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

Thank you, Laurine. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals' fourth quarter and full year 2014 performance. Our fourth quarter and full year 2014 results were released this morning and are available on the SEC's EDGAR system and on our Web site, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our Web site. Joining me today on our 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 fourth quarter and full year 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 and involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the Risk Factors and management's discussion and analysis of financial condition and results operations 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 are available on the SEC's EDGAR system and our Web site. 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. 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. Mihael Polymeropoulos.

Thank you very much Jim, good morning everyone. Before I begin the update I would like to thank the amazing Vanda team for producing an unbelievable 2014 with great milestones, the approval of HETLIOZ for Non-24, its commercial launch and the regain of Fanapt price in the U.S. and Canada. This would not have been possible without the professionalism and team work of our Vanda team, the community of patients that we serve and the physicians that treat them. I would like to first update you on our progress with the launch of HETLIOZ in the U.S. for the indication on Non-24. In the fourth quarter we continued to strengthen our commercial organization. We restarted our direct-to-consumer campaign on Non-24 which produced a significant number of additional new prescriptions and opt-ins. Our case manager and account manager system has been successful in providing support to patients and their physicians and drive towards diagnosis and treatment with HETLIOZ. Over 760 HETLIOZ new patient prescriptions were written as of December 31, 2014. This includes the addition of over 220 new patient prescriptions during the fourth quarter of 2014. Since the third quarter, that reflects a growth rate of 40% for total prescriptions written. Of the over 760 new prescriptions written, more than 470 patients have already received at least one script as of yearend 2014. Of the remaining 290 unfilled scripts, approximately 180 are in various states of the payer approval process and we expect them to eventually be dispensed to the patient. We expect that the remaining 110 would not be filled primarily for patient specific reasons. During 2014 the other time to fill ranges from eight to 12 weeks for about half of the prescriptions written while the remaining prescriptions time to fill extends beyond 12 weeks. More importantly of…

Thank you Mihael. Investors will see in our press release that beginning this quarter Vanda is offering non-GAAP financial information. We're doing so because we believe the non-GAAP financial information enhances the overall understanding of our financial performance when considered together with the GAAP figures. On a GAAP basis, during the full year 2014 Vanda recorded net income of $20.2 million as compared to a net loss of $21.1 million for the full year of 2013. On a diluted shares basis this reflects net income of $0.55 per share for the full year 2014 compared to a diluted net loss per share of $0.69 for the prior year. Vanda recorded net income of $69.7 million for the fourth quarter of 2014 compared to a loss of $7.7 million during the same period in 2013. On a diluted shares basis, this reflects net income of $1.77 per share in the fourth quarter of 2014 as compared to a diluted net loss per share of $0.23 for the fourth quarter of 2013. The Vanda fourth quarter and full year 2014 financial statements reflect the impact of the settlement agreement with Novartis announced on December 22, 2014 related to the Fanapt license arbitration proceedings. As part of the settlement which became effective on December 31, 2014 the parties dismissed the arbitration and released each other from any related claims. In addition Novartis transferred all U.S. and Canadian rights in the Fanapt franchise to Vanda, made a 25 million equity investment in Vanda and granted to Vanda an exclusive worldwide license to AQW051, a Phase II alpha-7 nicotinic receptor agonist. Vanda has recorded a $77.6 million gain on arbitration settlement during the fourth quarter of 2014, a $15.9 million intangible asset related to the U.S. and Canadian Fanapt rights and $3 million of Fanapt…

Thank you, Jim. I'll be happy now to address any questions.

We will now begin the question-and-answer session (Operator Instructions). And our first question from Jason Butler from JMP Securities. Please go ahead.

Thanks for taking the questions and congrats on the quarter. First question just on the 4Q revenue. Can you just walk us through -- you gave us some very helpful details on the patient metrics et cetera. Can you just talk us through the patient dynamics in the quarter and how you arrived at 6 million number?

Thank you very much Jason I will pass this on to Jim.

I think the way we would describe really the fourth quarter and frankly how we’re looking at the business on a go forward basis is that we continue to be successful in identifying patients and having new patient scripts written. And as you can see, there is a sequential methodical growth that we’re seeing in our business and that’s really our expectation on a go forward as well. It’s that we ended the year with about 330 patients on therapy and our expectation is that by quarter-to-quarter you're going to see us grow in a slow methodical fashion quarter-over-quarter. There's going to be quarters where you're going to potentially see some better and some worse but that’s the underlying dynamics and we’re exceptionally thrilled with continuing seeing good reimbursement and persistency.

And just to close this Jason, our guidance of $40 million to $45 million per year is exactly consistent with what Jim described, a base of about 330 patients on therapy at the end of the year, plus this continues incremental growth month to month, quarter-to-quarter.

And then just in terms of - you made a comment about inventory being reflective of patient demand. It's a growth product. So is it fair to say that there was some inventory purchasing during the quarter to maintain the roughly two weeks of stocking?

You're exactly right that once you reach a steady state, the incremental -- call it increased purchasing you need to keep up with underlying demand is de minimis. And that was certainly the case this quarter.

Just one more question on HETLIOZ. The growth to net 2015 can you talk about, what your expectations are there and specifically in 1Q when you expect to see some impact of reimbursement resets?

That's another question for Jim. But just to set the stage here that Q1 is a typically higher gross net quarter given the patients on Medicare Part D. But Jim?

It starts with, you've heard that our full year gross to net 2014 was less than 10% and we do expect that that will increase in the first quarter and it's because approximately half of our patients -- half of the 330 we talked about ending the year are Medicare Part D patients who are going to be subject to that coverage gap. And if folks are familiar with that calculation, it's about just over $2,200 is the manufacturers' contribution to that. And that means about half of our patients will result in us having a liability for that in January as a one-time item during the year. So when you look at 2014 gross to net below 10%, you'd expect something in -- maybe the mid-teens in Q1 that dissipates as the year goes on.

And then last question from me just, on the pipeline on VLY-686. Mihael, can you just give us some broad perspectives on what the medical need here is for the patient population, or what the ultimate commercial opportunity is that you think you can address with this drug?

Of course we’re focused to closest IDN, see the results and more discussion to follow once we have that. But broadly chronic pruritus, the eating seen among many indications and especially in patients with atopic dermatitis is a significantly unmet medical need. In fact the definition of chronic pruritus means treatment resistance. And we're not talking about something mild here but that is something life altering. This people are -- response by scratching to the point of bleeding deformities, avoiding going to public et cetera. In some estimates there are about 1 million people in the U.S. that would suffer from chronic pruritus. In current treatments that include antihistamines, steroids or UV radiation are totally ineffective. So if we were to show that we have an oral drug that can actually control the chronic pruritus, that can suggest a very significant contribution to the patients in addressing these medical need.

Thank you. And our next question comes from Josh Schimmer from Piper Jaffray. Please go ahead.

First on both HETLIOZ and Fanapt. How do you gauge whether there is room for additional price increases? You took price increase on both products. So just trying to understand the thinking behind that and whether you feel that there is additional leeway for price increases in the coming months or years. And then the second question -- I think Jim said you're going to stop giving update metrics. On the HETLIOZ launch can you just explain why you're deciding to do that now?

Let me discuss the price increase thinking. First of all in HETLIOZ -- on HETLIOZ we consider that price adjustment having a better understanding of the market and what the drug offers. So just for everybody we took about a 15% market adjustment this year. Now for future plans that's nothing I can comment at this time. On Fanapt there were two parts. Fanapt comes in several doses one milligram, 2, 4, 6, 8, 10, 12 in a titration pack. Based on demand and understanding how the product is used, we took a price increase of the 6 and 8 milligrams which was a significant jump to about 30% or so. And the 12 milligrams was adjusted in what appears to be a 100% but actually it is consistent with the use of 12 milligrams as once a day. And therefore it was adjusting for usage. Now the net Fanapt increase overall is actually small. It is about a 15% net taken into account that 40% of the patients are on Medicaid and price increases based on the legislation result in additional rebates leading to actually a net decrease of the Medicaid channel. And again your question, future price increases so prospects I cannot comment on this at this time. The second part had to do, why are we suggesting that we're not going to give all these metrics in the future. The simple answer is because we believe that we are -- at least in the detailed metrics we gave today are very reflective of what is going to be happening in the near future. If there is some significant deviations and reasons to revisit some of these metrics, we can come back but we believe now a quarterly reporting of revenue progress is the best metric to allow shareholders to calculate value.

The purpose of providing this level of granularity in a launch year, when for example we didn’t provide guidance was really to enable investors to have better visibility into our business model and cost structure and we feel like we’ve done that and that was an important part of getting people grounded in what HETLIOZ could look like in the future. And now that we’ve evolved to providing guidance this year, that level of granularity really shouldn’t be required.

So can I kind of clarify on HETLIOZ, Mihael you said that price increase was based and learning of the market and the product? What is it that you’ve learned since launch that’s given you greater confidence in the value add?

Well, we’re not [indiscernible] with our patients. We’re in continuous contact with 100s of patients that have taken treatment. And clearly the anecdotal reports are there is life changing experience that they have once HETLIOZ works for them and that’s all. And consistent with that we decided to take the increase but also the positive experience that we’ve been having with payers and reimbursement channels recognizing the value added to this patient community that has been grossly underserved.

Thank you. And our next question comes from Corey Davis from Canaccord. Please go ahead.

Thanks. First question would be Mihael, how definitive are the Phase II results on 686 going to be? Is it enough to make an affirmative go, no go decision for Phase III or could there be some ambiguity where you could see a signal that might warrant doing different type of Phase II study?

Thanks Corey. It is a small study. So with that we cannot commit that it’s going to be the definitive answer. It is really a two Phase II study trying to understand the potential signal. So we’re looking for a signal. We’re looking to analyze the data very carefully and see if there is something directional. Having said that just to be clear, the study is still blinded at this time and therefore I have no knowledge which direction it's going to go. Of course we would prefer a clear signal for a Phase III progress but certainly we’re going to be looking very carefully.

If there is a clear signal can you go right to Phase III?

Absolutely. It would require a couple of things. One is a design to identify more doses. Here we’re doing the single dose of 100 milligrams and a discussion with the FDA of the appropriate path. Remind you that nobody has been approved and the FDA at this time is uncertain what is the correct primary endpoint. Ourselves, the community experts would argue that what we’re using today is as exploratory primary endpoint of the vision and scale [ph] is the right approach, but certainly we would like to reach agreement with the FDA on that.

So you'd have to combine both -- kind of anew primary end point and dose finding into a Phase III for that to work?

Yes, which is not unusual. So you would like to have more than one dose and certainly it’s going to be a number of endpoints. But of course the primary endpoint at least, that has to be an agreement with the FDA which direction to go.

And then I am sorry if you -- this was asked and answered already, but the Fanapt guidance seemed a little bit light to me compared to where it’s been in the previous years and I'm curious why it would be down especially arguably now it’s got more promotion than it had before behind it and I know you’re not giving quarterly guidance, but is there some reason to suspect that the first couple of quarters are going to be disproportionately lower than Q3 and Q4 might be?

Again as you said we’re not going to give guidance on the quarter but let me tell you the thinking. Last year in the hands of Novartis, the product was about $65 million net. The year before that was more like 75 million net. So you can see there was a sequential ’13-’14 drop in the hands of Novartis. So before we have the ability to evaluate tactics, strategies, test them and attempt to re-launch the product, we cannot commit that this kind of trajectory towards a lower number may not continue. So our $55 million to $56 million guidance is a reflection of what the product has been doing, it’s trajectory and the acknowledgement that with the transition here and during transition years, this is not necessarily the time that we see growth.

And with that said I think that -- and you heard in our initial press release this is an immediately accretive asset. When you look at the royalty we would have otherwise gotten this year versus the cash flow that we’ll get, even in the range of the guidance that we’re offering, what an exceptional thing for Vanda. And it comes of course with great deal of optionality for future growth that Mihael will of course keep you abreast of.

Just to highlight here, what we tried to say in the script as well, we see a dual value in Fanapt. We see the immediate value of net revenues to Vanda, very significant in the next three years but we also see the revenues for years to come. And just to remind everyone that the NCE patent for Fanapt with [indiscernible] expires in November 2016, however our Method To Treat patent that we listed in the Orange Book just this January has expiration in 2027, giving a long term prospect for revenues, but also the potential for growth. And also to remind you that for both the NCE and the 610 Method To Treat patent, we’re currently in litigation with a generic company.

So the second patent, the used patent that you recently listed has been consolidated with the litigation on the NCE patent?

Not yet, but certainly both of these patents are in the horizon and both are being actively pursued now in separate lawsuits.

And is your goal to consolidate them into one litigation?

I cannot comment on that and it is true that historically judges would like to see both cases together. Whether this is going to happen in this case or not isn’t clear.

Okay, well hopefully you can settle for a favorable outcome on that but that’s more comment than a question, and I’ll leave it at that.

Thank you. And our next question comes from Stefan Quenneville from Morningstar. Please go ahead.

I just -- I actually have a couple of questions. I wanted to ask you about the persistence rate of 70% that you guys cite. I'm just curious what’s driving people to stop taking the treatment, if there is any patterns emerging or anything we should be aware of? My second question is about your operating expense guidance of $105 million to $120 million. I'm just curious about the range and how much of that range relates to the flex and the DTC spending? And finally, given your -- the fight for HETLIOZ in Europe and as well as your plans with Fanapt there, what are -- could you help me sort of size out the opportunities in Europe for both drugs? And what’s your plans in terms of commercializing them there and the needs that you’re going to have to build up or perhaps sort of partner to expand sales in Europe? Thanks.

Sure Stefan. I will take question one and three and I will leave question two on the range of OpEx for Jim. So question one, let’s see what was it, persistence in the 70%. We’re actually very excited with the 70%. This is a great persistence cumulative rate. Of course it may change over time but we have sufficient data over the last nine months or so to feel very confident about this number. Your question has to do what may make 30% of the patients eventually stop taking the drug. And that would be a combination of things. Number one, it’s not going to work for everybody, as we had anticipated. So that can be one of the reasons. Number two will be they experience an adverse event that they don’t like. And remember the adverse event was commonly seen in the clinical service, has been headache in 5% to 10% of the patients or so, or vivid dreams. And half the patients like them, the other half did not like them. So these is a kind of flavor, so why people stop and then a myriad of reasons that people stop any drug. They are planning to start a new treatment et cetera, et cetera. So again the high level here is that the 70% is a great number and we hope we can continue to see such great persistence in the future. Your third question had to do with the overall European plan. I’ll break it out in two parts. One is HETLIOZ and then Fanapt. On HETLIOZ we’re in the midst of the EMA review. Hopefully a positive decision could come as early as Q3 of this year. We know that Vanda is in the best position to build the market and the awareness that are…

Exactly, and on the question regarding 2015 guidance for non-GAAP operating expenses, I think I really heard sort of two questions in there. One is hey, what’s the thinking around the size of the range and the other one relates to hey what’s happening with our expectations around DTC spend? Why don’t I start with DTC real quick? I think that what investors should begin to expect from us is that DTC is a part of our regular marketing mix quarter in and quarter out, unlike -- we took a little break you might remember in Q3 of last year. You expect going into ’15 you’re going to see DTC on a more regular quarter-to-quarter basis. Turning to the non-GAAP operating expense guidance, this is a new number of folks. So I’ll just remind them what this is. This is GAAP operating expenses. You back out cost of goods sold which of course is a variable cost linked revenue, and then you take out some of those non-cash items, like stock based comp, intangible asset amortization and we also removed that one time gain related to the settlement. In 2014 our non-GAAP operating expense was $98 million. So we’re guiding for 2015 for $105 million to $120 million. Given the magnitude of this range of $15 million, it appears to be an appropriate range that gives the latitude we need to manage the business. And we just simply aren’t going into any more detail than that.

Thank you. I will now turn the call over to Dr. Polymeropoulos for closing remarks.

Well, thank you very much everybody. It has been a great quarter and a great year 2014. We look forward to success in 2015 and we appreciate all your support. Thank you.