Vanda Pharmaceuticals Inc. (VNDA) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Vanda Pharmaceuticals Earnings Conference Call. My name is Lisa, 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 call over to your host, Mr. Jim Kelly, Senior Vice President, Chief Financial Officer. Please proceed, sir.

Thank you, Lisa. Good morning, and thank you for joining us to discuss Vanda Pharmaceuticals' first quarter 2013 performance. Our first quarter 2013 results were released this morning and are available on the SEC EDGAR system and on our website. 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 May 16, 2013. Joining me on today's call are Dr. Mihales Polymeropoulos, our President and CEO; Bob Repella, our Senior Vice President and Chief Commercial Officer; Dr. Paolo Baroldi, our Senior Vice President and Chief Medical 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'll comment on our financial results for the first quarter of 2013 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 securities laws. 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, MD&A and Results of Operations sections of our annual report on Form 10-K for the fiscal year ended December 31, 2012, which is available on the SEC 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. I would like to begin by acknowledging the latest addition to the Vanda management team, Dr. Paolo Baroldi, our Senior Vice President and Chief Medical Officer. Paolo brings a wealth of leadership and clinical development experience to his role, and we're very happy to have him back at Vanda. As you may recall, Paolo previously served as Vanda's Chief Medical Officer from 2006 through 2009. On the business side, our primary focus continues to be on the tasimelteon regulatory activities. In March, we announced that we held a pre-NDA meeting with the Division of Neurology Products of the FDA to discuss the regulatory path for filing an NDA for tasimelteon for the treatment of Non-24. At the pre-NDA meeting, the FDA confirmed that the efficacy and safety data that we proposed to be submitted in the tasimelteon NDA for Non-24 is adequate to support filing. The FDA also confirmed that the NDA supporting package that includes data from clinical pharmacology, preclinical pharmacology programs, chemistry and manufacturing was also deemed adequate to support filing. Based on this successful completion of the pre-NDA meeting and the internal progress made on our application preparation, we're targeting an NDA submission for tasimelteon in mid-2013. Given that Non-24 represents an unmet medical need, we will request priority review at the time of the NDA submission. If granted, the resulting 8-month priority review timeline would represent an upside to our current guidance, which assumes a 12-month standard review cycle. At the time of filing, the FDA may also provide direction regarding the status of an advisory committee meeting. Since there are no FDA-approved circadian regulators or treatment for Non-24, we believe it is likely that the FDA will seek to have an advisory committee meeting for tasimelteon in advance of a PDUFA date. In late April, we announced that we had amended the tasimelteon license agreement with Bristol-Myers Squibb. This action removes the necessity to enter into a third-party development and commercialization agreement. We're very pleased to now have the freedom to proceed in this manner. Turning to Fanapt, the atypical antipsychotic for the treatment of adults with schizophrenia. U.S. Fanapt prescriptions, as reported by IMS, were approximately 38,900 for the first quarter of 2013. This represents a 9% increase over first quarter 2012 prescriptions and a 2% increase versus fourth quarter 2012 prescriptions. We are encouraged by the recent positive growth trends in Fanapt prescriptions. Since March of this year, prescriptions have averaged greater than 3,100 per week for the first time since launch. Outside the United States, we withdrew our Marketing Authorization Application for FANAPTUM oral iloperidone tablets in the European Union. We intend to reassess our European regulatory strategy for FANAPTUM once the results from the Relapse Prevention Study in Patients with Schizophrenia, REPRIEVE, being conducted by Novartis become available. In Israel, Fanapt was recently approved for reimbursement, and our local distribution partner, Megapharm, expects to launch Fanapt this summer. I will now turn the call to our Chief Commercial Officer, Bob Repella, who will provide an update on our commercial efforts in support of tasimelteon in Non-24.

Thanks, Mihales. During the first quarter of 2013 and continuing into the second quarter of this year, the Vanda commercial team continue to make significant progress in our preparation for a potential commercial launch of tasimelteon for the treatment of Non-24-Hour Disorder. Our prelaunch preparation has continued with a focus on driving awareness and education of Non-24 among the blind community, advocacy groups, patient support organizations and health care professionals. Recently, the Vanda team had an opportunity to visit with a number of advocacy and support organizations and is actively planning to participate in a variety of forms in the coming months as part of our educational campaign designed to provide interested parties with an accurate understanding of Non-24. These include our visits to the White House and Helen Keller schools for the blind in New York and the Perkins School for the Blind and The Carroll Center in Boston, active participation at the American Foundation for the Blind, or AFB, national meeting in Chicago. This forum brings together approximately 500 individuals from a diverse group of organizations, including representatives of the AER, the Association of Education and Rehabilitation Specialists for the Blind, and COSB, the Council of Schools for the Blind. Vanda also participated in the VisionServe Alliance meeting here in Washington, D.C., which brings together a wide range of leaders from blind organizations such as Lighthouses across the country, the Blinded Veterans Association, the USA Blind Athletes Association and others. During the next few months, we are looking forward to a variety of additional opportunities to engage with the blind community, including the NFB, National Federation of the Blind, and ACB, American Council of the Blind, annual meetings. Each of these events draws thousands of participants from the blind community every year. All of these activities continue to enhance our understanding of how best to engage and communicate with the blind community and provide an opportunity to share information on the high prevalence of Non-24 among the totally blind and the significant impact this disorder has on their lives. In addition to the blind community, the commercial team continues to engage with a variety of health care professionals that may play a role in educating and treating patients with Non-24. During May and June, the commercial team will be participating in the American Society of Ocularists spring educational forum. The ASO represents a group of over 150 board-certified ocularists. They play a critical role in the blind community: the fabrication and fitting of custom-made ocular prosthetics. The 27th annual meeting of the Associated Professional Sleep Societies or SLEEP, a scientific forum focused on sleep and circadian rhythm disorders, where Dr. Steven Lockley from the Harvard Medical School and the Brigham and Women's Hospital and principal investigator for the SET and RESET studies, will deliver a presentation on Non-24. And the 95th Annual Endocrine Society Meeting or ENDO 2013, featuring 2 Vanda abstracts, one of which has been selected as a poster presentation. As you can see, the Non-24-Hour Disorder awareness and educational effort is a primary focus for Vanda. As we move through 2013 and continue to expand both the commercial and medical affairs teams, the reach and impact of our educational efforts is expected to continue to grow. While we recognize that a knowledge gap exists in the marketplace today, the recent results of our qualitative market research indicate that awareness and understanding of Non-24 is increasing. During the second half of the year, we have of a variety of additional market research projects planned to gauge our progress among the blind community and health care professional audiences. In addition to our live engagements, we are continuing to expand our Internet and social media presence and have kicked off our direct response radio campaign. All of these efforts are designed to educate and drive the continued growth of our database. This database includes blind individuals, their immediate family, relatives, friends, members of advocacy organizations and support groups, health care professionals and other constituents within the blind community. There are a variety of ways to join, including via the non-24.com website or by calling (855) 856-2424. By participating in the database, individuals can obtain information about Non-24, listen to patient testimonials, connect with others in the community and elect to receive ongoing updates. In addition to those already enrolled in the database, we are inviting all 1,500-plus blind individuals in the Vanda registry to enroll. The Vanda registry represents those blind individuals who previously communicated with us and expressed an interest in participating in the SET and RESET trials. Finally, while my comments today focused primarily on our educational efforts, the commercial team continues to work diligently to ensure that tasimelteon will be accurately characterized as the first and only circadian regulator that can reset the master body clock and then train the melatonin and cortisol rhythms to the 24-hour day-night cycle and that the appropriate patient support programs and services will be ready for a potential commercial launch in 2014. I will now turn the call over to Jim Kelly, our Chief Financial Officer, to discuss our financial results for the first quarter of 2013.

Thank you, Bob. During the first quarter of 2013, Vanda recorded a net loss of $4.2 million as compared to a net loss of $8 million for the first quarter of 2012. On a diluted shares basis, this reflects a loss of $0.15 per share for the first quarter of 2013 as compared to a net loss per share of $0.28 for the prior year. As of March 31, 2013, there were approximately 28.3 million shares of Vanda common stock outstanding. Total revenues for the first quarter of 2013 and '12 were each $8.1 million. In these periods, there were 2 sources of revenue. They are licensing revenue and royalty income. First quarter 2013 and '12 revenues each included $6.6 million of licensing revenue related to the amortization of the upfront payment received from Novartis for U.S. and Canadian commercial rights to Fanapt. First quarter 2013 and '12 revenues each included $1.5 million in Fanapt royalties received from Novartis. During each period, Vanda recognized that 10% royalty on Novartis' net sales of Fanapt. Total operating expenses for the first quarter of 2013 were $12.3 million compared to $16.5 million in the first quarter of 2012. Research and development costs of $8 million made up the majority of the first quarter 2013 spend and reflected a decrease of $4.2 million versus the $12.2 million for R&D spend in the first quarter of 2012. The primary reason for the lower expenses in the first quarter of 2013 was the completion of the tasimelteon Non-24 and major depressive disorder efficacy studies. As noted earlier, we are pleased with the speed of the appropriate decline in R&D expenses as we believe these positions us well as we transition towards becoming a commercial stage company. General and administrative expenses were $4 million for the first quarter of 2013 compared to $3.9 million in the first quarter of 2012. Vanda's cash, cash equivalents and marketable securities, which I'll refer to here as cash, totaled $110.9 million as of March 31, 2013. Cash decreased by $9.5 million in the first quarter of 2013 compared to decreases of $10.6 million in the first quarter of 2012 and $14 million in the fourth quarter of 2012. Vanda is providing investors with the following financial guidance for full year 2013. This financial guidance assumes a midyear NDA submission for tasimelteon for Non-24 is accepted by the FDA for standard review. 2013 expenses are expected to reflect lower research and development spending as compared to 2012 and an increase in commercial spending that is commensurate to progress with the tasimelteon NDA filing. Full year 2013 decrease in cash is expected to be between $45 million and $50 million compared to $47.5 million for 2012. Total 2013 operating expenses are expected to be between $57 million and $62 million. This includes Fanapt intangible asset amortization of $1.5 million and $4 million to $6 million of noncash stock-based compensation. Total 2012 operating expenses were $61 million. 2013 operating expenses also assume $4.3 million in milestone payments due upon the acceptance by the FDA of a tasimelteon NDA submission and $3 million to $4 million in NDA-related filing expenses. I will now turn the call back to Mihales.

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

[Operator Instructions] Your first question comes from the line of Jason Butler.

Just a quick one on the NDA submission. Other than the time needed to compile the document, are there any other time-gating steps in the submission process?

Thank you, Jason. No. The only activity that we have left is to compile the common technical dossier, again, not a trivial job. But we are well underway to completing and meeting our mid-2013 submission timeline. Yes, there are no other remaining activities.

Okay, great. And then just a question for Bob. Can you talk about any feedback you're hearing from the advocacy groups and the blind community as you're continuing with these outreach efforts? Is there any color you can give us about the increasing level of awareness or their willingness to participate and listen in these discussions?

Yes, I would say that generally, there's an enhanced appreciation for the direct link that exists between total blindness and Non-24 and, of course, an understanding of the high prevalence rate. And as they talk to their constituents and their members, whether it's NFB or AFB or others, they're getting feedback as it relates to members and others that are engaged with their constituents. And my sense is that the feedback they're getting continues to validate the challenges that these individuals have with Non-24, how debilitating it is, especially when you have that interface with the rehabilitation specialists and others that are working with the blind community every day. So the opportunity to engage is expanding. The number of forums that we're invited to is also increasing, and I think it comes with a clear recognition that this is a significant disorder of the totally blind and there's really been nothing available to them previously, and this could really make a difference.

And just to follow up on that, Jason, I think there are 2 aspects of the view of the disorder by people who have it and the advocacy groups alike. One is the health side with all the health consequences of Non-24, and the other one, the one that Bob was pointing to, is the social and occupational impairment that this disorder brings. So it is not only the expression of symptoms of the disorder but also a significant impact on the daily activities of these individuals.

Okay, great. Just one last question for Jim. Does your operating expense guidance assume, under a standard review timeline, that an advisory panel occurs in 2013, or do you assume it in 2014?

So the working assumption is that if you go to standard, you're going to be working with the 12-month. And so if you back up a couple of months off a 12-month, you'd be backing up off of mid next year by a few months. The specifics around that, of course, can tilt towards 2014, but you just don't know until they give you definitive feedback.

Your next question comes from the line of Charles Duncan.

This is Roy in for Charles. I had a question about the settlement with BMS. Are you guys still intending to do any third-party development and if you can discuss any of those?

Thank you, Roy. First of all, with BMS, it was an amendment of the existing agreement, just removing an option that BMS had of coming back and taking another look at the asset and licensing it back. So that overhang now is completely removed, and therefore, Vanda is in charge of making any decisions of any further co-development or/and co-commercialization. As we have described before, we are mindful of potential collaborations with other entities that could enhance the value of tasimelteon for the treatment of Non-24. These types of activities include discussions and engagements with entities that can help us further characterize the disorder but also confirm and characterize the outcomes of tasimelteon. Nothing necessarily imminent, but several of these activities are ongoing.

Okay, great. Another question on the -- what do you think will be the major points of debate, assuming you do have a panel, for the panel and for the agency?

Well, just to step back for a second, as you all know, we reported the second RESET study, which demonstrated definitively that the drug does have circadian regulatory activities and can train the master clock. But on top of that, we demonstrated that despite the small size of these studies, a very significant impact on sleep/wake measures of amount and timing, as well as a significant improvement on a global functioning scale is measured by the CGI. That, coupled with the emerging safety profile that appears to be very mild and very consistent with the chronic dosing, we believe that an advisory panel should welcome the opportunity to develop and approve a treatment for Non-24. The important point, not necessarily for debate but for Vanda to get across, is that this is the first circadian regulator and no other small molecule exists that has this property or to treat the disorder, to reset the master body clock, and that we are a unique mechanism in the class of dual melatonin receptor agonist or as we refer to as DMRA. So we believe that we have the data and the package to support approval, and we certainly hope that an advisory committee, if the FDA convince one, will have a similar opinion.

Okay. And can you tell us what's going to be in the presentations at ENDO?

No, we have not communicated that yet. We're following, of course, all the rules of this society. But as soon as we can discuss the content, but also, we know for people, its important timing and location, we will do so.

Okay. And one last question. When is the 10-Q going to be posted?

The filing deadline is tomorrow. It'll be out shortly.

Your next question comes from the line of Corey Davis. Oren G. Livnat - Jefferies & Company, Inc., Research Division: This is Oren Livnat for Corey. A few questions. I know in your pre-NDA meeting that it was mostly, I guess, administrative and quantitative type of discussion. But can you tell us, was there any conversation around whether you were on track for something like a "circadian regulator-type" claim? Was there any discussion around the formal indication at all?

Thanks, Oren. So the pre-NDA meeting, you characterized it correctly that it is usually a process. But also the FDA is very mindful to only grant pre-NDA meetings to programs that they have the appearance, at least, of having demonstrated sufficient efficacy that may warrant later the filing review. So we think there is a quantity of evidence check as well. We always have characterized in our discussions with the FDA, the drug is a circadian regulator. But of course, the pre-NDA meeting is not the right forum of discussing label claims. We do believe, however, that over the last 2 years, in our continuous discussions with the division, we have driven the distinction of drugs that may affect this or the other sleep parameter and drugs that definitively act as circadian regulators to reset the master clock in the suprachiasmatic nucleus. And we do believe that this division is very well aware of this distinction, and they're also mindful that the endpoints designed for those studies drive that message as well. Oren G. Livnat - Jefferies & Company, Inc., Research Division: All right. You did mention the Bristol agreement amendment. I don't -- you didn't mention if there were any potential changes to royalty rates down the road or imminent milestones besides the NDA acceptance. Were there any changes there, and have you ever characterized what that royalty rate is?

I'll start from the bottom. We have not characterized to numbers, what the royalty rate is. The number we've communicated -- I'm asking Jim to say what it is.

Sure. So what we've said is that BMS will receive a royalty rate in the low teens on our direct sales. In the event that we have a, for example, a partner in a different geography and we receive a royalty, in that case, BMS would receive in the mid-20s.

And the first part of your question, this current amendment does not change any of the economic terms of the prior agreement. Oren G. Livnat - Jefferies & Company, Inc., Research Division: All right, great. And if you could tell me -- give me one more. On the OpEx, you've been clear that you guys internally are, I guess, assuming conservatively a 12-month review for this NDA. But when it comes to your actual pre-commercial preparations and spending you're anticipating ramping through the end of this year and maybe into early next year, are you planning for the best case or the earliest case?

Just to step back for a second, first of all, we're very excited that we've been able to really turn down the R&D spend very significantly and very rapidly to allow our resources to flow into the commercial launch. It is true that our forecasts and assumptions assume a standard review. And it is also possible that there may be some additional acceleration of the commercial expense if we were to be granted a priority review. But we may have to wait for that, and therefore, this will be more of an August or so discussion once we hear back from the FDA. Oren G. Livnat - Jefferies & Company, Inc., Research Division: Right. So not that it really matters in the grand scheme of things, but if you were granted a priority review, maybe it'd be prudent for us to assume a launch in still the standard time frame?

Well, for now, all we can say is that our assumptions are standard review. We have not really guided how soon after the review we should launch. We're making every effort to be ready as soon as possible. I would say, Oren, as we get closer, we may be able to clarify those timelines.

Your next question comes from the line of Josh Schimmer.

Just wondering, given the prior [indiscernible] in the field, what's your confidence that you can get new method of use or dosing IP issued based on the SET and RESET studies? And were there any unexpected findings in there that you believe are particularly noteworthy and patent worthy?

Thank you, Josh. Just to talk a little bit about the IP furlough, as you all know, tasimelteon is protected by an NCE patent, which, with the expected full Hatch Waxman 5-year extension, will expire at about December of 2022. So this is a strong patent position. But of course, we're making every effort to identify new opportunities that may lead to further patent protection. To that effect, we have previously communicated that within our program, any unexpected findings that may improve and modify the method of use, and they're likely to be included in the current prescribing information, has been submitted as patent applications. We cannot yet discuss the content as they are confidential, but we're making every effort to proceed with those patents and eventually prosecute them until the issue.

Okay, got it. And then, Jim, I guess you've mentioned that if you sublicensed tasimelteon in Europe, the royalty obligation to Bristol shifts to that 20% or higher. Is that -- but you would owe off of your own royalty, or would that be a royalty off of total revenue?

It would be royalty off of what we receive, so not off the end user but rather what we receive.

So for example, if we were to receive a 30% royalty, the BMS royalty actually will be only 6% of the total also for the total revenue.

Your next question comes from the line of Lauren Migliore.

I'd just appreciate any comments you had regarding the cash flow runway and if you have any projections as to an expected level of tasimelteon sales that you need to reach cash flow breakeven given your expected cost structure.

Thank you, Lauren. We're not giving at this time any forecast on tasimelteon revenues. The first part of your question, I'm not sure I heard it well.

Just regarding the cash flow runway and how many quarters you're projecting.

Right. Yes, the only thing that I would say is the guidance we're giving today concerns only 2013, and it is a guidance on cash of a 2013 spend between $45 million and $50 million, which is about the same level as the prior year.

I would now like to turn the presentation back over to Dr. Polymeropoulos for closing remarks.

Thank you. Let us conclude this conference call. We thank you all for your interest and support for Vanda, and we look forward to speaking to you again soon.