Ladies and gentlemen, thank you for standing by, and welcome to the Vanda Pharmaceuticals Fourth Quarter 2019 Earnings Conference Call. At this time, all participants’ 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. Kevin Moran, Vice President and Controller. Please go ahead, sir.

Good afternoon. This isn’t Kevin. This is AJ Jones, Chief-Corporate Affairs Officer, but thank you so much Liz for that setup. I do appreciate it. Good afternoon, everyone, and thank you for joining us to discuss Vanda Pharmaceuticals’ fourth quarter and full year 2019 performance. Our fourth quarter and full year 2019 results were released this afternoon and are available on the SEC’s EDGAR System and on our website, vandapharmaceuticals.com. In addition, we are providing live and archived versions of this conference call on our website.Joining me today for the call is Dr. Mihales Polymeropoulos, our President and CEO; Kevin Moran, our Controller and also incoming acting Chief Financial Officer; Tim Williams, our General Counsel; Gunther Birznieks, our Chief Business Development Officer and member of R&D Committee; and Jim Kelly, our outgoing Executive Vice President and Chief Financial Officer.Following my introductory remarks, Mihales will give update on our ongoing activities, and Kevin will review our financial results for the fourth quarter and full year 2019. I will then comment on our plans for 2020 before opening the lines for your questions.Before I 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 on current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in our Risk Factors and Management’s Discussion and Analysis of Financial Conditions and Results of Operations sections in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and quarterly report on Form 10-Q for the quarterly ended in September 30, 2019, which are available on the SEC’s EDGAR System and on our website. Additional factors may be set forth in those sections of our earning – our annual report on form 10-K for the fiscal year ended December 31, 2019. To be filed with the SEC in the first quarter of 2020, we encourage all investors to read these reports and our SEC filings.The information we provide on this call is provided only as of today, and we will undertake no obligations to update or revise publicly any forward-leaning statements. We may also – we may make on this call on account of new information, future events or otherwise, except by required by law.With that being said, I’d now like to turn the call over to our CEO, Dr. Mihales Polymeropoulos. Mihales?

Thank you very much, AJ. Good afternoon, everyone, and thank you for joining us. 2019 was a transformative year for Vanda. We continue to drive strong growth and position the company for long-term success.As we move in 2020, we’re confident in our ability to build on great strides in our efforts to innovate for the benefit of all of our stakeholders, our patients, our employees, our shareholders, and the broader communities that we serve.Before I go into our updates, I want to take a moment to highlight some of our key accomplishments in the last year. Looking first to our commercial products, I’m encouraged by the continued growth we see for HETLIOZ and Fanapt. In particular, our ability to achieve double-digit year-over-year product sales growth for HETLIOZ, six years now into launch, speaks volumes to the talent and dedication of our experienced sales team as well as the value both blind and sighted patients with Non-24 see in the treatment.For Fanapt, we’re pleased with the U.S. Supreme Court decision to deny the petition for a writ of certiorari that was filed by WestWard Pharmaceuticals, a subsidiary of Hikma relating to our ‘610 Patent for Fanapt. This ensures the protection of the ‘610 Patent will remain through November 2, 2027.Additionally, we have made excellent progress around the launch of our direct to consumer marketing campaign for Fanapt, which is on pace to roll out in the first half of 2020.Turning to our robust product pipeline and our ongoing efforts to propel innovation clinical development, it is really an exciting time for Vanda with several late stage indications and a number of critical milestones that are expected over the next 12 months to 24 months.That said, I would like to start with tradipitant, our neurokinin-1 receptor antagonist, and provide an update on…

Great, thank you, Mihales. So I will begin by summarizing our exceptional full year 2019 financial results before turning to discuss the fourth quarter of 2019. Total revenues for the full year of 2019 were $227.2 million, an 18% increase compared to $193.1 million for 2018.HETLIOZ product sales of $143 million were the primary contributor and driver of our 2019 revenues and saw 23% growth compared to 2018. Fanapt product sales of $84.2 million reflect 9% growth compared to 2018.For the full year 2019, Vanda reported net income of $115.6 million compared to a net income of $25.2 million for 2018. The income tax benefit of $86.5 million reflected in the financial results for the full year 2019 includes the favorable impact of the release of Vanda’s deferred tax asset valuation allowance which occurred in the third quarter of 2019. This onetime tax benefit is a non-cash item and therefore does not have an immediate impact on Vanda’s cash balance, Vanda’s cash, cash equivalents and marketable securities referred to as cash as of December 31, 2019, $312.1 million representing an increase of $54.8 million to cash during 2019.Turning now to our quarterly results, total revenues for the fourth quarter of 2019 were $60.9 million, a 15% increase compared to $53 million in the fourth quarter of 2018. HETLIOZ net product sales were $38.6 million in the fourth quarter of 2019, a 19% increase compared to $32.4 million in the fourth quarter of 2018. They HETLIOZ patients on therapy number grew in the fourth quarter as compared to the third quarter of 2019. During 2019, we saw a downward and favorable Medicaid payer mixed trend the resulted in higher net revenue per unit.As of December 31, 2019, the specialty pharmacy channel held less two weeks of inventory as calculated based on…

Thank you, Kevin, and welcome again. In 2020, for HETLIOZ we will continue to advance the commercial – commercialization of HETLIOZ for Non-24 in the U.S. and also in Germany and further execute our commercial plans in new EU markets. For Fanapt, we will continue to expand commercial support for Fanapt or schizophrenia in the U.S. As relates to R&D, we will we continue our clinical and commercial activities in support of tradipitant. We will also advance the lifecycle management of HETLIOZ both in R&D and also commercial activities including SMS which was mentioned earlier. We will also advance Fanapt’s lifecycle as well as continued R&D and also commercial activities. For early stage, both AQW051, VTR-297 and also CFTR. We will continue to move those along the clinical paths and programs that have been announced.Additionally, we will also have a – we will also have other business objectives related to our IP and portfolio – our additional IP and portfolio support all of our products. We will also invest heavily as well in terms of hiring, in terms of human capital to ensure the advancement of our scientific innovation and also to develop core competencies towards our long-term growth as our company.With that being said, I will now turn the call over back to Mihales. Mihales?

Thank you very much AJ and Kevin. At this time, we’ll 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 so much for taking the questions and congrats on the great commercial year last year. So for, I guess, top of mind, given that atopic dermatitis results were released today, and that it appears to have a beneficial effect in the mild patients. What would be the realistic outcome here, do you think that you could change the second Phase III trial to focus more on the mild patients and that would be the regulatory path forward or what are some other options that we can think of in terms of consideration of moving forward to that program?

Certainly. So first of all, the summary of the results are that the hypothesis that tradipitant is a antipruritic agent across the spectrum of severity of AD has not been confirmed. However, for people with a mild type of AD it appears that tradipitant has a strong antipruritic effect and does so early in the clinical meaningful way. The way we think about these results, Chris, is that there are two significant to ignore, meaning that while the headline of course is unfortunately and disappointing. So the EPIONE study did not confirm that blocking the actions of substance speed through NK1 receptors will be of significant therapeutic effect to all AD patients. Nonetheless, the effect is large as it appears from the study. The results of study would need to be confirmed to be certain that both the result is reproducible and second, that the magnitude is reproduced as well.If so, we certainly understand from discussions with experts in the field that this could fit a significant unmet medical need in an area that the atopic dermatitis field is not concentrating today. New treatments are concentrating to treat primarily the lesions seen in the moderate and severe patients. But certainly, there is no other effort for a systemic, safe antipruritic treatment for patients with mild disease.So what does that mean for Vanda's program? The EPIONE II study is in early phases, which means it can be efficiently reassessed and adapted to be shifted towards the population that we think the drug likely has the larger effect, and that is the mild population. Another consideration that our experts are urging us to look at is whether the drug would have an effect in the population of 12- to 18-year olds, a population that primarily has the mild type of AD associated with severe pruritus. And for which, there are no approved, safe, systemic treatments. We all know that mild treatment is treated with good skin hygiene, emollients and also local creams, including calcineurin inhibitors and crisaborole. So in that population, a systemic safe antipruritic treatment can play a significant role.So Vanda's plan is to continue to analyze the EPIONE wealth of data, quickly reassess how we can best utilize the ongoing EPIONE II study, which can be streamlined. And by that, I mean that with the results of the markings we see, fewer patients will be needed to evaluate whether or not the results in EPIONE is confirmed. And to be certain that we also answer the regulatory question, what does it mean if you succeeded to confirm this result. I would say it depends. Typically, the regulatory agencies would require two confirmatory studies. But of course, it depends on the magnitude of results in – upon confirmation. So I will leave it there, and I'm sure we'll have more to say about that in the coming quarters.

Okay. Okay, that makes sense absolutely. Okay. And then for – it was, at least in my mind, conspicuously not mentioned, but there was obviously interaction with the FDA with respect to the long-term toxicology requirement for a nine-month dog study. And clearly, there was a court decision recently with respect to that. So has there been any additional interactions between Vanda and the FDA on this program? And what updates can you provide to us with respect to strategy?

Yes, so to recap and summarize for all our audience, Vanda has disputed the necessity of an additional nine-month dog study as a preclinical additional toxicology study on top of all the toxicology studies that have been done without any significant safety signals that could inform human studies. Of course, the FDA disagreed with that. Our dispute went to the court. The court decision recently agreed with the FDA that while they have not provided evidence that this studyshould be required and how is it predictive for human safety, the court nonetheless agreed with the FDA that they have the authority to decide whether to require such study or not.We continued discussions with the FDA, we evaluate a number of options that include regulatory paths but also even additional paths. So I'm not going to specifically address today. So our view is that we have a number of options in front of us. And we remain optimistic that we will identify a suitable solution.

Okay. And I certainly respect that you are not prepared to discuss those strategic options right now. But when can we expect more color or information on that strategy? Just, I guess, as discussions progress with the FDA? Or is there something internally that needs to happen to kind of be able to put that forward?

Well, I will say, we'll give the update when we have the update.

Okay.

But certainly, there are a lot of things in process, specifically with the FDA that we hope we can make some strides.

Okay. And then may be just one last question from me, also regulatory, maybe you could just describe again what the package is for SMS? And what has been your interactions with the FDA with respect to that package?

So the packages we discussed before, the core part of that package is the Phase III – single Phase III study. That was a study that we discussed, a crossover design. The results of this study have been discussed with the FDA in a pre-NDA meeting, and we agreed what we will submit. We have submitted and we're waiting for this package to be filed. And it has two components. One is the Phase III clinical data but also a separate sNDA on a liquid formulation. I remind you that that study was conducted in both adults and children, and it included both the current capsule formulation and the proposed liquid formulation.

Okay. Okay, great. Well thank you so much Mihales for taking the questions and I’ll hop back in the queue.

Thanks Chris.

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

Hi. It's Roy in for Jason. Thanks for taking our questions. I had a few on EPIONE, I guess. Can you tell us what the baseline Worst Itch scores were for the mild versus the moderate and severe patients for treatment groups? And then, I guess, is it possible that any concomitant medications or other treatments confounded the results in the moderate to severe patients?

So I will answer the last one. We do not believe that any concomitant medications have confounded. So we truly believe that the severity type is actually true and not confounded finding within that population. I would refer you for the first one to the figure 2 in the press release, and that would be in box b, you will see some baseline parameters broken by IGA 1, 2 and IGA 3, 4. And your question, Worst Itch-NRS, is that at baseline, all patients were required to have an average Worst Itch score of 7 in a grading 0 to 10 scale. And you can see here that the average was 7.2 in the IGA 1, 2 group and 8.3 in the 3.4.

Okay, great. And then as far as 2020 guidance for HETLIOZ, it's kind of – suggests slowing growth. Can you describe what the main driver or drivers of that is? Thanks.

Well, it is true that if you calculate backwards and back out price, which you've done already that although we guided at the upper end on a double-digits growth like we had a double-digit growth this year, certainly those numbers are smaller. It is the first quarter. There are many things to know. We are six years into the launch. And as you know, it is very, very unlikely that products are in a rare orphan disorder will continue to grow like we've seen HETLIOZ. However, while we still forecast growth in the Non-24 business the initiatives that we have ongoing and hopefully, we'll expand in the coming quarters, we believe that they can add to that growthSpecifically, I would like to speak towards one of them. As we have discussed in the past, Non-24 disorder that can be co-morbid not only with psychiatric disorders that we've spoken about in the last couple of years, but also in patients with traumatic brain injury. And traumatic brain injury are a large number of patients with mild to severe concussions that have a remaining sleep-wake disorder, many types of the Non-24 type. That association with TBI is well-known and described in the Diagnostic and Statistical Manual 5 of Psychiatric Disorders.What we're doing towards that is we're exploring with neurologists their understanding, interest and awareness around the presence of Non-24 in TBI patients. This is a very early project, but you should expect us that our sales force and marketing will make a significant effort to identify and treat these patients. So that's one example of initiatives. And of course, we are very keen to see Smith-Magenis syndrome indication approved, so that will allow us to market directly to the families and patients with SMS. And we said in the past, we appreciate our long-standing multiyear relationship with the organization, PRISMS, the key advocacy organization for several hundred families in the U.S.

Okay, great. Thanks for taking the questions.

Thanks Roy.

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

Hey great. Thanks guys. This is Ben on for Derek. Thanks for taking my call. Just wondering if you can share when data are expected for this Fanapt PK study?

The pharmacokinetic study is ongoing, but I can give you the preview that the early data suggest a profile that will be compatible with the long-acting injectable. So while we're continuing to learn and finalize the pharmacokinetic study, we're actually in the early stages of designing our Fanapt schizophrenia efficacy study with a long-acting injectable.

Okay, thanks. And then one more from us, just in light of the DTC spend campaign for Fanapt, how should we think about OpEx for this year and then possibly in 2021 as well? Thanks.

As you noticed, we have not given a specific number for OpEx. We're guiding for a cash balance at the end of the year to exceed 320. Now as we have said, actually, in the past quarter, we expect that the OpEx sequentially will be increased due to an intensified direct-to-consumer campaign, including the Fanapt campaign, but also the number of studies that we're pursuing in R&D.

Okay. Thanks for the information.

Sure.

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

Hi guys, this is Shawn Egan calling in for Joel. A few from our team. Following the results from EPIONE, what is the team's current hypothesis on why it could be effective in the mild patients versus the more severe? And I know you mentioned that the mild setting, these patients are typically treated with immunosuppressive agents. Could that be impacting? Or maybe just your high-level views on that?

Yes, that is actually a question that, of course, there is not a complete answer. However, the prevailing literature today suggests that atopic dermatitis is a complex disorder and heterogeneous. In that, there are different types with different causality and different course. So that mild AD is not in atopic dermatitis with mild symptoms, but rather a distinct what is called endotype. In fact, we have some references in our press release on that. Both patients in mild AD and severe ad, they experience severe pruritus. So while they are characterized clinically by different type of lesions, mild AD has milder lesions, the severe AD has more severe lesions with a higher extent. The symptom of pruritus, nonetheless, is severe in both of them or can be severe in both of them.Now speaking towards the endotype, what do we begin to understand, and in fact, we are conducting a very large analysis in the entire population of over 800 patients that we screened into the AD looking both at biomarkers, but also the genetics of these individuals have now completed a whole genome sequencing analysis in every patient in the study. What we're identifying some of it is presented in figure two in the associated press release. In Panel C, you will see In Panel C, you will see the description that it appears that patients with IGA 1 and 2 had a lower eosinophil count as compared to patients than IGA 3 and 4. And what is very significant is that eosinophil count appears to be a marker of a disease, not a marker of a disease state. So that patients who have higher eosinophil count upon improving their blood eosinophil count does not become lower. So that is one very interesting endotype.The second one and it comes from…

Got it. Thank you. I really appreciate the color on that. Maybe another question on HETLIOZ, just kind of shifting gears a little bit. In the delayed sleep-wake phase disorder, have you done much work, kind of understanding the awareness for the indication? And maybe you could help us understand how high the unmet need is and how these patients are typically treated currently?

So DSPD is actually a condition that may affect in different studies from a half to several percentages of the population. And as we know, it's more prominent between adolescents – in adolescents and young adults. What is very interesting, people can self diagnose very quickly, calling themselves night owls or a difficulty getting up in the morning and being consistent. Often, people who have trouble getting up to go to school or go to work, but they have no trouble sleeping eight or nine hours when they left to initiate sleep on their own schedule. And typically, that is in the early morning hours, two, three o’clock in the morning. So that's about prevalence and self-diagnosis.When things get worse and DSPD impacts the occupational and social functioning of these patients, they seek treatment. Unfortunately, there is very little to treat them with, because sleep agents may help you follow sleep, but they will not do anything to the circadian cycle and, in fact worsen it.The work we're doing now is also inspired by the work of Michael Young at Rockefeller, who is a Nobel Prize winner a couple of years ago, having discovered a prominent mutation in humans with DSPD mutation. That is mutation in the CRY1 gene. And we're actually following up with that with an observational study in Turkey, where these families came from in a collaboration with investigators in Ankara. And we're learned a lot about the expression of DSPD there. And also, we're doing a similar study with DSPD patients in the U.S. Our goal is to conduct an integrationla study, both in patients with CRY1 mutation and without CRY1 mutation and begin to characterize the effect of tradipitant in that population.

Perfect. And then my last question is that just with Jim leaving, will there be any kind of changes in the corporate strategy at Vanda going forward?

Everything will be even better. Nothing immediate, but I would like to take the opportunity and really thank Jim for 10 years of tireless work; building a significant part of the company, both on commercially and being – encouraging the development of our compounds; and, of course, putting up with the communication with all of you guys and doing an excellent job. Thank you, Jim. Jim, why don't you say something?

Alright. Well, I'll take the moment to thank Mihales for bringing me on board 10 years ago and being a part of everything that we've built and accomplished, Mihales and this entire team. Will certainly miss all my colleagues, past and present, and have enjoyed interacting with yourselves, the analysts and the investment community, and look forward to watching great progress here at Vanda in years to come.

Thanks Jim.

I’m 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 all for joining us. Plenty to be discussed on EPIONE in upcoming scientific meetings. And certainly, we look forward to updating you on all our programs next time. Thank you.

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