Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Vanda Pharmaceuticals Earnings Conference Call. [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 first speaker for today, Vanda's Senior Vice President and Chief Financial Officer, Mr. Kevin Moran. Please go ahead, sir.

Thank you, Illac. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2020 performance. Our third quarter 2020 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 on today's 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 would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meaning of federal securities laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the cautionary note regarding forward-looking statements, 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, 2019, as updated by our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC, 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 revise publicly any forward-looking statements we may make on this call on account of new information, future events or otherwise, except as required by law. With that said, I would now like to turn the call over to our CEO, Dr. Mihales Polymeropoulos.

Thank you very much, Kevin. Good afternoon, everyone. The third quarter has been an outstanding quarter, despite the pandemic disruption, which peaked in the late spring. The late spring disruption did affect demand for both HETLIOZ and Fanapt as measured by new scripts for each of the products. Given the several week delay from the time the script is written to time to fill for HETLIOZ, the late spring impact on HETLIOZ demand translated to fewer starts in the third quarter. Despite that, and given the continued strong adherence, HETLIOZ revenue was minimally impacted. Our sales force returned to the field in the summer and has effectively navigated local medical office closures and implemented telemedicine approaches. Since late August, we have seen a significant increase in new HETLIOZ scripts, with total new scripts in September reaching all-time highs. This trend has continued in October, and we estimate, again, another record high for new HETLIOZ script generation in this month. Despite the expected payer hurdles, we remain optimistic that this demand will translate soon to revenue and fuel HETLIOZ growth in the fourth quarter and lead us with a positive momentum in 2021. The HETLIOZ new script volume comes from both blind and sighted Non-24 individuals, with the larger portion of these new prescriptions involving the sighted Non-24 population. On Fanapt, Fanapt's revenue in the third quarter was relatively flat compared to the second quarter. Early in the summer, we launched a direct-to-consumer campaign with national television advertisement. While it is early in the campaign, the lead indicators of website visits and searches saw significant increase as compared to before the initiation of the campaign. Qualitatively, the campaign has initiated a national dialogue on schizophrenia aimed at reducing stigma for this devastating illness. In parallel, awareness for our Fanapt brand is…

Thank you, Mihales. I'll begin by summarizing our financial results for the first 9 months of 2020 before turning to discuss the third quarter of 2020. Total revenues for the first 9 months of 2020 were $180.5 million, a 9% increase, compared to $166.3 million for the same period in 2019. HETLIOZ net product sales of $116.5 million were the primary contributor and driver of our revenues for the first 9 months of 2020 and saw a 12% growth compared to the same period in 2019. Fanapt net product sales of $64 million for the first 9 months of 2020 reflects 3% growth compared to the same period in 2019. For the first 9 months of 2020, Vanda recorded net income of $15.1 million compared to net income of $111.3 million for the same period in 2019. Net income for the first 9 months of 2020 included an income tax provision of $5.6 million as compared to an income tax benefit of $88.1 million in the same period in 2019. As a reminder, the income tax benefit of $88.1 million reflected in the financial results for the first 9 months of 2019 includes the favorable impact of the release of Vanda's deferred tax asset valuation allowance, which occurred in the third quarter of 2019. Vanda's cash, cash equivalents and marketable securities, referred to as cash, as of September 30, 2020, were $348.5 million, representing an increase of $48.9 million to cash as compared to September 30, 2019. Turning now to our quarterly results. Total revenues for the third quarter of 2020 were $60.3 million, a 1% increase compared to $59.5 million for the third quarter of 2019. HETLIOZ net product sales were $39.6 million for the third quarter of 2020, a 5% increase compared to $37.6 million in the third…

Thank you very much, Kevin. At this point, we'd be happy to answer any questions you may have.

[Operator Instructions] Our first question is from the line of Jason Butler of JMP Securities.

[indiscernible] for Jason. I guess, the first one, do you have any updates on the animal tox studies requested for tradipitant by the FDA? Any progress with the agency? And then I guess sticking with the FDA theme, any -- can you give us any details on discussions with the agency around the HETLIOZ sNDA for Smith-Magenis?

Of course. So first, the question is for the tradipitant 9-month toxicology dose study, which has been the center of discussion with the FDA in order for the FDA to allow safety studies to proceed beyond 3 months. And of course, you know that Vanda has characterized and explained the necessary nature of this study and is sad that Vanda will not conduct such a study that does not have a scientific justification, but it will claim the lives of dozens of beagle dogs. This discussion is continuing on with the FDA through the formal appeal process with the agency, and it is progressing. But I need to emphasize that, while this is going on, the pivotal gastroparesis study is ongoing, and it is our expectation that if we do have positive results in this study by mid-2021, that will be sufficient to file for gastroparesis indication, although we can anticipate that there may be restrictions to the length of treatment to 3 months. Of course, all this is further to be discussed, but we believe that given the metoclopramide label of 3 months, in the absence of any effective treatment beyond that, the FDA, if results are positive, will see our application favorably. No guarantees, of course, but we'll continue this discussion with the FDA. Your second question had to do with the Smith-Magenis Syndrome. The review is progressing, and we believe that the agency will take action by their target PDUFA date of December 1.

Okay. Great. And then I had a follow-up. So the gastroparesis trial has restarted. Why have some other trials not restarted due to COVID? Is it just local variability in decision-making? Or what's the rationale there?

Yes. Of course, the gastroparesis study had really slowed down, not stopped. Most, but not all sites have closed, and a few people were ongoing, and we managed to get drug to their homes. But of course, it is the nature of the disorder. You understand that this is a serious and, at times, life-threating disorder. These patients have no options. So it almost -- it is the pressure from patients and the recognition by the investigators and sites that this study must continue. Contrary to that, for atopic dermatitis, there are other therapeutic options, although there is still a significant unmet medical need. And you can see why, for that indication, it is a little more difficult to recruit and recruit with any efficient speed. On motion sickness, you recall, our positive Phase II study that we announced was conducted on actual boat travel. So given the local restrictions, it will be not possible now to put these patients on boats with the proximity and all the other COVID-19 restrictions. So hopefully, we'll come out the other way and start seeing some light and start -- begin these activities, and this study will begin. And I just also want to emphasize that the ODYSSEY study, of course, in COVID-19 pneumonia is ongoing. And in fact, it started with very significant speed in April of this year at the peak of the epidemic in New York. Recruited very quickly the first 60 patients, the results of which we reported in mid-late August. And since then, we had very slow recruitment, just a few more patients. In fact, in the last few weeks, due to recent peaks of hospitalizations in some areas of the country. But this study, as we explained in our press release, is hampered peculiarly by recruitment. While we all know there are a lot of cases and hospitalizations, nonetheless, large studies now are almost exclusively run by the U.S. government, which actually creates a difficulty in recruiting. So we are approaching the government and discussing the possibility of collaboration. And hopefully, we can report on that.

Next, we have Chris Howerton from Jefferies.

And congratulations on all the pipeline progress and, obviously, persevering in the face of pandemic. So for me, I think, interestingly, mostly related to financials, I think, in terms of the questions that I have. So I guess, first and foremost, for HETLIOZ and finance, maybe Mihales, you can remind us in terms of what the current kind of market access restrictions are. And any color you can provide to us with respect to conversion of new prescriptions to paying scripts? The second question I have relates to Smith-Magenis Syndrome. Just kind of what is the expectation in terms of the trajectory of the launch. Is there a fair amount of patients that you have in either an expanded access or compassionate use that you could theoretically convert to paying customers? And what is the expected payer mix for that patient population? And then the third one is probably a relatively simple question, but just trying to understand the impact of the DTC campaign for Fanapt. And how are you thinking about that incremental spend in the face of delays of potential label expanding clinical studies for that drug?

Yes, yes. Let me -- thank you much, Chris. So first of all, let me discuss a little bit the payer environment with HETLIOZ in Non-24. Nothing much has changed. And as we have discussed before, it is a minority, less than half of the scripts written that actually get filled, and that is with significant hurdles of prioritizations for all these scripts and then follow-on appeals. So that state of affair has not changed, in fact, has been pretty constant over the last several years. We do plan to adjust our strategy and make a push for better fill rates. But for now, it is what it has been, and we have characterized it for less than 50%, which is it a pretty sad affair. If you think about it for patients for which this is the only choice they have. But as I pointed out, the reason we remain optimistic to the growth and the momentum in next year, Non-24, is actually this surge of new demand and new scripts that we saw in the last part of August, but it continued rolling into September and October, reaching now new highs for the entire history since launch of HETLIOZ in Non-24. I will turn to your question about the SMS launch and expectations. We do have about 20 to 30 patients who have been on drug for several years now. This is in the open-label portion of the SMS study. So these people will make efforts upon approval, of course, to switch them to commercial product. Beyond that, we will focus on our existing registry of approximately 200 more families with whom we're reconnecting and letting them know about the progress of the program and, upon approval, when and if approval is received, to actually get them to…

I think maybe just another one, just to maybe add a little color to that too, Mihales, is just I think if we look at the spend quarter-over-quarter this year was higher in the first quarter, slightly lower in the second quarter and basically flat to the third quarter. So I guess what's the trajectory there? And I guess is the DTC spend for Fanapt something that's meaningful? Or am I barking up an empty tree here?

Right. First of all, let me say that the guidance we have for the year for operational expense and the forecast is inclusive of what we're doing with Fanapt. This is not a campaign with just an event of -- yes, it was planned. Now if you think about the future, I cannot quantitate with you yet. I'm not going to forecast 2021. But the principle is that if the campaign is successful in return on investment, of course, that's a campaign that you want to finance even more. What we do know is that this area of antipsychotics is highly promotionally sensitive. But of course, there are thresholds to break through, so we're testing all that. The good news with DTC, which Vanda has actually extensive experience, as you know, over the last 6 years, is incremental. And as long as you have good measurements, you can have very early lead indicators. So before you commit any significant amount of money in the DTC campaign, you will start to know how it's working and what your ROI is. So the summary is no impact on the OpEx for the year. It will remain as forecasted, and we are doing this to increase revenue. And we'll continue this if, actually, the early indicators are that it will have a positive impact, and we sure hope that it will. And as I said earlier, the very early lead indicators of people's interest and awareness look good.

Next, we have the line of Joel Beatty from Citi.

The first one is on SMS. I want to check with you. And could you help characterize your confidence in approval for the setting when the FDA makes its decision in December? Just kind of -- based on the history that you have the history of a successful approval for Non-24, and then more recently, there seemed to be the rejection with the jet lag, it's a -- yes -- and so I'm curious kind of where that falls on the spectrum of how FDA could consider it.

Yes. I would say we're quite confident, and this dialogue around this and us and the FDA is not new. As you recall, we filed late last year. And after initial review, the review was halted. We went back to the FDA, and we cleared away, the issues that presented a further review. And we agreed that if we can proceed. And of course, nobody gets a glimpse of what's going to happen. But certainly, I would say the FDA is working hard on this review and progressing. They're quite familiar with the disorder and our file. And also I would point you on something quite encouraging. The FDA has a disposal, the ability, instead of an advisory committee, to hold the meeting with experts or advocacy organizations. And in this case, in the summer, they held such a meeting with patient and patient groups with SMS, trying to understand what matters. And it seems from the questions -- this is publicly available, the questions in the dialogue, they were trying to identify the key issue to be treated and was confirmed by these patients and families in this conference that it is the sleep disorder and that it is sleep quality overall, as measured by parents, that matters, which is what our primary end point is. So I would consider this that the division is very engaged and very informed on the program. And I would say we're very confident.

Great. And then I have one other follow-up question, and it's about your use of cash going forward. I noticed that it seems like you have a growing cash balance at Vanda and up maybe roughly $50 million from a year ago to the $348.5 million now. How do you -- any plans or any thoughts on how that cash could be used as it grows?

Yes. So that gives us a lot of security that we can execute on our programs. And while Vanda has been a very conservative organization over its 17 years of existence, nonetheless, we have made very significant investments, both strengthening the commercial presence, but also in the pipeline. Our pipeline this year, given the COVID pandemic, has not advanced as quickly, so you may see this reflected in the operational expenses. But we believe the balance we have not only gives us security and independence, but actually gives us the resources where we can invest not only at the growth of our commercial products, but the pipeline. I think a beautiful example of that is the very early investment we made on the collaboration with UCSF on VSJ-110. This is a novel mechanism of action, CFTR activator, in prosecretory agent, which is moving to the clinic and is going after dry eye, where it is actually a minority of the patients that are treated with the blockbusters of RESTASIS and in Xiidra. And remind you that Xiidra, a couple of years ago, it had reached a revenue of $380 million a year at Shire, and the project group was acquired. After the acquisition by Takeda, Takeda divested the product to Novartis for $3.4 billion. So all of this is a recognition that dry eye is a very significant indication. And going back to Vanda's cash balance, having the ability to pursue this type of programs and grow them is very, very important for returning value to shareholders.

And currently, there are no further questions at this time. I would now like to hand or turn the call back to Vanda management for closing remarks.

Yes. Thank you very much all for joining us, and thank you very much for your questions. And hopefully, we'll talk soon. And let's all hope for good news beginning December with the sNDA on SMS. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Enjoy the rest of your day. Keep safe, and you may now disconnect.