amounts below do not includecontingent milestone payments or royalties, and assume the agreements and commitments will run through the end of terms,as such no early termination fees or penalties are included herein: Payments Due by PeriodContractual obligationsTotal 2018 2019 - 2021 2022 - 2023 Thereafter (in thousands)Operating leases$2,798 $737 $2,061 $ — $ —Purchase obligations 18,762 18,762 — — —Notes payable 256,187 6,187 250,000 — —Interest payable 29,263 11,763 17,500 — —Total contractual obligations$307,010 $37,449 $269,561 $ — $ — Operating LeasesWe have a lease of 13,981 square feet of office space at 900 East Hamilton Avenue, Campbell, California, or theCampbell Lease. The Campbell Lease has an initial term of approximately 58 months, commencing on December 27, 2016,with a beginning annual rental rate of $3.10 per rentable square foot, subject to agreed-upon increases. We received anabatement of the monthly rent for the first four months on the lease term. We have one option to extend the lease term for twoyears at the fair market rental rate then prevailing as detailed in the Campbell Lease.Purchase ObligationsPurchase obligations consist of agreements to purchase goods or services that are enforceable and legally bindingon us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum orvariable price provisions; and the approximate timing of the transaction.The API and the tablets for STENDRA/SPEDRA (avanafil) are currently manufactured by Sanofi. We have minimumpurchase commitments with Sanofi to purchase API materials and tablets through 2018. Our minimum purchase commitmentswith Sanofi totaled approximately $18.8 million as of December 31, 2017. We have no purchase commitments for rawmaterial supplies for Qsymia at December 31, 2017, and have open purchase orders totaling $472,000.Notes Payable and Interest PayableConvertible Senior Notes Due 2020On May 21, 2013, we closed an offering of $220.0 million in 4.5% Convertible Senior Notes due May 1, 2020, orthe Convertible Notes. The Convertible Notes are governed by an indenture, dated as of May 21, 2013, between theCompany and Deutsche Bank National Trust Company, as trustee. On May 29, 2013, we closed on an additional$30.0 million of Convertible Notes upon exercise of an option by the initial purchasers of the Convertible Notes. Total netproceeds from the Convertible Notes were approximately $241.8 million. The Convertible Notes are convertible at theoption of the holders at any time prior to the close of business on the business day immediately preceding November 1, 2019,only under certain conditions. On or after November 1, 2019, holders may convert all or any portion of their ConvertibleNotes at any time at their option at the conversion rate then in effect, regardless of these conditions.83 Table of ContentsSubject to certain limitations, we will settle conversions of the Convertible Notes by paying or delivering, as the case maybe, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The currentconversion rate of the Convertible Notes is $14.86 per share.Senior Secured Notes Due 2018On March 25, 2013, we entered into a Purchase and Sale Agreement with BioPharma providing for the purchase of adebt‑like instrument, or the Senior Secured Notes. Under the agreement, we received $50 million, less $500,000 in fundingand facility payments, at the initial closing on April 9, 2013. The scheduled quarterly payments on the Senior Secured Notesare subject to the net sales of (i) Qsymia and (ii) any other obesity agent developed or marketed by us or our affiliates orlicensees. The scheduled quarterly payments, other than the payment(s) scheduled to be made in the second quarter of 2018,are capped at the lower of the scheduled payment amounts or 25% of the net sales of (i) and (ii) above. Accordingly, if 25%of the net sales is less than the scheduled quarterly payment, then 25% of the net sales is due for that quarter, with theexception of the payment(s) scheduled to be made in the second quarter of 2018, when any unpaid scheduled quarterlypayments plus any accrued and unpaid make whole premiums must be paid. All unpaid balances are due in the secondquarter of 2018. Any quarterly payment less than the scheduled quarterly payment amount will be subject to a make wholepremium equal to the applicable scheduled quarterly payment of the preceding quarter less the actual payment made toBioPharma for the preceding quarter multiplied by 1.03. We may elect to pay full scheduled quarterly payments if we choose.Additional Contingent PaymentsWe have entered into development, license and supply agreements that contain provisions for payments uponcompletion of certain development, regulatory and sales milestones. Due to the uncertainty concerning when and if thesemilestones may be completed or other payments are due, we have not included these potential future obligations in theabove table.Selten Pharma, Inc.On January 6, 2017, we entered into a Patent Assignment Agreement with Selten, whereby we received exclusive,worldwide rights for the development and commercialization of BMPR2 activators for the treatment of PAH and relatedvascular diseases. As part of the agreement, Selten assigned to us its license to a group of patents owned by Stanford, whichcover uses of tacrolimus and ascomycin to treat PAH. We are responsible for future financial obligations to Stanford underthat license.We have also assumed full responsibility for the development and commercialization of the licensed compounds forthe treatment of PAH and related vascular diseases. We paid Selten an upfront payment of $1.0 million, and we will payadditional milestone payments based on global development status and future sales milestones, as well as tiered royaltypayments on future sales of these compounds. The total potential milestone payments are $39.0 million to Selten and$550,000 to Stanford. The majority of the milestone payments to Selten may be paid, at our sole option, either in cash or ourcommon stock, provided that in no event shall the payment of common stock exceed fifty percent of the aggregate amount ofsuch milestone payments.Mitsubishi Tanabe Pharma CorporationIn January 2001, we entered into an exclusive development, license and clinical trial and commercial supplyagreement with MTPC for the development and commercialization of avanafil. Under the terms of the agreement, MTPCagreed to grant an exclusive license to us for products containing avanafil outside of Japan, North Korea, South Korea,China, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Vietnam and the Philippines. We agreed to grant MTPC anexclusive, royalty‑free license within those countries for oral products that we develop containing avanafil. In addition, weagreed to grant MTPC an exclusive option to obtain an exclusive, royalty‑bearing license within those countries for non‑oralproducts that we develop containing avanafil. MTPC agreed to manufacture and supply us with avanafil for use in clinicaltrials, which were our primary responsibility. The MTPC agreement contains a number of milestone payments to be made byus based on various triggering events.84 Table of ContentsWe have made and expect to make substantial milestone payments to MTPC in accordance with this agreement aswe continue to develop avanafil in our territories outside of the United States and, if approved for sale, commercializeavanafil for the oral treatment of male sexual dysfunction in those territories. Potential future milestone payments include$6.0 million upon achievement of $250.0 million or more in worldwide net sales during any calendar year.The term of the MTPC agreement is based on a country‑by‑country and on a product‑by‑product basis. The termshall continue until the later of 10 years after the date of the first sale for a particular product or the expiration of thelast‑to‑expire patents within the MTPC patents covering such product in such country. In the event that our product isdeemed to be insufficiently effective or insufficiently safe relative to other PDE5 inhibitor compounds based on publishedinformation or not economically feasible to develop due to unforeseen regulatory hurdles or costs as measured by standardscommon in the pharmaceutical industry for this type of product, we have the right to terminate the agreement with MTPCwith respect to such product.In August 2012, we entered into an amendment to our agreement with MTPC that permits us to manufacture the APIand tablets for STENDRA ourselves or through third parties. On July 31, 2013, we entered into a Commercial SupplyAgreement with Sanofi Chimie to manufacture and supply the API for avanafil on an exclusive basis in the United States andother territories and on a semi‑exclusive basis in Europe, including the EU, Latin America and other territories. Further, onNovember 18, 2013, we entered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie to manufactureand supply the avanafil tablets on an exclusive basis in the United States and other territories and on a semi‑exclusive basisin Europe, including the EU, Latin America and other territories. Sanofi began producing API and tablets in 2015.On February 21, 2013, we entered into the third amendment to our agreement with MTPC which, among otherthings, expands our rights, or those of our sublicensees, to enforce the patents licensed under the MTPC agreement againstalleged infringement, and clarifies the rights and duties of the parties and our sublicensees upon termination of the MTPCagreement. In addition, we were obligated to use our best commercial efforts to market STENDRA in the U.S. byDecember 31, 2013, which was achieved by our commercialization partner, Auxilium.On July 23, 2013, we entered into the fourth amendment to our agreement with MTPC which, among other things,changes the definition of net sales used to calculate royalties owed by us to MTPC.OtherIn October 2001, we entered into the Assignment Agreement with Thomas Najarian, M.D., for the CombinationTherapy, that has since been the focus of our investigational drug candidate development program for Qsymia for thetreatment of obesity, obstructive sleep apnea and diabetes. The Combination Therapy and all the related Patents weretransferred to us with worldwide rights to develop and commercialize the Combination Therapy and exploit the Patents. TheAssignment Agreement requires us to pay royalties on worldwide net sales of a product for the treatment of obesity that isbased upon the Combination Therapy and the Patents until the last‑to‑expire of the assigned Patents. To the extent that wedecide not to commercially exploit the Patents, the Assignment Agreement will terminate, and the Combination Therapy andPatents will be assigned back to Dr. Najarian.Off‑Balance Sheet ArrangementsWe have not entered into any off‑balance sheet financing arrangements and have not established any specialpurpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options onnon‑financial assets.IndemnificationsIn the normal course of business, we provide indemnifications of varying scope to certain customers against claimsof intellectual property infringement made by third parties arising from the use of its products and to its clinical researchorganizations and investigator sites against liabilities incurred in connection with any third‑party claim arising from thework performed on behalf of the Company, among others. Historically, costs related to these indemnification provisions havenot been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on ourfuture results of operations.85 Table of ContentsTo the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directorsfor certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. Theindemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximumpotential amount of future payments we could be required to make under these indemnification agreements is unlimited;however, we maintain director and officer insurance coverage that reduces our exposure and enables us to recover a portionof any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicableinsurance coverage is minimal.Recent Accounting PronouncementsThe information on recent account pronouncements in incorporated by reference to Note 1 to our ConsolidatedFinancial Statements included elsewhere in this report.Dividend PolicyWe have not paid any dividends since our inception and do not intend to declare or pay any dividends on ourcommon stock in the foreseeable future. Declaration or payment of future dividends, if any, will be at the discretion of ourBoard of Directors after taking into account various factors, including our financial condition, operating results and currentand anticipated cash needs. Item 7A. Quantitative and Qualitative Disclosures about Market RiskThe Securities and Exchange Commission’s rule related to market risk disclosure requires that we describe andquantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes.Market risk sensitive instruments include all financial or commodity instruments and other financial instruments that aresensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors.Market and Interest Rate RiskOur cash, cash equivalents and available‑for‑sale securities as of December 31, 2017, consisted primarily of moneymarket funds and U.S. Treasury securities. Our cash is invested in accordance with an investment policy approved by ourBoard of Directors that specifies the categories (money market funds, U.S. Treasury securities and debt securities of U.S.government agencies, corporate bonds, asset‑backed securities, and other securities), allocations, and ratings of securities wemay consider for investment. Currently, we have focused on investing in U.S. Treasuries until market conditions improve.Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general levelof U.S. interest rates, particularly because the majority of our investments are in short‑term marketable debt securities. Theprimary objective of our investment activities is to preserve principal. Some of the securities that we invest in may be subjectto market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. Forexample, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, thevalue of our investment may decline. A hypothetical 100 basis point increase in interest rates would reduce the fair value ofour available‑for‑sale securities at December 31, 2017, by approximately $1.3 million. In general, money market funds arenot subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.86 Table of Contents Item 8. Financial Statements and Supplementary DataVIVUS, INC.1.Index to Consolidated Financial StatementsThe following financial statements are filed as part of this Report:Reports of Independent Registered Public Accounting Firm 88Consolidated Balance Sheets as of December 31, 2017 and 2016 90Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 91Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2017, 2016 and 2015 91Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2017, 2016 and 2015 92Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 93Notes to Consolidated Financial Statements 94Financial Statement Schedule II 122 87 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMStockholders and Board of DirectorsVIVUS, Inc.Campbell, CaliforniaOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of VIVUS, Inc. (the “Company”) as of December 31, 2017and 2016, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ (deficit) equity, andcash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statementschedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In ouropinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atDecember 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the periodended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”) and our report dated March 13, 2018 expressed an unqualified opinion thereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the consolidated financial statements are free of materialmisstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Ouraudits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonablebasis for our opinion./s/ OUM & CO. LLP San Francisco, CaliforniaMarch 13, 2018We have served as the Company's auditor since 2005.88 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMStockholders and Board of DirectorsVIVUS, Inc.Campbell, CaliforniaOpinion on Internal Control over Financial ReportingWe have audited VIVUS, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, basedon criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidatedstatements of operations, comprehensive (loss) income, stockholders’ (deficit) equity, and cash flows for each of the threeyears in the period ended December 31, 2017, and the related notes and financial statement schedule listed in theaccompanying index and our report dated March 13, 2018 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal 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 onthe Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered withthe PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities lawsand the applicable rules 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. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion.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 thereliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, 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 of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ OUM & CO. LLPSan Francisco, CaliforniaMarch 13, 201889 Table of Contents VIVUS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except par value) December 31, 2017 2016ASSETS Current assets: Cash and cash equivalents$66,392 $84,783Available-for-sale securities 159,943 184,736Accounts receivable, net 12,187 9,478Inventories 17,712 16,186Prepaid expenses and other current assets 7,178 8,251Total current assets 263,412 303,434Property and equipment, net 542 788Non-current assets 1,014 1,554Total assets$264,968 $305,776LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY Current liabilities: Accounts payable$10,072 $4,707Accrued and other liabilities 21,475 15,686Deferred revenue 2,075 19,174Current portion of long-term debt 5,147 8,708Total current liabilities 38,769 48,275Long-term debt, net of current portion 230,536 232,610Deferred revenue, net of current portion 4,674 6,449Non-current accrued and other liabilities 327 257Total liabilities 274,306 287,591Commitments and contingencies Stockholders’ (deficit) equity: Preferred stock; $1.00 par value; 5,000 shares authorized; no shares issued andoutstanding at December 31, 2017 and 2016 — —Common stock; $.001 par value; 200,000 shares authorized; 105,977 and 104,874 sharesissued and outstanding at December 31, 2017 and 2016, respectively 105 105Additional paid-in capital 834,730 831,750Accumulated other comprehensive loss (608) (616)Accumulated deficit (843,565) (813,054)Total stockholders’ (deficit) equity (9,338) 18,185Total liabilities and stockholders’ (deficit) equity$264,968 $305,776See accompanying notes to consolidated financial statements.90 Table of ContentsVIVUS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year Ended December 31, 2017 2016 2015Revenue: Net product revenue$44,983 $48,501 $54,622License and milestone revenue 7,500 69,400 11,574Supply revenue 10,407 2,291 26,674Royalty revenue 2,483 4,066 2,560Total revenue 65,373 124,258 95,430 Operating expenses: Cost of goods sold 17,187 10,602 34,157Selling, general and administrative 40,130 52,379 79,387Research and development 5,263 5,592 10,102Inventory impairment and other non-recurring charges — — 32,061Total operating expenses 62,580 68,573 155,707 Income (loss) from operations 2,793 55,685 (60,277) Interest and other expense: Interest expense 33,231 32,888 33,317Other expense (income), net 71 (575) (490)Interest expense and other expense, net 33,302 32,313 32,827(Loss) income before income taxes (30,509) 23,372 (93,104)Provision for income taxes 2 70 3Net (loss) income$(30,511) $23,302 $(93,107) Basic and diluted net (loss) income per share: Basic net (loss) income per share$(0.29) $0.22 $(0.90)Diluted net (loss) income per share$(0.29) $0.22 $(0.90)Shares used in per share computation: Basic 105,741 104,385 103,926Diluted 105,741 104,969 103,926 VIVUS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME(In thousands) Year Ended December 31, 2017 2016 2015Net (loss) income$(30,511) $23,302 $(93,107)Unrealized gain (loss) on securities, net of taxes 8 (355) (233)Comprehensive (loss) income$(30,503) $22,947 $(93,340)See accompanying notes to consolidated financial statements. 91 Table of ContentsVIVUS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands) Accumulated Additional Other Common Stock Paid-In Comprehensive Accumulated Shares Amount Capital Income (Loss) Deficit TotalBalances, January 1, 2015103,729 $104 $825,691 $(28) $(743,249) $82,518Sale of common stock through employee stockpurchase plan77 — 147 — — 147Vesting of restricted stock units249 — — — — —Share-based compensation expense — — 3,590 — — 3,590Net unrealized loss on securities — — — (233) — (233)Net loss — — — — (93,107) (93,107)Balances, December 31, 2015104,055 104 829,428 (261) (836,356) (7,085)Sale of common stock through employee stockpurchase plan41 — 39 — — 39Vesting of restricted stock units778 1 (1) — — —Share-based compensation expense — — 2,284 — — 2,284Net unrealized loss on securities — — — (355) — (355)Net income — — — — 23,302 23,302Balances, December 31, 2016104,874 105 831,750 (616) (813,054) 18,185Sale of common stock through employee stockpurchase plan51 — 38 — — 38Vesting of restricted stock units1,052 — — — — —Share-based compensation expense — — 2,942 — — 2,942Net unrealized loss on securities — — — 8 — 8Net loss — — — — (30,511) (30,511)Balances, December 31, 2017105,977 $105 $834,730 $(608) $(843,565) $(9,338)See accompanying notes to consolidated financial statements. 92 Table of ContentsVIVUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2017 2016 2015Cash flows from operating activities: Net (loss) income$(30,511) $23,302 $(93,107)Adjustments to reconcile net (loss) income to net cash (used for) provided byoperating activities: Depreciation and amortization 811 1,080 1,387Amortization of debt issuance costs and discounts 20,442 18,666 17,174Amortization of discount or premium on available-for-sale securities 768 944 2,282Share-based compensation expense 2,942 2,284 3,590Loss on disposal of property and equipment — 342 —Inventory impairment charge — — 29,522Changes in assets and liabilities: Accounts receivable (2,709) (481) 2,598Inventories (1,526) (2,584) (8,487)Prepaid expenses and other assets 1,069 1,516 2,639Accounts payable 5,365 (2,353) (3,370)Accrued and other liabilities 5,859 (1,524) (889)Deferred revenue (18,874) (3,027) 329Net cash (used for) provided by operating activities (16,364) 38,165 (46,332)Cash flows from investing activities: Property and equipment purchases (21) (211) (310)Purchases of available-for-sale securities (31,097) (135,997) (213,536)Proceeds from maturity of available-for-sale securities 37,470 60,050 281,250Proceeds from sales of available-for-sale securities 17,660 36,080 —Net cash provided by (used for) investing activities 24,012 (40,078) 67,404Cash flows from financing activities: Repayments of notes payable (26,077) (8,738) (8,998)Sale of common stock through employee stock purchase plan 38 39 147Net cash used for financing activities (26,039) (8,699) (8,851)Net (decrease) increase in cash and cash equivalents (18,391) (10,612) 12,221Cash and cash equivalents: Beginning of year 84,783 95,395 83,174End of period$66,392 $84,783 $95,395Supplemental cash flow disclosure: Interest paid$15,350 $15,368 $18,756Income taxes paid$47 $59 $58Non-cash investing activities: Unrealized gain (loss) on securities$8 $(355) $(233) See accompanying notes to consolidated financial statements. 93 Table of ContentsVIVUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Business and Significant Accounting PoliciesBusinessVIVUS is a biopharmaceutical company developing and commercializing innovative, next-generation therapies toaddress unmet medical needs in human health. The Company has two approved therapies and one product candidate inactive clinical development. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronicweight management. STENDRA® (avanafil) is approved by FDA for erectile dysfunction, or ED, and by the EuropeanCommission, or EC, under the trade name SPEDRA, for the treatment of ED in the EU. Tacrolimus is in clinical developmentfor the treatment of patients with Pulmonary Arterial Hypertension, or PAH.Qsymia incorporates a proprietary formulation combining low doses of active ingredients from two previouslyapproved drugs, phentermine and topiramate, and is being commercialized by the Company in the U.S. primarily through asales force supported by an internal commercial team, who promote Qsymia to physicians. Avanafil is an oralphosphodiesterase type 5 inhibitor that is being commercialized in the U.S., EU and other countries throughcommercialization collaborators.At December 31, 2017, the Company’s accumulated deficit was approximately $843.6 million. Based on currentplans, management expects to incur further losses for the foreseeable future. Management believes that the Company’sexisting capital resources combined with anticipated future cash flows will be sufficient to support its operating needs atleast for the next twelve months. However, the Company anticipates that it may require additional funding to find the rightpartner for expanded Qsymia commercial promotion to a broader primary care physician audience, create a pathway forcentralized approval of the marketing authorization application for Qsiva in the EU, conduct post-approval clinical studiesfor Qsymia, conduct non-clinical and clinical research and development work to support regulatory submissions andapplications for our current and future investigational drug candidates, finance the costs involved in filing and prosecutingpatent applications and enforcing or defending our patent claims, if any, to fund operating expenses, establish additional ornew manufacturing and marketing capabilities, and manufacture quantities of its drugs and investigational drug candidatesand to make payments under its existing license agreements and supply agreements.If the Company requires additional capital, it may seek any required additional funding through collaborations,public and private equity or debt financings, capital lease transactions or other available financing sources. Additionalfinancing may not be available on acceptable terms, or at all. If additional funds are raised by issuing equity securities,substantial dilution to existing stockholders may result. If adequate funds are not available, the Company may be required todelay, reduce the scope of or eliminate one or more of its commercialization or development programs or obtain fundsthrough collaborations with others that are on unfavorable terms or that may require the Company to relinquish rights tocertain of its technologies, product candidates or products that it would otherwise seek to develop on its own.Management has evaluated all events and transactions that occurred after December 31, 2017, through the datethese consolidated financial statements were filed. There were no events or transactions occurring during this period thatrequire recognition or disclosure in these consolidated financial statements. The Company operates in a single segment, thedevelopment and commercialization of novel therapeutic products.Significant Accounting Policies Principles of ConsolidationThe consolidated financial statements include the accounts of VIVUS, Inc., and its wholly owned subsidiaries. Allsignificant intercompany transactions and balances have been eliminated in consolidation.94 Table of ContentsUse of EstimatesThe Company’s consolidated financial statements are prepared in accordance with U.S. generally acceptedaccounting principles as set forth in the FASB’s Accounting Standards Codification, with consideration given to the variousstaff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission. Theseaccounting principles require management to make certain estimates, judgments and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates itsestimates, including critical accounting policies or estimates related to available‑for‑sale securities, debt instruments,contingencies, litigation, inventories, research and development expenses, income taxes, and share‑based compensation. TheCompany bases its estimates on historical experience, information received from third parties and on various market specificand other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.Actual results could differ significantly from those estimates under different assumptions or conditions.Cash and Cash EquivalentsThe Company considers highly liquid investments with maturities from the date of purchase of three months or lessto be cash equivalents. At December 31, 2017 and 2016, all cash equivalents were invested in money market funds or U.S.Treasury securities. These investments are recorded at fair value (see Note 2).Available‑for‑Sale SecuritiesThe Company determines the appropriate classification of marketable securities at the time of purchase andreevaluates such designation at each balance sheet date. Marketable securities have been classified and accounted for asavailable‑for‑sale. The Company may or may not hold securities with stated maturities greater than 12 months until maturity.In response to changes in the availability of and the yield on alternative investments as well as liquidity requirements, theCompany may sell these securities prior to their stated maturities. As these securities are viewed by the Company as availableto support current operations, securities with maturities beyond 12 months are classified as current assets.Securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component ofstockholders’ equity (deficit), unless the decline in value is deemed to be other than temporary, in which case such securitiesare written down to fair value and the loss is charged to other‑than‑temporary loss on impaired securities. The Companyperiodically evaluates its investment securities for other‑than‑temporary declines based on quantitative and qualitativefactors. Any losses that are deemed other-than-temporary are recognized as a non-operating loss. To date, the Company hasnot had any other-than-temporary declines in the value of any of the securities in its investment portfolio. Realized gains orlosses on the sale of marketable securities are determined on a specific identification method, and such gains and losses arereflected as a component of interest expense.Fair Value MeasurementsThe Company’s financial instruments include cash equivalents, available‑for‑sale securities, accounts receivable,accounts payable, accrued liabilities and debt. Available‑for‑sale securities are carried at fair value. The carrying value ofcash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to therelatively short‑term nature of these instruments. Debt instruments are initially recorded at face value, with stated interest andamortization of debt issuance discounts and costs recognized as interest expense, which currently approximates fair value.Issuance costs related to the conversion option of the Company’s convertible notes were charged to additionalpaid‑in capital. The portion of the issuance costs related to the debt component is being amortized and recorded as additionalinterest expense over the expected life of the convertible notes. In connection with the issuance of the convertible notes, theCompany entered into capped call transactions with certain counterparties affiliated with the underwriters.95 Table of ContentsConcentration of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash,cash equivalents, available‑for‑sale‑securities, and accounts receivable. The Company has established guidelines to limit itsexposure to credit risk by placing investments in high credit quality money market funds, U.S. Treasury securities orcorporate debt securities and by placing investments with maturities that maintain safety and liquidity within the Company’sliquidity needs. The Company has also established guidelines for the issuance of credit to existing and potential customers.Accounts Receivable, Allowances for Doubtful Accounts and Cash DiscountsThe Company extends credit to its customers for product sales resulting in accounts receivable. Customer accountsare monitored for past due amounts. Amounts that are determined to be uncollectible are written off against the allowance fordoubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses andexisting economic factors, and are adjusted periodically. Historically, the Company has not had any significant uncollectedaccounts. The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for promptpayment. The estimate of cash discounts is recorded at the time of sale. The Company accounts for the cash discounts byreducing revenue and accounts receivable by the amount of the discounts it expects the customers to take. The accountsreceivable are reported in the consolidated balance sheets, net of the allowances for doubtful accounts and cash discounts.There is no allowance for doubtful accounts at December 31, 2017 or 2016. The allowance for cash discounts is $195,000and $213,000 at December 31, 2017 and 2016, respectively.InventoriesInventories are valued at the lower of cost or market. Cost is determined using the first‑in, first‑out method using aweighted average cost method calculated for each production batch. Inventory includes the cost of the active pharmaceuticalingredients, or API, raw materials and third‑party contract manufacturing and packaging services. Indirect overhead costsassociated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventorybased on the units produced or distributed, assuming normal capacity, in the applicable period.Inventory costs of product shipped to customers, but not yet recognized as revenue, are recorded within inventorieson the consolidated balance sheets and are subsequently recognized to cost of goods sold when revenue recognition criteriahave been met.The Company’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in excessof its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities issubjective and primarily dependent on the Company’s estimates of future demand for a particular product. If the estimate offuture demand is inaccurate based on lower actual sales, the Company may increase the write down for excess inventory forthat product and record a charge to inventory impairment. The Company periodically evaluates the carrying value ofinventory on hand for potential excess amount over demand. As a result of this evaluation, for the year ended December 31,2015, the Company recognized an impairment charge of $29.5 million for Qsymia API inventory in excess of projecteddemand.Property and EquipmentProperty and equipment is stated at cost and includes computers and software, furniture and fixtures, leaseholdimprovements and manufacturing equipment. Depreciation is computed using the straight‑line method over the estimateduseful lives of two to seven years for computers and software, furniture and fixtures and manufacturing equipment. Leaseholdimprovements are amortized using the straight‑line method over the shorter of the remaining lease term or the estimateduseful lives. Expenditures for repairs and maintenance, which do not extend the useful life of the property and equipment, areexpensed as incurred. Gains and losses associated with dispositions are reflected as a non-operating gain or loss in theaccompanying consolidated statements of operations.Long‑lived assets, including property and equipment, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held96 Table of Contentsand used is measured by a comparison of the carrying amount of an asset to an estimate of undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, animpairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.To date, the Company has had no significant write-offs of long-lived assets.Debt Issuance CostsDebt issuance costs, which are presented in the balance sheet as a direct deduction from the carrying amount of thedebt liability, are amortized as interest expense using the effective-interest method over the expected term of the debt.Revenue RecognitionProduct Revenue:The Company recognizes product revenue when:(i)persuasive evidence that an arrangement exists,(ii)delivery has occurred and title has passed,(iii)the price is fixed or determinable, and(iv)collectability is reasonably assured.Revenue from sales transactions where the customer has the right to return the product is recognized at the time ofsale only if: (i) the Company’s price to the customer is substantially fixed or determinable at the date of sale, (ii) the customerhas paid the Company, or the customer is obligated to pay the Company and the obligation is not contingent on resale of theproduct, (iii) the customer’s obligation to the Company would not be changed in the event of theft or physical destruction ordamage of the product, (iv) the customer acquiring the product for resale has economic substance apart from that provided bythe Company, (v) the Company does not have significant obligations for future performance to directly bring about resale ofthe product by the customer, and (vi) the amount of future returns can be reasonably estimated.Product Revenue Allowances:Product revenue is recognized net of consideration paid to the Company’s customers, wholesalers and certifiedpharmacies. Such consideration is for services rendered by the wholesalers and pharmacies in accordance with thewholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped andmonthly program management and data fees. These services are not deemed sufficiently separable from the customers’purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.Other product revenue allowances include certain prompt pay discounts and allowances offered to the Company’scustomers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue atthe later of the date at which the related revenue is recognized or the date at which the allowance is offered. The Companyalso offers discount programs to patients. Calculating certain of these items involves estimates and judgments based on salesor invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations andguidelines that would impact the amount of the actual rebates or chargebacks. The Company reviews the adequacy ofproduct revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trendsor significant events indicate that adjustment is appropriate and to reflect actual experience.The Company ships units of Qsymia through a distribution network that includes certified retail pharmacies. TheCompany began shipping Qsymia in September 2012 and grants rights to its customers to return unsold product from sixmonths prior to and up to 12 months subsequent to product expiration. This has resulted in a potential return period of from24 to 36 months depending on the ship date of the product. As the Company had no previous experience in selling Qsymiaand given its lengthy return period, the Company was not initially able to reliably estimate expected returns of Qsymia at thetime of shipment, and therefore recognized revenue when units were dispensed to patients through prescriptions, at whichpoint, the product is not subject to return, or when the expiration period had ended.97 Table of ContentsBeginning in the first quarter of 2017, with 48 months of returns experience, the Company now believes that it hassufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the firstquarter of 2017, the Company began recognizing revenue from the sales of Qsymia upon shipment and recording a reservefor expected returns at the time of shipment.In accordance with this change in accounting estimate, in the first quarter of 2017 the Company recognized a one-time adjustment relating to products that had been previously shipped, consisting of $17.9 million of gross revenues,adjusted for an expected returns reserve of $5.7 million and estimated gross-to-net charges of $4.9 million, for a net impact of$7.3 million in revenues. The Company also recorded increased cost of goods sold of $0.6 million and marketing expense of$0.7 million associated with the change in accounting estimate. The increase in net product revenue resulted in a decrease innet loss of $6.0 million or $0.06 per share for 2017.Supply Revenue:The Company recognizes supply revenue from the sales of STENDRA or SPEDRA when the four basic revenuerecognition criteria described above are met. The Company produces STENDRA or SPEDRA through a contractmanufacturing partner and then sells it to its commercialization partners. The Company is the primary responsible party inthe commercial supply arrangements and bears significant risk in the fulfillment of the obligations, including risks associatedwith manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, theCompany recognizes supply revenue on a gross basis as the principal party in the arrangements. Under the Company’sproduct supply agreements, as long as the product meets specified product dating criteria at the time of shipment to thepartner, the Company’s commercialization partners do not have a right of return or credit for expired product. As such, theCompany recognizes revenue for products that meet the dating criteria at the time of shipment. Revenue from Multiple‑Element Arrangements:The Company accounts for multiple‑element arrangements, such as license and commercialization agreements inwhich a customer may purchase several deliverables, in accordance with ASC Topic 605‑25, Revenue Recognition —Multiple‑Element Arrangements, or ASC 605‑25. The Company evaluates if the deliverables in the arrangement representseparate units of accounting. In determining the units of accounting, management evaluates certain criteria, includingwhether the deliverables have value to its customers on a stand‑alone basis. Factors considered in this determination includewhether the deliverable is proprietary to the Company, whether the customer can use the license or other deliverables fortheir intended purpose without the receipt of the remaining elements, whether the value of the deliverable is dependent onthe undelivered items, and whether there are other vendors that can provide the undelivered items. Deliverables that meetthese criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined andaccounted for as a single unit of accounting.When deliverables are separable, the Company allocates non‑contingent consideration to each separate unit ofaccounting based upon the relative selling price of each element. When applying the relative selling price method, theCompany determines the selling price for each deliverable using vendor‑specific objective evidence, or VSOE, of sellingprice, if it exists, or third‑party evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price existsfor a deliverable, the Company uses best estimated selling price, or BESP, for that deliverable. Significant managementjudgment may be required to determine the relative selling price of each element. Revenue allocated to each element is thenrecognized based on when the following four basic revenue recognition criteria are met for each element: (i) persuasiveevidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the price is fixed ordeterminable; and (iv) collectability is reasonably assured.Determining whether and when some of these criteria have been satisfied often involves assumptions and judgmentsthat can have a significant impact on the timing and amount of revenue the Company reports. Changes in assumptions orjudgments, or changes to the elements in an arrangement, could cause a material increase or decrease in the amount ofrevenue reported in a particular period.ASC Topic 605‑28, Revenue Recognition — Milestone Method or (ASC 605‑28), established the milestone methodas an acceptable method of revenue recognition for certain contingent, event‑based payments under research anddevelopment arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantivemilestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an98 Table of Contentsevent: (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of aspecific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date thearrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due tothe Company. The determination that a milestone is substantive requires judgment and is made at the inception of thearrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is:(i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the itemdelivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relatessolely to past performance, and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.Other contingent, event‑based payments received for which payment is either contingent solely upon the passage oftime or the results of a collaborative partner’s performance are not considered milestones under ASC 605‑28. In accordancewith ASC 605, such payments will be recognized as revenue when all of the four basic revenue recognition criteria are met.Revenues recognized for royalty payments are recognized when the four basic revenue recognition criteriadescribed above are met.Cost of Goods SoldCost of goods sold for units shipped to customers includes the inventory costs of API, third‑party contractmanufacturing costs, packaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storagecosts, and overhead costs of the employees involved with production. Specifically, cost of goods sold for Qsymia dispensedto patients includes the inventory costs of the API, third‑party contract manufacturing and packaging and distribution costs,royalties, cargo insurance, freight, shipping, handling and storage costs, and overhead costs of the employees involved withproduction; cost of goods sold for STENDRA shipped to partners includes the inventory costs of purchased tablets, freight,shipping and handling costs. The cost of goods sold associated with deferred revenue on Qsymia and STENDRA productshipments is recorded as deferred costs, which are included in inventories in the consolidated balance sheets, until such timeas the deferred revenue is recognized.Research and Development ExpensesResearch and development, or R&D, expenses include license fees, related compensation, consultants’ fees,facilities costs, administrative expenses related to R&D activities and clinical trial costs incurred by clinical researchorganizations or CROs, and research institutions under agreements that are generally cancelable, among other related R&Dcosts. The Company also records accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costsincurred by CRO and clinical sites and include advertising for clinical trials and patient recruitment costs. These costs arerecorded as a component of R&D expenses and are expensed as incurred. Under the Company’s agreements, progresspayments are typically made to investigators, clinical sites and CROs. The Company analyzes the progress of the clinicaltrials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy ofaccrued liabilities. Significant judgments and estimates must be made and used in determining the accrued balance in anyaccounting period. Actual results could differ from those estimates under different assumptions. Revisions are charged toexpense in the period in which the facts that give rise to the revision become known.In addition, the Company has obtained rights to patented intellectual properties under several licensing agreementsfor use in research and development activities. Non‑refundable licensing payments made for intellectual properties that haveno alternative future uses are expensed to research and development as incurred.Advertising ExpensesAdvertising expenses are expensed as incurred. The Company incurred advertising and sales promotion costs relatedto its marketing of Qsymia of $3.2 million, $3.9 million and $12.6 million in 2017, 2016 and 2015, respectively.Share‑Based CompensationCompensation expense is recognized for share-based payments, including stock options, restricted stock units andshares issued under the employee stock purchase plan, using a fair‑value based method. The Company estimates the99 Table of Contentsfair value of share‑based payment awards on the date of the grant using the Black‑Scholes option‑pricing model, whichrequires the Company to estimate the expected term of the award, the expected volatility, the risk-free interest rate and theexpected dividends. The expected term, which represents the period of time that options granted are expected to beoutstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractualterms of the share‑based awards, vesting schedules and expectations of future employee behavior. Expected volatilities areestimated using the historical share price performance over the expected term of the option, which are adjusted as necessaryfor any other factors which may reasonably affect the volatility of VIVUS’s stock in the future. The risk‑free interest rate isbased on the U.S. Treasury yield in effect at the time of the grant for the expected term of the award. The Company does notanticipate paying any dividends in the near future. The Company develops pre‑vesting forfeiture assumptions based on ananalysis of historical data and expected future activity.Inventory Impairment and Other Non‑Recurring ChargesThe Company’s inventory impairment and other non-recurring charges consist of inventory impairment charges,proxy contest expenses and charges from cost reduction plans, including employee severance, one time termination benefitsand ongoing benefits related to the reduction of our workforce, facilities and other facility exit costs. Liabilities for costsassociated with the cost reduction plan are recognized when the liability is incurred. In addition, liabilities associated withcost reduction activities are measured at fair value. One-time termination benefits are expensed at the date the entity notifiesthe employee, unless the employee must provide future service, in which case the benefits are expensed ratably over thefuture service period. Ongoing benefits are expensed when cost reduction activities are probable and the benefit amounts areestimable. Other costs primarily consist of legal, consulting, and other costs related to employee terminations and areexpensed when incurred. Termination benefits are calculated in accordance with the various agreements with certain of theCompany’s employees.Income TaxesThe Company makes certain estimates and judgments in determining income tax expense for financial statementpurposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise fromdifferences in the timing of recognition of revenue and expense for tax and financial statement purposes.As part of the process of preparing the Company’s consolidated financial statements, the Company is required toestimate its income taxes in each of the jurisdictions in which the Company operates. This process involves the Companyestimating its current tax exposure under the most recent tax laws and assessing temporary differences resulting fromdiffering treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities,which are included in the Company’s consolidated balance sheets.The Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considersall available evidence, both positive and negative, including historical levels of income, expectations and risks associatedwith estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for avaluation allowance. If it is not more likely than not that the Company will recover its deferred tax assets, the Company willincrease its provision for taxes by recording a valuation allowance against the deferred tax assets that the Company estimateswill not ultimately be recoverable. As a result of the Company’s analysis of all available evidence, both positive andnegative, as of December 31, 2017, it was considered more likely than not that the Company’s deferred tax assets would notbe realized. However, should there be a change in the Company’s ability to recover its deferred tax assets, the Companywould recognize a benefit to its tax provision in the period in which the Company determines that it is more likely than notthat it will recover its deferred tax assets.The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of itsprovision for income taxes.FASB ASC topic 740, Income Taxes, or ASC 740, prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’sincome tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. ASC 740‑10 utilizes a two‑step approach for evaluating uncertain tax positions. Step one,Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likelythan not to be sustained upon audit, including resolution of related appeals or100 Table of Contentslitigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not tobe realized on ultimate settlement. The Company also recognizes interest and penalties accrued on any unrecognized taxbenefits as a component of its provision for income taxes. As of December 31, 2017, the Company does not have anyunrecognized tax positions.Foreign Currency TransactionsTransactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of thetransactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company’sfunctional currency at the rates prevailing on the balance sheet date. Non‑monetary items carried at fair value that aredenominated in foreign currencies are retranslated at the rates prevailing on the initial transaction dates.Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, areincluded in the profit and loss account for the period. Exchange differences arising on the retranslation of non‑monetaryitems carried at fair value are included in other expense in the accompanying consolidated statements of operations for theperiod.Contingencies and LitigationThe Company is periodically involved in disputes and litigation related to a variety of matters. When it is probablethat the Company will experience a loss, and that loss is quantifiable, the Company records appropriate reserves. TheCompany records legal fees and costs as an expense when incurred.Intangible AssetsThe Company records acquired intangible assets at cost and amortizes them over the estimated useful life of theasset. When events or changes in circumstances indicate that the carrying value of intangible assets may not be recoverable,the Company evaluates such impairment if the net book value of such assets exceeds the future undiscounted cash flowsattributable to such assets. Should an impairment exist, the impairment loss would be measured based on the excess carryingvalue of the asset over the asset’s fair value or discounted estimates of future cash flows attributable to the assets. To date, theCompany has recorded no impairment losses on its intangible assets.Net Income (Loss) Per ShareThe Company computes basic net income (loss) per share applicable to common stockholders based on theweighted average number of common shares outstanding during the period. Diluted net income (loss) per share is based onthe weighted average number of common and common equivalent shares, which represent shares that may be issued in thefuture upon the exercise of outstanding stock options or upon a net share settlement of the Company’s Convertible Notes.Common share equivalents are excluded from the computation in periods in which they have an anti‑dilutive effect. Stockoptions for which the price exceeds the average market price over the period have an anti‑dilutive effect on net income (loss)per share and, accordingly, are excluded from the calculation. As discussed in Note 13, the triggering conversion conditionsthat allow holders of the Convertible Notes to convert have not been met. If such conditions are met and the note holders optto convert, the Company may choose to pay in cash, common stock, or a combination thereof. However, if this occurs, theCompany has the intent and ability to net share settle this debt security; thus the Company uses the treasury stock method fornet income (loss) per share purposes. Due to the effect of the capped call instrument purchased in relation to the ConvertibleNotes, there would be no net shares issued until the market value of the Company’s stock exceeds $20 per share, and thus noimpact on diluted net income (loss) per share. Further, when there is a net loss, other potentially dilutive common equivalentshares are not included in the calculation of net loss per share since their inclusion would be anti‑dilutive. The followingtable presents the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):101 Table of Contents 2017 2016 2015Net income (loss)$(30,511) $23,302 $(93,107)Basic: Weighted-average shares outstanding 105,741 104,385 103,926Basic net income (loss) per share$(0.29) $0.22 $(0.90)Diluted: Weighted-average shares outstanding used in basic calculation 105,741 104,385 103,926Dilutive potential shares — 584 —Weighted-average shares outstanding used in diluted calculation 105,741 104,969 103,926Diluted net income (loss) per share$(0.29) $0.22 $(0.90) For the years ended December 31, 2017, 2016, and 2015, potentially dilutive outstanding stock options and RSUsof 13,499,000, 10,122,000 and 7,167,000, respectively, were not included in the computation of diluted net loss per sharebecause the effect would have been anti‑dilutive.Recent Accounting Pronouncements AdoptedIn July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory -Inventory (Topic 330), which changes the measurement principle for inventory from the lower of cost or market to the lowerof cost or net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course ofbusiness, less reasonably predictable costs of completion, disposal and transportation.” This standard eliminates theguidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in thesubsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The Companyadopted this standard in the first quarter of 2017, and it did not have a material impact on the Company’s condensedconsolidated financial statements.In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard is intended to simplify severalareas of accounting for share-based compensation arrangements, including the income tax impact, classification on thestatement of cash flows and forfeitures. The Company adopted this standard in the first quarter of 2017, and it did not have amaterial impact on the Company’s condensed consolidated financial statements.Recent Accounting Pronouncements Not Yet AdoptedIn May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers.This standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner todepict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received inexchange for those goods or services. This new standard will supersede most current revenue recognition guidance. In July2015, the FASB voted to delay the effective date of this standard by one year to the first quarter of 2018. Early adoption ispermitted, but not before the first quarter of 2017. This new revenue standard may be applied retrospectively to each priorperiod presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption, orthe “modified retrospective basis.” The Company plans to adopt this standard in the first quarter of 2018 using the modifiedretrospective basis. The Company has analyzed the effect of this standard on its consolidated financial statements andcurrently does not expect the adoption of this standard to have a material impact on the Company’s net product revenues andsupply revenues in the first quarter of adoption or on the timing of future recognition of net product revenues and supplyrevenues, as the Company expects that revenues generated will continue to be recognized upon the shipment of products tocustomers. Similarly, the Company does not expect a material impact on the recognition of royalty revenue. The Companydoes not expect the adoption of this standard to have a material impact on the Company’s license and milestone revenue inthe first quarter of adoption; however, the Company does expect that the timing of recognition of future milestone revenuerelated to current license and supply agreements as well as the timing and allocation of revenue related to any future licenseand supply agreements entered into by the Company may be impacted.102 Table of ContentsIn February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), which modifies theaccounting by lessees for all leases with a term greater than 12 months. This standard will require lessees to recognize on thebalance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, thisstandard is effective for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted.The Company’s only significant lease is its operating lease for its corporate headquarters, and, while the Company cannot yetestimate the amounts by which its financial statements will be affected by the adoption of this guidance, it expects that theoverall recognition of expense will be similar to current guidance, though possibly in different classifications, but that therewill be a significant change in the balance sheet due to the recognition of right of use assets and the corresponding leaseliabilities. The Company plans to adopt the new leases guidance effective January 1, 2019 using a modified retrospectivetransition method.In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230)Classification of Certain Cash Receipts and Cash Payments. The standard clarifies how certain cash receipts and cashpayments will be presented and classified in the statement of cash flows. The new standard is effective for fiscal years, andinterim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company iscurrently evaluating the impact that the standard will have on its consolidated financial statements. Note 2. Cash, Cash Equivalents and Available‑for‑Sale SecuritiesThe fair value and the amortized cost of cash, cash equivalents, and available-for-sale securities by major securitytype consist of the following (in thousands): As of December 31, 2017 Gross Gross Amortized Unrealized Unrealized EstimatedCash and cash equivalents and available-for-sale securitiesCost Gains Losses Fair ValueCash and money market funds$66,392 $ — $ — $66,392U.S. Treasury securities 21,070 1 (139) 20,932Corporate debt securities 139,481 16 (486) 139,011Total 226,943 17 (625) 226,335Less amounts classified as cash and cash equivalents (66,392) — — (66,392)Total available-for-sale securities$160,551 $17 $(625) $159,943 As of December 31, 2016 Gross Gross Amortized Unrealized Unrealized EstimatedCash and cash equivalents and available-for-sale securitiesCost Gains Losses Fair ValueCash and money market funds$84,783 $ — $ — $84,783U.S. Treasury securities 24,780 7 (110) 24,677Corporate debt securities 160,571 52 (564) 160,059Total 270,134 59 (674) 269,519Less amounts classified as cash and cash equivalents (84,783) — — (84,783)Total available-for-sale securities$185,351 $59 $(674) $184,736As of December 31, 2017, the Company’s available‑for‑sale securities have original contractual maturities up to 67months. In response to changes in the availability of and the yield on alternative investments as well as liquidityrequirements, the Company may sell securities prior to their stated maturities. As these securities are viewed by the Companyas available to support current operations, securities with maturities beyond 12 months are classified as current assets. Due totheir short‑term maturities, the Company believes that the fair value of its bank deposits, accounts payable and accruedexpenses approximate their carrying value.103 Table of ContentsFair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in theprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs andminimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the lastunobservable, may be used to measure fair value. The three levels are:·Level 1 — Quoted prices in active markets for identical assets or liabilities.·Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted pricesfor similar assets or liabilities; quoted prices in markets that are not active; or other inputs that areobservable or can be corroborated by observable market data for substantially the full term of the assets orliabilities.·Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant tothe fair value of the assets or liabilities.The following table represents the fair value hierarchy for our cash equivalents and available-for-sale securities bymajor security type (in thousands): As of December 31, 2017 Level 1 Level 2 Level 3 TotalCash and money market funds $66,392 $ — $ — $66,392U.S. Treasury securities 20,932 — — 20,932Corporate debt securities — 139,011 — 139,011Total $87,324 $139,011 $ — $226,335 As of December 31, 2016 Level 1 Level 2 Level 3 TotalCash and money market funds $84,783 $ — $ — $84,783U.S. Treasury securities 24,677 24,677Corporate debt securities — 160,059 — 160,059Total$109,460$160,059$ —$269,519 Note 3. Accounts ReceivableAccounts receivable consist of the following (in thousands): Balance as of December 31, December 31, 2017 2016Qsymia$10,400 $8,982STENDRA/SPEDRA 1,982 709 12,382 9,691Qsymia allowance for cash discounts (195) (213)Net$12,187 $9,478There was no allowance for doubtful accounts at December 31, 2017 or 2016. 104 Table of ContentsNote 4. Inventories Inventories consist of the following (in thousands): Balance as of December 31, December 31, 2017 2016Raw materials$13,663 $9,412Work-in-process 2,264 2,984Finished goods 1,785 3,110Deferred costs — 680Inventories$17,712 $16,186 Raw materials inventories consist primarily of the active pharmaceutical ingredients, or API, for Qsymia andSTENDRA/SPEDRA. Note 5. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following (in thousands): Balance as of December 31, December 31, 2017 2016Prepaid sales and marketing expenses$1,538 $1,767Prepaid insurance 1,124 1,182Other prepaid expenses and assets 4,516 5,302Total$7,178 $8,251 The amounts included in prepaid expenses and other assets consist primarily of prepayments for future services,miscellaneous non-trade receivables, prepaid interest and interest income receivable. These costs have been deferred asprepaid expenses and other current assets on the consolidated balance sheets and will be either (i) charged to expenseaccordingly when the related prepaid services are rendered to the Company, or (ii) converted to cash when the receivable iscollected by the Company. Note 6. Property and EquipmentProperty and equipment consist of the following (in thousands): Balance as of December 31, December 31, 2017 2016Computers and software$1,965 $1,965Furniture and fixtures 185 516Manufacturing equipment 213 213Leasehold improvements 513 492 2,876 3,186Accumulated depreciation (2,334) (2,398)Property and equipment, net$542 $788 Note 7. Non‑Current AssetsNon-current assets primarily consist of patent acquisition and assignment costs (see Note 10).105 Table of Contents Note 8. Accrued and Other LiabilitiesAccrued and other liabilities consist of the following (in thousands): Balance as of December 31, December 31, 2017 2016Accrued employee compensation and benefits$3,642 $3,014Reserve for product returns 7,854 —Product-related accruals 5,751 671Accrued interest on debt (see Note 13) 410 1,509Accrued manufacturing costs 1,238 6,835Accrued non-recurring charges (see Note 10) — 5Other accrued liabilities 2,580 3,652Total$21,475 $15,686 The amounts included in other accrued liabilities consist of obligations primarily related to sales, marketing,research, clinical development, corporate activities, the STENDRA license and royalties. Note 9. Non‑Current Accrued and Other LiabilitiesNon‑current accrued and other liabilities were $0.3 million and $0.3 million at December 31, 2017 and 2016,respectively, and were primarily comprised of deferred rent and costs associated with the exit of certain operating leases andsecurity deposits relating to the sublease agreements (see Note 10). Note 10. Inventory Impairment and Other Non-Recurring ChargesInventory impairment and other non-recurring charges consist of the following (in thousands): Year Ended December 31, 2017 2016 2015Inventory impairment (see Note 4)$ — $ — $29,522Employee severance and related costs — — 2,503Share-based compensation (see Note 15) — — 36Total inventory impairment and other non-recurring expense$ — $ — $32,061 As discussed in Note 1, in 2015 the Company recorded inventory impairment charges primarily for Qsymia APIinventory in excess of expected demand. In 2014, the Company recorded inventory impairment charges for finished goodsand certain non-API raw materials on hand in excess of demand.In 2015, the Company recorded employee severance and related costs and share-based compensation related to theJuly 2015 corporate restructuring plan, which reduced the Company’s workforce by approximately 60 job positions. In 2014,the Company recorded employee severance and related costs and share-based compensation costs related to the 2013 costreduction plan that reduced the Company’s workforce by approximately 20 employees.106 Table of ContentsThe following table sets forth activity for the cost reduction plans (in thousands): Severance obligationsBalance of accrued costs at December 31, 2014$3,280Charges 2,474Payments (5,344)Balance of accrued costs at December 31, 2015 410Charges —Reclassifications (268)Payments (137)Balance of accrued costs at December 31, 2016 5Charges —Reclassifications —Payments (5)Balance of accrued costs at December 31, 2017$ — Note 11. Deferred RevenueDeferred revenue consists of the following (in thousands): Balance as of December 31, December 31, 2017 2016Qsymia deferred revenue - current$ — $17,558STENDRA deferred revenue - current 2,075 1,616Deferred revenue - current$2,075 $19,174 STENDRA deferred revenue - non-current$4,674 $6,449 Qsymia deferred revenue consists of product shipped to the Company’s wholesalers, certified retail pharmacies andcertified home delivery pharmacy services networks, but not yet dispensed to patients through prescriptions, net of promptpayment discounts. Beginning in the first quarter of 2017, the Company began recognizing product revenue from the sales ofQsymia upon shipment. SPEDRA deferred revenue relates to a prepayment for future royalties on sales of SPEDRA. Note 12. License, Commercialization and Supply AgreementsMTPCIn January 2001, the Company entered into an exclusive development, license and clinical trial and commercialsupply agreement with Tanabe Seiyaku Co., Ltd., now Mitsubishi Tanabe Pharma Corporation, or MTPC, for thedevelopment and commercialization of avanafil. Under the terms of the agreement, MTPC agreed to grant an exclusivelicense to the Company for products containing avanafil outside of Japan, North Korea, South Korea, China, Taiwan,Singapore, Indonesia, Malaysia, Thailand, Vietnam and the Philippines. The Company agreed to grant MTPC an exclusive,royalty free license within those countries for oral products that we develop containing avanafil. The MTPC agreementcontains a number of milestone payments to be made by us based on various triggering events. The term of the MTPCagreement is based on a country by country and on a product by product basis. In August 2012, the Company entered into anamendment to the agreement with MTPC that permitted the Company to manufacture the active pharmaceutical ingredient,or API, and tablets for STENDRA by itself or through third parties. In 2015, the Company transferred the manufacturing ofthe API and tablets for STENDRA to Sanofi. The Company maintains royalty obligations to MTPC which have been passedthrough to our commercialization partners.107 Table of ContentsMenariniIn July 2013, the Company entered into a license and commercialization agreement, or the Menarini LicenseAgreement, and a supply agreement, or the Menarini Supply Agreement, with the Menarini Group through its subsidiaryBerlin Chemie AG, or Menarini. Under the terms of the Menarini License Agreement, Menarini received an exclusive licenseto commercialize and promote SPEDRA for the treatment of ED in over 40 countries, including the EU, plus Australia andNew Zealand. Additionally, the Company transferred to Menarini ownership of the marketing authorization for SPEDRA inthe EU for the treatment of ED, which was granted by the EC in June 2013. Under the Menarini License Agreement, theCompany has and is entitled to receive potential milestone payments based on certain net sales targets, plus royalties onSPEDRA sales. Under the terms of the Menarini Supply Agreement, the Company will supply Menarini with STENDRA drugproduct until December 31, 2018. Menarini also has the right to manufacture STENDRA independently, provided that itcontinues to satisfy certain minimum purchase obligations to the Company. Following the expiration of the Menarini SupplyAgreement, Menarini will be responsible for its own supply of STENDRA. Either party may terminate the Menarini SupplyAgreement for the other party’s uncured material breach or bankruptcy, or upon the termination of the Menarini LicenseAgreement.AuxiliumIn October 2013, the Company entered into a license and commercialization agreement, or the Auxilium LicenseAgreement, and a commercial supply agreement, or the Auxilium Supply Agreement. Auxilium terminated the AuxiliumSupply Agreement effective June 30, 2016 and the Auxilium License Agreement effective September 30, 2016.SanofiIn December 2013, the Company entered into a license and commercialization agreement, or the Sanofi LicenseAgreement, with Sanofi. Under the terms of the Sanofi License Agreement, Sanofi received an exclusive license tocommercialize and promote avanafil for therapeutic use in humans in Africa, the Middle East—Turkey and Commonwealthof Independent States, including Russia, or the Sanofi Territory. In July 2013, the Company entered into a CommercialSupply Agreement with Sanofi Chimie to manufacture and supply the API for avanafil on an exclusive basis in the UnitedStates and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. InNovember 2013, the Company entered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie tomanufacture and supply the avanafil tablets on an exclusive basis in the United States and other territories and on a semiexclusive basis in Europe, including the EU, Latin America and other territories. The Company has minimum annualpurchase commitments under these agreements for at least the initial five-year terms.On March 23, 2017, the Company and Sanofi entered into the Termination, Rights Reversion and TransitionServices Agreement, or the Transition Agreement, effective February 28, 2017. Under the Transition Agreement, effectiveupon the thirtieth (30th) day following February 28, 2017, the Sanofi License Agreement terminated for all countries in theSanofi territory. In addition, under the Transition Agreement, Sanofi will provide the Company with certain transitionservices in support of ongoing regulatory approval efforts while the Company seeks to obtain a new commercial partner orpartners for the Sanofi territory. The Company will pay certain transition service fees to Sanofi as part of the TransitionAgreement.MetuchenOn September 30, 2016, the Company entered into a license and commercialization agreement, or the MetuchenLicense Agreement, and a commercial supply agreement, or the Metuchen Supply Agreement, with Metuchen. Under theterms of the Metuchen License Agreement, Metuchen received an exclusive license to develop, commercialize and promoteSTENDRA in the United States, Canada, South America and India, or the Metuchen Territory, effective October 1, 2016. TheCompany and Metuchen have agreed not to develop, commercialize, or in-license any other product that operates as a PDE-5inhibitor in the Metuchen Territory for a limited time period, subject to certain exceptions. The Metuchen LicenseAgreement will terminate upon the expiration of the last-to-expire payment obligations under the Metuchen LicenseAgreement; upon expiration of the term of the Metuchen License Agreement,108 Table of Contentsthe exclusive license granted under the Metuchen License Agreement shall become fully paid-up, royalty-free, perpetual andirrevocable as to the Company but not certain trademark royalties due to MTPC.Metuchen will obtain STENDRA exclusively from the Company for a mutually agreed term pursuant to theMetuchen Supply Agreement. Metuchen may elect to transfer the control of the supply chain for STENDRA for theMetuchen Territory to itself or its designee by assigning to Metuchen the Company’s agreements with the contractmanufacturer. For 2016 and each subsequent calendar year during the term of the Metuchen Supply Agreement, if Metuchenfails to purchase an agreed minimum purchase amount of STENDRA from the Company, it will reimburse the Company forthe shortfall as it relates to the Company’s out of pocket costs to acquire certain raw materials needed to manufactureSTENDRA. Upon the termination of the Metuchen Supply Agreement (other than by Metuchen for the Company’s uncuredmaterial breach or upon completion of the transfer of the control of the supply chain), Metuchen’s agreed minimum purchaseamount of STENDRA from the Company shall accelerate for the entire then current initial term or renewal term, as applicable.The initial term under the Metuchen Supply Agreement will be for a period of five years, with automatic renewal forsuccessive two year periods unless either party provides a termination notice to the other party at least two years in advanceof the expiration of the then current term. On September 30, 2016, the Company received $70 million from Metuchen underthe Metuchen License Agreement. Metuchen will also reimburse the Company for payments made to cover royalty andmilestone obligations to MTPC during the term of the license agreement. For the year ended December 31, 2016, theCompany recognized this amount as license revenue, less an estimate of its financial obligations under the MetuchenLicense Agreement.AlvogenIn September 2017, the Company entered into a license and commercialization agreement, or the Alvogen LicenseAgreement, and a commercial supply agreement, or the Alvogen Supply Agreement, with Alvogen Malta Operations (ROW)Ltd, or Alvogen. Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for obtaining andmaintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. The Company received anupfront payment of $2.5 million in September 2017, which was recorded in license and milestone revenue in the third quarterof 2017, and is eligible to receive additional payments upon Alvogen achieving marketing authorization, commercial launchand reaching a sales milestone. Additionally, the Company will receive a royalty on Alvogen’s Qsymia net sales in SouthKorea. Under the Alvogen Supply Agreement, the Company will supply product to Alvogen. Note 13. Long‑Term DebtConvertible Senior Notes Due 2020In May 2013, the Company closed offerings of $250.0 million in 4.5% Convertible Senior Notes due May 2020, orthe Convertible Notes. The Convertible Notes are governed by an indenture, dated May 2013 between the Company andDeutsche Bank National Trust Company, as trustee. Total net proceeds from the Convertible Notes were approximately$241.8 million. The Convertible Notes are convertible at a conversion rate of approximately $14.86 per share at the option ofthe holders under certain conditions at any time prior to the close of business on the business day immediately precedingNovember 1, 2019. On or after November 1, 2019, holders may convert all or any portion of their Convertible Notes at anytime at their option at the conversion rate then in effect, regardless of these conditions. Subject to certain limitations, theCompany will settle conversions of the Convertible Notes by paying or delivering, as the case may be, cash, shares of itscommon stock or a combination of cash and shares of our common stock, at the Company’s election. Interest payments aremade quarterly.For the year ended December 31, 2017, total interest expense related to the Convertible Notes was $32.6 million,including amortization of $19.3 million of the debt discount and $1,023,000 of deferred financing costs. For the year endedDecember 31, 2016, total interest expense related to the Convertible Notes was $29.8 million, including amortization of$17.5 million of the debt discount and $929,000 of deferred financing costs. For the year ended December 31, 2015, totalinterest expense related to the Convertible Notes was $27.2 million, including amortization of $16.0 million of the debtdiscount and $848,000 of deferred financing costs.109 Table of ContentsSenior Secured Notes Due 2018In March 2013, the Company entered into the Purchase and Sale Agreement between the Company and BioPharmaSecured Investments III Holdings Cayman LP, a Cayman Islands exempted limited partnership, providing for the purchase ofa debt‑like instrument, or the Senior Secured Notes. Under the agreement, the Company received $50 million, less $500,000in funding and facility payments, at the initial closing in April 2013. The scheduled quarterly payments on the SeniorSecured Notes are subject to the net sales of (i) Qsymia and (ii) any other obesity agent developed or marketed by us or ouraffiliates or licensees. The scheduled quarterly payments, other than the payment(s) scheduled to be made in the secondquarter of 2018, are capped at the lower of the scheduled payment amounts or 25% of the net sales of (i) and (ii) above.Accordingly, if 25% of the net sales is less than the scheduled quarterly payment, then 25% of the net sales is due for thatquarter, with the exception of the payment(s) scheduled to be made in the second quarter of 2018, when any unpaidscheduled quarterly payments plus any accrued and unpaid make whole premiums must be paid. Any quarterly payment lessthan the scheduled quarterly payment amount will be subject to a make whole premium equal to the applicable scheduledquarterly payment of the preceding quarter less the actual payment made to BioPharma for the preceding quarter multipliedby 1.03. The Company may elect to pay full scheduled quarterly payments if it chooses.For the year ended December 31, 2017, the interest expense related to the Senior Secured Notes was $3.2 million,including amortization of deferred financing costs amounting to $153,000. For the year ended December 31, 2016, theinterest expense related to the Senior Secured Notes was $4.6 million, including amortization of deferred financing costsamounting to $235,000. For the year ended December 31, 2015, the interest expense related to the Senior Secured Notes was$6.3 million, including amortization of deferred financing costs amounting to $393,000.The following table summarizes information on the debt (in thousands): December 31, 2017Convertible Senior Notes due 2020$250,000Senior Secured Notes due 2018 6,187 256,187Less: Debt issuance costs (1,040)Less: Discount on convertible senior notes (19,464) 235,683Less: Current portion (5,147)Long-term debt, net of current portion$230,536 Future estimated payments as of December 31, 2017 are as follows: 2018$17,9502019 11,2502020 256,250Total 285,450Less: Interest portion (29,263)Senior Secured Notes$256,187 Note 14. Stockholders’ EquityCommon StockThe Company is authorized to issue 200,000,000 shares of common stock. As of December 31, 2017 and 2016, therewere 105,977,000 and 104,874,000 shares, respectively, issued and outstanding.Preferred StockThe Company is authorized to issue 5,000,000 shares of undesignated preferred stock with a par value of $1.00 pershare. As of December 31, 2017 and 2016, there were no preferred shares issued or outstanding. The Company may110 Table of Contentsissue shares of preferred stock in the future, without stockholder approval, upon such terms as the Company’s managementand Board of Directors may determine.Stockholder Rights PlanOn March 26, 2007, the Board of Directors of the Company adopted a Stockholder Rights Plan, or the Rights Plan,and amended its bylaws. Under the Rights Plan, the Company will issue a dividend of one right for each share of its commonstock held by stockholders of record as of the close of business on April 13, 2007.The Rights Plan is designed to guard against partial tender offers and other coercive tactics to gain control of theCompany without offering a fair and adequate price and terms to all of the Company’s stockholders. The Rights Plan isintended to provide the Board of Directors with sufficient time to consider any and all alternatives to such an action and issimilar to plans adopted by many other publicly traded companies. The Rights Plan was not adopted in response to anyefforts to acquire the Company and the Company is not aware of any such efforts.Each right will initially entitle stockholders to purchase a fractional share of the Company’s preferred stock for$26.00. However, the rights are not immediately exercisable and will become exercisable only upon the occurrence of certainevents. If a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of 15% ormore of the Company’s common stock while the Stockholder Rights Plan remains in place, then, unless the rights areredeemed by the Company for $.001 per right, the rights will become exercisable by all rights holders except the acquiringperson or group for the Company’s shares or shares of the third‑party acquirer having a value of twice the right’s then‑currentexercise price. The rights will expire on the earliest of (i) April 13, 2017 (the final expiration date), or (ii) redemption orexchange of the rights.On November 9, 2016, the Company adopted an Amended and Restated Preferred Stock Rights Agreement, or theA&R Rights Agreement, which amended and extended the Rights Plan. The A&R Rights Agreement was approved tomitigate the likelihood of an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986,as amended, or the Code, and thereby preserve the current ability of the Company to utilize certain net operating losscarryovers and other tax benefits of the Company and its subsidiaries to offset future income. The A&R Rights Agreement isintended to act as a deterrent to any person or group acquiring beneficial ownership of 4.9% or more of the outstandingcommon stock of the Company without the approval of the Board.The A&R Rights Agreement extends the expiration date of the rights from April 13, 2017 to November 9, 2019(subject to earlier expiration under the circumstances described below). It also lowers the threshold at which a person orgroup becomes an “Acquiring Person” to 4.9% of the outstanding Common Stock, subject to certain exceptions (includingthat any person or group who, as of the time of the first public announcement of the approval of the A&R Rights Agreement,beneficially owns 4.9% or more of the then-outstanding shares of Common Stock, will not be deemed to be an “AcquiringPerson” so long as such person or group does not thereafter acquire an additional 1% of the outstanding shares of CommonStock, subject to certain exceptions); and amends certain other provisions, including the definitions of “BeneficialOwnership” and “Exempt Person”, to include terms appropriate for the purpose of preserving the tax benefits.Each right would initially entitle the holder to purchase one one-thousandth of a share of the Company’s Series AParticipating Preferred Stock, par value $0.001 per share, or the Preferred Stock, for a purchase price of $5.30 (subject toadjustment). Under certain circumstances set forth in the A&R Rights Agreement, the Company may suspend theexercisability of the rights.The rights and the A&R Rights Agreement will expire on the earliest of (i) November 9, 2019, (ii) the time at whichthe rights are redeemed or exchanged pursuant to the A&R Rights Agreement, (iii) the repeal of Section 382 of the Code orany successor statute if the Board determines that the A&R Rights Agreement is no longer necessary or desirable for thepreservation of the tax benefits, (iv) the first business day following the date on which the A&R Rights Agreement fails to beratified by the Company’s stockholders at the Company’s 2017 annual meeting and (v) the beginning of a taxable year towhich the Board determines that no tax benefits may be carried forward. 111 Table of ContentsNote 15. Stock Option and Purchase PlansStock Option PlanOn March 29, 2010, the Company’s Board of Directors terminated the 2001 Stock Option Plan and adopted andapproved a new 2010 Equity Incentive Plan, or the 2010 Plan, which was approved by the Company’s stockholders at the2010 Annual Meeting of Shareholders. The 2001 Plan continues to govern awards previously granted under it. The 2010Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performanceshares and performance units to employees, directors and consultants, to be granted from time to time as determined by theBoard of Directors, the Compensation Committee of the Board of Directors, or its designees. The term of the option isdetermined by the Board of Directors on the date of grant but shall not be longer than 10 years. Options under this plangenerally vest over four years.The 2010 Plan’s original share reserve was 8,400,000 shares, plus any shares reserved but not issued pursuant toawards under the 2001 Plan as of the date of stockholder approval, or 99,975 shares, plus any shares subject to outstandingawards under the 2001 Plan that expire or otherwise terminate without having been exercised in full, or are forfeited to orrepurchased by the Company, up to a maximum of 8,111,273 shares (which was the number of shares subject to outstandingoptions under the 2001 Plan as of March 11, 2010). In September 2014, November 2016 and October 2017, the Company’sstockholders approved increases to the total number of shares reserved under the 2010 Plan by 5,950,000, 5,000,000 and7,000,000 shares, respectively, for a total of 26,350,000 shares.Restricted Stock UnitsBeginning in 2012, the Company began issuing restricted stock units under the 2010 Plan on a limited basis. Asummary of restricted stock unit award activity under the 2010 Plan is as follows: Weighted Number of Average Restricted Grant Date Stock Units Fair ValueRestricted stock units outstanding January 1, 2015333,500 $8.17Granted1,954,000 1.85Vested(248,688) 2.73Forfeited(628,937) 7.99Restricted stock units outstanding, December 31, 20151,409,875 1.87Granted562,500 1.43Vested(1,359,829) 1.68Forfeited(70,789) 1.95Restricted stock units outstanding December 31, 2016541,757 1.91Granted450,000 1.17Vested(621,851) 1.48Forfeited(78,366) 1.50Restricted stock units outstanding, December 31, 2017291,540 $1.78112 Table of ContentsStock OptionsA summary of stock option award activity under these plans is as follows: Years Ended December 31, 2017 2016 2015 Weighted- Weighted- Weighted- Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares PriceOptions outstanding at beginning of year9,568,143 $4.62 5,722,105 $7.97 5,956,459 $12.09Granted5,184,800 $1.06 4,980,835 $1.06 3,499,200 $2.46Exercised — $ — — $ — — $ —Cancelled(506,201) $2.17 (1,134,797) $5.89 (3,733,554) $9.38Options outstanding at end of year14,246,742 $3.41 9,568,143 $4.62 5,722,105 $7.97Options exercisable at end of year6,479,390 $6.10 3,740,459 $9.62 3,042,888 $11.48Weighted average grant-date fair value of optionsgranted during the year $0.50 $0.55 $1.44At December 31, 2017, stock options were outstanding and exercisable as follows: Options Outstanding Options Exercisable Weighted- Number Average Weighted- Number Weighted- Outstanding at Remaining Average Exercisable Average December 31, Contractual Exercise December 31, ExerciseRange of Exercise Prices 2017 Life Price 2017 Price$0.70—$1.00 763,000 6.81years$0.71 125,000 $0.70$1.06—$1.06 4,495,050 5.07years$1.06 2,171,851 $1.06$1.12—$1.12 4,117,100 6.07years$1.12 — $ —$1.15—$25.74 4,871,592 3.72years$7.94 4,182,539 $8.88$1.06—$25.74 14,246,742 4.99years$3.41 6,479,390 $6.10The aggregate intrinsic value of outstanding options as of December 31, 2017 was $0. At December 31, 2017,11,043,868 options remained available for grant.Valuation AssumptionsThe fair value of each option is estimated on the date of grant using the Black‑Scholes option pricing model,assuming no expected dividends and the following weighted average assumptions: 2017 2016 2015 Expected life (in years)4.27 4.33 4.69 Volatility57.0% 65.8% 70.8%Risk-free interest rate1.80% 1.36% 1.28%Dividend yield — — — Employee Stock Purchase PlanUnder the 1994 Employee Stock Purchase Plan, or the ESPP, the Company reserved 800,000 shares of commonstock for issuance to employees pursuant to the ESPP. The reserved amount was increased to 1,400,000 in 2003 and2,000,000 in 2011. Under the ESPP, eligible employees may authorize payroll deductions of up to 10% of their basecompensation (as defined) to purchase common stock at a price equal to 85% of the lower of the fair market value as of thebeginning or the end of each six-month offering period.113 Table of ContentsAs of December 31, 2017, 1,783,614 shares have been issued to employees and there are 216,386 shares availablefor issuance under the ESPP. The weighted average fair value of shares issued under the ESPP in 2017, 2016 and 2015 was$0.23, $0.33 and $0.69 per share, respectively.Valuation AssumptionsThe fair value of shares issued under the ESPP is estimated using the Black‑Scholes option pricing model, assumingno expected dividends and the following weighted average assumptions: 2017 2016 2015 Expected life (in years)0.5 0.5 0.5 Volatility47.4% 50.0% 63.4%Risk-free interest rate1.2% 0.5% 0.2%Dividend yield — — — Share‑Based Compensation ExpenseTotal estimated share‑based compensation expense, related to all of the Company’s share‑based awards, wascomprised as follows (in thousands): 2017 2016 2015Cost of goods sold$53 $147 $132Selling, general and administrative 2,544 1,644 2,862Research and development 345 493 398Non-recurring charges — — 198Total share-based compensation expense$2,942 $2,284 $3,590 Total share‑based compensation cost capitalized as part of the cost of inventory was $9,000, $33,000 and $23,000for the years ended December 31, 2017, 2016 and 2015, respectively.The following table summarizes share‑based compensation, net of estimated forfeitures associated with each type ofaward (in thousands): 2017 2016 2015Restricted stock units$924 $1,591 $1,409Stock options 2,002 675 2,143Employee stock purchase plan 16 18 38 $2,942 $2,284 $3,590As of December 31, 2017, unrecognized estimated compensation expense totaled $ 3.9 million related to non‑vestedstock options and restricted stock units and $8,000 related to the ESPP. The weighted average remaining requisite serviceperiod for the non‑vested stock options was 2.4 years and for the ESPP was less than 6 months. Note 16. CommitmentsLease CommitmentsIn August 2016, the Company entered into a lease for new principal executive offices, consisting of approximately13,981 square feet of office space at 900 E. Hamilton Avenue, Campbell, California, or the Campbell Lease. The CampbellLease has an initial term of approximately 58 months, commencing on December 27, 2016, with a beginning annual rentalrate of $3.10 per rentable square foot, subject to agreed-upon increases. The Company received an abatement of the monthlyrent for the first four months on the lease term. The Company has one option to extend the lease term for two years at the fairmarket rental rate then prevailing as detailed in the Campbell Lease.114 Table of ContentsFuture minimum lease payments under operating lease at December 31, 2017, were as follows (in thousands):2018$5312019 5482020 5642021 435 $2,078Cardiovascular Outcomes TrialAs a condition of FDA granting approval to commercialize Qsymia in the U.S., the Company agreed to completecertain post-marketing requirements. One requirement was to perform a cardiovascular outcomes trial, or CVOT, on Qsymia.The cost of a CVOT is estimated to be between $180 million and $220 million incurred over a period of approximately fiveyears. The Company is working with FDA to determine a pathway to provide FDA with information to support the safety ofQsymia in a more cost-effective manner. To date, the Company has not incurred expenses related to the CVOT.Note 17. Income TaxesDeferred income taxes result from differences in the recognition of expenses for tax and financial reporting purposes,as well as operating loss and tax credit carryforwards. Significant components of the Company’s deferred income tax assets asof December 31, 2017 and 2016, are as follows (in thousands): 2017 2016Deferred tax assets: Net operating loss carry forwards$152,947 $220,053Research and development credit carry forwards 17,426 16,550Share-based compensation 5,248 7,579Accruals and other 13,741 21,833Depreciation (36) 75Deferred revenue 1,486 3,123 190,812 269,213Valuation allowance (190,812) (269,213)Total$ — $ — The net decrease in the valuation allowance in 2017 and 2016 was $78.4 million and $15.2 million, respectively. Asof December 31, 2017, the Company had no significant deferred tax liabilities.On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes is a permanentreduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction inthe corporate income tax rate, the Company will need to revalue its net deferred tax asset at December 31, 2017. We estimatethat this will result in a reduction in the value of our net deferred tax asset of approximately $98.4 million, which will beoffset by the change in valuation allowance of $98.4 million.As of December 31, 2017, the Company had approximately $640.4 million and $276.2 million of net operating loss,or NOL, carryforwards with which to offset its future taxable income for federal and state income tax reporting purposes,respectively. The federal and state NOL carryforwards will begin expiring in 2022 and 2028, respectively, unless previouslyutilized.As of December 31, 2017, the Company has federal and state research credit carryforwards of approximately $13.2million, and $5.3 million, respectively. The federal research credit carryforwards will begin expiring in 2018, unlesspreviously utilized. The state research credit carryforwards do not expire.115 Table of ContentsUtilization of the Company’s NOL and tax credit carryforwards, or Tax Attributes, may be subject to substantialannual limitations provided by the Code and similar state provisions to the extent certain ownership changes are deemed tooccur. Such an annual limitation could result in the expiration of the Tax Attributes before utilization. The Tax Attributesreflected above have not been reduced by any limitations. To the extent it is determined upon completion of the analysis thatsuch limitations do apply, the Company will adjust the Tax Attributes accordingly. The Company faces the risk that itsability to use its Tax Attributes will be substantially restricted if it undergoes an “ownership change” as defined in Section382 of the Code, or Section 382.An ownership change under Section 382 would occur if “5-percent shareholders,” within the meaning of Section382, collectively increased their ownership in the Company by more than 50 percentage points over a rolling three-yearperiod. The Company has completed studies through December 31, 2016 and concluded that no adjustments were required. Ifthere is a future change of control, the Company’s NOL carryforwards and tax credits may not be available, or theirutilization could be subject to an annual limitation under Section 382. A full valuation allowance has been provided againstthe Company’s NOL carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to thevaluation allowance. Accordingly, there would be no impact on the consolidated financial statements.In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. Thisguidance affects entities that issue share-based payment awards to their employees and is designed to simplify several aspectsof accounting for share-based payment award transactions which include the income tax consequences, classification ofawards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. TheCompany adopted this standard in the first quarter of 2017. Under ASU 2016-09, excess tax benefits and deficiencies arerequired to be recognized prospectively as part of provision for income taxes rather than additional paid-in capital. TheCompany's cumulative effect of windfall tax attributes are approximately $17.4 million. After applying the valuationallowance, no adjustment was recorded to the beginning retained earnings balance.The provision (benefit) for income taxes is based upon the loss from continuing operations before income taxes asfollows (in thousands): 2017 2016 2015Income (loss) before income taxes: Domestic$(30,371) $23,592 $(92,967)International (138) (220) (137)Income (loss) before taxes$(30,509) $23,372 $(93,104)The provision (benefit) for income taxes consists of the following (in thousands): 2017 2016 2015Current: Federal$ — $ — $ —State 2 70 3Foreign — — —Total current provision (benefit) for income taxes$ 2 $70 $ 3Deferred: Federal$ — $ — $ —State — — —Foreign — — —Total deferred provision for income taxes$ — $ — $ —Total provision (benefit) for income taxes from continuing operations$ 2 $70 $ 3116 Table of ContentsThe effective tax rate differs from the amount computed by applying the statutory federal income tax rates asfollows: 2017 2016 2015 Tax at U.S. federal statutory rate(35)% 35% (35)%State income taxes, net of federal tax effect(1) 4 (2) Change in valuation allowance(310) (67) 31 Permanent items24 28 6 Tax credits(1) — — Tax Cuts and Jobs Act impact323 — — Effective tax rate —% —% —%The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): 2017 2016 2015Unrecognized tax benefits as of January 1$65 $38 $ —Gross increase/(decrease) for tax positions of prior years — 2 —Gross increase/(decrease) for tax positions of current year 45 25 38Unrecognized tax benefits balance at December 31$110 $65 $38The remaining balance of unrecognized tax benefits recorded on the Company’s consolidated balance sheets is asfollows (in thousands): 2017 2016Total unrecognized tax benefits$110 $65Amounts netted against deferred tax assets (110) (65)Unrecognized tax benefits recorded on consolidated balance sheets$ — $ —As the Company is not currently under examination, it is reasonable to assume that the balance of grossunrecognized tax benefits will likely not change in the next twelve months. The Company currently has not recorded interestand penalties relating to uncertain tax positions. Note 18. Segment Information and Concentration of Customers and SuppliersThe Company operates in one business segment — the development and commercialization of novel therapeuticproducts. Therefore, results of operations are reported on a consolidated basis for purposes of segment reporting, consistentwith internal management reporting. Disclosures about product revenues by geographic area, revenues and accountsreceivable from major customers, and major suppliers are presented below.Geographic InformationOutside the United States, the Company sells products principally in the EU. The geographic classification ofproduct sales was based on the location of the customer. The geographic classification of all other revenues was based on thedomicile of the entity from which the revenues were earned.117 Table of ContentsProduct revenue by geographic region is as follows (in thousands): Years Ended December 31, 2017 2016 U.S. ROW Total U.S. ROW TotalQsymia—Net product revenue$44,983 $ — $44,983 $48,501 $ — $48,501Qsymia—License revenue 5,000 2,500 7,500 — — —STENDRA/SPEDRA—License revenue — — — 69,400 — 69,400STENDRA/SPEDRA—Supply revenue 5,909 4,498 10,407 765 1,526 2,291STENDRA/SPEDRA —Royalty revenue — 2,483 2,483 1,649 2,417 4,066Total revenue$55,892 $9,481(1) $65,373 $120,315 $3,943(2) $124,258 2015 U.S. ROW Total Qsymia—Net product revenue$54,622 $ — $54,622 STENDRA/SPEDRA—License and milestonerevenue — 11,574 11,574 STENDRA/SPEDRA—Supply revenue 16,602 10,072 26,674 STENDRA/SPEDRA —Royalty revenue 418 2,142 2,560 Total revenue$71,642 $23,788(3) $95,430 (1)$7.0 million of which is attributable to Germany.(2)$3.9 million of which is attributable to Germany.(3)$23.7 million of which is attributable to Germany.Major customersRevenues from significant customers as a percentage of Qsymia product revenues is as follows: 2017 2016 2015 McKesson37% 34% 37% Amerisource Bergen32% 35% 31% Cardinal Health, Inc.29% 29% 30% Accounts receivable by significant customer as a percentage of the total gross accounts receivable balance are asfollows: 2017 2016 Amerisource Bergen42% 40%McKesson28% 30%Cardinal Health, Inc.28% 21%Major suppliersThe Company does not have any manufacturing facilities and intends to continue to rely on third parties for thesupply of the starting materials, API and tablets. Catalent Pharma Solutions, LLC, or Catalent, is the Company’s sole sourceof clinical and commercial supplies for Qsymia. Sanofi Chimie manufactures and supplies the API for our drug avanafil on anexclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU, LatinAmerica and other territories. Sanofi Winthrop Industrie manufactures and supplies the avanafil tablets on an exclusive basisin the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and otherterritories. Third‑party manufacturers may not be able to meet the Company’s needs with respect to timing, quantity orquality.During the years ended December 31, 2017, 2016 and 2015, the Company incurred expenses for work performed bya third‑party clinical research organization, or CRO, for Qsymia and STENDRA post‑approval studies that accounted for 0%, 27% and 11%, respectively, of total research and development expenses.118 Table of Contents Note 19. 401(k) PlanAll of the Company’s full‑time employees are eligible to participate in the VIVUS 401(k) Plan. Employer‑matchingcontributions for the years ended December 31, 2017, 2016 and 2015 were $272,000, $272,000 and $406,000, respectively. Note 20. Legal MattersShareholder LawsuitOn March 27, 2014, Mary Jane and Thomas Jasin, who purport to be purchasers of VIVUS common stock, filed anAmended Complaint in Santa Clara County Superior Court alleging securities fraud against the Company and three of itsformer officers and directors. In that complaint, captioned Jasin v. VIVUS, Inc., Case No. 114-cv-261427, plaintiffs assertedclaims under California’s securities and consumer protection securities statutes. Plaintiffs alleged generally that defendantsmisrepresented the prospects for the Company’s success, including with respect to the launch of Qsymia, while purportedlyselling VIVUS stock for personal profit. Plaintiffs alleged losses of “at least” $2.8 million, and sought damages and otherrelief. On July 18, 2014, the same plaintiffs filed a complaint in the United States District Court for the Northern District ofCalifornia, captioned Jasin v. VIVUS, Inc., Case No. 5:14-cv-03263. The Jasins’ federal complaint alleges violations ofSections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, based on facts substantially similar to thosealleged in their state court action. On September 15, 2014, pursuant to an agreement between the parties, plaintiffsvoluntarily dismissed their state court action with prejudice. Defendants moved to dismiss the federal action and moved todismiss again after plaintiffs amended their complaint to include additional factual allegations and to add seven new claimsunder California law. The court granted the latter motion on June 18, 2015, dismissing the seven California claims withprejudice and dismissing the two federal claims with leave to amend. Plaintiffs filed a Second Amended Complaint onAugust 17, 2015. Defendants moved to dismiss that complaint as well. On April 19, 2016, the court granted defendants’motion to dismiss with prejudice and entered judgment in favor of defendants. Plaintiffs filed a notice of appeal to the NinthCircuit Court of Appeals on May 18, 2016. The Ninth Circuit issued a decision on January 16, 2018, affirming the districtcourt’s dismissal of the action. The deadline for Plaintiffs to seek rehearing in the Ninth Circuit has now expired, and unlessPlaintiffs elect to file a petition for certiorari in the Supreme Court, the matter is concluded. The Company maintainsdirectors’ and officers’ liability insurance that it believes affords coverage for much of the anticipated cost of the remainingJasin action, subject to the use of the Company’s financial resources to pay for its self-insured retention and the policies’terms and conditions.Qsymia ANDA LitigationOn May 7, 2014, the Company received a Paragraph IV certification notice from Actavis Laboratories FL indicatingthat it filed an abbreviated new drug application, or ANDA, with the U.S. Food and Drug Administration, or FDA, requestingapproval to market a generic version of Qsymia and contending that the patents listed for Qsymia in FDA Orange Book at thetime the notice was received (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, and 8,580,299)(collectively “patents-in-suit”) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offerfor sale of a generic form of Qsymia as described in their ANDA. On June 12, 2014, the Company filed a lawsuit in the U.S.District Court for the District of New Jersey against Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC, collectivelyreferred to as Actavis. The lawsuit (Case No. 14-3786 (SRC)(CLW)) was filed on the basis that Actavis’ submission of theirANDA to obtain approval to manufacture, use, sell or offer for sale generic versions of Qsymia prior to the expiration of thepatents-in-suit constitutes infringement of one or more claims of those patents.On January 21, 2015, the Company received a second Paragraph IV certification notice from Actavis contendingthat two additional patents listed in the Orange Book for Qsymia (U.S. Patents 8,895,057 and 8,895,058) are invalid,unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. OnMarch 4, 2015, the Company filed a second lawsuit in the U.S. District Court for the District of New Jersey119 Table of Contentsagainst Actavis (Case No. 15-1636 (SRC)(CLW)) in response to the second Paragraph IV certification notice on the basis thatActavis’ submission of their ANDA constitutes infringement of one or more claims of the patents-in-suit.On July 7, 2015, the Company received a third Paragraph IV certification notice from Actavis contending that twoadditional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid, unenforceableand/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. On August 17, 2015,the Company filed a third lawsuit in the U.S. District Court for the District of New Jersey against Actavis (Case No. 15-6256(SRC)(CLW)) in response to the third Paragraph IV certification notice on the basis that Actavis’ submission of their ANDAconstitutes infringement of one or more claims of the patents-in-suit. The three lawsuits against Actavis were consolidatedinto a single suit (Case No. 14-3786 (SRC)(CLW)).On June 29, 2017, the Company entered into a settlement agreement with Actavis resolving the suit against Actavis.On July 5, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit. In accordance withlegal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S.Department of Justice for review.On March 5, 2015, the Company received a Paragraph IV certification notice from Teva Pharmaceuticals USA, Inc.indicating that it filed an ANDA with FDA, requesting approval to market a generic version of Qsymia and contending thateight patents listed for Qsymia in the Orange Book at the time of the notice (U.S. Patents 7,056,890, 7,553,818, 7,659,256,7,674,776, 8,580,298, 8,580,299, 8,895,057 and 8,895,058) (collectively “patents-in-suit”) are invalid, unenforceable and/orwill not be infringed by the manufacture, use or sale of a generic form of Qsymia as described in their ANDA. On April 15,2015, the Company filed a lawsuit in the U.S. District Court for the District of New Jersey against Teva Pharmaceutical USA,Inc. and Teva Pharmaceutical Industries, Ltd., collectively referred to as Teva. The lawsuit (Case No. 15-2693 (SRC)(CLW))was filed on the basis that Teva’s submission of their ANDA to obtain approval to manufacture, use, sell, or offer for salegeneric versions of Qsymia prior to the expiration of the patents-in-suit constitutes infringement of one or more claims ofthose patents.On August 5, 2015, the Company received a second Paragraph IV certification notice from Teva contending thattwo additional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid,unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. OnSeptember 18, 2015, the Company filed a second lawsuit in the U.S. District Court for the District of New Jersey against Teva(Case No. 15-6957(SRC)(CLW)) in response to the second Paragraph IV certification notice on the basis that Teva’ssubmission of their ANDA constitutes infringement of one or more claims of the patents-in-suit. The two lawsuits againstTeva were consolidated into a single suit (Case No. 15-2693 (SRC)(CLW)). On September 27, 2016, Dr. Reddy’sLaboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL, were substituted for Teva as defendantsin the lawsuit.On August 28, 2017, the Company entered into a settlement agreement with DRL resolving the suit against DRL.On September 6, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit. Inaccordance with legal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission andthe U.S. Department of Justice for review.The settlement agreement with DRL resolves all patent litigation brought by VIVUS against generic pharmaceuticalcompanies that have filed ANDAs seeking approval to market generic versions of Qsymia.STENDRA ANDA LitigationOn June 20, 2016, the Company received a Paragraph IV certification notice from Hetero USA, Inc. and Hetero LabsLimited, collectively referred to as Hetero, indicating that it filed an ANDA with FDA, requesting approval to market ageneric version of STENDRA and contending that patents listed for STENDRA in the Orange Book at the time of the notice(U.S. Patents 6,656,935, and 7,501,409) (collectively “patents-in-suit”) are invalid, unenforceable and/or will not beinfringed by the manufacture, use or sale of a generic form of STENDRA as described in their ANDA. On July 27, 2016, theCompany filed a lawsuit in the U.S. District Court for the District of New Jersey against Hetero (Case No. 16-4560 (KSH)(CLW)). On January 3, 2017, we entered into a settlement agreement with Hetero. Under the settlement agreement, Heterowas granted a license to manufacture and commercialize the generic version of STENDRA described in its ANDA filing in theUnited States as of the date that is the later of (a) October 29, 2024, which is 180 days prior to the expiration of the last toexpire of the patents-in-suit, or (b) the date that Hetero obtains final approval120 Table of Contentsfrom FDA of the Hetero ANDA. The settlement agreement provides for a full settlement of all claims that were asserted in thesuit.The Company is not aware of any other asserted or unasserted claims against it where it believes that an unfavorableresolution would have an adverse material impact on the operations or financial position of the Company. Note 21. Selected Financial Data (Unaudited)Selected Quarterly Financial Data (in thousands except per share data): Quarter Ended, March 31 June 30 September 30 December 312017 Total revenue$27,012 $11,227 $15,193 $11,941Total gross profit 20,845 7,657 11,679 8,005Operating expenses 19,778 16,214 12,767 13,821Net (loss) income (1,056) (13,386) (5,994) (10,075)Basic and diluted net (loss) income per share$(0.01) $(0.13) $(0.06) $(0.10) 2016 Total revenue$15,324 $13,776 $13,353 $81,805Total gross profit 11,620 11,129 11,288 79,619Operating expenses 19,855 17,435 14,201 17,082Net (loss) income (12,708) (11,401) (9,152) 56,563Basic net (loss) income per share (0.12) (0.11) (0.09) 0.54Diluted net (loss) income per share$(0.12) $(0.11) $(0.09) $0.54Note 22. Subsequent EventsOn February 26, 2018, the Company and Allan L. Shaw entered into a Consulting Agreement, or the ConsultingAgreement, effective February 1, 2018. The Consulting Agreement provides that the Company will recommend at the nextmeeting of the Compensation Committee of the Board of Directors that Mr. Shaw be granted a stock option to purchase300,000 shares of the Company’s common stock at a price per share equal to the fair market value as determined by theclosing price of the Company’s common stock on the date of grant. On March 9, 2018, the Compensation Committee of theBoard of Directors of the Company authorized and approved the grant to Mr. Shaw of a stock option to purchase 300,000shares of the Company’s common stock at a price per share equal to the closing price of the Company’s common stock on thedate of grant ($0.49 per share). The shares will vest in accordance with a vesting schedule subject to Mr. Shaw continuing toprovide services under the Consulting Agreement on the relevant vesting dates. 121 Table of ContentsFINANCIAL STATEMENT SCHEDULEThe financial statement Schedule II—VALUATION AND QUALIFYING ACCOUNTS is filed as part of theForm 10‑K.VIVUS, Inc.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS(in thousands)Each of the following valuation and qualifying accounts are reported as assets and liabilities of continuing anddiscontinued operations in the consolidated balance sheets for all periods presented. Balance at Charged Balance at Beginning of to Charges End of Period Operations* Utilized PeriodAllowance for Cash Discounts Fiscal year ended December 31, 2015$150 $1,933 $(1,919) $164Fiscal year ended December 31, 2016$164 $1,679 $(1,630) $213Fiscal year ended December 31, 2017$213 $1,344 $(1,362) $195*Amount charged to operations during fiscal years ended December 31, 2017, 2016 and 2015, includes $1,697,000, $1,474,000 and $1,656,000, respectively, for cash discount allowances related to revenue recognized during eachfiscal year. The remaining amounts were recorded on the consolidated balance sheets as deferred revenue at the endof each period, respectively.122 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone. Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in theSecurities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to ourmanagement, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed and operated, can only provide reasonableassurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, managementnecessarily was required to apply its judgment in evaluating the cost‑benefit relationship of possible controls andprocedures.As required by SEC Rule 13a‑15(b), the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s Interim Chief Executive Officer and the Company’sChief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and proceduresas of the end of the year covered by this report. Based on the foregoing, our Interim Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of our disclosure controls and procedures were effective at thereasonable assurance level.Management’s Annual Report on Internal Control Over Financial ReportingInternal control over financial reporting refers to the process designed by, or under the supervision of, our InterimChief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles, and includes those policiesand procedures that:(1)Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactionsand dispositions of our assets;(2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that our receipts andexpenditures are being made only in accordance with authorization of our management and directors; and(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use ordisposition of our assets that could have a material effect on the financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reportingobjectives because of its inherent limitations. Internal control over financial reporting is a process that involves humandiligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internalcontrol over financial reporting also can be circumvented by collusion or improper management override. Because of suchlimitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal controlover financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore,it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Our management is responsiblefor establishing and maintaining adequate internal control over financial reporting for the company, as such term is definedin Rules 13a-15(f) and 15d-15(f) of the Exchange Act.Our management has used the framework set forth in the report entitled Internal Control—Integrated Frameworkpublished by the Committee of Sponsoring Organizations of the Treadway Commission (2013), known as COSO Framework,to evaluate the effectiveness of the Company’s internal control over financial reporting. Based on123 Table of Contentsthis assessment, management has concluded that our internal control over financial reporting was effective as ofDecember 31, 2017.Attestation Report of the Registered Public Accounting FirmOUM & Co. LLP, the independent registered public accounting firm that audited our Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10‑K, has issued an attestation report on the effectiveness ofour internal control over financial reporting as of December 31, 2017. This report, which expresses an unqualified opinion onthe effectiveness of our internal controls over financial reporting as of December 31, 2017, is included herein.Changes in Internal Controls Over Financial ReportingThere has been no change in our internal controls over financial reporting during our most recent fiscal quarter thathas materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Item 9B. Other InformationNone.124 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item is hereby incorporated by reference from the information under the captions“Election of Directors,” “Corporate Governance—Board Committees,” “Executive Officers” and “Section 16(a) BeneficialOwnership Reporting Compliance” contained in the Company’s definitive Proxy Statement, to be filed with the Securitiesand Exchange Commission no later than 120 days from the end of the Company’s last fiscal year in connection with thesolicitation of proxies for its 2018 Annual Meeting of Stockholders.The Company has adopted a code of ethics that applies to its Chief Executive Officer, Chief Financial Officer, andto all of its other officers, directors, employees and agents. The code of ethics is available at the Corporate Governancesection of the Investor Relations page on the Company’s website at www.vivus.com. The Company intends to disclose futureamendments to, or waivers from, certain provisions of its code of ethics on the above website within four business daysfollowing the date of such amendment or waiver. Item 11. Executive CompensationThe information required by this item is incorporated by reference from the information under the caption“Corporate Governance—Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and“Executive and Director Compensation Tables” in the Company’s Proxy Statement referred to in Item 10 above. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersEquity Compensation Plan InformationInformation about our equity compensation plans at December 31, 2017, that were approved by our stockholderswas as follows: Number of Shares Weighted Average Number of Shares to be issued Upon Exercise Price of Remaining Exercise of Outstanding Outstanding Available forPlan CategoryOptions and Rights Options Future Issuance(c)Equity compensation plans approved by stockholders(a)14,538,282 $3.34 4,260,254Equity compensation plans not approved by stockholders(b) — — —Total14,538,282 $3.34 4,260,254 (a)Consists of three plans: our 2001 Stock Option Plan, our 2010 Equity Incentive Plan and our 1994 Employee StockPurchase Plan.(b)The Company currently has no instruments outstanding or available for issuance under non-approved equitycompensation plans.(c)Includes 4,043,868 shares for the 2010 Equity Incentive Plan and 216,386 shares for the 1994 Employee StockPurchase Plan.The remaining information required by this item is incorporated by reference from the information under the caption“Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement referred to inItem 10 above.125 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item is incorporated by reference from the information under the caption “CertainRelationships and Related Transactions” and “Corporate Governance—Board Independence” in the Company’s ProxyStatement referred to in Item 10 above. Item 14. Principal Accounting Fees and ServicesThe information required by this item is incorporated by reference from the information under the caption“Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s Proxy Statementreferred to in Item 10 above. PART IV Item 15. Exhibits and Financial Statement Schedules(a)Documents filed as part of this report1. Financial StatementsReference is made to the financial statements included under Item 8 of Part II hereof.2. Financial Statement SchedulesReference is made to the financial statement schedules included under Item 8 of Part II hereof. All other schedulesare omitted because they are not applicable or the required information is shown in the financial statements or thenotes thereto.3. Exhibits Refer to Item 15(b) immediately below.(b)The exhibits required by Item 601 of Regulation S‑K are listed in the Exhibit Index attached hereto and areincorporated herein by reference.126 Table of ContentsVIVUS, INC.REPORT ON FORM 10‑K FORTHE YEAR ENDED DECEMBER 31, 2017EXHIBIT INDEX ExhibitNumber Description2.1(1)† Asset Purchase Agreement between the Registrant and K‑V Pharmaceutical Company dated as ofMarch 30, 20072.2(2)† Asset Purchase Agreement dated October 1, 2010, between the Registrant, MEDA AB and Vivus RealEstate, LLC3.1(3) Amended and Restated Certificate of Incorporation of the Registrant3.2(4) Amended and Restated Bylaws of the Registrant3.3(5) Amendment No. 1 to the Amended and Restated Bylaws of the Registrant3.4(6) Amendment No. 2 to the Amended and Restated Bylaws of the Registrant3.5(7) Amendment No. 3 to the Amended and Restated Bylaws of the Registrant3.6(8) Amendment No. 4 to the Amended and Restated Bylaws of the Registrant3.7(9) Amendment No. 5 to the Amended and Restated Bylaws of the Registrant3.8(10) Amended and Restated Certificate of Designation of Rights, Preferences and Privileges of Series AParticipating Preferred Stock of the Registrant4.1(11) Specimen Common Stock Certificate of the Registrant4.2(12) Amended and Restated Preferred Stock Rights Agreement, dated as of November 9, 2016, by and betweenthe Registrant and Computershare Trust Company, N.A.4.3(13) Indenture dated as of May 21, 2013, by and between the Registrant and Deutsche Bank Trust CompanyAmericas, as trustee4.4(14) Form of 4.50% Convertible Senior Note due May 1, 202010.1(15)* Form of Indemnification Agreement by and among the Registrant and the Officers of the Registrant10.2(16)* Form of Indemnification Agreement by and among the Registrant and the Directors of the Registrant10.3(17)* 1994 Employee Stock Purchase Plan, as amended, Form of Subscription Agreement and Form of Notice ofWithdrawal10.4(18)* 2001 Stock Option Plan and Form of Agreement thereunder10.5(19)* 2001 Stock Option Plan, as amended on July 12, 200610.6(20)* Form of Notice of Grant and Restricted Stock Unit Agreement under the VIVUS, Inc. 2001 Stock OptionPlan10.7(21)* 2010 Equity Incentive Plan and Form of Agreement thereunder10.8(22)* 2010 Equity Incentive Plan, as amended on September 12, 201410.9(23)* 2010 Equity Incentive Plan (as amended and restated)10.10(24)* 2010 Equity Incentive Plan10.11(25)* Stand‑Alone Stock Option Agreement with Michael P. Miller dated as of April 30, 201010.12(26)† Agreement effective as of December 28, 2000, between the Registrant and Tanabe Seiyaku Co., Ltd.10.13(27) Amendment No. 1 effective as of January 9, 2004, to the Agreement effective as of December 28, 2000,between the Registrant and Tanabe Seiyaku Co., Ltd.10.14(28) Termination and Release executed by Tanabe Holding America, Inc. dated May 1, 200710.15(29)† Second Amendment effective as of August 1, 2012, to the Agreement dated as of December 28, 2000,between the Registrant and Mitsubishi Tanabe Pharma Corporation (formerly Tanabe Seiyaku Co., Ltd.)10.16(30)† Third Amendment effective as of February 21, 2013, to the Agreement dated as of December 28, 2000,between the Registrant and Mitsubishi Tanabe Pharma Corporation (formerly Tanabe Seiyaku Co., Ltd.)10.17(31)† Settlement and Modification Agreement dated July 12, 2001, between ASIVI, LLC, AndroSolutions, Inc.,Gary W. Neal and the Registrant10.18(32)† Assignment Agreement between Thomas Najarian, M.D. and the Registrant dated October 16, 200110.19(33)† Master Services Agreement dated as of September 12, 2007, between the Registrant and Medpace, Inc.127 Table of ContentsExhibitNumber Description10.20(34)† Exhibit A: Medpace Task Order Number: 06 dated as of December 15, 2008, pursuant to that certainMaster Services Agreement, between the Registrant and Medpace, Inc., dated as of September 12, 200710.21(35)† Commercial Manufacturing and Packaging Agreement by and between the Registrant and CatalentPharma Solutions, LLC dated as of July 17, 201210.22(36) Lease Agreement effective December 11, 2012, by and between the Registrant and SFERS Real EstateCorp. U.10.23(37)† Purchase and Sale Agreement effective as of March 25, 2013, between the Registrant and BioPharmaSecured Investments III Holdings Cayman LP10.24(38) Capped Call Confirmation dated May 15, 2013, by and between the Registrant and Deutsche Bank AG,London Branch10.25(39)* Form of Amended and Restated Change of Control and Severance Agreement10.26(40)† License and Commercialization Agreement dated July 5, 2013, between the Registrant and Berlin‑ChemieAG10.27(41)† Commercial Supply Agreement dated as of July 5, 2013, between the Registrant and Berlin‑Chemie AG10.28(42) Agreement dated July 18, 2013, by and between the Registrant and First Manhattan Co.10.29(43)* Letter Agreement dated July 18, 2013, by and among the Registrant, First Manhattan Co. and Peter Y. Tam10.30(44) Fourth Amendment to the Agreement dated as of December 28, 2000, between the Registrant andMitsubishi Tanabe Pharma Corporation (formerly Tanabe Seiyaku Co., Ltd.), effective as of July 1, 201310.31(45)† Commercial Supply Agreement dated July 31, 2013, by and between the Registrant and Sanofi Chimie10.32(46)* Employment Agreement dated September 3, 2013, by and between the Registrant and Seth H. Z. Fischer10.33(47)† License and Commercialization Agreement dated as of October 10, 2013, by and between the Registrantand Auxilium Pharmaceuticals, Inc.10.34(48)† Commercial Supply Agreement dated as of October 10, 2013, by and between the Registrant andAuxilium Pharmaceuticals, Inc.10.35(49)* Letter Agreement dated November 4, 2013, by and between the Registrant and Timothy E. Morris10.36(50)† Manufacturing and Supply Agreement dated November 18, 2013, by and between the Registrant andSanofi Winthrop Industrie10.37(51)† License and Commercialization Agreement dated December 11, 2013, by and between the Registrant andSanofi10.38(52)† Supply Agreement effective as of December 11, 2013, by and between the Registrant and Sanofi WinthropIndustrie10.39(53)† Patent Assignment Agreement, dated August 24, 2014, by and between the Registrant and JanssenPharmaceuticals, Inc.10.40(54)* Letter Agreement dated April 13, 2015, by and between the Registrant and Guy P. Marsh10.41(55)* Form of Second Amended and Restated Change of Control and Severance Agreement10.42(56)* Letter Agreement dated July 20, 2015, by and between the Registrant and Wesley W. Day, Ph.D.10.43(57)* Letter Agreement dated August 17, 2015, by and between the Registrant and Svai S. Sanford10.44(58) Letter Regarding Termination Notice dated December 30, 2015, from Auxilium Pharmaceuticals, Inc. andEndo Ventures Limited to the Registrant10.45(59) Letter Regarding Termination Notice dated as of June 30, 2016, from Auxilium Pharmaceuticals, Inc. andEndo Ventures Limited to the Registrant10.46(60) Letter Regarding Termination Notice dated as of August 29, 2016, from Auxilium Pharmaceuticals, LLCand Endo Ventures Limited to the Registrant10.47(61) First Amendment to Lease effective August 30, 2016, between the Registrant and MV Campus Owner,LLC, the successor in interest to SFERS Real Estate Corp. U.10.48(62) Office Lease effective September 2, 2016, between the Registrant and AG-SW Hamilton Plaza Owner, L.P.128 Table of ContentsExhibitNumber Description10.49(63)† License and Commercialization Agreement dated as of September 30, 2016, by and between theRegistrant and Metuchen Pharmaceuticals LLC10.50(64)† Commercial Supply Agreement dated as of September 30, 2016, by and between the Registrant andMetuchen Pharmaceuticals LLC10.51(65)† Patent Assignment Agreement dated as of January 6, 2017, by and between the Registrant and SeltenPharma, Inc.10.52(66)† License Assignment Agreement dated as of January 6, 2017, by and between the Registrant and SeltenPharma, Inc. 10.53(67)† Termination, Rights Reversion and Transition Services Agreement dated March 23, 2017, by and betweenthe Registrant and Sanofi10.54(68)† Settlement Agreement dated June 29, 2017, by and between the Registrant and Actavis Laboratories FL,Inc.10.55*†† Confidential Separation, General Release and Post-Separation Consulting Agreement effective December31, 2017, between the Registrant and Seth H. Z. Fischer21.1 List of Subsidiaries23.1 Consent of Independent Registered Public Accounting Firm24.1 Power of Attorney (See signature page)31.1 Certification of Interim Chief Executive Officer pursuant to Rules 13a‑14 and 15d‑14 promulgated underthe Securities Exchange Act of 1934, as amended31.2 Certification of Chief Financial Officer pursuant to Rules 13a‑14 and 15d‑14 promulgated under theSecurities Exchange Act of 1934, as amended32.1 Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C.1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002101 The following materials from the Registrant’s Annual Report on Form 10‑K for the year endedDecember 31, 2017, formatted in Extensible Business Reporting Language (XBRL), include: (i) theConsolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the ConsolidatedStatements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Cash Flows, and(v) related notes †Confidential treatment granted.††Confidential portions of this exhibit have been redacted and filed separately with the SEC pursuant to aconfidential treatment request in accordance with Rule 24b-2 of the Securities Exchange Act of 1934, as amended.*Indicates management contract or compensatory plan or arrangement.(1)Incorporated by reference to Exhibit 2.1 filed with the Registrant’s Annual Report on Form 10‑K for the fiscal yearended December 31, 2012, filed with the SEC on February 26, 2013.(2)Incorporated by reference to Exhibit 2.2 filed with the Registrant’s Annual Report on Form 10‑K/A for the fiscalyear ended December 31, 2012, filed with the SEC on June 12, 2013.(3)Incorporated by reference to Exhibit 3.2 filed with the Registrant’s Annual Report on Form 10‑K for the fiscal yearended December 31, 1996, filed with the SEC on March 28, 1997.(4)Incorporated by reference to Exhibit 3.2 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon April 20, 2012.(5)Incorporated by reference to Exhibit 3.3 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended March 31, 2013, filed with the SEC on May 8, 2013.(6)Incorporated by reference to Exhibit 3.4 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended March 31, 2013, filed with the SEC on May 8, 2013.129 Table of Contents(7)Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon May 13, 2013.(8)Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 24, 2013.(9)Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K filed with the SECon September 18, 2015.(10)Incorporated by reference to Exhibit 3.3 filed with the Registrant’s Registration Statement on Form 8‑A filed withthe SEC on March 28, 2007.(11)Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Annual Report on Form 10‑K/A for the fiscalyear ended December 31, 1996, filed with the SEC on April 16, 1997.(12)Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Current Report on Form 8-K filed with the SECon November 9, 2016.(13)Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon May 21, 2013.(14)Incorporated by reference to Exhibit 4.2 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon May 21, 2013.(15)Incorporated by reference to Exhibit 10.11 filed with the Registrant’s Form 8‑B filed with the SEC on June 25, 1996.(16)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon August 12, 2014.(17)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 29, 2011.(18)Incorporated by reference to Exhibit 10.44 filed with the Registrant’s Registration Statement on Form S‑8 filed withthe SEC on November 15, 2001.(19)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 13, 2006.(20)Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 13, 2006.(21)Incorporated by reference to Exhibit 10.7 filed with the Registrant’s Annual Report on Form 10‑K for the fiscal yearended December 31, 2010, filed with the SEC on March 1, 2011.(22)Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Registration Statement on Form S‑8 filed withthe SEC on November 5, 2014.(23)Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Registration Statement on Form S-8 filed withthe SEC on December 14, 2016.(24)Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Registration Statement on Form S-8 filed withthe SEC on December 15, 2017.(25)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon May 6, 2010.(26)Incorporated by reference to Exhibit 10.15 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2012, filed with the SEC on February 26, 2013.(27)Incorporated by reference to Exhibit 10.42A filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended March 31, 2004, filed with the SEC on May 7, 2004.130 Table of Contents(28)Incorporated by reference to Exhibit 10.61 filed with the Registrant’s Current Report on Form 8‑K filed with theSEC on May 4, 2007.(29)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon August 10, 2012.(30)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon February 25, 2013.(31)Incorporated by reference to Exhibit 10.20 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2012, filed with the SEC on February 26, 2013.(32)Incorporated by reference to Exhibit 10.79 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2009, filed with the SEC on March 10, 2010.(33)Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended March 31, 2013, filed with the SEC on May 8, 2013.(34)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K/A filed with theSEC on July 15, 2009.(35)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 23, 2012.(36)Incorporated by reference to Exhibit 10.34 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2012, filed with the SEC on February 26, 2013.(37)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended March 31, 2013, filed with the SEC on May 8, 2013.(38)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon May 16, 2013.(39)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 5, 2013.(40)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended June 30, 2013, filed with the SEC on August 8, 2013.(41)Incorporated by reference to Exhibit 10.4 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended June 30, 2013, filed with the SEC on August 8, 2013.(42)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 19, 2013.(43)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 24, 2013.(44)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon July 29, 2013.(45)Incorporated by reference to Exhibit 10.8 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended June 30, 2013, filed with the SEC on August 8, 2013.(46)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon September 4, 2013.(47)Incorporated by reference to Exhibit 10.9 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended September 30, 2013, filed with the SEC on November 7, 2013.(48)Incorporated by reference to Exhibit 10.10 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended September 30, 2013, filed with the SEC on November 7, 2013.131 Table of Contents(49)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8‑K filed with the SECon November 5, 2013.(50)Incorporated by reference to Exhibit 10.45 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2013, filed with the SEC on February 28, 2014.(51)Incorporated by reference to Exhibit 10.46 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2013, filed with the SEC on February 28, 2014.(52)Incorporated by reference to Exhibit 10.47 filed with the Registrant’s Annual Report on Form 10‑K for the fiscalyear ended December 31, 2013, filed with the SEC on February 28, 2014.(53)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10‑Q for the fiscalquarter ended September 30, 2014, filed with the SEC on November 5, 2014.(54)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 2015, filed with the SEC on August 3, 2015.(55)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K filed with the SECon June 24, 2015.(56)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 2015, filed with the SEC on August 3, 2015.(57)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2015, filed with the SEC on November 4, 2015.(58)Incorporated by reference to Exhibit 10.53 filed with the Registrant’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2015, filed with the SEC on March 9, 2016.(59)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 2016, filed with the SEC on August 4, 2016.(60)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2016, filed with the SEC on November 9, 2016.(61)Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2016, filed with the SEC on November 9, 2016.(62)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2016, filed with the SEC on November 9, 2016.(63)Incorporated by reference to Exhibit 10.4 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2016, filed with the SEC on November 9, 2016.(64)Incorporated by reference to Exhibit 10.5 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2016, filed with the SEC on November 9, 2016.(65)Incorporated by reference to Exhibit 10.55 filed with the Registrant’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2016, filed with the SEC on March 8, 2017.(66)Incorporated by reference to Exhibit 10.56 filed with the Registrant’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2016, filed with the SEC on March 8, 2017.(67)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended March 31, 2017, filed with the SEC on May 3, 2017.(68)Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 2017, filed with the SEC on August 3, 2017. 132 Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized: VIVUS, INC., a Delaware Corporation By:/s/ Thomas B. King Thomas B. King Interim Chief Executive Officer (Principal Executive Officer) Date: March 13, 2018 133 Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes andappoints each of Thomas B. King and Mark K. Oki as his attorney‑in‑fact for him, in any and all capacities, to sign eachamendment to this Report on Form 10‑K, and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney‑in‑fact or hissubstitute or substitutes may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on the dates indicated:Signature Title Date /s/ Thomas B. King Interim Chief Executive Officer (PrincipalExecutive Officer) and Director March 13, 2018Thomas B. King /s/ David Y. Norton Chairman of the Board of Directors and Director March 13, 2018David Y. Norton /s/ Mark K. OkiChief Financial Officer and Chief AccountingOfficer (Principal Financial and Accounting Officer)March 13, 2018Mark K. Oki /s/ Jorge Plutzky, M.D. Director March 13, 2018Jorge Plutzky, M.D. /s/ Eric W. Roberts Director March 13, 2018Eric W. Roberts /s/ Herman Rosenman Director March 13, 2018Herman Rosenman /s/ Allan L. Shaw Director March 13, 2018Allan L. Shaw 134Exhibit 10.55 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. CONFIDENTIAL SEPARATION, GENERAL RELEASE AND POST-SEPARATIONCONSULTING AGREEMENT This Confidential Separation, General Release and Post-Separation Consulting Agreement (the“Agreement”) is being entered into between Seth H.Z. Fischer (“Executive”) and VIVUS, Inc. (the“Company”) in connection with the termination of Executive’s employment with the Company onDecember 31, 2017 (the “Separation Date”). Whereas, in connection with Executive’s termination of employment effective as of December31, 2017, Executive is eligible to receive the severance benefits provided in Section 4 of theEmployment Agreement (the “Employment Agreement”) dated August 30, 2013, subject to the termsand conditions set forth therein including (but not limited to) entering into this Confidential SeparationAgreement and General Release in favor of the Company under Section 4.11 of the EmploymentAgreement and the provisions of Section 8 of the Employment Agreement. Whereas, in consideration for such severance benefits provided under Section 4 of theAgreement (the “Severance Benefits”) and in full satisfaction of any and all obligations of theCompany in the Employment Agreement, the parties wish to resolve any and all disputes, claims,complaints, grievances, charges, actions, petitions, and demands that Executive may have against theCompany and any of the Releasees as defined below, including, but not limited to, any and all claimsarising out of or in any way related to Executive’s employment with or separation from the Company. Whereas, the Company wishes to retain Executive as a consultant following the termination ofhis employment relationship so that Executive may advise the Company’s executives on matters withinExecutive’s expertise. Now, therefore, Executive covenants and agrees as follows: 1. Unpaid Wages and Vacation. Executive and the Company acknowledge and agreethat Executive has been paid, or will be paid, all outstanding, accrued compensation, salary, bonuses,and commissions, together with any accrued but unused vacation (the “Accrued Compensation,” asdefined in Section 4.2 of the Employment Agreement), through the Separation Date in accordance withapplicable law. 2. Benefits. As of Executive’s Separation Date, Executive is not eligible to accrueadditional benefits under any of the Company’s benefit plans, including, but not limited to, any dentalor medical insurance, long term care plans, retirement or 401(k) plans, vacation leave, sick leave, longterm disability insurance, life insurance, or personal accident insurance. Executive may be eligible toparticipate in a Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA”)continuation coverage program or any similar state medical and dental insurance continuation coverageprogram and exercise conversion rights with respect to any group life insurance. Executive shall beentitled to payment of Accrued Amounts under the terms and conditions of any Company benefit plansor programs. 3. Acknowledgement. Executive acknowledges and agrees that, other than the paymentsdescribed in Section 1 of this Agreement and the Severance Benefits as defined in Section 4 below, hehas no entitlement to additional compensation or benefits due from his employment. Executive furtheragrees that any Severance Benefit is not compensation for Executive’s services rendered throughExecutive’s Separation Date, but rather constitutes consideration for the promises contained in thisAgreement. 4. Severance Benefits. In consideration of Executive entering into this Agreement (andnot revoking it) and agreeing to fully abide by its terms, and in full satisfaction of any and allobligations of the Company to Executive in the Employment Agreement, the Company shall pay toExecutive following the Effective Date of this Agreement the following “Severance Benefits”: (a) Twelve (12) equal monthly severance payments each in the amount of$60,083.34, which is the equivalent of the monthly Base Salary which Executive was receiving as ofthe Separation Date, for a total payment of $721,000.08, with the first payment beginning no later thanJanuary 31, 2018; (b) Twelve (12) equal monthly severance payments each in the amount of$48,066.67, which is the equivalent of one-twelfth (1/12th) of the Executive’s Target Bonus for thefiscal year in which the termination occurred, for a total payment of $576,800.04, with the firstpayment beginning no later than January 31, 2018; and (c) A single, lump sum cash payment in the amount of $576,800.04 which isequivalent to the prorated amount of the Executive’s Target Bonus for the fiscal year in which thetermination occurred, with any such prorated bonus to be paid January 31, 2018. The Company will withhold the appropriate federal, state and local taxes, as determined by theCompany, from all Severance Benefits paid under this Agreement. The Company’s obligation to paySeverance shall automatically terminate upon Executive’s breach of any of the provisions of thisAgreement, and any Severance Benefits already paid to Executive prior to such breach shall becomeimmediately due and repayable to the Company. 5. Consulting Services. (a) Following the Separation Date, and at the request of the Company, Executivewill consult with the Company’s executive officers and other employees regarding certain of theCompany’s business and activities and Executive will be responsible for and undertake special projects, in any case as assigned by the Company in its sole discretion to Executive from time to time, for aperiod of one (1) year following the Separation Date. In this regard, Executive acknowledges thatduring the first three (3) months of the term of this Agreement, it is likely that he will be requested toconsult on ***. Although *** is expected to require substantial time and effort of Executive, neitherthe Company nor Executive expects the time and effort of Executive to remain at such levels on asustained basis over the remaining term of this Agreement. Executive further acknowledges that theconsultation is to be performed from Executive’s home and, upon reasonable advanced notice, theCompany’s office in California, but that the consultation also may require Executive to travel from timeto time. (b) From and after the Separation Date, Executive shall be an independentcontractor of the Company, and this Agreement shall not be construed to create any association,partnership, joint2 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. venture, employee or agency relationship between Executive and the Company for any purpose. Afterthe Separation Date, Executive shall have no authority to bind the Company or its affiliates, andExecutive shall not attempt to obligate or bind the Company or any of its affiliates in any way withoutthe Company’s prior approval. All documents, including but not limited to contracts, agreements,letters of intent, employment agreements and leases, that purport to bind or obligate the Company orany of its affiliates in any respect must be signed by the appropriate representative(s) of the Company. (c) The Company will provide Executive with support services in its Californiaoffice for the consulting period following the Separation Date to the extent determined necessary andreasonable by the Company. During the consulting period, Executive may be engaged or employed inany other business, trade, profession or other activity which does not place Executive in a conflict ofinterest with the Company; provided, that, during the consulting period, Executive shall not be engagedin any business activities that do or may compete with the business of the Company, without theCompany’s prior written consent to be given or withheld in its sole discretion. (d) As compensation for Executive’s consultation, Executive shall continue to be aService Provider as defined in the Company’s 2010 Equity Incentive Plan (the “Plan”) and the EquityAwards will continue vesting in accordance with the Plan until the Consultation Termination Date (asdefined below) (“Consulting Fee”). Executive acknowledges and agrees that the Consulting Fee doesnot constitute compensation for Executive’s time worked and services rendered through the SeparationDate, but rather constitutes consideration for Executive’s agreement to provide consulting services tothe Company on an “as needed” basis and as an independent consultant for the one (1) year periodfollowing the Separation Date, and that such consideration is above and beyond any wages, salary orother sums to which Executive is entitled from the Company under the terms of his employment withthe Company or under any other contract or law. Executive shall be responsible for costs or expensesincurred by Executive in connection with the performance of the consulting services, and in no eventshall the Company reimburse Executive for any such costs or expenses, except that the Company willreimburse Executive for travel-related expenses when the Company requests that Executive travel inorder to provide the consulting services, and the Company pre-approves any such expenses. (e) The Plan and the Notice of Grant for each Stock Option (as defined below) shallhereby be amended such that each such Stock Option shall be exercisable until the earlier of theTerm/Expiration Date specified in each such Notice of Grant or such date as the Stock Option isterminated in accordance with the Plan; provided, however, that any portion of a Stock Option thatvests during the period beginning with the Separation Date of this Agreement and ending on such dateas the Bring Down Release is delivered by Executive and becomes effective (the “Bring Down Date”)may not be exercised until after the Bring Down Date. (f) For purposes of the Agreement, the Equity Awards shall mean the StockOptions and the RSUs set forth below, as of the Separation Date. 3 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. STOCK OPTIONS Grant No.Grant DatePlan/TypeSharesVestedUnvestedTermination0000358209/03/20132010/ISO31,00431,004009/03/20200000358309/03/20132010/NQ968,996968,996009/03/20200000398101/23/20152010/NQ542,508421,854120,65401/23/20220000408901/22/20162010/NQ1,000,000479,166520,83401/22/20230000419001/27/20172010/NQ1,000,00001,000,00001/27/2024000397501/23/20152010/ISO86,09236,50049,59201/23/2022 RSUs Grant No.Grant DatePlan/TypeSharesVestedUnvested0000396801/23/20152010/RSU66,00045,37520,6250000400207/31/20152010/RSU117,000117,00000000418309/26/20162010/RSU300,000262,50037,5000000425801/27/20172010/RSU150,0000150,000 (g) The Company is and shall be, the sole and exclusive owner of all right, title andinterest throughout the world in and to all the results and proceeds of the consulting services performedunder this Agreement (the “Deliverables”), including all patents, copyrights, trademarks, trade secretsand other intellectual property rights (collectively “Intellectual Property Rights”). (h) The Company may terminate the consulting services provided under thisAgreement upon written notice to Executive if the Company determines that Executive is not willing,available or able to provide the required consulting services after reasonable attempts by the Companyto obtain such consulting services from Executive. The Company may also terminate this Agreementupon written notice to Executive for any reason after July 31, 2018. The consulting relationship willterminate, unless mutually renewed by both the Executive and the Company in writing, on the one (1)year anniversary of the Separation Date. In the event of termination pursuant to this Section 5(h)(“Consultation Termination Date”), Executive shall be a Service Provider under the Plan and theEquity Awards shall continue to vest through the date of termination of the consulting relationship. (i) Executive agrees to execute a second release, in the form attached to thisAgreement as Exhibit A (the “Bring Down Release”), on or within five (5) days of the Consultation4 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. Termination Date, which Bring Down Release shall cover the period from the date of execution of thisAgreement through the Consultation Termination Date. 6. Deferred Compensation. Notwithstanding anything in this Agreement to the contrary,if (i) on the date of Executive’s “separation from service” within the meaning of Section 409A of theInternal Revenue Code of 1986, as amended (the “Code,” and such separation, a “Separation fromService”), any of the Company's stock is publicly traded on an established securities market orotherwise (within the meaning of Section 409A(a)(2)(B)(i) of the Code), (ii) Executive is determined tobe a “specified employee” within the meaning of Section 409A(a)(2)(B) of the Code, (iii) the paymentsor benefits provided to Executive from the Company on account of Executive’s Separation fromService, to the extent such payments or benefit (after taking into account all exclusions applicable tosuch payments or benefits under Section 409A of the Code) is properly treated as “deferredcompensation” subject to Section 409A and (iv) such delay is required to avoid the imposition of thetax set forth in Section 409A(a)(1) of the Code, as a result of such Separation from Service, Executivewould receive any payment that, absent the application of this Section 8, would be subject to interestand additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application ofSection 409A(a)(2)(B)(i) of the Code, then no such payment shall be payable prior to the date that is thefirst business day after the earliest of (A) six (6) months after Executive’s termination date, (B)Executive's death or (C) such other date as will cause such payment not to be subject to such interestand additional tax (with a catch-up payment equal to the sum of all amounts that have been delayed tobe made as of the date of the initial payment). 7. General Release. Except for any rights granted under this Agreement, Executive, forhimself, and for his heirs, assigns, executors and administrators, hereby releases, remises and foreverdischarges the Company, its parents, subsidiaries, affiliates, divisions, predecessors, successors,assigns, and their directors, officers, partners, attorneys, shareholders, administrators, employees,agents, representatives, employment benefit plans, plan administrators, fiduciaries, trustees, insurersand re-insurers, and all of their predecessors, successors and assigns, (collectively, the “Releasees”), ofand from all claims, causes of action, covenants, contracts, agreements, promises, damages, disputes,demands, and all other manner of actions whatsoever, in law or in equity, that Executive ever had, mayhave had, now has, or that his heirs, assigns, executors or administrators hereinafter can, shall ormay have, whether known or unknown, asserted or unasserted, suspected or unsuspected inconnection with Executive’s employment or the termination of that employment, or any act or omissionwith respect to Executive’s employment which has occurred at any time up to and including the date ofthe execution of this Release (the “Released Claims”). (a) Released Claims. The Released Claims released include, but are not limited to,any claims for monetary damages; any claims related to Executive’s employment with the Company orthe termination thereof; any claims to severance or similar benefits; any claims to expenses, attorneys’fees or other indemnities ; any claims based on actions or failure to act on or before the date of thisAgreement; any claims for other personal remedies or damages sought in any legal proceeding orcharge filed with any court or federal, state or local agency either by one (1) or by a person claiming toact on Executive’s behalf or in Executive’s interest. Executive understands that the Released Claimsmight have arisen under many different local, state and federal statutes, regulations, case law and/orcommon law doctrines. Executive5 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. hereby specifically, but without limitation, agrees to release all of the Releasees from any and all claimsunder the following: i. Antidiscrimination laws, such as Title VII of the Civil Rights Act of1964, as amended, and Executive Order 11246 (which prohibit discrimination based on race, color,national origin, religion, or sex); Section 1981 of the Civil Rights Act of 1866 (which prohibitsdiscrimination based on race or color); the Americans with Disabilities Act and Sections 503 and 504 ofthe Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the AgeDiscrimination in Employment Act, as amended, 29 U.S.C. Section 621 et seq. (which prohibitsdiscrimination on the basis of age); the Equal Pay Act (which prohibits paying men and womenunequal pay for equal work); the California Fair Employment and Housing Act, California GovernmentCode Section 12900 et seq. (which prohibits discrimination based on protected characteristics includingrace, color, religion, sex, gender, gender expression, gender identity, sexual orientation, marital status,national origin, language restrictions, ancestry, physical or mental disability, medical condition, age,military or veteran status, and denial of leave); the California Equal Pay Law (which prohibits paying anemployee at a rate less than another employee of a different sex, race, or ethnicity for substantiallysimilar work), California Labor Code Section 1197.5; the Unruh Civil Rights Act, California Civil CodeSection 51 et seq. (which prohibits discrimination based on age, sex, race, color, religion, ancestry,national origin, disability, medical condition, marital status, or sexual orientation); New Jersey LawAgainst Discrimination, N.J.S.A. § 10:5-1 et seq.; or any other local, state or federal statute, regulation,common law or decision concerning discrimination, harassment, or retaliation on these or any othergrounds or otherwise governing the employment relationship. ii. Other employment laws, such as the federal Worker Adjustment andRetraining Notification Act of 1988 and the California Worker Adjustment and Retraining NotificationAct, California Labor Code Sections 1400 et seq. (known as WARN laws, which require that advancenotice be given of certain workforce reductions); the Executive Retirement Income Security Act of1974 (which, among other things, protects employee benefits); the Fair Labor Standards Act of 1938(which regulates wage and hour matters); the Family and Medical Leave Act of 1993 (which requiresemployers to provide leaves of absence under certain circumstances); the California Labor Code (whichregulates employment and wage and hour matters); the California Family Rights Act of 1993, CaliforniaGovernment Code Section 12945.1 et seq. (which requires employers to provide leaves of absenceunder certain circumstances); New Jersey Family Leave Act, N.J.S.A. § 34:11B-1 et seq.; ConscientiousEmployee Protection Act (C.E.P.A.), N.J.S.A. §§ 34:19-1 et seq.; New Jersey Wage Laws, N.J.S.A. §34:11 et seq.; and any other federal, state, or local statute, regulation, common law or decision relatingto employment, such as veterans’ reemployment rights laws or any other aspect of employment. iii. Other laws of general application, such as any federal, state, or local lawenforcing express or implied employment or other contracts or covenants; any other federal, state orlocal laws providing relief for alleged wrongful discharge, physical or personal injury, breach ofcontract, emotional distress, fraud, negligent misrepresentation, defamation, invasion of privacy,violation of public policy and similar or related claims; common law claims under any tort, contract orother theory now or hereafter recognized, and any other federal, state, or local statute, regulation,common law or decision otherwise regulating employment.6 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (a) Participation in Agency Proceedings. Nothing in this Agreement shall preventExecutive from filing a charge (including a challenge to the validity of this Agreement) with the EqualEmployment Opportunity Commission (the “EEOC”), the National Labor Relations Board (the“NLRB”), the California Department of Fair Employment and Housing (the “DFEH”), or other similarstate or local agencies, or from participating in any investigation or proceeding conducted by theEEOC, the NLRB, the DFEH or similar state or local agencies. However, by entering into thisAgreement, Executive understands and agrees that he is waiving any and all rights to recover anymonetary relief or other personal relief as a result of any such EEOC, NLRB, DFEH or similar state orlocal agency proceedings, including any subsequent legal action. (b) Claims Not Released. The Released Claims do not include claims byExecutive for: (1) unemployment insurance; (2) worker’s compensation benefits; (3) state disabilitycompensation; (4) Accrued Amounts ; (5) any rights for indemnification or contribution under theCompany’s certificate of incorporation or by-laws, the laws of the state of incorporation or any rights toinsurance coverage under any applicable directors’ and officers’ liability insurance policy and (6) anyother rights that cannot by law be released by private agreement. (c) Waiver of Rights under California Civil Code Section 1542. Executive furtheracknowledges that he has read Section 1542 of the Civil Code of the State of California, which providesas follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THECREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HERFAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWNBY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HERSETTLEMENT WITH THE DEBTOR. Executive understands that Section 1542 gives his the right not to release existing claims of which he isnot now aware, unless he voluntarily chooses to waive this right. Even though Executive is aware ofthis right, Executive nevertheless hereby voluntarily waives the right described in Section 1542, andelects to assume all risks for claims that now exist in his favor, known or unknown, arising from thesubject matter of the Release. Executive acknowledges that different or additional facts may be discovered in addition to what he nowknows or believes to be true with respect to the matters released in this Agreement, and Executiveagrees that this Agreement will be and remain in effect in all respects as a complete and final release ofthe matters released, notwithstanding any such different or additional facts. Executive represents andwarrants that he has not previously filed or joined in any claims that are released in this Agreement andthat he has not given or sold any portion of any claims released herein to anyone else, and that he willindemnify and hold harmless the persons and entities released in this Agreement from all liabilities,claims, demands, costs, expenses and/or attorneys’ fees incurred as a result of any such priorassignment or transfer. 7 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. 8. Non-Disclosure of This Agreement. Executive agrees that from and after the date ofthe receipt of this Agreement, he will not, directly or indirectly, provide to any person or entity anyinformation concerning or relating to the negotiation of this Agreement or its terms and conditions,except: (i) to the extent specifically required by law or legal process or as authorized in writing by theCompany; (ii) to his tax advisors as may be necessary for the preparation of tax returns or other reportsrequired by law; (iii) to his attorneys as may be necessary to secure advice concerning this Agreement;or (iv) to members of his immediate family. Executive agrees that prior to disclosing such informationunder parts (ii), (iii), or (iv), he will inform the recipients that they are bound by the limitations of thissection. Subsequent disclosure by any such recipients will be deemed to be a disclosure by Executive inbreach of this Agreement. 9. Obligations Regarding Confidential Information. Executive hereby reaffirms hisexisting obligations, to the fullest extent permitted by law, under the Confidential Information,Invention Assignment, and Arbitration Agreement that he signed with the Company or its affiliates onor about August 30, 2013 (the “Confidentiality Agreement”). Executive understands that his obligationsunder the Confidentiality Agreement survive his employment with the Company as provided in thatagreement. 10. Return of Information and Property. Executive hereby covenants and agrees thatExecutive shall promptly return all documents (whether in hard copy or electronic format), keys, creditcards, data devices, computer equipment, Company products, keycards, account information, and allother items which are the property of the Company and/or which contain confidential information.Executive agrees to work in cooperation with the Company’s IT Department to delete all Companyconfidential information and Company contacts from his/his personal laptop computer, cellular phoneand iPad. If Executive fails to return any company property, the Company will deduct from theSeverance an amount equal to the value of non-returned property. 11. Non-disparagement. Executive agrees that he will not make to any person or entityany false, disparaging, or derogatory comments about the Company, its business affairs, its products, itsemployees, clients, contractors, agents, or any of the other Releasees as defined in Section 5. TheCompany agrees to instruct the Company’s officers not to make any disparaging statements aboutExecutive to any third party, whether inside or outside the Company. 12. Communication with Government Agencies. Notwithstanding anything to thecontrary herein, Executive understands that nothing in this Agreement restricts or prohibits Executivefrom initiating communications directly with, responding to any inquiries from, providing testimonybefore, providing confidential information to, reporting possible violations of law or regulation to, orfrom filing a claim or assisting with an investigation directly with a self-regulatory authority or agovernment agency or entity (collectively, “Government Agencies”), or from making other disclosuresthat are protected under the whistleblower provisions of state or federal law or regulation, andExecutive does not need the Company’s prior authorization to engage in such conduct. ThisAgreement does not limit Executive’s right to receive an award for information provided toGovernment Agencies. 13. General. This Agreement and the Confidentiality Agreement contain the entireunderstanding and agreement between the parties relating to the subject matter of this Agreement, andmay not be altered or amended except by an instrument in writing signed by both parties. Executive hasnot8 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. relied upon any representation or statement outside this Agreement with regard to the subject matter,basis or effect of this Agreement. This Agreement shall be governed, construed, and enforced by theinternal laws of the State of New Jersey, without regard to the choice of law rules of any jurisdiction. Tothe extent any lawsuit is permitted under this Agreement, the Executive hereby expressly consents tothe personal and exclusive jurisdiction and venue of the state and federal courts located in New Jerseyfor any lawsuit filed against the Executive by the Company. The language of all parts of this Agreementwill in all cases be construed as a whole, according to the language’s fair meaning, and not strictly foror against any of the parties. This Agreement will be binding upon and inure to the benefit of the partiesand their respective representatives, successors and permitted assigns. Neither the waiver by either partyof a breach of or default under any of the provisions of the Agreement, nor the failure of such party, onone (1) or more occasions, to enforce any of the provisions of the Agreement or to exercise any right orprivilege hereunder will thereafter be construed as a waiver of any subsequent breach or default of asimilar nature, or as a waiver of any provisions, rights or privileges hereunder. The parties agree to takeor cause to be taken such further actions as may be necessary or as may be reasonably requested inorder to fully effectuate the purposes, terms, and conditions of this Agreement. This Agreement and therights and obligations of the parties hereunder may not be assigned by Executive without the priorwritten consent of the Company, but may be assigned by the Company without Executive’s permissionor consent. If any one (1) or more of the provisions of this Agreement, or any part thereof, will be heldto be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder of thisAgreement will not in any way be affected or impaired thereby. This Agreement may be signed in one(1) or more counterparts, each of which will be deemed an original, and all of which together willconstitute one (1) instrument. 14. Arbitration and Equitable Relief. (a) Intent of Agreement. The Company and the Executive agree and intend forthis Agreement to govern the resolution of all disputes, claims and other matters that arise out of orconcerning our relationship, whether related to Executive’s employment with the Company or not. TheCompany and the Executive (collectively, the “Parties”) shall resolve all such matters in accordancewith the provisions of this Agreement. (b) Mandatory Arbitration. The Parties agree that all claims, complaints,controversies, grievances, or disputes (collectively, “claims”) that arise out of or relate in any way tothe Parties’ relationship, whether based on contract, tort, statutory, or any other legal theory, shall besubmitted to mandatory, binding arbitration in New Jersey before a neutral arbitrator who is licensed topractice law in the state in which the arbitration is convened (the “Arbitrator”). The arbitration shall begoverned by the Federal Arbitration Act, 9 U.S.C. Section 1 et seq, as amended, and shall beadministered by the Judicial Arbitration & Mediation Services, Inc. (“JAMS”), in accordance withpursuant to its then-current Employment Arbitration Rules & Procedures (the “JAMS Rules”). A copyof the Employment Arbitration Rules & Procedures is attached hereto as Exhibit B. The Rules are alsoavailable online at http://www.jamsadr.com/rules-employment-arbitration/. The Parties or theirrepresentatives may also call JAMS at 800.352.5267 if they have questions about the arbitrationprocess. If the JAMS Rules are inconsistent with the terms of this Agreement, the terms of thisAgreement shall govern. 9 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. (c) Covered Claims. This Agreement covers all claims under federal, state or locallaw arising out of or relating to Executive’s application for employment with the Company, any offer ofemployment made by the Company, Executive’s employment by the Company, the breach of anyemployment agreement, the termination of Executive’s employment with the Company, or any otheraspect of Executive’s employment relationship with the Company, claims that the Executive may haveagainst the Company or against its officers, directors, supervisors, managers, employees, or agents intheir capacity as such, and claims that the Company may have against Executive. The claims coveredby this Agreement (the “Covered Claims”) include, but are not limited to, claims for breach of anycontract or covenant (express or implied), tort claims, claims for wrongful termination (constructive oractual) in violation of public policy, claims for discrimination or harassment (including, but not limitedto, harassment or discrimination based on race, sex, gender, religion, national origin, age, marital status,medical condition, psychological condition, mental condition, disability, sexual orientation, or anyother characteristic protected by law), claims for violation of any federal, state, or other governmentallaw, statute, regulation, or ordinance, including, but not limited to, all claims arising under Title VII ofthe Civil Rights Act, the Age Discrimination in Employment Act, the Americans With Disabilities Act,the California Fair Employment and Housing Act, the Consolidated Omnibus Budget ReconciliationAct of 1985, and Employee Retirement Income Security Act. The Parties specifically agree that theCovered Claims include claims under the Fair Labor Standards Act, the California Labor Code, andother federal, state, or local laws governing wages, hours and working conditions, including, but notlimited to, claims for overtime, unpaid wages, and meal period and rest break violations. (d) Claims Not Covered. Claims for workers’ compensation, unemploymentcompensation benefits, claims as a stockholder or any other claims that, as a matter of law, the Partiescannot agree to arbitrate are not subject to, and are excluded from, this Agreement. Nothing in thisAgreement shall be interpreted prohibit or preclude the filing of complaints with the CaliforniaDepartment of Fair Employment and Housing, the Equal Employment Opportunity Commission, or theNational Labor Relations Board. (e) Waiver of Class Action and Collective Action Claims. Except as otherwiserequired by law, the Parties expressly intend and agree that: (a) class action and collective actionprocedures shall neither be asserted nor apply in any arbitration conducted pursuant to this Agreement;(b) each Party will not assert class or collective action claims against the other in arbitration orotherwise; and (c) the Parties shall only submit their own, individual claims in arbitration and will notseek to represent the interests of any other person. (f) Waiver of Trial By Jury. THE EXECUTIVE UNDERSTANDS AND FULLYAGREES THAT BY ENTERING INTO THIS AGREEMENT, BOTH THE COMPANY AND THEEXECUTIVE ARE GIVING UP THEIR CONSTITUTIONAL RIGHT TO HAVE A TRIAL BY JURY,AND ARE GIVING UP THEIR NORMAL RIGHTS OF APPEAL FOLLOWING THE RENDERING OFA DECISION, EXCEPT AS THE FEDERAL ARBITRATION ACT AND APPLICABLE FEDERALLAW ALLOW FOR JUDICIAL REVIEW OF ARBITRATION PROCEEDINGS. (g) Claims Procedure. Arbitration shall be initiated pursuant to this Agreementupon written notice of either Party. The aggrieved Party shall give written notice of any claim to theother Party10 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. by certified or registered mail, return receipt requested. The Executive agrees to mail written notice ofall claims to the Company’s General Counsel at 900 E. Hamilton Avenue, Suite 550, Campbell, CA95008 (“Notice Address”). The Company agrees to mail written notice of all claims to Executive’s lastknown address on file with the Company. The written notice shall identify and describe the nature of allclaims asserted and the facts upon which such claims are based. Written notice of arbitration shall beinitiated within the statute of limitations and other time limitations applicable to the claim(s) asserted. (h) Arbitrator Selection. The Arbitrator shall be selected as provided in the JAMSRules. (i) Discovery. The JAMS Rules regarding discovery shall apply to any arbitrationconducted under this Agreement. The Arbitrator shall decide all discovery disputes. (j) Substantive Law. The Arbitrator shall apply the substantive law (and the law ofremedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to theclaim(s) asserted. The Federal Rules of Evidence shall apply. The Arbitrator, and not any federal, state,or local court or agency, shall have exclusive authority to resolve any dispute relating to theinterpretation, applicability, or enforceability of this Agreement. The Arbitrator shall conduct andpreside over an arbitration hearing of reasonable length, to be determined by the Arbitrator. TheArbitrator shall provide the Parties with a written decision explaining his or her findings andconclusions. The Arbitrator’s decision shall be final and binding upon the Parties. (k) Motions. The Arbitrator shall have jurisdiction to hear and decide prehearingdisputes and is authorized to hold prehearing conferences by telephone or in person as the Arbitratordeems necessary. The Arbitrator shall have the authority to set deadlines for completion of discoveryand the filing of dispositive motions, and to set briefing schedules for any motions. The Arbitrator shallhave the authority to adjudicate any cause of action, claim, or defense, including entire claims, pursuantto a motion for summary adjudication and/or summary judgment, and, in deciding such motions, shallapply applicable substantive state or federal law. (l) Compelling Arbitration/Enforcing Award. Either Party may bring an action incourt to compel arbitration under this Agreement and to confirm, vacate or enforce an arbitrationaward. Each Party shall bear its own attorney fees and costs and other expenses of such action. (m) Arbitration Fees and Costs. The Company shall be responsible for all costsunique to the arbitration process. Each Party shall pay its own costs and attorneys’ fees, if any;provided, however, if the Arbitrator determines that the Executive’s position was asserted in good faithwith a reasonable basis, the Company shall pay the Executive’s reasonable attorneys’ fees and costs.Under no circumstances shall the Executive be responsible for the Company’s attorneys’ fees. (n) Term of Agreement. This Agreement shall survive the termination ofExecutive’s employment. It may only be revoked or modified in a writing that specifically states theintent to revoke or modify the Agreement and that is signed by both Executive and the Chairman of theBoard. 11 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. (o) Severability. If any provision of this Agreement is adjudged to be void orotherwise unenforceable, in whole or in part, the void or unenforceable provision shall be severed andsuch adjudication shall not affect the validity of the remainder of this Agreement. (p) Voluntary Agreement. By executing this Agreement, the Parties represent thatthey have been given the opportunity to fully review, comprehend and negotiate the terms of thisAgreement. The Parties understand the terms of this Agreement, and freely and voluntarily sign it. 15. No Admission; Attorneys’ Fees. The parties agree that nothing contained in thisAgreement will constitute or be treated as an admission of liability or wrongdoing by either of them. Inany action to enforce the terms of this Agreement, the prevailing party will be entitled to recover itscosts and expenses, including reasonable attorneys’ fees. 16. ADEA Acknowledgment/Time Periods. With respect to the General Release in Section5 hereof, Executive agrees and understands that by signing this Agreement, he is specifically releasingall claims under the Age Discrimination in Employment Act, as amended, 29 U.S.C. Section 621 et seq.Executive acknowledges that he has carefully read and understands this Agreement in its entirety, andexecutes it voluntarily and without coercion. (a) Consideration Period. Executive further acknowledges that he is hereby beingadvised in writing to consult with a competent, independent attorney of his or her choice, at his or herown expense, regarding the legal effect of this Agreement before signing it, and that he is being given aperiod of twenty-one (21) days within which to consider and execute this Agreement, unless hevoluntarily chooses to execute this Agreement before the end of the twenty-one (21) day period. (b) Revocation Period. Executive understands that he has seven (7) days followinghis execution of this Agreement to revoke it in writing, and that this Agreement is not effective orenforceable until after this seven (7) day period has expired without revocation. For a revocation to beeffective, written notice must be received by the Chief Financial Officer of the Company at 900 E.Hamilton Avenue, Suite 550, Campbell, CA 95008, by no later than 9:00 a.m. on the eighth (8th)calendar day after the date by which Executive has signed this Agreement (“Revocation Deadline”). 17. Execution. Executive agrees that he will not sign and execute this Agreement beforehis Separation Date. Executive understands and agrees that this Agreement shall be null and void andhave no legal or binding effect whatsoever if: (1) Executive signs but then timely revokes theAgreement or (2) the Agreement is not signed by Executive on or before the twenty-first (21st) dayafter Executive receives it. This Agreement is only effective upon the receipt by the Company of thisAgreement, duly executed by Executive and without revocation by the Executive of the Agreement bythe Revocation Deadline (“Effective Date”). [SIGNATURE PAGE FOLLOWS] 12 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. IN WITNESS WHEREOF, the undersigned, intending to be bound hereby, have agreed to the terms andconditions of this Agreement as of the date first set forth below. EXECUTIVE: /s/ Seth H.Z. FischerName: Seth H.Z. Fischer Date: 12/26/2017 VIVUS, INC. By: /s/ MarkOki Name: Mark Oki Title: Chief Financial Officer Date: 26 Dec 2017 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. ELECTION TO EXECUTE PRIOR TO EXPIRATIONOF 21-DAY CONSIDERATION PERIOD I, Seth H.Z. Fischer, understand that I have twenty-one (21) days within which to consider andexecute the attached Confidential Separation Agreement and General Release. However, after having anopportunity to consult counsel, I have freely and voluntarily elected to execute the ConfidentialSeparation Agreement and General Release before such twenty-one (21) day period has expired. DateExecutive Signature   *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT A BRING DOWN RELEASE Pursuant to Section 5(h) of the [DATE] Confidential Separation, General Release and Post-SeparationConsulting Agreement (the “Agreement”) entered into between entered into between Seth H.Z. Fischer(“Executive”) and VIVUS, Inc. (the “Company”), Executive and the Company agree as follows: 1. Defined Terms. Defined terms used but not defined in this Bring Down Release shallhave the meanings given such terms in the Agreement. 2. Acknowledgement. Executive acknowledges and agrees that, other than the paymentsdescribed in Section 5 of the Agreement, he has been fully paid any and all compensation due andowing to her, including all wages, salary, commissions, bonuses, incentive payments, consultant fees,profit-sharing payments, expense reimbursements, leave or other benefits, up to and through theConsulting Termination Date or otherwise. Executive further agrees that the Severance Benefitsreferred to in Section 4 of the Agreement is not compensation for Executive’s services renderedthrough the Separation Date or Consulting Termination Date, but rather constitutes consideration for thepromises contained in the Agreement, and is above and beyond any wages, compensation, or salary orother sums to which he is entitled from the Company under the terms of his employment or consultingrelationship with the Company or under any other contract or law. 3. General Release. Except for any rights granted under the Agreement and this BringDown Release, Executive, for himself, and for Executive’s heirs, assigns, executors and administrators,hereby releases, remises and forever discharges the Company and its parents, subsidiaries, affiliates,and divisions, and each of their respective directors, officers, partners, attorneys, shareholders,administrators, employees, agents, representatives, employment benefit plans, plan administrators,fiduciaries, trustees, insurers and re-insurers, agents, and all of their predecessors, successors andassigns (collectively, the “Releasees”) of and from all claims, causes of action, covenants, contracts,agreements, promises, damages, disputes, demands, and all other manner of actions whatsoever, in lawor in equity, that Executive ever had, may have had, now has, or that Executive’s heirs, assigns,executors or administrators hereinafter can, shall or may have, whether known or unknown, asserted orunasserted, suspected or unsuspected, as a result of or related to Executive’s employment or consultingrelationship with the Company, the termination of that employment or consulting relationship, or anyact or omission which has occurred at any time up to and including the date of the execution of thisBring Down Release (the “Released Claims”). a) Released Claims. The Released Claims released include, but are not limited to,any claims for monetary damages; any claims for wages or compensation allegedly owed to Executive;any claims related to Executive’s employment or consulting relationship with the Company or thetermination thereof; any claims to severance or similar benefits; any claims to expenses, attorneys’ feesor other indemnities; any claims based on any actions or failures to act that occurred on or before thedate of this Bring Down Release; and any claims for other personal remedies or damages sought in anylegal proceeding or charge filed with any court or federal, state or local agency either by Executive orby any person claiming to act on Executive’s behalf or in Executive’s interest. Executive understandsthat the Released Claims1 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. may have arisen under different local, state and federal statutes, regulations, or common lawdoctrines. Executive hereby specifically, but without limitation, agrees to release all Releasees fromany and all claims under each of the following laws: i. Antidiscrimination laws, such as Title VII of the Civil Rights Act of 1964, asamended, and Executive Order 11246 (which prohibit discrimination based on race, color, nationalorigin, religion, or sex); Section 1981 of the Civil Rights Act of 1866 (which prohibits discriminationbased on race or color); the Age Discrimination in Employment Act of 1967 (which prohibitsdiscrimination based upon age); the Americans with Disabilities Act and Sections 503 and 504 of theRehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Equal Pay Act(which prohibits paying men and women unequal pay for equal work); the California Fair Employmentand Housing Act, California Government Code Section 12900 et seq. (which prohibits discriminationbased on protected characteristics including race, color, religion, sex, gender, sexual orientation, maritalstatus, national origin, language restrictions, ancestry, physical or mental disability, medical condition,age, and denial of leave); the California Equal Pay Law (which prohibits paying an employee at a rateless than another employee of a different sex, race, or ethnicity for substantially similar work),California Labor Code Section 1197.5; the Unruh Civil Rights Act, California Civil Code Section 51 etseq. (which prohibits discrimination based on age, sex, race, color, religion, ancestry, national origin,disability, medical condition, marital status, or sexual orientation); New Jersey Law AgainstDiscrimination, N.J.S.A. § 10:5-1 et seq.; or any other local, state or federal statute, regulation, commonlaw or decision concerning discrimination, harassment, or retaliation on these or any other grounds orotherwise governing the employment relationship. ii. Other employment laws, such as the federal Worker Adjustment and RetrainingNotification Act of 1988 and the California Worker Adjustment and Retraining Notification Act,California Labor Code Sections 1400 et seq. (known as WARN laws, which require advance notice ofcertain workforce reductions); the Executive Retirement Income Security Act of 1974 (which, amongother things, protects employee benefits); the Fair Labor Standards Act of 1938 (which regulates wageand hour matters); the Family and Medical Leave Act of 1993 (which requires employers to provideleaves of absence under certain circumstances); the California Labor Code (which regulatesemployment and wage and hour matters, including but not limited to misclassification claims); theCalifornia Family Rights Act of 1993, California Government Code Section 12945.1 et seq. (whichrequires employers to provide leaves of absence under certain circumstances); New Jersey FamilyLeave Act, N.J.S.A. § 34:11B-1 et seq.; Conscientious Employee Protection Act (C.E.P.A.), N.J.S.A. §§34:19-1 et seq.; New Jersey Wage Laws, N.J.S.A. § 34:11 et seq.; and any other federal, state, or localstatute, regulation, common law or decision relating to employment, reemployment rights, leaves ofabsence or any other aspect of employment. iii. Other laws of general application, such as federal, state, or local laws enforcingexpress or implied employment agreements or other contracts or covenants, or addressing breaches ofsuch agreements, contracts or covenants; federal, state or local laws providing relief for allegedwrongful discharge or termination, physical or personal injury, emotional distress, fraud, intentional ornegligent misrepresentation, defamation, invasion of privacy, violation of public policy or similarclaims; common law claims under any tort, contract or other theory now or hereafter recognized, andany other federal, state, or local statute, regulation, common law doctrine, or decision regulating orregarding employment. 2 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. a) Participation in Agency Proceedings. Nothing in this Bring Down Releaseshall prevent Executive from filing a charge (including a challenge to the validity of this Bring DownRelease) with the Equal Employment Opportunity Commission (the “EEOC”), the National LaborRelations Board (the “NLRB”), the California Department of Fair Employment and Housing (the“DFEH”), or other similar federal, state or local agency, or from participating in any investigation orproceeding conducted by the EEOC, the NLRB, the DFEH or similar federal, state or localagencies. However, by entering into this Bring Down Release, Executive understands and agrees thatExecutive is waiving any and all rights to recover any monetary relief or other personal relief as a resultof any such EEOC, NLRB, DFEH or similar federal, state or local agency proceeding, including anysubsequent legal action. b) Claims Not Released. The Released Claims do not include claims byExecutive for unemployment insurance benefits, workers’ compensation benefits, previously vestedbenefits under any Company-sponsored benefits plan or any other rights that cannot by law be releasedby private agreement. c) Waiver of Rights under California Civil Code Section 1542. Executivefurther acknowledges that he has read Section 1542 of the Civil Code of the State of California, whichprovides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THECREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HERFAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWNBY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HERSETTLEMENT WITH THE DEBTOR. Executive understands that Section 1542 gives him the right not to release existing claims of whichExecutive is not now aware, unless he voluntarily chooses to waive this right. Even though Executiveis aware of this right, he nevertheless hereby voluntarily waives the right described in Section 1542and any other statutes of similar effect, and elects to assume all risks for claims that now exist inExecutive’s favor, known or unknown, arising from the subject matter of the Release. Executiveacknowledges that different or additional facts may be discovered in addition to what Executive nowknows or believes to be true with respect to the matters released in this Bring Down Release, andExecutive agrees that this Bring Down Release will be and remain in effect in all respects as a completeand final release of the matters released, notwithstanding any such different or additionalfacts. EXCEPT AS OUTLINED ABOVE, THIS MEANS THAT, BY SIGNING THIS BRING DOWNRELEASE, EXECUTIVE WILL WAIVE ANY RIGHT HE MAY HAVE HAD TO PURSUE OR BRINGA LAWSUIT OR MAKE ANY LEGAL CLAIM AGAINST COMPANY OR THE SEPARATION DATERELEASEES INCLUDING, BUT NOT LIMITED TO, CLAIMS THAT IN ANY WAY ARISE FROMOR RELATE TO EXECUTIVE’S EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THECOMPANY OR THE TERMINATION OF THAT EMPLOYMENT OR CONSULTINGRELATIONSHIPO, UP TO AND INCLUDING THE DATE OF THE EXECUTION OF THIS BRINGDOWN RELEASE. EXECUTIVE AGREES NOT TO PURSUE OR BRING ANY SUCH LAWSUIT ORLEGAL CLAIM SEEKING MONETARY OR OTHER RELIEF.3 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. IN WITNESS WHEREOF, the undersigned has executed this Bring Down Release as of theConsultation Termination Date. [DO NOT SIGN UNTIL LAST DAY OF CONSULTING RELATIONSHIP] DateExecutive Signature 4 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT B Employment Arbitration Rules & Procedures *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. JAMSEmployment Arbitration Rules & ProceduresEffective July 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. JAMS EMPLOYMENT ARBITRATION RULES & PROCEDURESJAMS provides arbitration and mediation services worldwide. We resolve some of the world’s largest, most complex andcontentious disputes, utilizing JAMS Rules & Procedures as well as the rules of other domestic and international arbitralinstitutions. JAMS arbitrators and mediators are full-time neutrals who come from the ranks of retired state and federal judges andprominent attorneys. These highly trained, experienced ADR professionals are dedicated to the highest ethical standards ofconduct. Parties wishing to write a pre-dispute JAMS arbitration clause into their agreement should review the sample arbitrationclauses on page 4. These clauses may be modified to tailor the arbitration process to meet the parties’ individual needs. *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. TABLE OF CONTENTSAdministrative Fees3 Sample Clauses for Use in Employment Dispute Resolution Programs and ContractsSample Clause for Mediation Only4Sample Clause for Mediation and Arbitration4 JAMS Employment Arbitration Rules & ProceduresRule 1. Scope of Rules5Rule 2. Party Self-Determination6Rule 3. Amendment of Rules6Rule 4. Conflict with Law6Rule 5. Commencing an Arbitration6Rule 6. Preliminary and Administrative Matters7Rule 7. Number and Neutrality of Arbitrators; Appointment and Authority of Chairperson9Rule 8. Service9Rule 9. Notice of Claims11Rule 10. Changes of Claims12Rule 11. Interpretation of Rules and Jurisdictional Challenges12Rule 12. Representation13Rule 13. Withdrawal from Arbitration13Rule 14. Ex Parte Communications13Rule 15. Arbitrator Selection, Disclosures and Replacement14Rule 16. Preliminary Conference16Rule 17. Exchange of Information16Rule 18. Summary Disposition of a Claim or Issue17Rule 19. Scheduling and Location of Hearing18Rule 20. Pre-Hearing Submissions18Rule 21. Securing Witnesses and Documents for the Arbitration Hearing19Rule 22. The Arbitration Hearing19Rule 23. Waiver of Hearing21 2 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 24. Awards21Rule 25. Enforcement of the Award23Rule 26. Confidentiality and Privacy23Rule 27. Waiver24Rule 28. Settlement and Consent Award24Rule 29. Sanctions25Rule 30. Disqualification of the Arbitrator as a Witness or Party and Exclusion of Liability25Rule 31. Fees26Rule 32. Bracketed (or High-Low) Arbitration Option27Rule 33. Final Offer (or Baseball) Arbitration Option27Rule 34. Optional Arbitration Appeal Procedure28 Administrative FeesFor two-party matters, JAMS charges a $1,200 Filing Fee, to be paid by the party initiating the Arbitration. For mattersinvolving three or more parties, the Filing Fee is $2,000. A Case Management Fee of 12% will be assessed against allProfessional Fees, including time spent for hearings, pre- and post-hearing reading and research and award preparation. JAMS neutrals set their own hourly, partial and full-day rates. For information on individual neutrals’ rates and theadministrative fees, please contact JAMS at 800.352.5267. The fee structure is subject to change. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 3 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Sample Clauses for Use in Employment Dispute Resolution Programs and ContractsThe following are basic sample clauses providing for mediation or arbitration in an employment contract. A variety ofissues may affect the enforceability or effectiveness of these sample clauses; therefore, it is recommended that you reviewapplicable law in your jurisdiction and consult experienced counsel for advice. The information contained herein shouldnot be considered legal advice or legal opinion. For information about setting a case, call your local JAMS office at800.352.5267. Sample Clause for Mediation OnlyAny controversy, dispute or claim arising out of or relating to this [contract] or breach thereof shall first be settledthrough good-faith negotiation [OR company employment program] [other]. If the dispute cannot be settledthrough negotiation [OR company employment program] [other], the parties agree to attempt in good faith tosettle the dispute by mediation administered by JAMS. Sample Clause for Mediation and ArbitrationAny controversy, dispute or claim arising out of or relating to this [contract] or breach thereof shall first be settledthrough good-faith negotiation [OR company employment program] [other]. If the dispute cannot be settledthrough negotiation [OR company employment program] [other], the parties agree to attempt in good faith tosettle the dispute by mediation administered by JAMS. If the parties are unsuccessful at resolving the disputethrough mediation, the parties agree to [binding] arbitration administered by JAMS pursuant to its EmploymentArbitration Rules & Procedures and subject to JAMS Policy on Employment Arbitration Minimum Standards ofProcedural Fairness. Judgment on the Award may be entered in any court having jurisdiction. All of the JAMS Rules, including the Employment Arbitration Rules set forth below, can be accessed at the JAMS website: www.jamsadr.com/rules-clauses. 4 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. JAMS EMPLOYMENT ARBITRATION RULES & PROCEDURESNOTICE: These Rules are the copyrighted property of JAMS. They cannot be copied, reprinted or used in any way withoutpermission of JAMS, unless they are being used by the parties to an arbitration as the rules for that arbitration. If they arebeing used as the rules for an arbitration, proper attribution must be given to JAMS. If you wish to obtain permission to useour copyrighted materials, please contact JAMS at 949.224.1810. Rule 1. Scope of Rules(a) The JAMS Employment Arbitration Rules and Procedures (“Rules”) govern binding Arbitrations of disputes or claimsthat are administered by JAMS and in which the Parties agree to use these Rules or, in the absence of such agreement, thedisputes or claims are employment-related, unless other Rules are prescribed. (b) The Parties shall be deemed to have made these Rules a part of their Arbitration agreement (“Agreement”) wheneverthey have provided for Arbitration by JAMS under its Employment Rules or for Arbitration by JAMS without specifying anyparticular JAMS Rules and the disputes or claims meet the criteria of the first paragraph of this Rule. (c) The authority and duties of JAMS as prescribed in the Agreement of the Parties and in these Rules shall be carried outby the JAMS National Arbitration Committee (“NAC”) or the office of JAMS General Counsel or their designees. (d) JAMS may, in its discretion, assign the administration of an Arbitration to any of its Resolution Centers. (e) The term “Party” as used in these Rules includes Parties to the Arbitration and their counsel or representatives. (f) “Electronic filing” (e-file) means the electronic transmission of documents to and from JAMS and other Parties for thepurpose of filing via the Internet. “Electronic service” (e-service) means the electronic transmission of documents via JAMSElectronic Filing System to a party, attorney or representative under these Rules. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 5 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 2. Party Self-Determination(a) The Parties may agree on any procedures not specified herein or in lieu of these Rules that are consistent with theapplicable law and JAMS policies (including, without limitation, the JAMS Policy on Employment Arbitration MinimumStandards of Procedural Fairness and Rules 15(i), 30 and 31). The Parties shall promptly notify JAMS of any such Party-agreed procedures and shall confirm such procedures in writing. The Party-agreed procedures shall be enforceable as ifcontained in these Rules. (b) When an Arbitration Agreement provides that the Arbitration will be non-administered or administered by an entityother than JAMS and/or conducted in accordance with rules other than JAMS Rules, the Parties may subsequently agree tomodify that Agreement to provide that the Arbitration will be administered by JAMS and/or conducted in accordance withJAMS Rules. Rule 3. Amendment of RulesJAMS may amend these Rules without notice. The Rules in effect on the date of the commencement of an Arbitration (asdefined in Rule 5) shall apply to that Arbitration, unless the Parties have agreed upon another version of the Rules. Rule 4. Conflict with LawIf any of these Rules, or modification of these Rules agreed to by the Parties, is determined to be in conflict with a provisionof applicable law, the provision of law will govern over the Rule in conflict, and no other Rule will be affected. Rule 5. Commencing an Arbitration(a) The Arbitration is deemed commenced when JAMS issues a Commencement Letter based upon the existence of one ofthe following: (i) A post-dispute Arbitration Agreement fully executed by all Parties specifying JAMS administration or use of any JAMSRules; or (ii) A pre-dispute written contractual provision requiring the Parties to arbitrate the employment dispute or claim andspecifying JAMS administration or use of any JAMS Rules or that the Parties agree shall be administered by JAMS; or (iii) A written confirmation of an oral agreement of all Parties to participate in an Arbitration administered by JAMS orconducted pursuant to any JAMS Rules; or 6 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (iv) The Respondent’s failure to timely object to JAMS administration; or (v) A copy of a court order compelling Arbitration at JAMS. (b) The issuance of the Commencement Letter confirms that requirements for commencement have been met, that JAMShas received all payments required under the applicable fee schedule and that the Claimant has provided JAMS withcontact information for all Parties along with evidence that the Demand for Arbitration has been served on all Parties. (c) If a Party that is obligated to arbitrate in accordance with subparagraph (a) of this Rule fails to agree to participate inthe Arbitration process, JAMS shall confirm in writing that Party’s failure to respond or participate, and, pursuant to Rule19, the Arbitrator, once appointed, shall schedule, and provide appropriate notice of, a Hearing or other opportunity forthe Party demanding the Arbitration to demonstrate its entitlement to relief. (d) The date of commencement of the Arbitration is the date of the Commencement Letter but is not intended to beapplicable to any legal requirements such as the statute of limitations, any contractual limitations period or claims noticerequirements. The term “commencement,” as used in this Rule, is intended only to pertain to the operation of this andother Rules (such as Rule 3, 13(a), 17(a), 31(a)). Rule 6. Preliminary and Administrative Matters(a) JAMS may convene, or the Parties may request, administrative conferences to discuss any procedural matter relating tothe administration of the Arbitration. (b) If no Arbitrator has yet been appointed, at the request of a Party and in the absence of Party agreement, JAMS maydetermine the location of the Hearing, subject to Arbitrator review. In determining the location of the Hearing, such factorsas the subject matter of the dispute, the convenience of the Parties and witnesses, and the relative resources of the Partiesshall be considered, but in no event will the Hearing be scheduled in a location that precludes attendance by the Employee. (c) If, at any time, any Party has failed to pay fees or expenses in full, JAMS may order the suspension or termina- JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 7 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  tion of the proceedings. JAMS may so inform the Parties in order that one of them may advance the required payment. Ifone Party advances the payment owed by a non-paying Party, the Arbitration shall proceed, and the Arbitrator mayallocate the non-paying Party’s share of such costs, in accordance with Rules 24(f) and 31(c). An administrative suspensionshall toll any other time limits contained in these Rules or the Parties’ Agreement. (d) JAMS does not maintain an official record of documents filed in the Arbitration. If the Parties wish to have anydocuments returned to them, they must advise JAMS in writing within thirty (30) calendar days of the conclusion of theArbitration. If special arrangements are required regarding file maintenance or document retention, they must be agreedto in writing, and JAMS reserves the right to impose an additional fee for such special arrangements. Documents that aresubmitted for e-filing are retained for thirty (30) calendar days following the conclusion of the Arbitration. (e) Unless the Parties’ Agreement or applicable law provides otherwise, JAMS, if it determines that the Arbitrations so filedhave common issues of fact or law, may consolidate Arbitrations in the following instances: (i) If a Party files more than one Arbitration with JAMS, JAMS may consolidate the Arbitrations into a single Arbitration. (ii) Where a Demand or Demands for Arbitration is or are submitted naming Parties already involved in anotherArbitration or Arbitrations pending under these Rules, JAMS may decide that the new case or cases shall be consolidatedinto one or more of the pending proceedings and referred to one of the Arbitrators or panels of Arbitrators alreadyappointed. (iii) Where a Demand or Demands for Arbitration is or are submitted naming parties that are not identical to the Partiesin the existing Arbitration or Arbitrations, JAMS may decide that the new case or cases shall be consolidated into one ormore of the pending proceedings and referred to one of the Arbitrators or panels of Arbitrators already appointed. When rendering its decision, JAMS will take into account all circumstances, including the links between the cases and theprogress already made in the existing Arbitrations. 8 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Unless applicable law provides otherwise, where JAMS decides to consolidate a proceeding into a pending Arbitration, theParties to the consolidated case or cases will be deemed to have waived their right to designate an Arbitrator as well as anycontractual provision with respect to the site of the Arbitration. (f) Where a third party seeks to participate in an Arbitration already pending under these Rules or where a Party to anArbitration under these Rules seeks to compel a third party to participate in a pending Arbitration, the Arbitrator shalldetermine such request, taking into account all circumstances he or she deems relevant and applicable. Rule 7. Number and Neutrality of Arbitrators; Appointment and Authority ofChairperson(a) The Arbitration shall be conducted by one neutral Arbitrator, unless all Parties agree otherwise. In these Rules, the term“Arbitrator” shall mean, as the context requires, the Arbitrator or the panel of Arbitrators in a tripartite Arbitration. (b) In cases involving more than one Arbitrator, the Parties shall agree on, or, in the absence of agreement, JAMS shalldesignate, the Chairperson of the Arbitration Panel. If the Parties and the Arbitrators agree, a single member of theArbitration Panel may, acting alone, decide discovery and procedural matters, including the conduct of hearings to receivedocuments and testimony from third parties who have been subpoenaed to produce documents. (c) Where the Parties have agreed that each Party is to name one Arbitrator, the Arbitrators so named shall be neutral andindependent of the appointing Party, unless the Parties have agreed that they shall be non-neutral. Rule 8. Service(a) The Arbitrator may at any time require electronic filing and service of documents in an Arbitration. If an Arbitratorrequires electronic filing, the Parties shall maintain and regularly monitor a valid, usable and live email address for thereceipt of all documents filed through JAMS Electronic Filing System. Any document filed electronically shall be consideredas filed with JAMS when the transmission to JAMS Electronic Filing System is complete. Any document e-filed by 11:59 p.m.(of the sender’s time zone) shall be deemed filed on that date. Upon completion of filing, JAMS JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 9 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Electronic Filing System shall issue a confirmation receipt that includes the date and time of receipt. The confirmationreceipt shall serve as proof of filing. (b) Every document fi with JAMS Electronic Filing System shall be deemed to have been signed by the Arbitrator, CaseManager, attorney or declarant who submits the document to JAMS Electronic Filing System, and shall bear the typedname, address and telephone number of a signing attorney. Documents containing signatures of third parties (i.e.,unopposed motions, affidavits, stipulations, etc.) may also be filed electronically by indicating that the original signaturesare maintained by the filing Party in paper format. (c) Delivery of e-service documents through JAMS Electronic Filing System to other registered users shall be considered asvalid and effective service and shall have the same legal effect as an original paper document. Recipients of e-servicedocuments shall access their documents through JAMS Electronic Filing System. E-service shall be deemed complete whenthe Party initiating e-service completes the transmission of the electronic document(s) to JAMS Electronic Filing System fore-filing and/or e-service. Upon actual or constructive receipt of the electronic document(s) by the Party to be served, aCertificate of Electronic Service shall be issued by JAMS Electronic Filing System to the Party initiating e-service, and thatCertificate shall serve as proof of service. Any Party who ignores or attempts to refuse e-service shall be deemed to havereceived the electronic document(s) 72 hours following the transmission of the electronic document(s) to JAMS ElectronicFiling System. (d) If an electronic filing or service does not occur because of (1) an error in the transmission of the document to JAMSElectronic Filing System or served Party which was unknown to the sending Party; (2) a failure to process the electronicdocument when received by JAMS Electronic Filing System;(3) the Party was erroneously excluded from the service list; or (4) other technical problems experienced by the filer, theArbitrator or JAMS may, for good cause shown, permit the document to be filed nunc pro tunc to the date it was firstattempted to be sent electronically. Or, in the case of service, the Party shall, absent extraordinary circumstances, beentitled to an order extending the date for any response or the period within which any right, duty or other act must beperformed. 10 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (e) For documents that are not filed electronically, service by a Party under these Rules is effected by providing one signedcopy of the document to each Party and two copies in the case of a sole Arbitrator and four copies in the case of atripartite panel to JAMS. Service may be made by hand-delivery, overnight delivery service or U.S. mail. Service by any ofthese means is considered effective upon the date of deposit of the document. (f) In computing any period of time prescribed or allowed by these Rules for a Party to do some act within a prescribedperiod after the service of a notice or other paper on the Party and the notice or paper is served on the Party only by U.S.mail, three (3) calendar days shall be added to the prescribed period. Rule 9. Notice of Claims(a) Each Party shall afford all other Parties reasonable and timely notice of its claims, affirmative defenses or counterclaims.Any such notice shall include a short statement of its factual basis. No claim, remedy, counterclaim, or affirmative defensewill be considered by the Arbitrator in the absence of such prior notice to the other Parties, unless the Arbitratordetermines that no Party has been unfairly prejudiced by such lack of formal notice or all Parties agree that suchconsideration is appropriate notwithstanding the lack of prior notice. (b) Claimant’s notice of claims is the Demand for Arbitration referenced in Rule 5. It shall include a statement of theremedies sought. The Demand for Arbitration may attach and incorporate a copy of a Complaint previously filed with acourt. In the latter case, Claimant may accompany the Complaint with a copy of any Answer to that Complaint filed by anyRespondent. (c) Within fourteen (14) calendar days of service of the notice of claim, a Respondent may submit to JAMS and serve onother Parties a response and a statement of any affirmative defenses, including jurisdictional challenges, or counterclaimsit may have. (d) Within fourteen (14) calendar days of service of a counterclaim, a Claimant may submit to JAMS and serve on otherParties a response to such counterclaim and any affirmative defenses, including jurisdictional challenges, it may have. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 11 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (e) Any claim or counterclaim to which no response has been served will be deemed denied. (f) Jurisdictional challenges under Rule 11 shall be deemed waived, unless asserted in a response to a Demand orcounterclaim or promptly thereafter, when circumstances first suggest an issue of arbitrability. Rule 10. Changes of ClaimsAfter the filing of a claim and before the Arbitrator is appointed, any Party may make a new or different claim against aParty or any third Party that is subject to Arbitration in the proceeding. Such claim shall be made in writing, filed withJAMS and served on the other Parties. Any response to the new claim shall be made within fourteen(14) calendar days after service of such claim. After the Arbitrator is appointed, no new or different claim may besubmitted, except with the Arbitrator’s approval. A Party may request a hearing on this issue. Each Party has the right torespond to any new or amended claim in accordance with Rule 9(c) or (d). Rule 11. Interpretation of Rules and Jurisdictional Challenges(a) Once appointed, the Arbitrator shall resolve disputes about the interpretation and applicability of these Rules andconduct of the Arbitration Hearing. The resolution of the issue by the Arbitrator shall be final. (b) Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation orscope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall besubmitted to and ruled on by the Arbitrator. Unless the relevant law requires otherwise, the Arbitrator has the authority todetermine jurisdiction and arbitrability issues as a preliminary matter. (c) Disputes concerning the appointment of the Arbitrator shall be resolved by JAMS. (d) The Arbitrator may, upon a showing of good cause or sua sponte, when necessary to facilitate the Arbitration, extendany deadlines established in these Rules, provided that the time for rendering the Award may only be altered in accordancewith Rules 22(i) or 24. 12 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 12. Representation(a) The Parties, whether natural persons or legal entities such as corporations, LLCs, or partnerships, may be representedby counsel or any other person of the Party’s choice. Each Party shall give prompt written notice to the Case Manager andthe other Parties of the name, address, telephone and fax numbers and email address of its representative. Therepresentative of a Party may act on the Party’s behalf in complying with these Rules. (b) Changes in Representation. A Party shall give prompt written notice to the Case Manager and the other Parties of anychange in its representation, including the name, address, telephone and fax numbers and email address of the newrepresentative. Such notice shall state that the written consent of the former representative, if any, and of the newrepresentative, has been obtained and shall state the effective date of the new representation. Rule 13. Withdrawal from Arbitration(a) No Party may terminate or withdraw from an Arbitration after the issuance of the Commencement Letter (see Rule 5),except by written agreement of all Parties to the Arbitration. (b) A Party that asserts a claim or counterclaim may unilaterally withdraw that claim or counterclaim without prejudice byserving written notice on the other Parties and the Arbitrator. However, the opposing Parties may, within seven (7)calendar days of such notice, request that the Arbitrator condition the withdrawal upon such terms as he or she maydirect. Rule 14. Ex Parte Communications(a) No Party may have any ex parte communication with a neutral Arbitrator, except as provided in section (b) of this Rule.The Arbitrator(s) may authorize any Party to communicate directly with the Arbitrator(s) by email or other written meansas long as copies are simultaneously forwarded to the JAMS Case Manager and the other Parties. (b) A Party may have ex parte communication with its appointed neutral or non-neutral Arbitrator as necessary to securethe Arbitrator’s services and to assure the absence of conflicts, as well as in connection with the selection of theChairperson of the arbitral panel. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 13 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (c) The Parties may agree to permit more extensive ex parte communication between a Party and a non-neutral Arbitrator.More extensive communications with a non-neutral Arbitrator may also be permitted by applicable law and rules of ethics. Rule 15. Arbitrator Selection, Disclosures and Replacement(a) Unless the Arbitrator has been previously selected by agreement of the Parties, JAMS may attempt to facilitateagreement among the Parties regarding selection of the Arbitrator. (b) If the Parties do not agree on an Arbitrator, JAMS shall send the Parties a list of at least five (5) Arbitrator candidates inthe case of a sole Arbitrator and ten (10) Arbitrator candidates in the case of a tripartite panel. JAMS shall also provideeach Party with a brief description of the background and experience of each Arbitrator candidate. JAMS may replace anyor all names on the list of Arbitrator candidates for reasonable cause at any time before the Parties have submitted theirchoice pursuant to subparagraph(c) below. (c) Within seven (7) calendar days of service by the Parties of the list of names, each Party may strike two (2) names in thecase of a sole Arbitrator and three (3) names in the case of a tripartite panel, and shall rank the remaining Arbitratorcandidates in order of preference. The remaining Arbitrator candidate with the highest composite ranking shall beappointed the Arbitrator. JAMS may grant a reasonable extension of the time to strike and rank the Arbitrator candidatesto any Party without the consent of the other Parties. (d) If this process does not yield an Arbitrator or a complete panel, JAMS shall designate the sole Arbitrator or as manymembers of the tripartite panel as are necessary to complete the panel. (e) If a Party fails to respond to a list of Arbitrator candidates within seven (7) calendar days after its service, or fails torespond according to the instructions provided by JAMS, JAMS shall deem that Party to have accepted all of the Arbitratorcandidates. (f) Entities whose interests are not adverse with respect to the issues in dispute shall be treated as a single Party forpurposes of the Arbitrator selection process. JAMS 14 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  shall determine whether the interests between entities are adverse for purposes of Arbitrator selection, considering suchfactors as whether the entities are represented by the same attorney and whether the entities are presenting joint orseparate positions at the Arbitration. (g) If, for any reason, the Arbitrator who is selected is unable to fulfill the Arbitrator’s duties, a successor Arbitrator shallbe chosen in accordance with this Rule. If a member of a panel of Arbitrators becomes unable to fulfill his or her dutiesafter the beginning of a Hearing but before the issuance of an Award, a new Arbitrator will be chosen in accordance withthis Rule, unless, in the case of a tripartite panel, the Parties agree to proceed with the remaining two Arbitrators. JAMS willmake the final determination as to whether an Arbitrator is unable to fulfill his or her duties, and that decision shall befinal. (h) Any disclosures regarding the selected Arbitrator shall be made as required by law or within ten (10) calendar daysfrom the date of appointment. Such disclosures may be provided in electronic format, provided that JAMS will produce ahard copy to any Party that requests it. The Parties and their representatives shall disclose to JAMS any circumstanceslikely to give rise to justifiable doubt as to the Arbitrator’s impartiality or independence, including any bias or any financialor personal interest in the result of the Arbitration or any past or present relationship with the Parties and theirrepresentatives. The obligation of the Arbitrator, the Parties and their representatives to make all required disclosurescontinues throughout the Arbitration process. (i) At any time during the Arbitration process, a Party may challenge the continued service of an Arbitrator for cause. Thechallenge must be based upon information that was not available to the Parties at the time the Arbitrator was selected. Achallenge for cause must be in writing and exchanged with opposing Parties, who may respond within seven (7) days ofservice of the challenge. JAMS shall make the final determination as to such challenge. Such determination shall take intoaccount the materiality of the facts and any prejudice to the Parties. That decision will be final. (j) Where the Parties have agreed that a Party-appointed Arbitrator is to be non-neutral, that Party-appointed Arbitrator isnot obliged to withdraw if requested to do so only by the party who did not appoint that Arbitrator. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 15 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 16. Preliminary ConferenceAt the request of any Party or at the direction of the Arbitrator, a Preliminary Conference shall be conducted with theParties or their counsel or representatives. The Preliminary Conference may address any or all of the following subjects: (a) The exchange of information in accordance with Rule 17 or otherwise; (b) The schedule for discovery as permitted by the Rules, as agreed by the Parties or as required or authorized byapplicable law; (c) The pleadings of the Parties and any agreement to clarify or narrow the issues or structure the Arbitration Hearing; (d) The scheduling of the Hearing and any pre-Hearing exchanges of information, exhibits, motions or briefs; (e) The attendance of witnesses as contemplated by Rule 21; (f) The scheduling of any dispositive motion pursuant to Rule 18; (g) The premarking of exhibits, preparation of joint exhibit lists and the resolution of the admissibility of exhibits; (h) The form of the Award; and (i) Such other matters as may be suggested by the Parties or the Arbitrator. The Preliminary Conference may be conducted telephonically and may be resumed from time to time as warranted. Rule 17. Exchange of Information(a) The Parties shall cooperate in good faith in the voluntary and informal exchange of all non-privileged documents andother information (including electronically stored information (“ESI”)) relevant to the dispute or claim immediately aftercommencement of the Arbitration. They shall complete an initial exchange of all relevant, nonprivileged documents,including, without limitation, copies of all documents in their possession or control on which they rely in support of theirpositions, names of individuals whom they may call as witnesses at the Arbitration Hearing 16 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  and names of all experts who may be called to testify at the Arbitration Hearing, together with each expert’s report, whichmay be introduced at the Arbitration Hearing, within twenty-one (21) calendar days after all pleadings or notice of claimshave been received. The Arbitrator may modify these obligations at the Preliminary Conference. (b) Each Party may take at least one deposition of an opposing Party or an individual under the control of the opposingParty. The Parties shall attempt to agree on the number, time, location and duration of the deposition(s). Absentagreement, the Arbitrator shall determine these issues, including whether to grant a request for additional depositions,based upon the reasonable need for the requested information, the availability of other discovery and theburdensomeness of the request on the opposing Parties and witness. (c) As they become aware of new documents or information, including experts who may be called upon to testify, allParties continue to be obligated to provide relevant, nonprivileged documents, to supplement their identification ofwitnesses and experts and to honor any informal agreements or understandings between the Parties regarding documentsor information to be exchanged. Documents that were not previously exchanged, or witnesses and experts that were notpreviously identified, may not be considered by the Arbitrator at the Hearing, unless agreed by the Parties or upon ashowing of good cause. (d) The Parties shall promptly notify JAMS when a dispute exists regarding discovery issues. A conference shall be arrangedwith the Arbitrator, either by telephone or in person, and the Arbitrator shall decide the dispute. With the written consentof all Parties, and in accordance with an agreed written procedure, the Arbitrator may appoint a special master to assist inresolving a discovery dispute. Rule 18. Summary Disposition of a Claim or IssueThe Arbitrator may permit any Party to file a Motion for Summary Disposition of a particular claim or issue, either byagreement of all interested Parties or at the request of one Party, provided other interested Parties have reasonable noticeto respond to the motion. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 17 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 19. Scheduling and Location of Hearing(a) The Arbitrator, after consulting with the Parties that have appeared, shall determine the date, time and location of theHearing. The Arbitrator and the Parties shall attempt to schedule consecutive Hearing days if more than one day isnecessary. (b) If a Party has failed to participate in the Arbitration process, and the Arbitrator reasonably believes that the Party willnot participate in the Hearing, the Arbitrator may set the Hearing without consulting with that Party. The non-participatingParty shall be served with a Notice of Hearing at least thirty (30) calendar days prior to the scheduled date, unless the lawof the relevant jurisdiction allows for, or the Parties have agreed to, shorter notice. (c) The Arbitrator, in order to hear a third-party witness, or for the convenience of the Parties or the witnesses, mayconduct the Hearing at any location. Any JAMS Resolution Center may be designated a Hearing location for purposes of theissuance of a subpoena or subpoena duces tecum to a third-party witness. Rule 20. Pre-Hearing Submissions(a) Except as set forth in any scheduling order that may be adopted, at least fourteen (14) calendar days before theArbitration Hearing, the Parties shall file with JAMS and serve and exchange (1) a list of the witnesses they intend to call,including any experts; (2) a short description of the anticipated testimony of each such witness and an estimate of thelength of the witness’ direct testimony; and (3) a list of all exhibits intended to be used at the Hearing. The Parties shouldexchange with each other copies of any such exhibits to the extent that they have not been previously exchanged. TheParties should pre-mark exhibits and shall attempt to resolve any disputes regarding the admissibility of exhibits prior tothe Hearing. (b) The Arbitrator may require that each Party submit a concise written statement of position, including summaries of thefacts and evidence a Party intends to present, discussion of the applicable law and the basis for the requested Award ordenial of relief sought. The statements, which may be in the form of a letter, shall be filed with JAMS and served upon theother Parties at least seven (7) calendar days before the Hearing date. Rebuttal statements or other pre-Hearing writtensubmissions may be permitted or required at the discretion of the Arbitrator. 18 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 21. Securing Witnesses and Documents for the Arbitration HearingAt the written request of a Party, all other Parties shall produce for the Arbitration Hearing all specified witnesses in theiremploy or under their control without need of subpoena. The Arbitrator may issue subpoenas for the attendance ofwitnesses or the production of documents either prior to or at the Hearing pursuant to this Rule or Rule 19(c). Thesubpoena or subpoena duces tecum shall be issued in accordance with the applicable law. Pre-issued subpoenas may beused in jurisdictions that permit them. In the event a Party or a subpoenaed person objects to the production of a witnessor other evidence, the Party or subpoenaed person may fi an objection with the Arbitrator, who shall promptly rule on theobjection, weighing both the burden on the producing Party and witness and the need of the proponent for the witness orother evidence. Rule 22. The Arbitration Hearing(a) The Arbitrator will ordinarily conduct the Arbitration Hearing in the manner set forth in these Rules. The Arbitrator mayvary these procedures if it is determined to be reasonable and appropriate to do so. It is expected that the Employee willattend the Arbitration Hearing, as will any other individual party with information about a significant issue. (b) The Arbitrator shall determine the order of proof, which will generally be similar to that of a court trial. (c) The Arbitrator shall require witnesses to testify under oath if requested by any Party, or otherwise at the discretion ofthe Arbitrator. (d) Strict conformity to the rules of evidence is not required, except that the Arbitrator shall apply applicable law relatingto privileges and work product. The Arbitrator shall consider evidence that he or she finds relevant and material to thedispute, giving the evidence such weight as is appropriate. The Arbitrator may be guided in that determination byprinciples contained in the Federal Rules of Evidence or any other applicable rules of evidence. The Arbitrator may limittestimony to exclude evidence that would be immaterial or unduly repetitive, provided that all Parties are afforded theopportunity to present material and relevant evidence. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 19 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (e) The Arbitrator shall receive and consider relevant deposition testimony recorded by transcript or videotape, providedthat the other Parties have had the opportunity to attend and cross-examine. The Arbitrator may in his or her discretionconsider witness affidavits or other recorded testimony even if the other Parties have not had the opportunity to cross-examine, but will give that evidence only such weight as he or she deems appropriate. (f) The Parties will not offer as evidence, and the Arbitrator shall neither admit into the record nor consider, priorsettlement offers by the Parties or statements or recommendations made by a mediator or other person in connection withefforts to resolve the dispute being arbitrated, except to the extent that applicable law permits the admission of suchevidence. (g) The Hearing, or any portion thereof, may be conducted telephonically or videographically with the agreement of theParties or at the discretion of the Arbitrator. (h) When the Arbitrator determines that all relevant and material evidence and arguments have been presented, and anyinterim or partial Awards have been issued, the Arbitrator shall declare the Hearing closed. The Arbitrator may defer theclosing of the Hearing until a date determined by the Arbitrator, to permit the Parties to submit post-Hearing briefs, whichmay be in the form of a letter, and/or to make closing arguments. If post-Hearing briefs are to be submitted, or closingarguments are to be made, the Hearing shall be deemed closed upon receipt by the Arbitrator of such briefs or at theconclusion of such closing arguments, whichever is later. (i) At any time before the Award is rendered, the Arbitrator may, sua sponte or on application of a Party for good causeshown, reopen the Hearing. If the Hearing is reopened, the time to render the Award shall be calculated from the date thereopened Hearing is declared closed by the Arbitrator. (j) The Arbitrator may proceed with the Hearing in the absence of a Party that, after receiving notice of the Hearingpursuant to Rule 19, fails to attend. The Arbitrator may not render an Award solely on the basis of the default or absenceof the Party, but shall require any Party seeking relief to submit such evidence as the Arbitrator may require for therendering of an Award. If the Arbitrator reasonably believes that a Party will not attend the Hearing, the Arbitrator mayschedule the Hearing as a telephonic Hearing and 20 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  may receive the evidence necessary to render an Award by affidavit. The notice of Hearing shall specify if it will be inperson or telephonic. (k) Any Party may arrange for a stenographic or other record to be made of the Hearing and shall inform the other Partiesin advance of the Hearing. (i) The requesting Party shall bear the cost of such stenographic record. If all other Parties agree to share the cost of thestenographic record, it shall be made available to the Arbitrator and may be used in the proceeding. (ii) If there is no agreement to share the cost, the stenographic record may not be provided to the Arbitrator and may notbe used in the proceeding, unless the Party arranging for the stenographic record agrees to provide access to thestenographic record either at no charge or on terms that are acceptable to the Parties and the reporting service. (iii) If the Parties agree to the Optional Arbitration Appeal Procedure (see Rule 34), they shall, if possible, ensure that astenographic or other record is made of the Hearing. (iv) The Parties may agree that the cost of the stenographic record shall or shall not be allocated by the Arbitrator in theAward. Rule 23. Waiver of HearingThe Parties may agree to waive the oral Hearing and submit the dispute to the Arbitrator for an Award based on writtensubmissions and other evidence as the Parties may agree. Rule 24. Awards(a) The Arbitrator shall render a Final Award or a Partial Final Award within thirty (30) calendar days after the date of theclose of the Hearing, as defined in Rule 22(h) or (i), or, if a Hearing has been waived, within thirty (30) calendar days afterthe receipt by the Arbitrator of all materials specified by the Parties, except (1) by the agreement of the Parties; (2) upongood cause for an extension of time to render the Award; or (3) as provided in Rule 22(i). The Arbitrator shall provide theFinal Award or the Partial Final Award to JAMS for issuance in accordance with this Rule. (b) Where a panel of Arbitrators has heard the dispute, the decision and Award of a majority of the panel shall constitutethe Arbitration Award. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 21 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  (c) In determining the merits of the dispute, the Arbitrator shall be guided by the rules of law agreed upon by the Parties. Inthe absence of such agreement, the Arbitrator will be guided by the law or the rules of law that he or she deems to be mostappropriate. The Arbitrator may grant any remedy or relief that is just and equitable and within the scope of the Parties’agreement, including, but not limited to, specific performance of a contract or any other equitable or legal remedy. (d) In addition to a Final Award or Partial Final Award, the Arbitrator may make other decisions, including interim or partialrulings, orders and Awards. (e) Interim Measures. The Arbitrator may grant whatever interim measures are deemed necessary, including injunctiverelief and measures for the protection or conservation of property and disposition of disposable goods. Such interimmeasures may take the form of an interim or Partial Final Award, and the Arbitrator may require security for the costs ofsuch measures. Any recourse by a Party to a court for interim or provisional relief shall not be deemed incompatible withthe agreement to arbitrate or a waiver of the right to arbitrate. (f) The Award of the Arbitrator may allocate Arbitration fees and Arbitrator compensation and expenses, unless such anallocation is expressly prohibited by the Parties’ Agreement or by applicable law. (Such a prohibition may not limit thepower of the Arbitrator to allocate Arbitration fees and Arbitrator compensation and expenses pursuant to Rule 31(c).) (g) The Award of the Arbitrator may allocate attorneys’ fees and expenses and interest (at such rate and from such date asthe Arbitrator may deem appropriate) if provided by the Parties’ Agreement or allowed by applicable law. When theArbitrator is authorized to award attorneys’ fees and must determine the reasonable amount of such fees, he or she mayconsider whether the failure of a Party to cooperate reasonably in the discovery process and/or comply with theArbitrator’s discovery orders caused delay to the proceeding or additional costs to the other Parties. (h) The Award shall consist of a written statement signed by the Arbitrator regarding the disposition of each claim and therelief, if any, as to each claim. The Award shall also contain a concise written statement of the reasons for the Award,stating the essential findings and conclusions 22 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  on which the Award is based. The Parties may agree to any other form of Award, unless the Arbitration is based on anarbitration agreement that is required as a condition of employment. (i) After the Award has been rendered, and provided the Parties have complied with Rule 31, the Award shall be issued byserving copies on the Parties. Service may be made by U.S. mail. It need not be sent certified or registered. (j) Within seven (7) calendar days after service of a Partial Final Award or Final Award by JAMS, any Party may serve uponthe other Parties and on JAMS a request that the Arbitrator correct any computational, typographical or other similarerror in an Award (including the reallocation of fees pursuant to Rule 31 or on account of the effect of an offer to allowjudgment), or the Arbitrator may sua sponte propose to correct such errors in an Award. A Party opposing suchcorrection shall have seven (7) calendar days thereafter in which to file any objection. The Arbitrator may make anynecessary and appropriate corrections to the Award within twenty-one (21) calendar days of receiving a request orfourteen (14) calendar days after his or her proposal to do so. The Arbitrator may extend the time within which to makecorrections upon good cause. The corrected Award shall be served upon the Parties in the same manner as the Award. (k) The Award is considered final, for purposes of either the Optional Arbitration Appeal Procedure pursuant to Rule 34 ora judicial proceeding to enforce, modify or vacate the Award pursuant to Rule 25, fourteen (14) calendar days after serviceis deemed effective if no request for a correction is made, or as of the effective date of service of a corrected Award. Rule 25. Enforcement of the AwardProceedings to enforce, confirm, modify or vacate an Award will be controlled by and conducted in conformity with theFederal Arbitration Act, 9 U.S.C. Sec 1, et seq., or applicable state law. The Parties to an Arbitration under these Rules shallbe deemed to have consented that judgment upon the Award may be entered in any court having jurisdiction thereof. Rule 26. Confidentiality and Privacy(a) JAMS and the Arbitrator shall maintain the confidential nature of the Arbitration proceeding and the Award, includ- JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 23 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  ing the Hearing, except as necessary in connection with a judicial challenge to or enforcement of an Award, or unlessotherwise required by law or judicial decision. (b) The Arbitrator may issue orders to protect the confidentiality of proprietary information, trade secrets or othersensitive information. (c) Subject to the discretion of the Arbitrator or agreement of the Parties, any person having a direct interest in theArbitration may attend the Arbitration Hearing. The Arbitrator may exclude any non-Party from any part of a Hearing. Rule 27. Waiver(a) If a Party becomes aware of a violation of or failure to comply with these Rules and fails promptly to object in writing,the objection will be deemed waived, unless the Arbitrator determines that waiver will cause substantial injustice orhardship. (b) If any Party becomes aware of information that could be the basis of a challenge for cause to the continued service ofthe Arbitrator, such challenge must be made promptly, in writing, to the Arbitrator or JAMS. Failure to do so shallconstitute a waiver of any objection to continued service by the Arbitrator. Rule 28. Settlement and Consent Award(a) The Parties may agree, at any stage of the Arbitration process, to submit the case to JAMS for mediation. The JAMSmediator assigned to the case may not be the Arbitrator or a member of the Appeal Panel, unless the Parties so agree,pursuant to Rule 28(b). (b) The Parties may agree to seek the assistance of the Arbitrator in reaching settlement. By their written agreement tosubmit the matter to the Arbitrator for settlement assistance, the Parties will be deemed to have agreed that the assistanceof the Arbitrator in such settlement efforts will not disqualify the Arbitrator from continuing to serve as Arbitrator ifsettlement is not reached; nor shall such assistance be argued to a reviewing court as the basis for vacating or modifying anAward. (c) If, at any stage of the Arbitration process, all Parties agree upon a settlement of the issues in dispute and request theArbitrator to embody the agreement in a Consent Award, the Arbitrator shall comply with such request, unless the 24 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Arbitrator believes the terms of the agreement are illegal or undermine the integrity of the Arbitration process. If theArbitrator is concerned about the possible consequences of the proposed Consent Award, he or she shall inform theParties of that concern and may request additional specific information from the Parties regarding the proposed ConsentAward. The Arbitrator may refuse to enter the proposed Consent Award and may withdraw from the case. Rule 29. SanctionsThe Arbitrator may order appropriate sanctions for failure of a Party to comply with its obligations under any of theseRules or with an order of the Arbitrator. These sanctions may include, but are not limited to, assessment of Arbitration feesand Arbitrator compensation and expenses; any other costs occasioned by the actionable conduct, including reasonableattorneys’ fees; exclusion of certain evidence; drawing adverse inferences; or, in extreme cases, determining an issue orissues submitted to Arbitration adversely to the Party that has failed to comply. Rule 30. Disqualification of the Arbitrator as a Witness or Party and Exclusion ofLiability(a) The Parties may not call the Arbitrator, the Case Manager or any other JAMS employee or agent as a witness or as anexpert in any pending or subsequent litigation or other proceeding involving the Parties and relating to the dispute that isthe subject of the Arbitration. The Arbitrator, Case Manager and other JAMS employees and agents are also incompetent totestify as witnesses or experts in any such proceeding. (b) The Parties shall defend and/or pay the cost (including any attorneys’ fees) of defending the Arbitrator, Case Managerand/or JAMS from any subpoenas from outside parties arising from the Arbitration. (c) The Parties agree that neither the Arbitrator, nor the Case Manager, nor JAMS is a necessary Party in any litigation orother proceeding relating to the Arbitration or the subject matter of the Arbitration, and neither the Arbitrator, nor theCase Manager, nor JAMS, including its employees or agents, shall be liable to any Party for any act or omission inconnection with any Arbitration conducted under these Rules, including, but not limited to, any disqualification of orrecusal by the Arbitrator. JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 25 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 31. Fees(a) Except as provided in paragraph (c) below, unless the Parties have agreed to a different allocation, each Party shall payits pro rata share of JAMS fees and expenses as set forth in the JAMS fee schedule in effect at the time of thecommencement of the Arbitration. To the extent possible, the allocation of such fees and expenses shall not be disclosed tothe Arbitrator. JAMS’ agreement to render services is jointly with the Party and the attorney or other representative of theParty in the Arbitration. The non-payment of fees may result in an administrative suspension of the case in accordancewith Rule 6(c). (b) JAMS requires that the Parties deposit the fees and expenses for the Arbitration from time to time during the course ofthe proceedings and prior to the Hearing. The Arbitrator may preclude a Party that has failed to deposit its pro rata oragreed-upon share of the fees and expenses from offering evidence of any affirmative claim at the Hearing. (c) If an Arbitration is based on a clause or agreement that is required as a condition of employment, the only fee that anemployee may be required to pay is the initial JAMS Case Management Fee. JAMS does not preclude an employee fromcontributing to administrative and Arbitrator fees and expenses. If an Arbitration is not based on a clause or agreementthat is required as a condition of employment, the Parties are jointly and severally liable for the payment of JAMSArbitration fees and Arbitrator compensation and expenses. In the event that one Party has paid more than its share ofsuch fees, compensation and expenses, the Arbitrator may award against any other Party any such fees, compensation andexpenses that such Party owes with respect to the Arbitration. (d) Entities whose interests are not adverse with respect to the issues in dispute shall be treated as a single Party forpurposes of JAMS’ assessment of fees. JAMS shall determine whether the interests between entities are adverse forpurpose of fees, considering such factors as whether the entities are represented by the same attorney and whether theentities are presenting joint or separate positions at the Arbitration. 26 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  Rule 32. Bracketed (or High-Low) Arbitration Option(a) At any time before the issuance of the Arbitration Award, the Parties may agree, in writing, on minimum and maximumamounts of damages that may be awarded on each claim or on all claims in the aggregate. The Parties shall promptly notifyJAMS and provide to JAMS a copy of their written agreement setting forth the agreed-upon minimum and maximumamounts. (b) JAMS shall not inform the Arbitrator of the agreement to proceed with this option or of the agreed-upon minimum andmaximum levels without the consent of the Parties. (c) The Arbitrator shall render the Award in accordance with Rule 24. (d) In the event that the Award of the Arbitrator is between the agreed-upon minimum and maximum amounts, the Awardshall become final as is. In the event that the Award is below the agreed-upon minimum amount, the final Award issuedshall be corrected to reflect the agreed-upon minimum amount. In the event that the Award is above the agreed-uponmaximum amount, the final Award issued shall be corrected to reflect the agreed-upon maximum amount. Rule 33. Final Offer (or Baseball) Arbitration Option(a) Upon agreement of the Parties to use the option set forth in this Rule, at least seven (7) calendar days before theArbitration Hearing, the Parties shall exchange and provide to JAMS written proposals for the amount of money damagesthey would offer or demand, as applicable, and that they believe to be appropriate based on the standard set forth in Rule24(c). JAMS shall promptly provide copies of the Parties’ proposals to the Arbitrator, unless the Parties agree that theyshould not be provided to the Arbitrator. At any time prior to the close of the Arbitration Hearing, the Parties mayexchange revised written proposals or demands, which shall supersede all prior proposals. The revised written proposalsshall be provided to JAMS, which shall promptly provide them to the Arbitrator, unless the Parties agree otherwise. (b) If the Arbitrator has been informed of the written proposals, in rendering the Award, the Arbitrator shall choosebetween the Parties’ last proposals, selecting the proposal JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 27 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  that the Arbitrator finds most reasonable and appropriate in light of the standard set forth in Rule 24(c). This provisionmodifies Rule 24(h) in that no written statement of reasons shall accompany the Award. (c) If the Arbitrator has not been informed of the written proposals, the Arbitrator shall render the Award as if pursuant toRule 24, except that the Award shall thereafter be corrected to conform to the closest of the last proposals and the closestof the last proposals will become the Award. (d) Other than as provided herein, the provisions of Rule 24 shall be applicable. Rule 34. Optional Arbitration Appeal ProcedureThe Parties may agree at any time to the JAMS Optional Arbitration Appeal Procedure. All Parties must agree in writing forsuch procedures to be effective. Once a Party has agreed to the Optional Arbitration Appeal Procedure, it cannotunilaterally withdraw from it, unless it withdraws, pursuant to Rule 13, from the Arbitration. 28 JAMS EMPLOYMENT ARBITRATION RULES | JULY 1, 2014 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  800.352.5267 | www.jamsadr.com *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WASREQUESTED. ALL SUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION PURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. Exhibit 21.1LIST OF SUBSIDIARIESThe following is a list of subsidiaries of VIVUS, Inc.1.VIVUS UK Limited (United Kingdom), a wholly owned subsidiary of VIVUS, Inc.2.VIVUS BV (Netherlands), a wholly owned subsidiary of VIVUS, Inc.3.Vivus Limited (Bermuda), a wholly owned subsidiary of VIVUS, Inc.4.Vivus International, L.P. (Bermuda), General Partner Vivus Limited5.Vivus International Limited (Ireland), a wholly owned subsidiary of VIVUS, Inc. Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements on Forms S‑8 (No. 333‑142354,No. 333‑150647, No. 333‑157787, No. 333‑164921, No. 333‑168106, No. 333‑175926, No. 333‑199881, No. 333-215089and No. 333-222089) and Form S‑3 (No. 333‑161948) of our reports dated March 13, 2018 relating to the consolidatedfinancial statements and financial statement schedule of VIVUS, Inc. and the effectiveness of VIVUS, Inc.’s internal controlover financial reporting, which appear in this Annual Report on Form 10‑K./s/ OUM & CO. LLPSan Francisco, CaliforniaMarch 13, 2018 Exhibit 31.1CERTIFICATION OF INTERIM CHIEF EXECUTIVE OFFICER PURSUANTTO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002I, Thomas B. King, Interim Chief Executive Officer, certify that:1.I have reviewed this annual report on Form 10‑K of VIVUS, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, 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, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod 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 thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.Date: March 13, 2018 By:/s/ Thomas B. King Name:Thomas B. King Title:Interim Chief Executive Officer Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANTTO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002I, Mark K. Oki, Chief Financial Officer and Chief Accounting Officer, certify that:1.I have reviewed this annual report on Form 10‑K of VIVUS, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, 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, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod 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 thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.Date: March 13, 2018 By:/s/ Mark K. Oki Name:Mark K. Oki Title:Chief Financial Officer and Chief Accounting Officer Exhibit 32.1CERTIFICATION OF INTERIM CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002I, Thomas B. King, Interim Chief Executive Officer of VIVUS, Inc., certify, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that the Annual Report of VIVUS, Inc. on Form 10‑K forthe period ending December 31, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10‑K fairly presents, in all materialrespects, the financial condition and results of operations of VIVUS, Inc. This written statement is being furnished to theSecurities and Exchange Commission as an exhibit to such Annual Report on Form 10‑K. A signed original of this statementhas been provided to VIVUS, Inc. and will be retained by VIVUS, Inc. and furnished to the Securities and ExchangeCommission or its staff upon request. Date: March 13, 2018By:/s/ Thomas B. KingThomas B. KingInterim Chief Executive Officer I, Mark K. Oki, Chief Financial Officer and Chief Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that the Annual Report of VIVUS, Inc. on Form 10‑K forthe period ending December 31, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10‑K fairly presents, in all materialrespects, the financial condition and results of operations of VIVUS, Inc. This written statement is being furnished to theSecurities and Exchange Commission as an exhibit to such Annual Report on Form 10‑K. A signed original of this statementhas been provided to VIVUS, Inc. and will be retained by VIVUS, Inc. and furnished to the Securities and ExchangeCommission or its staff upon request. Date: March 13, 2018By:/s/ Mark K. OkiMark K. OkiChief Financial Officer and Chief Accounting Officer 

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