Good day ladies and gentlemen and welcome to the Vanda Pharmaceuticals' first quarter 2019 earnings conference call. At this time, all phone 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 would 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' first quarter 2019 performance. Our first quarter 2019 results were released this afternoon and are available on the SEC EDGAR system and on our website, www.vandapharma.com. In addition, we are 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. I will then comment on our financial results, before opening the lines for your questions. Before we proceed, I would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meanings of 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, 2018, 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 publicly revise 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. During the first quarter, we have continued to build on our momentum in 2018. As we continue our pursuit of innovative therapies, we will leverage our strong capital position to enhance our future growth prospects and our commitment to driving long-term value creation. Let us begin with an update on Tradipitant and the status of our current dispute with the FDA. To remind you, in February this year, we filed a complaint in federal court contesting the FDA's imposition of a partial clinical hold that does not allow for Vanda to conduct studies of Tradipitant beyond three months in duration. As previously discussed, the hold was imposed not because of findings in the extensive Tradipitant safety database, but because of an administrative insistence to conduct an unnecessary nine-month study in non-rodents and specifically dogs. Extensive studies of Tradipitant have already been completed. Tradipitant has been studied in more than 3,000 animals, including mice, rats, rabbits and dogs for durations up to two years and at doses of more than 300 times human dose multiples on a milligram per kilogram with no relevant safety findings. Similarly, Tradipitant has been studied in more than 600 patients in clinical studies for up to three months in duration with no significant findings. Following the court's grant of a request from the FDA for voluntary remand to cure its own potential mistake, the FDA provided remand response to Vanda on Friday, April 26, 2019. The response indicates that after reevaluation, the FDA believes that a partial clinical hold continues to be appropriate. While we are disappointed at the FDA's insistent on a partial clinical hold, we believe that we have provided sufficient information regarding the safety of Tradipitant to justify its continued study in patients beyond 12 weeks in accordance…

All right. Thank you Mihael. Total net product sales for the first quarter of 2019 were $47.7 million, a 10% decrease or $5.3 million compared to $53 million in the fourth quarter of 2018 and a 9% increase compared to $43.6 million in the first quarter of 2018. As I will describe in more detail on a product-by-product basis, the sequential decline in net product sales is fully accounted for by inventory changes in the fourth quarter of 2018 and the first quarter of 2019. The combined value of the inventory increase in the fourth quarter of 2018 was $2.5 million and the combined value of the inventory decrease in the first quarter of 2019 was $2.7 million. The inventory change contribution to the first quarter 2019 sequential revenue change was $5.2 million of the $5.3 million total. Absent these inventory changes, our commercial performance was effectively flat from quarter-to-quarter. HETLIOZ net product sales were $29 million in the first quarter of 2019, an 11% decrease compared to $32.4 million in the fourth quarter of 2018 and a 14% increase compared to $25.4 million in the first quarter of 2018. The HETLIOZ patients on therapy number continues to grow quarter-over-quarter. Of note, in early 2019, we saw a greater than expected decline in our HETLIOZ patients on therapy as compared to the fourth quarter of 2018. While we have seen this early first quarter decline in prior years, the magnitude was greater this year. This early first quarter decline has since reversed and patient demand has subsequently grown consistent with our full year 2019 plans. As of March 31, 2019, the specialty pharmacy channel held less than two weeks of inventory, as calculated based on trailing demand. In the first quarter of 2019, the units dispensed to patients by the…

Thank you very much Jim. At this time, we will be happy to answer any questions you may have.

[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. So I think the first question I have is just maybe an understanding question. So for the scheduling order that now has a deadline for Friday, what exactly would be the outcome of the scheduling order? What can we learn from those proceedings? Like what would be a scheduling order and what would be the outcome we can expect to see?

Well, I would say nothing material. It will be what it says it is a scheduling order where the two parties will present a calendar and would be an agreed-upon the parties and the court. But of course, our intent is to put an aggressive calendar and move quickly to discuss the merits of the case.

Got it. So basically the scheduling order just dictate the procedural happenings within the legal proceeding, is what I heard you say?

Correct.

Okay. Got it. Okay and then I think a lot of the questions that are on investor's mind and certainly mine as well is that certainly applaud your efforts to kind of put forward critical issues in the drug development field, but I think it would be helpful to us to contextualize the strategy of opposing the partial clinical hold and how that really generates value for Tradipitant and the company? So maybe just kind of fleshing out that strategy and how we, as outsiders, can see the value proposition of the strategy?

Certainly. That is a very fair question. And we do hear that from our investors as well. Just to start from the very top, we are a science driven company that we innovate very people's lives. And while this is the goal and this is how we intend to provide value for the patients and certain value to the company and its shareholders, how we do this is very important to Vanda that we operate within the bounds of law and within the bounds of ethical principles and scientific conduct. And this request by the FDA is outside of legal bounds. It is outside of ethical bounds. And it is outside of scientific conduct. The conduct of an animal experimentation without a justification and without belief that will add value to the knowledge and the goal of the experiment is not only unethical, it is illegal under the Animal Welfare Act. So the FDA has put us in a very difficult position to either be strong-armed to do something that is unjustified or do something that is illegal. Now having said all that and while it does matter a lot of how you conduct research, we are very focused to make sure we bring this very much needed product to patients as soon as possible. And what I have to tell you and our shareholders is that we are actually very impressed and stunned by the response from some of our patients that have been on the Tradipitant studies. Talking to them, we hear their horror stories and we hear, for at least some of them, their recovery stories when they are on Tradipitant and the need that they have for this drug. These patients are very anxious to return to treatment, both in clinical studies as well as eventually enjoy the drug to the market when it reaches it. But these patients are also instructing us that this should not be done at any cost and they agree with the company that the FDA's insistence on a useless animal study is a waste of their time and it's a waste of animal resource and the company's resources. You will see these patients becoming very active in this entire process in the coming weeks.

Okay. Well, that's helpful. Thank you. And maybe just one other question. This might be more appropriate for Jim. Given that the cash position of the company and the guidance to increase that cash position towards the end of this year, would you ever consider corporate strategy of share buybacks? And what are your thought process around that particular idea?

Yes. Before Jim comments on that, as you can see from our plans that we been a very transparent talking about. The company has a lot of plans of how to deploy the cash and we have been able to do that. At this time, we don't have any cash-back plan. But I will let Jim.

Yes. Well, it's accurate to say that we do not have a share repurchase plan in place today, but II think that you are correct and we certainly had this dialogue with other shareholders that this is something that we both take very serious this idea and are actively certainly considering.

Okay. All right. Well, thanks so much for taking the questions. I appreciate the color. And I will hop back in the queue. I appreciate it.

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

Hi. Thanks for taking the question. So the first one is on Smith-Magenis. What you plan to discuss with FDA at the upcoming meeting before filing the sNDA? What still needs to be agreed upon with them?

Well, I to discuss what is it that we plan to file and reach an agreement that this is adequate. And to remind you, the efficacy claim will be based on two studies, the randomized crossover study that we reported in December as well as an open label study that was conducted the year prior and reported.

Okay. Got it. And I guess I have follow-up to that. Has FDA agreed on the trial design of those animal studies or are there any outstanding issues regarding the filing that you hoping to get agreement on?

No. We have discussed this in prior calls. Though the FDA has seen these protocols and has made comments on these protocols, but we do not have any explicit agreement that these protocols and their results will suffice for an NDA filing.

Got it. Okay. And then a question regarding the animal studies. Could you discuss the alternative that you have proposed in place of the animal studies requested by FDA?

Yes. The animal studies, the reason for them, is to predict the occurrence of a safety issue in human clinical trials. And the FDA, by imposing the partial clinical hold, what it does is, it does not allow us to collect 12 month human safety data which are part of a customary safety database that you submit during an NDA filing. So theoretically, if regulators in other geographies that we are pursuing now, would allow us to conduct these studies and continue beyond three months, that could allow in itself for us to have the 12 month safety database at the time of NDA filing. Now having said that, the FDA, regardless the existence of a safety database of convincing benefit profile of the drug may still require such a study. That is why it is very important to resolve this issue now. An alternative would be that if this issue was not resolved at the time of NDA filing, Vanda will file with the data in hand and if the data are limited to three months data, we certainly would do that. Now of course, the FDA doesn't have to accept a filing or approve the drug with three month data, but we think there are ways around that that it can be reasonably accepted and a risk management program could be implemented to ensure safety while the drugs on the market.

Thank you.

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

Hi. It's [indiscernible] for Jason. Thanks for taking the questions. First question is on the Tradipitant animal toxicology again. I think you pretty much answered this by your previous comments, but I just wanted to ask bluntly that, what's the company's willingness to run the animal toxicology studies to preserve time left to approval? It sounds like it's zero, but just to get that answer?

Yes. Let's be clear on this. Vanda went to the FDA about a year ago and when we were told that we cannot continue because a nine-month dog study was not conducted as per guidance. We rightfully so asked for a justification. After a number of delays, eventually in December they told us the same thing that the justification is that there is a guidance. And now upon the response, while I cannot give you a lot of color, the FDA responded, but did not provide a justification of why this nine-month dog study will add value in predicting safety for human studies. So if the FDA had come back two days ago and saw this from their database analysis that indeed, this study has validity, meaning it has a positive predictive value and a negative predictive value, we would immediately conduct this study. Now of course, they have not provided that and we cannot conduct this study. To remind you, we have also presented to the FDA a plan to conduct this study and that was before the December partial clinical hold, conduct a nine-month dog study, but what's clinically and with laboratory measures the animals and limit sacrifice of animals, if needed, for moribund conditions or the emergence of adverse events. The FDA rejected this as well. And to be very clear to all our shareholders, Vanda believes that animal toxicology studies are necessary doing clinical drug development, but they have to be justified, they have to be sequenced, you have to learn from and only and if there are positive and negative predictive value is validated, that is the only time these studies should be conducted. So that is exactly why at this time we have not initiated such a study.

Okay. Great. Thank you very much. And a question on HETLIOZ and Smith-Magenis. What's been gating, if you had the data at the end of last year, what's been gating from the data to the discussion with the FDA?

Well, it is clinical study report preparations and preparing for the pre-NDA meeting. So it's pretty much time to prepare for that meeting.

Okay. Great. Thank you.

Sure.

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

Hi. Great. Thanks guys and thanks for taking the question. So I guess I have two for Mihael and one then for Jim. So first one for Mihael, I guess in the PR you talked potentially about filing a Tradipitant NDA, even if the lawsuit is not resolved. I mean that would imply that the lawsuit is of pretty long duration. So I guess what I am wondering is, at what point does it make sense from a fiduciary standpoint to just run the study? And then I guess maybe putting it a different way, at what point will the projected cost and time of the litigation be equal to the cost of the study that the FDA actually wants you to run? Second question for Mihael would be, just any color on the terms of enrollment for the Tradipitant atopic dermatitis study? Where we stand on that? I know when we expect data. But just to kind of get a sense of where the enrollment stands? And then Jim, just on HETLIOZ growth, any granularity you could provide around the growth and where it's coming between the sighted and blind? I guess where we are in terms of the proportion of patients for each group, that will be great? Thank you.

Yes. On your first question, just to clarify, this is not about cost of the study. These studies cost between $500,000 to $1 million. So it is not about tying to save money. It is about doing do the right thing. And again, it is not a question of whether we pursue to resolve this or let it go. It is very important for our shareholders also to understand that Vanda seeks to achieve the right balance between how we conduct studies and the timely availability of drugs to patients who need them. And we understand that benefit-risk ratio. And we will do everything we can not to jeopardize delivery of products to patients. But I think, us as a community of pharmaceutical companies and investors, we need to make sure that we don't just follow a regulator out of convenience or fear. Our regulators get better to serve all of us with a dialogue when we do speak out about issues that need to be discussed. In fact, I do know for certain that the leadership of the FDA appreciates Vanda's stance. It may be inconvenient at the time but Vanda is raising the right questions. Not only whether you should use certain animals for certain period of time, it is a larger question of public safety and that question is, are the studies that we are relying upon on drug safety are the right studies? Have we been too relaxed not involving ourselves in new studies that can actually improve safety of drugs? The paramount concern of Vanda is having safe products. And I know that if this is shared with all our colleagues in other biotech and pharmaceutical companies, certainly the U.S. public and certainly the FDA. Sometimes the regulators can be a little behind in adopting…

And just --

And our next question comes from the line of Esther Rajavelu with Oppenheimer. Your line is now open.

Hi guys. Thank you for taking my question. I just have two quick ones. Following up on one of the previous questions on the share repurchase, when would you be in a position to announce your decision on whether to do a release or not?

[Multiple Speakers] If somebody could put the phone on mute, I think they might be traveling, I appreciate it. And before I answer it, I would also throw out that I believe that Derek was going to perhaps ask a follow-up question. If he was, I would certainly encourage him to get back in the queue. So apologies, if he was cut off there. Now Esther, to your follow-up question regarding the concept of a share repurchase program. We are committed to creating value for our shareholders and following many different paths to do so, including through this type of path that we will give consideration to. These types of decisions are always being contemplated. So I wouldn't view it in the context of a deadline for a decision, but rather something that you actively always consider.

Got you. Thanks. And then my next question is, can you maybe talk about the addressable market opportunity for gastroparesis with a label for a shorter duration versus a label for chronic use?

Yes. So first of all, we discuss about the market before. And we believe to be true from the publication of Rey et al. of the iceberg, epidemiological profile of gastroparesis where 100 million patients would be diagnosed clinically or with laboratory means of gastroparesis. But a six million or larger number of people suffering from gastroparesis. To remind you, Esther, that gastroparesis today, the last drug approved by the FDA was 40 years ago and that was metoclopramide Reglan. Reglan is approved for short-term use up to three months because of the black box warning. And the FDA does understand that and the FDA does understand that there is no chronic treatment available. Now we believe that if we were to launch with a three-months label and a management program, that certainly will be a more narrow label than we would like to but certainly within a certain period of time, that requirement of that program most probably will go away. So we do not see that a risk management plan will restrict access to patients or will reduce our market opportunity.

Got you. Thank you very much. I will hop back in.

And we do have a follow-up question from the line of Derek Archila. Your line is now open.

Hi. Thanks for getting me back in here. So just to follow-up on the first question I asked. So it means that if the study costs $500,000 to $1 million, you would be willing to spend more on the litigation. Is that what I am hearing based on your answer? And then just the other two questions I wanted to get a sense of the enrollment for the Tradipitant atopic dermatitis study, where we stand? And then the split from where the HETLIOZ is growth is coming from? Thanks.

Yes. On the first question, I would say what we want to spend is zero. We don't want to spend any money and the regulator's stance is just wasteful and unacceptable and we hope they can see that there is no justification for what they ask. Your second question, Derek, was? The enrollment about atopic dermatitis. We have not discussed the numbers, as you know. I do appreciate you want to have a little more color. The enrollment is going well. In the last three months, it has accelerated through the team's efforts of making awareness to more general public but also increasing the number of sites. So we feel comfortable that the timelines we have reported of first half of 2020 results, that will be met.

And then you had the follow-up about the split of the business for HETLIOZ, the growth coming from HPI relative to the PDP business. When we look back over the last four quarters, so starting in Q1 of this year and then going back to three more, what I can tell you is that the mix of new patient additions, the ratio of sighted patients relative to blind patients has been very stable. And what you should take from that is that our engine to serve these patients by meeting with psychiatrist or our traditional awareness programs for blind individuals continue to be active and strong. One thing that we saw just trend-wise is, you might remember at mid last year we did have some planned turn over of our field force around midyear. And then we did active recruiting to refill those spots. It was about 40 spots. And what I can share is that while we were in that transition period, clearly that impacts the ability to generate new scripts. Those spots have been full and as we look at the trajectory of productivity of our field team, we are impressed. And it's really those trends that lead to our affirming of financial guidance for this year.

Got it. Thanks guys.

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

Hi. So I guess I had a follow-up. Mihael has touched on in answer to Derek's first question. Have you experienced any strong support or pushback from other biotech companies around the animal tox study? I mean, is it possible to expand this effort, bring on other parties or other companies? Thanks.

Yes. I am not going to be able to comment on that. But certainly, we appreciate the support of those who want to support this effort.

Great. Thank you.

And I am showing now further questions in queue at this time. I would like to turn the call back to Dr. Polymeropoulos for closing remarks.

Thank you very much for joining us and your support. Thank you.

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.