Welcome to the Q1 2017 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Adrian and I will be your operator for today’s call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. And I’ll now turn the call over to Jim Kelly, Vanda’s Executive Vice President and Chief Financial Officer.

Thank you, Adrian. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals first quarter 2017 performance. Our first quarter 2017 results were released this afternoon 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 and Gian Piero Reverberi, our Chief Commercial Officer. Following my introductory remarks, Dr. Polymeropoulos and Gian Piero will update you on our ongoing activities. Then I will comment on our financial results 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 meanings of the 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 Management’s Discussion and Analysis on Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 which is 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. Mihael Polymeropoulos.

Thank you, Jim. Good afternoon and thank you very much for joining us today. We begin 2017 with a conviction to grow our HETLIOZ and Fanapt revenues and to return the U.S. Fanapt business to growth. During the first quarter of 2017 we advanced our company's strategy on all fronts as we executed our growth strategy while delivering strong operational financial results. HETLIOZ net product sales grew to $20.2 million in the fourth quarter of 2017 a 5% increase compared to $19.3 million in the fourth quarter of 2016 and a 25% increase from compared to $16.2 million in the first quarter of 2016. Importantly, number of patients in therapy continued to grow quarter-over-quarter. Fanapt net product sales were $17.2 million in the first quarter of 2017 a 9% decrease compared to $18.9 million in the fourth quarter of 2016 and a 1% increase compared to $17.1 million in the first quarter of 2016. In the first quarter of 2017 we saw a 4% decline in Fanapt scripts as reported by Symphony [ph] when compared to the fourth quarter of 2016. We're optimistic that we will be able to solidify and grow the Fanapt business in the coming quarters. I will now provide you with an update on R&D pipeline progress and then turn it on to GP for an update on the commercial progress. I will update you on the clinical development for HETLIOZ, Fanapt, and tradipitant and then discuss our work on trichostatin A and the newly acquired CFTR portfolio of compounds. We believe that further clinical development of HETLIOZ beyond the kind of non-24 indication in adults has the potential to drive significant revenue growth of this franchise over the coming years. Specifically, studies to develop a pediatric formulation and a randomized study in patients with Smith-Magenis…

Thank you, Mihael. I will now update you on the progress on Fanapt in the U.S. and HETLIOZ in the U.S. and Europe. During the first quarter of 2017 we successfully completed the expansion of the Fanapt US field safety and the full team is now in the field promoting the benefits of Fanapt for both schizophrenia patients with a significant increase in [indiscernible] frequency to our target physicians audience. The organization is fully committed on the successful commercialization of Fanapt and we are optimistic on its potential to return to growth in the second part of 2017. The fundamentals of our HETLIOZ business remains strong as we consistently add new patients on therapy and are seeking early science on the improved persistency associated with the recent change to our specialty pharmacy network. We recently initiated a new patient outreach program with our dedicated team of nurse educators that is delivering excellent results, both in terms of options and new prescriptions. At the beginning of April we also launched new non-24 hour television campaign and we are monitoring the early impact of this new ad. In Germany we are in the early stage of the HETLIOZ commercial launch. We have transitioned our initial clinical trial patient over to commercial HETLIOZ and we are adding new nonclinical patients. The AMNOG reimbursement process is ongoing and we expect our final price to be in place by the third quarter. The preparation of the pricing and reimbursement dossiers are also progressing as planned in other European markets. I will now turn the call over to Jim Kelly, our Chief Financial Officer to discuss our first quarter financial results.

All right, thank you, Gian Piero. Total revenue for the first quarter of 2017 was $37.4 million 2% decrease compared to $38.2 million in the fourth quarter of 2016 and a 12% increase compared to $33.3 million in the first quarter of 2016. HETLIOZ net product sales grew to $20.2 million in the first quarter of 2017 a 5% increase compared to $19.3 million in the fourth quarter of 2016 and a 25% increase compared to $16.2 million in the first quarter of 2016. As of March 31, 2017 the specialty pharmacy channel held approximately two weeks of inventory as calculated based on trailing demand. Patients on therapy continued to grow quarter over quarter and the recent changes to our specialty pharmacy distribution network appeared to have improved the overall persistency trends for these patients. Similar to the first quarter of 2015 and 2016 we saw a reduction in unit refills early in the quarter which was followed by stronger performance for refills later in the quarter. We attribute this to payer dynamics specific to the start of the year. Fanapt net product sales were $17.2 million in the first quarter of 2017 a 9% decrease compared to $18.9 million in the fourth quarter of 2016 and 1% increase compared to $17.1 million in the first quarter of 2016. Wholesalers reduced inventory on hand by an amount that equates to over $202 million in net product sales in the quarter. In the first quarter of 2017 we saw a 4% decline in Fanapt scripts as reported by Symphony when compared to the fourth quarter of 2016. We now are looking forward to the coming quarters to better understand the potential to grow the Fanapt business. In summary, revenue performance for the first quarter was consistent with our expectations absent the…

Thank you, Jim. At this time we’ll be happy to answer questions you may have.

Thank you. [Operator Instructions] And we have Jason Butler from JMP Securities in the line of question. Please go ahead.

Hi, thanks for taking the questions. First on HETLIOZ, you mentioned the increase and persistence, can you just talk about what you're seeing there in terms of the changes you made and how that’s also having any effect on the net patient adds per month.

Jason, I will pass this on to Jim.

Yes, well Jason you might remember that we talked about in the second half of 2016 we migrated from one of the what we described as the poorest performer in our specially network to the highest performer in our specialty network, a good portion of the patients perhaps approaching as much as a third. What we're seeing in the first quarter is an improvement in the persistency of that patient group. So, we're certainly happy to see that and your question about its impact on net patient adds is the right next step to take with this. We believe we are seeing some improvements in our ability to grow patients in the period.

Great and then on Fanapt acknowledging that it's still early to see anything in terms of the impact of the sales force are you hearing anything at least anecdotally or seeing anything in certain geographic pockets the supports that you're seeing or going to see a return on that investment?

Yes, maybe I can describe a little bit the sales force approach. This is a sales force that covers the majority of the geography of the United States leaving only a small percent is whitespace and that is a big departure of the much smaller 50% sales force we had last year which left a significant wide space open. I would say it is very early to have a reading given the fact that most of our new sales force representatives were trained and put in place only over the last few weeks. So, what we should expect is that over this current quarter time will be spent talking to the target physicians and introducing or reintroducing Fanapt and hopefully start generating activity. And it is the back end of the year Q3 and Q4 were consistent with what DP described before, we hope we can return to growth.

Great and then just the last one for me a pipeline question, can you talk about the CFTR transaction you did, what led you to pursue that transaction, what is it that attracted you to the target and what can you learn from other people's experiences with this target?

Yes, so maybe I'll briefly discuss our business development activity and we have with us today Gunther Birznieks the Head of Business Development and he may want to comment on the specifics of the CFTR portfolio and the attractiveness to us. So, in terms of business development over the years Vanda has been very active scouting for opportunities that meet certain very quick thresholds and that is a scientific interest, develop ability and addressing unmet medical needs. And while we've been scouting, as you know very well, we have conducted very few transactions over the history of the company in the last 14 years. This one of the CFTR portfolio we found exceedingly attractive on the science, the early evidence, the ability to develop and the range of indications that can be treated. Maybe briefly Gunther can discuss a little bit about the mechanism and the types of indications that can be addressed.

Absolutely, thank you Mihael. So, just to touch upon the CFTR and attractiveness, the chloride channel that the CFTR regulates is very straightforward epithelial fluid retention and absorption mechanism where depending on the system whether it's intestinal for constipation or diarrhea or in the epithelial of the eye for dry eye represents a very straightforward mechanism of action. We've seen for example on the dry eye that there is data that indicates that in an eye drop formulation pre clinically up to eight hours one of the CFTR activators is capable of producing increased volume of tear secretion in the mouse eye over an extended period of time. That work, as well as the other work that's been done on the CFTR activators and inhibitors was done in Dr. Workman's Lab in UCSF.

Great that's helpful. Thank you for taking the questions.

And the next question comes from Josh Schimmer from Piper Jaffray. Please go ahead.

Hi this is Steven on for Josh. Thanks for taking the questions. Two on HETLIOZ, first can you may be just comment on the patient adoption in Germany so far and then how you are thinking about the rest of Europe? And second, maybe on the specific timing of to begin the study given that the trial has been slow to enroll and the rationale for only three clinical trials sites? Thanks.

Yes, on the adoption in Germany again as DP mentioned we're early in the launch in Germany. We do see however patients coming into treatment month after month, but again the emphasis there is the negotiation with the German authorities on pricing which will conclude in the third quarter and post that we'll be able to unfold a full strategy, commercialization strategy in Germany and hopefully we can talk more about expectations at that time. The question on the SMS Study, we have mentioned in the past that while there is a significant interest and support by the community of Smith-Magenis syndrome families conducting any study in this population is very challenging, given the behavioral neuro developmental co-morbidities in these adults with SMS. So we are evaluating alternative path on more conveniently enrolling patients in this study. And you are correct to point out at this time there are three active sites, but again all the recruitment is done through Vanda with the support of the Smith-Magenis advocacy organization PRISMS. We're evaluating a concept of the virtual site where you can actually accommodate the execution of this study at patients' home or near patients' homes without the burden of long distance travel.

Great thank you.

And our next question comes from Derek Archila from Oppenheimer. Please go ahead.

Hey guys, thanks for taking my questions and just following up on a question from Jason and talking about kind of the Fanapt and some of your comments around the kind of relaunch starting to really hit full stride in the second half, I mean should we assume kind of in the second quarter Fanapt sales kind of flattish, as you guys kind of start to see a little bit of traction but mostly it's going to be in the second half? And then I have a follow up.

Derek, yes indeed our expectation is to stop the decline and flat in the sales within this quarter and then begin to stabilize this flattening and return to growth in the back half of the year.

Okay and then just, maybe you can discuss some of the pushes and pulls relative to your HETLIOZ guidance and some of the variables that we should be thinking about that get you to the bottom or the top of the guidance range?

Well, I will let Jim take the difficult question. But maybe what I will characterize is that, this quarter performance is indeed meeting our expectations and what we've talked about persistence and what we've talked about the early signs of a continuous addition on patients and therapy, this is all very encouraging. But I am mostly encouraged by our ability to continue to identify new patients through the awareness campaigns and that is plural since the direct-to-consumer campaign now is beginning to be supplemented in a meaningful way through the outreach programs. But I'll pass it on to Jim.

Hey, sure. So the way it's probably best to think about our guidance range is that the midpoint of guidance implies about a 6.5% or 6.5 new patient adds per month and that is consistent with how we grew in 2016. And our ability to grow therefore becomes a function of adding at that rate which of course incorporates both, new patient identification plus persistency where you just heard Mihael references we continue to see very nice results in our ability to find new patients and also with some of the changes we recently made with our distribution network we feel very good about our ability to hold on to these patients and keep them on therapy. The next piece to consider is likely the gross to net and how that plays out through the year. What we've discovered is that the first quarter tends to be the highest period for our gross to net and it has to do with the number of patients who are on Medicare and the coverage gap liability that hits early in the year. For that reason Q1 tends to be the highest and then it down ticks for Q2, 3 and 4 and the feedback I've given everyone is, question that rate is it is around 12 plus or minus percent. So stepping back what you're hearing is things appear on track with our expectations that we set back in January. We're finding the patients, persistency is equal to better and our share of gross to net is playing out the way we thought.

Great, thanks for the color guys.

Welcome.

Sure.

And next question comes from Difei Yang from Aegis Capital. Please go ahead.

So good afternoon, this is Matt McLaughlin on for Difei and thank you for taking our questions. I did just have one more for some color on the Fanapt front. It appears to us that the Fanapt prescription trend seems to be stabilizing and the two pieces to that are persistency in new patients with persistency being filled by the specialty pharmacy replacements and the new patient piece being filled by the increased improved sales force and then from there you have another piece added and that's the G2N [ph] and now if we look at it from a seasonality perspective is that G2N [ph] piece the only seasonality portion of it or are there some other pieces in there that might have an effect going forward.

Thanks for the question. I will ask Jim to address it, but I just wanted to clarify the front end. Did I hear you correctly, you talked about new patients and persistency with specialty on Fanapt or you meant HETLIOZ?

Fanapt

Right, just to clarify that Fanapt, there is no specialty pharmacy, so we would not have the state of persistency, however HETLIOZ is only operate through a specialty pharmacy.

Okay, yes thank you for clarifying that, but in terms of the gross to net and seasonality for Fanapt?

Correct, yes, I will let Jim address that for both products.

Hey certainly. When we think about it I'll begin with Fanapt, when we think about the seasonality that we've seen over the last few years it is primarily related to the first quarter and this is true on both products. We certainly see some payer headwinds early in the quarter as patients either migrate to new insurance or have deductibles to address. However we have year in and year out seen strength in the back half of the first quarter that launches us on our way to the rest of the year, that would be the feedback going on seasonality really for both products, that would be the only component with respect to demand. And when it comes to gross to net you heard me mention the coverage gap liability on HETLIOZ which was specific to the first quarter. I wouldn't describe any other seasonality items on HETLIOZ with respect to gross to net. Looking to Fanapt, there's very little if any seasonality to our gross to net. And so we sit here now and what I think is the best part of the year it's our launch pad to growth.

Great, thank you. I did have one more in relation to the tradipitant for pruritus, could you remind us what's the minimum efficacy bar for the Phase II study?

So just to remind everybody, this is a two arm placebo controlled study, tradipitant administered 85 milligrams twice a day versus placebo. There is no specified cutoff of improvement. However, there are several measurements taken during this study. The visual analog scale of each and supplemented by the VARs scale and also scale specific for atopic dermatitis and each including the scored scale that includes it and nighttime sleep measurements and easy, but there is no predetermined cut off of efficacy on the VARS itch scale.

Okay thank you and if I may just maybe one more in relation to tradipitant, in terms of the - like the current treatment landscape and if we consider the current drugs in development where precisely do you see tradipitant fit in?

Yes, so the effort here with tradipitant in chronic pruritus or chronic [indiscernible] this study is conducted in patients with atopic dermatitis. We estimate there are about 900,000 million Americans who suffer from chronic itch due to atopic dermatitis. And if you know, the current solutions are few. Topical antihistamines, topical or systemic steroids or UV radiation. Now of course there is a pipeline of drugs trying to address the causality of atopic dermatitis. Tradipitant does not do that. Tradipitant aims to improve itch in these conditions. Now what is not clear if we succeed with this anti-itch activity of tradipitant whether they may be secondary benefits. As you may already know people with atopic dermatitis experience a feeling of itch and one of the solutions is the mechanical scratching which actually creates evolution of lesions and worsening of the underlying disease, so see tradipitant as oral symptomatic relief of itch.

Great, thank you so much.

This concludes the question-and-answer session. I’ll now turn the call back over to Dr. Polymeropoulos for final remarks.

Thank you very much and thank you all for joining us. We'll see you again next quarter. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.