Welcome to the Second Quarter 2014 Vanda Pharmaceuticals, Incorporated, Earnings Conference Call. My name is Shannon, and I'll be your operator for today's call. [Operator Instructions] Please, note that this conference is being recorded. I will now turn the call over to Mr. Jim Kelly, Vice President and Chief Financial Officer. You may begin, sir.

All right. Thank you, Shannon. Good morning, and thank you for joining us to discuss the Vanda Pharmaceuticals' second quarter 2014 performance. Our second quarter 2014 results were released this morning and are available on the SEC's EDGAR system and on our website, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website. Joining me on today's call is Dr. Mihael Polymeropoulos, our President and CEO. Following my introductory remarks, Dr. Polymeropoulos will update you on our ongoing activities, then I will comment on our financial results for the second quarter of 2014 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 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 and MD&A sections of our annual report on Form 10-K for the fiscal year ended December 31, 2013, and on our subsequently filed quarterly reports on Form 10-Q, which is available in 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'd now like to turn the call over to our CEO, Dr. Mihael Polymeropoulos.

Thank you very much, Jim. Good morning, everybody. We're encouraged by the early performance of the HETLIOZ launch in the U.S., and we are optimistic about the prospects for future growth. I would like to spend a few minutes and characterize the early launch activity in a bit more detail. Vanda launched HETLIOZ for the treatment of Non-24 in April of this year. Non-24 affects the majority of totally blind individuals, and it is estimated that approximately 80,000 people suffer from Non-24 in the U.S. Despite the high prevalence of Non-24, we recognized early on and prior to the launch that awareness about Non-24 was very low among blind individuals as well as the physician community. As you're aware, Vanda undertook an extensive direct-to-consumer disease awareness campaign utilizing both radio and TV advertisements. This extensive phase of our Non-24 direct-to-consumer campaign was conducted during the first half of this year and concluded at the end of May. The awareness campaign was highly effective, resulting in more than 9,500 people signing up in our database to learn more about Non-24 and potential treatments. In addition, we believe awareness significantly increased among the average American, and that includes healthcare professionals. With the conclusion of this first phase of disease awareness and with the launch of HETLIOZ, we have concentrated connections with individuals in our database to engage them into case management, a personal interaction that is designed to facilitate proper diagnosis and treatment. Our sales force of 24 account managers is exclusively concentrating on educating and assisting the growing pool of Patient Directed Physicians or PDPs. To date, these PDPs are mostly primary care physicians who are already treating the potential patients for other conditions. The potential patients have requested that we contact these PDPs on their behalf to introduce the physicians…

Thank you, Mihael. During the second quarter of 2014, Vanda recorded a net loss of $21.6 million as compared to a net loss of $26.5 million in the first quarter of 2014. On a diluted-share basis, this reflects a loss of $0.64 a share for the second quarter of 2014 as it compared to a net loss per share of $0.79 for the first quarter of 2014. As of June 30, 2014, there were approximately 33.9 million shares of Vanda common stock outstanding. Total revenue for the second quarter of 2014 were $10.9 million as compared to $9.1 million for the first quarter of 2014. During the second quarter of 2014, there were 3 sources of revenue. They were HETLIOZ product revenue, Fanapt royalty income and Fanapt licensing revenue. HETLIOZ product revenue for the second quarter of 2014 was $1.6 million, gross to netted sales adjustments for HETLIOZ product revenue were in the mid teens for the quarter. HETLIOZ is sold through specialty pharmacy channel, and the second quarter HETLIOZ product revenues are reflective of underlying prescription demand. Second quarter 2014 Fanapt licensing revenue was 7.9 -- $7.8 million as compared to $7.5 million during the first quarter of 2014. During each period, Vanda recognized a 10% royalty on Novartis net sales of Fanapt. Second quarter 2014 Fanapt royalties received from Novartis were $1.5 million compared to $1.6 million in the first quarter of 2014. Total operating expenses for the second quarter of 2014 were $32.5 million compared to $35.7 million in the first quarter of 2014. Selling, general and administrative costs of $28.1 million made up the majority of the spend for the second quarter of 2014 and reflects the commercial activity related to the April launch of HETLIOZ in the United States. Research and development costs for the second quarter of 2014 were $3.5 million compared to $7.3 million for the first quarter of 2014. First quarter 2014 R&D included a $2 million milestone payment associated with the HETLIOZ approval in the U.S. Vanda's cash, cash equivalents and marketable securities, which I'll refer to as cash, as of June 30, 2014, totaled $63.6 million. So we're also affirming our existing financial guidance for the full year 2014 that we originally provided back in May. Total 2014 operating expenses are expected to be between $110 million and $120 million. This includes intangible asset amortization expense of $2.3 million and $68 million of noncash stock-based compensation expense. I will now turn the call back to Mihael.

Thank you, very much, Jim. With that, we'd be happy to address any of your questions.

[Operator Instructions] Our first question comes from Joshua Schimmer from Piper Jaffray.

Just 2 quick ones. One, with regard to the direct-to-consumer advertising, how do you think about when is the right time to reengage on that front? What are kind of the parameters or variables you're looking for that, that will tell you that it's time to go back and return to that?

First of all, thank you very much, Josh, for joining us and the question. As we discussed, the awareness campaign, the large DTC campaign in the first half has been very successful making patients aware, engaging them in contacting us, and now fueling this launch. We believe there are thousands more of patients that can become aware and, therefore, can continue to fill our operation. We do plan in the fourth quarter to have a smaller-targeted DTC campaign, optimizing things to be more effective knowing all we know now from the first half. Just to be clear. The extent of that direct-to-consumer campaign the first quarter is within our operational guidance of OpEx of $110 million to $120 million.

Got it. And I know, you probably can't say too much about the arbitration with Novartis on Fanapt, but can you give us a sense of the process itself or the timing for how that arbitration might work?

I appreciate you are noting that arbitration proceedings, our private proceedings. And we'll honor that. As you know, Novartis disclosed that an arbitration is ongoing. And Vanda, indeed, has initiated this arbitration in regards to the Fanapt license. And that's pretty much the extent of our disclosure there. Now in general, arbitrations take a cycle of 12 months or so. And therefore, it is a rather expedient way to try to solve disputes -- contractual disputes between companies. So we do expect this arbitration to approximately take that course.

Our next question comes from Jason Butler from JMP Securities.

Maybe I could just start by asking about the prescriptions written versus those dispensed. You didn't give the metrics there, but maybe I could ask -- can you talk about the dynamics of that process from prescription being written to the patient to be getting the drug. Is anything changed versus the last update you gave? Are you seeing any increased hurdles or any increased roadblocks that would stop a patient getting a prescription or getting delays in getting a prescription?

Thank you, Jason, and thanks for the question. So, first of all, no, we do not see any prescription blocks. We see the same process that we saw early on in the launch, benefits investigation followed by request for prior authorization, completion of that prior authorization and fill. The time is variable from patient to patient, and the key factors are incomplete intake forms, signatures missing and things that take time to obtain. And then the normal process of insurer requesting prior authorization, physicians filling this out and moving on. It continues to be our expectation that the vast majority of prescriptions written will ultimately be filled. Now on the second part of your question, it's true that June 4 update we gave more specifics of our percent of scripts triaged to specialty pharmacies and percent of them being filled. We felt that these metrics were not useful, however, I can tell you that these metrics are significantly improving. And that, of course, is a function of time. So from the 420% -- from the 420 scripts written, a larger percent than what was reported in June is triaged. And a larger percent of what was reported in June is filled. So we're moving on the right direction.

And then, just looking forward, I know it's still very early in the launch, but can you talk about what -- given that you have these patient directed sales goals -- Patient Directed Physician sales goals, can you talk about what visibility, if any, you have into prescriptions that may or may not be or could potentially be written in coming weeks?

Yes. So I'm trying to see how to answer this question. Well, what is impressive about this process -- and we're actually impressed daily, is how targeted and precise it is because it starts with a patient who is engaged, interested and wants to find a solution for the problem they believe is Non-24. And on the other hand, we have a specific physician that knows the patient over periods of time and they want to help. And all it needs is the 2 parties to connect based on family [ph] information, which we're happily providing to both of them, resulting in a proper diagnosis, and if necessary, treatment. So we do have pretty good visibility of the pool of these payers or physicians and PDPs, and we do have very good visibility as they evolve, over time, get in to the physician's office. What has been impressing us is that in these early days of launch that things are not fully efficient. We're learning, we're adapting. We're seeing this steady demand. As you recall, back in June 4, early June, we reported 220 scripts, 68 clinical, 150 or so commercial demand. Now we are at 420. And if you just divide evenly over these 2 months, it's about 80 or 100 scripts per month. The amazing impressive thing is this steady rate of scripts coming in even if we're not at our most efficient. In fact I would say, we are in the early days of getting case management to work and adding to the efficiency of this engine.

That's helpful. Just last question. Maybe for Jim, you said that, your revenue recognition is reflective of underlying patient demand. Maybe -- could I just ask you to clarify when exactly you are recognizing revenue? Is it when a prescription is written or when a prescription is actually dispensed to the patient or a different period?

Yes so -- thanks for the question. So we're recognizing revenue upon sale to the specialty pharmacies.

Just to add to that, what we understand from specialty pharmacies is that they hold very little stock. It's usually 30 days or under. And therefore, because they have full visibility into the written scripts, that is why what they hold is a close reflection to the true demand that they fully understand.

Our next lesson comes from Stefan Quenneville from MorningStar.

Most of my questions have been asked. But maybe you should follow-up on your, I guess, strategy for launch in Europe? Specifically, I was just curious if there are any constraints on direct-to-consumer advertising in the major European countries and if that's going to impact your launch strategy there?

Thank you very much, Stefan. The direct-to-consumer advertising for pharmaceuticals is completely different between the U.S. and Europe. In fact, DTC our pharmaceutical product is not permitted almost across most of the European countries. We do not plan to do that, but similarly to the U.S., we're exploring disease awareness campaigns. And these are allowed almost in an identical fashion like they are in the U.S. Our strategy is actually proceeding with a few cautious steps. One is we want to understand what do the patients want, what do the patients need, whom and what do the patients listen to. And the only sources for that are the patients themselves through their advocacy organizations around Europe. We are placing significant efforts now to connect to these organizations and understand these dynamics of patient influencing points and also patients' request. It is possible that it is similar to the U.S. that a direct-to-consumer awareness campaign in Europe may be appropriate. We just don't have all the data to determine that today.

At this time, I would like to turn the call back to Dr. Polymeropoulos for closing remarks.

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