Vanda Pharmaceuticals Inc. (VNDA) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2012 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Christy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Jim Kelly, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you. Good morning, and thank you for joining us to discuss Vanda Pharmaceuticals' second quarter 2012 performance. Our second 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 September 1, 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 second quarter 2012 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, 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's EDGAR system and on 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, 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 made significant progress in the clinical development of tasimelteon for both Non-24 Disorder and major depression. For Non-24, we have now fully enrolled the larger clinical Phase III, S-E-T, SET study, a double-masked, placebo-controlled, 2-arm study. In that study, we have enrolled 84 individuals who are totally blind, with no light perception. During this screening phase, we determined that their biological reason is not contained to the 24-hour clock. This is accomplished via measurement of the urinary melatonin metabolite. The 84 patients were enrolled across multiple clinical sites in the U.S. and Germany during the 2-year span. The SET study is designed to determine the ability of tasimelteon to align the body clock to a 24-hour rhythm towards the endpoint, which is referred to in the scientific literature as entrainment. Unlike all entrainment, it's definitional for Non-24-Hour Disorder. We and key opinion leaders believe that a treatment of entraiment is the appropriate endpoint for any therapeutic modality aimed at affectively addressing the disorder. It is our hypothesis that tasimelteon will be able to restore the physiological process of resetting the body clock to a 24-hour rhythm in these patients to who lack light perception, and consequently, the likely ability of naturally resetting the body clock. Proof of mechanism has already been demonstrated during the screening phase of the RESET study. In addition to the primary endpoint of entrainment, we are also collecting daily data on nighttime sleep and daytime naps, including the duration and timing of each episode. These data will inform our secondary clinical endpoints of improvement in nighttime sleep and daytime naps. Since it is apparent that the aberrant sleep patterns currently have a periodic nature given the perpetual system of the body clock relative to the 24-hour clock, we are likely to define that the secondary endpoint the improvement in the worst quartile of sleep during the observation period. We're also collecting data of overall clinical impression, which will inform the CGI improvement endpoints. For the RESET studies we enrolled, we expect to report top line results of this study by the end of 2012. Our second Phase III study, the RESET, continues to enroll, and we expect to fully enroll that study in the next few months and report top line results in the first quarter of 2013. In the RESET study, patients receive tasimelteon during the screening phase, and those patients that are successfully maintained by tasimelteon to a 24-hour clock are randomized to either tasimelteon or placebo. It is our hypothesis that the highest proportion of patients in tasimelteon will continue to be entrained after randomization as compared to the placebo-treated patients. We're also collecting sleep data in the same fashion that we'll describe in the SET study. The results of the 2 studies will form the body of evidence of effectiveness by which we expect to seek FDA regulatory approval. While we have not reached an agreement with the FDA on the endpoints of these studies, we and key opinion leaders from around the world's believe that the design and endpoints of the current studies, if successful, will provide convincing and definitive proof of the effectiveness of tasimelteon in Non-24. We will continue to pursue available means in order to further clarify the regulatory path in the most exceeding manner as we advance towards our goal of a projected mid-2013 NDA filing with the FDA. On major depression, the MAGELLAN study of tasimelteon in patients with MDD, Major Depressive Disorder, continues to enroll towards a goal of 500 patients from multiple U.S. sites. Based on the current enrollment rate, we expect that we will report top line results in the first half of 2013. This is a 2-arm placebo-controlled study with tasimelteon as a monotherapy in MDD, and the primary endpoints are the typical HAMD and MADRS depression scales. We're also collecting data on sleep, as well as circadian function. We continued the technology project from Eli Lilly on the recently acquired Neurokinin-1 Receptor antagonist, VLY-686. VLY-686 could have utility across a number of potential indications in the way of exploring clinical development options at this time. On Fanapt, I would like to provide you with an update on our EMA application. We have received the Day 180 List of Outstanding Issues, and we have already had a meeting with their representative country to further clarify these items. The major outstanding issues centered around competitive efficacy, cardiac safety and appropriateness of the existing active control maintenance study. We're currently considering our strategy and have requested and expect to be granted an extension to respond to the outstanding issues in the fourth quarter of this year. Bob Repella, our Chief Commercial Officer, will provide an update on our market development efforts in support of tasimelteon for Non-24-Hour Disorder. Bob?

Okay. Thanks, Mihales. During the second quarter of 2012, the Vanda commercial team continued to make significant progress with our market development activities in support of tasimelteon for Non-24-Hour Disorder. In the U.S. alone, there are between 65,000 and 95,000 totally blind individuals suffering with Non-24, making this indication a significant standalone commercial opportunity for the company. Non-24 represents the first step in the life cycle plan for tasimelteon, which may also have utility in a variety of other conditions, including, but not limited to, major depression, or MDD. Over the past few months, we have continued our efforts to build strong and lasting relationships with key advocacy groups that represent the blind community. Vanda was an active participant and sponsor at both the National Federation for the Blind and American Council for the Blind annual meetings. Updates and information from both of these events were posted on the Non-24-Hour Disorder educational website, 24sleepwake.com. These interactions continue to enhance our understanding of how to best engage the blind community and improve the awareness and understanding of Non-24-Hour Disorder. During June, Vanda had the opportunity to present 5 posters at SLEEP, the Annual Meeting of the Associated Professional Sleep Societies, which is the largest annual gathering of circadian rhythm and sleep specialists in the U.S. Data presented included screening information from the Phase III SET study, which confirmed that approximately 70% of totally blind individuals with sleep complaints suffer with Non-24 and have a body clock that is not consistently aligned with the normal day-night cycle. This data confirms the high prevalence rate of Non-24 in totally blind individuals and underscores the potential value of tasimelteon in resetting and aligning the body clock to the 24-hour day-night cycle. Vanda also continues to have ongoing discussions with organizations that are interested in supporting our efforts to identify a traditional referral network with a focus on circadian rhythm disorders. We believe this approach will provide flexibility for blind individuals to be appropriately evaluated and treated for Non-24 by highly skilled health care professionals in their local geography. Finally, we are currently conducting a comprehensive health care utilization analysis of totally blind individuals with the assistance of a large, national managed care organization. This will help us better understand treatment patterns and assist us in quantifying the value platform for tasimelteon in Non-24. I look forward to providing you with additional updates on our market development activities in the future. I will now turn the call over to Jim Kelly, our CFO, to discuss our financials for the second quarter.

Thanks, Bob. During the second quarter 2012, Vanda recorded a net loss of $8 million as compared to a net loss of $1.3 million in the second quarter of 2011. On a diluted shares basis, this reflects a loss for the current quarter of $0.28 per share as compared to a net loss of $0.05 per share in the second quarter of 2011. As of June 30, 2012, there were approximately 28.2 million shares of Vanda common stock outstanding. Total revenue for the second quarter of 2012 was $8.4 million compared to $7.4 million in the second quarter of 2011. In these periods, there were 2 sources of revenue. They are licensing revenue and royalty income. The second quarter of 2012 and '11 revenue each included $6.7 million of licensing revenue related to the amortization of the upfront payment received from Novartis for U.S. and Canadian commercial rights of Fanapt. Second quarter 2012 revenues included $1.7 million for Fanapt royalties received from Novartis. This compares to a $750,000 for the second quarter of 2011. During each period, Vanda recognized a 10% royalty on Novartis net sales. Fanapt prescriptions, as reported by IMS, reached 37,000 for the second quarter of 2012. This represents a 5% increase over first quarter 2012 prescriptions and a 24% increase over second quarter 2011. Total operating expenses for the second quarter of 2012 were $16.5 million. This was flat as compared to Q1 2012. Research and development cost of $12.5 million made up the majority of that spend for the second quarter of 2012. This compares to $6 million for R&D spend in the second quarter of 2011. The increase in R&D expenses over the prior year is a result of the cost incurred in connection with the ongoing trials for tasimelteon in Non-24 and MDD, plus an upfront payment of $1 million made to Eli Lilly & Company in connection with the licensing of VLY-686, a Phase II ready NK-1R antagonist. General and administrative expenses were $3.6 million for the second quarter of 2012 compared to $2.6 million for the second quarter of 2011. Vanda's cash, cash equivalent and marketable securities as of June 30, 2012, totaled $144.7 million, a decrease of $12.5 million since the end of the first quarter of 2012. I will now turn the call back to Mihales.

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

[Operator Instructions] Your first question comes from Lauren Migliore from MorningStar.

Can you give us an idea about the extent of a sales force you think you might need for tasimelteon in the orphan indication? I know that this is an indication that the firm has said that it plans to market itself, but you're dealing with a general prescriber base. So just any thoughts you could give regarding what type of sales force and the targeted strategy. I know it's a little ahead of schedule here, but I'm just looking at potential commercialization build out in my model. It will be very helpful.

Lauren, it's a Mihales. Thank you very much for the question. Bob Repella will address that.

So we're looking at a model that will focus on a referral network, as I mentioned. So we're talking to a number of associations and societies about organizing, identifying a network of providers that will be available in MSA in geographies to the blind community so they can be properly evaluated for Non-24. So actually, if we kind of move to flesh out that network and its size and scope across the U.S., the way we're thinking about it is we would want to have to be large enough where it would be readily accessible to blind patients. But at the same time, wouldn't need a traditional type of sales force to call on those locations throughout the U.S. So generally, our thinking is more along the lines of MSLs and potentially a couple of dozen that could reach these sites that are in the network. And then it could also support interactions in academic medical centers and with payers as well. So it's not going to be a traditional model from a sales force perspective. And then, of course, a big effort that we have ongoing is disease awareness and education that's directed at the blind community through a variety of technology platforms and working with opinion leaders and advocacy entities as well. So it's going to be efficient, targeted and not what you would expect from the standpoint of a primary care type of sales force endeavour.

[Operator Instructions] We have no further questions at this time. I'd now like to turn the call back over to Dr. Mihales Polymeropoulos for closing remarks.

Thank you very much, and thank you all for participating. Again, we look forward over the next 6 to 9 months to a number of milestones for our company, including the Phase III results of tasimelteon in Non-24, as well as in the first half of 2013 results on the first Phase III study of major depression. Thanks again, and we look forward to speaking with you again soon.

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