Vanda Pharmaceuticals Inc. (VNDA) Q1 2018 Earnings Report, Transcript and Summary

Hello and welcome to the Q1 2018, Vanda Pharmaceuticals Incorporated Earnings Conference Call. My name is Sharron. 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 call is being recorded. I will now turn the call over to Mr. Jim Kelly, Vanda's Executive Vice President and Chief Financial Officer. Mr. Kelly, you may begin.

All right. Great. Thank you, Sharron. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals first quarter 2018 performance. Our first quarter 2018 results were released this afternoon and are available on the SEC's EDGAR system and on our website www.vandapharma.com. In addition, we'll be 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, Mihael 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, 2017, 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 are pleased to share our first quarter 2018 performance. I will begin with an update on our HETLIOZ business. The HETLIOZ, the psychiatry initiative which was launched late last year continues to drive an acceleration in new patient demand. In the first quarter of 2018 we achieved a new all-time high number of new HETLIOZ intakes. These are the prescriptions and patient starts as well as a new all-time high number of patients on therapy. The positive response from the psychiatric community is a confirmation of a significant unmet medical need of patients with Non-24. While our HBI strategy is delivering as expected there are still many areas to optimize beyond what we have accomplished to-date and include opportunities to improve demand generation, script to fill metrics and refill metrics. That said the results of the last two quarters leave us optimistic that these initiatives should have potential to drive the growth of HETLIOZ for years to come. In March we announced the results from the JET8 Phase III clinical study to treat to treat jet lag disorder. In this study we showed significant and clinically meaningful effects of HETLIOZ on the primary endpoint of this study as well as multiple secondary endpoints in the treatment of jet lag disorder. The completion of this study clears the way for a supplemental NDA filing. We are in the process of preparing an sNDA and plan to submit by end of year. This is consistent with our long term vision of lifecycle management of HETLIOZ including ongoing activities for pediatric formulation development and Smith-Magenis Syndrome. In Germany the HETLIOZ full commercial launch is proceeding, including the initiation of non-24 awareness direct to consumer campaign. The DTC pilot will begin to inform our understanding of how the successful aspect of our U.S. go-to-market strategy can translate into other markets. We continue to defend the intellectual property of our HETLIOZ franchise including filing a lawsuit, yesterday April 30, 2018 against Teva Pharmaceuticals, a Paragraph 4 under filing. I will now turn to Tradipitant, a neurokinin 1 receptor antagonist in late stage clinical development that has emerged as a significant driver of our clinical pipeline with two major indications pursued, pruritus in atopic dermatitis and gastroparesis. We recently held an end of Phase II meeting with the FDA dermatology division to discuss the pruritus in atopic dermatitis program. We have agreed on the indication pursuit, that is pruritus in atopic dermatitis and on the primary endpoint of Worst Itch Numeric Rating Scale. We believe that we will design a clinical study protocol that will capture the important assessments related to disease severity, although we have not yet agreed on the specific end points that will allow for such potential label claims. We are in the final stage of preparing our Phase III study which we plan to begin by mid-year. We continue to develop a deep scientific understanding of what Tradipitant does in pruritus in atopic dermatitis and in atopic dermatitis disease severity, including evaluating biomarkers and we have presented several studies at a number of a number of international meetings. We are also currently testing Tradipitant for the treatment of patients with gastroparesis. That is a disorder of delayed gastric emptying and we're now in the midst of enrolling patients in this Phase II study. Gastroparesis effects hundreds of thousands of Americans, carries significant mobility and mortality and represents a significant unmet medical need. As there are few treatment options for these patients a demonstration of a therapeutic effect by Tradipitant could you represent a significant advance for patients with this disorder as well as a large commercial opportunity for Vanda. Moving to Fanapt, our sales team continues making progress in introducing Fanapt as an additional option in treating adult patients with schizophrenia. On April 13, 2018 the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the Delaware District Court that West Ward Pharmaceuticals infringed Vanda's 610 patent for Fanapt. The Court of Appeals win significantly de-risks the entire litigation path. This win further solidifies nine years of remaining exclusivity and we plan to make investments in the lifecycle management of Fanapt. Manufacturing of an Iloperidone once a month injectable formulation is underway and we plan to enter the clinic later this year. I will now turn the call over to Jim Kelly to discuss our first quarter 2018 financial results.

Thank you, Mihael. Total revenue for the first quarter of 2018 was $43.6 million, a 2% decrease when compared to $44.3 million in the fourth quarter of 2017 and a 17% increase compared to $37.4 million in the fourth quarter of 2017. First quarter sales trends were impacted by trade inventory reductions, totaling between $2 million and $2.5 million, across both HETLIOZ and Fanapt. HETLIOZ net product sales grew to $25.4 million in the first quarter of 2018, a 2% increase compared to $25 million in the fourth quarter of 2017, and a 26% increase compared to $20.2 million in the first quarter of 2017. HETLIOZ patients on therapy continue to grow quarter-over-quarter with monthly new patient growth rates consistent with our full year 2018 financial guidance. As of March 31, 2018 the specialty pharmacy channel held approximately two weeks of inventory as calculated based on trailing demand. Units dispensed to patients by specialty pharmacies exceeded units sold by Vanda to the specialty channel. The impact of this inventory destocking was over $1.1 million. Adjusting for the combined impact of Q1 2018 and Q4 2017 inventory changes, the sequential demand for HETLIOZ grew by over $2.5 million in the first quarter of 2018. Fanapt net product sales of $18.2 million in the first quarter of 2018 reflect a 6% decrease, compared to $19.3 million in the fourth quarter of 2017, and a 5% increase compared to $17.2 million in the first quarter of 2017. Wholesalers have decreased inventory on hand, when compared to the fourth quarter of 2017. The impact of this inventory de-stocking was over $900,000. Fanapt prescriptions as reported by IQVIA were 27,372 in the first quarter of 2018, a 3% decrease compared to the fourth quarter of 2017 and this is consistent with the mid-point of our full year 2018 guidance expectations. You will see in our press release, that Vanda is offering non-GAAP financial information. We do so because we believe that the non-GAAP financial information can enhance an overall understanding of our financial performance when considered together with GAAP figures. Vanda non-GAAP net income and net loss exclude stock-based compensation and intangible asset amortization. On a non-GAAP basis during the first quarter of 2018 Vanda recorded a non-GAAP net income of $6.6 million, as compared to a non-GAAP net income of $1.4 million in the fourth quarter of 2017 and compared to a non-GAAP net loss of $4.9 million in the first quarter of 2017. On a non-GAAP basis for the first quarter of 2018 non-GAAP Vanda recorded non-GAAP operating expenses, excluding cost of goods sold, stock based compensation and intangible asset amortization of $33.1 million, compared to $38.4 million in the fourth quarter of 2017 and $38.6 million in the first quarter of 2017. Non-GAAP research and development expenses in the first quarter were down slightly decreasing by less than $1 million when compared to the first quarter or the fourth quarter of 2017. This decrease in spend was a result of the close out of the jet lag disorder Phase III study, which was partially offset by a rise in spend associated with Tradipitant for gastroparesis clinical study which is ongoing. Non-GAAP SG&A in the first quarter decreased by $4.5 million or 16% when compared to the fourth quarter of 2017. The primary driver of this sequential decline in spend was the reduced investment in DTC awareness programs for Non-24 as the commercial team placed increased emphasis on fully launching the Hetlioz, the psychiatry initiative. Vanda's cash, cash equivalents and marketable securities referred to as cash as of March 31, 2018 were $248.8 million, compared to $143.4 million as of December 31, 2017, representing an increase to cash of $105.4 million during the first quarter of 2018. In March 2018 Vanda completed a public offering of its common stock that resulted in net proceeds of $100.9 million. Vanda reiterates its prior 2018 financial guidance, updates its year end 2018 cash guidance to reflect the impact of the recent common stock offering and expects to achieve the following financial objectives in 2018. Net products sales from both Hetlioz and Fanapt of $180 million and $200 million; Hetlioz net product sales of between $108 and $118 million; Fanapt net product sales of between $72 and $82 million; non-GAAP operating expenses excluding cost of goods sold of between $163 million and $173 million. The primary drivers of the expected increase over prior year are clinical investments including studies of Tradipitant in atopic dermatitis and gastroparesis. Non-GAAP operating expenses excludes intangible asset amortization expense of $1.7 million and stock-based compensation of between $11 million and $15 million. Yearend 2018 cash is expected to be between $215 million and $225 million as compared to prior guidance of a $115 to a $125 million. This guidance includes the payment of a $25 million milestone obligation based on $250 million of cumulative HETLIOZ net product sales which we expect to occur in the second quarter of 2018. I'll now turn the call back over to Mihael.

Thanks, Jim. And now we will open the lines for your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jason Butler from JMP Securities. Mr. Butler, your line is open.

Hi, guys, it's William for Jason, thanks for taking the question. Just a couple of quick ones. I guess the Serlopitant failure in atopic dermatitis was surprising. I mean I'm sure you don't want to discuss another program. Just wondered if you could, just Scott how you found success with Tradipitant in this setting? Are the drugs, different patient population or trial design? And I have another question after that.

Thank you very much. Of course, we don't know anything more than what is known in the public domain, on that program. All we know is that they attempted to show an antipruritic effect in patients in atopic dermatitis, and we understand that the company suggested that this attempt failed. What is very important is to reiterate why we are convinced, that Tradipitant, a neurokinin-1 receptor antagonist maybe suited to treat pruritus patients with atopic dermatitis. And to remind everybody this conviction comes from two clinical studies, a small Phase II study, 2101 where a pharmacokinetic, pharmacodynamic analysis suggested a significant dose effect response for Tradipitant to treat pruritus in AD, and then the larger Phase II study 2102 that we reported last September, where we showed significant and meaningful effect in measurements of clinical improvement of it. Alongside improvements of disease severity as measured by scales like the SCORing Atopic Dermatitis SCORAD or EZ. Since then we have conducted very significant analysis and presents scientific in-depth data in a number of international meetings. So it is all these body of evidence that gives us conviction that Tradipitant can be successful in treating pruritus and ending in the commercial space as an important treatment for patients with atopic dermatitis. And just to suggest that the end of Phase II meeting with the FDA actually agreed on that point, that we're ready to go to Phase III with a dose proposed and that the data so far accumulated are consistent with hypothesis that the drug will work to treat pruritus in AD.

Okay great. And then, have you guys met with the FDA regarding the sNDA for jet lag or do you plan to?

We have not made yet, we're actually in the process now of putting together the clinical study report and the sNDA and it is likely that we will communicate with the FDA prior to that sNDA filling. And whether that is a guidance or PsNDA meeting will have to be defined. However we believe that we should in a position to file this sNDA by year end. And just to remind everyone this sNDA in support of the efficacy of tasimelteon in treating jet lag will consist of three main studies, a small but significant proof of concept study that was conducted a few years ago. And then two Phase III studies, one in a 5 hour phased events and the second one in eight-hour phase event all of them succeeded in primary and a second round of the secondary endpoint.

Great. I guess I had one more really quick follow-up, just briefly could you tell what differentiates your HDAC inhibitor from the other ones that are out there?

Well I'm glad you said a quick question well there is no quick answer. I will tell you that TSA with Trichostatin A is actually D prototypical HDAC inhibitor found in nature and it is considered a pan HDAC inhibitor, that means it inhibits a number of Histone deacetylase. And it is not just that approach and mechanism of action but our approach in treating hematologic malignancies with HDAC inhibitor. HDAC inhibitors today successfully approved for treatment of hematologic malignancies aimed to beat cytotoxic agents. What we want to evaluate is whether an HDAC inhibitor can achieve therapeutic effects in malignancies by inducing terminal differentiation. And the other angle of our product is the significant use of pharmacogenetics and pharmacogenomics to understand which patients with his hematologic malignancies will be more likely to respond to TSA.

Okay. Great. Thank you.

Our next question comes from Matthew Andrews from Jefferies. Mr. Andrews your line is open.

Hey good afternoon. My Mihael on tradipitant you guys recently presented some very interesting subgroup analyses suggesting that patients that have elevated IgE derive higher benefit from tradipitant or conversely placebo patients to worse. Can you talk about how what what's FDA's view of these data and to what extent will you?

Yeah absolutely so.

And possibly include a Richmond strategy for the patient population?

Absolutely. Thank you, Matthew. So just to summarize our finding in the second Phase II study 2102 was this not obvious and unexpected observation that patients who at baseline had above normal levels of IgE are the ones that experience the largest difference between drug placebo. And as you mentioned patients with normal levels of IgE experienced about the same size of the fact change of baseline for the drug but placebo had about the same effect. So as if saying that these IgE biomarker identifies patients on placebo that will perform as well as drug. So it may signify that they have different course of the disease with a relapsed emission rate within that period of observation. So we did have the opportunity to begin the discussion with the FDA, on IgE. Of course this is the first time they encounter this biomarker. We did discuss the concept of in enrichment and we do agree this enrichment strategy this can be useful. And whether or not we should exclude from the next study people with normal IgE, that is the part we continue to debate. So in order to design while we will continue to evaluate the value of the IgE biomarker we may not exclude patients with normal IgE levels. In different option which we are finalizing of course, is to exclude the space and ask question in an enriched population. If we do that however the benefit is that you have a higher likelihood of showing a larger effect but at the same time you may miss the opportunity to show the validity of this biomarker. So we're very close to starting the study and making the final decision where we're leaning now is not to exclude patients with normal IDA levels.

Terrific. And what remains on agreement relative to the endpoint for AAD component of the Phase 3 study. You have agreement on NRS, for-stitch h] NRS. What about for the AD portion?

Yeah, we don't have an agreement of the following. What is the appropriate? This is a relative scale that if successful with the secondary endpoint can be claimed and in what manner on the label. So the agreement is that pruritus been the most significant complain of base with atopic dermatitis worth treating. If the drive does sold improvement in worse stitch NRS centered as and that is clinically meaningful then you will have an indication of treat improved physician patients with atopic dermatitis. But as you'll recall, we have this I would say rather surprising unexpected finding in the last Phase II study where not only worse is improved but also we start seeing that measurements of lesion severity by its core and easy so a significant improvement over placebo. So our discussion with the FDA is that if this happens again in the phase 3 study, and we confirm that not only we improve it but actually we have an effect on lesions, we would like to figure out a way how to claim that. The FDA has been clear in their last two approvals in AD on crisaborole and dupilamab that they gave an indication of atopic dermatitis that required a couple of things. One is that the patients included had a certain degree of severity which was a 98 scale greater than two points. And that in order to get the indication atopic dermatitis, they have to improve to clear skin. So you have to do that or almost clear. That means you have to have this score of 2 and go to zero. The population we're pursuing is a same population we had the results in the last Phase 2 study, which is almost everybody from mild to moderate to severe disease and we excluded only the very severe. So this population will not meet the entry criteria of IDA greater than 2 and therefore a large number of patients are not going to be able to show improvement of more than 2 points. That is why this is a continued discussion. The FDA has approved two drugs for patient that met the severity threshold. They do not require us to have that severity threshold in patients with pruritus. Understand that pruritus occurs from mild to severe. And the question is if we cannot really use IDA of course we'll get measured it, but we cannot say everybody has the opportunity to improve because they entered with the score less than 2. So the discussion is what is an appropriate scale in this broader population than the other two drugs? We suggest it is SCORAD and it is easy. I don't believe the FDA is in agreement with us now. But it is a bridge that we will cross maybe once we have more data.

Got it. And then one for Jim. G&A ticked down quite a bit sequentially. And you discussed some rationale for it. Is this Q1 number kind a trend this way through the end of the year? Should we see some sort of uptick as the year progresses? And if it's going to be flat I guess R&D would tick up as you launch the Phase 3 for CP is that correct?

So, I'll start first with the SG&A characterization in the quarter, which is a meaningful decline of $4.5 million. And the majority of which is a decrease in the direct-to-consumer advertising for non-24 awareness. As we have worked to launch the HPI program we took a break here and that however doesn't mean we're going to scale back for the entire year. Of course we'll go back and continue that program and so I would expect that this would be a low point for the year of SG&A. So you should expect it to rise.

Okay. Thank you.

Our next question comes from Corey Davis from Seaport. Corey Davis your line is open.

Thanks very much. I just want to go back to the Phase III design for tradipitant and it still wasn't clear to me a few things. The first is I get what you are saying about segregating by IgE levels but it sounds like the FDA saying that you can't exclude patients with normal IgE, is that putting - in your mouth and their mouth?

Yes it is putting words in my mouth and their mouth. I believe they are trying to understanding now, IgE, I don't think they had a full opportunity to review all the IgE data. They don't have yet the full clinical study report within they works. So, the way I characterize this Tom, they do appreciate the use of enrichment strategy. However given the novelty of these IG market, they would like to learn more before they kind of suggest that you can exclude the certain population from the indication. Now on the other hand we are significantly intrigued by the IgE finding and we would like if possible to confirm it. So that is why I said that we are leaning not to exclude patients with normal IgE. So we'll have the opportunity to see if that difference in effect continues to be present.

Okay, so the way you can confirm it would be in your Phase III study?

Correct, in the first one.

And so are you going to start Phase III mid-year without finalizing these things or do you need to finalize again with the FDA a few more things before you be allowed to start it, or before you chose to start it?

We have finalize with the FDA all we need now to move forward and that is dose, the type of indication we are pursuing and the primary end point. The only thing that remains to be finalized internally, is the inclusion or exclusion of patients with normal IgE and that decision I would imagine will happen within the next 30 days. So we will start this study by June of this year.

Okay,

No, need to go back to the FDA.

Okay, got it. And now that you have got extra cash, why not do two studies in parallel. Do you want to wait and see the first results to help design the second Phase III sequentially.

Of course, you cannot do things in parallel, sequential or it can be in-tangent. We continue to run the lot of things in atopic dermatitis even from the existing data. So I think the expectation for our conduct for the rest of the year would be that we begin this Phase III study, there are many things to learn in operations of a much larger study and we do not exclude the potential of a - start of the second Phase III study.

Now, I see. Okay, and how long do you think it will take you to enroll it, is it unreasonable to expect this should be on the market as soon as 2021?

Actually our longer term our plan for the product is - I am looking at Jim.

Yeah exactly. We had spoken previously, and this is before we got our results and of course worked to this point of our desire to have a filing in 2020. Now we're going to go and we're going to learn about our ability to ramp up this study this year, that I think will further inform the timing to complete both and to get to that point.

Yeah, so consistent Corey with what you said. A 2021 in the market is within the range of the plan we have today.

Okay. And then last question for Jim. Can you remind us how much you have left in NOLs, just trying to figure out if you're ever going to start paying taxes.

Yeah, and of course our NOL number is also a function of the change in the 2017 ex-pop up impact. But the overarching feedback is it's in the magnitude of $250 million. Now in addition to that, I've got R&D credits and working credits which are in the range of $40 million.

And of course Corey, it is a function of our revenue. So we're do intend to try to increase the revenue. If we have to pay taxes, that's fine.

That's all I have. Thank you very much guys.

And speakers, that was our final question. I will now turn the call back over to Dr. Mihael Polymeropoulos.

Thank you very much. And thank you all for joining us. We'll see you soon in upcoming conference or our next quarter call. Thank you.

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