Vanda Pharmaceuticals Inc. (VNDA) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Vanda Pharmaceuticals Earnings Conference Call. My name is Towanda, and I will 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 Mr. Jim Kelly, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Towanda. Good morning, and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2012 performance. Our third quarter 2012 results were released this morning and are available on SEC EDGAR system and 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 this call will be available through December 6, 2012. Joining me on today's call are Dr. Mihales Polymeropoulos, our President and CEO; 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 third quarter of 2012 before opening the lines to 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 meaning of Federal Security 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 or similar expressions or words, identify forward-looking statements. Our forward-looking statements are based upon current expectations that involve risk, changes in circumstances, assumptions and uncertainties. These risks are described in the Risk Factors and MD&A sections of our annual report on the Form 10-K for the fiscal year ended December 31, 2011, and our subsequently filed 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 made significant progress in advancing our pipeline. Our tasimelteon clinical program in Non-24, for totally blind patients, is nearing completion. Both of our Phase III studies are now fully enrolled. The SET study has enrolled 84 patients, and we expect to report top line results by the end of 2012. The RESET study has enrolled 20 patients, and we expect it to report top line results in the first quarter of 2015. Non-24-Hour Disorder in the blind is a serious condition, which affects 50% to 70% of blind individuals with no light perception. The ability of the eye to perceive light has 2 functions. One is to form images and the other is to reset the master body clock through its impact on the suprachiasmatic nucleus, or SCN. It is the absence of the circadian body clock resetting function that is definitional for Non-24. And it is this circadian body clock resetting function that we aim to restore with tasimelteon. In our Phase III studies, we're evaluating the ability of tasimelteon to reset the master body clock and synchronize the circadian rhythm of blind patients suffering from Non-24 to 24 hours and also measures the impact of this resetting activity on measures of the sleep wake cycle. Specifically, the SET study is a double-masked randomized study in 84 individuals with Non-24. Patients are randomized one-on-one on tasimelteon 20 milligrams or placebo. The primary endpoint of this study is entrainment, which reflects a resetting of the body clock. This is measured by the proportion of patients who demonstrate entrainment of their alpha-sulfatoxymelatonin rhythm, or alpha MT6, by each treatment. A strip-down endpoint is response, measured by the proportion of patients who are both entrained and have a clinically meaningful improvement in at least one parameter of the sleep-wake cycle. These parameters include measures of total nighttime sleep, total daytime nap time, weighted timing of sleep and clinical global impression scale. We're also evaluating a number of secondary endpoints, including entrainment of the cortisol rhythm. It is worth noting that we have recently reported that tasimelteon was shown to entrain the cortisol rhythm as well as the alpha MT6 rhythm in Non-24 patients during the open-label screening phase of the RESET study. We believe this observation is significant, as it suggests that tasimelteon's circadian and training properties are due to a resetting of the master body clock at the site of the suprachiasmatic nucleus, and therefore, we expect it to affect all peripheral circadian activities, which include the sleep-wake cycle, core body temperature and cardiovascular, metabolic and hormonal homeostasis. The top line results of the SET study, which we expect to report by the end of 2012, will include outcomes of many of these endpoints. The RESET study is a double-masked randomized study in 20 patients with Non-24. The design includes an often label screening portion, which identifies people who are entrained on tasimelteon, followed by a randomized portion on tasimelteon and placebo. The primary endpoint of the RESET study is the maintenance of entrainment measured by the proportion of patients who remain entrained to a 24-hour alpha MT6 rhythm on each treatment. It is expected that patients randomized to placebo will be enabled to maintain entrainment, while patients randomized on tasimelteon will be able to maintain their entrained status. Additional endpoints in the RESET study include the maintenance of entrainment measured by entrainment of the cortisol rhythm. We expect to report top line results of the RESET study in the first quarter of 2013. We are in continuing discussions with the Food and Drug Administration and expect to hold a pre-NDA meeting in the first quarter of 2013 to confirm the path towards the goal of a projected mid-2013 NDA filing. If the FDA approves this planned NDA for Non-24, we believe that tasimelteon will become the first circadian regulator to be approved for the treatment of any circadian disorder. As such, we believe that it will represent a significant value for our patients and a substantial commercial opportunity for Vanda. Non-24 affects an estimated 65,000 to 95,000 patients in the U.S., although the awareness is extremely low. We believe this lack of awareness of the condition results from underdiagnosis in the absence of an effective treatment. While this is a hurdle, we believe it also represents a significant market opportunity for Vanda. As Bob Repella, our Chief Commercial Officer, will discuss in a few minutes, we're currently undertaking a number of activities designed to address these issues and prepare for a potential commercial launch. We're also evaluating tasimelteon for the treatment of major depression. Our Phase IIb/III MAGELLAN study of 500 patients with Major Depressive Disorder in the U.S. is now fully enrolled. Many lines of evidence have suggested a connection between circadian function and mood disorders. It is our hypothesis that tasimelteon, through its circadian regulatory activity, may be able to affect central nervous system pathways that are responsible for certain of the symptoms of major depression. In the MAGELLAN study, we're evaluating the ability of tasimelteon to improve the symptoms of major depression as a monotherapy measured by improvements in the Hamilton Depression and MADRS depression scales. Secondary endpoints of this study include measures of sleep improvements, measured with the LSEQ scale, as well as exploratory analysis of circadian function via salivary melatonin measurements. Major depression is a common and well-recognized disorder that affects millions of patients worldwide. Despite the availability of a number of antidepressant treatments, 2/3 of the patients report residual symptoms, which suggests that new therapeutic modalities are needed. If successful, tasimelteon could become the first circadian regulator in the U.S. to demonstrate antidepressant properties. Agomelatine, a dual melatonin agonist, is approved in the EU for the treatment of major depression. Top line results of the MAGELLAN study are currently expected to be reported in the first quarter of 2015. I will now turn to Fanapt, iloperidone, our FDA approved antipsychotic product marketed by Novartis in the U.S. Vanda receives royalties from Novartis on net sales of Fanapt, as reported in our earnings release. We have recently reported that Novartis had decided to discontinue development of the long-acting injectable or depot formulation of iloperidone. We're currently in discussions with Novartis to determine next steps. We reported earlier in the year that Fanapt was approved for marketing in Israel, and we are happy to report today that our Argentinian partner has informed us that Fanapt has also gained marketing approval in Argentina. In the EU, FANAPTUM, the trade name of Fanapt in Europe, is currently under review by the EMA and we expect a CHMP opinion within the next few months. We are also making progress with the development of our Neurokinin-1 Receptor antagonist, VLY-686, which we recently acquired from Lilly. We are now in the process of completing technology transfer and evaluating a number of possible indications for proof of concept evaluation, including pruritus in patients with a topic dermatitis and chemotherapy-induced pruritus. We believe that these indications represent significant unmet medical needs for which the VLY-686 may be uniquely suited to address through its mechanism of action. We expect that we will be prepared to initiate a clinical development program for VLY-686 in the second half of 2015. I will now turn the call to our Chief Commercial Officer, Bob Repella, who will now provide an update on our market development efforts in support of tasimelteon for Non-24-Hour Disorder. Bob?

Thanks, Mihales. During the third quarter of 2012, the Vanda commercial team continued to make progress in our preparation for a potential launch of tasimelteon for the treatment of Non-24-Hour Disorder. This orphan indication, which primarily impacts totally blind individuals, is a chronic, debilitating, circadian rhythm disorder, for which there are currently no FDA-approved treatments. Our launch preparation continues to focus on a number of important areas, including, first, increasing awareness and understanding of Non-24 as a circadian rhythm disorder. A significant knowledge gap exists in the marketplace today. A very small percentage of blind individuals struggling with Non-24 have been accurately diagnosed. We believe many have actually been misdiagnosed with insomnia, mood disorders or other conditions, which may result in treatment failure and disappointment for both the patient and the health care provider. With this as a backdrop, we are continuing to expand our educational programming with a goal of fostering a greater understanding of this serious chronic condition through a comprehensive effort focused on a number of groups, including blind individuals and their family members and friends, select medical professionals, physician specialties and provider networks, and advocacy organizations, including those that represent the blind community such as the National Federation of the Blind, the American Council of the Blind, the American Foundation for the Blind and National Industries for the Blind. And also, those advocacy organizations that focus on orphan and rare conditions, such as the National Organization of Rare Disorders, or NORD. These activities are beginning to generate additional dialogue about circadian rhythm disorders and increase the number of Internet searches on Non-24. As we move forward, we will continue to explore new educational platforms, and we intend to invest in those activities that will help ensure the accurate diagnosis and management of Non-24 in the blind population. A second important area of our launch preparation is ensuring that tasimelteon is accurately characterized as a circadian regulator. Here again, we believe a significant knowledge gap exists in the marketplace. The receptor binding profile and pharmaceutical properties of tasimelteon are distinctly different from those of melatonin, a food supplement. Tasimelteon is being developed as a circadian regulator for its potential ability to reset the master body clock and synchronize or entrain both the melatonin and cortisol circadian rhythms to the 24-hour day/night cycle. We are not pursuing a label for the treatment of insomnia with tasimelteon, which is the approved indication for ramelteon. I'm excited about the unique clinical position this may allow tasimelteon to occupy in the market, along with the potential for being the first FDA-approved product for the treatment of Non-24. From a business perspective, we believe this will provide the necessary support to implement a value-based, premium pricing strategy and to achieve comprehensive payer reimbursement for this orphan condition. When this is combined with a go-to-market strategy that includes an orphan condition and product-specific commercial model, which is designed to be cost effective, it is clear that Non-24, as an indication, has the potential to be a significant, standalone, commercial opportunity for Vanda. I will now turn the call over to Jim Kelly, our Chief Financial Officer, to discuss our financial results for the third quarter of 2012.

Thank you, Bob. During the third quarter of 2012, Vanda recorded a net loss of $5.3 million, as compared to a net loss of $3.1 million for the third quarter of 2011. On a diluted shares basis, this reflects a loss for the current quarter of $0.19 per share, as compared to a net loss of $0.11 per share for the third quarter of 2011. As of September 30, 2012, there were approximately 28.2 million shares of Vanda common stock outstanding. Total revenue for the third quarter of 2012 was $8.3 million, compared to $8 million in the third quarter of 2011. In these periods, there were 2 sources of revenue. They are licensing revenue and royalty income. Third quarter 2012 and '11 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. Third quarter 2012 revenues included $1.5 million in Fanapt royalties received from Novartis, as compared to $1.2 million for the third quarter of 2011. During each period, Vanda recognized that 10% royalty on Novartis' net sales of Fanapt. Fanapt prescriptions, as reported by IMS, were approximately 38,500 units from the third quarter of 2012. This represents a 3% increase over second quarter 2012 prescriptions and a 15% increase over third quarter 2011 prescriptions. Total operating expenses for the third quarter 2012 were $13.7 million. Research and development cost of $10.2 million made up the majority of our operating expenses for the third quarter of 2012. This is compared to $8.2 million for R&D spend in the third quarter of 2011. The increase in R&D expenses over the prior year is primarily the result of costs incurred in connection with the ongoing trials for tasimelteon in Non-24 and Major Depressive Disorder. General and administrative expenses were at $3.1 million for the third quarter of 2012, compared to $2.7 million for the third quarter of 2011, and Vanda's cash, cash equivalent and marketable securities as of September 30, 2012, totaled $134.4 million, a decrease of $10.3 million since the end of the second quarter 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 the line of Corey Davis with Jefferies & Company. Oren G. Livnat - Jefferies & Company, Inc., Research Division: It's actually Oren Livnat for Corey. I've got a few questions on tasimelteon. I mean, the obvious question upfront is just, given that you still don't have any sign-off from the FDA on the "pathway," I'm just trying to get some better color around sort of where you are in those discussions. You mentioned that they'd like to see the SET and RESET data, presumably ahead of that Q1 meeting you're talking about. I'm just wondering, is there something specific that they've indicated that they're looking to see in there? Or are we just talking about them being on totally new ground here and there's no precedent for this indication, so they don't even know, really, what they're looking for?

Exactly. It is the latter. So as you know, we had a number of discussions over the last couple of years, a number of meetings with the FDA, trying to develop a common understanding of this orphan indication. It is not uncommon, as many of us understand, that the FDA may not have full knowledge of what is the appropriate way of evaluating the efficacy of the drug for an orphan indication, especially for an orphan indication that they have never approved a drug before. So they understand our intent to evaluate both the definitional issue with the disorder, which is the lack of entrainment to the 24-hour rhythm, which is a measurable, well understood, and, according to all experts that have published in the world, the accepted outcome for effective medicine Non-24. But also, the FDA is interested to understand any clinical implications of the ability of tasimelteon to entrain circadian rhythms. So to that effect, we have layered our endpoints so that our primary endpoint is the objective entrainment of circadian rhythms. And then the step-down is a combined endpoint. So for those people who were entrained, we asked the secondary question, how many of them, in addition to being entrained, have significantly improved in one of several sleep-wake measurable functions. So the bottom line is, in the latest discussion we had with them, they expressed the wish that we meet with them once we have the data from the studies so they can -- it can better inform the path towards regulatory filing. Just to clarify, that we believe there are 2 main paths towards approval of this drug and evaluation by the FDA. One is a regular path, which is evaluate the drug based on the effectiveness on the primary endpoint of entrainment because it is the well-accepted endpoint, and that is a regular path approval. But also, there is the opportunity of the accelerated path of approval, which is available to drugs in unmet medical needs and serious conditions, where a drug can be approved based on its surrogate marker. Now, of course, we made the distinction that entrainment is not a surrogate but rather definitional. But if the FDA was to consider that the surrogate, they still have the opportunity to follow the accelerated path of approval. Oren G. Livnat - Jefferies & Company, Inc., Research Division: And I think, to follow-up on that, so they've indicated, obviously, they want to see this data and clearly they're at least curious about what you call secondary or clinical effects presumably on sleep measures and we know they've been very uptight in the past with some other insomnia drugs, which obviously, is a different indication, having a pretty high hurdle for a sort of the breadths of sleep measures that they've acquired people to hit, even unreasonably so. And I'm just curious if you think that if you nail your entrainment, how high the hurdle may or may not be on the clinical sleep side, if at all?

Right, that is why I think they want to see the results. And of course, it depends on how much well we cleared the hurdle of entrainment. And, of course, then look at the clinical endpoints. Now we feel very confident that the drug will clear the hurdle of entrainment, and we also feel very confident that we will at least see significant trends, if not significance in the combined endpoint of response. Just to say that the FDA is familiar with the concept of approving drugs on a marker and actually in front of us, I think, today is the panel on Cushing's syndrome in the Novartis drug, which is considered under approval and approved in Europe based on its effect on cortisol levels. The reason I mentioned that is that it is very significant that we have now demonstrated in the open-label study that not only we affect the circadian rhythm of melatonin, but that of cortisol. The 2 are not directly related. The relatedness is through the master clock. So that will be another point of evidence that we will provide from these clinical studies that will further inform this discussion with the FDA. Oren G. Livnat - Jefferies & Company, Inc., Research Division: All right. I'm happy to step in line if there is one otherwise I can keep going.

Why don't you keep going for now? Oren G. Livnat - Jefferies & Company, Inc., Research Division: Tasimelteon depression, obviously, is very interesting and I guess we have no idea what to expect there while we have pretty high confidence on the entrainment sleep side. So, I guess, I'm wondering, for your to-go, no-go decision moving forward after that data comes along, what sort of hurdle you've set internally? Do you want to see something in line with current marketed depression drugs? Or do you think, given that you have a radically different mechanism, that potentially the hurdle could be lower and still very interesting to move forward, given the different approach?

Well, let's speak historically. The hurdle for major depression drugs is high the way it is and depression jobs are not differentiated on how many points they improved the HAMD scale or for certain responders. So, of course, we'll be very excited if a drug clears the HAMD and MADRS scales with significance. But I think the very intriguing aspect here will be what else did we learn about the mechanism of action. So the first answer to your question, of course, it is a go if it is positive on the MADRS and HAMD scales. But we will be particularly excited if we learn something about the additional effects of the drug it may have because it is unique circadian regulatory properties. And what I mean by that is specific effects on the LSEQ, that's the Leeds questionnaire of sleep. We're also measuring sleep daily with actigraphy, but we are also collecting a lot of information on circadian function, and, specifically, the phase advance or delay nature of individual base in circadian rhythm by measuring melatonin at screening and then during treatment. So hopefully, it will be the combination of this information that will allow us to develop the final go/no-go decision. But certainly, clearing the first hurdle of the HAMD and MADRS scales, it's going to be potentially pivotal. Oren G. Livnat - Jefferies & Company, Inc., Research Division: All right. I know you guys aren't emphasizing Fanapt these days, but I am curious, given the European meeting that you're anticipating very soon and CHMP opinion, what was the status of that relapse -- placebo-controlled relapse prevention study that, I think, Novartis is or was doing and does that factor at all into this conversation at this point?

Yes, just to brief everybody, as a first marketing commitment in the U.S., Novartis would have to conduct for the oral Fanapt a maintenance study, which is a placebo-controlled randomized study. That study is ongoing, and for now, our partner, Novartis, is reporting to us that the expectation is that this study could have resolved sometime in 2014. This study has taken a little time. Now the results of this study may be necessary for European approval, although we're not certain about that. So the more color to this is that with the EMA, we're in discussions on several aspects of the package, one of them discusses how appropriate the maintenance studies that we have in the current package are for approval in Europe. We argue that the maintenance effect of iloperidone treatment of schizophrenia has been demonstrated. And that was shown in the study of 1,300 patients versus haloperidol, where iloperidone, Fanapt, was shown to be non-inferior under a number of sensitivity analyses convincingly demonstrating the maintenance effect in a 12-month study. So that is part of the discussion. We know that the EMA accepts both models, the non-inferior active control design, but also the placebo-controlled design and sometimes they prefer the placebo. So hopefully, we'll convince them that this is not necessary, but if they were to require that, it will have to wait the results from the ongoing Novartis study. Oren G. Livnat - Jefferies & Company, Inc., Research Division: All right, and you can remind us on the depot formulation -- Novartis has dropped that, highlight that you still have x U.S. rights on all formulations, do you see any near-term activity on the depot formulation with a partner or x U.S.?

Well, let's go back to the U.S. event. So as all of our shareholders know from our report, Novartis has been working in a pharmacokinetic study evaluating the release profile of 2 alternative depot formulations for once-a-month injection, one with a microparticle and the other one includes crystals. Now we are confident that both these formulations should have profiles compatible with the once-a-month injection. So from the technical point of view, we continue to believe that from the standpoint of technical success, iloperidone depot could proceed. Of course, there would be many considerations on that. In regards to the U.S., we are in discussions with Novartis so that we can better understand the data, their decision-making process and discuss next steps; x U.S., of course, we have the rights, but it is a contextual decision. Depot formulations are not standalone approvals, but rather, follow an oral formulation approval. So now we will be focused in the EU to gain regulatory approval of the oral formulation, but, of course, being mindful of the opportunity of the depot formulation, recognizing that depot formulations historically have done extremely well in the marketplace and actually outperforming their oral formulation counterparts. But the focus now will be: one, to concentrate on the support of the oral Fanapt approval in Europe; and two, understand more the details of the depot program by Novartis in the U.S.

[Operator Instructions] And with no further questions in the queue, I would now like to hand the conference over to Mr. Jim Kelly for closing remarks.

Thank you, Towanda. I'm going to hand it actually over to Mihales.

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

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.