Vanda Pharmaceuticals Inc. (VNDA) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Vanda Pharmaceuticals Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions]I would now like to hand the conference over to your speaker today, Mr. Jim Kelly, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

All right. Thank you very much. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2019 performance. Our third quarter 2019 results were released this afternoon and are available on the SEC's EDGAR System and on our website, www.vandapharma.com.In addition, we are providing live and archived versions of this conference call on our website. Joining me today on the call is Dr. Mihales Polymeropoulos, our president and CEO. Following my introductory remarks, Mihales 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'd 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, 2018, and quarterly report on Form 10-Q for the quarter ended June 30, 2019, 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'd now like to turn the call over to our CEO, Dr. Mihales Polymeropoulos.

Thank you very much, Jim. Good afternoon, everyone, and thank you very much for joining us. This has been an excellent quarter for Vanda. As we reported today, Vanda's revenue from our commercialized products continued to grow in the third quarter.Our performance in the third quarter demonstrates the strength of our position in the market and our ongoing commitment to pursue value enhancing opportunities with the objective of driving long-term sustainable growth. We continue to drive growth of Hetlioz six years into the launch, and this performance is a testament to our ability to continue to drive awareness for non-24-hour sleep-wake disorder with both patients and doctors in a unique and unprecedented manner.We continue to see strong demand for new patients in both blind and sighted individuals with non-24. In addition to our commercial success on Hetlioz, we are preparing a significant direct-to-consumer marketing campaign for Fanapt, the first of its kind for schizophrenia treatment, which will begin early next year.We have received very positive feedback on a broad circulation magazine print campaign for Fanapt that was piloted this summer and look forward to expand our Fanapt marketing campaign in the coming months. In the last few months, we have also launched a comprehensive regulatory strategy aimed at driving regulatory changes that appreciate and enable innovation, improve access to drugs and increase competition.Our intent is to undertake an intensive and collaborative engagement with the regulatory authorities on all matters of Vanda's business. We believe that this strategy will advance interest of Vanda and better support our products and the patients we serve.An example of this engagement is Vanda's participation in the common process for the new draft guidance issued by the FDA on gastroparesis this summer. We commented on a number of important issues including the proposed number of endpoints, the length of clinical evaluation and the design of the safety database. Many of our key comments were consistent with feedback expressed by others, including GI physicians, the Gastroparesis Clinical Research Consortium and the American Neurogastroenterology and Motility Society and advocacy organizations of patients. We're also actively engaging with the FDA on discussions around the appropriate models for preclinical safety evaluations and post-marketing safety evaluations, as well as on appropriate development plans for all of our projects.We have made significant progress on our assets in clinical development, and I will discuss a few highlights. We are advancing rapidly on a number of parallel tracks for all of our products, and we are currently conducting a significant number of clinical trials with numerous planned regulatory submissions in the next 24 months. On Hetlioz, for the treatment of jet lag disorder, we continue our engagement with the FDA to resolve the issues that precluded approval, and we remain confident that our supplemental NDA for jet lag disorder demonstrates the significant and clinically meaningful effects of Hetlioz on the essential core features of jet lag disorder, namely insomnia and next day alertness. Also on Hetlioz, a pre-sNDA meeting is scheduled for Smith-Magenis syndrome during the fourth quarter.Our sNDA for Smith-Magenis syndrome will include the largest controlled study ever conducted in the disorder, and we look forward to working with the FDA to bring this important treatment to patients and their families as soon as possible. For Fanapt, we plan to initiate a study in bipolar disorder in the coming months. In addition, the studies of a long-acting injectable formulation of Fanapt are ongoing. I will now turn to tradipitant.This is our neurokinin-1 receptor antagonist. We reported positive results from our Phase 2 study in our motion sickness program with tradipitant earlier this year. Plans for a Phase 3 study in motion sickness are well under way, and we anticipate beginning the study in the fourth quarter. We plan to meet with the FDA and chart a path for our clinical program that supports an NDA filing for motion sickness later in 2020.We're also advancing two additional important indications, as you are aware, for tradipitant, atopic dermatitis and gastroparesis. On gastroparesis, the Phase 3 study of patients with both idiopathic and diabetic gastroparesis is enrolling and randomizing patients. The duration of the study is 12 weeks, and we plan to enroll approximately 200 patients. We are very excited to report significant progress of the study of tradipitant in atopic dermatitis.We have now completed enrollment of the first Phase 3 study, EPIONE, in October and expect to report results in the first quarter of 2020. We have also begun enrollment in the second Phase 3 study for atopic dermatitis by the name, EPIONE II. Vanda continues to have a strong presence at a number of scientific meetings this past quarter, including the United European Gastroenterology, the American College of Gastroenterology, the Gordon Research chronobiology meetings and also, we presented 12 papers at the American Society of Human Genetics. These presentations included whole genome sequence analysis of gastroparesis, Smith-Magenis syndrome in schizophrenia patients, discoveries of novel regions affecting human chronotypes in circadian period length and patterns of homozygosity across species.We continue to strengthen and defend our IP portfolio, including through the addition of newly issued patents for our products. In summary, we are very excited by our significant progress, both commercially and clinically, with strong financial performance, a healthy cash balance, growing profits and revenue while, at the same time, progressing our innovative projects at an accelerated pace. Jim?

All right. Thank you, Mihales. As Mihales highlighted, during the third quarter of 2019, we saw exceptional year-over-year revenue growth, which is consistent with our plans. Total net product sales for the third quarter of 2019 were $59.5 million, a 21% increase compared to $49.1 million in the third quarter of 2018.Hetlioz net product sales were $37.6 million in the third quarter of 2019, a 26% increase compared to $29.9 million in the third quarter of 2018. The Hetlioz patient on therapy number declined slightly in the third quarter as compared to the second quarter of 2019. Reminder that the second quarter saw a record growth with the largest number of new patient additions seen since the early days of Hetlioz launch. As of September 30, 2019, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand.Specialty pharmacy's inventory on hand at the end of the third quarter of 2019 was lower when compared to the second quarter of 2019. The value of this inventory change was approximately 900,000. Fanapt net product sales of $21.9 million in the third quarter of 2019, reflects a 14% increase compared to $19.2 million in the third quarter of 2018. As of September 30, 2019, wholesalers have decreased inventory on hand when compared to the second quarter of 2019.The value of this inventory change was approximately 200,000. Fanapt prescriptions, as reported by IQVIA exponent, decreased by 2% compared to the third quarter of 2018. And prescription trends remain consistent with our full-year 2019 financial guidance. In the third quarter of 2019, Vanda recorded net income of $100.4 million compared to net income of $7.2 million for the third quarter of 2018.The income tax benefit of $88.1 million, reflected in the financial results for the third quarter of 2019, includes the favorable impact of the release of Vanda's deferred tax asset valuation allowance. Now this is a one-time tax benefit and a noncash item, and therefore does not have an immediate impact on Vanda's cash balance. That said, the recognition of the deferred tax asset this quarter does reflect management's strong conviction in our business and future profitability. Income before income tax in the third quarter of 2019 was $12.3 million, a 69% increase compared to $7.3 million in the third quarter of 2018.Operating expenses in the third quarter of 2019 were $48.7 million compared to operating expenses of $42.9 million in the third quarter of 2018. The increase of $5.8 million was a combination of increased SG&A cost and an increase to cost of goods sold associated with the higher net product sales. We expect operating expenses to rise in the fourth quarter of 2019 driven by our commercial DTC spend and R&D project activities. Of particular note are the new tradipitant Phase 3 studies for gastroparesis, atopic dermatitis and motion sickness.Vanda's cash, cash equivalents and marketable securities referred to as cash as of September 30, 2019, were $299.6 million, representing an increase in cash of $59 million compared to the third quarter of 2018. Vanda reiterates its 2019 net product sales guidance and expects results in the upper half of the range; net product sales from both Hetlioz and Fanapt of between $215 million and $225 million; Hetlioz net product sales of between $137 million and $143 million; Fanapt net product sales of between $78 million and $82 million.In addition, Vanda is providing an update to year-end 2019 cash and expects to achieve the following financial objectives. Year-end cash is expected to be greater than $295 million, this compares to prior guidance of greater than $275 million.I'll now turn the call back to Mihales.

Thank you very much. At this point, we would love to answer your questions.

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

Hey. Thank you for taking my question. So first of all, congrats for the pretty good kind of third quarter. My first question related to tradipitant, maybe two. So for the time line of the atopic dermatitis Phase 2 top line results, a little bit kind of earlier than expected, so how could you kind of attribute to this kind of quick enrollment? And any related information you can share with us?

Yes, you're correct that our initial estimate for completing the study was in the first quarter. And the reason for this is dual. One is good execution and speed of recruitment, but also, we were able to cap the recruitment at about 375 patients instead of the approximate 500, and this was after our analysis of the blinded data, which showed a very small increment in the power of the study between 375 and 500. So that is really the explanation, but we're really excited to see the results in the first quarter.

I see. Great. Okay. And next question is, we understand on December 13, you will have your motions hearing for the clinical partial hold dispute with the FDA for the summary judgment. So what kind of a potential outcome would you expect? And how would you communicate to the street?

Yes. I will actually pass this question to our General Counsel, Tim Williams, who is here with us. And I will say, of course, we cannot make any comments. All the information is in the public domain. But I will let Tim answer your question.

Sure. Thanks, Mihales. Just as a – to set context, and as a reminder, when we filed our summary judgment motion in the case back in July, we did request this oral hearing. So this is – we are happy that Judge Bates granted that request, which he did on Monday of this week. The documentation for that is publicly available on the PACER system as well. So we remain confident in our position on the case, and we're looking forward to the hearing. Apart from that, I echo what Mihales said, we won't speculate on strategy or outcomes or responses to that hearing.

Sure, fair. Maybe one last question from me is the – what have been the key considerations for Phase 3 motion sickness study, given the learning from positive Phase 2?

Yes. As we said with the Phase 2, of course, very strong results, very significant protection of patients that took tradipitant over those that took placebo. One of the key learnings is that we learned that rough seas matter and wave height matters, and this will be controlled in the next study. I don't mean that we're going to make weather, but we will at least randomize patients when certain sea conditions are achieved. But I want to underscore also that we soon will plan to request an end of Phase 2 meeting with the FDA to formally review the results and the upcoming clinical study.

Got it. Thank you. That's all for me. Congrats again.

All right. Thank you.

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

Hi. Thanks for taking my questions. So the first one is on the DTC spending. If I heard you right, earlier in the call, you mentioned some increasing OpEx for additional DTC spending.And I think that this is an area, if I remember right, that you cut back a little bit on earlier this year. So can you talk about maybe which products that would be focused on, as well as what gives you confidence that, presumably, the spending will lead to increased scripts?

Yes, that's a fair question. First of all, I will say that we're not prepared now to discuss specific spend target. But I'll give you a little bit the thinking behind it and also where confidence around DTC comes from. I will first speak to our experience.Our experience has been a fantastic performance of our direct-to-consumer campaign on Hetlioz in the first three to four years with a very significant drive before saturation and now with our smaller reminder campaign. It is that DTC campaign that has driven now the creation of a database of approximately 30,000 patients interested in learning more about non-24 and continue to drive our growth. So there, the return on investment has been fantastic. Now the question is what additional DTC campaign we'll do and for what product? As I mentioned, we are now planning a direct-to-consumer television campaign for Fanapt.And the thinking behind it is that this category of drugs, antipsychotics, are actually quite sensitive to direct-to-consumer promotion. Fanapt did not have any. The other brands that are available today of antipsychotic drugs do have a strong presence of direct-to-consumer campaign behind them. The goal of this campaign for Vanda would be consistent with the principles under which we operate, which is make patients aware and empower them.And at the same time, we will be likely the first company ever to advertise a drug for schizophrenia. All our competitors have advertised their products not for their first indication schizophrenia, but rather for bipolar disorder and major depression. We think that does very little to destigmatize this horrific disease. And from our early pilots in print, we're getting very significant positive responses of Vanda's efforts to actually bring the word schizophrenia in front of Americans, destigmatize it and offer Fanapt as another treatment to patients to discuss with their doctors.So we're very excited about that. But also I want to point out, Joel, that Vanda has employed in the past very good metrics to understand performance of a DTC campaign even before – long before revenues come. And I will not comment specifically what we plan to do with Fanapt. But we will have the opportunity to know very quickly what is the effect of this campaign and what that spend should be. So of course, we're doing this to increase our revenue. And we will make sure we understand the metrics of a positive ROI.

Really appreciate all the detail. And I guess one more question and it's on tradipitant. Can you discuss FDA's willingness to approve tradipitant for any indication without completing any additional animal preclinical work? And I guess what I'm getting at there is that – it seems clear for certain indications that FDA wants additional preclinical work, but some other indications maybe shorter-term use, such as motion sickness. And does that seem to change the way the FDA would consider approving it at all for those indications that could be shorter term?

Yes, that's a fair question. So I'll take one indication at a time. For motion sickness, you're right, this is a incidental intermittent treatment where having the long-term safety data in two species will be certainly outside of recommendations of ICH guidance. So it is our full expectation that this part of the database would not be required.Of course, the FDA doesn't tell you what is required until you file and maybe they tell you them later. However, on motion sickness, I would say that we should feel very confident that this database that already exists for preclinical data will be well within requirements. Now we also feel confident about our plan to produce a safety database in a plan that will enhance the safety of the program above and beyond what FDA is doing now. Without spending too much time on this, I will actually guide you to Vanda's comment on the gastroparesis guidance, it's publicly available in regulations.gov, you can search for gastroparesis, and you'll see the Vanda comment.Within these Vanda comments, you will see our proposal to the FDA of a very comprehensive a safety database creation, where we call submission of placebo-controlled study data in the [Technical Difficulty] 12-week placebo-controlled study data for the safety database at the time of approval, and then distribute [Technical Difficulty] through a specialty pharmacy program and a complete registry that will continue on for up to 10,000 patients reporting and analyzing continuously to the FDA.By the way that Vanda is advancing to enhance safety of all drugs, we believe that the current system required by the FDA and ICH guidance, the drugs that may treat thousands or millions of people are released on the market with databases of 100 patients exposed for 12 months is grossly inadequate and delays detection of signals. We believe that our proposal certainly should be adopted and it has the potential to transform and improve safety of human drugs.

Got it. Thank you.

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

Hi. Thanks for taking the questions. First one, can you give us any more color of the patient dynamics for Hetlioz from 2Q to 3Q?

Yes, I'll characterize it a little bit and maybe Jim wants to add something. We are continuing to see growth in the patients added per month. And the growth comes from the combination of both our PDP program, which is a patient-directed physician program and the HPI program, which is the Hetlioz psychiatry initiative. And we continue to see a very significant addition of demand every month. Jim, do you want to add something?

Sure. Hi Jason, you heard me mention earlier that the second quarter was a record quarter of growth for Hetlioz. It was exceptional in terms of new patient adds and getting – driving patients on therapy. We held that effectively in the third quarter, which is in and of itself an amazing feat.I think, as we head into summer and we do a little less DTC and such, third quarter is a little extra work for us. So as we look at the shape of the business, we think that maintaining a strong patient on-therapy and patient demand in the third quarter on the heels of a record second quarter is exceptional. And so we're really looking forward to building the business from here.

Yes. I just want to point out, Jason, that it is exceptional for a product in this space to continue to grow six years into the launch. And again, I'm very proud of our team and the efforts and ingenuity to continue to grow this product. But it happens actually because Vanda never gave up to try to identify patients that will benefit.What we're learning now from our patient stories every day is that Vanda has given them an answer to the peculiar disorder that were misdiagnosed and untreated for many years, non-24. And we see patients that lives have been transformed, being either blind or sighted, and we see doctors that all of a sudden are enlightened with the effects of the drug in some of their patients.Only to mention an e-mail I received this last week where one of our sales representatives walked into a doctor's office only to be hugged to say thank you for what Hetlioz has done to one of his patients. That was a male patient sighted with peculiar sleep issues that because of our awareness, the physician recognized that it may be non-24 and now he successfully treated this patient.So this story actually make us think that Vanda is doing the right thing. And we will continue to drive growth by identifying patients that are underdiagnosed today.

Great. That's helpful. And then just one more question. On the bipolar disorder study for Fanapt, can you give us any more details even at a high level on how you're thinking about trial design and whether you expect this to be a registration study? Thanks.

I would start from the bottom. Yes, it will be a registration study. And – otherwise, it's pretty boring. It would be a three-week inpatient, three or four-week in-patient study. Yes, we're debating that. And we will have the classic endpoints that all successful studies will have and psychotics have.

Great. Thanks for taking the questions.

Of course.

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

Good afternoon guys, and thanks for taking the questions. So just a few from us. I guess, first, we didn't see any non-GAAP reconciliation figures in the press release. So I just wanted to get a sense of where the stock-based comp figure kind of was for the quarter and the breakdown of that.So maybe we can just start there, and then I have a couple of follow-ups.

Sure, Derek. And in fact, you will see all the stock-based comp detail and its breakout between SG&A and R&D in the 10-Q, so that data will still be there. This quarter, we decided to remove that schedule simply because our guidance we gave this year, we no longer guide on non-GAAP OpEx. We had stopped that this year. And so it just didn't seem to make sense to continue it, especially since all the data you need is right there in the queue.

Okay. Fair enough. And then just on R&D expense. So it seems like through the good portion of this year, it's kind of been on the low side relative to consensus and at least our estimates as well. So it sounds like the R&D should start ramping up, you started – or at least sounds like you're going to be starting some studies. So can you just kind of give us a sense, maybe the magnitude?And then, obviously, without giving 2020 guidance, how should we be thinking about, again, a variety of different studies? What that cost could look like over the next 12 to 18 months?

All right. Well, I think one of the important things you heard from Mihales a little bit earlier is our ability to operate in an incredibly efficient way. I mean, we have found that, for example, in atopic dermatitis that we feel really confident in completing enrollment at approximately, I think, the number is 370, 375 as opposed to the original 500 and get us to the answer quicker and for less. And in this business, that's pretty impressive.So we're happy with the R&D execution. Also on the heels of great motion sickness results, the part we're going to be initiating study soon, and as you heard, the gastroparesis is up and going, we're coming into a window here where we do expect a step-up in R&D expense. And you are going to hear more from us about guidance as we get into next year, but I wouldn't want to jump in front of that.

Okay. All right. So just moving on to Hetlioz. So as we think about some of the comments, it sounded like you were talking about a small sequential decline in the number of patients on therapy from 2Q to 3Q. So I guess, 2Q was that more record-setting type of volume. So can you just give us a sense, maybe the split between volume and price as we kind of stepped into the third quarter?

Yes. So the first thing I would share is that on the heels of record growth, we were thrilled, just to even maintain that patient on-therapy number in Q3, when we all know Q3s can be quieter, whether it's docs' vacation, patient vacation, little less DTC. So we're exceptionally happy. I think you remember, in Q2, we saw a 9 million sequential step up. So holding it and then having a nice set up for the go forward, we're thrilled.

Okay. So I guess, again, if we're talking about volume –

And then as you think – yes, if you think about Q2 versus Q3 and you just sort of step back, view them as flattish, and we're thrilled to move from here.

Okay. So I mean, I guess, your comments said that there was a sequential decline, but now it's flattish. So I just want to make sure that we got that straight as we model this.

Well, remember, there's a couple of pieces I shared with you. A small, slight decline in patients on therapy, about 900,000 in destocking. So I mean, clearly, there's some moving pieces. But if you're thinking about, Jim talked to me about where the business is going, what I would tell you, as you think about it from an investor's point of view, is that on the heels of an exceptional second quarter, Vanda held their position in Q3, and we're looking forward to building from here.

Okay. And then, I guess, last question here on HPI. We've gone through many months now and a quarter. So I guess, do you think we are in terms of what inning we're in, in HPI? And ultimately, you guys continue to talk about kind of growth from here. So again, where do you think this can go?

Well, I can answer that. We continue to find strong demand month after month. So we do not see any signs of saturation of the new demand on HPI. And in fact, we're in the midst of reorganizing our sales force and activities to even emphasize more Hetlioz sales.

Great. Thanks for taking my questions.

Sure.

I am showing no further questions in queue at this time. I'd like to turn the call back to Dr. Polymeropoulos for closing remarks.

Yes, thank you very much for joining us on this call. I appreciate all your questions, and we'll talk to you soon.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, you may now disconnect.