Good day ladies and gentlemen and welcome to the Vanda Pharmaceutical’s fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder today’s conference is being recorded. I’d now like to introduce your host for today’s conference Mr. Jim Kelly, Executive Vice President and Chief Financial Officer. Sir, please go ahead.

All right thank you Liz. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals fourth quarter 2018 performance. Our fourth quarter and full year 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 will 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’d like to remind everyone that various statements that we make on this call will be forward-looking statements within the meanings 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, and our quarterly report on Form 10-Q for the quarter ended September 30, 2018, which are available on the SEC's EDGAR system and on our website. Additional factors maybe set forth in new sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 to be filed with the SEC in the first quarter of 2019. 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. 2018 has been a year of great accomplishments and growth for Vanda in both commercial and research and development. Before I review our achievements and share our plans for 2019 I would like to address the importance of last week’s announcement and how it makes our company stronger for our patients and shareholders. Last week we announced that Vanda filed a complaint against the Food and Drug Administration asking the court to set aside a partial clinical hold affecting certain proposed studies of Tradipitant. The FDA imposed this partial clinical hold on two proposed studies, the first was a proposed 52 week open label expansion peer for patients who have completed the Tradipitant Phase II clinical study 2301 in gastroparesis. The second was a new follow on 52 week open label expansion protocol for 302 for patients who had completed the 2301 study. In imposing the partial clinical hold the FDA stated that we’re required to conduct an additional chronic toxicity study in dogs, monkeys, or mini-pigs before allowing patients access in any clinical protocol beyond 12 weeks. The partial clinical hold was not based on any safety or efficacy data related to Tradipitant rather the FDA informed Vanda that these additional toxicity study is required by guidance document. We do not expect the partial clinical hold to have any material impact in our ongoing clinical studies, in atopic dermatitis and motion sickness or the planned Phase III study in gastroparesis. Further the partial clinical hold has not had any impact on the potential timing of an NDA filing or approval for these indications. We will continually reassess this situation has events unfold. Please note drug safety is our top priority and we fully support conducting cuts that are most effective as we have said…

All right thank you Mihael. Before I review our financial results I would remind listeners to refer to our fourth quarter and full year 2018 earnings press release issued this afternoon. On today’s call we will be discussing non-GAAP financial information, the press release we issued this afternoon includes a description of these non-GAAP metrics which we believe they will provide additional insights into the financial aspects of our business and a full reconciliation of GAAP to non-GAAP financial information is available on that press release. I will begin by summarizing the full year 2018 results before turning to discuss the fourth quarter of 2018. Total revenue for the full year 2018 was a $193.1 million a 17% increase compared to a $165.1 million in 2017. HETLIOZ net product sales of $115.8 million were the primary contributor and driver of our 2018 revenue and saw a 29% growth as compared to 2017. Fanapt product sales of $77.3 million reflect 3% growth as compared to 2017. On a non GAAP basis during the full year 2018 Vanda recorded a non-GAAP net income of $38.4 million compared to non-GAAP net loss of $3.4 million for the full year 2017. Vanda’s cash and cash equivalents and marketable securities refer to as cash as of December 31, 2018 were $257.4 million representing an increase of a $113.9 million to cash during 2018. During 2018 we grew revenues each quarter while keeping operating expenses relatively flat which drove an increase to net income each quarter. Total revenue for the fourth quarter of 2018 was $53 million an 8% increase compared to $49.1 million in the third quarter of 2018 and a 20% increase compared to $44.3 million in the fourth quarter of 2017. HETLIOZ net product sales grew to $32.4 million in the fourth quarter…

Thank you Jim. At this time, we will open the lines for your questions.

[Operator Instructions] Our first question comes from the line of Chris Howerton with Jefferies. Your line is now open.

Great. Thanks for taking the questions and congratulations on the strong financial quarter. So I think you know the obviously top of mind in most people is the partial clinical hold and I understand that given that there is an ongoing lawsuit, there is probably not too much you can say. But I think with the expectation that the current proposed timelines will not be affected by this current status, when would that change if this was not resolved? So is that in the order of months or you know what can you tell us about the expected timelines and when the resolution has to happen to not affect your timelines?

Yeah. Thank you, Chris, and thanks for pointing out the sensitivity of the existing litigation. Our intent is over the coming weeks and months to be able to resolve this partial clinical hold and have it lifted. And we believe there are many parts to get there. And of course the path that is visible is the court. And there are parts that can be explored as we move over the next few weeks and couple of months. So the intent of course is to get this partial clinical hold behind us and continue in an expedient way to enroll our patients and continue the studies. We know however that this partial clinical hold is not affecting the NDA filing of our programs at this time. And it is obvious as we discuss timelines that are first Phase 3 study in atopic dermatitis EPIONE, which is ongoing will be expected to complete the report in mid-2020. And we expect to begin the second Phase 3 study likely in a staggered manner by the first quarter of 2020. As such, it is obvious that the efficacy studies now are the ones in the critical path to NDA filing and not the completion of the 12 month study for safety data. But having said that, we are confident and very optimistic that soon we will be able to create a way to lift this partial clinical hold and move forward.

Okay, sure. And in terms of moving tradipitant forward for gastroparesis and obviously some sensitivity with respect to the long-term safety studies, do you expect any impact in terms of your actions with the FDA regarding the end of Phase 2 meeting and coming to alignment with the pivotal trial design?

Not at all. In fact we are moving as fast as possible to complete the clinical study report of the successful study. We’re now in the final stages of preparation to start a Phase 3 study and preparing the dossier for the end of Phase 2 meeting. And I know sometimes people may be confused when you take an adversary position how will the FDA react. The FDA as we know is a very well established respected institution with great people. And they do understand that at times there will be challenges that in no means affect the behavior of FDA employees as they are reviewing applications and meet with companies. In fact Vanda had a good dose of that in the past where as expected there are adversarial positions in innovative products. We experienced that with Fanapt and the position they took and were adverse to their opinion, they corrected course and Fanapt was approved and more recently on tasimelteon. There was a lot of back and forth with the FDA on endpoints and disagreement, but that did not prevent the FDA to review in a priority fashion HETLIOZ and approve HETLIOZ on the first review done. So we’re very confident that this challenge which is a challenge that we believe is interesting to the FDA as a whole will not affect the gastroparesis discussions in any way.

Okay. That makes sense. And then maybe just you could provide a little more color around the HETLIOZ numbers. What can you say about the patient mix that are currently on therapy or have received the prescription between blinded and sighted non-24 patients and do you see any difference in persistence on therapy with respect to those patient populations.

Just to correct result and I’ll let Jim quantify in any way we can. It continues to be that the larger portion of our patients in treatment continues to be blind patients because these are the patients historically that have come to treatment over a long period of time but quickly sited person patients are making a significant portion of the database of patients on treatment. I don’t believe we have reported exactly that mix but I will let Jim quantify.

Hi Chris. Yeah the mix and the trends have been very consistent and they are the following that since the launch of the HPI initiative scripts written have been the majority for sited patients with non-24 versus the group for blind patients. That said reimbursement has in fact been more difficult for sited patients. When it is still down to eventual reimbursement and you look out the month in and month out new patient starts you continue to see that more sited patients than blind initiate treatment each month and therefore the trend that you see on prescriptions written which is more sited than blind continues through to new patient starts. When you look at persistency while we don’t give specific persistency numbers out we’ve been happy to share the following, we find that once a patient has completed adequate trial whether they are blind or sited we have found that these patients are highly persistent to treatment and the statistic we like to share is that the month-in-month persistency of our patients irrespective of our vision status is in the high 90s.

Yeah okay. Okay I’ll go ahead and hop back in the queue and thank you so much for answering the questions.

Okay Chris.

Our next question comes from Joel Beatty with Citi. Your line is now open.

Hi thanks for taking the questions. The first one is and partial clinical hold and the discussion with FDA around animal studies can you provide maybe a little more clarity on why at this point in time it sounds like Vanda has some drug studies in the past of Tradipitant and there’s an opportunity to drug a monkey or many pig studies here what is it about these studies that it makes it the right time?

Well first of all to clarify that it is not a specific species that Vanda objects. Vanda objects that any nine month chronic study given our circumstances in prior data with Tradipitant is necessary so we believe that in nine months a chronic non-rodent study is not necessary if that is the point of our contention. In your question why now, because now is the time to begin collecting data towards the 12 month safety data as we discussed. And in fact this wiz to collect data was accelerated by patient demand. Patients in our Phase II gastroparesis and before we have blinded data and we understood the efficacy which we understand now patients had come to investigators, and through investigators to us to request an ultimate label study so they can continue to receive the treatment that they were receiving in the double blind study. So that is the origin of initiation of the open label study and of course now with the positive efficacy study behind us it is very important to continue to offer not a label and at the same time collect the data towards the 12 month safety database.

Yeah appreciate that that’s helpful. Then another question is about a week ago there was a lawsuit on CL I believe it was originated back in 2017 or so but we being getting questions about in the last week, just curious if you could comment on the status of that currently?

All right of course again I will preface these we don’t get engaged in comments with up ongoing litigation. This specific key time lawsuit for 0:00:33.4 lawsuit regulator or the 0:00:38.1 is a former employee and under current law people can file this key time lawsuits where they can allege certain behaviors of companies and it is result of this case are settled often the relators can benefit from a portion of the proceeds. In this case this key time was unfilled last week that means that we were sealed for a period of time and that’s customary and during the sealed process the United States government the Department of Justice evaluates the case and facts and decide whether they will join that means they will intervene and they’re interested in the outcome of this case. In this case the Department of Justice evaluated and we’re very pleased that they decided not to intervene. Now how this case will proceed or not we don’t know and we have not been served with this case yet.

Okay got it thanks for the and maybe one last question on Tradipitant and atopic dermatitis can you maybe discuss a timeline for the whole program we talked about the results that are expected for the first phase of readout could you discuss the importance of the second phase retrial is success needed in both trials how about the results in the first trial affect beginning enrollment in the second trial? Thanks.

Of course and I pointed out that we estimate now that we’re going to have results of the first Phase III3 8D study in mid-2020. And we suggested that we plan to start the second study in a staggered fashion that means before we have the final top line results. And of course without knowing these results you cannot necessarily affect the design of the second study. We have however considered of potentially implementing an interim analysis by an independent party at some point during the contact of the Phase III study so if that is the case that could potentially affect the design of the second Phase III study. The another part is a practical matter. It is difficult to recruit for any study including atopic dermatitis studies in a short period of time. So you want to avoid having two studies going on all at once in the same geography. We are considering however beginning and implementing these programs in different geographies and potentially Europe.

Great thank you appreciate the efforts.

Sure.

Our next question comes from Jason Butler with JMP Securities. Your line is now open.

Hi thanks for taking the questions. First one just can you tell us for HETLIOZ guidance for 2019 is there any contribution there from the jetlag indication or is that all non-24?

Hi Jason. This is all non-24 there is no jetlag assumed in this guidance.

Okay and then just follow on from the questions around reimbursement dynamics for the sited non-24 patients you talked about the reimbursement pushed back the additional prioritization. Can you talk about what the specific prioritization requirements are for sighted patients with non-24?

Yeah. The prioritization criteria vary from payer to payer or PBM to PBM. And in terms of the sighted, the objection is that they are sighted. And of course this is an improper use of prioritization criteria because the drug as we all know is approved for non-24 hour sleep-wake disorder regardless of the state of blindness or sightedness. Unfortunately in a very self-serving way, some but not all payers use this criterion as a criterion of non-approval. And we help our patients make the case. And what is encouraging when our patients continue the appeal process and eventually find themselves to the final step before a court hearing, which is an administrative law judge in the few experiences we have so far invariantly the administrative law judge orders the payer to approve because of course there is no other treatment and it is seen that the prioritization is improper. So it is not that the prioritization criteria are legitimate and the patients don’t meet them. The criteria we all decided are sometimes even with blind patients suggest items like a step therapy of other drugs and include hypnotics, include wake agents like provocateur et cetera. We all know that it is improper and likely illegal. Of course there is a lot of attention these days on PBMs. And very recently there is a lot of focus on these improper step therapies. So we hope that this general climate of focus on getting the PBMs to do the right thing, they do the right thing for rare orphan disorders like non-24 in the patients who stem to benefit from these drugs.

Right. Thanks. And then if I could just one more on tradipitant. If you -- in the scenario where you don’t resolve the clinical hold and pursue an NDA, would it be the expectation that the label would be limited to that 12 weeks of treatment? And if so, does that impact the market opportunity here or is there a way to pursue a chronic label even with that clinical hold in place?

Yeah. At this time we cannot imagine a scenario where we do not resolve this issue expediently for the simple reason that there are many ways to resolve it.

Okay. Okay, great. Thanks for taking the questions.

Sure.

Our next question comes from Charles Duncan with Cantor Fitzgerald. Your line is now open.

Hi. This is Pete Stavropoulos from Charles Duncan. So I have a question with regards to gastroparesis and tradipitant. So from my understanding there is an approximately 30% placebo effect when it comes to gastroparesis studies and readouts such as nausea. And so, there is -- there maybe a requirement for an extended study past the 12 weeks. Is there any -- are you guys confident that within that 12 weeks a larger multi-center Phase 3 that you can actually hit the endpoints within the 12 weeks or you need more time to separate placebo from [Indiscernible]?

Thanks Pete. I’m not sure where this evidence comes from. There is no evidence that in gastroparesis studies we need to treat patients more than 12 weeks. In fact the data from our study, the four week study and the data from the aprepitant similarly our four week study suggest as we did a significant separation can be achieved in just four weeks. If anything we started seeing a plateauing of the placebo effect, meaning that in subsequent weeks, maybe six weeks, eight weeks, you will continue to see even better separation. So it is exactly the opposite of what you suggested. And therefore, a study that will attempt to confirm the four week results that we saw in the prior one is more likely to happen. And what is likely that we will do, of course we’re in discussion with the FDA that is allow the double-blind placebo portion to extend to 12 weeks. So not only we learn what happens at four weeks, but we have data that can inform doctors and patients what happens in subsequent weeks.

Okay. Thank you very much for the clarification.

Of course.

[Operator Instructions] Our next question comes from the line of Esther Rajavelu with Oppenheimer. Your line is now open.

Thank you. Thank you for taking my question. Can you help us understand the lower SG&A expense in 4Q relative to the rest of the year? How much of that is related to G&A versus sales and marketing and if any of that is related to [Indiscernible] from the HPI initiative?

Certainly. Certainly. Yeah, Esther, when we look at our -- Gian Piero mentioned earlier, when we look at our spend in SG&A in 2018, one of the things that occurred was that we actually reduced a fair amount not just in the fourth quarter, but throughout the year, spend on non-24 DTC. And that was linked to the productivity that we’re having from our field force on generating new scripts in the absence of [Indiscernible]. In addition to that, you might remember that in June we had a number of sales reps that we separated with from the company. And this was simply a decision to try to put ourselves in a better positions with folks on board to drive results in the future. The combination of those two things certainly plead into the cadence of SG&A spend as we went quarter-to-quarter.

Got it. And then on the guidance for HETLIOZ, it suggest lower, a lower year-over-year growth rate in 2019 versus what you saw in 2018 and 2017. So can you help us understand some of the considerations that went into the development for the guidance range?

Yeah. Just to be clear, the growth of new patient adds is identical in 2019 versus 2018. Now it’s understood that growth on top of growth if you’re dealing with that a minimum and equal amount results in a lower percentage point. So get that, but our ability to grow our business what you’re hearing from our guidance is we’ve got every bit of conviction as we enter 2019 as we did in our ability to execute in 2018.

Got it. And in terms of the sighted versus the blinded patients that you’ve included in that guidance range, one would think that given you’re just sort of in the early stages of approaching the sighted patients that that would potentially have a stronger uptake. How -- what can you say about that?

You know I think the way we have approached guidance is we say to folks this is in a level set way what we think we can accomplish. And in addition to that, you can be sure we’ll always try to do better. And a couple of levers that we’ve talked about in the past are true in 2019 as they’ve been true all the way along from creating more awareness to get more scripts reimbursed to making sure that our specialty pharmacies work to help patients get treatment in a timely fashion. These things all hold true.

Got it. And how long does it take for sighted patients once they get the script all the way through that process when you either get them the drug or they just decide to walk away. Is there a couple -- is it a few weeks or a few months?

Yeah. Esther you remember we discussed since I remember you were asking the similar question last quarter. And I expressed how displeased we are and destruct of how long patients have to wait and go through appeals of improper denials before they get to drug. So what you’re hearing is that a large number, the majority of the sighted people who get a script from their doctor to start treating non-24, they do not get the script filled for a long time and in the hopes of the payers is never. So we want to work very hard to change that.

So this is not, this is not a situation that essentially over the longer term can be rectified, it’s basically just the course of business that you would have to work through the entire process and that lag will exist into perpetuity eventually?

Yeah. Let’s model this what you just said. So if it is true, what we’re observing that after rounds of appeals and eventually administrative law judge hearing, patients eventually get their scripts. Then it’s a matter of time for most of them to get it. And if that is true, you take that a period of time that it takes to reach an AOJ hearing and you will see that will take actually certain periods of that before we stabilize and have most of our patients on treatment. So the answer to the prior question to Jim about growth, not only we expect to see this steady add of new patients per month same in 2019 like 2018, but if some of our plants came to fruition supporting patients through the payer hurdles, you have your potential to see an even bigger increase, but we cannot commit to any of that because we cannot control what the payers do.

Got it. And then moving on to tradipitant, can you talk a little bit about the Phase 3 study in atopic dermatitis. What is that -- how long have patients been dosed in that study?

The study is a double-blind eight week randomized study.

Okay. Got it. And then lastly I might have misheard you on this, but for the motion sickness trial, are you targeting only those that sea sickness or including all types of motion sickness?

Well the patients come with a history of motion sickness in all types of travel, land, sea and air, but in our first model, we are developing a sea sickness model. So people actually get on an actual boat, in this case it is in the Pacific Ocean for a period of time in a specific route.

Looks like a vacation. Well thank you for taking my question. I appreciate it.

Of course.

Our next question comes from the line of Derek Archila with Stifel. Your line is now open.

Hi. Good afternoon, guys. Thanks for taking the question. So maybe just first Mihael or Jim, we’re hearing that there is a lot of kind of issues for the sighted patients getting access to HETLIOZ. I mean can you -- I mean I guess investors really want to know what are the definitive strategies that you’re doing to better access for these patients, I guess that’s what I really like to better understand what you guys are doing and when that’s starting to flow through and is that going to be a 2019 event or a 2020 event? I guess my second question would be the late sleep disorder, it looks like you’re focusing on a very narrow subset of patients. So I guess what’s the rationale for that, is there any genetic rationale like for HETLIOZ in that indication or why is that specific genetic mutation? And then lastly, just remind me on Fanapt, on some of these lifecycle management, the long-acting injectable or even the bipolar. What does that do for the intellectual properties through that asset? Thanks.

Yeah, sure. I’ll start from the top, what is Vanda doing to help patients access HETLIOZ once prescribed HETLIOZ for non-24. So that includes actually both blind and sighted patients. Vanda all along has a third party that we contract with HETLIOZ Solutions where they are the first point of entry of scripts, they [Indiscernible] them, they do a benefits investigation and then hand it off to Vanda Benefits and Vanda Benefits works with patients to ensure that the adequate information is supplied to the insurance companies both on the initial request for approval, but also subsequent appeals. So that’s how the system is now. The Vanda Benefits as I’ve described before is an internal project that began mid-2018 and now it is becoming more mature. So we’re hopeful that it can help patients access the drug and overcome more of their hurdles, but of course time will tell. Your second question is on DSPD and why we chose the CRY1 exon 11 deletion mutant patients. What is behind that is a key publication in 2017 of Pat Caddell, senior author being Dr. Michael Young of Rockefeller University. Michael Young, to remind our audience here was awarded Noble Prize of Medicine last year for circadian rhythm disorders. In that President of National Academy Science paper what he discovered is that some patients with delayed sleep phase disorder carried this deletion in exon 11 of CRY1 which is a core protein in regulation circadian rhythms. But what is very interesting around CRY1 and exon 11 mutation is the frequency. And what I pointed out today is that the prevalence is estimated to be 0.8% of the population which means these are over 2 million people in the U.S. carrying this mutation. And while some of them may experience DSPD, which is…

Got it. Thanks. And then just to follow up on my first question. So you talked about some of the initiatives [Indiscernible] kind of market access started in mid-2018 and it’s becoming more mature. I guess how would you characterize access back then relative to now and I guess where do you see it going in the next 12 to 18 months? Thanks.

Well, I cannot quantify before and after yet, but we believe that our consorted efforts will result in a higher percentage of patients eventually accessing treatment. But of course we are very aware of the micro environment of how the government thinks of benefit managers and of course the situation is very fluid. What role they’re going to play, how this criteria prioritizations step at it et cetera will hold up in a new system. We know that the exposure of the improper rebates or rebates that don’t really flow through to benefit patients exposes a system which is now under scrutiny and question whether these criteria that were supposed to improve the cost have actually done so. And we are very interested to see the government would become interested whether these criteria indeed are appropriate or legal. So we’re watching the situation very carefully. Okay. If there are no questions, thank you very much for joining us. And we appreciate your support.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.