Vanda Pharmaceuticals Inc (VNDA) 2015 Q4 法說會逐字稿

Welcome to the Q4 2015 Vanda Pharmaceuticals earnings conference call. My name is Anna and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Jim Kelly, Vanda's Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Anna. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals' fourth-quarter and full-year 2015 performance. Our fourth-quarter and full-year 2015 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. Mihael Polymeropoulos, our President and CEO. Following my introductory remarks, Dr. Polymeropoulos will update you on our ongoing activities. Then I will comment on our financial results before opening the lines for your questions.

Before we proceed, I 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 risk factors and management 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, 2014, and our subsequently filed quarterly reports on Form 10-Q, 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 are under no obligation to update or revise publically 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 call over to our CEO, Dr. Mihael Polymeropoulos.

Thank you, Jim. Good afternoon, everyone, and thank you very much for joining us. In the fourth quarter, we experienced strong revenue growth, leading to full-year 2015 total non-GAAP net revenue of $109.9 million, which was consistent with the upper end of our earlier financial guidance.

HETLIOZ revenue grew by 30% as compared to the prior quarter, to $15.1 million. The majority of new patient demand was generated from our opt-in database, which is continuing to grow, primarily through our effective DTC campaign. More than 17,000 individuals have opted-in to date, the majority of which are self-identified likely patients.

We believe the fundamentals of our HETLIOZ business are strong and have provided net product sales guidance for 2016 of between $73.0 million and $78.0 million as compared to $44.3 million recorded in 2015.

In the European Union, we are currently focusing our efforts on pricing and reimbursement activities for HETLIOZ in key countries as well as beginning systematic efforts to increase Non-24 awareness. Our immediate goal is to prepare for a HETLIOZ launch in Germany in the third quarter of 2015.

Fanapt was again a significant revenue contributor for Q4, with $16.7 million, which is in line with a similar result in Q3. In late Q4, we completed the launch of a 50-person Fanapt-dedicated sales force, which is promoting Fanapt primarily to psychiatrists across the U.S. Our goal is to stabilize the unit demand for Fanapt with this effort.

We are currently in various stages of litigation on our expanded Fanapt patent portfolio against a number of Paragraph IV generic manufacturers. A four-day trial against Roxane, a generic manufacturer, on patents 198 and 610 is scheduled to begin on February 29.

In December of 2015, the FDA accepted for review our sNDA -- supplemental New Drug Application -- for Fanapt for the maintenance treatment of schizophrenia. A FDA PDUFA date has been set for May 2016. Additionally, we have submitted an application for the approval of iloperidone for the treatment of schizophrenia in the EU, and that review is ongoing. We expect to have a CHMP opinion by year end regarding this regulatory filing.

Beyond our commercialized products, we are also progressing on our clinical pipeline. On HETLIOZ, we are making progress on our programs, including the following:

Smith-Magenis Syndrome. an observational study has been completed, and an open-label intervention study is underway. We expect to initiate a Phase III study in the second half of 2016.

Jet Lag Syndrome. An observational study was conducted in the fourth quarter of 2015 and the data are presently being analyzed. Pending results from this observational study, we expect to initiate a Phase III study in the second half of 2016.

Pediatric Non-24. A pharmacokinetic study and subsequent efficacy study are expected to begin in the first and second half of 2016, respectively.

On Tradipitant, our neurokinin receptor antagonist, we conducted a pharmacokinetic study that has been now completed and analysis is ongoing. We have also initiated a Phase II proof-of-concept study in chronic pruritus, results of which are expected in the first half of 2017.

On Trichostatin A, an HDAC inhibitor, we plan to file an IND application for various oncology indications in 2016.

Finally, on AQW051, our alpha-7 nicotinic agonist, we continue the evaluation of potential clinical development paths.

I will now turn the call to Jim.

Thank you, Mihael. You will see in our press release that Vanda is offering non-GAAP financial information. We do so because we believe the non-GAAP financial information can enhance the overall understanding of our financial performance when considered with GAAP figures.

When describing the fourth-quarter and full-year 2015 financial results, I will be making comparisons to 2014. As a reminder, the Vanda fourth-quarter and full-year 2014 financial statements reflect the impact of the settlement agreement with Novartis announced on December 22, 2014. Vanda recorded a $77.6 million gain on arbitration settlement during the fourth quarter of 2014. For this reason, I will focus my commentary on the non-GAAP results.

Vanda non-GAAP net loss excludes Fanapt licensing agreement revenue, stock-based compensation, intangible asset amortization, and the gain on arbitration settlement. On a non-GAAP basis, during the full year 2015, Vanda recorded a non-GAAP net loss of $18.9 million as compared to a non-GAAP net loss of $80.0 million for the full year of 2014. During the fourth quarter of 2015, Vanda recorded a non-GAAP net loss of $10.0 million compared to a non-GAAP net loss of $13.5 million in the same period in 2014.

Vanda non-GAAP total revenues exclude Fanapt licensing agreement revenue. Non-GAAP total revenue adjustments are specific to 2014. For 2015, GAAP and non-GAAP total revenues are the same. Non-GAAP total revenue for the full year 2015 was $109.9 million compared to $19.4 million during the prior year. This result was consistent with Vanda's full-year 2015 total revenue guidance of between $100.0 million and $115.0 million.

Non-GAAP total revenue for the fourth quarter of 2015 was $31.8 million, a 12% increase compared to $28.3 million in the third quarter of 2015, and a 319% increase compared to $7.6 million in the fourth quarter of 2014. This is the result of significant growth in the year-to-date sales of HETLIOZ in the U.S. and the acquisition of the Fanapt product rights at the end of 2014.

HETLIOZ net product sales grew to $44.3 million for the full year 2015, a 246% increase compared to $12.8 million in 2014. HETLIOZ net product sales grew to $15.1 million in the fourth quarter of 2014, a 30% increase compared to $11.7 million in the third quarter of 2015 and a 152% increase compared to $6.0 million in the fourth quarter of 2014.

As of December 31, 2015, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand. We did see a return to normal stocking levels in the fourth quarter of 2015 as compared to the prior quarter.

Fanapt net product sales of $65.6 million for the full year of 2015 compares to $65.0 million in 2014 as reported by Novartis. Fanapt net product sales of $16.7 million in the fourth quarter of 2015 compares to $16.7 million for the third quarter of 2015.

On a non-GAAP basis, for the full year 2015, Vanda recorded non-GAAP operating expenses, which exclude cost of goods sold, stock-based compensation, and intangible asset amortization, of $105.7 million compared to $98.0 million in 2014. This result was consistent with Vanda's full-year 2015 guidance for non-GAAP operating expenses of between $100.0 million and $110.0 million.

On a non-GAAP basis for the fourth quarter of 2015, Vanda recorded non-GAAP operating expenses of $35.7 million compared to $26.4 million in the third quarter of 2015 and $20.4 million in the fourth quarter of 2014. The $9.4 million sequential quarter increase in non-GAAP operating expenses was driven by an increase in commercial activities, which included the fourth-quarter 2015 HETLIOZ U.S. Non-24 awareness campaign, the HETLIOZ EU launch preparations, and the expansion of the U.S. field force from 12 to 50 representatives.

Vanda's cash, cash equivalents, and marketable securities -- referred to as cash -- as of December 31, 2015, were $143.2 million compared to $144.3 million as of September 30, 2015. Full-year 2015 increased cash of $13.4 million benefited from the receipt of a Fanapt royalty payment and the timing of payments for the Fanapt gross-to-net liabilities. We expect approximately $10.0 million of the benefit related to gross-to-net liabilities to reverse over the course of 2016 and 2017.

Vanda expects to achieve the following financial objectives for 2016:

Net product sales from both HETLIOZ and Fanapt of between $143.0 million and $153.0 million;

HETLIOZ net product sales of between $73.0 million and $78.0 million;

Fanapt net product sales of between $70.0 million and $75.0 million;

Non-GAAP operating expenses, excluding cost of goods sold, of between $125.0 million and $135.0 million. The primary drivers of the expected increase over the prior year are investments in the U.S. Fanapt and European HETLIOZ commercial businesses. Non-GAAP operating expenses also exclude intangible asset amortization expense of $10.9 million and stock-based compensation of between $9.0 million and $11.0 million.

Year-end 2016 cash is expected to be between $123.0 million and $143.0 million.

I'll now turn the call back to Mihael.

Thank you, Jim. At this time, we'll open up the line for your questions. We will be happy to answer any questions you may have.

(Operator Instructions) Jason Butler, JMP Securities.

Thanks for taking my question. Just first one on the HETLIOZ guidance. Can you just give us any color on whether your guidance includes any expected price increases in 2016?

Thank you very much Jason. The guidance does not include any price increases. So the guidance and the growth implied is unit growth only.

Okay, great, helpful. And then given that you now have several quarters of experience with HETLIOZ in the marketplace, do you think you have a good working understanding of the appropriate level of investment in the commercial efforts? And ultimately, do you think you now have a handle on what level of revenue it will take to get to profitability for the franchise?

Certainly. I want to point out that while we are now about seven quarters in, in the launch, it is still a launch period, and we are learning a lot. A few key lessons here is that DTC continues to be very effective and continues to drive the input to our new patient demand generation.

As I said earlier in our script, 17,000 individuals have now opted-in from the beginning of this campaign in the last seven quarters or so. This of course is generated by our systematic now, national DTC campaign. And I would say that the levels of investment in the DTC campaign have settled and what you have seen as general spend in Q4, it is more likely to continue going forward.

We are also evaluating continuously ways that we can improve efficiency of generating new patient demand. That means looking very carefully in our data of the 17,000 individuals, the majority of which are self-identified likely patients and trying to understand ways that we can improve both the percent of conversion to treated patients, but also the time to conversion.

Other areas that we seek to improve efficiency, and our recent work in Q4 suggests that we are improving significantly, is the time and percentage of dispensing after an intake or the script has been received. We have talked in the past that on average, about half the scripts received are completed and dispensed in about 12 weeks.

And while this may be an okay number in general for orphan drugs, we believe we can do better. And we have internal initiatives now towards that, and the early results suggest that we can improve those metrics.

So in summary, we believe we are investing well in the Fanapt launch now. We can certainly improve processes, but we do not believe that any additional investments that we may need are going to be far outside of what we are doing today.

Great, that is really helpful. I just have two real quick questions. One: does your HETLIOZ guidance include any sales in Europe? And then two: in the opt-in program, how many patients do you have in there or family members of pediatric patients do you think you have identified?

On the first question, the guidance for HETLIOZ, the $73.0 million to $78.0 million does not break out U.S. and Europe. It is a global number. However, just to point out that the European number will be minuscule this year. The expectation is we are launching in Q3 in Germany and we are going to expect of course very few patients being on treatment and contributing on revenue.

Your next question was in the opt-in database, how many of these opt-ins could likely be parents of kids below the age of 18. We do not know this answer, but we do know that about 30% or so of the opt-ins in the database have identified themselves as friends and family. But we do not know the age breakdown.

Now in the course of our pediatric Non-24 program, we intend to have a specific registry where we will develop a database of parents, alongside their children under the age of 18, that would be interested in the clinical program. That will form the nucleus of the potential pediatric Non-24 registry for the future.

Great. Thank you very much and thanks again for taking the questions.

Josh Schimmer, Piper Jaffray.

Thanks for taking the questions. First, maybe you can help us understand what you're looking for in the observational studies in Jet Lag and Smith-Magenis Syndrome that will inform further development.

Yes. I will start off with the Smith-Magenis Syndrome. Just for a background, Smith-Magenis Syndrome is a rare genetic disorder due to a chromosomal deletion on human chromosome 17. One of the cardinal features of the disorder, which is alongside other developmental and skeletal deficits that these individuals may have is a significant aberration of the sleep-wake cycle, which has been described in the literature, but not in a way that one can conduct controlled clinical studies on.

So what we are looking in the observational study is to one: better characterize the sleep deficit in a way that can be translated in an endpoint, understanding both the biomarkers underlying the deficit, but also the measurement of the deficit in a controlled manner that will inform discussions with regulatory agencies, leading to the endpoints of the study. So it is both characterizing the disorder, but also optimizing the endpoints.

On the Jet Lag study, the observational study goals are again very similar. One is characterize what is it, the measurable effect of transatlantic flights that move patients in the range of five to eight time zones and characterize that, especially on their sleep-wake cycle with objective and subjective parameters. And second: better understand potential endpoints.

What is interesting here in the Jet Lag as well, there is a lot more knowledge in the literature about the effect of Jet Lag on people's sleep and wake cycle in contrast to Smith-Magenis Syndrome, we're identifying quite a few interesting new phenomena that have not be fully described in the literature. And that actually will create interesting opportunities to optimize the protocol and inform our discussions with regulatory authorities.

Got it. What ultimately how should we be thinking about operating margins after -- once you have a few years to execute on the HETLIOZ launch? And you also pass through some of the royalty obligations on Fanapt.

I am not sure I heard well the first part of your question. You said operating something. I didn't hear it.

Margins.

Operating margins, okay. So the question is our outlook for operating margins on HETLIOZ and then Fanapt in the future. I will start with Fanapt and I will pass on to Jim to talk about HETLIOZ.

On Fanapt, just a clarity on the royalty, today's royalty obligation, combined to two entities that receive this royalty, is 23% of net. That royalty is due at this level up until the expiration of the NCE patent, which expires in November of this year, 2016. After that, and based on the new agreement we reported with Sanofi, the royalty will go effectively to 9% for the following three years, and then it will go to 6%.

Jim, on HETLIOZ?

Sure. Just to confirm here, Josh, what I believe you're asking is as we reach cash flow positive and net income positive, just what might our operating margins look like? Our net income as a percent of revenue. Is that correct?

Correct.

All right, fantastic. So I think Mihael did a nice job of talking about how our gross margin is going to improve. Right now, our gross margin is looking at about 18% to 20%, and when you factor in some of these favorable adjustments to Fanapt, that's going to decrease from 18% to 20% to the 11% to 13% range. So that is a spectacular improvement, I think, in sort of our gross margin.

Then as we move forward, of course, I think the key feedback we are giving to all is that we expect to be a cash flow positive company; we expect to deliver earnings, be EBITDA positive. That is our expectation. So while we do not show that in our guidance for 2016, it is certainly our expectation as we move beyond that point to reach that at some point.

All right. So what are the key components that we can talk about today? I think the first one is we've got a fairly mature SG&A cost structure for our U.S. business for both HETLIOZ and for Fanapt. In the fourth quarter, we brought online our full 50 for Fanapt and we are seven quarters into launch of HETLIOZ.

So what we are looking for in the U.S. now is to create operating leverage to drive revenue with the OpEx in a manner consistent with what you see -- generally consistent with what you see in the fourth quarter. So hopefully, that is an important first piece of the puzzle.

As you look at the increases over time, you will see that as we continue to launch HETLIOZ in Europe, you will see some additional SG&A come online. And so we will talk to you about that as we seek to launch in those different markets.

The last piece of the puzzle therefore becomes R&D. I can speak for now for 2016, our expectation that R&D is going to be approximately flat year over year. So while I know I am not giving you a specific profile for the out years, hopefully that gives you some of the building blocks.

Got it, very helpful. And then just one last question. Have you begun discussions with countries in Europe regarding HETLIOZ reimbursement rate? And if so, what kind of ballpark do you expect that will be in?

Well, we have begun our activities towards reimbursement. The first emphasis is in Germany. And just to remind you, there are several processes and cycles you go through.

Our expectation is that with our launch in Q3, we will have approximately a full year of pre-pricing that we set. And during that year, there will be a negotiation of the price that actually we will be reimbursed at. That will be a very important milestone and can set the tone for other countries as well, although discussions with other countries will proceed in an independent manner.

For example, soon in parallel with the German negotiations, we expect to be involved in reimbursement activities in France and potentially Italy. And with these three first countries -- these three first countries will form the focus of our thinking.

Just to give more color, though, as a philosophy, we believe that the drug is priced properly in the U.S. and we believe a similar pricing will be sought for in Europe. However, we do know that there are a lot of idiosyncrasies in the European reimbursement system, and while we may request flat pricing, the chances of having exactly flat pricing are not very high. And in fact, discounts are expected in different markets. But we will wait and see and we will negotiate as good as we can.

And just to remind myself, melatonin is not available in Europe. Is that correct?

Melatonin is, as we have discussed before, a dietary supplement that may be available in some European countries, not in others. But in no country is melatonin or any form of it approved and available for treatment of Non-24.

Which countries do you know do not have access to it?

I cannot tell you now.

Got it. Okay, thanks very much.

Difei Yang, Brean Capital.

Thanks for taking my questions. Just a quick few. The first question, if we look at SG&A Q4 versus Q3, there was an increase of $10.0 million. Would you give us a little bit of color how the $10.0 million was allocated to Fanapt versus HETLIOZ?

Hi Difei, thanks for the question. I would highlight that there are a couple of different items on Fanapt and HETLIOZ. It is the HETLIOZ awareness campaign -- the Q3 versus Q4. There was the continued investment in Europe and preparations for our HETLIOZ launch, and then finally the third component was bringing the Fanapt 50 on board. We went from 12 to 50 within the quarter. And of course, everything else surrounding their efforts.

We have not been offering the detail -- the breakdown of those different items. But I think the important thing to share is that the spending that you see in our SG&A is representative of a maturing of our SG&A. Now, I will tell you, it was slightly more than I expected in the fourth quarter, but that is because we executed so well getting the Fanapt folks on board. We are actually really thrilled with the quality of the folks we were able to find for our field force and getting them going.

But as you look forward, what you're seeing is a mature SG&A. And from that, you are going to see us build operating leverage as we continue to drive the business.

And the full 2016.

SG&A? Well, the full 2016 non-cash OpEx guidance is $125.0 million to $135.0 million and that compares to the $105.7 million that we put up for 2015. And that increase is representative of sort of the full-year run rate of the maturing of the Fanapt U.S. investment in sales and marketing and the remaining component is the launch in Europe. So what you are seeing is a continued and maturing investment in our commercial business.

Okay, thank you. That is very helpful. So moving on to HETLIOZ awareness campaign, DTC campaign, would you walk us through -- so from the time you start the DTC campaign, then what happens? And then how does that process turn into HETLIOZ prescription then revenue? What is that sales cycle look like? How long does it take?

We have not shared a lot of details on conversion rates or time to conversion. But of course, you can back into it and quickly realize that we have under 1,000 patients. We are not discussing patients on treatment number either. And we have 17,000 people who have opted-in the database. And therefore, that tells you that the conversion so far is a small number.

But what is more important are two things. One is that regardless of how long somebody has been opted-in in the database, these patients continue to have the potential of becoming treated patients. So if, for example, some patients opted-in the database three years ago, they still have the potential to move on to the group of patients who are being treated.

And what drives that is a number of things. One is awareness and deepening of awareness that you can achieve with the repeated DTC. Our discussions through case management directly with these patients. And finally, the complex behavioral decision-making for every patient, their families, and their doctors.

So this is what eventually causes the complexity, to answer the question what is the average time of converting and what is the percent. The important thing is that we continue to believe that a number of patients in the 17,000 database will continue to convert over time.

The second piece, which is very important, and very encouraging, is that despite having run the DTC campaign on and off for the last seven quarters, and despite the fact that 17,000 individuals have opted-into the database, we continue to see a very flat rate of dollars spent per opt-in, which suggests that we have not yet saturated the interest of patients and potential patients that can come to this database. So DTC remains a very effective way of identifying potential new patients and continue to grow this registry.

Thanks, that is very helpful. And let me try to change the question slightly from a different angle. So what you're saying is that despite the DTC campaign being intermittent, that the growth of the prescription is fairly constant or gradual, rather than you see a spike then it comes down, basically in sync with or slightly delayed from DTC. Is that the right way to look at this?

Yes. So there are two different forces here. The first part is how does the opt-in rate change with an intermittent DTC. And the second one is how do new RXs change with an intermittent DTC?

The answer to the first one is there is an absolute correlation between opt-in and DTC. So the weeks that we don't run DTC, we have much fewer opt-ins. The weeks that we run DTC, we have much higher opt-ins.

On the correlation between intakes and intermittent DTC, there you see a flat -- that new RXs are relatively flat with little variation from week to week, regardless if there is a DTC in the background. And this you would expect, given the fact that it takes a significant longer time for one to go from opt-in to an intake script. And the fact that patients who are treated today are a very small percent as compared to the far bigger registry of opt-ins.

Yes, great. That makes perfect sense. That leads to my last quick question on Q3. What was the ending inventory, wholesale inventory level?

What we said is that we had in both Q3 and Q4, it was less than two weeks, but what happened sequentially in Q3 as compared to Q2 is inventories actually went down. There was destocking. And it was the first time since launch that we saw any destocking.

Well, that reversed itself in the fourth quarter, so there is some benefit in the fourth quarter when you look at the 30% growth sequentially from Q3 to Q4, there is a small amount that was representative of the normalization. And it is in the range of $200,000 or so.

Oh, yes, it is very minor. Okay, thanks.

Yes.

Thanks, that's all. Congratulations for a great Q4.

Stefan Quenneville, Morningstar.

Thanks for taking my question. I just have a question about your pricing strategy for HETLIOZ going forward. Obviously the drug fulfills a very unique niche in the marketplace, and I was wondering what the scope is for price increases going forward. And what your strategy is going to be going forward, thinking about pricing increases.

Thank you very much. So as I said before, we believe that HETLIOZ at this time is properly priced for two things: the benefit that we understand it provides to patients, and the audience number of patients that are being addressed by it. At this time, there is no planned price increase that is included in our guidance of revenue.

And maybe a bit longer term beyond this year -- and obviously this would be a very good year to not try and push through an aggressive price increase, given the scrutiny on a lot of drugs recently. But sort of longer term, what do you feel the scope for pricing power is?

As I said before, our pricing decision is done based on the benefit that we believe the drug gives to patients and how many patients are there to be treated. And that is for a very specific reason of making sure that we can recover the investments that we made in developing these drugs, especially HETLIOZ. We've been working on it since 2004. And of course, being able to make appropriate investments in our R&D organization.

So again, all I can say for now is that after having gone through our first seven quarters and understanding both benefit, the growth of the audience, and the size of the audience, and of course we understand the investment we have made to get here through the R&D organization and what will it take to recoup that investment, we think we are properly priced.

Okay, great. Thanks.

Well, thank you very much for joining us on our Q4 call. And we will be talking to you soon.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.