Vanda Pharmaceuticals Inc. (VNDA) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Jasmine and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, to Mr. Jim Kelly, Senior Vice President and CFO. You may proceed.

Thank you, Jasmine. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals first quarter 2012 performance. Our first quarter 2012 results were released this morning and are available on 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 will be available through June 6, 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 and the management team will update you on our ongoing activities. Then, I will comment on our financial results for the first quarter 2012 before opening the lines for your questions. Before we proceed, I'd like to remind everyone that various statements that we make on this call will be forward-looking statements within the meanings of federal securities laws. Words such as, but not limited to, believe, expect, anticipate, estimate, intend, plan, project, target, goal, 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 and MD&A sections of our annual report on Form 10-K for the fiscal year ended December 31, 2011, which is available on the SEC EDGAR system and our website. We encourage all investors to read this report and our other SEC filings. The information we provide on this call is provided only as of today. 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. Additionally, certain non-GAAP financial measures will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measures can be found in our press release, which is available on our website. 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. In this past year and quarter, we have made significant progress towards our vision of building a specialty pharmaceutical company to address unmet basic needs in disorders associated with the central nervous system. We view this strategy as a path to creating significant value for our shareholders. Tasimelteon has progressed in the clinic for both the Non-24-Hour Disorder in the blind, I will refer to this as Non-24, as well as Major Depressive Disorder, MDD. For Non-24, our main pivotal efficacy study is expected to be completed by the end of 2012. This pivotal study, by the name of SET, is the largest study of its kind to be conducted in the world and the first to examine a novel therapeutic agent for this disorder. In this study, we're measuring the speed of the body clock for each individual before and after treatment, as well as the amount and timing of their daytime and nighttime sleep episodes daily during the treatment period of up to 6 months. Such a complete evaluation will allow us to conduct a comprehensive evaluation of the effect of Tasimelteon in the course of this disorder. In the second pivotal study for Non-24, the RESET study, we first identified patients that can be successfully entrained to a 24-hour period with Tasimelteon and we then re-randomize these patients to either Tasimelteon or placebo to evaluate the maintenance of treatment effect. We reported earlier this year that we had enrolled the first few patients in this study, which represents the first time that we have definitively shown that Tasimelteon is able to entrain the body clock in blind patients with Non-24. The recent study is also expected to be completed by the end of this year. Non-24 is a chronic, serious disorder for which there is no approved FDA treatment. Non-24 has a devastating impact on the lives of those suffering from it and as such, there's a compelling reason to develop treatments in an efficient and rapid manner. We are currently in discussions with the U.S. FDA regarding a regulatory path to the filing of an NDA for Tasimelteon and look forward to reaching the conclusion of these discussions. In MDD, we continue to recruit patients in the MAGELLAN Study, a 500-patient, double-masked, placebo-controlled study conducted in the U.S, which aims to evaluate the effects of Tasimelteon on the symptoms of depression as a monotherapy. In that study, we also measured Tasimelteon's ability to improve sleep and collect information on measures of the circadian cycle of these patients. We expect to report top line results for the MAGELLAN study in the first half of 2013. We're excited about the progress of our Tasimelteon program and we are looking forward to the completion of our studies and progressing towards our goal of an NDA filing in mid-2013 and the commercial launch in Non-24 as early as the first half of 2014. I will now turn to Fanapt in the U.S. Novartis has reported revenues of $15.4 million for the first quarter of 2012. Fanapt prescriptions, as reported by AMS, reached 35,000 in the first quarter of 2012, which represents a 39% increase over the first quarter of 2011 and a 6% increase over the fourth quarter of 2011. We continue to be confident in the value that Fanapt can provide for patients with schizophrenia through the good efficacy profile and a differentiated favorable movement disorder and metabolic effect safety profile. On the research and development front, Novartis is conducting a number of clinical studies, including a relapse prevention study in schizophrenia, a sweep study from risperidone, olanzapine or aripiprazole to Fanapt, a pharmacokinetic tolerability study in adolescent patients and a Phase II study of the once a month injectable formulation of Fanapt. 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 Mexico, Argentina and Israel. We anticipate receiving marketing approvals for our oral Fanapt in these countries over the next 12 months. In Europe, the review of our Marketing Authorization Application by the EMA is continuing. We have received the initial list of comments of EMA, which among others include questions around the informativeness of the iloperidone long-term maintenance study. We expect to respond to EMA questions by mid-May. We will keep you informed of any significant progress on these applications at a future time. On the business development front, in April, we obtained an exclusive global license for VLY-686 from Eli Lilly to develop and commercialize a small molecule neurokinin 1 receptor antagonist, NK-1R, for all human indications. NK-1R antagonist has been evaluated in a number of indications, including chemotherapy-induced nausea and vomiting, CINV; post-operative nausea and vomiting, PONV; alcohol dependence, anxiety, depression and pruritus. VLY-686, formerly known at Lilly as LY 686017 has demonstrated a proof of concept in our codependents in a study published by the NIH. In that study, VLY-686 was shown to reduce alcohol cravings and voluntary alcohol consumption among patients with alcohol dependence. VLY-686 is a Phase II-ready program. In 2012, we intend to initiate and complete the technology transfer activities and further examine the clinical and commercial profile of VLY-686. This strategic evaluation will further inform potential indications for an early clinical development program. Under the terms of the licensing agreement with Lilly, we will pay an initial license fee of $1 million and be responsible for all development costs. Lilly is also eligible to receive additional payments based upon achievement of specified development and commercialization milestones, as well as tiered royalties on net sales at percentage rates up to the low double digits. These milestones include $4 million for pre-NDA approval milestones and up to $95 million for future regulatory approval in sales milestones. Now Bob Repella, our Chief Commercial Officer, will provide you with an update on our prelaunch marketing activities for Tasimelteon. Bob?

Thanks, Mihales. During the first quarter of 2012, the Vanda marketing team continued to put the foundation in place for the commercialization and launch of Tasimelteon for Non-24. The Non-24 indications for Tasimelteon has the potential to be a significant, standalone, commercial opportunity for the company and represents the first step in building a long-term life cycle plan that includes additional indications to achieve sustainable growth. It is estimated that between 65,000 and 95,000 individuals in the U.S. suffer with non-24, with a prevalence rate between 50% and 70% in totally blind individuals. This is a chronic, debilitating, circadian rhythm disorder, for which there are currently no FDA-approved treatments. Among patients and healthcare professionals, awareness of non-24 as a circadian rhythm disorder in totally blind individuals remains low. As a result, a primary area of focus for the commercial team in 2012 is increasing access to information through vehicles such as 24sleepwake.com. This website represents just one example of a broad campaign that will utilize multiple platforms to engage all constituents in the blind community. These disorder awareness educational programs are being developed with the input and guidance of opinion leaders in the area of circadian rhythm disorders. We've also been very active in establishing relationships with advocacy organizations for the blind. We continue to engage many entities in order to better understand their respective missions and identify the best approaches for the company to interact with blind individuals. We believe this represents an excellent opportunity for Vanda to demonstrate its long-term commitment to the blind community. One additional item that we're focusing our efforts on is the feasibility of organizing a physician referral network, with a focus on circadian rhythm disorders, inclusive of Non-24 and the unique challenges of this orphan disorder. We are early in the process but have engaged a number of professional entities that have expressed an interest in identifying approaches that can help us better serve the needs of the blind community. Our goal is to create a seamless mechanism for blind individuals to access specialty care locally, including the appropriate evaluation and diagnosis of Non-24. Let me close by emphasizing that these are just a few of the many initiatives we are working on as we try to make a positive difference in the lives of non-24 patients and prepare for the launch of Tasimelteon. I look forward to providing you additional updates in the future. I'll now turn the call over to over to Jim Kelly, our CFO, to discuss our financials for the first quarter of 2012.

Thank you, Bob. During the first quarter of 2012, Vanda recorded a net loss of $8 million as compared to net income of $136,000 for the first quarter of 2011. On a diluted shares basis, this reflects a loss for the current quarter of $0.28 per share as compared to net income of $0.00 per share for the first quarter of 2011. As of March 31, 2012, there were approximately 28.2 million shares of Vanda common stock outstanding. Total revenue for the first quarter of 2012 was $8.1 million compared to $7.5 million in the first quarter of 2011. In these periods, there were 2 sources of revenue. They are licensing revenue and royalty income. First quarter 2012 and '11 revenue each included $6.6 million of licensing revenue related to the amortization of the upfront payment received from Novartis for the U.S. and Canadian commercial rights to Fanapt. First quarter 2012 revenues included $1.5 million in Fanapt royalties received from Novartis as compared to $900,000 for the first quarter of 2011. During each period, Vanda recognized a 10% royalty on Novartis net sales. Total operating expenses for the first quarter 2012 were $16.5 million. Research and development costs of $12.2 million made up the majority of that spend for the first quarter of 2012. This compared to $4.3 million for our R&D spend in the first quarter of 2011. The increase in R&D expenses over the prior year is a result of the cost incurred in connection with the new and ongoing studies for Tasimelteon in Non-24 and MDD. General and administrative expenses were $3.9 million for the first quarter of 2012 compared to $2.9 million for the first quarter of 2011. Vanda's cash, cash equivalents and marketable securities as of March 31, 2012, totaled $157.3 million, a decrease of $10.6 million since the end of the fourth quarter of 2011. Vanda is providing investors with the following financial guidance for full year 2012. The press release we issued this morning shows certain portions of our guidance in both GAAP and non-GAAP form and explains the nature of the items excluded from the non-GAAP results. General and administrative expenses are expected to be between $13 million and $15 million. This compares to $11.5 million in 2011 and includes approximately $2 million to $4 million in commercial expenses for prelaunch preparation for Tasimelteon in the treatment of Non-24. G&A expenses also include approximately $3 million of stock-based compensation. Excluding stock-based compensation, G&A expenses are expected to be between $10 million and $12 million. Research and development expenses are expected to be between $42 million and $47 million. This compares to $29 million in 2011. The increase of $13 million to $18 million over 2011 reflects the ongoing investment in the development of Tasimelteon for Non-24 and MDD. R&D expenses include approximately $2.5 million of stock-based compensation. Excluding stock-based compensation, R&D expenses are expected to be between $39.5 million and $44.5 million. Total GAAP operating expenses are expected to be between $57 million and $64 million. This includes Fanapt cost of sales of $1.5 million related to amortization of an intangible asset and $5 million to $6 million of stock-based compensation. Full year change in cash is expected to be between $45 million and $50 million. I will now turn the call back to Mihales.

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

[Operator Instructions] Your first question comes from the line of Corey Davis with Jefferies.

Can you first elaborate further on the nature of the questions that the European regulators asked you on Fanapt? Do you think that there's a chance they won't accept the long-term trials that have been done or are they more routine in nature?

First of all, we'll not go into the details of the questions and objections, but let me clarify a little bit on the maintenance studies since we highlight it. Typically, the European agency has not accepted active controlled studies for maintenance effects of antipsychotics. But rather, have recently required that sponsors submit the placebo re-randomization relapse prevention studies. We already had a study that was conducted by Novartis that compared iloperidone's and haloperidol's effect on maintenance and had shown a non-inferiority to haloperidol. So we have submitted this study and the question from the Europeans has to do whether such a study and the way that was conducted and analyzed, gave sufficient information for them to conclude that iloperidone should be indicated for maintenance prevention. So I would not characterize their question as routine questions. I would characterize it as one of the objections and concerns and the way that we have approached it is in a dual manner. One is we have demonstrated to them, through a sensitivity analysis of multiple ways to look at the data, that all the data point to the same conclusion that iloperidone indeed, demonstrated a maintenance effect similar to that, to the globe standard at the time, haloperidol. And the second part is we have informed the European agency that indeed, a relapse prevention study with a placebo control is underway in the U.S. as a post marketing commitment to the FDA and that study is currently underway by Novartis. We conclude, in our response on that subject, that Vanda does not believe that EMA needs to wait for the results of that study before they conclude, that indeed, iloperidone has demonstrated adequate evidence of a maintenance effect.

The Tasimelteon endpoint, how comfortable are you that the FDA is themselves comfortable with the endpoint that you've chosen? And how would you expect the eventual indication in the label on Tasi to read?

Let me address first, the FDA question. As we have communicated before and today, we're in discussions with the FDA what is the appropriate path and that of course, spells out what is the appropriate endpoint that will be required for approval. To date, we have not reached an agreement with the FDA on what the endpoint is. And to remind everyone, Vanda, with the advice of opinion leaders around the world, believes that for these indications, the appropriate and specific endpoint is a demonstration of entrainment of the body clock back to 24 hours. And by the resetting of this body clock, there are expected to be clinical benefits. However, these clinical benefits may be difficult to statistically, significantly demonstrate in the small studies that we're conducting now. Of course, the studies are small not because of choice but rather because of the orphan indication and the inherent difficulties recruiting in this very difficult to treat and identify population. So while Vanda is declaring the primary endpoint to be entrainment and the secondary endpoint to be parameters associated with nighttime and daytime sleep, I want to be clear that the FDA has not yet reached the same conclusion. So that is a discussion that will continue. What was the second part, Cory?

I'm just reading what the indication might look like eventually?

Yes. The indication would be it is -- our proposed indication would be, it is indicated for the treatment of Non-24-Hour Disorder in the blind and the effect has been demonstrated in controlled studies as Tasimelteon's ability to entrain the body clock to 24 hours. Now, depending on the degree of success that we will have with a clinical endpoint, it is likely that this information will also be included in the label in a fashion such as it has also been demonstrated that Tasimelteon in controlled studies in patients with non-24, in the blind, has demonstrated the ability to improve the amount and timing of nighttime sleep and decrease the daytime sleep. Of course, we'll wait to see the results on that.

And how do you actually measure entrainment?

Yes. So just to step back for one second, to get everybody on the same page. The human body does have a master body clock that sits in the middle of our brain, in an area called the suprachiasmatic nucleus . That clock, if you were to the left in the dark or if you were blind, it will tick at about a period of about 24.5 hours. However, the light that most of us can perceive through the retina and communicated to the suprachiasmatic nucleus through a path called the retinohypothalamic tract, has ability to reset the body clock back to 24 hours and do so every day. So through light, regardless of the speed of our internal clock, we go back to 24. Blind people with no light perception cannot do this resetting. So how do we measure the body clock? The output of the body clock is the circadian and periodic increase and decrease in the night hormone, melatonin. So what we do is we measure the period from the rise and fall of a melatonin metabolite, the alpha-sulfatoxymelatonin in the healing of these patients. And we do that in a 48-hour period unit and repeat that in a series of 4 weeks. So knowing where the peak of this circadian-regulated melatonin rise and fall is, at what time, exact time of the day, we can actually measure now the speed of the body clock with the precision of about 1/10 of an hour. So we do that during screening for 4 weeks. We randomize patients, drug or placebo. Then at weeks 3, 4, 5 and 6, false randomization, we measure the clock and our hope that the primary endpoint is that Tasimelteon 20 milligrams given 1/2 an hour before bedtime can retrain the body clock back to 24 hours. So what I mentioned earlier in the script was that our results that we reported in late January came from the open-label screening period of the second study, the RESET study, in that every patient took Tasimelteon, every patient had a clock that was running at about 24.5 and we've shown in the first few patients, the ability of Tasimelteon to successfully entrain. This is very exciting because there is an expectation and no report in the literature that any individual could spontaneously be entrained. And therefore, we must attribute in this early data, the entrainment to the ability of Tasimelteon to do so. So with that, that makes us feel highly optimistic that we will demonstrate entrainment in the first pivotal study, the study SET. Let us conclude this conference call. We thank you very much for your interest in and support for Vanda and we look forward to speaking with you again soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.