Vanda Pharmaceuticals Inc. (VNDA) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Erika, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Jim Kelly, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you. Good morning, and thank you for joining us to discuss Vanda Pharmaceuticals' fourth quarter and full year 2011 performance. Our fourth quarter and full year 2011 results were released this morning and are available on the SEC's EDGAR system and on our website, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website and a telephone replay of the call, which will be available through February 21, 2012. Joining me on today's call are Dr. Mihales Polymeropoulos, our President and CEO; Dr. John Feeney, our Senior Vice President and Chief Medical Officer; Bob Repella, our Senior Vice President and Chief Commercial Officer; and Gunther Birznieks, our Vice President of Business Development. Following my introductory remarks, Dr. Polymeropoulos will update you on our ongoing activities, then I will comment on our financial results for the fourth quarter and full year 2011 before opening the lines for your questions. Before we proceed, I would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meaning of federal securities laws. Words such as, but not limited to, believe, expect, anticipate, estimate, intend, plan, project, target, likely, will, would and could or the negative of these terms and similar expressions or words identify forward-looking statements. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the Risk Factors in the MD&A of Financial Condition and Results of Operation sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and quarterly reports on Form 10-Q, which are available on the SEC's EDGAR system and on our website. We encourage all investors to read these reports and our other SEC filings. The information we provide on this call is provided only as of today, and we undertake no obligation to update or revise publicly any forward-looking statements we may make on this call on account of new information, future events or otherwise except as required by law. With that said, I would now like to turn the call over to our CEO, Dr. Mihales Polymeropoulos.

Thank you, Jim. Good morning, and thank you very much for joining us. Over the last quarter, we have been making significant progress on our tasimelteon program. Tasimelteon is a circadian regulator which is being evaluated in clinical studies with the orphan indication, Non-24-Hour Sleep/Wake Disorder or Non-24, as well as for the treatment of major depressive disorder. Our goal is to assume a leadership position in the development of therapeutics that have a potential of resetting the body clock. Many of our bodily functions, including the sleep-wake cycle, metabolic processes, mood regulation, homeostasis cardiovascular regulation, to name a few, are governed by the body clock. While the master body clock is located in the brain structure known as suprachiasmatic nucleus, SCN, peripheral tissues are also known to have their own clock that follow the influence of the master body clock. While the molecule is believed to have the ability to reset the body clock, and therefore, it may have corrective therapeutic properties in disorders where the body clock is aberrant. The body clock is reset each day through the action of daily light exposure which sets in motion a number of molecular processes that result in a circadian period of exactly 24 hours in length. For many individuals, without daily exposure to light, the master body clock will run at a circadian period of longer than 24 hours, which is reflected in a population average of about 24.5 hours. Blind individuals with no light perception suffering from Non-24 cannot reset their body clock to a 24-hour day and therefore will drift at a rate of about 0.5 hour a day. As a result, blind individuals who have suffered from Non-24 are often severely misaligned with a standard 24-hour sleep-wake schedule. Although there is a narrow window in the rotation where such a patient's body clock is correctly aligned, there are many more days in the rotation where they are out of alignment in such a manner that the body clock compels them to sleep during the day and stay awake at night. Thus, misalignment expresses itself with severely aberrant sleep and wake schedules that are incompatible with normal, social and occupational functioning, rendering these already disabled individuals significantly more impaired. The condition is chronic and there are no available FDA-approved treatments that can reset the body clock. It is estimated that in the United States, there are approximately 65,000 to 95,000 individuals suffering from Non-24, although the awareness of the disorder is believed to be much lower among physicians and patients. Experts agree that the definitive measure of the period of the body clock is a measurement over time of the night hormone, melatonin, which when misaligned could result in a longer than 24-hour body clock, causes this disorder. On average, individuals with Non-24 demonstrate a circadian period of melatonin secretion of approximately 24.5 hours, although the exact period of length varies from person to person. Vanda has developed a clinical program to evaluate the effects of tasimelteon in resetting the master body clock in individuals with Non-24. Vanda's clinical program is the largest ever conducted and far exceeds any published work in groups of patients with Non-24. This program includes 2 main efficacy studies of tasimelteon known as SET and RESET. The goals of the SET study are to evaluate approximately 100 patients with the disorder and demonstrate the ability of tasimelteon to reset the master body clock in these individuals to a 24-hour period. The study includes a screening period, during which the circadian body clock period is measured for each study participant over 4 weeks. Individuals with a period longer than 24.25 hours are subsequently randomized to either placebo or tasimelteon for approximately 6 months. During this randomization period, the clock's period is reevaluated over a subsequent 4-week period. During screening, as well as during randomization, daily reports of nighttime and daytime sleep are recorded. We have identified approximately 75 of the 100 patients in the target population. We are currently in discussions with the Food and Drug Administration of the most appropriate way to analyze and present data so that the effect of tasimelteon can be evaluated. In the second study, RESET, we intend to identify 20 patients who respond to the drug after 6 or more weeks of treatment. After a 6-week, open-label period, individuals are designated as responders, if their master body clock period is changed to that of exactly 24 hours. Responders are then randomized to either a placebo or tasimelteon, and their body clock is reevaluated. This study will allow us to determine whether withdrawal of tasimelteon from a responder will result in the resumption of Non-24. On January 26, we reported that we have identified the first 4 responders to randomize in the RESET study. Since it is not expected that the body clock can reset itself continuously, our observation in these 4 patients demonstrate that tasimelteon can reset the body clock in patients with Non-24. This represents the first time that a drug product candidate has shown body clock resetting properties in humans, and it may open a new therapeutic arena for circadian-regulating drug projects. The SET and RESET studies are expected to be completed by year end, and we expect to file a New Drug Application by mid-2013. Tasimelteon is also under evaluation in our MAGELLAN study for efficacy in major depressive disorder. This is a 500-patient study, comparing the effects of tasimelteon to placebo in the treatment of symptoms of major depression. It is well established in the scientific literature that one of the functions of the body clock is to control mood and affect. It is further believed that misalignment of the body clock with external daily cues may lead to the development of an affective syndrome. We believe that tasimelteon's property to reset the body clock make it a good candidate for this application. In the current studies, we're characterizing a number of classical endpoints of mood and sleep, as well as measuring properties of body clock alignment. Recruitment of the study is ongoing in approximately 40 sites in the U.S. We expect to report top line results from the study in the first half of 2013. I will now turn to Fanapt in the United States. Novartis has reported revenues of $16.2 million for the fourth quarter of 2011, bringing the full year 2011 revenues to $44.8 million. Fanapt prescriptions, as reported by IMS, reached 33,000 in the fourth quarter of 2011, which was approximately equal to the third quarter of 2011. On a full year basis, prescriptions have grown from approximately 55,000 in 2010 to over 120,000 in 2011. On the existing development front, Novartis is conducting a number of clinical studies, including a relapse prevention study in schizophrenia, a sleep study from espasla emlamprothene [ph] or hypicsolo [ph] to Fanapt, a pharmacokinetic tolerability study in adolescent patients, and a Phase II study of the once-a-month injectable formulation of iloperidone. The expected completion dates of all these studies are updated regularly by Novartis and can be found on clinicaltrials.gov. Outside the U.S., we continue to pursue registration through our partners in several Latin American countries and Israel. After further evaluation of the regulatory environment, as well as the commercial opportunity in Singapore and Australia, we have no current plans to pursue registration in those countries. The review of our Marketing Authorization Application in Europe by EMA is continuing. We have received the initial list of comments from EMA, which among others include questions that are being formally met [ph] of the iloperidone long-term maintenance study. We have requested and have been granted a 3-month extension of the review cycle in order to better prepare our responses to these questions. If the EMA does not accept the current long-term maintenance study, we may have to await the results of the ongoing study by Novartis, which is expected to be completed by the fourth quarter of 2013 before we can complete the EMA requirements. We will keep you informed of any significant progress at a future time. I will now turn the call to Jim Kelly, our Chief Financial Officer, to discuss our financials for the fourth quarter and year ended December 31, 2011. Jim?

Thank you, Mihales. During the full year 2011, Vanda recorded a net loss of $9.8 million as compared to net income of $7.2 million for the full year 2010. On a diluted shares basis, this reflects a loss of $0.35 per share for the full year 2011 as compared to net income per share of $0.25 for the prior year. Turning to our quarterly results. Vanda recorded a net loss of $5.5 million for the fourth quarter 2011 compared to net income of $2.2 million during the same period in 2010. On a diluted shares basis, this reflects a loss for the current quarter of $0.20 per share as compared to net income of $0.08 per share for the fourth quarter of 2010. As of December 31, 2011, there were approximately 28.1 million shares of Vanda common stock outstanding. Total revenue for the fourth quarter of 2011 was $8.4 million compared to $7.8 million in the same period in 2010. In these periods, there were 3 sources of revenue. They are licensing revenue, royalty income and grant revenue. Fourth quarter of 2011 and 2010 revenue each included $6.8 million of licensing revenue related to the amortization of the upfront payment received from Novartis for U.S. and Canadian commercial rights to Fanapt. Fourth quarter 2011 revenues included $1.6 million in Fanapt royalties received from Novartis, as compared to approximately $500,000 for the fourth quarter of 2010. During each period, Vanda recognized a 10% royalty on Novartis net sales. For fourth quarter of 2010, revenue also included a $500,000 grant received under the IRS's Therapeutic Discovery Project Credit Program. Total operating expenses for the fourth quarter of 2011 were $14.3 million. Research and development cost of $10.6 million made up the majority of that spend for the fourth quarter of 2011. This compared to $3.8 million for R&D spend in the fourth quarter of 2010. The increase in R&D expenses over the prior year is a result of cost incurred in connection with the new and ongoing trials for tasimelteon in Non-24 and major depressive disorder. General and administrative expenses were $3.3 million for the fourth quarter of 2011, compared to $2.8 million in the fourth quarter of 2010. Vanda's cash, cash equivalent and marketable securities as of December 31, 2011 totaled $167.9 million, a decrease of $12.6 million since the end of the third quarter of 2011. 2012 financial guidance. Vanda will not be providing full year 2012 financial guidance at this time as the final total patient enrollment and timing of completion of the ongoing tasimelteon clinical studies will impact our 2012 operating expenses. However, we do expect our 2012 operating expenses to exceed those of 2011. We will evaluate our ability to provide additional guidance as the year progresses, possibly as early as the earnings call for the first quarter results. I will now turn the call back to Mihales.

Thank you, Jim. At this time, we'll be happy to address any of your questions.

[Operator Instructions] And our first question comes from the line of our Lauren McGilmore (sic) [Migliore] with Morningstar.

I know it's still at least a year away from potential approval, but could you give us a sense of the firm's initial thoughts with regard to commercialization structure? Is tasimelteon an asset the firm thinks that can market itself? And also, how many providers are out there for Non-24-Hour Disorder? And what type of sales force would be necessary to reach these patients?

So first of all, let me frame a little bit the question and our Chief Commercial Officer, Bob Repella, will be able to make some comments as well. As you know, the initial application that we expect will be for the orphan indication of Non-24. And as an orphan indication, it may require a completely rethought commercial strategy applicable to this indication. It is the intent of Vanda to commercialize the products ourselves for this indication. However, for the major depression indication, our reasoning is that if successful in the future and leading to an application and approval, that it is more likely for Vanda to concentrate on a specialty commercial strategy while the applicability of promoting the primary care may be pursued through our partners. Having said that, I'll turn it over to Bob to discuss further.

Sure. So I mean, when we look at tasimelteon for Non-24, we see the significant opportunity as it relates to an orphan indication. As Mihales mentioned, we're talking about 65,000 to 95,000 potential patients who have significant unmet medical need. And we anticipate that this could be the first product that would be a true circadian regulator, could reset the body clock and align these patients' body clock with the 24-hour day/night cycle. Right now, our focus here is on building awareness and educating patients, caregivers, health care professionals about Non-24 and the fact that it is truly a circadian regulation type of disorder. We're working with opinion leaders, advocacy organizations. We're also helping to support information dissemination by other platforms, like the Internet. And as we move through the prelaunch process, we'll make the determination as to the best way to commercialize the asset. We're looking at all different possibilities, whether a small sales force would be the right option and themselves as a potential possibility. And then of course, utilizing technology to ensure that we're reaching out to our target audience across all stakeholders to communicate effectively and ensure the patients that can benefit from this product for this disease will realize the therapy.

But just if you could give me a little bit of better sense as to what type of providers treat the disorder and how many of them are out there?

I think generally, we would characterize it as a pretty broad base of providers. So when you look at blind patients, they don't concentrate generally among any specific physician specialty. They do have visits to certain specialists more frequently than others, like sleep specialist and in some instances, psychiatry as well. But for the most part, they are seeing generalists, family practice doctors and internists, because they're also being managed for a variety of other conditions that go beyond their basic challenge with being blind.

And just to underscore that Non-24 is a very serious disorder, leading to a tremendous impairment with the patients. And our hope is that tasimelteon will provide not just a circadian resetting, but actually eventually be proven to improve the functioning of these patients. And providing such a benefit, we believe that will drive the commercial success and adaptation of the product.

Our next question comes from the line of Graig Suvannavejh with Jefferies.

I jumped on late, so my apologies if my questions are slightly repetitive. But could you just provide an update on how enrollment in that tasi trial is going and the timing on when we might be able to see data? And then the second question has to do with just your progress on x-U.S. initiatives with Fanapt.

So first of all, with the tasimelteon program, the 2 key efficacy studies are studies, SET and RESET. The SET study aims to identify 100 patients with the disorder, and the RESET study is the one that aims to identify 20 patients that are responding to the drug. In the 100-patient SET study, what we said earlier is that we have identified approximately 75 patients which are either already randomized or eligible to be randomized in the study. We believe that we can get close to the 100-patient mark by mid-year. And since this is approximately a 6-month study, top line results could be reported by year end. The RESET study is set by patients who also come from the main efficacy study. And since the aim is to identify about 20 patients, we also believe that the RESET study can actually enroll and report by end of year, 2012. All of this will be in time to allow us to file the NDA as has been reported previously by mid-2013. Just to remind everyone that the other study that is ongoing, the Phase II/III study with 500 patients with major depressive disorder is also ongoing. It is recruiting across 40 sites in the U.S. and it is expected to complete the report by the first half of 2013. The second part of your question had to do with the rest of the world Fanapt. What we discussed earlier, Graig, was that we're pursuing registration in a number of Latin American countries -- Argentina, Mexico, and also Israel -- through our partners in those countries. We have made the determination that the 2 applications in Singapore and Australia, we will no longer pursue after we have fully evaluated both the regulatory environment, also the size of the commercial opportunity, and rather focus in the partnered countries, as well as the pursuit of a European registration. In Europe, the EMA review is ongoing. We have received a number of initial comments, as expected, and one of them has to do with whether or not the Novartis original long-term maintenance study, which compares iloperidone and haloperidol, would be sufficient for the EMA requirements. So we have engaged in discussion. We plan to pursue this further with the European -- we have asked and have been granted a 3-month extension in order to prepare these answers. And what I said earlier in the call is that it is possible that EMA may not accept the older study as definitive for maintenance review. If it is so, then we would have to await the results of the ongoing maintenance study which Novartis is running. This is the classic placebo re-randomization, relapse prevention study. That study is expected to report by Novartis some time by the end of 2013. So if that's the case, there would be some delay with the European filing. Now this could still be okay because the protection in Europe is driven exclusively by the European 10-year data protection. So that clock starts by the time of the first approval in any formulation. So even though a European filing may be delayed, we don't believe that the commercial impact of this delay will be of any significance.

[Operator Instructions]

Well, thank you very much. Let us conclude this conference call. We, of course, thank you for your interest in and support for Vanda and we look forward to speaking with you again soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.