VIVUS, Inc
Annual Report 2018

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, 2018OR☐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 of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 be contained, tothe best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment tothis Form 10‑K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” inRule 12b‑2 of the Exchange Act.Large accelerated filer ☐Accelerated filer ☒Non‑accelerated filer ☐Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised 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, 2018, totaled approximately $73,540,927 based on theclosing stock price as reported by the NASDAQ Global Select Market.As of February 20, 2019, there were 10,637,164 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, 2018, are incorporated by reference into Part III of this report.Part III - ITEMS 10, 11, 12, 13, 14 Table of ContentsVIVUS, INC.FISCAL 2018 FORM 10‑KINDEX PART I Item 1: Business 5Item 1A: Risk Factors 33Item 1B: Unresolved Staff Comments 67Item 2: Properties 67Item 3: Legal Proceedings 68Item 4: Mine Safety Disclosures 68 PART II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 69Item 6: Selected Financial Data 70Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 71Item 7A: Quantitative and Qualitative Disclosures about Market Risk 88Item 8: Financial Statements and Supplementary Data 89Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 125Item 9A: Controls and Procedures 125Item 9B: Other Information 126 PART III Item 10: Directors, Executive Officers and Corporate Governance 127Item 11: Executive Compensation 127Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 127Item 13: Certain Relationships and Related Transactions, and Director Independence 127Item 14: Principal Accountant Fees and Services 128 PART IV Item 15: Exhibits and Financial Statement Schedules 128Item 16: Form 10-K Summary 136 Signatures 136Power of Attorney 137Exhibit Index 129Certification 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,” “plan,” “likely,” “opportunity,” “estimated,” and “potential,” the negative use ofthese 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):·our, or our current or potential partners’, ability to successfully commercialize Qsymia including risks anduncertainties related to expansion to distribution, the broadening of payor reimbursement, the expansion ofQsymia’s primary care presence, and the outcomes of our discussions with pharmaceutical companies and ourstrategic and franchise-specific pathways for Qsymia;·our ability to sell through the Qsymia retail pharmacy network;·the impact of promotional programs for Qsymia on our net product revenue and net income (loss) in future periods;·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;·our, or our current or potential partners’, ability to successfully seek and gain approval for Qsymia in territoriesoutside the U.S.;·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 (“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 (“CVOT”);·the impact of the indicated uses and contraindications contained in the Qsymia label and the Risk Evaluation andMitigation Strategy (“REMS”) requirements;·the impact of any possible future requirement to provide further analysis of previously submitted clinical trial data;·our dialog with the European Medicines Agency (“EMA”) relating to the U.S.-based CVOT for Qsymia (theapproved trade name in the EU for the medicinal product is Qsiva), and the resubmission of an application for thegrant of a marketing authorization to the EMA, the timing of such resubmission, if any, the results of any requiredCVOT, the assessment by the EMA of the application for marketing authorization, and their agreement with thedata from any required CVOT and ultimately the decision of the European Commission whether to grant marketingauthorization for Qsiva in the EU;Risks and uncertainties related to PANCREAZE (pancrelipase):·our ability to maintain the relationship with the sole manufacturer for PANCREAZE;·our ability to accurately forecast PANCREAZE demand;·our ability to maintain a satisfactory level of PANCREAZE inventory;·risks and uncertainties related to the timing, strategy, tactics and success of the marketing and sales ofPANCREAZE;3 Table of Contents·our ability to successfully maintain and increase market share against current competing products and potentialcompetitors that may develop alternative formulations of the drug;·the ability of our partners to maintain regulatory approvals to manufacture and adequately supply our products tomeet demand;Risks 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 commercialization ofSTENDRA/SPEDRA by our current or potential collaborators;·our ability to successfully complete, on acceptable terms and on a timely basis, avanafil partnering discussions forterritories under our license with Mitsubishi Tanabe Pharma Corporation in which we do not have a commercialcollaboration;·Sanofi Chimie’s ability to manufacture the avanafil active pharmaceutical ingredient and Sanofi WinthropIndustrie’s ability to manufacture avanafil tablets;·the ability of our partners to maintain regulatory approvals to manufacture and adequately supply our products tomeet demand;Risks and uncertainties related to our business:·our history of losses and variable quarterly results;·our ability to effectively manage expenses;·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;·our ability to identify and acquire cash flow generating assets and opportunities;·risks related to the failure to obtain or retain federal or state-controlled substances registrations and noncompliancewith Drug Enforcement Administration (“DEA”) or state controlled substances regulations;·risks related to the failure to obtain FDA or foreign authority clearances or approvals and noncompliance with FDAor foreign authority regulations;·our ability to develop a proprietary formulation and to demonstrate through clinical testing the quality, safety, andefficacy 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;·compliance with post-marketing regulatory standards, post-marketing obligations or pharmacovigilance rules is notmaintained;·the volatility and liquidity of the financial markets;·our liquidity and capital resources;·our expected future revenues, operations and expenditures;·our ability to execute on our business strategy to enhance long-term stockholder value;·our ability to address or potentially reduce our outstanding balance of $181.4 million of the 4.5% ConvertibleSenior Notes due 2020 (the “Convertible Notes”);·our ability to successfully integrate recent changes to our Board of Directors and the senior management team; and·other factors that are described from time to time in our periodic filings with the Securities and ExchangeCommission (the “SEC”) including those set forth in this filing as “Item 1A. Risk Factors.”4 Table of ContentsWhen 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. PART I Item 1. BusinessOverviewVIVUS is a specialty pharmaceutical company with three approved therapies and one product candidate in activeclinical development. PANCREAZE® (pancrelipase), which we acquired in June 2018, is indicated for the treatment ofexocrine pancreatic insufficiency (“EPI”) due to cystic fibrosis or other conditions. Qsymia® (phentermine and topiramateextended release) is approved by FDA for chronic weight management. STENDRA® (avanafil) is approved by FDA forerectile dysfunction (“ED”) and by the European Commission (“EC”) under the trade name SPEDRA, for the treatment of EDin the EU. VI-0106 (tacrolimus) is in active clinical development and is being studied in patients with pulmonary arterialhypertension (“PAH”).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.Business StrategyEarly in 2018, we announced that we would focus our strategy on building a portfolio of cash flow generating assetsto leverage our expertise in commercializing specialty pharmaceutical assets. In April 2018, John Amos was named our newChief Executive Officer and a member of our Board of Directors to lead our new strategy. In addition, we added Kenneth Suhand M. Scott Oehrlein as President and Chief Operations Officer, respectively. These three individuals have strong trackrecords of building successful cash flow positive businesses through product acquisition. In combination with the othercurrent members of the senior leadership team, we believe that we are well positioned to continue to successfully execute onour business strategy.In June 2018, we completed the first acquisition under this strategy when we acquired all product rights forPANCREAZE® (pancrelipase) in the United States and PANCREASE® MT in Canada for $135.0 million in cash fromJanssen Pharmaceuticals (“Janssen”). PANCREAZE is a prescription medicine used to treat people who cannot digest foodnormally because their pancreas does not make enough enzymes due to cystic fibrosis or other conditions. We believe we cansupport PANCREAZE by leveraging our existing commercial infrastructure and expanding it to include up to 10 additionalsales representatives in the U.S. and possibly two sales representatives in Canada focused on gastrointestinal and cysticfibrosis physicians.In April 2018, we entered into a note purchase agreement (the “Note Purchase Agreement”) with affiliates ofAthyrium Capital Management (“Athyrium”) for the issuance and sale of up to $110.0 million of 10.375% senior securednotes due 2024 to be issued substantially concurrently with the consummation of the PANCREAZE acquisition. The NotePurchase Agreement also allows up to an additional $10.0 million of 10.375% senior secured notes due 2024 to be issued atour option within 12 months of the initial issue date, subject to certain conditions. Notes in the amount of $110.0 millionwere issued in June 2018. Concurrent with the issuance of the initial notes, we issued warrants to purchase 0.3 million sharesof our common stock to the note holders. Additionally, concurrent with the issuance of the senior secured notes, werepurchased the Convertible Notes held by Athyrium, with a face value of $60.0 million, at a discount to par plus accruedinterest. In October 2018, we settled a purchase of approximately $8.6 million outstanding principal amount of ourConvertible Notes for approximately $7.1 million plus accrued interest. We continue our evaluation of alternatives foraddressing our remaining principal balance of $181.4 million of the Convertible Notes.5 Table of ContentsCommercial 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 specialty sales force with 18 external and three internal salesrepresentatives who promote Qsymia to physicians and focus on high value territories. Our sales efforts are focused onmaintaining a commercial presence with high volume prescribers of anti-obesity products. Our marketing efforts havefocused on rolling out unique programs to encourage targeted prescribers to gain more experience with Qsymia with theirobese or overweight patient population. We continue to invest in digital media in order to amplify our messaging toinformation-seeking consumers. The digital messaging encourages those consumers most likely to take action to speak withtheir physicians about obesity treatment options. We believe our enhanced digital strategies deliver clear and compellingcommunications to potential patients. We have also recently added a direct distribution option for Qsymia patients inaddition to the retail pharmacy channel. We utilize a patient savings plan to further drive Qsymia brand preference at thepoint of prescription and to encourage long-term use of the brand.In the first quarter of 2019, we plan to initiate a Phase 4 clinical study designed to evaluate the safety and efficacy ofQsymia capsules in obese adolescents between the ages of 12 and 17 years. The Phase 4 post-marketing study, which FDArequired as part of the approval of Qsymia in 2012, is expected to enroll 200 patients at approximately 20 clinical sites in theUnited States. The primary endpoint of the randomized, double blind, placebo-controlled, parallel-design study is the meanpercentage change in body-mass index compared with placebo over 56 weeks of treatment. Participants will also beinstructed to follow a reduced-calorie diet and to implement a family-based lifestyle modification program that includesphysical activity, behavioral change and family support. Safety and tolerability of Qsymia will also be assessed. We expectto report top-line results from this Phase 4 trial in the second half of 2020.In September 2017, we entered into a license and commercialization agreement (the “Alvogen License Agreement”)and a commercial supply agreement (the “Alvogen Supply Agreement”) with Alvogen Malta Operations (ROW) Ltd(“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. 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, we will supply product to Alvogen.PANCREAZEApproved in 2010, PANCREAZE is a pancreatic enzyme preparation consisting of pancrelipase, an extract derivedfrom porcine pancreatic glands, as well as other enzyme classes, including porcine-derived lipases, proteases and amylases.PANCREAZE is specifically indicated for the treatment of EPI. EPI is a condition that results from a deficiency in theproduction and/or secretion of pancreatic enzymes. It is associated with cystic fibrosis and chronic pancreatitis, and affectsapproximately 85 percent of cystic fibrosis patients. There is no cure for EPI and pancreatic enzyme replacement therapy isthe primary treatment for the condition. We commercialize PANCREAZE in the U.S. and Canada by leveraging our existingcommercial infrastructure and expanding it to include 10 additional contract sales representatives in the U.S. and possiblytwo sales representatives in Canada focused on gastro-intestinal and cystic fibrosis physicians.Since its approval, PANCREAZE has been commercialized by Janssen. In June 2018, we acquired the commercialrights to PANCREAZE and PANCREASE MT in the U.S. and Canada.STENDRA/SPEDRASTENDRA is an oral phosphodiesterase type 5 (“PDE5”) inhibitor that we have licensed from Mitsubishi6 Table of ContentsTanabe Pharma Corporation (“MTPC”). FDA approved STENDRA in April 2012 for the treatment of ED in the United States.In June 2013, the EC adopted a decision granting marketing authorization for SPEDRA, the approved trade name for avanafilin the EU, for the treatment of ED in the EU.The Menarini Group, through its subsidiary Berlin Chemie AG (“Menarini”), is our exclusive licensee for thecommercialization and promotion of SPEDRA for the treatment of ED in over 40 countries, including the EU Member States,Australia and New Zealand. In addition, Menarini licensed rights directly from MTPC to commercialize avanafil in certainAsian territories. We receive royalties from Menarini based on SPEDRA net sales and are entitled to receive future milestonepayments based on certain net sales targets. Menarini will also reimburse us for payments made to cover various obligationsto MTPC during the term of the Menarini License Agreement. Menarini obtains SPEDRA exclusively from us.Metuchen Pharmaceuticals LLC (“Metuchen”) is our exclusive licensee for the development, commercializationand promotion of STENDRA in the United States, Canada, South America and India. Metuchen reimburses us for paymentsmade to cover royalty and milestone obligations to MTPC, but otherwise owes us no future royalties. Metuchen obtainsSTENDRA exclusively from us.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.Product Development Pipeline and Life Cycle ManagementVI-0106 - 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 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(“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 acquired the exclusive, worldwide rights for the development and commercialization ofBMPR2 activators for the treatment of PAH and related vascular diseases from Selten Pharma, Inc. (“Selten”). Selten assignedto us its license to a group of patents owned by the Board of Trustees of the Leland Stanford Junior University (“Stanford”)which cover uses of tacrolimus and ascomycin to treat PAH. We paid Selten an upfront payment of $1.0 million, and we willpay additional 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. We haveassumed full responsibility for the development and commercialization of the licensed compounds for the treatment of PAHand related vascular diseases.In October 2017, we held a pre-IND meeting with FDA for VI-0106, our proprietary formulation of tacrolimus for thetreatment of PAH. FDA addressed our questions related to preclinical, nonclinical and clinical data and the planned design ofclinical trials of tacrolimus in class III and IV PAH patients, and clarified the requirements needed to file an IND to initiate aclinical trial in this indication. As discussed with FDA, we currently intend to design and conduct clinical trials that couldqualify for Fast Track and/or Breakthrough Therapy designation.7 Table of ContentsTacrolimus for the treatment of PAH has received Orphan Drug Designation from FDA in the United States and theEuropean Commission on a basis of a scientific opinion adopted by the Committee for Orphan Medicinal Products of 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 and completingthe development of our proprietary formulation of tacrolimus in 2019. We are currently seeking alternatives for financing thedevelopment of tacrolimus.Qsymia for Additional IndicationsWe are currently considering further development of Qsymia for the treatment of various diseases, includingobstructive sleep apnea and nonalcoholic steatohepatitis (“NASH”). We expect no future development until we haveconcluded our discussions with FDA regarding our CVOT for Qsymia.Products and Development ProgramsOur approved drugs and investigational drug candidates are summarized as follows:Drug Indication Status Commercial rightsQsymia Obesity United StatesCommercially available Worldwide rights available, except forSouth Korea EUMarketing AuthorizationApplication (“MAA”) denied in2014 South KoreaNot yet commercially available South Korea commercial rights licensed toAlvogen Qsymia Obstructive Sleep Apnea Phase 2 study completed Worldwide rights availableQsymia Diabetes Phase 2 study completed Worldwide rights available PANCREAZE EPI United StatesCommercially available U.S. and Canadian rights available CanadaCommercially available STENDRA/SPEDRA(avanafil) Erectile Dysfunction United StatesCommercially available Worldwide license from MTPC (excludingcertain Asian markets). U.S., Canada,South America and India commercial rightslicensed to Metuchen EUCommercially available EU, Australia and New Zealandcommercial rights licensed to MenariniGroup VI-0106 (tacrolimus) PAH Phase 2a study completedIND to be filed in 2019 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 (“NIH”) losing just 10% of body8 Table of Contentsweight may help obese patients reduce the risk of developing other weight‑related medical conditions, while making ameaningful difference in health and well‑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 (obese patients) or with a BMIof 27 or greater (overweight patients) in the presence of at least one weight‑related comorbidity, such as hypertension, type 2diabetes 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,healthcare 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 (“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.In June 2017, we entered into a settlement agreement with Actavis Laboratories FL, Inc., Actavis, Inc., and ActavisPLC, collectively referred to as Actavis, and in August 2017, we entered into a settlement agreement with Dr. Reddy’sLaboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL. The settlement9 Table of Contentsagreement with Actavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, or earlierunder certain circumstances. The settlement agreement with DRL will permit DRL to begin selling a generic version ofQsymia on June 1, 2025, or earlier under certain circumstances.PANCREAZE for the Treatment of Exocrine Pancreatic InsufficiencyThe pancreas produces enzymes to help with the digestion of food. EPI is a condition that results from a deficiencyin the production and/or secretion of pancreatic enzymes. Due to a lack of these enzymes, people with EPI cannot properlydigest the nutrients in food such as fats, proteins, and carbohydrates. EPI is associated with acute or chronic pancreatitis,which constitutes approximately 51% of the EPI market, cystic fibrosis, which constitutes approximately 20% of the EPImarket and pancreatic cancer, which constitutes approximately 11% of the EPI market. There is no cure for EPI andpancreatic enzyme replacement therapy is the primary treatment for the condition.Approved in 2010, PANCREAZE is a pancreatic enzyme preparation consisting of pancrelipase, an extract derivedfrom porcine pancreatic glands, as well as other enzyme classes, including porcine-derived lipases, proteases and amylases.PANCREAZE is specifically indicated for the treatment of EPI.Since its approval, PANCREAZE has been commercialized by Janssen. In June 2018, we acquired the commercialrights to PANCREAZE and PANCREASE MT in the U.S. and Canada, respectively. In connection with the acquisition ofPANCREAZE, we and Janssen also entered into transition services agreements pursuant to which Janssen and a Canadianaffiliate of Janssen will provide certain transition services to us in the U.S. and Canada as we transition to full control overthe PANCREAZE supply chain. The transition in the U.S. occurred in the first quarter of 2019. We commercializePANCREAZE in the U.S. and Canada by leveraging our existing commercial infrastructure and expanding it to include 10additional contract sales representatives in the U.S. and possibly two sales representatives in Canada focused on gastro-intestinal and cystic fibrosis physicians.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 an sNDA for STENDRA. STENDRA is now indicated to be taken as early asapproximately 15 minutes before sexual activity. On January 23, 2015, the EC adopted the Commission ImplementingDecision amending the marketing authorization for SPEDRA. SPEDRA is now approved in the EU to be taken as neededapproximately 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 Member States, plus Australia and New Zealand. We have granted anexclusive license to Metuchen to market STENDRA in the United States, Canada, South America and India. We have alsogranted an exclusive license to Sanofi to commercialize avanafil in Africa, the Middle East, Turkey, and the CIS, includingRussia. We are currently in discussions with potential partners to commercialize STENDRA in other territories where we donot currently 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.10 Table of ContentsVI-0106 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 (“ERA”) phosphodiesterase-5(“PDE5”) inhibitors, prostacyclin analogues, selective IP receptor agonists, and soluble guanylate cyclase (“sGC”)stimulators, which aim to reduce symptoms and improve quality of life. All currently approved products treat the symptomsof PAH, but do not address the underlying disease. According to LifeSci Capital (Feb 2016 Analysis), the U.S. andworldwide markets for PAH pharmaceutical treatments in 2015 exceeded $2.7 billion and $4.5 billion, respectively.We believe that bone morphogenic protein receptor 2 (“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 in the U.S. AnOrphan Drug Designation can provide benefits to us, such as: tax credits on clinical research, simplification of administrativeprocedures (reduction of the waiting period and reduction of the amount of registration fees), and marketing exclusivity ofseven years after 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.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 million11 Table of Contentsto Selten and $550,000 to Stanford. The majority of the milestone payments to Selten may be paid, at our sole option, eitherin cash or our common stock, provided that in no event shall the payment of common stock exceed fifty percent of theaggregate amount of such 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 and expect to file an IND in 2019.Tacrolimus for the treatment of PAH has received Orphan Drug Designation from FDA in the United States and, onAugust 23, 2017, from the EC (on the basis of a scientific opinion adopted by the Committee for Orphan Medicinal Productsof the European 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 (“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 which establishes standards for conducting, recording data from, and reportingresults of, clinical trials, and are intended to assure that the data and reported results are credible, accurate, and that the rights,safety and well‑being of study participants are protected. Clinical trials must be under protocols that detail the objectives ofthe study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must besubmitted to FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independentinstitutional review board (“IRB”). The IRB will consider, among other things, regulations and guidelines for obtaininginformed consent from study subjects, as well as other ethical factors and the safety of human patients. The sponsoringcompany, FDA, or the IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding thatthe 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,12 Table of Contentsmulticenter clinical trials are conducted with patients afflicted with a target disease or medical condition in order to providesubstantial evidence 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 (“NDA”) for a pharmaceutical product in order to obtain approval tocommence commercial sales. In responding to an NDA, FDA may grant marketing approval or may request additionalinformation or further research or studies if it determines that the application does not satisfy its regulatory approval criteria.FDA approval for a pharmaceutical product may not be granted on a timely basis, if at all. Under the goals and policiesagreed to by FDA under the Prescription Drug User Fee Act (“PDUFA”) FDA has approximately twelve months in which tocomplete its initial review of a standard NDA and respond to the applicant, and approximately eight months for a priorityNDA. FDA does not always meet its PDUFA goal dates and in certain circumstances, the review process and the PDUFA goaldate may be extended. A subsequent application for approval of an additional indication must also be reviewed by FDAunder the same criteria as apply to original applications, and may not be approved as well. In addition, even if FDA approvalis granted, it may not cover all the clinical indications for which approval is sought or may contain significant limitations inthe form of warnings, precautions or contraindications with respect to conditions of use. In addition, FDA may require thedevelopment and implementation of a REMS to address specific safety issues at the time of approval or after marketing of theproduct. A REMS may, for instance, restrict distribution and impose burdensome implementation requirements. Ourapproved 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 approvalbased on new information regarding the safety or efficacy of the product or if compliance with post‑marketing regulatoryobligations is not maintained. In addition, FDA may require companies to conduct post‑marketing studies or trials, referred toas PMRs, to evaluate safety issues related to the approved product, and may withdraw approval or impose marketingrestrictions based on the results of PMR studies or trials or other relevant data. FDA has required us to perform PMR studiesand trials for both of our approved products, Qsymia and STENDRA. FDA has broad post‑market regulatory and enforcementpowers, including the ability to levy civil monetary penalties, suspend or delay issuance of approvals, seize or recallproducts, or withdraw approvals. Additionally, all applicable clinical trials we conduct for our investigational drugcandidates, both before and after approval, and the results of those applicable clinical trials when available, are required to beincluded in a clinical trials registry database that is available and accessible to the public via the Internet. Our failure toproperly participate in the clinical trial database registry may subject us to significant civil penalties.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 (“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.FDA 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 that13 Table of Contentscould have a significant commercial impact, including civil and criminal fines and agreements that materially restrict themanner in which a company promotes 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 security requirements, record-keeping and certain reportingobligations as well as prescription procedures and limitations on prescription refills. In addition, the parties who perform ourclinical and commercial manufacturing, distribution, dispensing and clinical studies for Qsymia are required to maintainnecessary DEA registrations and state licenses. The DEA periodically inspects facilities for compliance with its rules andregulations.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 and EU Good Laboratory Practice (“GLP”) obligations must also be respectedduring conduct of the trials. Clinical trials must be approved by the competent authorities and the competent EthicsCommittees in the EU Member States in which the clinical trials take place. A clinical trial application (“CTA”) must besubmitted 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. Although Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework,setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposedand applied the provisions of the Directive in a manner that is not always uniform. This has led to variations in the rulesgoverning the conduct of clinical trials in the individual EU Member States. The EU legislator adopted Regulation (EU) No536/2014 (the “Clinical Trials Regulation”) in 2014. The new EU Clinical Trials Regulation, which will replace the EUClinical Trials Directive, introduces a complete overhaul of the existing regulation of clinical trials for medicinal products inthe EU, including a new coordinated procedure for authorization of clinical trials that is reminiscent of the mutualrecognition procedure for marketing authorization of medicinal products, and increased obligations on sponsors to publishclinical trial results. The Clinical Trials Regulation is expected to start to apply in 2020. The requirements governing theconduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.To obtain marketing authorization for 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 Pediatric14 Table of ContentsInvestigation Plan (“PIP”) approved by the Pediatric Committee of the EMA. Alternatively, confirmation that we have beengranted a waiver or deferral from the conduct of these studies by the PDCO must be provided.Medicinal products are authorized in the EU in one of two ways, either by the competent authorities of the EUMember States through the decentralized procedure, mutual recognition procedure or national procedure (single EU MemberState), or through the centralized procedure by the European Commission following a positive opinion by the Committee forMedicinal Products for Human Use (“CHMP”) of the EMA. The authorization process is essentially the same irrespective ofwhich route is used.The centralized procedure provides for the grant of a single marketing authorization that is valid for all EU MemberStates and three of the four European Free Trade Association (“EFTA”) countries (Iceland, Liechtenstein and Norway). Thecentralized procedure is compulsory for medicinal products produced by certain biotechnological processes, advancedtherapy medicinal products, products designated as orphan medicinal products, and products with a new active substanceindicated for the treatment of certain diseases. It is optional for those products that are containing a new active substance thatis not yet authorized in the EEA or for products that constitute a significant therapeutic, scientific or technical innovation orfor which grant of centralized marketing authorization is in the interest of patients in the EU. Accelerated evaluation may begranted by the CHMP in exceptional cases. These are defined as circumstances in which a medicinal product is expected tobe of a “major public health interest.” Three cumulative criteria must be fulfilled in such circumstances: the seriousness ofthe disease, such as heavy disabling or life‑threatening diseases, to be treated; the absence or insufficiency of an appropriatealternative therapeutic approach; and anticipation of high therapeutic benefit. In these circumstances, the EMA ensures thatthe opinion of 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 Heads of Medicines Agencies (“CMDh”) for review. This review, which may also be escalated to the CHMP in case ofdisagreement in CMDh would result in a decision by the European Commission. This decision is binding on all EU MemberStates. In accordance with the mutual recognition procedure, the company applies for national marketing authorization inone EU Member State. The mutual recognition procedure allows companies that have a medicinal product already authorizedin one EU Member State to apply for this authorization to be recognized by the competent authorities in other EU MemberStates. The national marketing authorization procedure is founded on the same basic EU regulatory process as the othermarketing authorization procedures discussed in this Section. The national marketing authorization procedure, which isincreasingly rare, permits a company to submit an application to the competent authority of a single EU Member State and, ifsuccessful, to obtain a marketing authorization that is valid only in this EU Member State.The maximum timeframe for the evaluation of a marketing authorization application in the EU is 210 days. Thisperiod does not include clock stops during which applicants respond to questions from the competent authority. The initialmarketing authorization granted in the EU is valid for five years. The authorization may be renewed and remain valid for anunlimited period unless the national competent authority or the European Commission decides on justified grounds toproceed with one additional five-year renewal period. The renewal of a marketing authorization is subject to a re-evaluationof the risk-benefit balance of the product by the national competent authorities or the EMA.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 product15 Table of Contentsobtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to theirauthorization, are held to bring a significant clinical benefit in comparison with existing therapies.Similar 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 requiring marketing authorization holders to conduct pharmacovigilance activities,and to assess and monitor the safety of medicinal products. We cannot guarantee that we or Menarini, as the marketingauthorization holder for SPEDRA in the EU, would be able to comply with the post‑marketing obligations imposed as part ofthe marketing authorization for SPEDRA. Failure to comply with these requirements may lead to the suspension, variation orwithdrawal of the marketing authorization for SPEDRA in the EU.Various requirements apply to the manufacturing and placing on the EU market of medicinal products. Manufactureof medicinal products in the EU requires a manufacturing authorization. The manufacturing authorization holder mustcomply with requirements set out in the applicable EU laws, regulations and guidance. These requirements includecompliance with EU cGMP standards when manufacturing medicinal products and APIs. These obligations extend to themanufacture of APIs outside of the EU for import into the EU. Similarly, the distribution of medicinal products into andwithin the EU is subject to compliance with the applicable EU laws, regulations and guidelines, including the requirement tohold appropriate authorizations for distribution granted by the competent authorities of the EU Member States. Marketingauthorization holders may be subject to civil, criminal or administrative sanctions, including suspension of manufacturingauthorization, in case of non-compliance with the EU or EU Member States’ requirements applicable to the manufacturing ofmedicinal products.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 (“SmPC”) as approved by the competent authorities. The SmPC is thedocument that provides information to physicians concerning the safe and effective use of the medicinal product. It forms anintrinsic and integral part of the marketing authorization granted for the medicinal product. Promotion of a medicinalproduct that does not comply with the SmPC is considered to constitute off‑label promotion. The off‑label promotion ofmedicinal products is prohibited in the EU. The applicable laws at the EU level and in the individual EU Member States alsoprohibit the direct‑to‑consumer advertising of prescription‑only medicinal products. Violations of the rules governing thepromotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment. Theselaws may further limit or restrict communications concerning the advertising and promotion of our products to the generalpublic 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/her16 Table of Contentscompetent professional organization, and/or the competent authorities of the individual EU Member States. Theserequirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EUMember States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrativepenalties, fines or imprisonment.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 has 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 drug pricing program, and fraud and abuse and enforcement. These changes haveimpacted and will continue to impact existing government healthcare programs and have resulted in the development of newprograms, including Medicare payment for performance initiatives and improvements to the physician quality reportingsystem 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. The Affordable Care Act also made changes to the 340B drug pricing program, which are describedbelow under the heading “Coverage and Reimbursement.” With regard to the amount of the rebates owed, the AffordableCare Act increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovatorproducts and from 11% to 13% for non‑innovator products; changed the calculation of the rebate for certain innovatorproducts that qualify as line extensions of existing drugs; and capped the total rebate amount at 100 percent of the averagemanufacturer price. In addition, the Affordable Care Act and subsequent legislation changed the definition of averagemanufacturer price. The Centers for Medicare and Medicaid Services (“CMS”), the federal agency that administers Medicareand the Medicaid Drug Rebate program, issued final regulations that became effective on April 1, 2016 to implement thechanges to the Medicaid Drug Rebate program under the Affordable Care Act. In addition, the Affordable Care Act requirespharmaceutical manufacturers of branded prescription drugs to pay an annual, nondeductible branded prescription drug feeto the federal government beginning in 2011, apportioned among these entities according to their market share in certaingovernment healthcare programs, although this fee does not apply to sales of certain products approved exclusively fororphan indications. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug feeof $2.8 billion in 2019 and thereafter, 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 most Medicare Part D prescriptiondrug plans, commonly referred to as the “donut hole,” manufacturers were required to provide a 50 percent discount onbranded prescription drugs dispensed to beneficiaries during their “donut hole” period as a condition for the manufacturer’soutpatient drugs to be covered under Medicare Part D. The Bipartisan Budget Act of 2018 (“BBA”) increased suchmanufacturer point-of-sale discounts to 70 percent effective as of January 1, 2019. We currently have limited coverage underMedicare Part D for our drugs, but coverage could increase in the future.Some of the provisions of the Affordable Care Act have yet to be fully implemented, and certain provisions havebeen subject to judicial and Congressional challenges. In addition, there have been efforts by the Trump administration torepeal or replace certain aspects of the Affordable Care Act and to alter the implementation of the Affordable Care Act andrelated laws. For example, the Tax Cuts and Jobs Act enacted on December 22, 2017, eliminated the shared responsibilitypayment for individuals who fail to maintain minimum essential coverage under section 5000A of the Internal RevenueCode of 1986, commonly referred to as the “individual mandate,” effective January 1, 2019. On January 22, 2018, PresidentTrump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certainACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, theannual fee imposed on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain healthinsurance providers based on market share and the medical device excise tax on non-exempt medical devices. Additionallegislative changes, regulatory changes, and judicial challenges related to the Affordable Care Act remain possible. It isunclear how the Affordable Care Act and its17 Table of Contentsimplementation, as well as efforts to repeal or replace, or invalidate, the Affordable Care Act, or portions thereof, will affectour business. It is possible that the Affordable Care Act, as currently enacted or as it may be amended in the future, and otherhealthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generallyand on our ability to maintain or increase sales of our existing products or to successfully commercialize our productcandidates, if approved.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 the cost‑effectiveness of ourproducts. Even with studies, our products may be considered less safe, less effective or less cost‑effective than existingproducts, and third‑party payors may not provide coverage and reimbursement for our product candidates, 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 2027. 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 files to provide state Medicaid agencieswith a basis of comparison for their own reimbursement and pricing methodologies and rates. It is difficult to project theimpact 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,18 Table of Contentsdiscounts 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 program in order for federal funds to be available for the manufacturer’s drugsunder Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge statutorilydefined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340Bcovered entities include a variety of community health clinics and other entities that receive health services grants from thePublic Health Service, as well as hospitals that serve a disproportionate share of low‑income patients. The Affordable CareAct expanded the 340B program to include additional types of covered entities: certain free standing cancer hospitals,critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Affordable Care Act, butexempts “orphan drugs” from the ceiling price requirements for these covered entities. The 340B ceiling price is calculatedusing a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatientdrug as calculated under the Medicaid Drug Rebate program. Changes to the definition of average manufacturer price and theMedicaid Drug Rebate amount under the Affordable Care Act or otherwise also could affect our 340B ceiling pricecalculations and negatively impact our results of operations.The Health Resources and Services Administration (“HRSA”), which administers the 340B program, issued a finalregulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties onmanufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. Itis currently unclear how HRSA will apply its enforcement authority under the new regulation. Implementation of this finalrule and the issuance of any other final regulations and guidance could affect our obligations under the 340B program inways we cannot anticipate. HRSA also is implementing a 340B ceiling price reporting requirement during the first quarter of2019 pursuant to which we are required to report the 340B ceiling prices for our covered outpatient drugs to HRSA on aquarterly basis. In addition, legislation may be introduced that, if passed, would further expand the 340B program toadditional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing ondrugs used in the 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 the correction. Price recalculations also mayaffect the 340B ceiling price at which we are required to offer our products to certain covered entities, and we may berequired to issue refunds to covered entities.We are liable for errors associated with our submission of pricing data. Civil monetary penalties can be applied if weare found to have charged 340B covered entities more than the statutorily mandated ceiling price. In addition to retroactiverebates and the potential for 340B program refunds, if we are found to have knowingly submitted false average manufacturerprice or best price information to the government, we may be liable for significant civil monetary penalties per item of falseinformation. Our failure to submit monthly/quarterly average manufacturer price and best price data on a timely basis couldresult in a significant civil monetary penalty per day for each day the information is late beyond the due date. Such failurealso could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in theMedicaid 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.CMS and the Office of the Inspector General have pursued manufacturers that were alleged to have failed to reportthese data to the government in a timely manner. Governmental agencies may also make changes in program interpretations,requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.We cannot assure you that our submissions will not be found by CMS to be incomplete 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 (“VA”) Federal Supply Schedule (“FSS”) pricing program, established by Section 603 of the Veterans19 Table of ContentsHealth Care Act of 1992. Under this program, we are obligated to make our product available for procurement on an FSScontract and charge a price to four federal agencies—VA, Department of Defense, Public Health Service, and Coast Guard—that is no higher than the statutory Federal Ceiling Price (“FCP”). The FCP is based on the non‑federal average manufacturerprice (“Non‑FAMP”) which we calculate and report to the VA on a quarterly and annual basis. We also participate in theTricare Retail Pharmacy program, established by Section 703 of the National Defense Authorization Act for FY 2008, andrelated regulations, under which we pay quarterly rebates on utilization of innovator products that are dispensed to Tricarebeneficiaries through Tricare retail network pharmacies. The rebates are calculated as the difference between AnnualNon‑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, including Greece and Spain, have led and may continue tolead to substantial delays in payment and payment partially with government bonds rather than cash for medicinal products,which could negatively impact our revenues and profitability. Moreover, in order to obtain reimbursement of our medicinalproducts in some countries, including some EU Member States, we may be required to conduct Health TechnologyAssessments (“HTAs”) 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.In the EU, the sole legal instrument at the EU level governing the pricing and reimbursement of medicinal productsis Council Directive 89/105/EEC (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.HTA of medicinal products is becoming an increasingly common part of the pricing and reimbursement proceduresin some EU Member States. These EU Member States include the United Kingdom, France, Germany and Sweden. The HTAprocess in the EEA Member States is governed by the national laws of these countries. HTA is the procedure according towhich the assessment of the public health impact, therapeutic impact and the economic and20 Table of Contentssocietal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted.HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost‑effectiveness of individual medicinalproducts as well as their potential implications for the healthcare system. Those elements of medicinal products are comparedwith 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. A negative HTA by a leading and recognized HTA body concerning one of our medicinal products could not onlyundermine our ability to obtain reimbursement for such product not only in the EU Member State in which the negativeassessment was issued, but also in other EU Member States. For example, EU Member States that have not yet developedHTA mechanisms could rely to some extent on the HTA performed in countries with a developed HTA framework, such asFrance, Germany or Sweden, when adopting decisions concerning the pricing and reimbursement of a specific medicinalproduct.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.On January 31, 2018, the European Commission adopted a proposal for a regulation on HTA. This legislativeproposal is intended to boost cooperation among EU Member States in assessing health technologies, including newmedicinal products, and providing the basis for cooperation at the EU level for joint clinical assessments in these areas. Theproposal provides that EU Member States will be able to use common HTA tools, methodologies, and procedures across theEU, working together in four main areas, including joint clinical assessment of the innovative health technologies with themost potential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities,identification of emerging health technologies to identify promising technologies early, and continuing voluntarycooperation in other areas. Individual EU Member States will continue to be responsible for assessing non-clinical (e.g.,economic, social, ethical) aspects of health technology, and making decisions on pricing and reimbursement. The EuropeanCommission has stated that the role of the draft HTA regulation is not to influence pricing and reimbursement decisions inthe individual EU Member States. However, this consequence cannot be excluded.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 healthcare Anti‑Kickback Statute, which prohibits, among other things, knowingly or willinglyoffering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce orreward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of anyhealthcare items or service for which payment may be made, in whole or in part, by federal healthcare programssuch 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 certain21 Table of Contentscommon business arrangements and activities from prosecution or regulatory sanctions, the exemptions andsafe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor maybe subject to scrutiny. Moreover, the anti-kickback statute is subject to evolving interpretation and there are nosafe harbors for many common practices, including patient or product support programs, educational andresearch grants, or charitable donations. We seek to comply with the exemptions and safe harbors wheneverpossible, but our practices may not in all cases meet all of the criteria for safe harbor protection fromanti‑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. Actionsunder the False Claims Act may be brought by the U.S. Attorney General or as a qui tam action by a privateindividual in the name of the government. Many pharmaceutical and other healthcare companies have beeninvestigated and have reached substantial financial settlements with the federal government under the civilFalse Claims Act for a variety of alleged improper marketing activities, including providing free product tocustomers with the expectation that the customers would bill federal programs for the product; providingconsulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’sproducts; and inflating prices reported to private price publication services, which are used to set drug paymentrates under government healthcare programs. In addition, in recent years the government has pursued civil FalseClaims Act cases against a number of pharmaceutical companies for causing false claims to be submitted as aresult of the marketing of their products for unapproved, and thus non‑reimbursable, uses. More recently, federalenforcement agencies are and have been investigating certain pharmaceutical companies’ product and patientassistance programs, including manufacturer reimbursement support services, relationships with specialtypharmacies, and grants to independent charitable foundations. False Claims Act liability is potentiallysignificant in the healthcare industry because the statute provides for treble damages and mandatory penaltiesper false or fraudulent claim or statement. Because of the potential for large monetary exposure, healthcare andpharmaceutical companies often resolve allegations without admissions of liability for significant and materialamounts. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws,including, among others, federal criminal healthcare fraud and false statement statutes that extend tonon‑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 (“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 (“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. In addition, the California Consumer Privacy Act (“CCPA”) was signedinto law on June 28, 2018 and largely takes effect January 1, 2020. The law contains new disclosure obligationsfor businesses that collect personal information about California residents and affords those individuals newrights relating to their personal information that may22 Table of Contentsaffect our ability to use personal information. The CCPA has substantial penalties for non-compliance, and wecontinue to assess its impact on our business. 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 General Data Protection Regulation(“GDPR”), an EU-wide regulation that became fully enforceable on May 25, 2018, replacing the EU DataProtection Directive, imposes strict obligations and restrictions on the ability to collect, analyze and transferpersonal data, including health data from clinical trials and adverse event reporting. The GDPR imposesrestrictions on the processing (e.g., collection, use, disclosure) of personal data, including a number ofrequirements relating to the consent of the individuals to whom the personal data relates, the informationprovided to the individuals prior to processing their personal data, notification of data processing obligationsto the competent national data protection authorities and the security and confidentiality of the personal data.GDPR also imposes strict restrictions on the transfer of personal data out of the EU to the United States. Theseobligations and restrictions concern, in particular, the consent of the individuals to whom the personal datarelate, the information provided to the individuals, the transfer of personal data out of the EEA or Switzerland,security breach notifications, security and confidentiality of the personal data, as well as substantial potentialfines for breaches of the data protection obligations. Failure to comply with the requirements of the GDPR andthe related national data protection laws of the EU Member States may result in substantial fines and otheradministrative penalties. Compliance with GDPR may be onerous and increase our cost of doing business. Thelegislative and regulatory landscape for privacy and data security continues to evolve, and there has been anincreasing amount of focus on privacy and data security issues with the potential to affect our business. Theseprivacy and data security laws and regulations could increase our cost of doing business, and failure to complywith these laws and regulations could result in government enforcement actions (which could include civil orcriminal penalties), private litigation and/or adverse publicity and could negatively affect our operating resultsand business. Moreover, patients about whom we or our partners obtain information, as well as the providerswho share 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 healthcare providers in thestates. Other states prohibit providing meals to prescribers or other marketing‑related activities and restrict theability of manufacturers to offer co-pay support to patients for certain prescription drugs. Some states requirethe posting of information relating to clinical studies and their outcomes. Some states and cities requireidentification or licensing of sales representatives. In addition, some states require pharmaceutical companiesto implement compliance programs or marketing codes of conduct. Foreign governments often have similarregulations, which we also will be subject 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 of drugs, devices, biologics and medical supplies for which payment isavailable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to theCenters for Medicare and Medicaid Services within the U.S. Department of Health and Human Services(“CMS”) information related payments and other transfers of value, directly or indirectly, to physicians (definedto include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well asownership and investment interests held by physicians and their immediate family members. Beginning in2022, applicable manufacturers also will be required to report information regarding payments and transfers ofvalue provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists,and certified nurse-midwives; and·the federal Foreign Corrupt Practices Act of 1977 and other similar anti‑bribery laws in other jurisdictionsprohibit companies and their intermediaries from providing money or anything of value to officials of foreigngovernments, candidates for foreign political office, or public international organizations with the23 Table of Contentsintent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increasein anti‑bribery law enforcement activity by U.S. and foreign regulators, with more frequent and aggressiveinvestigations and enforcement proceedings by both the Department of Justice and the U.S. Securities andExchange Commission. A determination that our operations or activities are not, or were not, in compliancewith United States or foreign laws or regulations could result in the imposition of substantial fines, interruptionsof 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 mandatorypenalties, imprisonment, damages, fines, exclusion from government‑funded healthcare programs, like Medicare andMedicaid, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuringof our operations could adversely affect our ability to operate our business and our financial results. Although complianceprograms can mitigate the risk of investigation and prosecution for violations of these laws and regulations, the risks cannotbe entirely eliminated. Any action against us for violation of these laws or regulations, even if we successfully defend againstit, could cause us to incur significant legal expenses and divert our management’s attention from the operation of ourbusiness. Moreover, achieving and sustaining compliance with applicable federal and state privacy, data security and fraudlaws and regulations may prove costly.Data protection authorities from the different EU Member States may interpret the GDPR and applicable relatednational laws differently and impose requirements additional to those provided in the GDPR. In addition, guidance onimplementation and compliance practices may be updated or otherwise revised, which adds to the complexity of processingpersonal data in the EU. When processing personal data of subjects in the EU, we must comply with the applicable dataprotection laws. In particular, when we rely on third party services providers processing personal data of subjects in the EUwe must enter into suitable agreements with these providers and receive sufficient guarantees that the providers meet therequirements of the applicable data protection laws, particularly the GDPR which imposes specific and relevant obligations.Although there are legal mechanisms to allow for the transfer of personal data from the EEA to the US, a decision ofthe European Court of Justice in the Schrems case (Case C-362/14 Maximillian Schrems v. Data Protection Commissioner)that invalidated the safe harbor framework has increased uncertainty around compliance with EU privacy law requirements.As a result of the decision, it was no longer possible to rely on the safe harbor certification as a legal basis for the transfer ofpersonal data from the EU to entities in the US. On February 29, 2016, however, the European Commission announced anagreement with the United States Department of Commerce (“DOC”) to replace the invalidated Safe Harbor framework with anew EU-US “Privacy Shield.” On July 12, 2016, the European Commission adopted a decision on the adequacy of theprotection provided by the Privacy Shield. The Privacy Shield is intended to address the requirements set out by theEuropean Court of Justice in its ruling by imposing more stringent obligations on companies, providing stronger monitoringand enforcement by the DOC and Federal Trade Commission, and making commitments on the part of public authoritiesregarding access to information. US companies have been able to certify to the US Department of Commerce theircompliance with the privacy principles of the Privacy Shield since August 1, 2016.On September 16, 2016, an Irish privacy advocacy group brought an action for annulment of the EC decision on theadequacy of the Privacy Shield before the European Court of Justice (Case T-670/16). In October 2016, a further action forannulment was brought by three French digital rights advocacy groups (Case T-738/16). Case T-670/16 was declaredinadmissible. Case T-738/16 is still pending before the European Court of Justice. The United States was admitted as anintervener in the action on September 4, 2018. If the European Court of Justice invalidates the Privacy Shield, it will nolonger be possible to rely on the Privacy Shield certification to support transfer of personal data from the EU to entities in theUS. Adherence to the Privacy Shield is not, however, mandatory. US-based companies are permitted to rely either on theiradherence to the Privacy Shield or on the other authorized means and procedures to transfer personal data provided by theGDPR. If we or our vendors fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendorsrely upon to allow for the transfer of personal data from the EEA or Switzerland to the US (or other countries not consideredby the European Commission to provide an adequate level of data protection) are not considered adequate, we could besubject to government enforcement actions and significant penalties24 Table of Contentsagainst us, and our business could be adversely impacted if our ability to transfer personal data outside of the EEA orSwitzerland is restricted, which could adversely impact our operating results.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. 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.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 (the “Menarini License Agreement”)and a supply agreement (the “Menarini Supply Agreement”) with the Menarini Group through its subsidiary Berlin‑ChemieAG (“Menarini”).Under 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, 2018. 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 terminate25 Table of Contentsthe Menarini License Agreement if certain additional regulatory obligations are imposed on SPEDRA, and we may terminatethe Menarini License Agreement if Menarini challenges our patents covering SPEDRA or if Menarini commits certain legalviolations. Either party may terminate the Menarini License Agreement for the other party’s uncured material breach orbankruptcy.Under the terms of the Menarini Supply Agreement, we supplied 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, Menarini isresponsible for its own supply of STENDRA. Either party may terminate the Menarini Supply Agreement for the other party’suncured 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. Under the Sanofi License Agreement, we have received payments of $10.0 million relating tolicense and milestone payments through December 31, 2018.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.On December 7, 2018, we entered into an amendment to the Commercial Supply Agreement with Sanofi Chimie,pursuant to which certain amendments were made to the Commercial Supply Agreement, which include: (i) beginningJanuary 1, 2019, Sanofi Chimie will manufacture and supply API for avanafil on an exclusive basis in all countries where wehave the right to sell avanafil; (ii) beginning January 1, 2019, the yearly minimum quantities of API that we must purchasefrom Sanofi Chimie will be adjusted, as well as adjustments to the associated pricing and payment terms; and (iii) with theinitial five year term of the Commercial Supply Agreement expiring on December 31, 2018, we and Sanofi Chimie haveagreed to extend the term of the Commercial Supply Agreement until December 31, 2023 unless either party makes a timelyelection to terminate the agreement and that thereafter the Commercial Supply Agreement will auto-renew for successive oneyear terms unless either party makes a timely election not to renew.In March 2017, we and Sanofi entered into the Termination, Rights Reversion and Transition Services Agreement (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.Metuchen 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.26 Table of ContentsMetuchen 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 (the “Alvogen License Agreement”)and a commercial supply agreement (the “Alvogen Supply Agreement”) with Alvogen Malta Operations (ROW) Ltd(“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. 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.Janssen Pharmaceuticals, IncIn June 2018, we acquired the commercial rights to PANCREAZE and PANCREASE MT in the U.S. and Canadafrom Janssen. In connection with the acquisition of PANCREAZE, we and Janssen also entered into transition servicesagreements pursuant to which Janssen and a Canadian affiliate of Janssen will provide certain transition services to us in theU.S. and Canada as we transition to full control over the PANCREAZE supply chain. The transition in the U.S. occurred inthe first quarter of 2019. We commercialize PANCREAZE in the U.S. and Canada by leveraging our existing commercialinfrastructure and expanding it to include 10 additional contract sales representatives in the U.S. and possibly two salesrepresentatives in Canada focused on gastro-intestinal and cystic fibrosis physicians. We also entered into a Long-TermCollaboration Agreement with Johnson & Johnson Health Care Systems Inc., a New Jersey corporation and an affiliate ofJanssen, pursuant to which they will cooperate in the reporting and certification of pricing and sales data and the payment ofrebates and discounts under certain governmental programs.27 Table of ContentsOtherIn October 2001, we entered into an assignment agreement (the “Assignment Agreement”) with Thomas Najarian,M.D. for a combination of pharmaceutical agents for the treatment of obesity and other disorders (the “CombinationTherapy”) that became the focus of our development program for Qsymia. The Combination Therapy and all related patentapplications (the “Combination Therapy Patents”) were transferred to us with worldwide rights to develop and commercializethe Combination Therapy and exploit the Combination Therapy Patents. In addition, the Assignment Agreement requires usto pay royalties on worldwide net sales of a product for the treatment of obesity that is based upon the Combination Therapyand the Combination Therapy Patents until the last‑to‑expire of the assigned Combination Therapy Patents. To the extentthat we decide not to commercially exploit the Combination Therapy Patents, the Assignment Agreement will terminate andthe Combination Therapy and the Combination Therapy Patents will be assigned back to Dr. Najarian. In 2006, Dr. Najarianjoined the Company as a part‑time employee and served as a Principal Scientist. In November 2013, Dr. Najarian’semployment with the Company 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. 16/026,886PendingU.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. 16/220,269PendingU.S. Patent Publication No. 2016/0250180 A1 16/220,276PendingCanadian 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 11/21/2020TACROLIMUS U.S. Patent No. 9,474,745Expiring 04/30/2032U.S. Patent Application No. 16/198,242PendingPCT/US16/12694PendingPCT/US16/30737PendingPCT/US16/47148Pending 28 Table of Contents*These expiration dates are based on the number of days of patent term adjustment (“PTA”) calculated by the U.S. Patent and TrademarkOffice (“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 (“EEA”) under the Decentralized, Mutual Recognition or national procedures. The approach (known as the8+2+1 formula) permits eight years of data exclusivity and 10 years of marketing exclusivity. Within the first eight years ofthe 10 years, an applicant for a marketing authorization for a generic or biosimilar medicinal product is not permitted to crossrefer to the preclinical and clinical trial data relating to the reference product. Even if the generic or biosimilar product isauthorized after expiry of the eight years of data exclusivity, it cannot be placed on the market until the full 10‑year marketexclusivity has expired. This 10‑year market exclusivity may be extended cumulatively to a maximum period of 11 years ifduring the first eight years of those 10 years, the marketing authorization holder obtains an authorization for a new (second)therapeutic indication which, during the scientific evaluation prior to its authorization, is held to bring a significant clinicalbenefit 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, PANCREAZE and STENDRA, together with their respective APIs and finishedproducts, as well as our clinical supplies, are manufactured on a contract basis. In addition, packaging for the commercialdistribution of the Qsymia and PANCREAZE product capsules and the STENDRA product tablets is performed by contractpackaging companies. We expect to continue to contract with other third‑party providers for manufacturing services,including APIs, finished products, and packaging operations as needed. We believe that our current agreements and purchaseorders with third‑party manufacturers provide for sufficient operating capacity to support the anticipated commercial demandfor Qsymia, PANCREAZE and STENDRA and our clinical supplies. However, if we are unable to obtain a sufficient supply ofQsymia, PANCREAZE or STENDRA for our commercial sales, or the clinical supplies to support our clinical trials, or if weshould encounter delays or difficulties in our relationships with our manufacturers or packagers, we may lose potential sales,have difficulty entering into collaboration agreements for the commercialization of STENDRA for territories in which we donot have a commercial collaboration or our clinical trials may be delayed.Catalent Pharma Solutions, LLC (“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.In connection with the acquisition of PANCREAZE, we and Janssen also entered into transition services agreementspursuant to which Janssen and a Canadian affiliate of Janssen will provide certain transition services to us in the U.S. andCanada as we transition to full control over the PANCREAZE supply chain. The transition in the U.S. occurred in the firstquarter of 2019. Nordmark Arzneimittel GmbH & Co. KG (“Nordmark”) is the Company’s sole source of clinical andcommercial supplies for PANCREAZE.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.29 Table of ContentsWe 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, either directly orindirectly through others or on commercially acceptable terms, if at all, we may not be able to commercialize our products asplanned. Although we are taking these actions to avoid a disruption in supply, we cannot provide assurance that we may notexperience a disruption in the future.Marketing and SalesWe commercialize Qsymia and PANCREAZE in the U.S. primarily through a specialty sales force, supported by aninternal commercial team. Our efforts to expand the appropriate use of Qsymia include scientific publications, participationand presentations at medical conferences, and development and implementation of patient-directed support programs. Wehave rolled out marketing programs to encourage targeted prescribers to gain more experience with Qsymia. We haveincreased our investment in digital media in order to amplify our messaging to information-seeking consumers. The digitalmessaging encourages those consumers most likely to take action to speak with their physicians about obesity treatmentoptions. We believe our enhanced web-based strategies will deliver clear and compelling communications to potentialpatients. We also provide the Q and Me® Patient Support Program online which supports Qsymia patients make thebehavioral changes needed for sustained weight-loss. We launched PANCREAZE in the U.S. in February of 2019, whichincluded 10 contract sales representatives and additional marketing and promotional activities.Product Distribution and REMSWe rely on Cardinal Health 105, Inc. (“Cardinal Health”) a third‑party distribution and supply‑chain managementcompany, to warehouse Qsymia and PANCREAZE and distribute them to the certified home delivery pharmacies andwholesalers that then distribute our products directly to patients and certified retail pharmacies. Cardinal Health providesbilling, collection and returns services. Cardinal Health is our exclusive supplier of distribution logistics services, andaccordingly we depend on Cardinal Health to satisfactorily perform its obligations under our agreement with them. We havealso teamed with MedVantx Pharmacy Services to provide direct-to-patient distribution of Qsymia.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.30 Table of ContentsQsymia for the treatment of chronic weight management competes with several approved anti-obesity drugsincluding, Belviq® (lorcaserin), marketed by Eisai Inc., Eisai Co., Ltd.’s U.S. subsidiary; Xenical® (orlistat), marketed byRoche; alli®, the over-the-counter version of orlistat, marketed by GlaxoSmithKline; Contrave® (naltrexone/bupropion),Nalpropion Pharmaceuticals, Inc.’s anti-obesity compound; and Saxenda® (liraglutide), an anti-obesity compound marketedby Novo Nordisk A/S.Agents approved for type 2 diabetes that have demonstrated weight loss in clinical studies may also compete withQsymia. These include Farxiga™ (dapagliflozin) from AstraZeneca and Bristol-Myers Squibb, an SGLT2 inhibitor;Jardiance® (empagliflozin) from Boehringer Ingelheim, 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 inhibitorand Glyxambi® (empagliflozin/linagliptin) from Boehringer Ingelheim and Eli Lilly, an SGLT2 inhibitor and DPP-4inhibitor combination product. Also, EnteroMedics® Inc. markets the Maestro Rechargeable System for certain obese adults,the first weight loss treatment device that targets the nerve pathway between the brain and the stomach that controls feelingsof hunger and fullness.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 by reestablishing balance to the ways the body packages and metabolizes fat. In January 2013, Rhythm Pharmaceuticals(“Rhythm”) announced the initiation of a Phase 2 clinical trial with RM 493, a small peptide melanocortin 4 receptor(“MC4R”) 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 thesesingle-agent generic drugs has a REMS program. Although these products have not been approved by FDA for use in thetreatment of chronic obesity, the off-label use of the generic drugs in the U.S. or the importation of the generic drugs 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, we entered into a settlement agreement with Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC,collectively referred to as “Actavis,” and in August 2017, we entered into a settlement agreement with Dr. Reddy’sLaboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as “DRL.” The settlement agreement withActavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, or earlier under certaincircumstances. The settlement agreement with DRL will permit DRL to begin selling a generic version of Qsymia on June 1,2025, or earlier under certain circumstances. It is possible that one or more additional companies may file an AbbreviatedNew Drug Application (“ANDA”) and could receive FDA approval to market a generic version of Qsymia before the entrydates specified in our settlement agreements with Actavis and DRL. If a generic version of Qsymia is launched, our businesswill be negatively 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.31 Table of ContentsPANCREAZE for the treatment of pancreatic insufficiency competes with Creon®, marketed by AbbVie, Inc.,Zenpep®, marketed by Allergan Inc., Pertzye®, marketed by Digestive Care, Inc., and UltresaTM, marketed by Aptalis PhamaUS, Inc.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 (“ODT”)), co-promoted by GlaxoSmithKline plc and Merck & Co., Inc. Additionally, genericformulations of sildenafil citrate and tadalafil are currently available on the market and, on January 3, 2017, we grantedHetero 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.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 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 or biosimilars of these innovative productscannot rely on data contained in the marketing authorization dossier submitted for the innovative medicinal product.Innovative medicinal products are also entitled to 10 years’ market exclusivity. During this 10‑year period no generic orbiosimilar medicinal product can be placed on the EU market. The 10‑year period of market exclusivity can be extended to amaximum of 11 years if, during the first eight years of those 10 years, the Marketing Authorization Holder for the innovativeproduct obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior totheir authorization, are held to bring a significant clinical benefit in comparison with existing therapies. If we do not obtainextended patent protection and data exclusivity for our product candidates, our business may be materially harmed.EmployeesAs of February 20, 2019, we had 57 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.32 Table of ContentsInsuranceWe 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.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 by visiting the SEC’s Internet site athttp://sec.gov. The contents of these websites are not incorporated into this filing. Further, VIVUS’s references to the URLsfor these websites are intended to 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 (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®, PANCREAZE and STENDRA/SPEDRA.Our success will depend on our ability and that of our current or future collaborators to effectively and profitablycommercialize Qsymia, PANCREAZE 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 (“REMS”) any future changes to the REMS, and any other requirements established byFDA in the future;·efficiently conduct the post-marketing studies required by FDA;33 Table of Contents·effectively and efficiently manage our sales force and commercial team for the promotion of Qsymia andPANCREAZE;·effectively increase the level of revenue for PANCREAZE;·successfully assume the supply chain and commercial responsibilities for PANCREAZE;·maintain a good relationship with the manufacturer of PANCREAZE;·ensure a sufficient level of PANCREAZE inventory;·ensure that the active pharmaceutical ingredients (“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;·comply with other healthcare regulatory requirements;·comply with state and federal controlled substances requirements; and·maintain and defend our patents, if challenged.If we are unable to successfully commercialize Qsymia, PANCREAZE and/or STENDRA/SPEDRA, our ability togenerate product sales will be severely limited, which will have a material adverse impact on our business, financialcondition, and results of operations.We have a new management team which may cause disruption in our business, which disruption could have a materiallyadverse effect on our results of operations.In 2018, former executives of Willow Biopharma Inc. joined our management team, including John Amos as ournew Chief Executive Officer, M. Scott Oehrlein as our new Chief Operations Officer and Kenneth Suh as our new President. Ifwe are unable to successfully retain and integrate the new management team, our business could be harmed.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 a proprietary formulation of tacrolimus as a precursor to the clinical development 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 currentGood Manufacturing Practices (“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;34 Table of Contents·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.If 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 2018, we initiated a new business strategy. These changes, and the potential for additional changes to ourmanagement, organizational structure and strategic business plan, may cause speculation and uncertainty regarding ourfuture 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, Menarini and Metuchen, to successfully commercializeQsymia and STENDRA/SPEDRA in their respective territories, including obtaining any necessary approvals and we cannotassure you that they will be successful. Our dependence on our collaborative arrangements for the commercialization ofQsymia and STENDRA/SPEDRA, including our license agreements with Alvogen, MTPC, Menarini and Metuchen, subjectus 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;35 Table of Contents·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.In 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 (“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. Also, on an interim basis, we have agreements with affiliates ofJanssen for the commercialization of PANCREASE MT in Canada. In determining our royalty revenue from such agreements,we rely on our collaboration partners to provide accounting estimates and reports for various discounts and allowances,including product returns. As a result of fluctuations in inventory, allowances and buying patterns, actual sales and productreturns of STENDRA/SPEDRA in particular reporting periods may be affected, resulting in the need for ourcommercialization partners to adjust or restate their accounting estimates set forth in the reports provided to us. 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.36 Table of ContentsIf we are unable to enter into agreements with collaborators for the territories that are not covered by our existingcommercialization agreements, our ability to commercialize Qsymia and STENDRA/SPEDRA in these territories may beimpaired.We intend to enter into collaborative arrangements or a strategic alliance with one or more pharmaceutical partnersor others to commercialize Qsymia and STENDRA/SPEDRA in territories that are not covered by our current commercialcollaboration agreements. For example, Qsymia is currently licensed for sale only in the U.S. and we have acommercialization agreement to market it in South Korea. STENDRA/SPEDRA is currently not marketed in Africa, theMiddle East, Turkey, the CIS, Mexico and Central America. We may be unable to enter into agreements with third parties forQsymia and STENDRA/SPEDRA for these territories on favorable terms or at all, which could delay, impair, or preclude ourability to commercialize Qsymia and STENDRA/SPEDRA in these territories.Failure 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, Janssen and any potential future collaborators in certain territories,intend to market Qsymia, PANCREAZE/PANCREASE and STENDRA/SPEDRA outside the U.S., which will subject us torisks related to conducting business internationally.We, through Alvogen, Menarini, Metuchen and any potential future collaborators in certain territories, intend tomanufacture, market, and distribute Qsymia, PANCREAZE/PANCREASE and STENDRA/SPEDRA outside the U.S. Also, onan interim basis, we have agreements with affiliates of Janssen for the commercialization of PANCREASE MT in Canada. Weexpect that we will be subject to additional 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.;37 Table of Contents·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, in 2015, we recorded inventory impairment and 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 our analysis of thethen-current Qsymia inventory on hand and remaining shelf life, in relation to our projected demand for the product. Thecurrent FDA-approved commercial product shelf life for Qsymia is 36 months. STENDRA is approved in the U.S. andSPEDRA 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. PANCREAZE has a short shelf life and forecasting both the amounts and the timing ofdemand for PANCREAZE is 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. (“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 (“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,38 Table of Contentssuspension or revocation of regulatory approval and criminal prosecution. Failure to coordinate financial systems could alsonegatively impact our ability to accurately report and forecast product revenue. If we are unable to effectively manage thedistribution and data collection process, sales of Qsymia could be severely compromised and our business, financialcondition and results of operations would be harmed.If we are unable to maintain or enter into agreements with suppliers or our suppliers fail to supply us with the APIs for ourproducts or finished products or if we rely on single-source suppliers, we may experience delays in commercializing ourproducts.We purchase all supplies related to PANCREAZE from a single manufacturer. We currently do not have supplyagreements for topiramate or phentermine, which are the APIs used in Qsymia. We cannot guarantee that we will besuccessful in maintaining or entering into supply agreements on reasonable terms or at all or that we or our suppliers will beable to obtain or maintain the necessary regulatory approvals or state and federal controlled substances registrations forcurrent or potential future suppliers in a timely manner or at all.We anticipate that we will continue to rely on single-source suppliers for PANCREAZE, phentermine andtopiramate for the foreseeable future. Any production shortfall on the part of our suppliers that impairs the supply ofphentermine, topiramate or PANCREAZE could have a material adverse effect on our business, financial condition andresults of operations. If we are unable to obtain a sufficient quantity of these compounds, there could be a substantial delay insuccessfully developing a second source supplier. An inability to continue to source product from any of these suppliers,which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategicdevelopments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adverselyaffect our ability to satisfy demand for Qsymia or PANCREAZE, which could adversely affect our product sales andoperating 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, PANCREAZE and STENDRA from third parties. If we defaulton any of our material obligations under those licenses, we could lose rights to these drugs.We have in-licensed and otherwise contracted for rights to Qsymia, PANCREAZE and STENDRA, and we may enterinto similar licenses 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 licensed the rights to PANCREAZE from Janssen. We license the rights to Qsymia from Dr. Najarian.We believe we are in compliance with the material terms of our license agreements with MTPC, Janssen and Dr. Najarian.However, there can be no assurance that this compliance will continue or that the licensors will not have a differinginterpretation of the material terms of the agreements. If the license agreements were terminated early or if the terms of thelicenses were contested for any reason, it would have a material adverse impact on our ability39 Table of Contentsto commercialize products subject to these agreements, our ability to raise funds to finance our operations, our stock priceand our overall financial condition. The monetary and disruption costs of any disputes involving our agreements could besignificant despite rulings in our favor.Our ability to gain and increase market acceptance and generate revenues will be subject to a variety of risks, many ofwhich are out of our control.Qsymia, PANCREAZE and STENDRA/SPEDRA may not gain or increase market acceptance among physicians,patients, healthcare payors or the medical community. We believe that the degree of market acceptance and our ability togenerate revenues from such drugs 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;·contraindications for Qsymia and STENDRA/SPEDRA;·our ability to increase market acceptance for and use of PANCREAZE;·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.40 Table of ContentsWe 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 subject to additional REMS restrictions or 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 (“CVOT”). We estimate the cost of a CVOT as currently designed to be between $180.0 millionand $220.0 million incurred over a period of approximately five years. We have held several meetings with FDA to discussalternative strategies for obtaining cardiovascular (“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 CV risk signal and indicated that they did not believe a randomized placebo-controlledCVOT would provide additional information regarding the CV risk of Qsymia. The epidemiology experts maintained that awell-conducted retrospective observational study could provide data to further inform on potential CV risk. We worked withthe expert group to develop a protocol and conduct a retrospective observational study. We have submitted information fromthis study to FDA in support of a currently pending supplemental New Drug Application (“sNDA”) seeking changes to theQsymia label. Although we and consulted experts believe there is no overt signal for CV risk to justify the CVOT, we arecommitted to working with FDA to reach a resolution. There is no assurance, however, that FDA will accept any measuresshort of those specified in the CVOT to 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 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 regulatory obligations,clinical trials or other development activities may be extended, delayed or terminated, and we may not be able to completeour post-approval clinical trials or other development activities for Qsymia, PANCREAZE and STENDRA, obtain regulatoryapproval for our future investigational drug candidates, successfully commercialize our approved drugs or otherwise advanceour business. There can be no assurance that we will be able to manage our existing consultants or find other competentoutside contractors and consultants on commercially reasonable terms, or at all.41 Table of ContentsQsymia 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 be subjectto substitution by prescribing physicians, or by pharmacists, with individual drugs contained in the Qsymia formulation,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. For more informationconcerning pricing and reimbursement of medicinal products in the EU and, in particular, the impact of HTA, please refer tothe section titled “Government Regulation - Coverage and Reimbursement.”42 Table of ContentsIf we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage.Qsymia, PANCREAZE and STENDRA/SPEDRA, like all pharmaceutical products, are subject to heightened risk forproduct liability claims due to inherent potential side effects. For example, because topiramate, a component of Qsymia, mayincrease 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,PANCREAZE, STENDRA/SPEDRA or a future investigational drug candidate or product, we may incur substantialliabilities. Regardless of merit 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 technologies43 Table of Contentsand products that are more effective than those we are currently marketing or researching and developing. Suchdevelopments could render Qsymia and STENDRA less competitive or possibly obsolete.Qsymia for the treatment of chronic weight management competes with several approved anti-obesity drugsincluding, Belviq (lorcaserin), marketed by Eisai Inc., Eisai Co., Ltd.’s U.S. subsidiary; Xenical (orlistat), marketed byRoche; alli, the over-the-counter version of orlistat, marketed by GlaxoSmithKline; Contrave (naltrexone/bupropion),Nalpropion Pharmaceuticals, Inc.’s anti-obesity compound; and Saxenda (liraglutide), an anti-obesity compound marketedby Novo Nordisk A/S. Agents that have been approved for type 2 diabetes that have demonstrated weight loss in clinicalstudies may also compete with Qsymia. These include Farxiga™ (dapagliflozin) from AstraZeneca and Bristol-Myers Squibb,an SGLT2 inhibitor; Jardiance (empagliflozin) from Boehringer Ingelheim, an SGLT2 inhibitor; Victoza (liraglutide) fromNovo 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 inhibitorand DPP-4 inhibitor combination product. Also, EnteroMedics® Inc. markets the Maestro Rechargeable System for certainobese adults, the first weight loss treatment device that targets the nerve pathway between the brain and the stomach thatcontrols feelings of hunger and fullness.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 both challengers.In June 2017, we entered into a settlement agreement with Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC,collectively referred to as “Actavis,” and in August 2017, we entered into a settlement agreement with Dr. Reddy’sLaboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as “DRL.” The settlement agreement withActavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, or earlier under certaincircumstances. The settlement agreement with DRL will permit DRL to begin selling a generic version of Qsymia on June 1,2025, or earlier under certain circumstances. It is possible that one or more additional companies may file an AbbreviatedNew Drug Application (“ANDA”) and could receive FDA approval to market a generic version of Qsymia before the entrydates specified in our settlement agreements with Actavis and DRL. If a generic version of Qsymia is launched, this will harmour business. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consumingclinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on FDA’s finding that theinnovator’s product is safe and effective. Additionally, generic drug companies generally do not expend significant sums onsales and marketing activities, instead relying on physicians or payors to substitute the generic form of a drug for the brandedform. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovativepharmaceutical or biotechnology companies44 ®®®®®®®®®Table of Contentswho have incurred substantial expenses associated with the research and development of the drug product and who mustspend 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 and permits theANDA holder to implement a separate but comparable REMS. We cannot predict the outcome or impact on our business ofany future action that we may take with regard to sharing our REMS program or if FDA grants a waiver allowing the genericcompetitor to market a generic drug with a separate but comparable REMS.PANCREAZE for the treatment of pancreatic insufficiency competes with Creon®, marketed by AbbVie, Inc.,Zenpep®, marketed by Allergan Inc., Pertzye®, marketed by Digestive Care, Inc., and Ultresa, marketed by Aptalis PhamaUS, Inc.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 (“ODT”)), co-promoted by GlaxoSmithKline plc and Merck & Co., Inc. Additionally, genericformulations of sildenafil citrate and tadalafil are currently available on the market and, on January 3, 2017, we grantedHetero 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.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. On September 30, 2016, we entered into a license andcommercialization 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 (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. Also, on June 8, 2018, we closed onthe acquisition of PANCREAZE from Janssen, pursuant to which we acquired the rights to PANCREAZE and PANCREASEMT in the U.S. and Canada. Further potential transactions we may consider include a45 TMTable of Contentsvariety 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 an acquisition target. Anysuch transactions may require us to incur non-recurring or other charges, may increase our near- and long-term expendituresand may pose significant integration challenges, require additional expertise or disrupt our management or business, any ofwhich 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.Our 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 June 8, 2018, we closed on the acquisition of PANCREAZE from Janssen,pursuant to which we acquired the rights to PANCREAZE and PANCREASE MT in the U.S. and Canada. Also, on January 6,2017, we entered into a Patent Assignment Agreement with Selten, whereby we received exclusive, worldwide rights for thedevelopment and commercialization of tacrolimus for the treatment of PAH and related vascular diseases. Because ourinternal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies,academic scientists and other researchers to sell or license products or technology to us. The success of this strategy dependspartly upon our ability to identify, select and acquire promising pharmaceutical investigational drug candidates andproducts.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 of46 Table of Contentsdrug development, including the possibility that an investigational drug candidate will not be shown to be sufficiently safeand effective for approval by regulatory authorities. In addition, we cannot be certain that any drugs that we develop orapproved products 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 our research programs,investigational drug candidate development, approved drug commercialization efforts and business operations.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 (“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 PANCREAZE, Nordmark is our sole source of clinical and commercial supplies. Nordmark has significantexperience in manufacturing; however, there is no assurance that they will continue to be successful in supplying47 Table of ContentsPANCREAZE in the future or if we will be able to continue our relationship with Nordmark on favorable terms to us for anyfuture formulations and quantities.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.We 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 (“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. Additionally, we intend to launch the VIVUS HealthcarePlatform in 2019, which will provide current and potential customers with an integrated online approach to weightmanagement.The collection and use of personal health data and other personal data in the EU is governed by the General DataProtection Regulation (“GDPR”) which became applicable on May 25, 2018, replacing the EU Data Protection Directive,imposes strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health datafrom clinical trials and adverse event reporting and substantial fines and other administrative penalties. Compliance with theGDPR may be onerous and increase our cost of doing business. For more information concerning the data protectionrequirements in the EU and the EU Member States and the rules governing the transfer of personal data to the U.S., pleaserefer to the section title “Government Regulation - Fraud and Abuse and Privacy and Data Security Laws and Regulations.”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 healthcare Anti-Kickback Statute, which prohibits, among other things, knowingly or willinglyoffering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce orreward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of anyhealthcare items or service for which payment may be made, in whole or in part, by federal healthcare48 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. Moreover,the anti-kickback statute is subject to evolving interpretation and there are no safe harbors for many commonpractices, including patient or product support programs, educational and research grants, or charitabledonations. We seek to comply with the exemptions and safe harbors whenever possible, but our practices maynot in all cases meet all of 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. Actionsunder the False Claims Act may be brought by the U.S. Attorney General or as a qui tam action by a privateindividual in the name of the government. Many pharmaceutical and other healthcare companies have beeninvestigated and have reached substantial financial settlements with the federal government under the civilFalse Claims Act for a variety of alleged improper marketing activities, including providing free product tocustomers with the expectation that the customers would bill federal programs for the product; providingconsulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’sproducts; and inflating prices reported to private price publication services, which are used to set drug paymentrates under government healthcare programs. In addition, in recent years the government has pursued civil FalseClaims Act cases against a number of pharmaceutical companies for causing false claims to be submitted as aresult of the marketing of their products for unapproved, and thus non-reimbursable, uses. More recently, federalenforcement agencies are and have been investigating certain pharmaceutical companies’ product and patientassistance programs, including manufacturer reimbursement support services, relationships with specialtypharmacies, and grants to independent charitable foundations. False Claims Act liability is potentiallysignificant in the healthcare industry because the statute provides for treble damages and mandatory penaltiesper false or fraudulent claim or statement. Because of the potential for large monetary exposure, healthcare andpharmaceutical companies often resolve allegations without admissions of liability for significant and materialamounts. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws,including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;·The federal Health Insurance Portability and Accountability Act of 1996, as amended by HIPAA imposescriminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposesobligations, with respect to safeguarding the privacy, security and transmission of individually identifiablehealth 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. The General Data Protection Regulation(“GDPR”), for example, is an EU-wide regulation that imposes restrictions on the processing (e.g., collection,use, disclosure) of personal data and that also imposes strict restrictions on the transfer of personal data out ofthe EU to the United States. In addition, most healthcare providers who prescribe our products and from whomwe obtain patient health information are subject to privacy and security requirements under the HealthInsurance Portability and Accountability Act of 1996 and by the Health Information Technology for Economicand Clinical Health Act (“HITECH”) which are collectively49 Table of Contentsreferred to as “HIPAA.” We are not a HIPAA-covered entity and we do not operate as a business associate to anycovered entities. Therefore, the HIPAA privacy and security requirements do not apply to us (other thanpotentially with respect to providing certain employee benefits). However, we could be subject to criminalpenalties if we knowingly obtain individually identifiable health information from a covered entity in a mannerthat is not authorized or permitted by HIPAA or for aiding and abetting and/or conspiring to commit a violationof HIPAA. We are unable to predict whether our actions could be subject to prosecution in the event of animpermissible disclosure of health information to us. The legislative and regulatory landscape for privacy anddata security continues to evolve, and there has been an increasing amount of focus on privacy and datasecurity issues with the potential to affect our business. These privacy and data security laws and regulationscould increase our cost of doing business, and failure to comply with these laws and regulations could result ingovernment enforcement actions (which could include civil or criminal penalties), private litigation and/oradverse publicity 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 healthcare providers in thestates. Other states prohibit providing meals to prescribers or other marketing-related activities and restrict theability of manufacturers to offer co-pay support to patients for certain prescription drugs. Some states requirethe posting of information relating to clinical studies and their outcomes. Some states and cities requireidentification or licensing of sales representatives. Some states restrict the ability of manufacturers to offer co-pay support to patients for certain prescription drugs. Other states and cities require identification or licensingof state representatives. In addition, some states require pharmaceutical companies to implement complianceprograms or marketing codes of conduct. Foreign governments often have similar regulations, which we alsowill be subject 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 of drugs, devices, biologics and medical supplies for which payment isavailable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the Centers for Medicare and Medicaid Services (“CMS”) within the U.S. Department of Health and HumanServices information related payments and other transfers of value, directly or indirectly, to physicians (definedto include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well asownership and investment interests held by physicians and their immediate family members. Beginning in2022, applicable manufacturers also will be required to report information regarding payments and transfers ofvalue provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists,and certified nurse-midwives; and·the federal Foreign Corrupt Practices Act of 1977 and other similar anti-bribery laws in other jurisdictionsprohibit companies and their intermediaries from providing money or anything of value to officials of foreigngovernments, candidates for foreign political office, or public international organizations with the intent toobtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. and foreign regulators, with more frequent and aggressiveinvestigations and enforcement proceedings by both the Department of Justice and the SEC. A determinationthat our operations or activities are not, or were not, in compliance with United States or foreign laws orregulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendoror other third-party relationships, termination of necessary licenses and permits, and other legal or equitablesanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuitsbrought by private litigants, may also follow as a consequence.State and federal regulatory and enforcement agencies continue to actively investigate violations of healthcare lawsand regulations, and the U.S. Congress continues to strengthen the arsenal of enforcement tools. Most recently, the BipartisanBudget Act of 2018 increased the criminal and civil penalties that can be imposed for violating certain federal healthcarelaws, including the federal healthcare Anti-Kickback Statute. If our operations are found to be in violation of any of the lawsand regulations described above or any other governmental regulations that apply to us, we may be50 Table of Contentssubject to significant civil, criminal and administrative penalties, imprisonment, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid (i.e., loss of coverage for products), and the curtailment orrestructuring of our operations including by entering into a Corporate Integrity Agreement with the U.S. Department ofHealth and Human Services Office of Inspector General. Any penalties, damages, fines, curtailment or restructuring of ouroperations, or associated adverse publicity, could adversely affect our ability to operate our business and our financialresults. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws andregulations, the risks cannot be entirely eliminated. Any action against us for violation of these laws or regulations, even ifwe successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attentionfrom the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacydata, 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 theprevention 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 an51 Table of Contentsimmediate cessation of the impermissible conduct, resulting in adverse publicity. FDA may also require that all futurepromotional materials receive prior agency review and approval before use. Certain states have also adopted regulations andreporting requirements surrounding the promotion of pharmaceuticals. Qsymia, PANCREAZE and STENDRA are subject tothese regulations. Failure by us or any of our collaborators to comply with state requirements may affect our ability topromote or sell pharmaceutical drugs in certain states. This, in turn, could have a material adverse impact on our financialresults and financial condition and could subject us to significant liability, including civil and administrative remedies aswell as criminal sanctions.We are subject to ongoing regulatory obligations and restrictions, which may result in significant expense or 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 and regulations. Failureto comply with current and future regulations of the DEA, relevant state authorities or any comparable internationalrequirements could lead to a variety of sanctions, including revocation or denial of renewal of DEA registrations, fines,injunctions, or civil or criminal penalties, and could result in, among other things, additional operating costs to us or delaysin 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.We 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 cGMP. These regulations govern quality control of the manufacturing processes and documentation policies andprocedures, and the implementation and operation of quality systems to control and assure the quality of investigationalproducts and products approved for sale. Our facilities and quality systems and the facilities and quality systems of our third-party contractors must be inspected routinely for compliance. If any such inspection or audit identifies a failure to complywith applicable regulations or if a violation of our product specifications or applicable regulation occurs independent ofsuch an inspection or audit, we or FDA may require remedial measures that may be costly and/or time consuming for us or athird party to implement and that may include the issuance of a warning letter, temporary or permanent suspension of aclinical trial or commercial sales, recalls, market withdrawals, seizures, or the temporary or permanent closure of a facility.Any such remedial measures would be imposed upon us or third parties52 Table of Contentswith whom 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. (“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 at 100 percent of the average manufacturer price. Inaddition, the Affordable Care Act and subsequent legislation changed the definition of average manufacturer price. Finally,the Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescriptiondrug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share ofthe branded prescription drug fee of $2.8 billion in 2019 and thereafter, based on the dollar value of its branded prescriptiondrug 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 the53 Table of ContentsMedicaid Drug Rebate program has and will continue to increase our costs and the complexity of compliance, has been andwill be time consuming, and could have 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 program requires participating manufacturers to agree to charge statutorilydefined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340Bcovered entities include a variety of community health clinics and other entities that receive health services grants from thePublic Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The Affordable CareAct expanded the 340B program to include additional types of covered entities: certain free standing cancer hospitals,critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Affordable Care Act, butexempts “orphan drugs” from the ceiling price requirements for these covered entities. The 340B ceiling price is calculatedusing a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatientdrug as calculated under the Medicaid Drug Rebate program. Changes to the definition of average manufacturer price and theMedicaid rebate amount under the Affordable Care Act and CMS’s issuance of final regulations implementing those changesalso could affect our 340B ceiling price calculations and negatively impact our results of operations. The Health Resources and Services Administration (“HRSA”), which administers the 340B program, issued a finalregulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties onmanufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. Itis currently unclear how HRSA will apply its enforcement authority under the new regulation. Implementation of this finalrule and the issuance of any other final regulations and guidance could affect our obligations under the 340B program inways we cannot anticipate. HRSA also is implementing a 340B ceiling price reporting requirement during the first quarter of2019 pursuant to which we are required to report the 340B ceiling prices for our covered outpatient drugs to HRSA on aquarterly basis. In addition, legislation may be introduced that, if passed, would further expand the 340B program toadditional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing ondrugs used in the 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 the correction. Price recalculations also mayaffect the 340B ceiling price at which we are required to offer our products to certain covered entities, and we may berequired to issue refunds to covered entities.We are liable for errors associated with our submission of pricing data. Civil monetary penalties can be applied if weare found to have charged 340B covered entities more than the statutorily mandated ceiling price. In addition to retroactiverebates and the potential for 340B program refunds, if we are found to have knowingly submitted false average manufacturerprice or best price information to the government, we may be liable for significant civil monetary penalties per item of falseinformation. Our failure to submit monthly/quarterly average manufacturer price and best price data on a timely basis couldresult in a significant civil monetary penalty per day for each day the information is late beyond the due date. Such failurealso could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in theMedicaid 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.CMS and the Office of the Inspector General have pursued manufacturers that were alleged to have failed to reportthese data to the government in a timely manner. Governmental agencies may also make changes in program interpretations,requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.We cannot assure you that our submissions will not be found by CMS to be incomplete 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 $181,07154 Table of Contentsfor each item of false information. If we overcharge the government in connection with our FSS contract or the Tricare RetailPharmacy Program, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government.Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under theFalse Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a governmentinvestigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect onour 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 files to provide state Medicaid agencies with a basis of comparison for their ownreimbursement and pricing methodologies and rates. It is difficult to project the impact of these evolving reimbursementmechanics 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 include measures that limit or prohibit payments for some medical treatments or subjectthe pricing of drugs to government control and regulations changing the rebates we are required to provide, and proposalsthat would do so. Further, federal budgetary concerns could result in the implementation of significant 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 the American TaxpayerRelief Act of 2012. Subsequent legislation extended the 2% reduction, on average, to 2027. These cuts reducereimbursement payments related to our products, which could potentially negatively impact our revenue.In March 2010, the President signed the Affordable Care Act. The Affordable Care Act substantially changed theway healthcare is financed by both governmental and private insurers, and could have a material adverse effect on our futurebusiness, cash flows, financial condition and results of operations, including by operation 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.·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 that55 Table of Contentsqualify as line extensions of existing drugs; and capped the total rebate amount at 100 percent of the averagemanufacturer price.·Effective in January 2011, pharmaceutical companies were required to provide a 50 percent discount onbranded prescription drugs dispensed to beneficiaries during their Medicare Part D coverage gap period or“donut hole,” which is a coverage gap that currently exists in the Medicare Part D prescription drug program.The BBA increased such manufacturer point-of-sale discounts to 70% effective as of January 1, 2019. Wecurrently do not have coverage under 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 an annual, nondeductible, branded prescription drug fee to the federal government,which is apportioned among pharmaceutical manufacturers according to their market share in certaingovernment healthcare programs, although this fee does not apply to sales of certain products approvedexclusively for orphan indications. Each individual pharmaceutical manufacturer pays a prorated share of thebranded prescription drug fee of $2.8 billion in 2019 and thereafter, based on the dollar value of its brandedprescription 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 revenue.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. Some of the provisions of theAffordable Care Act have yet to be fully implemented, and certain provisions have been subject to judicial andCongressional challenges. In addition, there have been efforts by the Trump administration to repeal or replace certainaspects of the Affordable Care Act and to alter the implementation of the Affordable Care Act and related laws. For example,the Tax Cuts and Jobs Act enacted on December 22, 2017, eliminated the individual mandate, beginning in 2019. Additionallegislative changes, regulatory changes, and judicial challenges related to the Affordable Care Act remain possible. Weexpect that the Affordable Care Act, as currently enacted or as it may be amended in the future, and other healthcare reformmeasures that may be adopted in the future, could have a material adverse effect on our industry generally and on our abilityto maintain or increase sales of our existing products or to successfully commercialize our product candidates, if approved.We 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 and regulatory actions. In addition, we may confront limitationsin insurance coverage for Qsymia, STENDRA and our investigational drug candidates. For example, the Medicare programgenerally does not provide coverage for drugs used to treat erectile dysfunction or drugs used to treat obesity. Similarly,other insurers may determine that such products are not covered under their programs. If we fail to successfully secure andmaintain reimbursement coverage for our approved drugs and investigational drug candidates or are significantly delayed indoing so, we will have difficulty achieving market acceptance of our approved drugs and investigational drug candidatesand our business will be harmed. Congress has enacted healthcare reform and may enact further reform, which couldadversely affect the 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 from56 Table of Contentssubstituting 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. For more informationconcerning pricing and reimbursement of medicinal products in the EU and, in particular, the impact of HTA, please refer tothe section titled “Government Regulation - Coverage and Reimbursement.”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 reimbursement of, drugs. A government or third-party payor decision not to approve pricing for, or provideadequate coverage and reimbursements 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 (“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 proprietary57 Table of Contentsinformation, we could incur liability and the further development of our investigational drug candidates, orcommercialization of our approved drugs, could be delayed. If we are unable to restore our information systems in the eventof a systems failure, our communications, daily operations and the ability to develop our investigational drug candidates andapproved drug commercialization efforts would be severely affected.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. Brexit may harm our ability to market our products, to do business, increase our costs and negatively affect our stock price.Worldwide economic conditions remain uncertain due to various developments including the decision by theUnited Kingdom to initiate the formal procedure of withdrawal from the EU (often referred to as “Brexit”), current economicchallenges in Asia and other disruptions to global and regional economies and markets.Brexit has created significant uncertainty about the future relationship between the United Kingdom and the EU,including with respect to the laws and regulations that will apply as the United Kingdom determines which EU laws toreplace or replicate in the event of a withdrawal. From a regulatory perspective, the United Kingdom's withdrawal from theEU could give rise to significant complexity and risks. In addition, the exact terms of the United Kingdom's withdrawal andthe laws and regulations that will apply after the United Kingdom withdraws from the EU may affect manufacturing sites thathold an EU manufacturing authorization issued by the United Kingdom competent authorities. 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. For example, we have limited patent coverage for PANCREAZE,which would not protect us should others develop alternative formulations of the drug.58 Table of ContentsThese companies would then be able to develop, manufacture and sell products that compete directly with our products. Inthat case, our revenues and operating results 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 (“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 submitted by generic drug companies asserting that generic forms ofour approved therapies 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 (“FDCA”) which renders itsusceptible to potential competition from generic manufacturers via the ANDA approval process. The FDCA includesprovisions 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/orwill not be infringed by the manufacture, use, or sale of the generic product. A patent owner who receives a Paragraph IVcertification may choose to sue the generic applicant for patent infringement.We received certain Paragraph IV certification notices and have entered into settlement agreements with those whohave submitted those notices. The settlement agreement with Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC,collectively referred to as “Actavis,” will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024,or earlier under certain circumstances. The settlement with Dr. Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc.,collectively referred to as “DRL,” will permit DRL to begin selling a generic version of59 Table of ContentsQsymia on June 1, 2025, or earlier under certain circumstances. It is possible that one or more additional companies may filean ANDA and could receive FDA approval to market a generic version of Qsymia before the entry dates specified in oursettlement agreements with Actavis and DRL, including if it is determined that the generic product does not infringe ourpatents, or that our patents are invalid or unenforceable. Although we intend to vigorously enforce our intellectual propertyrights relating to Qsymia, in the event there is a future ANDA filer, there can be no assurance that we will prevail in a futuredefense of our patent rights. If a generic version of Qsymia or any of our other approved therapies is introduced, thesetherapies would become subject 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 not aware, that our approved drugs, investigational drugcandidates or technologies may infringe. Further, it is not always clear to industry participants, including us, which patentscover various types of products or methods. The coverage of patents is subject to interpretation by the courts, and theinterpretation is not always uniform. We cannot assure you that others holding any of these patents or patent applicationswill not assert infringement claims against us for damages or seek to enjoin our activities. If we are sued for patentinfringement, we would need to demonstrate that our products or methods do not infringe the patent claims of the relevantpatent and/or that the patent claims are invalid or unenforceable, and we may not be able to do 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.60 Table of ContentsWe 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. Risks 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 and PANCREAZE;·the costs associated with the integration of PANCREAZE operations;·the costs to commercialize PANCREAZE;·our ability to obtain marketing authorization by the EC for Qsiva in the EU and other territories;·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;61 Table of Contents·the costs associated with obtaining, developing and marketing any new development assets;·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. However, there canbe no assurance that funding will be available on favorable terms, if at all. We are continually evaluating our existingportfolio and we may choose to divest, sell or spin-off one or more of our drugs and/or investigational drug candidates at anytime. We cannot assure you that our drugs will generate revenues sufficient to enable us to earn a profit. If we are unable toobtain additional capital, management may be required to explore alternatives to reduce cash used by operating activities,including the termination of research and development efforts that may appear to be promising to us, the sale of certain assetsand the reduction in overall operating activities. If adequate funds are not available, we may be required to delay, reduce thescope 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, 2018, we have $181.4 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 1,683,000 shares of our commonstock under certain circumstances prior to maturity at a conversion rate of 6.73038 shares per $1,000 principal amount ofConvertible Notes, which represents a conversion price of approximately $148.58 per share, subject to adjustment undercertain conditions. On October 8, 2015, IEH Biopharma LLC, a subsidiary of Icahn Enterprises L.P., announced that it hadreceived tenders for $170,165,000 of the aggregate principal amount of our Convertible Notes in62 Table of Contentsits previously announced cash tender offer for any and all of the outstanding Convertible Notes. The Convertible Notes areconvertible at the option of the holders under certain conditions at any time prior to the close of business on the business dayimmediately preceding November 1, 2019. Investors in our common stock will be diluted to the extent the Convertible Notesare converted into shares of our common stock, rather than being settled in cash.In April 2018, we entered into an agreement for a new $120.0 million senior secured note (the “Athyrium Notes”)with Athyrium Capital Management, LP (“Athyrium”). $110.0 million of the Athyrium Notes were drawn down in June 2018,with the remaining $10.0 million available for drawing upon meeting certain conditions. Payments on the Athyrium Notesbear interest at 10.375% and are interest-only for the first 36 months; thereafter the notes will be repaid in 36 equal monthlypayments. Concurrently, we repurchased Convertible Notes held by Athyrium, with a face value of $60.0 million, for $51.0million. In October 2018, we settled a purchase of approximately $8.6 million outstanding principal amount of ourConvertible Notes for approximately $7.1 million plus accrued interest. We continue our evaluation of alternatives foraddressing our remaining $181.4 million of Convertible Notes.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 (the “BioPharma Agreement”) with BioPharma Secured InvestmentsIII Holdings Cayman LP (“BioPharma”) which provides for the purchase of a debt-like instrument. Under the BioPharmaAgreement, we may not (i) incur indebtedness greater than a specified amount, (ii) pay a dividend or other cash distributionon our capital stock, unless we have cash and cash equivalents in excess of a specified amount, (iii) amend or restate ourcertificate of incorporation or bylaws unless such amendments or restatements do not affect BioPharma’s interests under theBioPharma Agreement, (iv) encumber the collateral, or (v) abandon certain patent rights, in each case without the consent ofBioPharma. Any future debt financing we enter into may involve similar or more onerous covenants that restrict ouroperations.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.The 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, 2018, we had $111.2 million in cash, cash equivalents and available-for-sale securities. While atDecember 31, 2018, 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, 2018.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.63 Table of ContentsOur 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 and to file a petition for certiorari in the SupremeCourt has now expired and the matter is concluded.We have an accumulated deficit of $880.5 million as of December 31, 2018, and we may continue to incur substantialoperating losses for the future.We have generated a cumulative net loss of $880.5 million for the period from our inception through December 31,2018, 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, 2018, we had approximately $630.7 million and $273.6 million of net operating loss (“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.64 Table of ContentsWe face the risk that our ability to use our tax attributes will be substantially restricted if we undergo an “ownership change”as defined in Section 382 of the U.S. Internal Revenue Code (“Section 382”). An ownership change under Section 382 wouldoccur if “5-percent shareholders,” within the meaning of Section 382, collectively increased their ownership in the Companyby more than 50 percentage points over a rolling three-year period. We have not completed a recent study to assess whetherany change of control has occurred or whether there have been multiple changes of control since our formation, due to thesignificant complexity and cost associated with the study. We have completed studies through December 31, 2016 andconcluded no adjustments were required. If we have experienced a change of control at any time since our formation, ourNOL carryforwards 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.Risks 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, PANCREAZE andSTENDRA;·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;65 Table of Contents·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;·trading activity by highly technical investors utilizing sophisticated algorithms and high frequency trading;·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; and·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. We may be unsuccessful in properly integratingand profitably marketing PANCREAZE. In addition, although we have entered into license and commercializationagreements with Menarini to commercialize and promote SPEDRA for the treatment of ED in over 40 countries, including theEU, plus Australia and New Zealand and with Metuchen to commercialize STENDRA in the U.S., Canada, South America andIndia, we and they may not be successful in commercializing avanafil in these territories. Our operating expenses are largelyindependent of sales in any particular period. We believe that our quarterly and annual results of operations may benegatively affected by a variety of factors. These factors include, but are not limited to, the level of patient demand forQsymia and STENDRA, the ability of our distribution partners to process and ship product on a timely basis, the success ofour third-party’s manufacturing efforts to meet customer demand, fluctuations in foreign exchange rates, investments in salesand marketing efforts to support the sales of Qsymia and STENDRA, investments in the research and development efforts,and expenditures we may incur to acquire additional products.66 Table of ContentsFuture 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;·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 (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 monthly67 Table of Contentsrent for the first four months on the lease term. We have one option to extend the lease term for two years at the fair marketrental rate then prevailing as detailed in the Campbell Lease.Beginning in August 2018, we also rent a small office space in Morristown, New Jersey with a rental period throughAugust 2020.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 ProceedingsWe are not aware of any asserted or unasserted claims against us where we believe that an unfavorable resolutionwould have an adverse material impact on our operations or financial position. Item 4. Mine Safety Disclosures.None.68 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.” As ofFebruary 20, 2019, there were 10,637,164 shares of outstanding common stock that were held by 2,353 stockholders ofrecord and no outstanding shares of preferred stock. On February 20, 2019, the last reported sales price of our common stockon the Nasdaq Global Select Market was $5.27 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, 2013 through December 31, 2018 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 Pharmaceutical Index,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.69 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 12/31/2013 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. 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.70 Table of ContentsSelected Financial Data(In thousands, except per share data)Selected Annual Financial Data Year Ended December 31, 2018 2017 2016 2015 2014Income Statement Data: Total revenue$65,062 $65,373 $124,258 $95,430 $114,181Total operating expenses$68,541 $62,580 $68,573 $155,707 $164,892Income (loss) from operations$(3,479) $2,793 $55,685 $(60,277) $(50,711)Net (loss) income$(36,950) $(30,511) $23,302 $(93,107) $(82,647)Basic net (loss) income per share$(3.48) $(2.89) $2.23 $(8.96) $(7.99)Diluted net (loss) income per share$(3.48) $(2.89) $2.22 $(8.96) $(7.99)Balance Sheet Data: Working capital$124,327 $224,643 $255,159 $214,143 $301,789Total assets$302,147 $264,968 $305,776 $277,202 $366,938Long-term debt$294,446 $235,683 $241,318 $231,390 $227,783Accumulated deficit$(880,515) $(843,565) $(813,054) $(836,356) $(743,249)Stockholders’ (deficit) equity$(40,023) $(9,338) $18,185 $(7,085) $82,518 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, 2018, 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.Reverse Stock SplitOn September 10, 2018, we effected a one-for-10 reverse stock split of our common stock. As a result of the reversestock split, every 10 shares of our pre-reverse split common stock issued and outstanding was combined and converted intoone issued and outstanding share of post-reverse split common stock without any change in the par value of the shares.Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stock split was reclassifiedfrom “Common stock” to “Additional paid-in capital.” No fractional shares were issued as a result of the reverse stock split;any fractional shares that would have resulted were rounded up to the nearest whole share. Proportionate voting rights andother rights of stockholders were not affected by the reverse stock split, other than as a result of the rounding up of potentialfractional shares. All stock options, warrants and restricted stock units outstanding and common stock reserved for issuanceunder our equity incentive plans immediately prior to the reverse stock split were adjusted by dividing the number ofaffected shares of common stock by 10 and, where applicable, multiplying the exercise price by 10. All share and per shareamounts related to common stock, stock options, warrants and restricted stock units have been restated for all periods to giveretroactive effect to the reverse stock split.OverviewVIVUS is a specialty pharmaceutical company with three approved therapies and one product candidate in activeclinical development. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronic weightmanagement. In June 2018, we acquired the U.S. and Canadian commercial rights for PANCREAZE® (pancrelipase), which isindicated for the treatment of exocrine pancreatic insufficiency (“EPI”) due to cystic fibrosis or other conditions.STENDRA® (avanafil) is approved by FDA for erectile dysfunction (“ED”) and by the EC under the trade name SPEDRA, forthe treatment of ED in the EU. VI-0106 (tacrolimus) is in active clinical development and is being studied in patients withpulmonary arterial hypertension (“PAH”).71 Table of ContentsBusiness StrategyEarly in 2018, we announced that we would focus our strategy on building a portfolio of cash flow generating assetsto leverage our expertise in commercializing specialty pharmaceutical assets. In June 2018, we completed the firstacquisition under this strategy as we acquired all product rights for PANCREAZE® (pancrelipase) in the United States andPANCREASE® MT in Canada for $135.0 million in cash from Janssen Pharmaceuticals. PANCREAZE is a prescriptionmedicine used to treat people who cannot digest food normally because their pancreas does not make enough enzymes dueto cystic fibrosis or other conditions. We believe we can support PANCREAZE in the U.S. market by leveraging our existingcommercial infrastructure and expanding it to include up to 10 additional sales representatives in the U.S. and possibly twosales representatives in Canada focused on gastro-intestinal and cystic fibrosis physicians. We expect to build a smallcommercial presence in Canada to support PANCREASE MT, the trade name for pancrelipase in Canada.Another key strategy for 2018 was the recruitment and hiring of a permanent, full-time CEO. In April 2018, weannounced the acquisition of Willow Biopharma Inc. (“Willow”). With this acquisition, we announced the addition of threenew members to our senior leadership team. John Amos was named our new Chief Executive Officer and a member of theVIVUS Board of Directors. Kenneth Suh continued as President and Chief Executive Officer of Willow until being namedPresident of VIVUS in August 2018. M. Scott Oehrlein was named to the newly created position of Chief Operations Officerof VIVUS. These three individuals have a strong track record of building successful cash flow positive businesses throughproduct acquisition. In combination with the other current members of the senior leadership team, we believe that we are wellpositioned to continue to successfully execute on our business strategy.In April 2018, we entered into a note purchase agreement (the “Note Purchase Agreement”) with affiliates ofAthyrium Capital Management (“Athyrium”) for the issuance and sale of up to $110.0 million of 10.375% senior securednotes due 2024 to be issued substantially concurrently with the consummation of the PANCREAZE acquisition. The NotePurchase Agreement also allows up to an additional $10.0 million of 10.375% senior secured notes due 2024 to be issued atour option within 12 months of the initial issue date, subject to certain conditions. Notes in the amount of $110.0 millionwere issued in June 2018. Concurrent with the issuance of the initial notes, we issued warrants to purchase 0.3 million sharesof our common stock to the note holders. Additionally, concurrent with the issuance of the senior secured notes, werepurchased Convertible Notes held by Athyrium, with a face value of $60.0 million, at a discount to par plus accruedinterest. In October 2018, we settled a purchase of approximately $8.6 million outstanding principal amount of ourConvertible Notes for approximately $7.1 million plus accrued interest. We continue our evaluation of alternatives foraddressing our remaining $181.4 million of Convertible Notes.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 specialty sales force who promote Qsymia to physicians. Our salesefforts 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 (the “Alvogen License Agreement”)and a commercial supply agreement (the “Alvogen Supply Agreement”) with Alvogen Malta Operations (ROW) Ltd(“Alvogen”). Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for72 Table of Contentsobtaining and maintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. Wereceived an upfront payment of $2.5 million in September 2017 and are eligible to receive additional payments uponAlvogen achieving marketing authorization, commercial launch and reaching a sales milestone. Additionally, we willreceive a royalty on Alvogen’s Qsymia net sales in South Korea. Under the Alvogen Supply Agreement, we will supplyproduct to Alvogen.PANCREAZESince its approval, PANCREAZE has been commercialized by Janssen. In June 2018, we acquired the commercialrights to PANCREAZE and PANCREASE MT in the U.S. and Canada. In connection with the acquisition of PANCREAZE,we and Janssen also entered into transition services agreements pursuant to which Janssen and a Canadian affiliate of Janssenwill provide certain transition services to us in the U.S. and Canada as we transition to full control over the PANCREAZEsupply chain. The transition in the U.S. occurred in the first quarter of 2019. We commercialize PANCREAZE in the U.S. andCanada by leveraging our existing commercial infrastructure and expanding it to include 10 additional contract salesrepresentatives in the U.S. and possibly two sales representatives in Canada focused on gastro-intestinal and cystic fibrosisphysicians.Approved in 2010, PANCREAZE is a pancreatic enzyme preparation consisting of pancrelipase, an extract derivedfrom porcine pancreatic glands, as well as other enzyme classes, including porcine-derived lipases, proteases and amylases.PANCREAZE is specifically indicated for the treatment of exocrine pancreatic insufficiency (“EPI”). EPI is a condition thatresults from a deficiency in the production and/or secretion of pancreatic enzymes. It is associated with cystic fibrosis andchronic pancreatitis, and affects approximately 85 percent of cystic fibrosis patients. There is no cure for EPI and pancreaticenzyme replacement therapy is the primary treatment for the condition.STENDRA/SPEDRASTENDRA is an oral phosphodiesterase type 5 (“PDE5”) inhibitor that we have licensed from Mitsubishi TanabePharma Corporation (“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.The Menarini Group, through its subsidiary Berlin Chemie AG (“Menarini”), is our exclusive licensee for thecommercialization and promotion of SPEDRA for the treatment of ED in over 40 countries, including the EU Member States,Australia and New Zealand. In addition, Menarini licensed rights directly from MTPC to commercialize avanafil in certainAsian territories. We receive royalties from Menarini based on SPEDRA net sales and are entitled to receive future milestonepayments based on certain net sales targets. Menarini will also reimburse us for payments made to cover various obligationsto MTPC during the term of the Menarini License Agreement. Menarini obtains SPEDRA exclusively from us.Metuchen Pharmaceuticals LLC (“Metuchen”) is our exclusive licensee for the development, commercializationand promotion of STENDRA in the United States, Canada, South America and India. Metuchen reimburses us for paymentsmade to cover royalty and milestone obligations to MTPC, but otherwise owes us no future royalties. Metuchen obtainsSTENDRA exclusively from us.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.Product Development Pipeline and Life Cycle ManagementVI-0106 - 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 the73 Table of Contentspulmonary artery is greater than 25 mmHg at rest or 30 mmHg during physical activity. These high pressures make it difficultfor the heart to pump blood through 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(“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 acquired the exclusive, worldwide rights for the development and commercialization ofBMPR2 activators for the treatment of PAH and related vascular diseases from Selten Pharma, Inc. (“Selten”). Selten assignedto us its license to a group of patents owned by the Board of Trustees of the Leland Stanford Junior University (“Stanford”)which cover uses of tacrolimus and ascomycin to treat PAH. We paid Selten an upfront payment of $1.0 million, and we willpay additional 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. We haveassumed full responsibility for the development and commercialization of the licensed compounds for the treatment of PAHand related vascular diseases.In October 2017, we held a pre-IND meeting with FDA for VI-0106, our proprietary formulation of tacrolimus for thetreatment of PAH. FDA addressed our questions related to preclinical, nonclinical and clinical data and the planned design ofclinical trials of tacrolimus in class III and IV PAH patients, and clarified the requirements needed to file an IND to initiate aclinical trial in this indication. As discussed with FDA, we currently intend to design and conduct clinical trials that couldqualify for Fast 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 Commission on the basis of a scientific opinion adopted by the Committee for Orphan Medicinal Products of 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 and completingthe development of our proprietary formulation of tacrolimus in 2018. We are currently seeking alternatives for financing thedevelopment of tacrolimus.Qsymia for Additional IndicationsWe are currently considering further development of Qsymia for the treatment of various diseases, includingobstructive sleep apnea and nonalcoholic steatohepatitis (“NASH”). We expect no future development until we haveconcluded our discussions with FDA regarding our CVOT for Qsymia.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.74 Table of ContentsAs 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 RecognitionFor all revenue transactions, we evaluate our contracts with our customers to determine revenue recognition usingthe following five-step model:1)We identify the contract(s) with a customer;2)We identify the performance obligations in the contract;3)We determine the transaction price;4)We allocate the transaction price to the identified performance obligations; and5)We recognize revenue when (or as) the entity satisfies a performance obligation.Product RevenueProduct revenue is recognized at the time of shipment at which time we have satisfied our performance obligation.Product revenue is recognized net of consideration paid to our customers, wholesalers and certified pharmacies. Suchconsideration is for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certifiedpharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly program managementand 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 a reserve for estimated product returns, certain prompt pay discounts andallowances offered to our customers, program rebates and chargebacks. These product revenue allowances are recognized as areduction of revenue at the date at which the related revenue is recognized. We also offer discount programs to patients.Calculating certain of these items 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 theamount of the actual rebates or chargebacks. We review the adequacy of product revenue allowances on a quarterly basis.Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment isappropriate and to reflect actual experience. See Note 9 for product reserve balances.Change in Accounting Estimate in 2017We ship units of Qsymia through a distribution network that includes certified retail pharmacies. We began shippingQsymia in September 2012, and we grant rights to our customers to return unsold product from six months prior to and up to12 months subsequent to product expiration. This has resulted in a potential return period of from 24 to 36 monthsdepending on the ship date of the product. As we had no previous experience in selling Qsymia and given the lengthy returnperiod, we were not initially able to reliably estimate expected returns of Qsymia at the time of shipment,75 Table of Contentswhich was required by the accounting literature at the time, and we therefore recognized revenue when units were dispensedto patients through prescriptions, at which point the product was not subject to return, or when the expiration period hadended.Beginning in the first quarter of 2017, with 48 months of returns experience, we believed that we had sufficient dataand experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017,under the then relevant accounting literature, we began recognizing revenue from the sales of Qsymia upon shipment andrecording a reserve for expected returns at the time of shipment.In accordance with this change in accounting estimate, in the first quarter of 2017 we recognized a one-timeadjustment relating to products that had been previously shipped, consisting of $17.9 million of gross revenues, adjusted foran expected returns reserve of $5.7 million and estimated gross-to-net charges of $4.9 million, for a net impact of $7.3million in revenues. We also recorded increased cost of goods sold of $0.6 million and marketing expense of $0.7 millionassociated with the change in accounting estimate. The increase in net product revenue resulted in a decrease in net loss of$6.0 million or $0.57 per share in 2017.The following table summarizes the activity in the accounts related to Qsymia and PANCREAZE product revenueallowances (in thousands): Wholesaler/ Product Discount Pharmacy Cash Rebates/ Returns Programs Fees Discounts Chargebacks TotalBalance at January 1, 2016$ — $(972) $(1,160) $(164) $(480) $(2,776)Current provision related to sales made duringcurrent period* — (18,919) (7,153) (1,679) (871) (28,622)Payments — 18,884 7,033 1,630 1,250 28,797Balance at December 31, 2016 — (1,007) (1,280) (213) (101) (2,601)Current provision related to sales made duringcurrent period* (9,251) (20,806) (6,673) (1,344) (1,174) (39,248)Payments 1,397 17,429 6,870 1,362 991 28,049Balance at December 31, 2017 (7,854) (4,384) (1,083) (195) (284) (13,800)Current provision related to sales made duringcurrent period* (11,428) (13,908) (6,937) (1,327) (6,001) (39,601)Payments 4,404 15,991 7,017 1,370 1,317 30,099Balance at December 31, 2018$(14,878) $(2,301) $(1,003) $(152) $(4,968) $(23,302)*Current provision related to sales made during current period includes $39.1 million, $38.7 million and $27.2 million for product revenueallowances related to revenue recognized during the years ended December 31, 2018, 2017 and 2016, 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 produce STENDRA or SPEDRA through a contract manufacturing partner and then sell it to ourcommercialization partners. We are the primary responsible party in the commercial supply arrangements and bear significantrisk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and qualityassurance, as well as inventory, financial and credit loss. As such, we recognize supply revenue on a gross basis as theprincipal party in the arrangements. We recognize supply revenue at the time of shipment and, in the unusual case where theproduct does not meet contractually specified product dating criteria at the time of shipment to the partner, we record areserve for estimated product returns. There are no such reserves as of December 31, 2018.License and Milestone RevenueLicense and milestone revenues related to arrangements, usually license and/or supply agreements, entered into byus are recognized by following the five-step process outlined above. The allocation and timing of recognition of suchrevenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactlyfollow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differand the timing of recognition of a significant performance obligation may predate the contractual date.76 Table of ContentsRoyalty RevenueWe rely on data provided by our collaboration partners in determining our contractually based royalty revenue.Such data includes accounting estimates and reports for various discounts and allowances, including product returns. Werecord royalty revenues based on the best data available and make any adjustments to such revenues as such informationbecomes available.InventoriesInventories are valued at the lower of cost or net realizable value. Cost is determined using the first in, first outmethod using a weighted average cost method calculated for each production batch. Inventory includes the cost of the activepharmaceutical ingredients (“API”), raw materials and third-party contract manufacturing and packaging services. Indirectoverhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed intoinventory based 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.Research and Development ExpensesResearch and development (“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 incurred by CROand clinical sites and include advertising for clinical trials and patient recruitment costs. These costs are recorded as acomponent 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.77 Table of ContentsShare‑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, we enteredinto capped call transactions with certain counterparties affiliated with the underwriters. The fair value of the purchasedcapped 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, 2018 or 2017.78 Table of ContentsIncome 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, 2018, it was considered more likely thannot that our deferred tax assets would not be realized. However, should there be a change in our ability to recover its deferredtax assets, we would recognize a benefit to our tax provision in the period in which we determine that it is more likely thannot 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 OPERATIONSRevenues Years Ended December 31, Increase/(Decrease) (in thousands, except for percentages)2018 2017 2016 2018 vs 2017 2017 vs 2016 Qsymia—Net product revenue$40,558 $44,983 $48,501 (10)% (7)%PANCREAZE - Net product revenue 16,226 — — N/A N/A License and milestone revenue — 7,500 69,400 (100)% (89)%Supply revenue 4,863 10,407 2,291 (53)% 354%STENDRA/SPEDRA royalty revenue 2,307 2,483 4,066 (7)% (39)%PANCREASE royalty revenue 1,108 — — N/A N/A Total revenue$65,062 $65,373 $124,258 (0)% (47)% Net product revenueQsymia net product revenue for 2016 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 recording of revenueof $7.3 million related to shipments which had previously been deferred. Excluding this one-time adjustment, Qsymia netproduct revenue for 2017 was $37.6 million. Currently, Qsymia is only approved for sale in the U.S.; therefore, all netproduct revenue for Qsymia to date has been earned in the U.S.79 Table of ContentsThe following table reconciles gross Qsymia product revenue to net Qsymia product revenue (in thousands): Year Ended December 31, 2018 2017 2016Gross Qsymia product revenue$66,513 $85,044 $73,689Returns & allowances (2,967) (9,251) —Discount programs (13,703) (20,129) (15,994)Wholesaler/Pharmacy fees (6,704) (7,728) (6,849)Cash discounts (1,327) (1,697) (1,474)Rebates/Chargebacks (1,254) (1,256) (871)Net Qsymia product revenue$40,558 $44,983 $48,501Results for 2017 include gross Qsymia product revenue of $17.9 million and net Qsymia product revenue of $7.3million related to our change in accounting estimateThe following table reconciles gross PANCREAZE product revenue to net PANCREAZE product revenue (inthousands): Year Ended December 31, 2018 2017 2016Gross PANCREAZE product revenue$30,717 $ — $ —Returns & allowances (8,460) — —Wholesaler/Pharmacy fees (381) — —Cash discounts (604) — —Rebates/Chargebacks (5,046) — —Net PANCREAZE product revenue$16,226 $ — $ —Prescriptions are as follows: Year Ended December 31, 2018 2017 2016Qsymia units shipped (in thousands) 349 441 442 Qsymia prescriptions dispensed (in thousands) 360 395 442 PANCREAZE units shipped (in thousands) 73 — — Units shipped represent our direct shipments into the sales channel. We expect net Qsymia product revenue in 2019to be consistent with or increase from 2018 levels due to new marketing and distribution efforts. We expect net PANCREAZEproduct revenue in 2019 to increase from 2018 levels due to our market relaunch and expected promotional efforts.License 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 forcommercial rights to Qsymia in South Korea. License and milestone revenue for 2016 consisted of the $69.4 million earnedfor the granting of the license under the Metuchen License Agreement for commercial rights to STENDRA in the U.S.,Canada, South America and India.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 collaboration 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 other80 Table of Contentsitems, their minimum purchase commitments, end user demand, and distributor inventory levels. As a result, supply revenuehas and will continue to fluctuate materially between reporting periods.Royalty revenueRoyalty revenue was attributable to commercialization agreements with Menarini, with Auxilium in 2016 and, in2018, with Janssen for which we earn royalties based on a certain percentage of net sales in Canada reported bycommercialization partners. We record royalty revenue related to STENDRA based on reports provided by our partners. Weexpect STENDRA/SPEDRA royalty revenue in 2019 to remain relatively consistent with 2018 levels. In addition, we expectroyalty revenue from Canadian PANCREASE MT sales to remain relatively consistent until we assume commercialresponsibility in 2019, at which time we will recognize sales of PANCREASE MT as net product revenue.Cost of goods sold and Amortization of intangible assets Year Ended December 31, 2018(In thousands, except percentages)Qsymia PANCREAZE STENDRA/ SPEDRA TotalNet product revenue$40,558 $16,226 $ — $56,784 Supply revenue — — 4,863 4,863 Total product and supply revenue 40,558100% $16,226100% $4,863100% $61,647100% Cost of goods sold (excluding amortization) 4,69312% $5,15632% $4,76498% $14,61324%Amortization of intangible assets 3631% 8,27751% —0% 8,64014%Total cost of goods sold 5,05612% $13,43383% $4,76498% $23,25338% Product and supply gross margins$35,50288% $2,79317% $992% $38,39462% Year Ended December 31, 2017 Qsymia PANCREAZE STENDRA/ SPEDRA TotalNet product revenue$44,983 $ — $ — $44,983 Supply revenue — — 10,407 10,407 Total product and supply revenue$44,983100% $ — $10,407100% $55,390100% Cost of goods sold (excluding amortization)$6,99316% $ — $9,65093% $16,64330%Amortization of intangible assets$5441% $ — $ —0% $5441%Total cost of goods sold$7,53717% $ — $9,65093% $17,18731% Product and supply gross margins$37,44683% $ — $7577% $38,20369% Year Ended December 31, 2016 Qsymia PANCREAZE STENDRA/ SPEDRA TotalNet product revenue$48,501 $ — $ — $48,501 Supply revenue — — 2,291 2,291 Total product and supply revenue$48,501100% $ — $2,291100% $50,792100% Cost of goods sold (excluding amortization)$6,79814% $ — $3,079134% $9,87719%Amortization of intangible assets$7251% $ — $ —0% $7251%Total cost of goods sold$7,52316% $ — $3,079134% $10,60221% Product and supply gross margins$40,97884% $ — $(788)-34% $40,19079% Cost of goods sold for Qsymia includes the inventory costs of API, third party contract manufacturing andpackaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storage costs, and overhead costsof the employees involved with production. Cost of goods sold for PANCREAZE includes third party contract manufacturingcosts, amortization of the PANCREAZE license, service fees, royalties, insurance, and overhead costs. Cost of goods sold forSTENDRA/SPEDRA shipped to our commercialization partners includes the inventory costs of API and tableting andfluctuate as a percentage of supply revenue largely due to the absorption of costs due to volume. Fluctuations in the cost ofgoods sold as a percentage of net product and supply revenue over the periods was primarily due to the sales mix amongQsymia, PANCREAZE and STENDRA/SPEDRA.81 Table of ContentsSelling, general and administrative Years Ended December 31, Increase/(Decrease) (In thousands, except percentages)2018 2017 2016 2018 vs 2017 2017 vs 2016 Selling and marketing$13,970 $16,638 $21,775 (16)% (24)%General and administrative 23,971 23,492 30,604 2% (23)%Total selling, general and administrativeexpenses$37,941 $40,130 $52,379 (5)% (23)% The decrease in selling and marketing expenses in 2018 compared to 2017 was due primarily to the reduction of thesize of our sales force in 2017 and cost saving efforts to reduce marketing programs, partially offset by PANCREAZEmarketing expenses. The decrease in selling and marketing expenses for 2017 compared to 2016 was due primarily to thereduction of the size of our sales force and cost saving efforts to reduce marketing programs and lower promotional activitiesfor Qsymia. Selling and marketing expenses are expected to increase in 2019 due to the official launch of PANCREAZE inthe first quarter of 2019, including potential additions to our field force and potential additional marketing, partneringand/or promotional activities.The increase in general and administrative expenses in 2018 compared to 2017 was primarily due to approximately$2.0 million in one-time expenses related to the PANCREAZE and Willow Biopharma acquisitions and the addition of ournew executive officers, partially offset by reductions in legal spending due to the settlement of our Qsymia litigation in2017. The decrease in general and administrative expenses in 2017 compared to 2016 was primarily due to the results of ourcontinuing efforts to cut costs and lower spending for corporate activities. We expect general and administrative expenses tofluctuate significantly on a quarterly basis due to the timing of activities such as business development, debt restructuringand personnel changes.Research and development Years Ended December 31, Increase/(Decrease) Drug Indication/Description2018 2017 2016 2018 vs 2017 2017 vs 2016 (In thousands, except percentages) Qsymia$1,120 $31 $1,335 3,513% (98)%STENDRA 172 127 147 35% (14)%PANCREAZE 878 — — N/A N/A VI-0106 1,999 2,189 — (9)% N/A Share-based compensation 312 345 493 (10)% (30)%Overhead costs* 2,866 2,571 3,617 11% (29)%Total research and development expenses$7,347 $5,263 $5,592 40% (6)% *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 increase in total research and development expenses in 2018 compared to 2017 was primarily due to increasedspending for Qsymia post-marketing requirements and spending for PANCREAZE product improvements. The overalldecrease in total research and development expenses in 2017 as compared to 2016 was primarily due to lower overhead costsas a result of our efforts to reduce discretionary spending and reductions in share-based compensation expense, partiallyoffset by increases in spending for the development of tacrolimus for the treatment of PAH. We expect that our research and development expenses will increase in 2019 as we continue our spending forPANCREAZE product improvements and complete our post-marketing requirements for Qsymia, in addition to ourcontinuing development activities for VI-0106 for the treatment of PAH.Interest expense (income), netInterest expense (income) consists primarily of interest expense and the amortization of issuance costs and discountsand premiums from our Convertible Notes and Senior Secured Notes Due 2024. In 2018, we recorded a gain of82 Table of Contentsapproximately $1.4 million due to the purchase of approximately $8.6 million outstanding principal amount of ourConvertible Notes from a holder in a private transaction for $7.1 million plus all accrued but unpaid interest. Other expense(income), net for the periods presented were not significant. Cash paid for interest was $18.4 million, $15.4 million and $15.4million in 2018, 2017 and 2016, respectively. We expect interest and other expense (income) for 2019 to increase due to theinterest expense related to the additional debt issued in June 2018.Provision for (Benefit from) income taxesThe tax provisions for all years are the result of certain state tax liabilities. We periodically evaluate the realizabilityof our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred taxassets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of taxattributes to fully utilize these assets. We weighed both positive and negative evidence and determined that there is acontinued need for a full valuation allowance on our deferred tax assets in the U.S. as of December 31, 2018. We willcontinue to asses such evidence on a quarterly basis in 2019 to determine whether we will need to reverse all or a portion ofthe valuation allowance.LIQUIDITY AND CAPITAL RESOURCESCash. Cash, cash equivalents and available‑for‑sale securities totaled $111.2 million at December 31, 2018, ascompared to $226.3 million at December 31, 2017. The decrease was primarily due to net cash used for the acquisition of thePANCREAZE license, operating activities, debt servicing and debt repayments during the period, partially offset by cashreceived from the issuance of the new debt. In the fourth quarter of 2018, we generated positive cash flows from operatingactivities and expect that to continue to generate positive cash from operating activities in the future. Since inception, wehave 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, arewritten 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, 2018, was $25.6 million, as compared to$12.2 million at December 31, 2017. Currently, we do not have any significant concerns related to accounts receivable orcollections. As of February 20, 2019, we had collected 75% of the accounts receivable outstanding at December 31, 2018.Liabilities. Total liabilities were $342.2 million at December 31, 2018, compared to $274.3 million atDecember 31, 2017. The increase in total liabilities was primarily due to the issuance of new debt, partially offset by therepayment and repurchase of certain existing debt. Additional changes in total liabilities were due to timing differences inour various liability accounts.83 Table of ContentsSummary Cash Flows Years Ended December 31, 2018 2017 2016 (in thousands)Cash provided by (used for): Operating activities$(23,607) $(16,364) $38,165Investing activities (56,150) 24,012 (40,078)Financing activities 43,776 (26,039) (8,699)Operating Activities. Cash used for operating activities in 2018 primarily consisted of our operating losses,adjusted for non-cash items, in addition to increases in accounts receivable and inventory due to the addition ofPANCREAZE, partially offset by an increase in accrued and other liabilities, primarily due to product reserves forPANCREAZE. Cash used for operating activities in 2017 primarily consisted of our operating losses adjusted for non-cashitems, in addition to increases in accounts receivable and inventory and a decrease in our deferred revenue balances due toour switch to the sell-in model for Qsymia product revenue. These were partially offset by increases in accounts payable andaccrued liability balances, mostly due to timing. Cash provided by operating activities in 2016 related primarily to ouroperating income, which was primarily the result of $70 million received from our license agreements with Metuchen,partially offset by the timing of payments made and received in other asset and liability accounts.Investing Activities. Cash used for investing activities in 2018 primarily related to cash paid for the acquisition ofthe PANCREAZE license, partially offset by net proceeds from sales and maturities of our investment securities. Cashprovided by or used for investing activities in 2017 and 2016 primarily related to the purchases and maturities of investmentsecurities. The fluctuations from period to period are due primarily to the timing of purchases, sales and maturities of theseinvestment securities and were impacted in 2016 by the investment of portions of the cash received from the MetuchenLicense Agreement.Financing Activities. Cash provided by financing activities in 2018 resulted from the net proceeds of $108.0million from the issuance of our Senior Secured Notes due 2024, partially offset by the use of a total of $58.1 million torepurchase a combined total of $68.6 million of face value of our Convertible Notes and the repayment of $6.2 million of ourSenior Secured Notes due 2018. Cash used in financing activities for 2017 and 2016 consisted primarily of our repaymentsof $26.1 million and $8.7 million, respectively, under our Senior Secured Notes due 2018.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 service our existing debt, pursue development and commercial opportunities, which could come in the form of alicense, a co-development agreement, a merger or acquisition or in some other form, or to create a pathway for centralizedapproval of the marketing authorization application for Qsiva in the EU, conduct post-approval clinical studies for Qsymia,conduct non-clinical and clinical research and development work to support regulatory submissions and applications for ourcurrent and future investigational drug candidates, finance the costs involved in filing and prosecuting patent applicationsand enforcing or defending our patent claims, if any, to fund operating expenses and manufacture quantities of ourinvestigational drug candidates 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 through collaborations with othersthat are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates orproducts that we would otherwise seek to develop on our own.Contractual ObligationsThe following table summarizes our contractual obligations at December 31, 2018, 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,84 Table of Contentsnon‑cancelable, and legally binding obligations and future commitments as of December 31, 2018. The amounts below donot include contingent milestone payments or royalties, and assume the agreements and commitments will run through theend of terms, as such no early termination fees or penalties are included herein: Payments Due by PeriodContractual obligationsTotal 2019 2020 - 2022 2023 - 2024 Thereafter (in thousands)Operating leases$2,314 $828 $1,486 $ — $ —Purchase obligations 33,052 15,918 10,709 6,425 —Notes payable 291,426 — 240,639 50,787 —Interest payable 58,355 19,577 34,165 4,613 —Total contractual obligations$385,147 $36,323 $286,999 $61,825 $ — Operating LeasesWe have a lease of 13,981 square feet of office space at 900 East Hamilton Avenue, Campbell, California (the“Campbell 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. Beginning in August 2018, we also renta small office space in Morristown, New Jersey with a rental period through August 2020.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. On December 7,2018, we entered into an amendment to the Commercial Supply Agreement with Sanofi Chimie, pursuant to which certainamendments were made to the Commercial Supply Agreement, which include: (i) beginning January 1, 2019, Sanofi Chimiewill manufacture and supply API for avanafil on an exclusive basis in all countries where we have the right to sell avanafil;(ii) beginning January 1, 2019, the yearly minimum quantities of API that we must purchase from Sanofi Chimie will beadjusted, as well as adjustments to the associated pricing and payment terms; and (iii) with the initial five year term of theCommercial Supply Agreement expiring on December 31, 2018, we and Sanofi Chimie have agreed to extend the term of theCommercial Supply Agreement until December 31, 2023 unless either party makes a timely election to terminate theagreement and that thereafter the Commercial Supply Agreement will auto-renew for successive one year terms unless eitherparty makes a timely election not to renew. We have minimum purchase commitments with Sanofi to purchase API materialsand tablets through 2023. Our minimum purchase commitments with Sanofi totaled approximately $28.7 million as ofDecember 31, 2018. PANCREAZE is currently manufactured by Nordmark. Our minimum purchase commitments toNordmark totaled approximately $3.8 million at December 31, 2018. Our minimum purchase commitments for Qsymiatotaled approximately $0.6 million at December 31, 2018.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 (the“Convertible Notes”). The Convertible Notes are governed by an indenture, dated as of May 21, 2013, between the Companyand Deutsche Bank National Trust Company, as trustee. On May 29, 2013, we closed on an additional $30.0 million ofConvertible Notes upon exercise of an option by the initial purchasers of the Convertible Notes. Total net proceeds from theConvertible Notes were approximately $241.8 million. The Convertible Notes are convertible at the option of the holders atany time prior to the close of business on the business day immediately preceding November 1, 2019, only under certainconditions. On or after November 1, 2019, holders may convert all or any portion of their Convertible Notes at any time attheir option at the conversion rate then in effect, regardless of these conditions. Subject to certain limitations, we will settleconversions of the Convertible Notes by paying or delivering, as the case85 Table of Contentsmay be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. Thecurrent conversion rate of the Convertible Notes is $148.58 per share. In 2018, we repurchased a total of $68.6 million of facevalue of the Convertible notes for a total of $58.1 million in cash.Senior Secured Notes Due 2024In June 2018, we entered into an indenture (the “Indenture”) with U.S. Bank National Association as trustee andcollateral agent regarding the purchase agreement entered into with affiliates of Athyrium Capital Management (collectively,the “Purchasers”) for the issuance and sale of (i) $110.0 million of 10.375% senior secured notes due 2024 (the “Notes”), (ii)up to an additional $10.0 million of 10.375% senior secured notes due 2024 to be issued subsequently at our option within12 months of the Notes issue date, subject to certain conditions, and (iii) a warrant for 330,000 shares issued concurrentlywith the issuance of the Notes. The Notes were issued at a purchase price equal to 99% of the principal amount. The Notescontain customary representations, warranties, covenants, conditions and indemnities. Payments on the Notes are interest-only for the first 3 months; thereafter, the Notes will be repaid in 36 equal monthly payments.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. The MTPC agreement contains anumber of milestone payments to be made by us based on various triggering events.We 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 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 Commercial86 Table of ContentsSupply 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 Member States, Latin America andother territories. On December 7, 2018, we entered into an amendment to the Commercial Supply Agreement with SanofiChimie, pursuant to which certain amendments were made to the Commercial Supply Agreement, which include: (i)beginning January 1, 2019, Sanofi Chimie will manufacture and supply API for avanafil on an exclusive basis in all countrieswhere we have the right to sell avanafil; (ii) beginning January 1, 2019, the yearly minimum quantities of API that we mustpurchase from Sanofi Chimie will be adjusted, as well as adjustments to the associated pricing and payment terms; and (iii)with the initial five year term of the Commercial Supply Agreement expiring on December 31, 2018, we and Sanofi Chimiehave agreed to extend the term of the Commercial Supply Agreement until December 31, 2023 unless either party makes atimely election to terminate the agreement and that thereafter the Commercial Supply Agreement will auto-renew forsuccessive one year terms unless either party makes a timely election not to renew. Further, on November 18, 2013, weentered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie to manufacture and supply the avanafiltablets on an exclusive basis in the United States and other territories and on a semi exclusive basis in Europe, including theEU Member States, 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. by December31, 2013, which was achieved by our commercialization partner, Auxilium.On July 23, 2013, we entered into an amendment to our agreement with MTPC which, among other things, changesthe 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.To 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 to87 Table of Contentsrecover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements inexcess of applicable insurance coverage is minimal.Recent Accounting PronouncementsThe information on recent account pronouncements is 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, 2018, 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, 2018, by approximately $0.5 million. In general, money market funds arenot subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.88 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 90Consolidated Balance Sheets as of December 31, 2018 and 2017 92Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 93Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2018, 2017 and 2016 93Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2018, 2017 and 2016 94Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 95Notes to Consolidated Financial Statements 96Financial Statement Schedule II 124 89 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, 2018and 2017, 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, 2018, 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, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the periodended December 31, 2018, 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, 2018, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”) and our report dated February 26, 2019 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, CaliforniaFebruary 26, 2019We have served as the Company's auditor since 2005.90 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, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the related notes and financial statement schedule listed in theaccompanying index and our report dated February 26, 2019 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, CaliforniaFebruary 26, 201991 Table of Contents VIVUS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except par value) December 31, 2018 2017ASSETS Current assets: Cash and cash equivalents$30,411 $66,392Available-for-sale securities 80,838 159,943Accounts receivable, net 25,608 12,187Inventories 23,132 17,712Prepaid expenses and other current assets 7,538 7,178Total current assets 167,527 263,412Property and equipment, net 341 542Intangible and other non-current assets 134,279 1,014Total assets$302,147 $264,968LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable$8,921 $10,072Accrued and other liabilities 33,044 21,475Deferred revenue 1,235 2,075Current portion of long-term debt — 5,147Total current liabilities 43,200 38,769Long-term debt, net of current portion 294,446 230,536Deferred revenue, net of current portion 4,290 4,674Non-current accrued and other liabilities 234 327Total liabilities 342,170 274,306Commitments and contingencies Stockholders’ deficit: Preferred stock; $.001 par value; 5,000 shares authorized; no shares issued andoutstanding at December 31, 2018 and 2017 — —Common stock; $.001 par value; 200,000 shares authorized; 10,636 and 10,603 sharesissued and outstanding at December 31, 2018 and 2017, respectively 11 11Additional paid-in capital 840,751 834,824Accumulated other comprehensive loss (270) (608)Accumulated deficit (880,515) (843,565)Total stockholders’ deficit (40,023) (9,338)Total liabilities and stockholders’ deficit$302,147 $264,968See accompanying notes to consolidated financial statements.92 Table of ContentsVIVUS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year Ended December 31, 2018 2017 2016Revenue: Net product revenue$56,784 $44,983 $48,501License and milestone revenue — 7,500 69,400Supply revenue 4,863 10,407 2,291Royalty revenue 3,415 2,483 4,066Total revenue 65,062 65,373 124,258 Operating expenses: Cost of goods sold (excluding amortization) 14,613 16,643 9,877Amortization of intangible assets 8,640 544 725Selling, general and administrative 37,941 40,130 52,379Research and development 7,347 5,263 5,592Total operating expenses 68,541 62,580 68,573 Income (loss) from operations (3,479) 2,793 55,685 Interest and other expense: Interest expense 33,876 33,231 32,888Gain on extinguishment of debt (1,427) — —Other expense (income), net 970 71 (575)Interest expense and other expense, net 33,419 33,302 32,313(Loss) income before income taxes (36,898) (30,509) 23,372Provision for income taxes 52 2 70Net (loss) income$(36,950) $(30,511) $23,302 Basic and diluted net loss per share: Basic net (loss) income per share$(3.48) $(2.89) $2.23Diluted net (loss) income per share$(3.48) $(2.89) $2.22Shares used in per share computation: Basic 10,621 10,574 10,439Diluted 10,621 10,574 10,497 VIVUS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME(In thousands) Year Ended December 31, 2018 2017 2016Net (loss) income$(36,950) $(30,511) $23,302Unrealized gain (loss) on securities, net of taxes 338 8 (355)Comprehensive (loss) income$(36,612) $(30,503) $22,947See accompanying notes to consolidated financial statements. 93 Table of ContentsVIVUS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands) Accumulated Additional Other Common Stock Paid-In Comprehensive Accumulated Shares Amount Capital Loss Deficit TotalBalances, January 1, 201610,396 $10 $829,522 $(261) $(836,356) $(7,085)Sale of common stock through employee stockpurchase plan4 — 39 — — 39Vesting of restricted stock units83 — — — — —Share-based compensation expense — — 2,284 — — 2,284Net unrealized loss on securities — — — (355) — (355)Net income — — — — 23,302 23,302Balances, December 31, 201610,483 10 831,845 (616) (813,054) 18,185Sale of common stock through employee stockpurchase plan 5 — 38 — — 38Vesting of restricted stock units115 1 (1) — — —Share-based compensation expense — — 2,942 — — 2,942Net unrealized gain on securities — — — 8 — 8Net loss — — — — (30,511) (30,511)Balances, December 31, 201710,603 11 834,824 (608) (843,565) (9,338)Sale of common stock through employee stockpurchase plan11 — 41 — — 41Exercise of common stock options for cash10 — 78 — — 78Vesting of restricted stock units12 — — — — —Share-based compensation expense — — 3,285 — — 3,285Warrants issued for acquisition of PANCREAZE — — 828 — — 828Warrants issued in association with the issuanceof debt — — 1,695 — — 1,695Net unrealized gain on securities — — — 338 — 338Net loss — — — — (36,950) (36,950)Balances, December 31, 201810,636 $11 $840,751 $(270) $(880,515) $(40,023)See accompanying notes to consolidated financial statements. 94 Table of ContentsVIVUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2018 2017 2016Operating activities: Net (loss) income$(36,950) $(30,511) $23,302Adjustments to reconcile net (loss) income to net cash used for operating activities: Depreciation and amortization 8,875 811 1,080Amortization of debt issuance costs and discounts 18,228 20,442 18,666Amortization of discount or premium on available-for-sale securities 559 768 944Share-based compensation expense 3,285 2,942 2,284Gain on extinguishment of debt (1,427) — —Loss on disposal of property and equipment — — 342Changes in assets and liabilities: Accounts receivable (13,421) (2,709) (481)Inventories (5,849) (1,526) (2,584)Prepaid expenses and other assets (370) 1,069 1,516Accounts payable (1,151) 5,365 (2,353)Accrued and other liabilities 5,838 5,859 (1,524)Deferred revenue (1,224) (18,874) (3,027)Net cash (used for) provided by operating activities (23,607) (16,364) 38,165Investing activities: Property and equipment purchases (34) (21) (211)Acquisition of PANCREAZE license (135,000) — —Purchases of available-for-sale securities (41,506) (31,097) (135,997)Proceeds from maturity of available-for-sale securities 58,101 37,470 60,050Proceeds from sales of available-for-sale securities 62,289 17,660 36,080Net cash (used for) provided by investing activities (56,150) 24,012 (40,078)Financing activities: Net proceeds from debt issuance 107,991 — —Repayments of notes payable (64,334) (26,077) (8,738)Net proceeds from exercise of common stock options 78 — —Sale of common stock through employee stock purchase plan 41 38 39Net cash provided by (used for) financing activities 43,776 (26,039) (8,699)Net decrease in cash and cash equivalents (35,981) (18,391) (10,612)Cash and cash equivalents: Beginning of year 66,392 84,783 95,395End of period$30,411 $66,392 $84,783Supplemental cash flow disclosure: Interest paid$18,445 $15,350 $15,368Income taxes paid$60 $47 $59Non-cash investing activities: Unrealized gain (loss) on securities$338 $8 $(355) See accompanying notes to consolidated financial statements. 95 Table of ContentsVIVUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Business and Significant Accounting PoliciesBusinessVIVUS is a specialty pharmaceutical company with three approved therapies (Qsymia®, PANCREAZE® andSTENDRA®/SPEDRA) and one product candidate in active clinical development (VI-0106). Qsymia (phentermine andtopiramate extended release) is approved by the U.S. Food and Drug Administration (“FDA”) for chronic weightmanagement. In June 2018, the Company acquired the U.S. and Canadian commercial rights for PANCREAZE (pancrelipase),which is indicated for the treatment of exocrine pancreatic insufficiency due to cystic fibrosis or other conditions. STENDRA(avanafil) is approved by FDA for erectile dysfunction (“ED”), and by the European Commission (“EC”) under the tradename SPEDRA, for the treatment of ED. The Company commercializes Qsymia and PANCREAZE in the U.S. through aspecialty sales force supported by an internal commercial team. The Company licenses the commercial rights toSTENDRA/SPEDRA in the U.S., EU and other countries and to PANCREAZE in Canada. VI-0106 (tacrolimus) is in activeclinical development and is being studied in patients with pulmonary arterial hypertension (“PAH”).At December 31, 2018, the Company’s accumulated deficit was approximately $880.5 million. Managementbelieves that the Company’s existing capital resources combined with anticipated future cash flows will be sufficient tosupport its operating needs for at least the next twelve months. However, the Company anticipates that it may requireadditional funding to service its existing debt, pursue development and commercial opportunities, which could come in theform of a license, a co-development agreement, a merger or acquisition or in some other form, or to 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 its current and future investigational drug candidates, finance the costs involved in filing and prosecutingpatent applications and enforcing or defending its patent claims, if any, to fund operating expenses and manufacturequantities of the Company’s investigational drug candidates and to make payments under its existing license agreements andsupply agreementsIf 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, 2018, 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 PoliciesPrinciples 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.Reverse Stock SplitOn September 10, 2018, the Company effected a one-for-10 reverse stock split of its common stock. As a result ofthe reverse stock split, every 10 shares of the Company’s pre-reverse split common stock issued and outstanding was96 Table of Contentscombined and converted into one issued and outstanding share of post-reverse split common stock without any change in thepar value of the shares. Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stocksplit was reclassified from “Common stock” to “Additional paid-in capital.” No fractional shares were issued as a result of thereverse stock split; any fractional shares that would have resulted were rounded up to the nearest whole share. Proportionatevoting rights and other rights of stockholders were not affected by the reverse stock split, other than as a result of therounding up of potential fractional shares. All stock options, warrants and restricted stock units outstanding and commonstock reserved for issuance under the Company’s equity incentive plans immediately prior to the reverse stock split wereadjusted by dividing the number of affected shares of common stock by 10 and, where applicable, multiplying the exerciseprice by 10. All share and per share amounts related to common stock, stock options, warrants and restricted stock units havebeen restated for all periods to give retroactive effect to the reverse stock split.Use 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 the recognition of revenue and related reserves,available‑for‑sale securities, debt instruments, contingencies, litigation, inventories, research and development expenses,income taxes, and share‑based compensation. The Company bases its estimates on historical experience, informationreceived from third parties and on various market specific and other relevant assumptions that it believes to be reasonableunder the circumstances, the results of which form the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates underdifferent 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, 2018 and 2017, all cash equivalents were invested in money market funds or U.S.Treasury securities. These investments are recorded at fair value (see Note 3).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.Debt 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. The97 Table of Contentscarrying value of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair valuedue to the relatively short‑term nature of these instruments. Debt instruments are initially recorded at face value, with statedinterest and amortization of debt issuance discounts and costs recognized as interest expense, which currently approximatesfair 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.Concentration 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, 2018 or 2017. The allowance for cash discounts is $152,000and $195,000 at December 31, 2018 and 2017, respectively.InventoriesInventories are valued at the lower of cost or net realizable value. Cost is determined using the first‑in, first‑outmethod using a weighted average cost method calculated for each production batch. Inventory includes the cost of the activepharmaceutical ingredients (“API”), raw materials and third‑party contract manufacturing and packaging services. Indirectoverhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed intoinventory based 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.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 the98 Table of Contentsestimated useful lives. Expenditures for repairs and maintenance, which do not extend the useful life of the property andequipment, are expensed as incurred. Gains and losses associated with dispositions are reflected as a non-operating gain orloss in the accompanying 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 held andused 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 RecognitionSee Note 2.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.Research and Development ExpensesResearch and development (“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 of$2.1 million, $3.2 million and $3.9 million in 2018, 2017 and 2016, 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 the fairvalue of share‑based payment awards on the date of the grant using the Black‑Scholes option‑pricing model, which requiresthe Company to estimate the expected term of the award, the expected volatility, the risk-free interest rate and the expecteddividends. The expected term, which represents the period of time that options granted are expected to be outstanding, isderived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of theshare‑based awards, vesting schedules and expectations of future employee behavior. Expected volatilities99 Table of Contentsare estimated using the historical share price performance over the expected term of the option, which are adjusted asnecessary for any other factors which may reasonably affect the volatility of VIVUS’s stock in the future. The risk‑free interestrate is based on the U.S. Treasury yield in effect at the time of the grant for the expected term of the award. The Companydoes not anticipate paying any dividends in the near future. The Company develops pre‑vesting forfeiture assumptions basedon an analysis of historical data and expected future activity.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 by considering allavailable evidence, both positive and negative, including historical levels of income, expectations and risks associated withestimates 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. Realization of deferred tax assets by the Company is dependent upon the amount andtiming of the generation of future taxable income, if any. As a result of the Company’s analysis of all available evidence,both positive and negative, as of December 31, 2018, it was considered more likely than not that the Company’s deferred taxassets would not be realized. As a result, the Company’s net deferred tax assets have been fully offset by a valuationallowance. Should there be a change in the Company’s ability to recover its deferred tax assets, the Company wouldrecognize a benefit to its tax provision in the period in which the Company determines that it is more likely than not that itwill recover its deferred tax assets. The Company will continue to analyze the evidence each quarter during 2019 todetermine whether it becomes more likely than not that all or a portion of its deferred tax assets are realizable.The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of itsprovision for income taxes.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 be100 Table of Contentsrecoverable, the Company evaluates such impairment if the net book value of such assets exceeds the future undiscountedcash flows attributable to such assets. Should an impairment exist, the impairment loss would be measured based on theexcess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows attributable to theassets. To date, the Company has recorded no impairment losses on its intangible assets. See Note 8.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 $20 per share, and thus noimpact on diluted net income (loss) per share. Further, when there is a net loss, other potentially dilutive common equivalentshares are not included in the calculation of net loss per share since their inclusion would be anti‑dilutive. The followingtable presents the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts): 2018 2017 2016Net (loss) income$(36,950) $(30,511) $23,302Basic: Weighted-average shares outstanding 10,621 10,574 10,439Basic net (loss) income per share$(3.48) $(2.89) $2.23Diluted: Weighted-average shares outstanding used in basic calculation 10,621 10,574 10,439Dilutive potential shares — — 58Weighted-average shares outstanding used in diluted calculation 10,621 10,574 10,497Diluted net (loss) income per share$(3.48) $(2.89) $2.22For the years ended December 31, 2018, 2017, and 2016, potentially dilutive outstanding stock options and RSUsof 2,168,000, 1,350,000 and 1,012,000, respectively, were not included in the computation of diluted net loss per sharebecause the effect would have been anti‑dilutive.Recent Accounting Pronouncements AdoptedBeginning January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) AccountingStandards Codification Topic 606, Revenue from Contracts with Customers. This standard is a comprehensive new revenuerecognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customerat an amount that reflects the consideration expected to be received in exchange for those goods or services. This newstandard supersedes most previously-existing revenue recognition guidance. The Company adopted this standard in January2018 using the modified retrospective basis. See Note 2 for a further discussion of the Company’s revenue accounting andthe impact of the adoption of this standard.In January 2018, the Company adopted FASB 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 andcash payments will be presented and classified in the statement of cash flows. The adoption of this standard had no impact onthe Company’s consolidated financial statements.For 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of aBusiness, which clarifies the definition of a business to assist entities with evaluating whether transactions should be101 Table of Contentsaccounted for as acquisitions (or disposals) of assets or businesses, and applied the new guidance prospectively. See Notes 8and 12 for further information on intangible assets acquired in 2018.Recent Accounting Pronouncements Not Yet AdoptedIn 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. The Company will adopt thisguidance effective January 1, 2019 using a modified retrospective transition method, not adjusting comparative periods. TheCompany’s only significant lease is its operating lease for its corporate headquarters, although it has several smaller leases.The adoption of this guidance will have a significant impact on the Company’s balance sheets as it will recognize right ofuse assets and corresponding lease liabilities for each of its leases. As of January 1, 2019, the Company had $1.5 million ofright of use assets and $1.8 million of lease liability. The impact of the adoption on accumulated deficit will be minimal. TheCompany expects the overall ongoing recognition of expense to be similar to current guidance, though the classification ofsuch expense could be significantly different.In June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on FinancialInstruments, which requires credit losses on most financial assets measured at amortized cost and certain other instruments tobe measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under thismodel, entities will estimate credit losses over the entire contractual term of the instrument. This standard is effective forfiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating the potentialimpact of this standard, but does not expect it to have a material impact on its consolidated financial statements.In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820):Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which adds disclosurerequirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3fair value measurements. This standard is effective for fiscal years beginning after December 31, 2019 and early adoption ispermitted. The Company is evaluating the provisions of this guidance. Note 2. RevenueOn January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contractswith Customers (“Topic 606”). Topic 606 supersedes the revenue recognition requirements in Topic 605 RevenueRecognition (“Topic 605”) and requires entities to recognize revenue when control of the promised goods or services istransferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchangefor those goods or services.The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method appliedto those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on or afterJanuary 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported inaccordance with our historic accounting under Topic 605. Due in large part to the change in accounting estimate made bythe Company in the first quarter of 2017, revenue amounts as reported for the year ended December 31, 2017 under Topic605 are approximately the same as they would have been under Topic 606, and the Company did not have or record acumulative impact of adopting Topic 606 as of January 1, 2018.Revenue RecognitionFor all revenue transactions, the Company evaluates its contracts with its customers to determine revenuerecognition using the following five-step model:1)The Company identifies the contract(s) with a customer;2)The Company identifies the performance obligations in the contract;3)The Company determines the transaction price;4)The Company allocates the transaction price to the identified performance obligations; and5)The Company recognizes revenue when (or as) the entity satisfies a performance obligation.102 Table of ContentsProduct RevenueProduct revenue is recognized at the time of shipment at which time the Company has satisfied its performanceobligation. 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 a reserve for estimated product returns, certain prompt pay discounts andallowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances arerecognized as a reduction of revenue at the date at which the related revenue is recognized. The Company also offersdiscount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoicedata, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelinesthat would impact the amount of the actual rebates or chargebacks. The Company reviews the adequacy of product revenueallowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significantevents indicate that adjustment is appropriate and to reflect actual experience. See Note 9 for product reserve balances.Change in Accounting Estimate in 2017The 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, which was required by the accounting literature at the time, and therefore recognized revenue when unitswere dispensed to patients through prescriptions, at which point the product was not subject to return, or when the expirationperiod had ended.Beginning in the first quarter of 2017, with 48 months of returns experience, the Company believed that it hadsufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the firstquarter of 2017, under the then relevant accounting literature, the Company began recognizing revenue from the sales ofQsymia upon shipment and recording a reserve for 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 $0.57 per share for the year ended December 31, 2017.Supply RevenueThe Company produces STENDRA/SPEDRA through a contract manufacturing partner and then sells it to theCompany’s commercialization partners. The Company is the primary responsible party in the commercial supplyarrangements and bears significant risk in the fulfillment of the obligations, including risks associated with manufacturing,regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, the Companyrecognizes supply revenue on a gross basis as the principal party in the arrangements. The Company recognizes supplyrevenue at the time of shipment and, in the unusual case where the product does not meet contractually-specified productdating criteria at the time of shipment to the partner, the Company records a reserve for estimated product returns. There areno such reserves as of December 31, 2018.License and Milestone RevenueLicense and milestone revenues related to arrangements, usually license and/or supply agreements, entered into bythe Company are recognized by following the five-step process outlined above. The allocation and timing of103 Table of Contentsrecognition of such revenue will be determined by that process and the amounts recognized and the timing of thatrecognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysisof the agreement may differ and the timing of recognition of a significant performance obligation may predate thecontractual date.Royalty RevenueThe Company relies on data provided by its collaboration partner in determining its contractually-based royaltyrevenue. Such data includes accounting estimates and reports for various discounts and allowances, including productreturns. The Company records royalty revenues based on the best data available and makes any adjustments to such revenuesas such information becomes available.Segment and Geographic InformationThe 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.Outside 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 earnedRevenue disaggregated by revenue source and by geographic region was as follows (in thousands): Years Ended December 31, 2018 U.S. ROW TotalQsymia—Net product revenue$40,558 $ — $40,558PANCREAZE - Net product revenue 16,226 — 16,226PANCREAZE - Royalty revenue — 1,108 1,108STENDRA/SPEDRA—Supply revenue 1,646 3,217 4,863STENDRA/SPEDRA—Royalty revenue — 2,307 2,307Total revenue$58,430 $6,632(1) $65,062 2017 U.S. ROW TotalQsymia—Net product revenue$44,983 $ — $44,983Qsymia—License revenue 5,000 2,500 7,500STENDRA/SPEDRA—Supply revenue 5,909 4,498 10,407STENDRA/SPEDRA—Royalty revenue — 2,483 2,483Total revenue$55,892 $9,481(2) $65,373 2016 U.S. ROW TotalQsymia—Net product revenue$48,501 $ — $48,501STENDRA/SPEDRA—License revenue 69,400 — 69,400STENDRA/SPEDRA—Supply revenue 765 1,526 2,291STENDRA/SPEDRA—Royalty revenue 1,649 2,417 4,066Total revenue$120,315 $3,943(3) $124,258(1)$5.5 million of which was attributable to Germany and $1.1 million of which was attributable to Canada.(2)$7.0 million of which was attributable to Germany and $2.5 million of which was attributable to South Korea.(3)$3.9 million of which was attributable to Germany.104 Table of ContentsRevenue and cost of goods sold by source was as follows (in thousands): Year Ended December 31, 2018 Qsymia PANCREAZE STENDRA/SPEDRA TotalNet product revenue$40,558 $16,226 $ — $56,784Supply revenue — — 4,863 4,863Royalty revenue — 1,108 2,307 3,415Total revenue$40,558 $17,334 $7,170 $65,062 Cost of goods sold (excluding amortization)$4,693 $5,156 $4,764 $14,613Amortization of intangible assets$363 $8,277 $ — $8,640 2017 Qsymia PANCREAZE STENDRA/SPEDRA TotalNet product revenue$44,983 $ — $ — $44,983License 7,500 — — 7,500Supply revenue — — 10,407 10,407Royalty revenue — — 2,483 2,483Total revenue$52,483 $ — $12,890 $65,373 Cost of goods sold (excluding amortization)$6,993 $ — $9,650 $16,643Amortization of intangible assets$544 — $ — $544 2016 Qsymia PANCREAZE STENDRA/SPEDRA TotalNet product revenue$48,501 $ — $ — $48,501License — — 69,400 69,400Supply revenue — — 2,291 2,291Royalty revenue — — 4,066 4,066Total revenue$48,501 $ — $75,757 $124,258 Cost of goods sold (excluding amortization)$6,798 $ — $3,079 $9,877Amortization of intangible assets$725 — $ — $725 Major customersRevenues from significant customers as a percentage of Qsymia product revenues is as follows: 2018 2017 2016 Amerisource Bergen34% 32% 35% McKesson30% 37% 34% Cardinal Health, Inc.28% 29% 29% Accounts receivable by significant customer as a percentage of the total gross accounts receivable balance are asfollows: 2018 2017 Johnson & Johnson40% —%Cardinal Health, Inc.29% 28%Amerisource Bergen20% 42%McKesson 5% 28%105 Table of ContentsMajor 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 (“Catalent”) is the Company’s sole sourceof clinical and commercial supplies for Qsymia. Nordmark Arzneimittel GmbH & Co. KG (“Nordmark”) is the Company’ssole source of clinical and commercial supplies for PANCREAZE. Sanofi Chimie manufactures and supplies the API for ourdrug avanafil on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe,including the EU Member States, Latin America and other territories. Sanofi Winthrop Industrie manufactures and suppliesthe avanafil tablets on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe,including the EU Member States, Latin America and other territories. Third‑party manufacturers may not be able to meet theCompany’s needs with respect to timing, quantity or quality.During the years ended December 31, 2018, 2017 and 2016, the Company incurred expenses for work performed bya third‑party clinical research organization that accounted for 30%, 0% and 27%, respectively, of total research anddevelopment expenses. Note 3. 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, 2018 Gross Gross Amortized Unrealized Unrealized EstimatedCash and cash equivalents and available-for-sale securitiesCost Gains Losses Fair ValueCash and money market funds$30,411 $ — $ — $30,411U.S. Treasury securities 42,261 34 (111) 42,184Corporate debt securities 38,848 9 (203) 38,654Total 111,520 43 (314) 111,249Less amounts classified as cash and cash equivalents (30,411) — — (30,411)Total available-for-sale securities$81,109 $43 $(314) $80,838 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) $159,943As of December 31, 2018, the Company’s available‑for‑sale securities have original contractual maturities up to57 months. 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.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. Valuation techniques used to measure fair value must maximize the use of observable inputs106 Table of Contentsand minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and thelast unobservable, 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, 2018 Level 1 Level 2 Level 3 TotalCash and money market funds$30,411 $ — $ — $30,411U.S. Treasury securities 42,184 — — 42,184Corporate debt securities — 38,654 — 38,654Total$72,595 $38,654 $ — $111,249 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 Note 4. Accounts ReceivableAccounts receivable consist of the following (in thousands): Balance as of December 31, December 31, 2018 2017Qsymia$13,987 $10,400PANCREAZE 10,213 —STENDRA/SPEDRA 1,560 1,982 25,760 12,382Qsymia allowance for cash discounts (152) (195)Net$25,608 $12,187There was no allowance for doubtful accounts at December 31, 2018 or 2017. 107 Table of ContentsNote 5. InventoriesInventories consist of the following (in thousands): Balance as of December 31, December 31, 2018 2017Raw materials$17,813 $13,663Work-in-process 1,719 2,264Finished goods 3,600 1,785Inventories$23,132 $17,712 Raw materials inventories consist primarily of the API for Qsymia and STENDRA/SPEDRA. Note 6. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following (in thousands): Balance as of December 31, December 31, 2018 2017Prepaid sales and marketing expenses$1,525 $1,538Prepaid insurance 1,451 1,124Taxes receivable 779 1,222Other prepaid expenses and assets 3,783 3,294Total$7,538 $7,178 The amounts included in prepaid expenses and other current assets consist primarily of prepayments for futureservices, miscellaneous non-trade receivables, prepaid interest and interest income receivable. These costs have been deferredas prepaid 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 7. Property and EquipmentProperty and equipment consist of the following (in thousands): Balance as of December 31, December 31, 2018 2017Computers and software$1,999 $1,965Furniture and fixtures 185 185Manufacturing equipment 213 213Leasehold improvements 513 513 2,910 2,876Accumulated depreciation (2,569) (2,334)Property and equipment, net$341 $542 108 Table of ContentsNote 8. Intangible and Other Non‑Current AssetsIntangible and other non-current assets consist of the following (in thousands): December 31, 2018 December 31, 2017 Cost AccumulatedAmortization Net Cost AccumulatedAmortization NetPANCREAZE license (1)$141,895 $(8,277) $133,618 $ — $ — $ —Janssen patents (2) 3,050 (2,597) 453 3,050 (2,235) 815Other non-current assets 208 — 208 199 — 199Total$145,153 $(10,874) $134,279 $3,249 $(2,235) $1,014 (1)In June 2018, the Company acquired the rights to license PANCREAZE in the U.S. and Canada, as described furtherin Note 12. The rights are being amortized over their estimated useful life of 10 years using the straight-line method.(2)In September 2014, the Company acquired certain patents relating to Qsymia from Janssen Pharmaceuticals,approximately $3.1 million of which was recorded as an intangible asset. The patents are being amortized over theirestimated useful life of 5.5 years using the straight-line method. Other non-current assets primarily consist of real estate deposits. Amortization of intangible assets was $8.6 millionand $0.5 million for the years ended December 31, 2018 and 2017, respectively. Future expected amortization expenses forintangible assets as of December 31, 2018 are as follows (in thousands):2019$14,5522020 14,2802021 14,1902022 14,1902023 14,190Thereafter 62,669Total$134,071 Note 9. Accrued and Other LiabilitiesAccrued and other liabilities consist of the following (in thousands): Balance as of December 31, December 31, 2018 2017Reserve for product returns (see Note 2)$14,878 $7,854Product-related accruals (see Note 2) 8,272 5,751Accrued manufacturing costs 4,313 1,238Accrued employee compensation and benefits 2,591 3,642Accrued interest on debt (see Note 13) — 410Other accrued liabilities 2,990 2,580Total$33,044 $21,475 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. 109 Table of ContentsNote 10. Non‑Current Accrued and Other LiabilitiesNon‑current accrued and other liabilities were $0.2 million and $0.3 million at December 31, 2018 and 2017,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. Note 11. Deferred RevenueDeferred revenue relates to a prepayment for future royalties on sales of SPEDRA. In 2018, the Company recorded$1.2 million of revenues which had been deferred as of December 31, 2017. These amounts were applied against theprepayment for future royalties. 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 (“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.MenariniIn July 2013, the Company entered into a license and commercialization agreement (the “Menarini LicenseAgreement”) and a supply agreement (the “Menarini Supply Agreement”) with the Menarini Group through its subsidiaryBerlin Chemie AG (“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 Member States, plusAustralia and New Zealand. Additionally, the Company transferred to Menarini ownership of the marketing authorization forSPEDRA in the EU for the treatment of ED, which was granted by the EC in June 2013. Under the Menarini LicenseAgreement, the Company has and is entitled to receive milestone payments based on certain net sales targets, plus royaltieson SPEDRA sales. Under the terms of the Menarini Supply Agreement, the Company supplied Menarini with SPEDRA drugproduct until December 31, 2018. Menarini also has the right to manufacture SPEDRA independently, provided that itcontinues to satisfy certain minimum purchase obligations to the Company. Following the expiration of the Menarini SupplyAgreement, Menarini is responsible for its own supply of SPEDRA. 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.SanofiIn December 2013, the Company entered into a license and commercialization agreement (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 (the “Sanofi Territory”).110 Table of ContentsIn July 2013, the Company entered into a Commercial Supply Agreement with Sanofi Chimie to manufacture andsupply the API for avanafil on an exclusive basis in the United States and other territories and on a semi-exclusive basis inEurope, including the EU Member States, Latin America and other territories.On December 7, 2018, the Company entered into an amendment to the Commercial Supply Agreement with SanofiChimie, pursuant to which certain amendments were made to the Commercial Supply Agreement, which include: (i)beginning January 1, 2019, Sanofi Chimie will manufacture and supply API for avanafil on an exclusive basis in all countrieswhere the Company has the right to sell avanafil; (ii) beginning January 1, 2019, the yearly minimum quantities of API thatthe Company must purchase from Sanofi Chimie will be adjusted, as well as adjustments to the associated pricing andpayment terms; and (iii) with the initial five year term of the Commercial Supply Agreement expiring on December 31, 2018,the Company and Sanofi Chimie have agreed to extend the term of the Commercial Supply Agreement until December 31,2023 unless either party makes a timely election to terminate the agreement and that thereafter the Commercial SupplyAgreement will auto-renew for successive one year terms unless either party makes a timely election not to renew.In November 2013, the Company entered into a Manufacturing and Supply Agreement with Sanofi WinthropIndustrie to manufacture and supply the avanafil tablets on an exclusive basis in the United States and other territories andon a semi exclusive basis in Europe, including the EU Member States, Latin America and other territories. The Company hasminimum annual purchase commitments under these agreements for at least the initial five-year term.On March 23, 2017, the Company and Sanofi entered into the Termination, Rights Reversion and TransitionServices Agreement (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 provides the Company with certain transition servicesin support of ongoing regulatory approval efforts while the Company seeks to obtain a new commercial partner or partnersfor the Sanofi Territory. The Company pays certain transition service fees to Sanofi as part of the Transition Agreement.MetuchenOn September 30, 2016, the Company entered into a license and commercialization agreement (the “MetuchenLicense Agreement”) and a commercial supply agreement (the “Metuchen Supply Agreement”) with MetuchenPharmaceuticals LLC (“Metuchen”). Under the terms of the Metuchen License Agreement, Metuchen received an exclusivelicense to develop, commercialize and promote STENDRA in the United States, Canada, South America and India (the“Metuchen Territory”) effective October 1, 2016. The Company and Metuchen have agreed not to develop, commercialize,or in-license any other product that operates as a PDE-5 inhibitor in the Metuchen Territory for a limited time period, subjectto certain exceptions. The Metuchen License Agreement will terminate upon the expiration of the last-to-expire paymentobligations under the Metuchen License Agreement; upon expiration of the term of the Metuchen License Agreement, theexclusive 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.111 Table of ContentsAlvogenIn September 2017, the Company entered into a license and commercialization agreement (the “Alvogen LicenseAgreement”) and a commercial supply agreement (the “Alvogen Supply Agreement”) with Alvogen Malta Operations(ROW) Ltd (“Alvogen”). Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible forobtaining and maintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. TheCompany received an upfront payment of $2.5 million in September 2017, which was recorded in license and milestonerevenue in the third quarter of 2017, and is eligible to receive additional payments upon Alvogen achieving marketingauthorization, commercial launch and reaching a sales milestone. Additionally, the Company will receive a royalty onAlvogen’s Qsymia net sales in South Korea. Under the Alvogen Supply Agreement, the Company will supply product toAlvogen.PANCREAZEIn June 2018, the Company closed on an Asset Purchase Agreement (the “PANCREAZE Purchase Agreement”) withJanssen Pharmaceuticals, Inc. (“Janssen”) pursuant to which the Company acquired the rights to PANCREAZE andPANCREASE MT in the U.S. and Canada and certain existing inventory for a purchase price of $135.0 million in cash.The Company also acquired all of the outstanding shares of Willow Biopharma Inc. (“Willow”). Willow had nosignificant assets at the time of acquisition. The Company issued fully-exercisable warrants to the former owners of Willow,including John Amos, M. Scott Oehrlein and Kenneth Suh, for the purchase of 357,000 shares of the Company’s commonstock at an exercise price of $3.70 per share and agreed to assume certain of Willow’s liabilities. The amounts paid to theformer owners were accounted for as a fee for the acquisition of PANCREAZE.As all the PANCREAZE assets acquired were a part of one product line, the PANCREAZE Purchase Agreement wasaccounted for as an asset acquisition, with an intangible asset of $141.9 million for the PANCREAZE license recorded on theconsolidated balance sheet, which was comprised of the purchase price of $135.0 million, the fair value of the warrants issuedof $0.8 million, the value of liabilities assumed of $0.4 million, the value of the Willow liabilities assumed of $1.5 millionand accruals for estimated destruction of future unsalable inventory of $6.3 million, less the net value of PANCREAZEinventory acquired of $2.1 million. The fair value of the warrants issued was recorded in additional paid-in capital and wasestimated using the Black-Scholes option pricing model, using a term of 7.0 years, an estimated volatility of 61.6%, a risk-free interest rate of 2.91% and an expected dividend yield of 0%. The intangible asset is being amortized over an expecteduseful life of 10 years, which corresponds with the expiration of certain significant patent rights related to PANCREAZE.In connection with the PANCREAZE Purchase Agreement, the Company and Janssen also entered into transitionservices agreements pursuant to which Janssen and a Canadian affiliate of Janssen will provide certain transition services tothe Company in the U.S. and Canada as the Company transitions to full control over the PANCREAZE supply chain. TheCompany and Johnson & Johnson Health Care Systems Inc., a New Jersey corporation and an affiliate of Janssen, also enteredinto a Long-Term Collaboration Agreement pursuant to which they will cooperate in the reporting and certification ofpricing and sales data and the payment of rebates and discounts under certain governmental programs.112 Table of ContentsNote 13. Long‑Term DebtThe Company’s indebtedness consists of the following (in thousands): Balance as of December 31, December 31, 2018 2017Senior secured notes due 2018$ — $6,187Unamortized discount and debt issuance costs — (7)Senior secured notes due 2018, net — 6,180 Convertible senior notes due 2020 181,426 250,000Unamortized discount and debt issuance costs 6,358 (20,497)Convertible senior notes due 2020, net 187,784 229,503 Senior secured notes due 2024 110,000 —Unamortized premium and debt issuance costs, net (3,338) —Senior secured notes due 2024, net 106,662 — Total debt 294,446 235,683Less current portion — 5,147Total long-term debt$294,446 $230,536 Senior 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 (the “Senior Secured Notes Due 2018”). Under the agreement, the Company received $50 million, less$500,000 in funding and facility payments, at the initial closing in April 2013. The scheduled quarterly payments on theSenior Secured Notes were subject to the net sales of (i) Qsymia and (ii) any other obesity agent developed or marketed by usor our affiliates or licensees. The scheduled quarterly payments, other than the payment(s) scheduled to be made in thesecond quarter of 2018, were 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 forthat quarter, 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 were to be paid. Any quarterly paymentless than the scheduled quarterly payment amount was 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 made its final payment on the Senior Secured Notes Due 2018 in April 2018.Convertible Senior Notes Due 2020In May 2013, the Company closed offerings of $250.0 million in 4.5% Convertible Senior Notes due May 2020 (the “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 $148.58 per share at the optionof the 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. In June 2018, the Company repurchased $60.0 million of face value of the Convertible Notes for $51.0million in cash plus accrued but unpaid interest using funds received from the issuance of the Company’s Senior SecuredNotes Due 2024. The gain was accounted for as a debt modification with the gain113 Table of Contentsapplied to the modified debt. In October 2018, the Company repurchased $8.6 million of face value of the Convertible Notesfor $7.1 million in cash plus accrued but unpaid interest. The gain on this repurchase of $1.4 million was accounted for as anextinguishment of debt and recorded on the income statement.Senior Secured Notes Due 2024In June 2018, the Company entered into an indenture (the “Indenture”) with U.S. Bank National Association astrustee and collateral agent regarding the purchase agreement entered into with affiliates of Athyrium Capital Management(collectively, the “Purchasers”) for the issuance and sale of (i) $110.0 million of 10.375% senior secured notes due 2024 (the“2024 Notes”), (ii) up to an additional $10.0 million of 10.375% senior secured notes due 2024 to be issued subsequently atthe Company’s option within 12 months of the issue date of the 2024 Notes, subject to certain conditions, and (iii) a warrantfor 330,000 shares issued concurrently with the issuance of the 2024 Notes. The 2024 Notes were issued at a purchase priceequal to 99% of the principal amount and contain customary representations, warranties, covenants, conditions andindemnities.The Company used the net proceeds from the issuance of the 2024 Notes to pay (i) certain fees, costs and expensesrelating to the issuance and sale of the 2024 Notes, (ii) to finance a portion of the acquisition of PANCREAZE and (iii) torepurchase $60.0 million of the Company’s outstanding Convertible Notes from the Purchasers or their affiliates for apurchase price of $51.0 million (plus accrued but unpaid interest to the repurchase date). The fair value of the warrant issuedwas estimated using the Black-Scholes option pricing model, using a term of 6.0 years, an estimated volatility of 62.7%, arisk-free interest rate of 2.83% and an expected dividend yield of 0%. The Indenture has an effective interest rate of 11.3%and includes customary covenants and events of default, including covenants that, among other things, restrict theincurrence of future indebtedness, the granting of liens, the making of investments, distributions or dividends, and theCompany’s ability to merge, consolidate or sell assets, in each case subject to certain exceptions. In addition, the Indentureincludes certain financial maintenance covenants related to minimum cash balances and minimum quarterly net revenuesrelated to PANCREAZE.Future estimated payments on all of the Company’s indebtedness as of December 31, 2018 are as follows (inthousands):2019$19,5772020 197,3742021 36,1312022 41,2992023 37,789Thereafter 17,611 $349,781 Note 14. Stockholders’ EquityCommon StockThe Company is authorized to issue 200,000,000 shares of common stock with a par value of $0.001 per share. As ofDecember 31, 2018 and 2017, there were 10,636,000 and 10,603,000 shares, respectively, issued and outstanding.Reverse Stock SplitOn September 10, 2018, the Company effected a one-for-10 reverse stock split of its common stock. As a result ofthe reverse stock split, every 10 shares of the Company’s pre-reverse split common stock issued and outstanding wascombined and converted into one issued and outstanding share of post-reverse split common stock without any change in thepar value of the shares. Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stocksplit was reclassified from “Common stock” to “Additional paid-in capital.” No fractional shares were issued as a result of thereverse stock split; any fractional shares that would have resulted were rounded up to the nearest114 Table of Contentswhole share. Proportionate voting rights and other rights of stockholders were not affected by the reverse stock split, otherthan as a result of the rounding up of potential fractional shares. All stock options, warrants and restricted stock unitsoutstanding and common stock reserved for issuance under the Company’s equity incentive plans immediately prior to thereverse stock split were adjusted by dividing the number of affected shares of common stock by 10 and, where applicable,multiplying the exercise price by 10. All share and per share amounts related to common stock, stock options, warrants andrestricted stock units have been restated for all periods to give retroactive effect to the reverse stock split.Preferred StockThe Company is authorized to issue 5,000,000 shares of undesignated preferred stock with a par value of $0.001 pershare. As of December 31, 2018 and 2017, there were no preferred shares issued or outstanding. The Company may issueshares of preferred stock in the future, without stockholder approval, upon such terms as the Company’s management andBoard of Directors may determine.Stockholder Rights PlanOn March 26, 2007, the Board of Directors of the Company adopted a Stockholder Rights Plan (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 (the“A&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 (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 (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.115 Table of ContentsThe 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. Note 15. Stock Option and Purchase PlansStock Option PlansIn July 2018, the Company’s Board of Directors terminated the 2010 Equity Incentive Plan and adopted andapproved a new 2018 Equity Incentive Plan (the “2018 Plan”) which was approved by the Company’s stockholders at the2018 Annual Meeting of Shareholders. The 2010 Plan continues to govern awards previously granted under it and the 2001Plan continues to govern awards previously granted under it. The 2018 Plan provides for the grant of stock options, stockappreciation rights, restricted stock awards, restricted stock units, performance shares and performance units to individualswho perform services to the Company. The 2018 Plan will be administered by the Board of Directors, or a committee ofindividuals appointed by the Board of Directors, including the Compensation Committee of the Board of Directors. Themaximum term of an option will be specified in the award agreement, provided that the term will be no more than 10 years,and provided further that an incentive stock option granted to a ten percent stockholder must have a term not exceeding 5years.The 2018 Plan’s original share reserve was 150,000 shares, plus any shares reserved but not issued pursuant toawards under the 2010 Plan as of the date of stockholder approval of the 2018 Plan, or 603,375 shares, plus any sharessubject to outstanding awards under the 2010 Plan and 2001 Stock Option Plan that expire or otherwise terminate withouthaving been exercised in full, or are forfeited to or repurchased by the Company, up to a maximum of 1,881,449 shares(which was the number of shares subject to outstanding options under the 2010 Plan and 2001 Stock Option Plan as of thedate of stockholder approval).In April 2018, the Company’s Board of Directors adopted the VIVUS, Inc. 2018 Inducement Equity Incentive Plan (the “Inducement Plan”) and reserved 502,000 shares of the Company’s common stock for issuance pursuant to equityawards granted under the Inducement Plan. The Inducement Plan was adopted without stockholder approval pursuant to Rule5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of equity-basedawards, including options, stock appreciation rights, restricted stock, restricted stock units, performance units andperformance shares. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under theInducement Plan may only be made to individuals not previously employees of the Company (or following such individuals’bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry intoemployment with the Company.116 Table of ContentsRestricted Stock UnitsA summary of restricted stock unit award activity is as follows: Weighted Number of Average Restricted Grant Date Stock Units Fair ValueRestricted stock units outstanding, January 1, 2016140,982 $18.74Granted56,250 14.31Vested(135,998) 16.75Forfeited(7,391) 19.83Restricted stock units outstanding, December 31, 201653,843 18.99Granted45,000 11.73Vested(62,192) 14.79Forfeited(7,518) 14.99Restricted stock units outstanding, December 31, 201729,133 17.78Vested(19,185) 19.82Forfeited(8,903) 12.05Restricted stock units outstanding, December 31, 20181,045 $29.08Stock OptionsA summary of stock option award activity for all plans is as follows: Years Ended December 31, 2018 2017 2016 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 year1,422,581 $34.12 954,724 $46.23 572,249 $79.69Granted1,157,668 $3.95 518,484 $10.60 498,096 $10.60Exercised(10,029) $6.99 — $ — — $ —Cancelled(129,158) $15.27 (50,627) $21.66 (115,621) $58.32Options outstanding at end of year2,441,062 $20.92 1,422,581 $34.12 954,724 $46.23Options exercisable at end of year1,124,744 $39.25 653,183 $60.72 376,575 $95.74Weighted average grant-date fair value of optionsgranted during the year $1.90 $4.95 $5.52At December 31, 2018, stock options outstanding and exercisable were 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 2018 Life Price 2018 Price$2.81—$3.70 748,500 6.59years$3.66 17,500 $3.53$3.90—$10.60 867,410 5.06years$7.62 454,035 $9.51$11.20—$87.40 628,961 4.17years$21.35 457,018 $25.11$89.10—$257.40 196,191 2.42years$144.19 196,191 $144.19$2.81—$257.40 2,441,062 5.09years$20.92 1,124,744 $39.25The aggregate intrinsic value of outstanding options as of December 31, 2018 was $0. At December 31, 2018, theCompany had 707,648 shares available for grant.117 Table of ContentsValuation Assumptions for OptionsThe 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: 2018 2017 2016 Expected life (in years)4.50 4.27 4.33 Volatility57.7% 57.0% 65.8%Risk-free interest rate2.70% 1.80% 1.36%Dividend yield — — — Employee Stock Purchase PlanThe Company has reserved a total of 200,000 shares for issuance under the 1994 Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, eligible employees may authorize payroll deductions of up to 10% of their basecompensation (as defined) to purchase up to 700 shares per offering period of common stock at a price equal to 85% of thelower of the fair market value as of the beginning or the end of each six-month offering period.As of December 31, 2018, 189,890 shares have been issued to employees and there are 10,110 shares available forissuance under the ESPP. The weighted average fair value of shares issued under the ESPP in 2018, 2017 and 2016 was$1.63, $2.28 and $3.28 per share, respectively.Valuation Assumptions for ESPP SharesThe 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: 2018 2017 2016 Expected life (in years)0.5 0.5 0.5 Volatility91.5% 47.4% 50.0%Risk-free interest rate2.4% 1.2% 0.5%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): 2018 2017 2016Cost of goods sold$66 $53 $147Selling, general and administrative 2,907 2,544 1,644Research and development 312 345 493Total share-based compensation expense$3,285 $2,942 $2,284 Total share‑based compensation cost capitalized as part of the cost of inventory was $26,000, $9,000 and $33,000for the years ended December 31, 2018, 2017 and 2016, respectively.The following table summarizes share‑based compensation, net of estimated forfeitures associated with each type ofaward (in thousands): 2018 2017 2016Restricted stock units$249 $924 $1,591Stock options 3,007 2,002 675Employee stock purchase plan 29 16 18 $3,285 $2,942 $2,284As of December 31, 2018, unrecognized estimated compensation expense totaled $2.8 million related to118 Table of Contentsnon‑vested stock options and restricted stock units and $16,000 related to the ESPP. The weighted average remainingrequisite service period for the non‑vested stock options was 2.7 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 (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. Beginning in August 2018, we also rent a small officespace in Morristown, New Jersey with a rental period through August 2020.Future minimum lease payments under operating leases at December 31, 2018, were as follows (in thousands):2019$5992020 6002021 482 $1,681Cardiovascular 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 (“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 TaxesThe Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets andliabilities are determined based on differences between financial reporting and the tax bases of assets and liabilities and aremeasured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuationallowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.Deferred income taxes result from differences in the recognition of expenses for tax and financial reporting purposes, as wellas operating loss and tax credit carryforwards. Significant components of the Company’s deferred income tax assets as ofDecember 31, 2018 and 2017, are as follows (in thousands): 2018 2017Deferred tax assets: Net operating loss carry forwards$152,172 $152,947Research and development credit carry forwards 16,721 17,426Share-based compensation 5,086 5,248Accruals and other 15,180 13,741Depreciation 633 (36)Deferred revenue 1,268 1,486 191,060 190,812Valuation allowance (191,060) (190,812)Total$ — $ — 119 Table of ContentsRealization of deferred tax assets by the Company is dependent upon the amount and timing of the generation offuture taxable income, if any. As a result of the Company’s analysis of all available evidence, both positive and negative, asof December 31, 2018, it was considered more likely than not that the Company’s deferred tax assets would not be realized.As a result, the Company’s net deferred tax assets have been fully offset by a valuation allowance.The net increase in the valuation allowance in 2018 was $0.2 million. The net decrease in the valuation allowancein 2017 was $78.4 million. As of December 31, 2018, the Company had no significant deferred tax liabilities.On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes is apermanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of thereduction in the corporate income tax rate, the Company revalued its net deferred tax asset at December 31, 2017. Thisresulted in a reduction in the value of our net deferred tax asset of approximately $98.4 million, which was entirely offset bythe change in valuation allowance of $98.4 million due to the Company’s full valuation allowance position.The Act includes certain anti-deferral and anti-base erosion provisions, including a new minimum tax on globalintangible low-taxed income (“GILTI”). The Act subjects the Company to current tax on GILTI of its controlled foreigncorporations. Due to current year foreign losses, at December 31, 2018, the Company was not subject to GILTI. To theextent the Company would have been subject to a GILTI income inclusion, any reduction to the deferred tax assets, would befully offset by the change in valuation allowance. There is no tax expense impact related to GILTI inclusion.As of December 31, 2018, the Company had approximately $630.7 million and $273.6 million of net operating loss(“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 2028, unless previously utilized. Federal NOLcarryforwards generated in tax years beginning in 2018 are not subject to expiration. Federal NOLs that arose on or afterJanuary 1, 2018 can be carried forward indefinitely against future income but can only be used to offset a maximum of 80%of the Company’s federal taxable income in any year.The Act expanded the scope of the $1.0 million deduction limitation and expanded the definition of a coveredperson under the Internal Revenue Code for tax years beginning after December 31, 2017. The Act repealed the performancebase exception; therefore, all compensation paid to a covered employee in excess of $1.0 million will be nondeductible,unless it is subject to the transition rule. The Act expended the definition of a covered employee to include the CFO and tocover any individual who served as the CEO or CFO at any time during the tax year. The covered employee definition hasbeen further expanded to provide that once an employee becomes a covered employee for any tax year beginning afterDecember 31, 2016, the employee will remain a covered employee for all future tax years. The Company had approximately$0.9 million of officer compensation expense limited for the year ended December 31, 2018.The Act revised the business interest expense limitation. For tax years beginning after December 31, 2017, theInternal Revenue Code limits the deduction for business interest to the sum of business interest income and 30% of adjustedtaxable income without regard to business interest expense or income; and NOL deduction. Limited interest is carriedforward indefinitely. In 2018, the Company’s interest limitation was $6.3 million. State conformity to this provision isapplied on a jurisdiction‐by‐jurisdiction basis.The Act extended and modified bonus depreciation provisions, in the Internal Revenue Code, allowing businessesto immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount ofallowable bonus depreciation is then phased down over four years. 80% will be allowed for property placed in service in2023, 60% in 2024, 40% in 2025, and 20% in 2026. The Company has taken bonus depreciation of approximately $34,000in the current year. State conformity to this provision and is applied on a jurisdiction‐by‐jurisdiction basis.As of December 31, 2018, the Company has federal and state research credit carryforwards of approximately $12.7million, and $5.2 million, respectively. The federal research credit carryforwards will begin expiring in 2018, unlesspreviously utilized. The state research credit carryforwards do not expire.Utilization of the Company’s NOL and tax credit carryforwards (“Tax Attributes”) may be subject to substantialannual limitations provided by the U.S. Internal Revenue Code and similar state provisions to the extent certain ownershipchanges are deemed to occur. Such an annual limitation could result in the expiration of the Tax Attributes before utilization.The Tax Attributes reflected above have not been reduced by any limitations. To the extent it is determined upon completionof the analysis that such limitations do apply, the Company will adjust the Tax Attributes120 Table of Contentsaccordingly. The Company faces the risk that its ability to use its Tax Attributes will be substantially restricted if itundergoes an ownership change, as defined in Section 382 of the U.S. Internal Revenue Code (“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 percentage points over a rolling three-yearperiod. The Company has completed studies through December 31, 2016, and concluded that no adjustments wererequired. If the Company has experienced a change of control at any time since its formation, its NOL carryforwards and taxcredits may not be available, or their utilization could be subject to an annual limitation under Section 382. A full valuationallowance has been provided against the Company's NOL carryforwards, and if an adjustment is required, this adjustmentwould be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on the consolidatedfinancial statements.The Company adopted ASU 2016-09 during the year ended December 31, 2017. Under ASU 2016-09, excess taxbenefits and deficiencies are required to be recognized prospectively as part of provision for income taxes rather thanadditional paid-in capital. The Company's cumulative effect of windfall tax attributes were approximately $17.4 million.After applying the valuation allowance, no adjustment was recorded to the beginning retained earnings balance.The provision (benefit) for income taxes is based upon the loss from continuing operations before income taxes asfollows (in thousands): 2018 2017 2016Income (loss) before income taxes: Domestic$(36,800) $(30,371) $23,592International (98) (138) (220)Income (loss) before taxes$(36,898) $(30,509) $23,372The provision (benefit) for income taxes consists of the following (in thousands): 2018 2017 2016Current: Federal$ — $ — $ —State 57 2 70Foreign (5) — —Total current provision (benefit) for income taxes$52 $ 2 $70Deferred: Federal$ — $ — $ —State — — —Foreign — — —Total deferred provision for income taxes$ — $ — $ —Total provision (benefit) for income taxes from continuing operations$52 $ 2 $70The effective tax rate differs from the amount computed by applying the statutory federal income tax rates asfollows: 2018 2017 2016 Tax at U.S. federal statutory rate21% 35% 35%State income taxes, net of federal tax effect 2 1 4 Change in valuation allowance(2) 310 (67) Permanent items(21) (24) 28 Tax credits — 1 — Tax Cuts and Jobs Act impact — (323) — Effective tax rate —% —% —%121 Table of ContentsThe reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): 2018 2017 2016Unrecognized tax benefits as of January 1$110 $65 $38Gross increase/(decrease) for tax positions of prior years (33) — 2Gross increase/(decrease) for tax positions of current year 14 45 25Unrecognized tax benefits balance at December 31$91 $110 $65The remaining balance of unrecognized tax benefits recorded on the Company’s consolidated balance sheets is asfollows (in thousands): 2018 2017Total unrecognized tax benefits$91 $110Amounts netted against deferred tax assets (91) (110)Unrecognized tax benefits recorded on consolidated balance sheets$ — $ —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. 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, 2018, 2017 and 2016 were $277,000, $272,000 and $272,000, respectively. Note 19. Legal MattersThe Company is not aware of any 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 20. Selected Financial Data (Unaudited)Selected Quarterly Financial Data (in thousands except per share data): Quarter Ended, March 31 June 30 September 30 December 312018 Total revenue$11,900 $14,960 $18,088 $20,114Total gross profit 9,270 11,674 14,604 14,901Operating expenses 14,192 18,312 17,680 18,357Net loss (10,653) (12,574) (9,223) (4,500)Basic and diluted net loss per share$(1.00) $(1.18) $(0.87) $(0.42) 2017 Total revenue$27,012 $11,227 $15,193 $11,941Total gross profit 20,845 7,657 11,679 8,005Operating expenses 19,778 16,214 12,767 13,821Net loss (1,056) (13,386) (5,994) (10,075)Basic and diluted net loss per share$(0.10) $(1.27) $(0.57) $(0.95)122 Table of Contents 123 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, 2016$164 $1,679 $(1,630) $213Fiscal year ended December 31, 2017$213 $1,344 $(1,362) $195Fiscal year ended December 31, 2018$195 $1,346 $(1,389) $152*Amount charged to operations during fiscal years ended December 31, 2018, 2017 and 2016, includes $1,327,000, $1,697,000 and $1,474,000, 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.124 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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizedthat any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance ofachieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily wasrequired to apply its judgment in evaluating the cost‑benefit relationship of possible controls and procedures.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 Chief Executive Officer and the Company’s ChiefFinancial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as ofthe end of the year covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of our disclosure controls and procedures were effective at the reasonable assurancelevel.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 ChiefExecutive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles, and includes those policies and proceduresthat:(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 on125 Table of Contentsthis assessment, management has concluded that our internal control over financial reporting was effective as ofDecember 31, 2018.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, 2018. This report, which expresses an unqualified opinion onthe effectiveness of our internal controls over financial reporting as of December 31, 2018, 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.126 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 2019 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, 2018, 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)1,940,107 $25.37 717,758Equity compensation plans not approved by stockholders(b)502,000 3.70 —Total2,442,107 $20.91 717,758 (a)Consists of four plans: our 2001 Stock Option Plan, our 2010 Equity Incentive Plan, our 2018 Equity Incentive Planand our 1994 Employee Stock Purchase Plan.(b)Consists of our 2018 Inducement Equity Incentive Plan.(c)Includes 707,648 shares for our 2018 Equity Incentive Plan and 10,110 shares for our 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. 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.127 Table of Contents 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. ExhibitsRefer to Item 15(b) immediately below.(b)ExhibitsThe exhibits required by Item 601 of Regulation S‑K are listed in the Exhibit Index attached hereto and areincorporated herein by reference.128 Table of ContentsVIVUS, INC.REPORT ON FORM 10‑K FORTHE YEAR ENDED DECEMBER 31, 2018EXHIBIT INDEX ExhibitNumber Description Incorporation by reference ExhibitFormFiling Date2.1† Asset Purchase Agreement between theRegistrant and K‑V PharmaceuticalCompany dated as of March 30, 20072.1Form 10-K for the fiscalyear ended December 31,2012 (001-33389)February 26, 20132.2† Asset Purchase Agreement dated October 1,2010, between the Registrant, MEDA ABand Vivus Real Estate, LLC2.2Form 10‑K/A for the fiscalyear ended December 31,2012 (001-33389)June 12, 20132.3† Asset Purchase Agreement between theRegistrant and Janssen Pharmaceuticals, Inc.dated April 30, 20182.1Form 10-Q for the fiscalquarter ended June 30,2018 (001-33389)August 7, 20183.1 Restated Certificate of Incorporation of theRegistrant, as amended and restated throughSeptember 10, 20183.1Form 8-K (001-33389)September 10, 20183.2 Amended and Restated Bylaws of theRegistrant, as further amended3.2Form 10-Q for the fiscalquarter ended June 30,2018 (001-33389)August 7, 20183.3 Amended and Restated Certificate ofDesignation of Rights, Preferences andPrivileges of Series A Participating PreferredStock of the Registrant3.3Form 8‑A (001-33389)March 28, 20074.1 Specimen Common Stock Certificate of theRegistrant4.1Form 10‑K/A for the fiscalyear ended December 31,1996 (001-33389)April 16, 19974.2 Amended and Restated Preferred StockRights Agreement, dated as of November 9,2016, by and between the Registrant andComputershare Trust Company, N.A.4.1Form 8-K (001-33389)November 9, 20164.3 Indenture dated as of May 21, 2013, by andbetween the Registrant and Deutsche BankTrust Company Americas, as trustee4.1Form 8‑K (001-33389)May 21, 20134.4 Form of 4.50% Convertible Senior Note dueMay 1, 2020 (included in Exhibit 4.3)4.2Form 8‑K (001-33389)May 21, 20134.5 Indenture, dated as of June 8, 2018, amongthe Registrant, the other guarantors fromtime to time party thereto and U.S. BankNational Association, as trustee andcollateral agent4.1Form 8-K (001-33389)June 11, 20184.6 First Supplemental Indenture, dated as ofOctober 11, 2018, among the Registrant, asissuer and U.S. Bank National Association,as trustee and collateral agent4.3Form 8-K (001-33389)October 17, 2018129 Table of ContentsExhibitNumber Description Incorporation by reference ExhibitFormFiling Date4.7 Form of 2024 Note (included in Exhibit 4.5)4.2Form 8-K (001-33389)June 11, 20184.8 Warrant to Purchase Shares of CommonStock issued to Torreya Capital, LLC datedFebruary 23, 20184.5Form 10-Q for the fiscalquarter ended March 31,2018 (001-33389)May 8, 20184.9 Form of Athyrium Warrant, dated as of June8, 20184.3Form 8-K (001-33389)June 11, 20184.10* Form of Warrant to be issued by theRegistrant to certain shareholders of WillowBiopharma Inc.4.9Form 10-Q for the fiscalquarter ended June 30,2018 (001-33389)August 7, 201810.1* Form of Indemnification Agreement by andamong the Registrant and the Officers of theRegistrant10.11Form 8-B (001-33389)June 25, 199610.2* Form of Indemnification Agreement by andamong the Registrant and the Directors ofthe Registrant10.1Form 8-K (001-33389)August 12, 201410.3* 1994 Employee Stock Purchase Plan, asamended, Form of Subscription Agreementand Form of Notice of Withdrawal10.1Form 8-K (001-33389)July 29, 201110.4* 2001 Stock Option Plan and Form ofAgreement thereunder10.44Form S-8 (001-33389)November 15, 200110.5* 2001 Stock Option Plan, as amended onJuly 12, 200610.1Form 8-K (001-33389)July 13, 200610.6* Form of Notice of Grant and RestrictedStock Unit Agreement under theVIVUS, Inc. 2001 Stock Option Plan10.2Form 8-K (001-33389)July 13, 200610.7* 2010 Equity Incentive Plan and Form ofAgreement thereunder10.7Form 10-K for the fiscalyear ended December 31,2010 (001-33389)March 1, 201110.8* 2010 Equity Incentive Plan4.1Form S-8 (001-33389)December 15, 201710.9* Stand‑Alone Stock Option Agreement withMichael P. Miller dated as of April 30, 201010.1Form 8-K (001-33389)May 6, 201010.10* 2018 Inducement Equity Incentive Plan4.1Form S-8 (001-33389)June 1, 201810.11* Form of Agreement under the 2018Inducement Equity Incentive Plan10.4Form 10-Q for the fiscalquarter ended June 30,2018 (001-33389)August 7, 201810.12* 2018 Equity Incentive Plan4.1Form S-8 (001-33389)October 24, 201810.13* Form of Restricted Stock Units Agreementunder the 2018 Equity Incentive Plan10.2Form 10-Q for the fiscalquarter ended September30, 2018 (001-33389)November 1, 201810.14* Form of Stock Option Agreement under the2018 Equity Incentive Plan10.3Form 10-Q for the fiscalquarter ended September30, 2018 (001-33389)November 1, 2018130 Table of ContentsExhibitNumber Description Incorporation by reference ExhibitFormFiling Date10.15† Agreement effective as of December 28,2000, between the Registrant and TanabeSeiyaku Co., Ltd.10.15Form 10-K for the fiscalyear ended December 31,2012 (001-33389)February 26, 201310.16 Amendment No. 1 effective as of January 9,2004, to the Agreement effective as ofDecember 28, 2000, between the Registrantand Tanabe Seiyaku Co., Ltd.10.42AForm 10-Q for the fiscalquarter ended March 31,2004 (001-33389)May 7, 200410.17 Termination and Release executed byTanabe Holding America, Inc. dated May 1,200710.61Form 8-K (001-33389)May 4, 200710.18† Second Amendment effective as ofAugust 1, 2012, to the Agreement dated asof December 28, 2000, between theRegistrant and Mitsubishi Tanabe PharmaCorporation (formerly TanabeSeiyaku Co., Ltd.)10.1Form 8-K (001-33389)August 10, 201210.19† Third Amendment effective as of February21, 2013, to the Agreement dated as ofDecember 28, 2000, between the Registrantand Mitsubishi Tanabe Pharma Corporation(formerly Tanabe Seiyaku Co., Ltd.)10.1Form 8-K (001-33389)February 25, 201310.20 Fourth Amendment to the Agreement datedas of December 28, 2000, between theRegistrant and Mitsubishi Tanabe PharmaCorporation (formerly TanabeSeiyaku Co., Ltd.), effective as of July 1,201310.1Form 8-K (001-33389)July 29, 201310.21† Settlement and Modification Agreementdated July 12, 2001, between ASIVI, LLC,AndroSolutions, Inc., Gary W. Neal and theRegistrant10.20Form 10-K for the fiscalyear ended December 31,2012 (001-33389)February 26, 201310.22† Assignment Agreement between ThomasNajarian, M.D. and the Registrant datedOctober 16, 200110.79Form 10-K for the fiscalyear ended December 31,2009 (001-33389)March 10, 201010.23† Master Services Agreement dated as ofSeptember 12, 2007, between the Registrantand Medpace, Inc.10.2Form 10-Q for the fiscalquarter ended March 31,2013 (001-33389)May 8, 201310.24† Exhibit A: Medpace Task Order Number: 06dated as of December 15, 2008, pursuant tothat certain Master Services Agreement,between the Registrant and Medpace, Inc.,dated as of September 12, 200710.1Form 8-K/A (001-33389)July 15, 2009131 Table of ContentsExhibitNumber Description Incorporation by reference ExhibitFormFiling Date10.25† Commercial Manufacturing and PackagingAgreement by and between the Registrantand Catalent Pharma Solutions, LLC datedas of July 17, 201210.1Form 8-K (001-33389)July 23, 201210.26† Purchase and Sale Agreement effective as ofMarch 25, 2013, between the Registrant andBioPharma Secured Investments IIIHoldings Cayman LP10.1Form 10-Q for the fiscalquarter ended March 31,2013 (001-33389)May 8, 201310.27 Capped Call Confirmation dated May 15,2013, by and between the Registrant andDeutsche Bank AG, London Branch10.1Form 8-K (001-33389)May 16, 201310.28* Form of Amended and Restated Change ofControl and Severance Agreement10.1Form 8-K (001-33389)July 5, 201310.29* Form of Second Amended and RestatedChange of Control and SeveranceAgreement10.1Form 8-K (001-33389)June 24, 201510.30* Form of Third Amended and RestatedChange of Control and SeveranceAgreement10.5Form 10-Q for the fiscalquarter ended June 30,2018 (001-33389)August 7, 201810.31† License and Commercialization Agreementdated July 5, 2013, between the Registrantand Berlin‑Chemie AG10.3Form 10-Q for the fiscalquarter ended June 30,2013 (001-33389)August 8, 201310.32† Commercial Supply Agreement dated as ofJuly 5, 2013, between the Registrant andBerlin‑Chemie AG10.4Form 10-Q for the fiscalquarter ended June 30,2013 (001-33389)August 8, 201310.33 Agreement dated July 18, 2013, by andbetween the Registrant and FirstManhattan Co.10.1Form 8-K (001-33389)July 19, 201310.34* Letter Agreement dated July 18, 2013, byand among the Registrant, FirstManhattan Co. and Peter Y. Tam10.1Form 8-K (001-33389)July 24, 201310.35* Employment Agreement dated September 3,2013, by and between the Registrant andSeth H. Z. Fischer10.1Form 8-K (001-33389)September 4, 201310.36*† Confidential Separation, General Releaseand Post-Separation Consulting Agreementeffective December 31, 2017, between theRegistrant and Seth H. Z. Fischer10.55Form 10-K for the fiscalyear ended December 31,2017 (001-33389)March 14, 201810.37† License and Commercialization Agreementdated as of October 10, 2013, by andbetween the Registrant and AuxiliumPharmaceuticals, Inc.10.9Form 10-Q for the quarterended September 30, 2013 (001-33389)November 7, 201310.38† Commercial Supply Agreement dated as ofOctober 10, 2013, by and between theRegistrant and AuxiliumPharmaceuticals, Inc.10.10Form 10-Q for the quarterended September 30, 2013 (001-33389)November 7, 2013132 Table of ContentsExhibitNumber Description Incorporation by reference ExhibitFormFiling Date10.39 Letter Regarding Termination Notice datedDecember 30, 2015, from AuxiliumPharmaceuticals, Inc. and Endo VenturesLimited to the Registrant10.53Form 10-K for the fiscalyear ended December 31,2015 (001-33389)March 9, 201610.40 Letter Regarding Termination Notice datedas of June 30, 2016, from AuxiliumPharmaceuticals, Inc. and Endo VenturesLimited to the Registrant10.1Form 10-Q for the fiscalquarter ended June 30,2016 (001-33389)August 4, 201610.41 Letter Regarding Termination Notice datedas of August 29, 2016, from AuxiliumPharmaceuticals, LLC and Endo VenturesLimited to the Registrant10.1Form 10-Q for the fiscalquarter ended September30, 2016 (001-33389)November 9, 201610.42* Letter Agreement dated November 4, 2013,by and between the Registrant andTimothy E. Morris10.1Form 8-K (001-33389)November 5, 201310.43† Commercial Supply Agreement datedJuly 31, 2013, by and between theRegistrant and Sanofi Chimie10.8Form 10-Q for the fiscalquarter ended June 30,2013 (001-33389)August 8, 201310.44† Termination, Rights Reversion andTransition Services Agreement dated March23, 2017, by and between the Registrant andSanofi10.3Form 10-Q for the fiscalquarter ended March 31,2017 (001-33389)May 3, 201710.45† Manufacturing and Supply Agreement datedNovember 18, 2013, by and between theRegistrant and Sanofi Winthrop Industrie10.45Form 10-K for the fiscalyear ended December 31,2013 (001-33389)February 28, 201410.46† License and Commercialization Agreementdated December 11, 2013, by and betweenthe Registrant and Sanofi10.46Form 10-K for the fiscalyear ended December 31,2013 (001-33389)February 28, 201410.47† Supply Agreement effective as ofDecember 11, 2013, by and between theRegistrant and Sanofi Winthrop Industrie10.47Form 10-K for the fiscalyear ended December 31,2013 (001-33389)February 28, 201410.48† Patent Assignment Agreement, datedAugust 24, 2014, by and between theRegistrant and Janssen Pharmaceuticals, Inc.10.1Form 10-Q for the fiscalquarter ended September30, 2014 (001-33389)November 5, 201410.49* Letter Agreement dated April 13, 2015, byand between the Registrant and Guy P.Marsh10.1Form 10-Q for the fiscalquarter ended June 30,2015 (001-33389)August 3, 201510.50* Letter Agreement dated July 20, 2015, byand between the Registrant and Wesley W.Day, Ph.D.10.3Form 10-Q for the fiscalquarter ended June 30,2015 (001-33389)August 3, 201510.51* Letter Agreement dated August 17, 2015, byand between the Registrant and Svai S.Sanford10.3Form 10-Q for the fiscalquarter ended September30, 2015 (001-33389)November 4, 2015133 Table of ContentsExhibitNumber Description Incorporation by reference ExhibitFormFiling Date10.52 Lease Agreement effective December 11,2012, by and between the Registrant andSFERS Real Estate Corp. U.10.34Form 10-K for the fiscalyear ended December 31,2012 (001-33389)February 26, 201310.53 First Amendment to Lease effective August30, 2016, between the Registrant and MVCampus Owner, LLC, the successor ininterest to SFERS Real Estate Corp. U.10.2Form 10-Q for the fiscalquarter ended September30, 2016 (001-33389)November 9, 201610.54 Office Lease effective September 2, 2016,between the Registrant and AG-SWHamilton Plaza Owner, L.P.10.3Form 10-Q for the fiscalquarter ended September30, 2016 (001-33389)November 9, 201610.55† License and Commercialization Agreementdated as of September 30, 2016, by andbetween the Registrant and MetuchenPharmaceuticals LLC10.4Form 10-Q for the fiscalquarter ended September30, 2016 (001-33389)November 9, 201610.56† Commercial Supply Agreement dated as ofSeptember 30, 2016, by and between theRegistrant and Metuchen PharmaceuticalsLLC10.5Form 10-Q for the fiscalquarter ended September30, 2016 (001-33389)November 9, 201610.57† Patent Assignment Agreement dated as ofJanuary 6, 2017, by and between theRegistrant and Selten Pharma, Inc.10.55Form 10-K for the fiscalyear ended December 31,2016 (001-33389)March 8, 201710.58† License Assignment Agreement dated as ofJanuary 6, 2017, by and between theRegistrant and Selten Pharma, Inc. 10.56Form 10-K for the fiscalyear ended December 31,2016 (001-33389)March 8, 201710.59† Settlement Agreement dated June 29, 2017,by and between the Registrant and ActavisLaboratories FL, Inc.10.1Form 10-Q for the fiscalquarter ended June 30,2017 (001-33389)August 3, 201710.60 Collateral Agreement, dated as of June 8,2018, among the Registrant, the otherguarantors from time to time party theretoand U.S. Bank National Association, astrustee and collateral agent10.1Form 8-K (001-33389)June 11, 201810.61 Purchase Agreement between the Registrantand affiliates of Athyrium CapitalManagement dated April 30, 201810.3Form 10-Q for the fiscalquarter ended June 30,2018 (001-33389)August 7, 201810.62#†† Amendment Nº1 to Commercial SupplyAgreement dated December 7, 2018 betweenSanofi Chimie and the Registrant 10.63# Amendment No. 1 to Collateral Agreementdated as of July 6, 2018 between theRegistrant and U.S. Bank NationalAssociation, as trustee and collateral agent 10.64# Amendment No. 2 to Collateral Agreementdated as of October 11, 2018 between theRegistrant and U.S. Bank NationalAssociation, as trustee and collateral agent 134 Table of ContentsExhibitNumber Description Incorporation by reference ExhibitFormFiling Date10.65# Amendment No. 3 to Collateral Agreementdated as of December 7, 2018 between theRegistrant and U.S. Bank NationalAssociation, as trustee and collateral agent 21.1# List of Subsidiaries 23.1# Consent of Independent Registered PublicAccounting Firm 24.1 Power of Attorney (See signature page) 31.1# Certification of Chief Executive Officerpursuant to Rules 13a‑14 and 15d‑14promulgated under the Securities ExchangeAct of 1934, as amended 31.2# Certification of Chief Financial Officerpursuant to Rules 13a‑14 and 15d‑14promulgated under the Securities ExchangeAct of 1934, as amended 32.1+ Certification of Chief Executive Officer andChief Financial Officer pursuant toSection 18 U.S.C. 1350, as adopted pursuantto Section 906 of the Sarbanes‑Oxley Act of2002 101 The following materials from theRegistrant’s Annual Report on Form 10‑Kfor the year ended December 31, 2018,formatted in Extensible Business ReportingLanguage (XBRL), include: (i) theConsolidated Balance Sheets, (ii) theConsolidated Statements of Operations,(iii) the Consolidated Statements ofComprehensive (Loss) Income, (iv) theConsolidated 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.#Filed herewith.+Furnished herewith. 135 Table of ContentsItem 16. Form 10-K SummaryNone. 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/ John P. Amos John P. Amos Chief Executive Officer (Principal Executive Officer) Date: February 26, 2019 136 Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes andappoints each of John P. Amos 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/ John P. Amos Chief Executive Officer (Principal ExecutiveOfficer) and Director February 26, 2019John P. Amos /s/ David Y. Norton Chairman of the Board of Directors and Director February 26, 2019David Y. Norton /s/ Mark K. OkiSenior Vice President, Chief Financial Officer andChief Accounting Officer (Principal Financial andAccounting Officer)February 26, 2019Mark K. Oki /s/ Karen Ferrell Director February 26, 2019Karen Ferrell /s/ Ed Kangas Director February 26, 2019Ed Kangas /s/ Thomas B. King Director February 26, 2019Thomas B. King /s/ Jorge Plutzky, M.D. Director February 26, 2019Jorge Plutzky, M.D. /s/ Eric W. Roberts Director February 26, 2019Eric W. Roberts /s/ Herman Rosenman Director February 26, 2019Herman Rosenman /s/ Allan L. Shaw Director February 26, 2019Allan L. Shaw 137EXHIBIT 10.62 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WAS REQUESTED. ALLSUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSIONPURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. November 15, 2018AMENDMENT N°1 to theCOMMERCIAL SUPPLY AGREEMENTEntered into force on January 1st, 2014 BETWEENVIVUS, Inc., company incorporated in the State of Delaware and having its registered office at 900 E. HamiltonAvenue, Suite 550, CAMPBELL, CA 95008, USA represented by John L. SLEBIR, SVP, General Counsel, dulyauthorized to represent the company hereunder.Hereinafter referred to as the “VIVUS” ANDSANOFI CHIMIE, Société anonyme, a company organized and existing under the laws of France, registered in theCompany and Trade Register of Creteil under the number 428 706 204, having its registered office at 82 avenueRaspail, 94250 Gentilly, France, represented by Philippe CLAVEL, Head of SAIS, duly authorised to represent thecompany hereunder,Acting for itself and on behalf of its Affiliates,Hereinafter collectively referred to as the “SANOFI CHIMIE”VIVUS and SANOFI CHIMIE are hereinafter individually or collectively referred to as “Party” or “Parties”.WITNESSETH:The Parties entered into a Commercial Supply Agreement relative to the active ingredient PDE5 inhibitor Avanafil(the “API”) effective as of January 1, 2014, whereby SANOFI CHIMIE undertakes to Manufacture and supply theAPI to VIVUS and VIVUS undertakes to purchase the API from SANOFI CHIMIE (the “Agreement”).The Parties have now agreed on new terms and conditions of the Agreement and therefore agree to amend theAgreement under the following terms and conditions of this amendment n°1 (the “Amendment”), with the effectivedate being the date this Amendment is fully executed by both the Parties hereto. Except as set forth in thisAmendment, all other provisions of the Agreement remain valid and unchanged.This Amendment is an integral part of the Agreement. stNovember 15, 2018NOW THEREFORE THE PARTIES AGREE AS FOLLOWS:PARAGRAPH 1 — “MANUFACTURING AND SUPPLY OF API”The Parties agree to replace Section 5.3.1 in its entirety by the following section:“5.3.1(a) Until December 31, 2018, SANOFI CHIMIE undertakes to supply, and VIVUS undertakes to purchase and bedelivered:(i) exclusively from SANOFI CHIMIE its total needs of API for the manufacture of VIVUS’ Product to becommercialized in the Exclusive Territory; and(ii) each Calendar Year, *** of VIVUS’s global annual demand of API needed for the manufacture ofVIVUS’ Product to be commercialized in the Semi-Exclusive Territory (for purposes of this Section5.3.10, the purchase of *** of VIVUS’s global annual demand during a particular Calendar Year shallbe calculated based on *** for API for the manufacture of VIVUS’ Product to be commercialized inthe Semi-Exclusive Territory, in each case submitted as of *** and requesting delivery of API no laterthan ***); and(iii) minimum yearly quantities of API through the term of the Agreement, *** as follows:***;*** are collectively referred to herein as the “Part A Minimum Yearly Quantities”.The Parties recognize that for the ***, VIVUS shall use its Commercially Reasonable Efforts to meet itsobligations *** considering the *** of *** already ***, but in no event shall VIVUS *** in *** and *** in ***.(b) As of January 1st, 2019, SANOFI CHIMIE undertakes to supply, and VIVUS undertakes to purchase and bedelivered:(i) exclusively from SANOFI CHIMIE its total needs of API for the manufacture of VIVUS’ Product tobe commercialized in the VIVUS Territory(ii) minimum yearly quantities of API, *** as follows:***.*** are collectively referred to herein as the “Minimum Yearly Quantities”.2 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WAS REQUESTED. ALLSUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSIONPURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. stNovember 15, 2018(c) It is further agreed:(i) that any Part B Minimum Yearly Quantities amount may be increased upon *** of delivery for ***;and for increased amounts above the Minimum Yearly Quantities that are greater than ***, higheramount on a good faith basis *** of the delivery is required of the minimum volume as outlinedabove.;(ii) that for the delivery of ***, the Parties agree that *** or some part of that *** can be delivered at theend of ***, additionally the *** that was not delivered as part of ***, for the quantity to be delivered ***,for a total of ***, will be included in *** delivery.(iii) The Parties further agree to meet and discuss in good faith the timing of any future delivery of thevolumes in the later years as mentioned above with the intent to have some flexibility on deliverytiming. The total minimum yearly volume will remain the same in aggregate, even if delivered at adifferent time.The Parties expressly agree that, as of January 1, 2019, Section 5.3.2 is amended so that to remove any obligationrelated to Semi Exclusive Territory.PARAGRAPH 2 - “PRICES AND PAYMENT”The Parties agree that section 8.1 of the Agreement shall be amended to include the following provision:“As from January 1, 2019, the price payable to SANOFI CHIMIE by VIVUS for the performance of the Servicesshall be as follows:***.Such price is for delivery of the API *** (at the site of tablet manufacture) in Europe, with the exception of *** forshipments outside of France.”The Parties agree to amend the Agreement by inserting the following provisions at the end of Section 8.4:“For further clarification of this Section 8.4, it is agreed and acknowledged that the price adjustment will consist ofthe difference between *** and the increase in COG’s resulting from the cost increase of raw materials seen that isabove ***. As an example; if the increase in the cost of goods resulting from the raw materials increase is ***, thetotal increase applied will be *** (if the amount of ***), then the total increase applied would equal ***.It is also agreed that if there is a catastrophic increase in the cost of raw materials of a particular component orstarting material, and the result is an increase of above *** in a calendar year, not including the increase for laborcosts, that the Parties agree to meet within *** to discuss a possible plan of action to evaluate options for reducingthe costs of said raw materials. Regardless of the outcome, this shall not relieve VIVUS’ Minimum YearlyQuantities obligation for the next delivery. In the event that in 2 consecutive years the increase in raw materialsresults in an increase in cost of goods between *** across such 2 year period, minus the labor costs, the Partieswill meet within *** 3 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WAS REQUESTED. ALLSUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSIONPURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. stNovember 15, 2018to discuss in good faith a plan to reduce such cost and engage in a discussion on potential options and considerpossible adjustments of the Part B Minimum Yearly Quantity if warranted.PARAGRAPH 3 — “TERM AND TERMINATION”Pursuant to Section 9.1 of the Agreement, the Agreement expires upon December 31, 2018. The Parties herebyexpressly agree to extend the term of the Agreement for five (5) years.Therefore, Section 9.1 shall be replaced in its entirety by the following section:“This Agreement shall become effective as of January 1, 2014 and unless terminated as provided herein, shallremain in full force and effect until December 31, 2023 (the “Initial Term).Either Party shall be entitled to terminate the Agreement subject to ***-prior notice sent to the other Party, it beingspecified, however, that the *** prior notice cannot be effective before December 31, 2021. Thereafter, theAgreement shall be automatically renewed for successive one (1) year terms, unless either Party provides notice oftheir desire to not renew for a subsequent one (1) year term at least *** in advance of the end of the then currentterm.Upon termination of the Agreement pursuant to this section 9.1, VIVUS shall purchase from SANOFI CHIMIE at theprices paid by SANOFI CHIMIE ***, all stocks of raw material or starting materials procured by SANOFI CHIMIEthat are reasonable and necessary for the Manufacture of the API(s) in compliance with the greater of (i) the rollingforecasts or (ii) the last purchase order of the APIs (the Required Materials). SANOFI CHIMIE will *** to cancel anyundelivered purchase orders of Required Materials and/or assist VIVUS in identifying potential purchasers of suchRequired Materials. If these purchase orders cannot be cancelled, these Required Materials will be considered asSANOFI CHIMIE stock, and obligation to purchase these Required Materials will still be responsibility of VIVUS.Upon request, SANOFI CHIMIE can destroy these Required Materials with responsibility of the cost of destructionbeing paid by VIVUS.” PARAGRAPH 4 — “ASSIGNMENT / SUBCONTRACT”The Parties agree to replace Article 15 of the Agreement in its entirety by the following:“Neither Party may subcontract, assign, extend or transfer any of its rights and obligations under this Agreementwithout the express and prior written consent of the other Party, which consent shall not be unreasonably withheld,conditioned or delayed; except that:(i) VIVUS may transfer or assign its rights and obligations under this Agreement, in whole or in part, toits Affiliates, or in whole to a single Commercialization Partner in connection with a sale, sublicense,transfer or assignment of (a) rights relating to the manufacture of the VIVUS’ Product, (b) all orsubstantially all of its assets or (c) the business relating to the VIVUS’ Product; and(ii) SANOFI CHIMIE may transfer or assign its rights and obligations under this Agreement (a) to itsAffiliates; or (b) in connection with a sale, sublicense, transfer or assignment of all or substantially allof the assets or rights relating to the manufacture of the API.4 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WAS REQUESTED. ALLSUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSIONPURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ststNovember 15, 2018No assignment or transfer of this Agreement or of any rights hereunder shall relieve the assigning Party of any of itsobligations and liability hereunder, unless the assignee undertakes in writing to, and can reasonably, assume suchobligations and liabilities.This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respectivesuccessors and assigns.”IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be duly executed on the datesindicated herein below.Made in two (2) original copies. SANOFI CHIMIE VIVUS Inc. Date:/s/ Philippe Clavel Date:/s/ John L. SlebirName:Philippe CLAVEL Name:John L. SlebirTitle:Head of SAIS Title:SVP, General CounselDate:16/11/2018 Date:07 Dec. 2018 5 *** INDICATES MATERIAL THAT WAS OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT WAS REQUESTED. ALLSUCH OMITTED MATERIAL WAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSIONPURSUANT TO RULE 24B-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.Exhibit 10.63AMENDMENT NO. 1 TO COLLATERAL AGREEMENTThis AMENDMENT NO. 1 TO COLLATERAL AGREEMENT, dated as of July 6,2018 (this “Amendment”), is entered into by and between VIVUS, Inc., a Delaware corporation(“Issuer”), U.S. Bank National Association, as Trustee (“Trustee”) and U.S. Bank NationalAssociation, as Collateral Agent (“Collateral Agent”).WHEREAS, the Issuer, Trustee and Collateral Agent are parties to that certain CollateralAgreement, dated as of June 8, 2018 (the “Collateral Agreement”); andWHEREAS, the parties thereto desire to amend the Collateral Agreement pursuant to Section8.21 thereof on the terms set forth in this Amendment.NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants andagreements hereinafter set forth, and for other good and valuable consideration, the receipt andsufficiency of which is hereby acknowledged and accepted, the parties hereto, intending to be legallybound, hereby agree as follows:1. Amendments to Collateral Agreement. a.Amendment to Schedule 4.13. Paragraph 1 of Schedule 4.13 of the CollateralAgreement is hereby amended by deleting it in its entirety and replacing it with thefollowing:“The Issuer shall, no later than July 31, 2018, (a) enter into an Account ControlAgreement in form and substance satisfactory to the Majority Holders withrespect to each of the accounts disclosed in Section 9 of the Issuer’s PerfectionCertificate delivered on or prior to the Effective Date or (b) move any suchaccount to another financial institution approved by the Majority Holders andensure that such replacement bank account is subject to the “control” (as definedin Article 9 of the UCC) of the Collateral Agent pursuant to an Account ControlAgreement in form and substance satisfactory to the Majority Holders.2.Miscellaneous. a.Ratification of Collateral Agreement. Except as expressly amended and modifiedby this Amendment, the Collateral Agreement, including the exhibits and schedulesthereto, is and shall remain unchanged and in full force and effect in accordancewith its terms. b.Other Miscellaneous Terms. The provisions of Sections 8.15, 8.16 and 8.20 of theCollateral Agreement shall apply mutatis mutandis to this Amendment.[Signature pages follow]  IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of thedate first written above. VIVUS, INC. By:/s/ Mark OkiName:Mark OkiTitle:Chief Financial Officer {Signature Page to Amendment No. 1 to Collateral Agreement} U.S. BANK NATIONAL ASSOCIATIONas Trustee By:/s/ Alison D.B. NadeauName:Alison D.B. NadeauTitle:Vice President U.S. BANK NATIONAL ASSOCIATIONas Collateral Agent By:/s/ Alison D.B. NadeauName:Alison D.B. NadeauTitle:Vice President {Signature Page to Amendment No. 1 to Collateral Agreement} Exhibit 10.64AMENDMENT NO. 2 TO COLLATERAL AGREEMENTThis AMENDMENT NO. 2 TO COLLATERAL AGREEMENT, dated as of October 11,2018 (this “Amendment”), is entered into by and between VIVUS, Inc., a Delaware corporation(“Issuer”), U.S. Bank National Association, as Trustee (“Trustee”) and U.S. Bank NationalAssociation, as Collateral Agent (“Collateral Agent”).WHEREAS, the Issuer, Trustee and Collateral Agent are parties to that certain CollateralAgreement, dated as of June 8, 2018 (as amended by that Amendment No. 1 to Collateral Agreementdated as of July 6, 2018, the “Collateral Agreement”); andWHEREAS, the parties thereto desire to amend the Collateral Agreement pursuant to Section8.21 thereof on the terms set forth in this Amendment.NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants andagreements hereinafter set forth, and for other good and valuable consideration, the receipt andsufficiency of which is hereby acknowledged and accepted, the parties hereto, intending to be legallybound, hereby agree as follows:1. Amendments to Collateral Agreement. a.Amendment to Schedule 4.13. Schedule 4.13 of the Collateral Agreement ishereby amended by deleting it and replacing it in its entirety with the form attachedhereto as Exhibit A. 2.Miscellaneous. a.Ratification of Collateral Agreement. Except as expressly amended and modifiedby this Amendment, the Collateral Agreement, including the exhibits and schedulesthereto, is and shall remain unchanged and in full force and effect in accordancewith its terms. b.Other Miscellaneous Terms. The provisions of Sections 8.15, 8.16 and 8.20 of theCollateral Agreement shall apply mutatis mutandis to this Amendment.[Signature pages follow]  IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of thedate first written above. VIVUS, INC. By:/s/ Mark OkiName:Mark OkiTitle:Chief Financial Officer {Signature Page to Amendment No. 2 to Collateral Agreement} U.S. BANK NATIONAL ASSOCIATIONas Trustee By:/s/ Alison D.B. NadeauName:Alison D.B. NadeauTitle:Vice President U.S. BANK NATIONAL ASSOCIATIONas Collateral Agent By:/s/ Alison D.B. NadeauName:Alison D.B. NadeauTitle:Vice President {Signature Page to Amendment No. 2 to Collateral Agreement}  EXHIBIT A Schedule 4.13 Certain Post-Closing Obligations 1.The Issuer shall, no later than July 31, 2018, (a) enter into an Account Control Agreement inform and substance satisfactory to the Majority Holders with respect to each of the accountsdisclosed in Section 9 of the Issuer’s Perfection Certificate delivered on or prior to theEffective Date or (b) move any such account to another financial institution approved by theMajority Holders and ensure that such replacement bank account is subject to the “control”(as defined in Article 9 of the UCC) of the Collateral Agent pursuant to an Account ControlAgreement in form and substance satisfactory to the Majority Holders.2.To the extent obtainable using commercially reasonable efforts, no later than sixty (60)calendar days following the Effective Date, the Issuer shall execute and deliver baileeagreements to be entered into among the Issuer, the Collateral Agent and each of thefollowing warehouseman, bailees, agents or processors referred to in the Issuer’s PerfectionCertificate delivered on or prior to the Effective Date: (a) Catalent; (b) Cardinal; (c) Sanofi;and (d) Nordmark.3.The Issuer shall, no later than December 5, 2018, cause Willow Biopharma Inc. to enter into(a) an Account Control Agreement with respect to any and all deposit accounts, securitiesaccounts and commodity accounts with the Collateral Agent and the applicable bank,securities intermediary or commodity intermediary with which such account or accounts areheld and (b) all other related agreements, documents and instruments, including any pledgeagreement from Willow BioPharma Inc. in favor of the Collateral Agent with respect to anysuch accounts4.The Issuer shall, no later than one hundred and eighty (180) calendar days following theEffective Date, dissolve or otherwise terminate, or cause the dissolution or termination of,the following Restricted Subsidiaries of the Issuer, and provide evidence thereof to theCollateral Agent: (a) VIVUS UK LIMITED, a private limited company organized andexisting under the laws of the United Kingdom, (b) VIVUS LIMITED, organized andexisting under the laws of Bermuda, (c) VIVUS International, L.P., organized and existingunder the laws of Bermuda, (d) VIVUS INTERNATIONAL LIMITED, organized andexisting under the laws of Ireland and (e) VIVUS REAL ESTATE LLC, a limited liabilitycompany organized and existing under the laws of the State of New Jersey. Exhibit 10.65AMENDMENT NO. 3 TO COLLATERAL AGREEMENTThis AMENDMENT NO. 3 TO COLLATERAL AGREEMENT, dated as of December 7,2018 (this “Amendment”), is entered into by and between VIVUS, Inc., a Delaware corporation(“Issuer”), U.S. Bank National Association, as Trustee (“Trustee”) and U.S. Bank NationalAssociation, as Collateral Agent (“Collateral Agent”).WHEREAS, the Issuer, Trustee and Collateral Agent are parties to that certain CollateralAgreement, dated as of June 8, 2018 (as amended by that Amendment No. 1 to Collateral Agreementdated as of July 6, 2018 and that Amendment No. 2 to Collateral Agreement dated as of October 11,2018, the “Collateral Agreement”); andWHEREAS, the parties thereto desire to amend the Collateral Agreement pursuant to Section8.21 thereof on the terms set forth in this Amendment.NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants andagreements hereinafter set forth, and for other good and valuable consideration, the receipt andsufficiency of which is hereby acknowledged and accepted, the parties hereto, intending to be legallybound, hereby agree as follows:1. Amendments to Collateral Agreement. a.Amendment to Schedule 4.13. Schedule 4.13 of the Collateral Agreement ishereby amended by deleting it and replacing it in its entirety with the form attachedhereto as Exhibit A. 2.Miscellaneous. a.Ratification of Collateral Agreement. Except as expressly amended and modifiedby this Amendment, the Collateral Agreement, including the exhibits and schedulesthereto, is and shall remain unchanged and in full force and effect in accordancewith its terms. b.Other Miscellaneous Terms. The provisions of Sections 8.15, 8.16 and 8.20 of theCollateral Agreement shall apply mutatis mutandis to this Amendment.[Signature pages follow]  IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of thedate first written above. VIVUS, INC. By:/s/ Mark K. OkiName:Mark K. OkiTitle:Chief Financial Officer & Accounting Officer {Signature Page to Amendment No. 3 to Collateral Agreement} U.S. BANK NATIONAL ASSOCIATIONas Trustee By:/s/ Georgina NassarName:Georgina NassarTitle:Assistant Vice President U.S. BANK NATIONAL ASSOCIATIONas Collateral Agent By:/s/ Georgina NassarName:Georgina NassarTitle:Assistant Vice President {Signature Page to Amendment No. 3 to Collateral Agreement}  EXHIBIT A Schedule 4.13 Certain Post-Closing Obligations 1.The Issuer shall, no later than July 31, 2018, (a) enter into an Account Control Agreement inform and substance satisfactory to the Majority Holders with respect to each of the accountsdisclosed in Section 9 of the Issuer’s Perfection Certificate delivered on or prior to theEffective Date or (b) move any such account to another financial institution approved by theMajority Holders and ensure that such replacement bank account is subject to the “control”(as defined in Article 9 of the UCC) of the Collateral Agent pursuant to an Account ControlAgreement in form and substance satisfactory to the Majority Holders.2.To the extent obtainable using commercially reasonable efforts, no later than sixty (60)calendar days following the Effective Date, the Issuer shall execute and deliver baileeagreements to be entered into among the Issuer, the Collateral Agent and each of thefollowing warehouseman, bailees, agents or processors referred to in the Issuer’s PerfectionCertificate delivered on or prior to the Effective Date: (a) Catalent; (b) Cardinal; (c) Sanofi;and (d) Nordmark.3.The Issuer shall, no later than February 5, 2019, cause Vivus Pharmaceuticals Limited (f/k/aWillow Biopharma Inc.) to enter into (a) an Account Control Agreement with respect to anyand all deposit accounts, securities accounts and commodity accounts with the CollateralAgent and the applicable bank, securities intermediary or commodity intermediary withwhich such account or accounts are held and (b) all other related agreements, documents andinstruments, including any pledge agreement from Vivus Pharmaceuticals Limited in favorof the Collateral Agent with respect to any such accounts4.The Issuer shall, no later than January 31, 2019, dissolve or otherwise terminate, or cause thedissolution or termination of, the following Restricted Subsidiaries of the Issuer, and provideevidence thereof to the Collateral Agent: (a) VIVUS UK LIMITED, a private limitedcompany organized and existing under the laws of the United Kingdom, (b) VIVUSLIMITED, organized and existing under the laws of Bermuda, (c) VIVUS International,L.P., organized and existing under the laws of Bermuda, (d) VIVUS INTERNATIONALLIMITED, organized and existing under the laws of Ireland and (e) VIVUS REALESTATE LLC, a limited liability company organized and existing under the laws of theState of New Jersey. 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.6.Willow Biopharma Inc., 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. 333-57374, No. 333-73394, No. 333-104287, No. 333-107066, No. 333‑142354, No. 333‑150647, No. 333‑157787, No. 333‑164921,No. 333‑168106, No. 333‑175926, No. 333‑199881, No. 333-215089, No. 333-222089, No. 333-225367 and No. 333-227966) and Form S‑3 (No. 333‑227353) of our reports dated February 26, 2019 relating to the consolidated financialstatements and financial statement schedule of VIVUS, Inc. and the effectiveness of VIVUS, Inc.’s internal control overfinancial reporting, which appear in this Annual Report on Form 10‑K./s/ OUM & CO. LLPSan Francisco, CaliforniaFebruary 26, 2019 Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANTTO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002I, John P. Amos, 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: February 26, 2019 By:/s/ John P. Amos Name:John P. Amos Title:Chief Executive Officer Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANTTO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002I, Mark K. Oki, Senior Vice President, 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: February 26, 2019 By:/s/ Mark K. Oki Name:Mark K. Oki Title:Senior Vice President, Chief Financial Officer andChief Accounting Officer Exhibit 32.1CERTIFICATION OF 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, John P. Amos, Chief Executive Officer of VIVUS, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that the Annual Report of VIVUS, Inc. on Form 10‑K for theperiod ending December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 and that information contained in such Annual Report on Form 10‑K fairly presents, in all material respects, thefinancial condition and results of operations of VIVUS, Inc. This written statement is being furnished to the Securities andExchange Commission as an exhibit to such Annual Report on Form 10‑K. A signed original of this statement has beenprovided to VIVUS, Inc. and will be retained by VIVUS, Inc. and furnished to the Securities and Exchange Commission or itsstaff upon request. Date: February 26, 2019By:/s/ John P. AmosJohn P. AmosChief Executive Officer I, Mark K. Oki, Senior Vice President, Chief Financial Officer and Chief Accounting Officer, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that the Annual Report ofVIVUS, Inc. on Form 10‑K for the period ending December 31, 2018 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10‑K fairlypresents, in all material respects, the financial condition and results of operations of VIVUS, Inc. This written statement isbeing furnished to the Securities and Exchange Commission as an exhibit to such Annual Report on Form 10‑K. A signedoriginal of this statement has been provided to VIVUS, Inc. and will be retained by VIVUS, Inc. and furnished to theSecurities and Exchange Commission or its staff upon request. Date: February 26, 2019By:/s/ Mark K. OkiMark K. OkiSenior Vice President, Chief Financial Officer and ChiefAccounting Officer 

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