Welcome to the Q3 2017 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Leslie and I will be your operator for today. 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. I’ll now turn the call over to Vanda’s Senior Vice President and Chief Financial Officer, Jim Kelly. Mr. Kelly, you may begin.

Thank you, Leslie. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals third quarter 2017 performance. Our third quarter 2017 results were released this afternoon and are available on the SEC 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 June 30, 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 very much, Jim. Good afternoon, everybody, and welcome to our third quarter call. During the third quarter of 2017, we demonstrated the importance of a diverse set of ongoing initiative to advance our growth strategy. The tradipitant results in atopic dermatitis, early trends from the HETLIOZ to psychiatrists initiative, HPI, and the resolution of the HETLIOZ pricing negotiations in Germany are important milestones for Vanda. With strong execution, we believe these initiatives have the potential to drive new growth for Vanda that exceed our previous expectations. I will begin with an update on each of these important initiatives. The HETLIOZ to psychiatrists initiative, HCI, which was launched in August with less than the 30 of the U.S, Fanapt field force was expanded to the full Fanapt in October. We’re excited to announce that early results are encouraging and we believe this initiative has the potential to significantly increase the peak sales potential for HETLIOZ. The positive response from the psychiatric community underscores the significant unmet need of patients with Non-24. We’re just at the beginning of understanding the long-term potential for the treatment of this Non-24 patient population. As a reminder, the approved U.S. HETLIOZ label covers any individual with Non-24 irrespective of [indiscernible] status. Epidemiological data a likely for this disorder of Non-24 and its comorbidity with psychiatric disorders, but recent literature suggested the disorder mainly prevalent among patients with mood disorders. Soon after the initial launch of HETLIOZ to psychiatrists in August 2017, new prescriptions from HPI began to surpass those from our regular sales. We are actively working to adopt our resources to accommodate this new source of patients and address new payer mix and dynamics. We look forward to saying more on this initiative in the coming quarters, as our understanding of the long-term…

Thanks, Mihael. Total revenue for the third quarter of 2017 was $41.3 million, a 2% decrease compared to $42.1 million in the second quarter of 2017, and a 7% increase compared to $38.5 million in the third quarter of 2016. HETLIOZ net product sales were $22.3 million in the third quarter of 2017, a 1% decrease compared to $22.5 million in the second quarter of 2017, and a 19% increase compared to $18.7 million in the third quarter of 2016. The number of HETLIOZ patients on therapy continued to grow quarter-over-quarter. As of June 30, 2017, the specialty pharmacy channel held less than two weeks of inventory, as calculated based on trailing demand. Units dispensed to patients by the specially pharmacy exceeded units sold by Vanda to the specialty pharmacy channel. The approximate net product sales value of this inventory to stocking was 400,000. Of note, less than 3% of the units dispensed to non-24 patients in the third quarter of 2017 were the result of the new HETLIOZ psychiatry initiative. We expect to begin to see the impact of this initiative in the fourth quarter of 2017 and more fully as we enter 2018. Fanapt net product sales were $19.1 million in the third quarter of 2017, a 3% decrease compared to $19.5 million in the second quarter of 2017, and a 4% decrease compared to $19.8 million in the third quarter of 2016. Wholesalers have decreased inventory on hand by an amount that equates to over $1.5 million in net products sales, when compared to the second quarter of 2017 and over $2.5 million, when compared to year-end 2016. Fanapt saw favorability of over $2 million in the third quarter of 2017 related to a decline in the Medicaid percent mix of our business. Over the course of…

Thank you very much, Jim. Happy to answer any questions.

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

Hi, thanks for taking my questions. Just a couple. First off on HETLIOZ, you saw patient growth in the quarter, but sales were essentially flat when you adjust for the destocking. And additional color you can give us there about the dynamics there? Are you seeing any changes in the drop off rate, for example?

Yes, Mihael, I’ll take that one.

Yes, that’s actually a good question.

Yes. The…

Yes, I’m sorry, Jim. I’ll answer the persistency question that has not changed at all. And for the dynamics, Jim will explain.

Hey, certainly. We continue to add quarter-over-quarter. There were two pieces to the puzzle that resulted in, I’d call it, some headwinds on the sequential growth front. One was the destocking in the U.S. that I mentioned, and then the second one was the change in our German pricing. Now while our German revenue is not of a significant magnitude in its total, we only had July at our launch price, and then August and September were at a 30% discount to that price, which was also there for, at least, 100,000 or more impact on the quarter on a run rate.

Okay, great. And then for the patients, the psychiatry patients, can you just talk about the reimbursement dynamics there? Have you seen any pushback or any debate around the sighted versus blinded patients in terms of reimbursement approvals?

Yes. So we did have experience before with psychiatry patients with non-24 that have continuously come into the program. And what we’ve seen in the past is that, payers block more scripts that come out of psychiatry non-24 patients than blind. Of course, we do not agree with that attitude, but nonetheless it is a fact. Now, as we are looking at the significant volume of new patient prescriptions that have come in since the August, the percent of scripts field within the first few weeks of treatment is generally comparable to what we seen for psychiatry patients during past. Now Jason, this exact activity that we are monitoring within Vanda, of the fulfillment of scripts for psychiatry non-24 patients, we can image it is an activity that has taken significant focus of the organization and it has the highest potential of immediate pace on growth. But just to add however, that due to this HPI and despite any headwinds with filling out prescriptions by payers, we are now growing significantly the base of patients with checklist. We are very early in this activity, but we have reasons to be very optimistic that this program will change the trajectory of the checklist business in the near future.

Okay, great, thanks. And then just last question for me again on HCI, have you thought about or do you have any plans for a clinical studies in cited Non-24 patients in the psychiatric setting, any thoughts on whether new data could enhance the commercial opportunity either in terms of reimbursement or in terms of adoption?

Yes, I would say adoption is where the use of focus will be and that’s actually quite clear by the large reforms of the psychiatric target base where physicians identify these patients and initiate treatment. We want to support this program with additional data gathering and most probably that would be understanding better the epidemiologic nature and the comorbidity with added preservatives.

Okay, great. Thanks for taking the questions.

Our next question comes from Charles Duncan with Piper Jaffray.

Yes, hi guys, thanks for taking the questions. It was pretty hard to hear Mihaels over the course of the call, but I think he mentioned that he felt it was an exceptional quarter or year thus far and I’m just kind of wondering if he could provide a little bit more color on that, because if we look Q-on-Q sequential versus year-on-year, really the optics are pretty strained or constrained a little bit, so I’m wondering as you think about the HPI and its impact, you said in the near future, do you have any goals like for the next six months or 12 months? How you think the HETLIOZ revenue or new patients and persistence can change over the course of the next year or so?

So this is Mihael, I hope this connection is a little better, I’ll keep my answer short and pass it on to Jim Kelly. The characterization of exceptional is actually the very significant and quick response that we have seen from psychiatrist identify and willing to treat patients with Non-24. Unfortunately because we have only three months of data and in fact only one month with the full sales force, it is hard to project and the personal care is that it is very hard to see this very significant activity impacts revenue immediately because of the significant lifetime from script to field, and I would let James give you more color.

Hey certainly. Charles, you heard me mention that within the current quarter less than 3% of the dispense – the HETLIOZ units dispense were to patients as a part of this initiative. However, beginning in mid August, the number of new prescriptions that we’re receiving through the HPI initiative became more than half of the total scripts coming in and therefore what we’re witnessing is an exceptionally important new source of patient acquisition to drive growth. Our expectation is that our ability to find new patients and then convert them through reimbursement and not just have them diagnosed, but actually receive treatment that number of new patients month in and month out will rise, the specifics of how much that’s going to rise is going to be learned, I believe over in the coming months as we get more experience with the full field force. And so that’s why we’re incredibly excited about this initiative, but also coming back to you very soon on exactly what we’re seeing and how it’s going to drive the trajectory of our business.

Okay that’s helpful, additional color on – in terms of the relative percentage of new scripts coming in through that initiative. If I could ask just a quick question on the pipeline and growth opportunities there, on HETLIOZ you mentioned the jet lag disorder trial perhaps deepen yet this year, and then you also started a new eight-hour advanced stimulated jet lag disorder. I’m just kind of wondering if you consider those two studies how are they really different or what really drove that new stimulated jet lag study relative to the ongoing jet lag disorder and what would you anticipate out of that jet lag disorder study yet to read out perhaps this year?

Thank you very much Charles for this question. So, just to rewind for a second, we have learned from two trial studies, Study 2101 and 3101 that tasimelteon has basically regulatory properties in a simulated sleep lab five-hours phase advanced study, the significant improvement in relevant clinical parameters. Our efforts has been to supplement those trials with data from additional five-hour and eight-hour flight, actual flights flying from the U.S. to Europe to understand in actual travelers the effect of tasimelteon to suppress symptoms of jet lag. The reason we added an eight-hours drug study is that during the observational phase that leads into the flight study, we understood something very significant where despite every effort made to block compounders and these are most probably from the aesthetic sleep time, variable light conditions in the actual flight. This compounders cannot disturb, so what happens is that people that are screened in and they had a significant impairment in a sleep laboratory phase event study, when they travel that effects of disturbance is significantly smaller. So immediately that would suggest that actual flight studies would be very hard to detect the signal between drug and placebo, because if placebo and drug are compounded by the drive to sleep through unsatisfied homeostatic type, then the primary analysis of difference between drug and placebo can be interpreted. Understanding that variably, we continued the flight study and we will have 20 or so patients complete the randomized portion. But we decided to supplement our file with an eight-hour study to give a fuller picture to the regulatory agencies with the effects of the drugs for this disorder.

Okay that’s helpful and makes sense. Last question on tradipitant, the upcoming end of Phase II meeting with the agency, have you asked for data and has it – do you have a data set if it’s roughly first half of the quarter coming up and if not, are there any additional experimental results that you’re looking forward to before you request that study or any other gating items? Or before you request that meeting?

Yes, okay, we are in the process of requesting anything right now. We do not need any additional experimental data, however, we want to be very thoughtful as we approach now the development of an orally than for atopic dermatitis. I cannot specify exactly when the close of this meeting is going to be and actually we typically refrain from giving those exact regulatory calendars. However, it is our commitment to get a common understanding with the FDA and proceed as soon as possible with a Phase III program.

Okay, thank you for the added color.

Our next question is from Matthew Andrews with Jefferies.

Hey, thank you. Good afternoon. Poulos and Jim, can you give us some sense of what gives you confidence, you’re going to be able to grow Fanapt scripts, obviously, they declined sequentially maybe reaching a bottom here? What evidence have you seen in your analyses that suggests you can actually get it to growth either by the end of this year or perhaps early in 2018?

Well, Matthew, to quickly answer, I’ll let Jim give more color. Having forecasted growth in Q3, not repeat it. Actually, we are not very confident whether this growth can happen. There’s some tell-tale signs that may suggest internally that we’re on the right track, but nothing to right come yet. But I will let Jim talk about it.

Yes, Matt, what we’re seeing is, as you look at the quarter-over-quarter growth profile of the – our territories, we see the following. And this is looking back over eight quarters. As we put more resources on Fanapt, we see that more and more territories grow than not. And as we look at the last few quarters, the number of territories that decline greater than 5% continue to shrink. And therefore, this is what is happening on a more granular level beneath what you’re seeing Matthew on a national level, which is a slowing of the decline and what appears now to be approaching really a stabilization point. Although this quarter, we saw just under 2% sequential decline. So as we look at, for example, 90% of our territories, we see growth there. However, when we layer on the bottom, for example, 10%, it takes us to a decline. And that puts us in a position to continue to try to turn those tough territories, in addition to doing the right things in our existing growth territories to drive the business. Now that said, I’m going to echo Mihael’s prior comment. If we came into this year saying, we had a conviction that we could predict the timing of when this could happen? We were unable to do so. We thought it would happen in the third and fourth quarter. So while we continue to believe there are tactics to grow this business, I think, we got to take a wait and see here and come back to you when we see the tangible evidence that we can turn this corner and fully return Fanapt to growth.

Interesting you did discuss lifecycle management for Fanapt with the oral program, or many comments on the subq formulation. Can – is that tied in with the – guidance now where you’re spending $12 million to $15 million less on the operating expense side, what is – what are you foregoing, at least, temporarily with that reduction in spending of $12 million to $15 million?

Yes. So a good question. The…

Jim, would you like to answer those?

There was no – the Fanapt lifecycle management was not a part of the 2017 guidance.

Okay.

And therefore, – yes, other – underspend was in other parts well really across the business, both in R&D and SG&A.

Transitioning over to tradipitant, what was the feedback coming out of the Itch meeting in Poland a few weeks ago, as it relates to the dataset from meetings with clinical advisors and key opinion leaders? Anything you can share?

Well, it’s hard to quantify this. But yes, it’s hard to quantify. However, there’s a significant excitement on the potential of an oral state agent that could be available to treat the significant effects of pruritus, but also treat the underlying disorder atopic dermatitis. Of course, these have not increased HETLIOZ results and clinicians basically get more excited with more patients, more numbers. But I would say, there is a significant interest today in the mechanism of action of this compound and the robustness of the results in this rather small atopic dermatitis study.

And then just lastly, on your thoughts on the Phase III program, is there anything we – which you can share with us at this time thoughts on around what the primary endpoint may be actual length of the study, size and any details on the patient population you target, or would those be items that really have to be finalized with the FDA? Thanks.

Yes, Matthew, I think, a better time to discuss these items to be more concrete, would be after we have concluded what we want to do and also have concluded discussions with the FDA, whether the FDA want to see. But do expect us that we’ll design a program that can answer prospectively both questions. Does the drug improve Pruritus in patients with atopic dermatitis and was the drug so effect in the underlying signature disease? So both endpoints would be heavily considered.

Okay. Thank you. Thank you. We have no further questions at this time. I’ll now turn the call back over to Vanda’s President and CEO, Dr. Polymeropoulos.

Thank you very much for joining us for the third quarter of 2017 call, and we look forward to talking to you in the near future. Thank you.

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