UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.      )

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Vanda Pharmaceuticals Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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April 28, 2010

 

Dear Stockholder:

 

I am pleased to invite you to attend Vanda Pharmaceuticals Inc.’s 2010 Annual Meeting of Stockholders (the “Annual Meeting”), to be held on June 3, 2010, at 9605 Medical Center Drive, Rockville, Maryland. The Annual Meeting will begin promptly at 9:00 a.m., local time.

 

Enclosed are the following:

 

 

Details regarding the business expected to be conducted at the Annual Meeting are more fully described in the accompanying Notice of Annual Meeting of Stockholders and Proxy Statement.

 

We consider the votes of all stockholders important, no matter how many or how few shares you own. Whether or not you expect to attend the Annual Meeting, please date, sign, and return your proxy card in the enclosed envelope to ensure that your shares are voted at the Annual Meeting. You also may vote your shares by telephone or via the Internet by following the voting instructions on the proxy card. If you attend the Annual Meeting, you may vote your shares in person (even if you previously voted by proxy) by following the instructions in the Proxy Statement.

 

On behalf of your Board of Directors, thank you for your continued support and interest.

 

 

 

Mihael H. Polymeropoulos, M.D.

President and Chief Executive Officer

 

TABLE OF CONTENTS

 

 

Vanda Pharmaceuticals Inc.

9605 Medical Center Drive, Suite 300

Rockville, Maryland 20850

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On June 3, 2010

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Vanda Pharmaceuticals Inc., a Delaware corporation (the “Company”). The Annual Meeting will be held on June 3, 2010, at 9:00 a.m. local time at 9605 Medical Center Drive, Rockville, Maryland for the following purposes:

 

 

These items of business are more fully described in the accompanying Proxy Statement. Please read the accompanying Proxy Statement and vote your shares by proxy by completing, signing, dating and returning your proxy card in the enclosed postage pre-paid envelope. You also may vote your shares by telephone or via the Internet by following the telephone and Internet voting instructions on the proxy card.

 

Your Board of Directors unanimously recommends you vote the proxy card “FOR” the Company’s two director nominees, Howard Pien and H. Thomas Watkins; and “FOR” Proposal 2 and Proposal 3.

 

The record date for the Annual Meeting is April 16, 2010. Only stockholders of record at the close of business on that date may vote at the Annual Meeting or any adjournment thereof.

 

Electronic Delivery of Proxy Materials

 

We are pleased to offer stockholders the opportunity to receive future proxy mailings by e-mail. To request electronic delivery, please vote via the Internet at www.proxyvote.com (you will be asked to enter a 12 or 14 digit control number which can be found on the first page of your proxy card) and, when prompted, enroll to receive proxy materials electronically in future years.

 

Important Notice Regarding Internet Availability of Proxy Materials for the Annual Meeting: The 2010 Notice and Proxy Statement and 2009 Annual Report are also available at our corporate website www.vandapharma.com. Additionally, in accordance with SEC rules, you may access these materials at http://materials.proxyvote.com/921659, which does not have “cookies” that identify visitors to the site.

 

 

 

Stephanie R. Irish
Acting Chief Financial Officer, Secretary and Treasurer

 

Rockville, Maryland

April 28, 2010

 

 

 

This Proxy Statement and accompanying proxy are being distributed on or about April 28, 2010

 

Vanda Pharmaceuticals Inc.

9605 Medical Center Drive, Suite 300

Rockville, Maryland 20850

 

PROXY STATEMENT

FOR THE 2010 ANNUAL MEETING OF STOCKHOLDERS

June 3, 2010

 

 

Why am I receiving these materials?

 

We sent you this Proxy Statement and the enclosed proxy card because the Board of Directors of Vanda Pharmaceuticals Inc. (sometimes referred to as the “Company” or “Vanda”) is soliciting your proxy to vote your shares at the 2010 Annual Meeting of Stockholders (the “Annual Meeting”). You are invited to attend the Annual Meeting to vote on the proposals described in this Proxy Statement. However, you do not need to attend the Annual Meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card, or follow the instructions below to submit your proxy by telephone or via the Internet. In addition, we are sending to our stockholders an annual report that will accompany this Proxy Statement in accordance with Securities and Exchange Commission (“SEC”) rules.

 

We intend to mail this Proxy Statement, the annual report and accompanying proxy card on or about April 28, 2010 to all stockholders of record entitled to vote at the Annual Meeting.

 

Who can vote at the Annual Meeting?

 

Only stockholders of record at the close of business on April 16, 2010, the record date for the Annual Meeting, will be entitled to vote at the Annual Meeting. On the record date, there were 27,879,548 shares of the Company’s common stock (“Common Stock”) outstanding. All of these outstanding shares are entitled to vote at the Annual Meeting (one vote per share of Common Stock) in connection with the matters set forth in this Proxy Statement.

 

A list of stockholders entitled to vote at the Annual Meeting will be available for examination at Vanda Pharmaceuticals Inc., 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850 for ten days before the Annual Meeting and at the Annual Meeting.

 

Stockholder of Record: Shares Registered in Your Name

 

If on April 16, 2010, your shares were registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, then you are a stockholder of record. As a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy. Whether or not you plan to attend the Annual Meeting, sign, date and return the enclosed proxy card or vote your shares by telephone or via the Internet as instructed below to ensure your vote is counted.

 

Beneficial Owner: Shares Registered in the Name of a Broker or Bank

 

If on April 16, 2010, your shares were held in an account at a broker, bank or other nominee holder, then you are the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, if you are not the stockholder of record, you may not vote those shares in person at the Annual Meeting unless you request and obtain a valid proxy from your broker or other agent in whose street name your shares are registered.

What am I being asked to vote on?

 

At the Annual Meeting, the stockholders will vote on:

 

 

How does the Board of Directors of Vanda recommend that I vote on the proposals?

 

The Board of Directors of Vanda unanimously recommends that you vote “FOR” the election of each of Howard Pien and H. Thomas Watkins (Proposal 1), “FOR” the approval of the material terms of the Incentive Plan (Proposal 2) and “FOR” the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2010 (Proposal 3).

 

How do I vote?

 

You may vote “FOR” all our nominees to the Board of Directors or you may “WITHHOLD” your vote for any nominee you specify. For each other matter that may be voted on at the Annual Meeting, you may vote “FOR” or “AGAINST” or abstain from voting.

 

Stockholder of Record: Shares Registered in Your Name

 

If you are a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy using the enclosed proxy card or by telephone or via the Internet as described below. Whether or not you plan to attend the Annual Meeting, we urge you to vote using the proxy to ensure your vote is counted. You may still attend the Annual Meeting and vote in person if you have already voted by proxy. If you plan on attending the Annual Meeting you must bring a form of personal picture identification with you.

 

 

We provide Internet proxy voting to allow you to vote your shares on-line, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank

 

If you are a beneficial owner of shares registered in the name of your broker, bank, or other nominee holder, you should have received a voting instruction card with these proxy materials from that organization rather than from Vanda. You should follow the instructions on the voting instruction card to ensure that your vote is counted.

Alternatively, a number of brokers and banks participate in a program provided through Broadridge Financial Solutions, Inc. (formerly known as ADP Investor Communication Services), which enables beneficial holders to grant proxies to vote shares via telephone or the Internet. If your shares are held by a broker or bank that participates in the Broadridge program, you may grant a proxy to vote those shares telephonically by calling the telephone number listed in the voting instructions received from your broker or bank, or via the Internet at Broadridge’s website at www.proxyvote.com. To vote in person at the Annual Meeting, you must obtain a valid proxy from your broker, bank, or other nominee holder. Follow the instructions from your broker, bank or other organization included with these proxy materials, or contact your broker, bank or other nominee holder to request a proxy form.

 

How many votes do I have?

 

On each matter to be voted upon, you have one vote for each share of Common Stock you own as of April 16, 2010.

 

What vote is required to approve each matter?

 

 

What is a “broker non-vote”?

 

Broker non-votes occur when a beneficial owner of shares held in street name does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine matters.” Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker or nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can still vote the shares with respect to “routine” matters but not with respect to “non-routine” matters. “Non-routine matters” include director elections or matters that may substantially affect the rights or privileges of stockholders, such as mergers or stockholder proposals.

What effect do abstentions and broker non-votes have on the proposals?

 

Abstentions and broker non-votes will have no effect on Proposals 1, 2 or 3. However, we still urge you to please provide voting instructions for all of your shares that are held by your broker, bank or other nominee holder, so that your votes will be counted at the Annual Meeting. We only count broker non-votes in determining whether a quorum of stockholders is present to conduct business at the Annual Meeting.

 

What if I return a proxy card but do not make specific choices?

 

If you return a signed and dated proxy card without marking any voting selections, your shares will be voted:

 

 

If any other matter is properly presented at the Annual Meeting, the proxyholders for shares voted on the proxy card (i.e. one of the individuals named as proxies on your proxy card) will vote your shares using his or her best judgment.

 

Who is paying for this proxy solicitation?

 

The accompanying proxy is being solicited by the Board of Directors of the Company. In addition to this solicitation by mail, directors and employees of the Company may solicit proxies in person, by telephone, or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. In addition, the Company may also retain one or more third parties to aid in the solicitation of brokers, banks and institutional and other stockholders. We will pay for the entire cost of soliciting proxies. We may reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

 

Can I change my vote after submitting my proxy?

 

Yes. You can revoke your proxy at any time before the final vote at the Annual Meeting. If you are the record holder of your shares, you may revoke your proxy in any one of three ways:

 

 

What is the quorum requirement?

 

A quorum of stockholders is necessary to conduct business at the Annual Meeting. Pursuant to our Bylaws, a quorum will be present if a majority of the voting power of outstanding shares of the Company entitled to vote generally in the election of directors is represented in person or by proxy at the Annual Meeting. On the record date, there were 27,879,548 shares of Common Stock outstanding and entitled to vote. Thus 13,939,775 shares must be represented by stockholders present at the Annual Meeting or represented by proxy to have a quorum.

 

Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you attend the Annual Meeting and vote in person. Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present for the transaction

of business. If a quorum is not present, the holders of a majority of the votes present at the Annual Meeting may adjourn the Annual Meeting to another date.

 

What happens if the Annual Meeting is postponed or adjourned?

 

Unless the polls have closed or you have revoked your proxy, your proxy will still be in effect and may be voted once the Annual Meeting is reconvened. However, you will still be able to change or revoke your proxy with respect to any proposal until the polls have closed for voting on such proposal.

 

How are votes counted?

 

Votes will be counted by the inspector of elections appointed for the Annual Meeting, who will separately count “FOR” and “WITHHOLD” and, with respect to proposals other than the election of directors, “AGAINST” votes, abstentions and broker non-votes. Abstentions and broker non-votes have no effect and will not be counted towards the vote total for any proposal.

 

Could other matters be decided at the Annual Meeting?

 

Vanda does not know of any other matters that may be presented for action at the Annual Meeting. Should any other business come before the Annual Meeting, the persons named on the enclosed proxy card will have discretionary authority to vote the shares represented by proxies in accordance with their best judgment. If you hold shares through a broker, bank or other nominee as described above, they will not be able to vote your shares on any other business that comes before the Annual Meeting unless they receive instructions from you with respect to such other business.

 

How can I find out the results of the voting at the Annual Meeting?

 

Preliminary voting results are expected to be announced at the Annual Meeting. Final voting results will be reported on a Current Report on Form 8-K filed with the SEC no later than June 9, 2010.

 

May I propose actions for consideration at next year’s annual meeting or nominate individuals to serve as directors?

 

Yes. The following requirements apply to stockholder proposals, including director nominations, for the 2011 annual meeting of stockholders.

 

Requirements for Stockholder Proposals to be Considered for Inclusion in Proxy Materials:

 

Stockholders interested in submitting a proposal (other than the nomination of directors) for inclusion in the proxy materials to be distributed by us for the 2011 annual meeting of stockholders may do so by following the procedures prescribed in Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). To be eligible for inclusion in Vanda’s proxy materials, stockholder proposals must be received at our principal executive offices no later than the close of business on December 29, 2010 which is the 120th day prior to the first anniversary of the date that we released this Proxy Statement to our stockholders for the Annual Meeting. To be included in our proxy materials, your proposal also must comply with the Company’s Bylaws and Rule 14a-8 promulgated under the Exchange Act regarding the inclusion of stockholder proposals in company-sponsored proxy materials. If we change the date of the 2011 annual meeting of stockholders by more than 30 days from the anniversary of this year’s Annual Meeting, stockholder proposals must be received a reasonable time before we begin to print and mail our proxy materials for the 2011 annual meeting of stockholders. Proposals should be sent to Vanda Pharmaceuticals Inc., 9605 Medical Center Drive, Suite 300, Rockville, MD 20850 Attn: Secretary.

 

Requirements for Stockholder Nomination of Director Candidates and Stockholder Proposals Not Intended for Inclusion in Vanda’s Proxy Materials:

 

Stockholders who wish to nominate persons for election to the Board of Directors at the 2011 annual meeting of stockholders or who wish to present a proposal at the 2011 annual meeting of stockholders, but who do not intend

for such proposal to be included in Vanda’s proxy materials for such meeting, must deliver written notice of the nomination or proposal to the Corporate Secretary at 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850 no earlier than February 3, 2011 and no later than March 5, 2011. However, if the 2011 annual meeting of stockholders is held earlier than May 4, 2011 or later than July 3, 2011, nominations and proposals must be received no later than the close of business on the later of (a) the 90th day prior to the 2011 annual meeting of stockholders and (b) the 10th day following the day we first publicly announce the date of the 2011 annual meeting. The stockholder’s written notice must include certain information concerning the stockholder and each nominee and proposal, as specified in Vanda’s Bylaws.

 

Copy of Bylaws:

 

You may request a copy of the Company’s Bylaws at no charge by writing to Vanda’s Secretary at 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850. A current copy of our Bylaws also is available at our corporate website at www.vandapharma.com. To access our Bylaws from the main page of our website, click on “Investor Relations” at the top of the page, then click on “Corporate Governance,” and then click on “Amended and Restated Bylaws.”

 

How can I find Vanda’s proxy materials and annual report on the Internet?

 

This Proxy Statement and the 2009 Annual Report are available at our corporate website at www.vandapharma.com. You also can obtain copies without charge at the SEC’s website at www.sec.gov. Additionally, in accordance with SEC rules, you may access these materials at http://materials.proxyvote.com/921659 which does not have “cookies” that identify visitors to the site.

 

How do I obtain a separate set of Vanda’s proxy materials if I share an address with other stockholders?

 

As permitted by applicable law, only one copy of Vanda’s proxy materials, which include this Proxy Statement, the 2009 Annual Report and the proxy card, is being delivered to stockholders with the same last name residing at the same address, unless such stockholders have notified Vanda of their desire to receive multiple copies of our proxy materials. Vanda will deliver a separate copy of our proxy materials within 30 days after an oral or written request from any stockholder residing at an address to which only one copy was mailed. If you are a stockholder at a shared address to which we delivered a single copy of the proxy materials and you want a separate copy of this Proxy Statement and/or the 2009 Annual Report, or if you want to receive a separate proxy statement and/or annual report in the future, or if you are a stockholder at a shared address to which we delivered multiple copies of the proxy materials and you desire to receive only one copy in the future, please submit your request by mail to Investor Relations, Vanda Pharmaceuticals Inc., 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850 or by telephone at (240) 599-4500.

 

If a broker, bank or other holder holds your Vanda shares for you, please contact your broker, bank or other nominee directly if you have questions, require additional copies of this Proxy Statement, the 2009 Annual Report, or additional voting instructions for the Annual Meeting or if you wish to receive multiple copies of proxy materials in the future if you reside at the same address as another stockholder and only one copy was delivered to you.

 

May I elect to receive Vanda stockholder communications electronically rather than through the mail?

 

Yes. If you received your 2010 Annual Meeting materials by mail, please help us conserve natural resources and significantly reduce Vanda’s printing and mailing costs, by signing up to receive future stockholder communications via e-mail. With electronic delivery, we will notify you via e-mail as soon as the annual report and our proxy materials are available on the Internet, and you can submit your stockholder votes online. Electronic delivery also can help reduce the number of bulky documents in your personal files and eliminate duplicate mailings. To sign up for electronic delivery:

 

 

 

Your electronic delivery enrollment will be effective until you cancel it. If you have questions about electronic delivery, please contact Investor Relations, Vanda Pharmaceuticals Inc., 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850 or by telephone at (240) 599-4500.

 

Whom should I call if I have any questions?

 

If you have any questions, would like additional Vanda proxy materials or proxy cards, or need assistance in voting your shares, please contact Investor Relations, Vanda Pharmaceuticals Inc., 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850 or by telephone at (240) 599-4500.

 

Under our Bylaws, our Board of Directors is divided into three classes of equal size. The members of each class are elected to serve a 3-year term with the term of office of each of the three classes ending in successive years. Pursuant to our Bylaws, the Board of Directors has fixed the current number of directors at six (6). Howard Pien and H. Thomas Watkins are the two Class I directors whose terms expire at this Annual Meeting. Howard Pien and H. Thomas Watkins have been nominated for election by our Board of Directors to serve until the 2013 Annual Meeting or until their successors are elected (or until their earlier death, resignation or removal). It is our policy to encourage nominees for director to attend the Annual Meeting. Howard Pien’s and H. Thomas Watkins’ ages as of April 16, 2010 and certain additional biographical information are set forth below.

 

Directors are elected by a plurality of the votes cast at the Annual Meeting. The two nominees receiving the highest number of “FOR” votes will be elected. Abstentions and “broker non-votes” will have no effect on the outcome of the election of directors at the Annual Meeting.

 

Shares represented by signed proxy cards will be voted on Proposal 1 “FOR” the election of Mr. Pien and Mr. Watkins to the Board of Directors at the Annual Meeting, unless otherwise marked on the card. If any Vanda director nominee becomes unavailable for election as a result of an unexpected occurrence, shares represented by proxy cards will be voted for the election of a substitute nominee designated by our current Board of Directors, unless otherwise marked on the card. Mr. Pien and Mr. Watkins, Vanda’s two director nominees, have each agreed to serve as a director if elected. We have no reason to believe that either Vanda nominee will be unable to serve if elected.

 

Qualification of Directors and Nominees

 

The following is a brief discussion of the specific experience, qualifications, attributes or skills that led to the conclusion by our Nominating/Corporate Governance Committee that each of our directors and nominees is qualified to serve as one of our directors:

 

We believe that our directors and nominees have an appropriate balance of knowledge, experience, attributes, skills and expertise required for our Board of Directors as a whole and that we have sufficient independent directors to comply with applicable law and regulations. We believe that our directors have a broad range of personal characteristics including leadership, management, pharmaceutical, business, marketing and financial experience and abilities to act with integrity, with sound judgment and collegially, to consider strategic proposals, to assist with the development of our strategic plan and oversee its implementation, to oversee our risk management efforts and executive compensation and to provide leadership, to commit the requisite time for preparation and attendance at board and committee meetings and to provide required expertise on our board committees.

 

In addition, five of our six directors are independent under The Nasdaq Global Market (“Nasdaq”) standards (Dr. Polymeropoulos, our Chief Executive Officer, being the only exception as he is an employee) and our Nominating/Corporate Governance Committee believes that all six directors are independent of the influence of any particular stockholder or group of stockholders whose interests may diverge from the interests of our stockholders as a whole.

 

We believe that each director and nominee brings a strong background and set of skills to our Board of Directors, giving the Board of Directors, as a whole, competence and experience from a wide variety of areas.

 

The following is a brief biography for Vanda’s two director nominees. For further biographical information on all our directors and executive officers see the section entitled “Executive Officers and Directors” below and for additional reasons why our directors were recommended for election by the Nominating/Corporate Governance Committee of our Board of Directors see the section entitled “Corporate Governance”.

 

Howard H. Pien, age 52, has served as a Director of Vanda since June 2007. Mr. Pien served as President and Chief Executive Officer and a Director of Medarex, Inc from June 2007 until it was acquired by Bristol-Myers Squibb Co. in September 2009. Prior to his tenure at Medarex, Mr. Pien served as President and Chief Executive Officer of Chiron Corporation until April 2006 when it was acquired by Novartis. He joined Chiron from

GlaxoSmithKline (formerly SmithKline Beecham), where he served as President, Pharmaceuticals for SmithKline Beecham and later as President of GlaxoSmithKline’s International Pharmaceuticals business. Mr. Pien has also held positions in sales, market research, licensing and product management at Abbott Laboratories and Merck & Co. In the past five years Mr. Pien has served on the board of directors of Chiron Corporation, Medarex, ViroPharma Incorporated and ImmunoGen, Inc. Mr. Pien earned a B.S. from the Massachusetts Institute of Technology and an M.B.A. from Carnegie-Mellon University.

 

H. Thomas Watkins, age 57, has served as a Director of Vanda since September 2006. Mr. Watkins has served as the President and Chief Executive Officer of Human Genome Sciences, Inc. and as a member of its board of directors since 2005. Prior to his tenure at Human Genome Sciences Inc., Mr. Watkins served as President of TAP Pharmaceutical Products, Inc. Mr. Watkins previously held a series of executive positions over the course of nearly twenty years with Abbott Laboratories. Mr. Watkins also serves on the board of directors of the Biotechnology Industry Organization (BIO). He holds a B.B.A. from the College of William and Mary and an M.B.A from the University of Chicago Graduate School of Business.

 

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE THE PROXY CARD “FOR” THE ELECTION OF HOWARD PIEN AND H. THOMAS WATKINS.

 

Independence of the Board of Directors

 

As required under Nasdaq listing standards, a majority of the members of a listed company’s Board of Directors must qualify as “independent,” as affirmatively determined by the Board of Directors. Consistent with these regulations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, its senior management and its independent registered public accounting firm, the Board of Directors has determined that all of our directors are independent directors within the meaning of applicable Nasdaq listing standards, except for Dr. Mihael H. Polymeropoulos, our Chief Executive Officer.

 

Information Regarding the Board of Directors and its Committees

 

As required under Nasdaq listing standards, our independent directors meet in regularly scheduled executive sessions at which only independent directors are present. Dr. Argeris N. Karabelas, Chairman of the Board of Directors, presides over these executive sessions. Stockholders interested in communicating with the independent directors regarding their concerns or issues may address correspondence to a particular director, or to the independent directors generally, in care of Vanda Pharmaceuticals Inc. at 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850, Attn: Secretary. The Secretary has the authority to disregard any inappropriate communications or to take other appropriate actions with respect to any inappropriate communications. If deemed an appropriate communication, the Secretary will forward it, depending on the subject matter, to the chairman of a committee of the Board of Directors or a particular director, as appropriate.

 

The Board of Directors has an Audit Committee, a Compensation Committee and a Nominating/Corporate Governance Committee. The following table provides membership and meeting information for each of the Board committees during 2009:

 

 

 

 

Following the resignation of Mr. Ramsay as a member of the Board of Directors and Audit Committee as of January 7, 2010, Mr. Pien was appointed to serve as a member of the Audit Committee. Effective upon the resignation of Dr. Halak as a member of the Board of Directors, Audit Committee and Nominating/Corporate Governance Committee as of April 21, 2010, Vincent J. Milano was elected to the Board of Directors and appointed to serve as a member of the Audit Committee and Mr. Dugan was appointed to serve as the Chairman of the Nominating/Corporate Governance Committee.

 

Below is a description of each committee of the Board of Directors. The Board of Directors has determined that each member of the Audit, Compensation and Nominating/Corporate Governance Committees meets applicable rules and regulations regarding “independence” and that each such member is free of any relationship that would interfere with his individual exercise of independent judgment with regard to the Company.

Audit Committee

 

The Audit Committee of the Board of Directors oversees the quality and integrity of the Company’s financial statements and other financial information provided to the Company’s stockholders, the retention and performance of the Company’s independent accountants, the effectiveness of the Company’s internal controls and disclosure controls, and the Company’s compliance with ethics policies and SEC and related regulatory requirements. For these purposes, the Audit Committee, among other duties and powers, (1) approves audit fees for, and appoints and reviews the performance of, the Company’s independent accountants, (2) reviews reports prepared by management, and attested by the Company’s independent accountants with respect to the financial statements contained therein, assessing the adequacy and effectiveness of the Company’s internal controls and procedures, prior to the inclusion of such reports in the Company’s periodic filings as required under the rules of the SEC, (3) reviews the Company’s annual and quarterly reports, and associated consolidated financial statements, with management and the independent accountants prior to the first public release of the Company’s financial results for such year or quarter, (4) reviews with external counsel any legal matters that could have a significant impact on the Company’s financial statements, (5) establishes and maintains procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls and auditing matters and business conduct or ethics violations, and (6) reviews the Company’s compliance with its Code of Business Conduct and Ethics. Our Audit Committee charter can be found in the corporate governance section of our corporate website at www.vandapharma.com. Three directors comprised the Audit Committee in 2009: Mr. Dugan (the Chairman of the Audit Committee), Dr. Halak and Mr. Ramsay. The Audit Committee met eleven times during 2009. Following the resignation of Mr. Ramsay as a member of the Board of Directors and Audit Committee as of January 7, 2010, Mr. Pien was appointed to serve as a member of the Audit Committee. Effective upon the resignation of Dr. Halak as a member of the Board of Directors and Audit Committee as of April 21, 2010, Vincent J. Milano was elected to the Board of Directors and appointed to serve as a member of the Audit Committee.

 

The Board of Directors annually reviews the Nasdaq listing standards definition of independence for Audit Committee members and has determined that all members of our Audit Committee are independent (as independence is currently defined in applicable Nasdaq listing standards and Rule 10A-3 promulgated under the Exchange Act).

 

Compensation Committee

 

The Compensation Committee of the Board of Directors reviews and approves the design of, assesses the effectiveness of, and administers executive compensation programs, including the Incentive Plan. For these purposes, the Compensation Committee, among other duties and powers, (1) reviews and approves corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other Company executives, (2) reviews and approves the terms of offer letters, employment agreements, severance agreements, change-in-control agreements, and other material agreements between the Company and its executive officers, (3) approves material changes to the Company’s 401(k) plan and oversees its implementation, (4) reviews and approves the Compensation Discussion and Analysis included in this Proxy Statement, and (5) conducts reviews of executive officer succession planning. Our Compensation Committee charter can be found in the corporate governance section of our website at www.vandapharma.com. Three directors comprise the Compensation Committee of the Board of Directors: Dr. Karabelas (the Chairman of the Compensation Committee), Mr. Pien and Mr. Watkins. The Compensation Committee met twelve times during 2009.

 

The Board of Directors has determined that all members of the Compensation Committee are independent (as independence is currently defined in the Nasdaq listing standards). In addition each member of this committee is a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

 

Dr. Polymeropoulos, our Chief Executive Officer, does not participate in the determination of his own compensation or the compensation of directors. However, Dr. Polymeropoulos does make recommendations to the Compensation Committee regarding the amount and form of the compensation of the other executive officers and key employees, and he often participates in the Compensation Committee’s deliberations about their compensation.

No other executive officers participate in the determination of the amount or form of the compensation of executive officers or directors.

 

The Compensation Committee retained Towers Perrin, a well-known consulting firm specializing in executive compensation, as its independent compensation consultant in November 2006 and continued to use the firm’s services through 2009. The firm’s 2007 report was used as the basis for determining 2008 executive compensation. In light of the developments that occurred during 2008, most notably the receipt by the Company in July 2008 of a not-approvable letter issued by the U.S. Food and Drug Administration (the “FDA”) with respect to our New Drug Application (the “NDA”) for Fanapt^tm, the Compensation Committee decided in December 2008 not to implement any significant changes to executive compensation for 2009, pending the outcome of the FDA’s review of our complete response to its not-approvable letter (the “Complete Response”). In December 2009, Towers Perrin presented a new executive compensation report to the Compensation Committee. Towers Perrin provided the Compensation Committee with data about the compensation paid by our peer group of companies and other employers who compete with the Company for executives, updated the Compensation Committee on new developments in areas that fall within the Compensation Committee’s jurisdiction and was available to advise the Compensation Committee regarding all of its responsibilities. The consultant serves at the pleasure of the Compensation Committee rather than the Company, and the consultant’s fees are approved by the Compensation Committee.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the Compensation Committee is or has ever been an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our Board of Directors or our Compensation Committee.

 

Nominating/Corporate Governance Committee

 

Our Nominating/Corporate Governance Committee identifies, evaluates and recommends nominees to our Board of Directors and committees of our Board of Directors, conducts searches for appropriate directors, and evaluates the performance of our Board of Directors and of individual directors. Our Nominating/Corporate Governance Committee is also responsible for reviewing developments in corporate governance practices, evaluating the adequacy of our corporate governance practices and reporting and making recommendations to the Board of Directors concerning corporate governance matters. Our Nominating/Corporate Governance Committee charter can be found in the corporate governance section of our corporate website at www.vandapharma.com. Three directors comprised the Nominating/Corporate Governance Committee in 2009: Dr. Halak (the Chairman of the Nominating/Governance Committee), Dr. Karabelas and Mr. Watkins. The Nominating/Corporate Governance Committee met three times during 2009. Effective upon the resignation of Dr. Halak as a member of the Board of Directors and Nominating/Corporate Governance Committee as of April 21, 2010, Mr. Dugan was appointed to serve as the Chairman of the Nominating/Corporate Governance Committee.

 

The Board of Directors has determined that all members of the Nominating/Corporate Governance Committee are independent (as independence is currently defined in the Nasdaq listing standards).

 

The Nominating/Corporate Governance Committee believes that candidates for director should have certain minimum qualifications, including being able to read and understand basic financial statements and having a general understanding of the Company’s industry. The Nominating/Corporate Governance Committee also considers other factors it deems appropriate, including, but not limited to:

 

 

 

In conducting this assessment, the committee considers diversity, age, skills, and such other factors as it deems appropriate given the then-current needs of the Board of Directors and the Company, to maintain a balance of knowledge, experience and capability. While diversity and variety of experiences and viewpoints represented on the Board of Directors should always be considered, the Nominating/Corporate Governance Committee believes that a director nominee should not be chosen nor excluded solely or largely because of race, color, gender, national origin or sexual orientation or identity.

 

In the case of incumbent directors whose terms of office are set to expire, the Nominating/Corporate Governance Committee reviews such directors’ overall service to the Company during their term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair such directors’ independence.

 

When there is a vacancy on the Board of Directors, the Nominating/Corporate Governance committee uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems it appropriate, a professional search firm. The Nominating/Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board of Directors. The Nominating/Corporate Governance Committee meets to discuss and consider such candidates’ qualifications and then selects a nominee for recommendation to the Board of Directors by majority vote.

 

The Nominating/Corporate Governance Committee will consider director candidates recommended by stockholders and evaluate them using the same criteria as candidates identified by the Board of Directors or the Nominating/Corporate Governance Committee for consideration. If a stockholder of the Company wishes to recommend a director candidate for consideration by the Nominating/Corporate Governance Committee, the stockholder recommendation should be delivered to the Secretary of the Company at the principal executive offices of the Company pursuant to the terms and conditions of our Bylaws. The stockholder recommendation must, among other things, set forth

 

 

 

In addition, our Bylaws require that the stockholder recommendation shall set forth as to each person whom the stockholder proposes to nominate for election or reelection as a director (1) the name, age, business address and residence address of the person; (2) the principal occupation or employment of the person; (3) the class, series and number of shares of capital stock of the Company that are owned beneficially and of record by the person; (4) a statement as to the person’s citizenship; (5) the completed and signed representation and agreement described above; (6) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Section 14 of the Exchange Act; (7) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (8) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person with respect to stock of the Company and whether any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock) has been made by or on behalf of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk of stock price changes for, such person or to increase or decrease the voting power or pecuniary or economic interest of such person with respect to stock of the Company.

 

As described above, the Nominating/Corporate Governance Committee has recommended the members of our Board of Directors for their directorships. In evaluating such directors, our Nominating/Corporate Governance Committee has reviewed the experience, qualifications, attributes and skills identified in the biographical information contained below under “Executive Officers and Directors”. The Nominating/Corporate Governance Committee believes that the members of our Board of Directors offer insightful and creative views and solutions with respect to issues facing the Company. In addition, the Nominating/Corporate Governance Committee also believes that the members of our Board of Directors function well together as a group.

 

The Nominating/Corporate Governance Committee believes that the above-mentioned attributes and qualifications, along with the leadership skills and other experiences of the members of the Board of Directors described in further detail below under the section entitled “Executive Officers and Directors”, provide the Company with the perspectives and judgment necessary to guide the Company’s strategies and monitor their execution.

Separation of CEO and Chairman Roles

 

Our Board of Directors separates the positions of Chairman of the Board and Chief Executive Officer. Separating these positions allows our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman of the Board to lead the Board of Directors in its fundamental role of providing advice to and independent oversight of management. The Board of Directors recognizes the time, effort, and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman, particularly as the Board of Directors’ oversight responsibilities continue to grow. We believe that having separate positions and having an independent outside director serve as Chairman is the appropriate leadership structure for the Company at this time.

 

Meetings of the Board of Directors

 

The Board of Directors met twenty-six times during 2009. Each director attended 75% or more of the aggregate of the meetings of the Board of Directors and of the committees on which he served, held during the period for which he was a director or committee member.

 

Stockholder Communications with the Board of Directors

 

Stockholders may communicate with the Board of Directors by sending a letter to the Secretary, Vanda Pharmaceuticals Inc., 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850. Each such communication should set forth (1) the name and address of such stockholder, as they appear on the Company’s books and, if the shares of the Company’s stock are held by a nominee, the name and address of the beneficial owner of such shares, and (2) the number of shares of the Company’s stock that are owned of record by such record holder and beneficially by such beneficial owner. The Secretary will review all communications from stockholders, but may, in her sole discretion, disregard any communication that she believes is not related to the duties and responsibilities of the Board of Directors. If deemed an appropriate communication, the Secretary will submit a stockholder communication to a chairman of a committee of the Board of Directors, or a particular director, as appropriate.

 

Code of Business Conduct and Ethics

 

The Company has adopted the Vanda Pharmaceuticals Inc. Code of Business Conduct and Ethics that applies to all directors, officers and employees. The Company has also adopted an additional Code of Ethics for its Chief Executive Officer and Senior Financial Officers. Both of these codes are available at our website at www.vandapharma.com. If the Company makes any substantive amendments to either of these codes or grants any waiver from a provision of either code to any applicable executive officer or director, the Company will promptly disclose the nature of the amendment or waiver on its website.

 

Risk Oversight

 

Our Board of Directors oversees the management of risks inherent in the operation of our business and the implementation of our business strategies. Our Board of Directors performs this oversight role by using several different levels of review. In connection with its reviews of the operations and corporate functions of our Company, our Board of Directors provides oversight to address the primary risks associated with those operations and corporate functions. In addition, our Board of Directors reviews the risks associated with the Company’s business strategies periodically throughout the year as part of its consideration of undertaking any such business strategies.

 

Each committee of our Board of Directors also oversees the management of the Company’s risk that falls within the committee’s areas of responsibility. In performing this function, each committee has full access to management, as well as the ability to engage advisors. Our Acting Chief Financial Officer reports to the Audit Committee and is responsible for identifying, evaluating and implementing risk management controls and methodologies to address any identified risks. In connection with its risk management role, our Audit Committee meets privately with representatives from our independent registered public accounting firm and our Acting Chief Financial Officer.

The oversight of risk within the Company is an evolving process requiring the Company to continually look for opportunities to further embed systematic enterprise risk management into ongoing business processes within the Company. The Board of Directors encourages management to continue to drive this evolution.

 

As part of its oversight of the Company’s executive compensation program, the Compensation Committee considers the impact of the Company’s executive compensation program, and the incentives created by the compensation awards that it administers, on the Company’s risk profile. In addition, the Compensation Committee reviews all of its compensation policies and procedures, including the incentives that they create and factors that may reduce the likelihood of excessive risk taking, to determine whether they present a significant risk to the Company. The Compensation Committee determined that, for all employees, the Company’s compensation programs do not encourage excessive risk and instead encourage behaviors that support sustainable value creation.

 

Compensation of Directors

 

On December 19, 2005, our Board of Directors adopted a compensation program for outside directors. Pursuant to this program, each member of our Board of Directors who is not our employee receives a $25,000 annual fee as well as $2,500 for each board meeting attended in person ($1,250 for meetings attended by telephone). The Chairman of the Board of Directors receives an additional annual fee of $10,000, and the chairman of each committee of the Board of Directors receives an additional annual fee of $2,000. Each director receives $1,000 for each meeting of any committee of the Board of Directors attended in person or by telephone other than committee meetings that are held concurrently with a board meeting.

 

Under the director compensation program adopted on December 19, 2005, each member of our Board of Directors who is not our employee and who is elected after December 19, 2005 initially receives an option to purchase 35,000 shares of our Common Stock upon election, and each member of our Board of Directors who is not our employee will also receive, upon the conclusion of each annual meeting of our stockholders, an option to purchase 15,000 shares of our Common Stock. The stock option granted upon election vests and becomes exercisable in equal monthly installments over a period of four years from the date of the grant, except that in the event of a change in control or a director’s death or disability, the option will accelerate and become immediately exercisable. Each annual stock option vests and becomes exercisable in equal monthly installments over a period of one year from the date of grant, except that in the event of a change in control or a director’s death or disability, the option will accelerate and become immediately exercisable. All of these options have an exercise price equal to the fair market value of our Common Stock on the date of the grant.

 

In November 2007, Towers Perrin reviewed our director compensation program and did not recommend any changes to the program. The Board has not made any changes to our director compensation program since its adoption.

 

2009 Director Compensation

 

The following table shows the compensation earned by each of our non-officer directors for the year ended December 31, 2009:

 

 

 

 

 

The following table describes the options that we granted to our non-employee directors and that were outstanding as of December 31, 2009:

 

 

 

 

APPROVAL OF THE MATERIAL TERMS OF THE VANDA PHARMACEUTICALS INC. 2006

EQUITY INCENTIVE PLAN

 

We are asking stockholders to approve the material terms of the Vanda Pharmaceuticals Inc. 2006 Equity Incentive Plan, as amended (the “Incentive Plan”), as adopted in connection with our initial public offering in 2006 and as amended in certain respects since then, solely to satisfy a requirement of Federal tax law that enhances our ability to deduct compensation deemed paid to certain of our executive officers in connection with awards granted under the Incentive Plan.

 

Under the Federal tax laws, a publicly-held company such as Vanda will not be allowed a federal income tax deduction for compensation paid to certain executive officers to the extent that the compensation exceeds $1 million per officer in any year. An exception to this loss deduction rule is available for compensation that qualifies as “performance-based compensation” under these tax laws. Among the conditions imposed on performance-based compensation is the requirement that such compensation be paid under a plan of which certain of its terms have received approval by the public company’s stockholders. To continue our ability to grant equity awards that qualify as performance-based compensation and preserve our ability to deduct compensation amounts with respect to certain awards granted under the Incentive Plan to our executive officers, we are asking our stockholders to approve the material terms of the Incentive Plan. Our stockholders previously approved the Incentive Plan in March 2006. Since that date, our Board has approved an amendment to the Incentive Plan that adds two additional categories of performance goals that may be applied to performance-based awards granted under the Incentive Plan. The complete list of all such performance goals is set forth below under “Performance-Based Compensation.” See also “Section 162(m) Considerations” below for additional details about these Federal tax laws.

 

Approval of this Proposal 2 will constitute approval of this revised list of performance goals, the annual share limitations under the Incentive Plan for purposes of Section 162(m) under the Code and the other material terms of the Incentive Plan.

 

If our stockholders do not approve this Proposal 2, we will not have obtained the approval necessary to fully deduct compensation amounts that may be paid in connection with certain plan awards granted under the Incentive Plan to certain of our executive officers.

 

We established the Incentive Plan in April 2006 to provide a means whereby the Company could operate an executive compensation program following our initial public offering. This enables us to provide eligible individuals with an opportunity to acquire shares of our Common Stock and to benefit from increases in value of our Common Stock. We believe that equity awards under the Incentive Plan play an important role in our efforts to attract, employ and retain employees, directors and consultants.

 

The materials terms and provisions of the Incentive Plan are summarized below. The summary, however, is not intended to be a complete description of all the terms of the Incentive Plan. This summary is qualified in its entirety by reference to the complete text of the Incentive Plan. A copy of the Incentive Plan has been filed with our Proxy Statement, as filed with the SEC, and is available through the SEC website at www.sec.gov. A copy of the Incentive Plan will also be provided to any stockholder upon written request to: Corporate Secretary at 9605 Medical Center Drive, Suite 300, Rockville, Maryland 20850. To the extent there is a conflict between this summary and the Incentive Plan, the terms of the Incentive Plan will govern.

 

Share Reserve.  We have reserved 5,619,924 shares of our Common Stock for issuance under the Incentive Plan. As of April 16, 2010, 3,195,497 shares were subject to outstanding options having a weighted average exercise price equal to $16.05 per share, 248,250 shares were subject to outstanding restricted stock units (“RSUs”), 830,971 shares have been issued upon exercise or settlement of awards granted under the Incentive Plan, and 1,345,206 shares remain available for grant. These share numbers, as well as the annual limits on the number of shares that may be granted subject to each type of plan award, the number of shares subject to outstanding awards and the exercise price that applies to outstanding awards will be proportionately adjusted in the event we experience a stock split, stock dividend or certain other types of corporate transactions. In addition, the Compensation Committee has the authority in the event of certain extraordinary dividends, spin-offs and other corporate events to adjust one or more of these features as it determines appropriate in its discretion.

On January 1 of each year over the term of the Incentive Plan, the number of shares reserved under the Incentive Plan automatically increases by 4% of the total number of shares of Common Stock that are outstanding at that time, or, if less, by 1,500,000 shares (or such lesser number as may be approved by the Company’s Board of Directors). As of January 1, 2010, the number of shares of Common Stock that may be issued under the Incentive Plan was automatically increased by 1,102,535 shares, representing 4% of the total number of shares of Common Stock outstanding on January 1, 2010, increasing the total number of shares of Common Stock available for issuance under the Incentive Plan to 5,619,924 shares. If a stock award granted under the Incentive Plan expires or otherwise terminates without being exercised in full, the shares of our Common Stock not acquired pursuant to the stock award again become available for subsequent issuance under the Incentive Plan. In addition, shares not delivered under an award as a result of a net exercise provision or otherwise and shares repurchased by the Company upon forfeiture of the shares, shall again become available for issuance under the Incentive Plan.

 

Administration.  The Compensation Committee of our Board of Directors administers the Incentive Plan. The Compensation Committee has complete discretion to make all decisions relating to the interpretation and operation of the Incentive Plan, including the discretion to determine who will receive an award, what type of award it will be, how many shares will be covered by the award, what the vesting requirements will be, if any, and what the other features and conditions of each award will be. The Compensation Committee has the ability to reprice outstanding options and stock appreciation rights (“SARs”) without first obtaining stockholder approval, and modify outstanding awards with the consent of any adversely affected option holder.

 

Eligibility.  The following groups of individuals are eligible to participate in the Incentive Plan:

 

 

The Compensation Committee determines which eligible persons will be granted awards under the Incentive Plan.

 

Types of Awards.  The Incentive Plan provides for the following types of awards:

 

 

Stock Options.  Both incentive stock options and nonstatutory stock options are available for grant under the Incentive Plan. An optionee who exercises an incentive stock option may qualify for favorable tax treatment under section 422 of the Code. On the other hand, nonstatutory stock options do not qualify for such favorable tax treatment. Since our initial public offering in 2006, only nonstatutory stock options have been granted under the Incentive Plan. The exercise price of options granted under the Incentive Plan may not be less than 100% of the fair market value of our Common Stock on the grant date. Optionees may pay the exercise price by using:

 

 

Options granted under the Incentive Plan are subject to the terms and conditions of option agreements approved by the Compensation Committee. They vest at the time or times, and upon such conditions, as determined by the Compensation Committee. In most cases, our options, other than annual grants to our non-employee directors, vest over the four-year period following the date of grant, subject to continued service by the optionee during that period. Options generally expire 10 years after they are granted, except that they generally expire earlier

if the optionee’s service terminates earlier. The Incentive Plan provides that no participant may receive options covering more than 500,000 shares in the same year, except that a newly hired employee may receive options covering up to 1,000,000 shares in the first year of employment.

 

Stock Appreciation Rights.  A SAR allows a recipient to benefit from increases in the value of our Common Stock, but does not provide any ownership interest in our Common Stock. SARs are granted pursuant to SAR agreements adopted by the Compensation Committee. The Compensation Committee determines the strike price of each SAR, which can not be less than 100% of the fair market value of our Common Stock on the date of grant. Upon exercise of a SAR, we will pay the participant an amount equal to the product of (a) the excess of the per share fair market value of our Common Stock on the date of exercise over the strike price, multiplied by (b) the number of shares of our Common Stock with respect to which the SAR is exercised. This amount may be paid in cash, shares of our Common Stock, or any combination thereof. Each SAR may or may not be subject to vesting, and vesting, if any, shall occur upon satisfaction of the conditions specified by the Compensation Committee. SARs generally expire 10 years after they are granted, except that they generally expire earlier if the recipient’s service terminates earlier. SARs vest at the time or times determined by the Compensation Committee. To date, the Company has not granted SARs under the Incentive Plan.

 

The Incentive Plan provides that no participant may receive SARs covering more than 500,000 shares in the same year, except that a newly hired employee may receive SARs covering up to 1,000,000 shares in the first year of employment. The Incentive Plan also provides for automatic annual option grants to members of our Board of Directors who are not our employees. See “Corporate Governance — Compensation of Directors.”

 

Restricted Stock.  Restricted stock awards are granted pursuant to restricted stock agreements adopted by the Compensation Committee which include provisions regarding the number of shares the participant may be issued, the purchase price, if any, and the restrictions to which the shares will be subject. Awards of restricted stock may be granted in consideration for (a) cash, (b) property, (c) past or future services rendered to us or our affiliates, or (d) any other form of legal consideration approved by the Compensation Committee. The issued shares may either be immediately vested upon issuance or subject to a vesting schedule tied to length of service or attainment of performance goals. Upon termination of the participant’s service, the shares issued pursuant to a restricted stock award may be subject to forfeiture to, or repurchase by, the Company. The Incentive Plan provides that no participant may receive more than 500,000 restricted shares that are subject to performance-based vesting conditions in a single fiscal year of the Company.

 

RSUs.  RSU awards represent the right to receive the value of shares of our Common Stock at a specified date in the future. RSU awards are granted pursuant to RSU agreements approved by the Compensation Committee. Upon settlement, the shares, their cash equivalent, or any combination thereof are delivered to the recipient. No cash consideration is required in connection with a RSU award. Each award of RSUs may or may not be subject to vesting tied to length of service or attainment of performance goals and may be settled immediately upon vesting or on a deferred basis. In no event shall more than 500,000 RSUs that are subject to performance-based vesting conditions be granted to any participant in a single fiscal year of the Company. Dividend equivalents may be credited in respect of shares covered by a RSU award.

 

Performance-Based Compensation.  The Incentive Plan is designed to allow the Compensation Committee to issue restricted stock and RSUs that qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, if certain conditions are met. Accordingly, the Compensation Committee may structure restricted stock and RSUs so that they are only granted or vest upon the attainment of certain pre-established objective performance goals. The performance goals that may be used by the Compensation Committee for awards of restricted stock or RSUs consist of: (a) operating profits (including EBITDA); (b) net profits; (c) earnings per share; (d) profit returns and margins; (e) revenues; (f) stockholder return and/or value; (g) stock price; (h) working capital; (i) regulatory achievements (including submitting or filing applications or other documents with regulatory authorities or receiving approval of any such applications or other documents and passing pre-approval inspections (whether of the Company or the Company’s third-party manufacturer) and validation of manufacturing processes (whether of the Company or the Company’s third-party manufacturer)); and (j) clinical achievements (including initiating clinical studies, initiating enrollment, completing enrollment or enrolling particular numbers of subjects in clinical studies, completing phases of a clinical study (including the

treatment phase), or announcing or presenting preliminary or final data from clinical studies in each case, whether on particular timelines or generally). The Board recently amended the Incentive Plan to add, subject to approval of this Proposal 2, the last two goals set forth above. Performance goals may be measured solely on a corporate, subsidiary or business unit basis, or a combination thereof.

 

Performance criteria may reflect absolute entity performance or a relative comparison of entity performance to the performance of a peer group of entities or other external measure of the selected performance criteria. Profit, earnings and revenues used for any performance goal may exclude: (a) gains or losses on operating asset sales or dispositions; (b) asset write-downs; (c) litigation or claim judgments or settlements; (d) accruals for historic environmental obligations; (e) effect of changes in tax law or rate on deferred tax liabilities; (f) accruals for reorganization and restructuring programs; (g) uninsured catastrophic property losses; (h) the cumulative effect of changes in accounting principles; and (i) any extraordinary and unusual items in Accounting Standards Codification No. 225-20 and/or in management’s discussion and analysis of financial performance appearing in the Company’s annual report to stockholders for the applicable year.

 

Corporate Transactions.  In the event that the Company is a party to a merger or reorganization, outstanding awards will be subject to the agreement of such transaction. Such agreements will provide for one or more of the following (a) continuation of the outstanding awards by the Company, if the Company is a surviving corporation; (b) the assumption of the outstanding awards by the surviving corporation; (c) the substitution by the surviving corporation of its own awards for the outstanding awards; (d) full vesting and exercisability followed by cancellation of the outstanding awards; or (e) settlement of the full value of the outstanding awards in cash, cash equivalents, or securities of the surviving corporation followed by cancellation of such awards.

 

Amendments or Termination.  Our Board of Directors may amend or terminate the Incentive Plan at any time. If our Board of Directors were to amend the Incentive Plan, it would not need to ask for stockholder approval of the amendment unless applicable law or Nasdaq rules require such approval. The Incentive Plan will automatically terminate on April 12, 2016.

 

Federal Income Tax Consequences of Awards Granted under the Incentive Plan

 

The following is a general summary as of the date of this Proxy Statement of the U.S. Federal income tax consequences to participants and the Company with respect to stock awards granted under the Incentive Plan. This summary does not address state, local or foreign tax treatment, which may vary from the U.S. Federal income tax treatment. In any event, each participant should consult his or her own tax advisor as to the tax consequences of particular transactions under the Incentive Plan.

 

Incentive Stock Options.  No taxable income is recognized by an optionee upon the grant of an incentive stock option as described in Section 422(b) of the Code (ISO), and no taxable income is recognized at the time an ISO is exercised unless the optionee is subject to the alternative minimum tax. The excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares is includable in alternative minimum taxable income.

 

If the optionee holds the purchased shares for more than one year after the date the ISO was exercised and more than two years after the ISO was granted (the “required ISO holding periods”), then the optionee will generally recognize long-term capital gain or loss upon disposition of such shares. The gain or loss will equal the difference between the amount realized upon the disposition of the shares and the exercise price paid for such shares. If the optionee disposes of the purchased shares before satisfying either of the required ISO holding periods, then the optionee will recognize ordinary income equal to the fair market value of the shares on the date the ISO was exercised over the exercise price paid for the shares (or, if less, the amount realized on a sale of such shares). Any additional gain will be a capital gain and will be treated as short-term or long-term capital gain depending on how long the shares were held by the optionee.

 

Nonstatutory Stock Options.  No taxable income is recognized by an optionee upon the grant of a stock option not described in Sections 422 or 423 of the Code (NSO). The optionee will generally recognize ordinary income in the year in which the option is exercised equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares. If the optionee is an employee or former employee, the

optionee will be required to satisfy the tax withholding requirements applicable to such income. Upon resale of the purchased shares, any subsequent appreciation or depreciation in the value of the shares will be treated as short-term or long-term capital gain depending on how long the shares were held by the optionee.

 

Restricted Stock.  A participant who receives an award of restricted stock does not generally recognize taxable income at the time of the award. Instead, the participant recognizes ordinary income when the shares vest, subject to withholding if the participant is an employee or former employee. The amount of taxable income is equal to the fair market value of the shares on the vesting date(s) less the cash, if any, paid for the shares. A participant may make a one-time election to recognize income at the time the participant receives restricted stock in an amount equal to the fair market value of the restricted stock (less any cash paid for the shares) on the date of the award by making an election under Section 83(b) of the Code.

 

RSUs.  In general, no taxable income results upon the grant of an RSU. The recipient will generally recognize ordinary income (subject to withholding if the recipient is an employee or former employee) equal to the fair market value of the shares that are delivered to the recipient upon settlement of the RSU award.

 

Stock Appreciation Rights.  In general, no taxable income results upon the grant of a SAR. A participant will generally recognize ordinary income in the year of exercise equal to the value of the shares or other consideration received. In the case of a current or former employee, this amount is subject to withholding.

 

Section 409A.  The foregoing description assumes that Section 409A of the Code does not apply to an award. In general, options and SARs are exempt from Section 409A if the exercise price per share is at least equal to the fair market value per share of our Common Stock at the time the option or SAR was granted. RSUs are subject to Section 409A unless they are settled within two and one half months after the end of the later of (i) the end of our fiscal year in which vesting occurs or (ii) the end of the calendar year in which vesting occurs. Restricted stock awards are not generally subject to Section 409A. If an award is subject to Section 409A and the provisions for the exercise or settlement of that award do not comply with Section 409A, then the participant would be required to recognize ordinary income whenever a portion of the award vested (regardless of whether it had been exercised or settled). This amount would also be subject to a 20% federal tax in addition to the federal income tax at the participant’s usual marginal rate for ordinary income.

 

Tax Treatment of Vanda.  The Company will generally be entitled to an income tax deduction at the time and to the extent a participant recognizes ordinary income as a result of an award granted under the Incentive Plan. As described herein, Section 162(m) of the Code may limit the deductibility of awards granted under the Incentive Plan.

 

Section 162(m) Considerations.  Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to a company’s chief executive officer and three other highest compensated executive officers (other than the chief financial officer under current rules). Stock options and SARs are exempt from this limitation if (a) the exercise price is at least 100% of the fair market value of the underlying stock on the date the option or SAR is granted and (b) the plan under which the options are granted is approved by the stockholders and contains a limit on the number of options or SARs granted to any one individual under the plan during a specified period. Various other rules apply with regard to compensation committee independence and the procedures that must be followed by the committee in connection with performance-based awards that may be fully deducted under Section 162(m). Other stock awards, such as restricted stock and RSUs, must vest only upon the achievement of objective performance goals established in writing by the Compensation Committee while the outcome is substantially uncertain, the material terms of which have been approved by the stockholders, in order to qualify as performance-based compensation and be exempt from this limitation, as well as be granted under a plan and by a compensation committee that complies with these rules. The Incentive Plan includes certain annual limits, as described above, on the number of shares that may be granted to an individual under options, SARs, restricted stock, and RSU awards in order to comply with the Section 162(m) requirements. As described above, the Incentive Plan permits the grant of stock performance awards based on several different performance criteria. The approval sought by this Proposal 2 is to continue qualification of the Incentive Plan as a plan under which Section 162(m)-qualified performance-based compensation awards may be granted. The Compensation Committee reserves the right to grant awards under the Incentive Plan that do not qualify as performance-based compensation.

New Plan Benefits and Option Grant Table

 

Except as described above under “Corporate Governance — Compensation of Directors,” future awards to our directors, executive officers, employees and other eligible participants under the Incentive Plan are discretionary and therefore are not determinable at this time. Further, since automatic awards to our non-employee directors depend on the non-employee director’s continued service and the Board of Director’s discretion to vary the type and terms of those awards, it is not possible to determine the exact number of shares that will be subject to such awards. However, on the date of the annual meeting, each person then continuing to serve as a non-employee director will receive an option to purchase 15,000 shares of our Common Stock with an exercise price equal to the fair market value of our Common Stock on that date.

 

The table below shows the number of shares of Common Stock for which options, restricted stock and RSUs have been granted under the Incentive Plan from its inception through April 16, 2010, as to each of the executive officers named in the Summary Compensation Table contained in this Proxy Statement in the section entitled “Executive Compensation”, each nominee for election as a director and the various indicated groups. To date, only stock options, restricted stock and RSUs have been granted under the Incentive Plan.

 

 

 

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides certain information regarding our equity compensation plans in effect as of April 16, 2010:

 

Equity Compensation Plan Information

 

 

 

 

The Board Of Directors Recommends
A “FOR” Vote In Favor Of Proposal 2.

 

The Audit Committee of our Board of Directors has selected PricewaterhouseCoopers LLP, an independent registered public accounting firm, as our independent auditors for the year ending December 31, 2010, and has further directed that management submit the selection of independent auditors for ratification by the stockholders at the Annual Meeting. PricewaterhouseCoopers LLP has audited our financial statements and has attested to the effectiveness of our internal control over financial reporting since we commenced operations in March 2003. Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

Neither our Bylaws nor other governing documents or laws require stockholder ratification of the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm. However, the Audit Committee of the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee of the Board of Directors will reconsider whether or not to retain PricewaterhouseCoopers LLP. Even if the selection is ratified, the Audit Committee of our Board of Directors in its discretion may direct the appointment of different independent auditors at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.

 

In order for Proposal 3 to pass, holders of a majority of all those outstanding shares present in person, or represented by proxy, and cast either affirmatively or negatively at the Annual Meeting must vote “FOR” Proposal 3. Abstentions and broker non-votes will be counted towards a quorum, however, they will not be counted either “FOR” or “AGAINST” the proposal and will have no effect on the proposal. Because the ratification of the appointment of the independent registered public accounting firm is a matter on which a broker or other nominee is generally empowered to vote, no broker non-votes are expected to exist in connection with this matter.

 

Independent Registered Public Accounting Firm’s Fees

 

The following table represents aggregate fees billed to the Company for the years ended December 31, 2009, and December 31, 2008, by PricewaterhouseCoopers LLP, our principal accountant.

 

 

 

 

All fees described above were pre-approved by the Audit Committee in accordance with the requirements of Regulation S-X under the Exchange Act.

Pre-Approval Policies and Procedures

 

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services rendered by PricewaterhouseCoopers LLP, our independent registered public accounting firm. The Audit Committee can pre-approve specified services in defined categories of audit services, audit-related services and tax services up to specified amounts, as part of the Audit Committee’s approval of the scope of the engagement of PricewaterhouseCoopers LLP or on an individual case-by-case basis before PricewaterhouseCoopers LLP is engaged to provide a service. The Audit Committee has determined that the rendering of tax-related services by PricewaterhouseCoopers LLP is compatible with maintaining the principal accountant’s independence for audit purposes. PricewaterhouseCoopers LLP has not been engaged to perform any non-audit services other than tax-related services.

 

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS

YOU VOTE THE PROXY CARD “FOR” PROPOSAL 3

 

The Audit Committee of the Board of Directors consisted in 2009 of the three non-employee directors named below. The Board of Directors annually reviews the Nasdaq listing standards’ definition of independence for Audit Committee members (including the requirements of Exchange Act Rule 10A-3) and has determined that each member of the Audit Committee meets that standard. Mr. Dugan serves as an audit committee financial expert in accordance with applicable SEC regulations.

 

The principal purpose of the Audit Committee is to assist the Board of Directors in its general oversight of our accounting and financial reporting processes and audits of our consolidated financial statements. The Audit Committee is responsible for selecting and engaging our independent auditor and approving the audit and non-audit services to be provided by the independent auditor. The Audit Committee’s function is more fully described in its charter, which the Board of Directors has adopted and which the Audit Committee reviews and approves on an annual basis.

 

Our management is responsible for preparing our consolidated financial statements and our financial reporting process. PricewaterhouseCoopers LLP, our independent registered public accounting firm, is responsible for performing an independent integrated audit of our consolidated financial statements and expressing an opinion on the conformity of those consolidated financial statements with accounting principles generally accepted in the United States and attesting to the effectiveness of our internal control over financial reporting.

 

The Audit Committee has reviewed and discussed with our management the audited consolidated financial statements of the Company and “Management’s Report on Internal Control over Financial Reporting” in Item 9A included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “10-K”).

 

The Audit Committee has also reviewed and discussed with PricewaterhouseCoopers LLP the audited consolidated financial statements in the 10-K, including the report issued by PricewaterhouseCoopers LLP on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In addition, the Audit Committee discussed with PricewaterhouseCoopers LLP those matters required to be discussed by Statement on Auditing Standards No. 61, as amended. Additionally, PricewaterhouseCoopers LLP provided to the Audit Committee the written disclosures and the letter required by PCAOB rule 3526 “Communication with Audit Committees concerning independence” as adopted by the Public Company Accounting Oversight Board. The Audit Committee also discussed with PricewaterhouseCoopers LLP its independence from the Company.

 

Based upon the review and discussions described above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for year ended December 31, 2009 for filing with the United States Securities and Exchange Commission. We have selected PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the year ended December 31, 2010, and have approved submitting the selection of the independent registered public accounting firm for ratification by the stockholders.

 

Submitted by the following members of the Audit Committee:

 

Richard W. Dugan, Chairman
Brian K. Halak, Ph.D.²
Howard H. Pien

 

 

¹ The material in this report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of Vanda under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

² Dr. Halak resigned as a member of the Board of Directors and the Audit Committee as of April 21, 2010. Effective upon Dr. Halak’s resignation, Vincent J. Milano was elected to the Board of Directors and appointed to serve as a member of the Audit Committee.

 

The names of the executive officers and directors of Vanda and certain information about each of them as of April 16, 2010, are set forth below:

 

Mihael H. Polymeropoulos, M.D., age 50, has served as President, Chief Executive Officer and a Director of Vanda since May of 2003. Prior to joining Vanda, Dr. Polymeropoulos was Vice President and Head of the Pharmacogenetics Department at Novartis AG from 1998 to 2003. Prior to his tenure at Novartis, he served as Chief of the Gene Mapping Section, Laboratory of Genetic Disease Research, National Human Genome Research Institute, from 1992 to 1998. Dr. Polymeropoulos is the co-founder of the Integrated Molecular Analysis of Genome Expression (IMAGE) Consortium. Dr. Polymeropoulos holds a degree in Medicine from the University of Patras. We believe that Dr. Polymeropoulos’ qualifications to sit on our Board of Directors include his executive experience at Novartis, his expertise in the fields of psychology and pharmacogenetics, his extensive knowledge of central nervous system disorders and his long history with the Company.

 

John J. Feeney III, M.D., age 55, has served as Vanda’s Senior Medical Officer since November of 2007 and served as Vanda’s Acting Chief Medical Officer since January of 2009. In March of 2010, Dr. Feeney was appointed as our Chief Medical Officer. Prior to joining Vanda, Dr. Feeney was the Acting Deputy Director in the Division of Neurology Products at the FDA. During his 16 years at the FDA, Dr. Feeney served in various roles, including Medical Officer in the Division of Neuropharmacological Drug Products and Neurology Team Leader. Prior to joining the FDA, Dr. Feeney practiced general neurology in both military and civilian settings. Dr. Feeney holds a B.S. in biology from the University of California at San Diego and an M.D. from Georgetown Medical School. Dr. Feeney is board certified in neurology.

 

Stephanie R. Irish, age 39, has served as Vanda’s Acting Chief Financial Officer and Treasurer since January of 2009 and served as Vanda’s Controller since February of 2005. In March of 2010, Ms. Irish was appointed as our Secretary. Prior to joining Vanda, Ms. Irish was Controller at Avalon Pharmaceuticals, Inc. from 2000 to February 2005. Ms. Irish was the Chicago Cluster Controller for Marriott International, Senior Living Services Division from 1999 to 2000. From 1995 to 1999, Ms. Irish held several accounting positions at The Institute for Genomic Research. From 1993 to 1995, Ms. Irish was an auditor at Beers & Cutler, Certified Public Accountants. Ms. Irish holds a B.S. in accounting from the University of Maryland and is licensed in Maryland as a certified public accountant.

 

Argeris N. Karabelas, Ph.D., age 57, has served as a Director and Chairman of the Board since 2003, when he co-founded Vanda with Dr. Polymeropoulos. Dr. Karabelas has served as a Partner of Care Capital, LLC since 2001. Prior to his tenure at Care Capital, Dr. Karabelas was the Founder and Chairman of the Novartis BioVenture Fund, from July 2000 to December 2001. From 1998 to 2000, he served as Head of Healthcare and CEO of Worldwide Pharmaceuticals for Novartis. Prior to joining Novartis, Dr. Karabelas was Executive Vice President of SmithKline Beecham (now part of GlaxoSmithKline) responsible for U.S. operations, European operations, Regulatory, and Strategic Marketing, from 1981 to 1998. In addition to the public directorships held by Dr. Karabelas as set forth below, he is a director of Inotek Pharmaceuticals Corporation and Chairman of Cyreniac, Inc. Dr. Karabelas holds a Ph.D. in Pharmacokinetics from the Massachusetts College of Pharmacy. We believe that Dr. Karabelas’ qualifications to sit on our Board of Directors include his experience as a venture capitalist investing in and advising pharmaceutical companies, his executive experience in the pharmaceutical business, his knowledge of regulatory matters, his long history with the Company and his experience on other public company boards.

 

Public directorships held by Dr. Karabelas within the past five years: Skye Pharma, plc, Human Genome Sciences, Inc. (Chairman), NitroMed, Inc. and Minster, plc.

 

Richard W. Dugan, age 68, has served as a Director of Vanda since December of 2005. From 1976 to September 2002, Mr. Dugan served as a Partner with Ernst & Young, LLP, where he served in a variety of managing and senior partner positions, including Mid-Atlantic Area Senior Partner from 2001 to 2002, Mid-Atlantic Area Managing Partner from 1989 to 2001 and Pittsburgh Office Managing Partner from 1979 to 1989. Mr. Dugan retired from Ernst & Young, LLP in September 2002. Mr. Dugan holds a B.S.B.A. from Pennsylvania State University. We believe that Mr. Dugan’s qualifications to sit on our Board of Directors include his more than 25 years as a Partner

with Ernst & Young, LLP, his long history with the Company, his status as a financial expert under The Sarbanes-Oxley Act of 2002 and his experience on other public company boards.

 

Public directorships held by Mr. Dugan within the past five years: Middlebrook Pharmaceuticals, Inc. (formerly known as Advancis Pharmaceutical Corporation) and Critical Therapeutics, Inc.

 

Vincent J. Milano, age 46, has served as a Director of Vanda since April 2010. Mr. Milano has served as President and Chief Executive Officer of ViroPharma Incorporated since March 2008. Mr. Milano served as Chief Operating Officer from January 2006 to March 2008, and as Vice President, Chief Financial Officer of ViroPharma from November 1997 to March 2008. Mr. Milano also previously served as Vice President, Finance & Administration, Treasurer, and as Executive Director, Finance & Administration of ViroPharma. Prior to joining ViroPharma, Mr. Milano was with KPMG LLP, independent certified public accountants, where he was a Senior Manager from 1991 to 1996. Mr. Milano received his Bachelor of Science degree in Accounting from Rider College. We believe that Mr. Milano’s qualifications to sit on our Board of Directors include his executive experience in the pharmaceutical business, his knowledge of finance and accounting, and his experience on other public company boards.

 

Public directorships held by Mr. Milano within the past five years: ViroPharma Incorporated, VerticalNet, Inc.

 

Howard H. Pien, age 52, has served as a Director of Vanda since June 2007. Mr. Pien served as President and Chief Executive Officer and a Director of Medarex, Inc from June 2007 until it was acquired by Bristol-Myers Squibb Co. in September, 2009. Prior to his tenure at Medarex, Mr. Pien served as President and Chief Executive Officer of Chiron Corporation until April 2006 when it was acquired by Novartis. He joined Chiron from GlaxoSmithKline (formerly SmithKline Beecham), where he served as President, Pharmaceuticals for SmithKline Beecham and later as President of GlaxoSmithKline’s International Pharmaceuticals business. Mr. Pien has also held positions in sales, market research, licensing and product management at Abbott Laboratories and Merck & Co. Mr. Pien earned a B.S. from the Massachusetts Institute of Technology and an M.B.A. from Carnegie-Mellon University. We believe that Mr. Pien’s qualifications to sit on our Board of Directors include his executive experience in the pharmaceutical business, his knowledge of product licensing and management, his business degree and his experience on other public company boards.

 

Public directorships held by Mr. Pien within the past five years: Chiron Corporation, Medarex, ViroPharma Incorporated and ImmunoGen, Inc.

 

H. Thomas Watkins, age 57, has served as a Director of Vanda since September 2006. Mr. Watkins has served as the President and Chief Executive Officer of Human Genome Sciences, Inc. and as a member of its board of directors since 2005. Prior to his tenure at Human Genome Sciences Inc., Mr. Watkins served as President of TAP Pharmaceutical Products, Inc. Mr. Watkins previously held a series of executive positions over the course of nearly twenty years with Abbott Laboratories. Mr. Watkins also serves on the Board of Directors of the Biotechnology Industry Organization (BIO). He holds a B.B.A. from the College of William and Mary and an M.B.A from the University of Chicago Graduate School of Business. We believe that Mr. Watkins’ qualifications to sit on our Board of Directors include his executive experience in the pharmaceutical business, his experience with late-stage product development, his knowledge of in-licensing and other partnering strategies, his business degree and his experience on other public company boards.

 

Public directorships held by Mr. Watkins within the past five years: Human Genome Sciences, Inc.

 

The following table sets forth certain information known to us regarding beneficial ownership of our Common Stock as of April 16, 2010, by:

 

 

Unless otherwise indicated, to our knowledge, each stockholder possesses sole voting and investment power over the shares listed, except for shares owned jointly with that person’s spouse. The table below is based upon information supplied by officers, directors and principal stockholders and Schedules 13Gs and 13Ds filed with the SEC through April 16, 2010.

 

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as noted by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

 

Percentage of shares beneficially owned is based on 27,879,548 shares of Common Stock outstanding as of April 16, 2010.

 

 

 

 

 

Section 16(a) of the Exchange Act requires our directors, executive officers, and certain holders of more than 10% of our Common Stock to file reports regarding their ownership and changes in ownership of our securities with the SEC, and to furnish us with copies of all Section 16(a) reports that they file.

 

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us and written representations provided to us by all of our directors and officers and certain of our greater than 10% stockholders, we believe that during the year ended December 31, 2009, our directors, executive officers, and greater than 10% stockholders complied with all applicable Section 16(a) filing requirements.

 

Compensation Discussion and Analysis

 

This section discusses the principles underlying our executive compensation decisions related to fiscal year 2009 and the most important factors relevant to an analysis of these decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers and places in perspective the data presented in the tables and other quantitative information that follows this section. As a result of the constant evolution and highly competitive nature of the biopharmaceutical industry, we have designed a compensation program that is focused on attracting, motivating and retaining the industry leaders and experts necessary to achieve and implement our goal of establishing a leading biopharmaceutical company focused on developing and commercializing clinical-stage products for central nervous system disorders.

 

Summary

 

Compensation for our executive officers during 2009 was largely driven by our performance, particularly with respect to the attainment of a number of significant regulatory and commercial milestones. The first of these 2009 milestones was achieved in May, when the FDA granted U.S. marketing approval of Fanapt^tm, our compound for the acute treatment of schizophrenia in adults. This approval was of particular significance to the Company, in that we had suspended our further development activities, as well as non-essential business activities, and had been operating under a reduced spending plan, following the Company’s receipt in July 2008 of a not-approvable letter issue by the FDA with respect to our NDA for Fanapt^tm. We achieved the second of these milestones in October, with the execution of an amended and restated sublicense agreement with Novartis, which provided Novartis with exclusive commercialization rights to all formulations of Fanapt^tm in the U.S. and Canada. In January 2010, Novartis launched Fanapt^tm in the U.S.

 

In addition to the factors and criteria set forth below, these recent developments involving Fanapt^tm were considered by our Compensation Committee in determining the compensation paid to our executive officers in 2009 and evaluating the overall effectiveness of our compensation program in attracting, motivating and retaining highly qualified and experienced individuals. For example, although salaries remained relatively constant in 2009 from their 2008 levels as we continued to operate under a reduced spending plan pending the outcome of the FDA’s review of our Complete Response to the FDA’s not-approvable letter, following the FDA’s approval of Fanapt^tm in May 2009, the Compensation Committee granted equity awards to our executive officers, as well as to all of our other employees, both in recognition of the significant effort required to achieve this critical milestone and to provide incentives to achieve additional milestones, including the completion of a commercial partnership for Fanapt^tm. In December 2009, following regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 of our amended and restated sublicense agreement with Novartis, the Compensation Committee granted additional equity awards and paid 2009 annual incentive cash bonuses to our executive officers and other employees both in recognition of the significant effort involved in securing a partner for the commercialization of Fanapt^tm in the U.S. and Canada and to incentivize them to support the commercial launch of Fanapt^tm in the U.S. by Novartis, to pursue foreign regulatory approvals and commercial partnerships for Fanapt^tm and to further the development of tasimelteon, our product for the treatment of sleep and mood disorders, including Circadian Rhythm Sleep Disorders.

Objectives of Compensation Program

 

Our executive compensation program is designed to attract, as needed, individuals with the skills necessary for us to achieve our business plan, to reward those individuals fairly over time, and to retain those individuals who continue to perform at or above our expectations.

 

Compensation Components

 

As is the case with most companies of our size in the biopharmaceutical industry, our executive compensation program has four primary components — salary, a yearly cash incentive bonus, stock awards and certain cash and equity award vesting acceleration benefits in the event of an executive’s involuntary termination without cause.

 

 

We view our four primary components of our executive compensation as related but distinct. Although our Compensation Committee does review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part on our view of internal equity and consistency, individual performance and other information we deem relevant. We believe that, as is common in the biotechnology sector, stock awards are the primary motivator in attracting and retaining executives, and that salary and cash incentive bonuses are secondary considerations. Except as described below, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of compensation. This is due to the small size of our executive team and the need to tailor each executive’s award to retain and motivate that executive.

 

In addition to the primary components of compensation described above, we provide our executives with benefits that are generally available to our salaried employees. These benefits include health and medical benefits, flexible spending plans, matching 401(k) contributions and group life and disability insurance.

 

Compensation Procedures

 

Our Compensation Committee’s current intent is to perform annually a strategic review of our executive officers’ cash compensation and share and option holdings to determine whether they provide adequate incentives and motivation to our executive officers and whether they adequately compensate our executive officers relative to comparable officers in other companies. Our Compensation Committee’s most recent review occurred in December 2009. This review is described in more detail below. Compensation Committee meetings typically have included,

for all or a portion of each meeting, not only the committee members but also our President and Chief Executive Officer, our Chief Business Officer and, from time to time, our Acting Chief Financial Officer. The Compensation Committee also regularly meets in executive session without any of our officers or other employees present. For compensation decisions, including decisions regarding the grant of equity compensation relating to executive officers (other than our President and Chief Executive Officer), the Compensation Committee typically considers the recommendations of our President and Chief Executive Officer.

 

We do not have any program, plan or obligation that requires us to grant equity compensation to any executive on specified dates. The authority to make equity grants to executive officers rests with our Compensation Committee, although, as noted above, the Compensation Committee does consider the recommendations of our President and Chief Executive Officer in setting the compensation of our other executives, as well as the recommendations of the other members of our Board of Directors.

 

Benchmarking of Base Compensation and Equity Holding

 

In December 2008, as the Company continued to operate under a reduced spending plan, our Compensation Committee determined not to make any significant changes to the overall compensation of our executive officers for 2009, pending the outcome of the FDA’s review of our Complete Response. Our 2009 executive compensation was, therefore, originally determined with reference to the executive compensation report prepared by Towers Perrin and delivered to the Compensation Committee in November 2007, which served as the basis for our determination of 2008 executive compensation. At its November 2007 meeting, the Compensation Committee determined that our executive officers’ salaries, cash incentive bonuses and equity holdings were at or near the median of executives with similar roles at comparable companies and that no material changes should be made to the compensation levels of our executive officers at that time.

 

In December 2009, the Compensation Committee received a new executive compensation report from Towers Perrin for the purposes of reviewing our 2009 executive compensation relative to comparable companies and establishing our 2010 executive compensation. In identifying a peer group for us, Towers Perrin considers such factors as stage of product development and commercialization, market capitalization, revenue, cash balance, product pipeline, employee headcount, strength of commercial partnerships and competition for executive talent. In December 2009, Towers Perrin recommended that our current peer group should consist of the following 16 companies:

 

 

Of these companies, only Acorda, Cyprus, InterMune, Targacept and XenoPort were also part of the 2007 peer group whose data the Compensation Committee had previously considered. Towers Perrin determined that this was the appropriate current peer group for us due to a variety of factors, including the significant developments that occurred during 2009, in particular, the Company’s transition from a development-stage company to a company with an approved product, a commercial partner and a strong cash position.

 

Following its review of the compensation data included in the 2009 peer group report, the Compensation Committee observed that our executive officers’ total cash compensation (i.e., salary and cash incentive bonuses) was at or below the 25th percentile of executives with similar roles at the peer group companies, a result largely due to the fact that the Company did not pay any cash incentive bonuses in 2009 for 2008 performance, and that, with the exception of our Chief Business Officer, the expected value of our executives’ equity holdings were generally above the 75th percentile, partly due to the RSU grants made in late 2008 that were subject to performance vesting conditions tied to FDA approval of Fanapt^tm. The expected equity holdings of our Chief Business Officer was near

the median of the peer group data. The peer group data indicated that our executive officers’ total direct compensation was at or near the 75th percentile, except in the case of our Chief Business Officer, whose total direct compensation fell between the 25th and 50th percentiles of the data. While the Compensation Committee had not targeted these particular results, it considered them to be generally consistent with the Company’s philosophy of conserving cash pending achievement of significant product-related milestones while providing long-term equity incentives with significant upside potential.

 

As it makes decisions with respect to compensation for individual executive officers and for the Company’s compensation programs in general, the Compensation Committee relies upon the peer group data to understand where the Company’s compensation practices fall relative to its competitors, to identify individual officers whose compensation seems out of step with other Company officers or similar officers at peer group companies, and as a way of staying current with market practices. To date, the Compensation Committee has not specifically benchmarked or targeted a particular level of compensation with respect to total compensation or to any individual component of compensation.

 

Base Salary

 

Given the uncertainties of the economic climate and our workforce reduction at the end of 2008, we did not increase the salaries payable to our President and Chief Executive Officer, Mihael H. Polymeropoulos, M.D., and our Senior Vice President, Chief Business Officer and Secretary, William D. “Chip” Clark, for the year ended December 31, 2009 from their 2008 levels. As a result, their base salaries for 2009 remained at $442,000 and $312,000, respectively. Following the workforce reduction, pursuant to which the employment of each of our former Chief Medical Officer and Chief Financial Officer was terminated, we promoted John J. Feeney III, M.D. to the position of Acting Chief Medical Officer, and Stephanie R. Irish to the position of Acting Chief Financial Officer, increasing their base salaries to $270,000 and $200,000, respectively, effective as of the execution of their employment agreements in May 2009. In December 2009, in consultation with Towers Perrin, the Compensation Committee determined to increase by 3.5% to 4.0% the base salaries of our executive officers for 2010, as a result of which, Dr. Polymeropoulos’ salary increased to $460,000, Mr. Clark’s salary increased to $323,000, Dr. Feeney’s salary increased to $280,000 and Ms. Irish’s salary increased to $207,000. The Compensation Committee chose to apply an increase percentage that was slightly higher than a typical cost of living adjustment because it concluded that allowing total cash compensation to remain at a level at or below the 25th percentile of the peer group was not appropriate in light of the milestones achieved during 2009.

 

Cash Incentive Bonuses

 

The target levels of annual cash incentive bonuses for our executives were initially established as part of their respective individual employment agreements. For 2009, these targets were set at 40% of base salary for our Chief Executive Officer and 25% of base salary for our other named executive officers. Each of these employment agreements provides that the executive will receive a cash incentive bonus determined in the discretion of our Board of Directors, with a target bonus amount specified for that executive based on individualized objective and subjective criteria. These criteria are established by the Compensation Committee on an annual basis, and include specific objectives relating to the achievement of clinical, regulatory, business and/or financial milestones. For 2009, these criteria included FDA approval of Fanapt^tm, preparing for the commercial launch of Fanapt^tm and the completion of one or more strategic partnerships.

 

At the end or following the conclusion of each fiscal year, the Compensation Committee evaluates the performance of each of our executives with respect to the attainment of their objectives to determine the actual amount of their cash incentive bonuses. Each executive’s target bonus amount is then multiplied by a factor between 0 and 1.5, depending upon his or her level of performance. For 2009 performance, given the significance of the Company’s accomplishments during the year, the Compensation Committee applied the highest percentage available for each officer and applied an additional multiplier of 2 to the resulting bonus amounts. These multipliers were applied to each of our non-executive employees as well. As a result, and as further described in the Summary Compensation Table that follows this Compensation Discussion and Analysis, in December 2009 our Chief Executive Officer received a cash bonus equal to 120% of his 2009 base salary, and our Chief Business Officer, our Acting Chief Financial Officer and our Acting Chief Medical Officer received cash bonuses equal to 60% of their respective 2009 base salaries.

Also in December 2009 when it undertook its review of our executive compensation arrangements, the Compensation Committee decided to increase the target bonus percentage for each named executive officer by 10% of their respective base salaries so that for 2010 our Chief Executive Officer’s target bonus percentage will be 50% of base salary and each of our other named executive officers will have a target bonus percentage equal to 35% of base salary. This decision, along with the modest increases in base salary described above, was driven in part by a desire to push total cash compensation above the 25th percentile for 2010.

 

Equity Compensation

 

Since our initial public offering on April 12, 2006, we have made option grants based on the closing market value of our stock as reported on Nasdaq on the date of grant. To date, we have granted additional equity compensation awards to executive officers when the Compensation Committee determines it appropriate to do so and do not have a practice of making routine periodic award grants.

 

On December 16, 2008, the Compensation Committee granted RSUs to certain of the Company’s executives as set forth in the table below. 50% of the these RSUs vested on May 6, 2009 following approval by the FDA of the NDA for Fanapt^tm and 50% vested on December 31, 2009. These RSUs were granted to provide significant incentives for these executives to continue the Company’s pursuit of FDA approval for Fanapt^tm and to achieve additional Company milestones.

 

 

We made two rounds of equity award grants to our executive officer during 2009, the value of which are reflected in the “2009 Grants of Plan-Based Awards” table below. The first of these grants, made on May 22, 2009, was of options with an exercise price of $12.55, the closing price of the Company’s Common Stock on the grant date. Each option becomes exercisable in equal monthly installments over four years, as the executive completes each additional month of continuous service with the Company after May 22, 2009. These options were granted both in recognition of the significant efforts required to achieve FDA approval for Fanapt^tm and to provide incentives for these executives to achieve additional Company milestones, including, among other things, completing a commercial partnership for Fanapt^tm. The number of shares subject to these options granted to each named executive officer is set forth below:

 

 

On December 17, 2009, the Compensation Committee granted options to the Company’s executives as set forth in the table below. Each of these options had an exercise price of $10.65, the closing price of the Company’s Common Stock on the grant date. Each option becomes exercisable in equal monthly installments over four years, as the executive completes each additional month of continuous service with the Company after December 17,

2009. These options were granted both in recognition of the significant effort involved in securing a partner for the commercialization of Fanapt^tm in the U.S. and Canada and to provide incentives for these executives to achieve additional Company milestones, including, among other things, supporting the commercial launch of Fanapt^tm in the U.S. by Novartis, pursuing foreign regulatory approvals and commercial partnerships for Fanapt^tm and the further the development of tasimelteon.

 

 

With respect to each round of options granted during the course of 2009, the Compensation Committee determined the number of option shares to grant based upon its conclusion in the judgment of its members of the appropriate number of shares that were commensurate with the level of corporate achievements in 2009, the individual contributions made in connection with these achievements and the level of additional long-term incentives required to retain and motivate our executive team. The Compensation Committee did not use the peer group data in any particular way in reaching these determinations.

 

Severance and Change in Control Benefits

 

Each of our executives has a provision in his or her employment agreement with the Company providing for certain severance benefits in the event of termination without cause, as well as a provision that provides for the acceleration of his or her then unvested options in the event of termination without cause following a change in control of the Company. In addition, Dr. Polymeropoulos is entitled to certain tax benefits upon a change in control of the Company pursuant to a tax indemnity agreement entered into in 2007. These severance and acceleration provisions are described in the “— Employment Agreements” section below, and certain estimates of these severance and change in control benefits are provided in “— Estimated Payments and Benefits Upon Termination” below. No changes were made to these benefits in 2009 with respect to Dr. Polymeropoulos and Mr. Clark. Dr. Feeney and Ms. Irish were provided with these benefits upon execution of their employment agreements in May 2009.

 

Other Benefits

 

Our executives are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and disability insurance and our 401(k) plan, in each case on the same basis as our other employees. There were no special benefits or perquisites provided to any executive officer in 2009. The Company provides matching contributions of up to 50% to the first 6% contribution of each employee’s 401(k) contribution per pay period.

 

Tax and Accounting Matters

 

We account for the equity compensation expense for our employees under FASB ASC Topic 718, which requires us to estimate and record an expense for each award of equity compensation over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is accrued. Until we achieve sustained profitability, the availability to us of a tax deduction for compensation expense is not material to our financial position. We structure cash incentive bonus compensation so that it is taxable to our employees at the time it becomes available to them. In 2009 the annual non-performance based compensation of Dr. Polymeropoulos, our President and Chief Executive Officer, exceeded $1 million and the amount exceeding $1 million was not deductible by the Company. In addition to the total cash compensation in the amount of $973,045 received by Dr. Polymeropoulos in 2009, Dr. Polymeropoulos had income of $765,000 related to the settlement of

RSUs granted to him 2008. Our option grants are designed to be exempt from the $1 million limit. While the deductibility of executive compensation by the Company is a factor considered by the Compensation Committee in designing our compensation programs and making individual compensation decisions, it is only one of several factors that are considered and the Compensation Committee reserves the right to award from time to time compensation amounts that are or may not be fully deductible. For further information on the Section 162(m) requirements and considerations, see Proposal 2.

 

Recent Developments

 

On December 17, 2009, the Compensation Committee approved RSUs for the Company’s executives as set forth in the table below to be granted on January 1, 2010. Each RSU vests in equal annual installments over four years beginning January 1, 2011, provided that the executive remains employed with us. These awards were granted to provide significant incentives for these executives to achieve additional Company milestones, including, among other things, the further development of tasimelteon, supporting the commercial launch of Fanapt^tm in the U.S. by Novartis and the pursuit of foreign regulatory approvals for Fanapt^tm.

 

 

William D. “Chip” Clark resigned as the Company’s Senior Vice President, Chief Business Officer and Secretary, effective as of March 26, 2010. Effective upon Mr. Clark’s resignation, Stephanie R. Irish was appointed as Secretary of the Company. On March 24, 2010, Dr. John J. Feeney III’s title changed from Acting Chief Medical Officer to Chief Medical Officer. No changes to the compensation of Ms. Irish or Dr. Feeney resulted from these events.

 

Policies Regarding Recovery of Incentive Awards

 

Because the Company has only recently started to generate revenue, the Compensation Committee has not yet considered whether the Company would attempt to recover cash incentive bonuses to the extent that they were paid based on our financial performance and one or more measures of our financial performance are subsequently restated in a downward direction.

 

Compensation Committee Report³

 

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Submitted by the following members of the Compensation Committee:

 

Argeris N. Karabelas, M.D. (Chairman)
Howard H. Pien
H. Thomas Watkins

 

 

³ The material in this report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of Vanda under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

2009 Summary Compensation Table

 

The following table sets forth all of the compensation awarded to, earned by, or paid to the Company’s “principal executive officer,” “principal financial officer”, the two other highest paid executive officers and two additional individuals whom but for the fact that such individuals were not serving as our executive officers as of December 31, 2009 would have been one of our three most highly compensated executive officers (together, our “named executive officers”) for the years ended December 31, 2007, 2008 and 2009:

 

 

 

 

 

2009 Grants of Plan-Based Awards

 

The following table sets forth each plan-based award granted to the Company’s named executive officers during the year ended December 31, 2009.

 

 

 

 

Description of Certain Awards Granted in 2009

 

On May 22, 2009, we granted an option to Dr. Mihael Polymeropoulos to purchase a total of 250,000 shares of our Common Stock. The option vests with respect to 5,208 shares each month after May 22, 2009, that Dr. Polymeropoulos remains employed with us.

 

On May 22, 2009, we granted an option to Ms. Stephanie Irish to purchase a total of 95,000 shares of our Common Stock. The option vests with respect to 1,979 shares each month after May 22, 2009, that Ms. Irish remains employed with us.

 

On May 22, 2009, we granted an option to Mr. William “Chip” Clark to purchase a total of 75,000 shares of our Common Stock. The option vested with respect to 1,562 shares each month after May 22, 2009, that Mr. Clark remained employed with us. Mr. Clark resigned as an officer and employee of the Company as of March 26, 2010. This option will expire on June 26, 2010.

On May 22, 2009, we granted an option to Dr. John Feeney III to purchase a total of 95,000 shares of our Common Stock. The option vests with respect to 1,979 shares each month after May 22, 2009, that Dr. Feeney remains employed with us.

 

On December 17, 2009, we granted an option to Dr. Mihael Polymeropoulos to purchase a total of 175,000 shares of our Common Stock. The option vests with respect to 3,646 shares each month after December 17, 2009, that Dr. Polymeropoulos remains employed with us. On the same date, we approved an RSU award for Dr. Polymeropoulos, to be granted on January 1, 2010, representing 75,000 shares of our Common Stock. The RSUs vest in four equal annual installments beginning on January 1, 2011, provided that Dr. Polymeropoulos remains employed with us.

 

On December 17, 2009, we granted an option to Ms. Stephanie Irish to purchase a total of 70,000 shares of our Common Stock. The option vests with respect to 1,458 shares each month after December 17, 2009, that Ms. Irish remains employed with us. On the same date, we approved an RSU award for Ms. Irish, to be granted on January 1, 2010, representing 30,000 shares of our Common Stock. The RSUs vest in four equal annual installments beginning on January 1, 2011, provided that Ms. Irish remains employed with us.

 

On December 17, 2009, we granted an option to Mr. William “Chip” Clark to purchase a total of 70,000 shares of our Common Stock. The option vested with respect to 1,458 shares each month after December 17, 2009, that Mr. Clark remained employed with us. On the same date, we approved an RSU award for Mr. Clark, to be granted on January 1, 2010, representing 30,000 shares of our Common Stock. The RSUs vest in four equal annual installments beginning on January 1, 2011, provided that Mr. Clark remained employed with us. Mr. Clark resigned as an officer and employee of the Company as of March 26, 2010. The option will expire on June 26, 2010 and none of the RSUs vested prior to his resignation.

 

On December 17, 2009, we granted an option to Dr. John Feeney III to purchase a total of 70,000 shares of our Common Stock. The option vests with respect to 1,458 shares each month after December 17, 2009, that Dr. Feeney remains employed with us. On the same date, we approved an RSU award for Dr. Feeney, to be granted on January 1, 2010, representing 30,000 shares of our Common Stock. The RSUs vest in four equal annual installments beginning on January 1, 2011, provided that Dr. Feeney remains employed with us.

Outstanding Equity Awards at 2009 Year-End

 

The following table sets forth information regarding each unexercised option and unvested stock grant and RSUs that have vested but did not settle held by each of our named executive officers as of December 31, 2009.

 

 

 

 

 

2009 Option Exercises and Stock Vested

 

The following table shows the number of shares acquired upon option exercise and RSU settlement for each named executive officer during the year ended December 31, 2009.

 

 

 

 

Employment Agreements

 

We entered into offer letters or employment agreements with each of Mihael H. Polymeropoulos, M.D., our President and Chief Executive Officer, Stephanie R. Irish, our Acting Chief Financial Officer, Secretary and Treasurer, William D. “Chip” Clark, our former Senior Vice President, Chief Business Officer and Secretary and John J. Feeney III, M.D., our Chief Medical Officer.

 

Mihael Polymeropoulos, M.D.  We entered into an employment agreement in February 2005, which was amended effective December 16, 2008, with Dr. Polymeropoulos, which provides for an annual base salary of not less than $362,250 and the possibility of an annual target cash incentive bonus amount equal to 40% of his annual base salary upon achievement of certain performance goals (Dr. Polymeropoulos’ current base salary for 2010 is $460,000 and his target bonus amount has been increased to 50% of his annual base salary in 2010 by the Compensation Committee). If Dr. Polymeropoulos’ employment is terminated without cause, he becomes permanently disabled, or he terminates his employment for good reason, he will receive the following severance benefits following his employment termination: (1) a cash payment of his monthly base salary for 12 months; (2) payment of his monthly COBRA health insurance premiums; and (3) a bonus in an amount determined as follows: if he is terminated on or following the third anniversary of this agreement, the amount will be equal to the greater of the most recent target cash incentive bonus or the average target cash incentive bonus awarded for the prior three years. In addition, if, following a change in control, Dr. Polymeropoulos is terminated without cause, or he terminates his employment for good reason, he will become vested in 100% of his then unvested shares and options. In addition to the benefits provided in his employment agreement, the Company

entered into a tax indemnity agreement with Dr. Polymeropoulos in November of 2007 that provides certain benefits to him in the event of a change in control of the Company, as described below in “— Severance and change in control arrangements.” The employment agreement provides that, other than in connection with a change in control, in the event that Dr. Polymeropoulos’s employment is terminated by the Company for any reason other than Cause or Permanent Disability (each as defined therein) the vested portion of his options is determined by adding three months to his service and his stock options will be exercisable for six months after such termination.

 

Stephanie R. Irish.  We entered into an employment agreement in May 2009 with Ms. Irish, which provides for an annual base salary of not less than $200,000 and the possibility of an annual target cash incentive bonus amount equal to 25% of her annual base salary upon achievement of certain performance criteria (Ms. Irish’s current base salary for 2010 is $207,000 and her target bonus amount has been increased to 35% of her annual base salary in 2010 by the Compensation Committee). If Ms. Irish’s employment is terminated without cause, she becomes permanently disabled, or she terminates her employment for good reason, she will receive the following severance benefits following her employment termination: (1) a cash payment of her monthly base salary for 12 months; (2) payment of her monthly COBRA health insurance premiums; and (3) an amount equal to her annual target bonus at the rate in effect at the time of the termination. In addition, if, following a change in control, Ms. Irish is terminated without cause, or she terminates her employment for good reason, within 24 months of such change in control, she will become vested in 24 months’ worth of her then unvested shares and options granted pursuant to the terms of her employment agreement. The employment agreement also provides that, other than in connection with a change in control, in the event that Ms. Irish’s employment is terminated by the Company for any reason other than Cause or Permanent Disability (each as defined therein) the vested portion of her options is determined by adding three months to her service and her stock options will be exercisable for six months after such termination.

 

William D. “Chip” Clark.  We entered into an employment agreement in February 2005 with Mr. Clark, which was amended and restated as of November 4, 2008 and further amended and restated as of December 16, 2008, which contained terms substantially similar to those included in the employment agreements of our other executive officers. Mr. Clark resigned as an officer and employee of the Company as of March 26, 2010.

 

John J. Feeney III, M.D.  We entered into an employment agreement in May 2009 with Dr. Feeney, which provides for an annual base salary of not less than $270,000 and the possibility of an annual target cash incentive bonus amount equal to 25% of his annual base salary upon achievement of certain performance criteria (Dr. Feeney’s current base salary for 2010 is $280,000 and his target bonus amount has been increased to 35% of his annual base salary in 2010 by the Compensation Committee). If Dr. Feeney’s employment is terminated without cause, he becomes permanently disabled, or he terminates his employment for good reason, he will receive the following severance benefits following his employment termination: (1) a cash payment of his monthly base salary for 12 months; (2) payment of his monthly COBRA health insurance premiums; and (3) an amount equal to her annual target bonus at the rate in effect at the time of the termination. In addition, if, following a change in control, Dr. Feeney is terminated without cause, or he terminates his employment for good reason, within 24 months of such change in control, he will become vested in all of the shares underlying his options granted pursuant to his employment agreement. The employment agreement also provides that, other than in connection with a change in control, in the event that Dr. Feeney’s employment is terminated by the Company for any reason other than Cause or Permanent Disability (each as defined therein) the vested portion of his options is determined by adding three months to his service and his stock options will be exercisable for six months after such termination.

 

Severance and Change in Control Arrangements

 

See “— Employment Agreements” and “Compensation Discussion and Analysis — Severance and Change in Control Benefits” above for a description of the severance and change in control arrangements for Drs. Polymeropoulos and Feeney and Ms. Irish. Drs. Polymeropoulos and Feeney and Ms. Irish will only be eligible to receive severance payments if each officer signs a general release of claims.

 

Our Compensation Committee, as plan administrator of our Second Amended and Restated Management Equity Plan and our 2006 Equity Incentive Plan, has the authority to provide for accelerated vesting of the shares of Common Stock subject to outstanding options held by our named executive officers and any other person in connection with certain changes in control of Vanda.

In each employment agreement, a change in control is defined as (1) the consummation of a merger or consolidation of the Company with or into another entity, if persons who were not stockholders of the Company immediately prior to such merger or consolidation own immediately after such merger or consolidation 50% or more of the voting power of the outstanding securities of each of (a) the continuing or surviving entity and (b) any direct or indirect parent corporation of such continuing or surviving entity; or (2) the sale, transfer or other disposition of all or substantially all of the Company’s assets. A transaction shall not constitute a change in control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

 

Estimated Payments and Benefits Upon Termination

 

The following table describes the potential payments and benefits upon employment termination for each named executive officer, as if the executive’s employment terminated as of December 31, 2009, the last business day of 2009.