Welcome to the Q2 2017 Vanda Pharmaceuticals Earnings Conference Call. My name is Victoria and I will be your operator for today's call. At this time, all participants are in a listen only mode. And 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. Jim, you may begin.

Alright, thank you, Victoria. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals second quarter 2017 performance. Our second 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, Mihael 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 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 Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, 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'd now like to turn the call over to our CEO, Dr. Mihael Polymeropoulos.

Thank you, Jim. Good afternoon, everyone, and thank you very much for joining us today. During the second quarter of 2017, we have advanced our company growth strategy on all fronts, delivering strong operational and financial results. After successfully completing the expansion of our Fanapt field sales team in the first quarter of 2017, the full team has started promoting the benefits of Fanapt for adult schizophrenia patients with an expanded reach and frequency. The organization is fully committed to the successful commercialization of Fanapt and we're optimistic on its potential to return to growth in the second half of 2017. In addition to this, in July, the Fanapt U.S. field force team began promoting HETLIOZ to psychiatrists. We are confident that this will represent a great opportunity to both expand the number of Non-24 patients who can benefit from HETLIOZ and reinforce the partnership with the psychiatrist by brining solutions to patients with Non-24. The fundamentals of our HETLIOZ business remained strong and we continue adding new patients quarter-over-quarter. The price negotiations for HETLIOZ in Germany had transitioned to an arbitration phase, which we expect to conclude by the end of 2017. The preparation of the pricing and reimbursement dossiers in additional European markets is also progressing as planned. Looking now in more details at this quarter financial results. HETLIOZ net product sales were 22.5 million in the second quarter of 2017, a 12% increase compared to 20.1 million in the first quarter of 2017 and a 29% increase compared to 17.5 million in the second quarter of 2016. Fanapt net product sales grew to 19.5 million in the second quarter of 2017, a 13% increase compared to 17.2 million in the first quarter of 2017 and a 5% increase compared to 18.6 million in the second quarter of…

Thank you, Mihael. Total revenue for the second quarter of 2017 was 42.1 million, a 12% increase compared to 37.4 million in the first quarter of 2017, and 17% increase compared to 36 million in the second quarter of 2016. HETLIOZ net product sales grew to 22.5 million in the second quarter of 2017, a 12% increase compared to 20.2 million in the first quarter of 2017 and a 29% increase compared to 17.5 million in the second quarter of 2016. As of June 30, 2017, the specialty pharmacy channel held approximately two weeks of inventory as calculated based on trailing demand. Patients on therapy continue to grow quarter-over-quarter and recent changes in our specialty pharmacy distributor network appear to have improved the overall persistency trends for these patients as compared to last year. Fanapt net product sales were 19.5 million in the second quarter of 2017, a 13% increase compared to 17.2 million in the first quarter of 2017, and a 5% increase compared to 18.6 million in the second quarter of 2016. As compared to Q1 2017, wholesaler have increased inventory on hand by an amount that equates to over 1 million in net products sales, but still remains below the year-end inventory levels as of 12.31.2016. In the second quarter of 2017, we saw 1% decline in Fanapt scripts as reported by IMS when compared to the first quarter of 2017. The 2017 Fanapt revenue guidance between 77 million and 82 million is based on the expectation that TRX growth in the third and fourth quarters of 2017. Vanda recorded operating expenses of 44 million in the second quarter of 2017 compared to 45.3 million in the first quarter of 2017 and 40.8 million for the second quarter of 2016. Research and development expenses in the second…

Thank you very much. I'm happy to answer any questions.

Thank you. [Operator Instructions] And our first question comes from Jason Butler from JMP Securities. Please go ahead.

Hi, thanks to taking my questions and congrats on the quarter. First one just on HETLIOZ, can you maybe give us some color on the gross to net for the product and whether the trend was similar to that seen in prior years versus the first quarter?

Hi Jason, glad to take that one. It is similar and as expected that in the second quarter, we see a decline in the absolute amount of the gross to net. And as you might remember that's a function of the number of patients on HETLIOZ that our Medicare patients and are subject to the coverage GAAP in the first quarter.

Quick one on Fanapt, you mentioned about a $1 million of wholesaler inventory gain, sales grew by a little more than 2 million, was you know - despite a prescription decrease; was there any other explanation for the increase in revenue the bridges that gap.

I'll walk you through not only the inventory adjustment that we saw at wholesalers this quarter but I'll remind you what we saw in Q1. In Q1, as compared to year 2016, we saw inventories reduced by amount over 2 million. They corrected by about 1 million of that in the second quarter, meaning we're down over a 1 million year-to-date as compared to year end. And so those would be adjustments that you could make to the top line revenue amounts in each period.

Okay. Great.

Now that said, you saw the underlying trends from IMS and Symphony data sort of flattish, right down about the 1% but effectively sort of flattish. I quite often speak to sell through to the retail pharmacies as well, not surprising they're slightly up, very low single-digits that is not totally unexpected.

Okay. And then are you seeing in any territories where you've either changed, but the sales territory or you've added new reps, any positive impact yet even though the overall picture is what you say flattish?

So Jason, it's Mihael, it is too early to tell, we have started with the full sales force pretty much end of the first quarter beginning the second. So there are indeed territories that they're doing better than others as it's expected. But I would say, we need more data and more time for our sales force in the field to be able to see that impact.

Okay. And then just last question for me on Tradipitant and the gastroparesis trial. Have you made any changes to the trial conduct or enrollment criteria to address the slower than expected enrollment?

Yes we have done actually both. We've looked very carefully at any of our inclusion criteria that may have made it difficulty or otherwise eligible patients to come to the study. For example, the detailed requirements on the confirmatory gastroparesis test and the time since the last test, I think that typically we can look at and we have actually made those amendment. Also now we have been able better to estimate the number of sites needed and we are actually in the process of significantly improving the number of sites.

Okay. Great. Congrats again on the quarter. Thanks for taking the questions.

Thank you, Jason.

Our next question comes from Matthew Andrews from Jefferies. Please go ahead.

Hey, good afternoon. Can you talk a little bit more about the pricing negotiations in Germany related to HETLIOZ and why it's necessary to go into the arbitration phase?

Yeah. To clarify Matt, we were in the free price period in Germany as of August 1, 2016, and that is in the full year. If you have not agreed on a negotiated price, you go on to the next step which is arbitration. So going to arbitration means that we did not reach agreement on the price negotiation in the first round.

Is this typical many specialty products to - based on your experience to have to go through this process?

It's hard to tell, I don't think we're aware of all this statistics, we're looking at the same. But the arbitration procedure is there and it has been used quite often involve orphan and non-orphan drugs. So I cannot speak that this is unusual, certainly disappointing that we did not reach agreement, but hopefully more in discussion in the arbitration with an independent party will result in a good outcome.

Transitioning to Tradipitant chronic pruritus, have you received any guidance from FDA relative to what's considered clinically meaningful on the endpoint terms of its reduction and - I'm sorry for the eight week time period?

Yeah. No, we have not received a categorical cutoff. And as I had discussed before, in held discussions with the FDA, the FDA actually has expressed not in full satisfaction with the proposed visual analog scale measurement of it as a primary outcome. Unfortunately, they did not offer an alternative. And most key opinion leaders in the literature who suggests that the visual analog scale of pruritus is actually an accepted scale. And on your point of what constitutes clinically meaningful, again that's an open question, the FDA has not weighed in that.

So, presumably there are other measures as part of the protocol that may be acceptable to FDA there you are tracking as well in the study?

We're tracking - yeah we're tracking actually every type of scale typical for it and typical for places with atopic dermatitis. Just to give you a list of them, the visual analog scale is one. The VRS is another one. We collect patient diaries. We collect also physician measurements at the weekly visits. We collect these code which is scale for atopic dermatitis. We collect easy with the score in index. We collect daily diaries of sleep scale knowing that sleep also is disrupted in people with it. And finally we do have to CGIC, NPGIC is a global impression scales clinical in patient respectively along with the patient benefit index the PBI. So, hopefully we're collecting everything that is relevant, but it is very likely that the primary endpoint will refer to exchange of the severity of it from baselines compared to placebo on the VARs scale.

And just one last one as relates to your lifecycle management strategy for Fanapt particularly the long acting once monthly for schizophrenia, how important is that programmed from the standpoint of improving profitability for the franchise and then overall and what are you waiting for in terms of making a go, no go decision to invest there. Is there some sort of sales number or scripts number you want to see from Fanapt the back half of this year before you decide to invest in a Phase III for a long acting formulation? Thanks.

First, I'm not going to specifically address this profitability question, but I will say that our current analysis of a long acting injectable Fanapt is a net present value positive and we believe it is actually an incremental on the commitment of the franchise and the value for Fanapt as a whole. In terms of gating, in fact we have started the - I said activities more specifically manufacturing activities that will lead to a pharmacokinetic study and later efficacies study hopefully next year. So, I would say not much taken any more on the long active injectable. However, I would say that there could be other opportunities and indications to explorer on Fanapt. And as we know atypical antipsychotics typically have captured not just a portion of this schizophrenia market but also the other conditions seeing the psychiatrist office including mood disorders, major depressive disorder, anxiety treatment or bipolar disorder, depression or mania. So, we're highly interested to understand how Fanapt can play in this. And there yes we're more cautious and we would like to see a return to growth and the commitment of our psychiatrist to our product before incurring more significant investment in studies of mood disorders.

Okay. Great. Thank you.

Our next question comes from Charles Duncan from Piper Jaffray. Please go ahead.

Hi, this is Sarah on for Charles. Congrats on a good quarter. I have two questions. So the first one is it sounds like persistence on HETLIOZ on Non-24 has improved with the new distributor, I am just curious is there where you wanted to be or is there more room for improvement? And then can you also remind us of the metrics that you are tracking around patient awareness and identifying new patients, any color on how this moved during the second quarter?

Yes, thanks, Sarah. So I will address the later part and I'll let Jim Kelly talk about persistence. What we've been tracking over the last three years is the number of patients optimum and they cannot gain from direct to consumer mostly television campaign. And our field work with our independent living facilities for the blind. That number once in a while we give an update. That database now of people who we opted in has increased to over 24,000 people. And this is great because it's creates a tremendous pool of patients that we can always go back in to our case management group. As you know it is only a small fraction of them that have received a script are on treatment. I will pass it on to Jim on the persistence question.

Yeah. Hi Sarah. You were asking about the, are we happy with persistency or we perhaps doing other things. We are certainly happy that we made the move we made. We think that it offers a great benefit to our patients when they have a distributor that works with them to ensure they get the medication they need on time. Now while we haven't given specific numbers on persistency levels, I would say now that we've made this move. We think they are exceptional, in fact some other things that I find most interesting is that the longer patients are with us, the sticker they are. And that's really important. That's making sure that you've got those patients who need our drug most on for the duration and it's also for the business offers a great foundation from which they build from.

And just to add, you asked whether there is room for improvement. There is. Although as Jim was saying after six months being on treatment, persistency is at very high in the very high 90s. The front end, we do lose patients and some of them will lose them before they had an adequate treatment which is about a three month trial. So through education from case management to our sales force, those are physicians and the patients we are trying to improve that because of course you understand the compound are benefit of just even a few percentage points of persistence improvement.

Great, thanks. And just one follow-up. So in terms of the two Phase II readouts, you have this year in Tradipitant in Jet Lag assuming those data are both positive, what are the next steps you see and how do you think about prioritizing brand and focused on those versus some of the other clinical program you have?

Yeah, so I will address on the Jet Lag program. With good data there combined with our prior work in model subject like in a Phase II and Phase III study in our database that we have accumulated over the years on the safety of HETLIOZ, most likely the next step is an NDA submission for the Jet Lag indication. On the chronic pruritus, of course it's earlier in the clinical program. Let's see how the results are. We will sit down with the FDA and design a path to NDA filling.

Alright, thank you.

Sure, thanks.

Our next question comes from Derek Archila from Oppenheimer. Please go ahead

Hi, thanks guys and thanks for taking the questions. Congrats on the quarter. So just first one on SG&A during the quarter, came in pretty late, later than we were expecting. So I just wanted to confirm, so that reflects the full spend for the Fanapt sales force additions? And then I know Jim you talked about kind of a step up in the second half for SG&A for some promotional activities, could you just maybe give us a little bit more color on the type of promotional activities you guys are looking to do, is it for HETLIOZ or it's for Fanapt or for both? And then I have one follow-up. Thanks.

Okay, great. Q2 does in fact reflect the full quarter impact of the complete field force. And so that component of our SG&A is as expected. As we look at the sequential change, now that we've got the field force in place, we do want to have along with them numerous marketing programs that are going to help them in what they do. And so now that they are in the field fully trained and we've gotten passed that Phase of our effective re-launch will now move to the next which involves the supportive marketing programs. There could be some other incremental activities around the HETLIOZ piece but I would say that that's operating at a more of a steady state quarter-in, quarter-out level.

Okay, great. And then just one on the pipeline, I know you talked about some open label data from the SMS trial for HETLIOZ, I mean in what kind of fashion will you be kind of communicating that to investors and is that more kind of 4Q weighted?

Yeah. Most probably will be first a presentation at a conference. And in fact you know if this work is accepted, we have submitted it to the World Sleep Congress coming up in October.

And are you waiting for that publication or this kind of data to bring that to the FDA to kind of finish off kind of the design of the Phase III in the end points that you need to hit for that study?

No, we're ongoing with the randomized study. The end points are going to be inclusive of measurements of sleep quality but also measurements of day-time behavior scales like the Aberrant Behavior Checklist Scale. So you know that is not gating the publication of these open label data, does not gate our interactions with the FDA. But we do expect as the randomized study continues to enroll, to have an opportunity to talk to the FDA.

Got it. Thanks guys and congrats again.

Thanks.

Our last question comes from Cory Davis from Wainwright. Please go ahead.

Thanks very much. Primary question is Theravance had what seems like good data at their lowest dose in gastroparesis in their drug and curious just to your thoughts as to whether or not that's predictive or completely independent, whether or not Tradipitant would be successful in gastroparesis?

Well, I cannot speak or characterize the - you are referring to the Velusetrag Theravance data yet. What I would say that Velusetrag operates under different mechanism of action [indiscernible]. And all I can say that this is a significantly unmet medical need. We speak every day to patients in this field and more than one treatments are needed. So with good luck to Theravance on this, but we are actually highly optimistic that the mechanism of action of Tradipitant will be actually useful in treating gastroparesis.

And then with respect to Tradipitant in pruritus with the success of some biologics in the space, that are treating more of eczema than the pruritus associated with atopic dermatitis, do you think that helps you or hurts you assuming that your data are positive?

Yeah, I think it is independent. Just to remind everyone that we are trying to treat the itch and with that if we are successful you stop the scratching and you stop the lesions which actually create a vicious cycle in the pathology of the skin. Of course we are aware of treatment that are coming along for atopic dermatitis that can improve the condition itself. But as it goes, there is a very large patients with atopic dermatitis and the condition of itch. And as we can suspect many of them may not be candidates for treatments that may be altering the condition like biologic treatments or it may not work for them. However, the aim of the Tradipitant program is to treat it in any patient. So, we believe actually that other treatments as biologics can actually be used alongside Tradipitant.

And assuming that your Phase II data are positive, with the next step involve like your combination trial with some of these biologics or would you still go with like standalone in a atopic dermatitis treating pruritus?

Yeah, for now the plan is the standalone treating the condition of itch in patients with atopic dermatitis. And the ideas of combination with other biological or other treatments of [indiscernible] needs to be understood. Once we also understand how these other treatments help patients with the condition.

Okay, thanks very much.

Thank you, Cory.

Thank you. There are no further questions at this time. And I will now turn the call back over to Dr. Polymeropoulos.

Well, I thank you all for your support and participating on this call today. I will wish you all a happy August and the rest of the summer, and we'll talk to you soon.

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