Vanda Pharmaceuticals Inc (VNDA) 2017 Q2 法說會逐字稿

Welcome to the Q2 2017 Vanda Pharmaceuticals Earnings Conference Call. My name is Victoria, and I will be your operator for today's call. (Operator Instructions)

Please note that this conference is being recorded.

And I will now turn the call over to Jim Kelly, Vanda's Executive Vice President and Chief Financial Officer. Jim, you may begin.

Thank you, Victoria. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals second quarter 2017 performance. Our second quarter 2017 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; and Gian Piero Reverberi, our Chief Commercial Officer.

Following my introductory remarks, Mihael and Gian Piero 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'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 Operation sections of our annual report on form 10-K for the fiscal year ended December 31, 2016, and quarterly report on form 10-Q for the quarter ended March 31, 2017, which are available on the SEC 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. Mihael Polymeropoulos.

Thank you, Jim. Good afternoon everyone and thank you very much for joining us today.

During the second quarter of 2017, we have advanced our company growth strategy on all fronts, delivering strong operational and financial results.

After successfully completing the expansion of our Fanapt field sales team in the first quarter of 2017, the full team has started promoting the benefits of Fanapt for adult schizophrenia patients with an expanded reach and frequency. The organization is fully committed to the successful commercialization of Fanapt, and we're optimistic on its potential to return to growth in the second half of 2017.

In addition to this, in July, the Fanapt US field force team began promoting HETLIOZ to psychiatrists. We're confident that this will represent a great opportunity to both expand the number of Non-24 patients who can benefit from HETLIOZ and reinforce the partnership with the psychiatrists by bringing solutions to patients with Non-24.

The fundamentals of our HETLIOZ business remains strong and we continue adding new patients quarter-over-quarter.

The price negotiation for HETLIOZ in Germany has transitioned to an arbitration phase, which we expect to conclude by the end of 2017. The preparation of the pricing and reimbursement dossiers in additional European markets is also progressing as planned.

Looking now in more details at this quarter financial results, HETLIOZ net product sales were $22.5 million in the second quarter of 2017, a 12% increase compared to [$20.2 million] (corrected by company after the call) in the first quarter of 2017, and a 29% increase compared to $17.5 million in the second quarter of 2016.

Fanapt net product sales grew to $19.5 million in the second quarter of 2017, a 13% increase compared to $17.2 million in the first quarter of 2017, and a 5% increase compared to $18.6 million in the second quarter of 2016.

Now I would like to highlight the progress we're making in our clinical development pipeline. I will update you on the clinical development activities for HETLIOZ, Fanapt, tradipitant, and then discuss our work on Trichostatin A.

On HETLIOZ, we are progressing with a clinical program on jet lag, which is expected to report by end of this year. We're making good progress with the pharmacokinetic study of a liquid formulation of HETLIOZ in pediatric patients, and we now expect to complete enrollment in this study by end of this year as well.

On Smith-Magenis syndrome, we're continuing recruitment in the randomized study, with results expected in 2018. In the meantime, we're analyzing and plan to report data from the open-label study on SMS patients in the coming quarters.

On Fanapt, we have initiated activities towards the development of a long-acting injectable formulation, and we expect to initiate clinical work in 2018.

In Europe, the Marketing Authorization Application received a negative opinion by the CHMP, and we have now requested a reexamination.

Our clinical development pipeline work on tradipitant is ongoing. A tradipitant clinical study in patients with pruritus has now completed enrollment, and we expect study results by the end of this quarter.

A second tradipitant study in patients with gastroparesis started and is ongoing. Because of slow recruitment of the study, we now expect completion in the first half of 2018.

On Trichostatin A, we're on track for filing an IND shortly for clinical work to be initiated in patients with hematologic malignancies.

In summary, the second quarter of 2017 has been exceptional in both the commercial and the clinical setting, and we look forward to further growth and results of our clinical programs in the near future.

I will now turn the call over to Jim Kelly to discuss our first (sic - second) quarter financial results.

Thank you, Mihael. Total revenue for the second quarter of 2017, was $42.1 million, a 12% increase compared to $37.4 million in the first quarter of 2017, and a 17% increase compared to $36 million in the second quarter of 2016.

HETLIOZ net product sales grew to $22.5 million in the second quarter of 2017, a 12% increase compared to $20.2 million in the first quarter of 2017, and a 29% increase compared to $17.5 million in the second quarter of 2016.

As of June 30, 2017, the Specialty Pharmacy Channel held approximately 2 weeks of inventory as calculated based on trailing demand.

Patients on therapy continue to growth quarter-over-quarter and recent changes in our Specialty Pharmacy distributor network appear to have improved the overall persistency trends for these patients as compared to last year.

Fanapt net product sales were $19.5 million in the second quarter of 2017, a 13% increase compared to $17.2 million in the first quarter of 2017, and a 5% increase compared to $18.6 million in the second quarter of 2016. As compared to Q1 '17, wholesalers have increased inventory on hand by an amount that equates to over $1 million in net product sales, but still remains below the year-end inventory levels as of 12/31/2016.

In the second quarter of 2017, we saw a 1% decline in Fanapt scripts as reported by IMS, when compared to the first quarter of 2017. The 2017 Fanapt revenue guidance of between $77 million and $82 million is based on the expectation for TRx growth in the third and fourth quarters of 2017.

Vanda recorded operating expenses of $44.0 million in the second quarter of 2017, compared to $45.3 million in the first quarter of 2017, and $40.8 million for the second quarter of 2016.

Research and development expenses in the second quarter decreased by $2.9 million compared to the first quarter of 2017. This decrease is a function of timing of clinical activities.

As a reminder, the first quarter of 2017 also included a $1 million upfront payment associated with the recently announced CFTR portfolio licensing agreement.

We expect R&D costs to increase in the third and fourth quarters of 2017, compared to Q2, reflecting increased activity on the tradipitant gastroparesis and the HETLIOZ clinical studies.

SG&A expenses in the second quarter increased by $1.1 million compared to the first quarter of 2017. The most significant contributor to this increase was the full quarter impact of the expansion of the Fanapt US field force that occurred in the first quarter. We expect SG&A expenses to increase in the third and fourth quarters of 2017, as we fully roll out the sales and marketing programs for Fanapt in the US.

You will see in our press release that Vanda is offering non-GAAP financial information. We do so because we believe that the non-GAAP financial information can enhance an overall understanding of our financial performance when considered together with GAAP figures. Vanda non-GAAP net income excludes stock-based compensation and intangible asset amortization.

On a non-GAAP basis during the second quarter of 2017, Vanda recorded a non-GAAP net income of $1.6 million as compared to a non-GAAP net loss of $4.9 million for the first quarter of 2017, and compared to a non-GAAP income of $400,000 in the second quarter of 2016.

Vanda's cash, cash equivalents and marketable securities referred to as cash, as of June 30, 2017, were $137.1 million compared to $137.8 million as of March 30, 2017, representing a decrease to cash of approximately $600,000 during the second quarter of 2017.

Vanda reiterates its prior guidance and expects to achieve the following financial objectives in 2017. Net product sales from both HETLIOZ and Fanapt of between $165 million and $175 million. HETLIOZ net product sales of between $88 million and $93 million. Fanapt net product sales of between $77 million and $82 million. Non-GAAP operating expenses, excluding cost of goods sold of between $162 million and $172 million, and likely at the lower end of this range. Non-GAAP operating expenses exclude intangible asset and amortization expense of $1.7 million and stock-based compensation of between $9 million and $12 million. Year-end 2017 cash is expected to be between $121 million and $141 million.

With that, I'll now turn the call back to Mihael.

Thank you very much. Happy to answer any questions.

Thank you. (Operator Instructions) And our first question comes from Jason Butler from JMP Securities.

Congrats on the quarter. First one just on HETLIOZ. Can you maybe give us some color on the gross to net for the product and whether the trend was similar to that seen in prior years versus the first quarter?

Glad to take that one. It is similar and, as expected, that in the second quarter we see a decline in the absolute amount of the gross to net. And as you might remember, that's a function of the number of patients on HETLIOZ that are Medicare patients and are subject to the coverage gap in the first quarter.

Quick one on Fanapt. You mentioned about $1 million of wholesaler inventory gain. The sales grew by a little more than $2 million. Despite a prescription decrease, was there any other explanation for the increase in revenue that bridges that gap?

I'll walk you through not only the inventory adjustment that we saw at wholesalers this quarter, but I'll remind you what we saw in Q1. In Q1 as compared to year-end 2016, we saw inventories reduce by an amount over $2 million. It corrected by about $1 million of that in the second quarter, meaning we're down over $1 million year-to-date as compared to year-end. And so those would be adjustments that you could make to the top line revenue amounts in each period. Now that said, you saw the underlying trends from IMS and Symphony data sort of flattish, right, down about 1%, but effectively sort of flattish. I quite often speak to sell-through to the retail pharmacies as well. Not surprising, they're slightly up, very low single digits. That is not totally unexpected.

Okay. And then are you seeing in any territories where you've either changed the sales territory or you've added new reps, any positive impact yet, even though the overall picture is, like you say, flattish?

It is too early to tell. We started with the full sales force pretty much end of the first quarter, beginning of the second. So there are, indeed, territories that are doing better than others, as expected. But I would say we need more data and more time for our sales force in the field to be able to see that impact.

Okay. And then just last question from me. On tradipitant and the gastroparesis trial, have you made any changes to the trial conduct or enrollment criteria to address the slower-than-expected enrollment?

Yes, we have done actually both. We have looked very carefully at any of our inclusion criteria that may have made it difficult for otherwise eligible patients to come to the study. For example, the detailed requirements on the confirmatory gastroparesis test and the time since the last test are things that typically we can look at, and we have actually made those amendments. Also, now we have been able better to estimate the number of sites needed. And we are actually in the process of significantly improving the number of sites.

Okay, great. Congrats again on the quarter. Thanks for taking the questions.

Thank you, Jason.

Our next question comes from Matthew Andrews from Jefferies.

Can you talk a little bit more about the pricing negotiations in Germany related to HETLIOZ and why it's necessary to go into the arbitration phase?

Yes. To clarify, Matt, we were in the free price period in Germany as of August 1, 2016. And that is in the full year, if you have not agreed on a negotiated price, you go on to the next step, which is arbitration. So going to arbitration means that we did not reach agreement on the price negotiation in the first round.

Is this typical of many specialty products, based on your experience, to have to go through this process?

It's hard to tell. I don't think we're aware of all the statistics. We're looking at the same. But the arbitration procedure is there and it is being used quite often in both orphan and non-orphan drugs. So I cannot speak that this is unusual. Certainly disappointing that we did not reach agreement. But hopefully more discussion in the arbitration with an independent party will result in a good outcome.

Transitioning to tradipitant and chronic pruritus, have you received any guidance from FDA relative to what's considered clinically meaningful on the endpoint in terms of itch reduction for the 8-week time period?

No, we have not received a categorical cutoff. And as I had discussed before, in early discussions with the FDA, the FDA actually has expressed not full satisfaction with the proposed Visual Analogue Scale measurement of itch as a primary outcome. Unfortunately, they did not offer an alternative. And most key opinion leaders in the literature would suggest that the Visual Analogue Scale of pruritus is actually an accepted scale. And on your point of what constitutes clinically meaningful, again, that's an open question. The FDA has not weighed in that.

So presumably there are other itch measures as part of the protocol that may be acceptable to FDA that you're tracking as well in this study?

Yes. We're tracking actually every type of scale typical for itch and typical for patients with atopic dermatitis. Just to give you a list of them, the Visual Analogue Scale is one. The VRS is another one. We collect patient diaries. We collect also physician measurements at the weekly visits. We collect the SCORAD, which is Scale for Atopic Dermatitis. We collect the EASI, which is Eczema Area Scoring Index. We collect daily diary of sleep scale, knowing that sleep also is disrupted in people with itch. And finally, we do have CGIC and PGIC which are global impression scales, clinical and patient, respectively, along with the Patient Benefit Index, the PBI. So hopefully we're collecting everything that is relevant. But it is very likely that the primary end point will refer to the change of the severity of itch from base lines compared to placebo on the VAS scale.

And just one last one. As it relates to your life cycle management strategy for Fanapt and particularly the long-acting, once monthly for schizophrenia, how important is that program from the standpoint of improving profitability for the franchise and Vanda overall? And what are you waiting for in terms of making a go/no-go decision to invest there? Is there some sort of sales number or scripts number you want to see from Fanapt the back half of this year, before you decide to invest in a Phase III for a long-acting formulation? Thanks.

First, I'm not going to specifically address the profitability question. But I will say that our current analysis of a long-acting injectable Fanapt is a net present value positive, and we believe it is actually an incremental (inaudible) of the franchise and the value of Fanapt as a whole. In terms of gating, in fact, we have started the, I said activities, more specifically, manufacturing activities that will lead to a pharmacokinetic study and later efficacy study hopefully next year. So I would say not much gating anymore on the long-acting injectable. However, I would say that there could be other opportunities and indications to explore in Fanapt. And as we know, a typical antipsychotic typically have captured not just a portion of the schizophrenia market, but also the other conditions seen in psychiatrists' office, including mood disorders, Major Depressive Disorder, as a conjunctive treatment for bipolar disorder, depression or mania. So we're highly interested to understand how Fanapt can play in this. And there, yes, we are more cautious and we would like to see a return to growth and a commitment of our psychiatrists to our product before incurring more significant investment in studies of mood disorders.

Our next question comes from Charles Duncan from Piper Jaffray.

This is Sarah on for Charles. Congrats on a good quarter. I have two questions. So the first one is, it sounds like persistence on HETLIOZ and Non-24 has improved with the new distributor. I'm just curious is this where you want it to be? Or is there more room for improvement? And then, can you also remind us of the metrics that you're tracking around patient awareness and identifying new patients? And any color on how these moved during second quarter.

Yes. Thanks, Sarah. So I will address the latter part, and I'll let Jim Kelly talk about persistence. What we've been tracking over the last 3 years is the number of patients opting in. And they can opt in from our direct-to-consumer, mostly television campaign and our field work with independent living facilities for the blind. That opt-in number, once in a while we give an update. That database now of people we have opted in, has increased to over 24,000 people. And this is great because it creates a tremendous pool of patients that we can always go back in, and we do, through our case management group. As you know, it is only a small fraction of them that have received a script or are on treatment. I will pass it on to Jim on the persistence question.

Yes. Hi, Sarah. You were asking are we happy with persistency and are we perhaps doing other things? We're certainly happy that we made the move we made. We think that it offers a great benefit to our patients when they have a distributor that works with them to ensure they get the medication they need on time. Now, while we haven't given specific numbers on persistency levels, I would say now that we've made this move, we think they're exceptional. In fact, some of the things that I find most interesting is that the longer patients are with us, the stickier they are, and that's really important. That's making sure that you've got those patients who need our drug most on for the duration. And it also, for the business, offers a great foundation from which to build from.

And just to add, you asked whether there's room for improvement. There is. Although, as Jim was saying, up to 6 months of being on treatment, persistencies are very high, in the very high 90s. The front end, we do lose patients. And some of them, we lose them before they had an adequate treatment, which is about a 3-month trial. So through education, from case management, to our sales force, towards our physicians and the patients, we're trying to improve that, because, of course, you understand the compounding benefit of just even a few percentage points of persistent improvement.

Great. Thanks. And just one follow-up. So in terms of the 2 Phase II read-outs you have this year in atopic derm and jet lag, assuming those data are both positive, what are the next steps you see? And how do you think about prioritizing spend and focus on those versus some of the other clinical programs you have?

Yes. So I will address on the jet lag program, with good data there, combined with our prior work in models of jet lag in a Phase II and a Phase III study in our database that we've accumulated over the years on the safety of HETLIOZ, most likely the next step is an NDA submission for the jet lag indication. On the chronic pruritus, of course, it's earlier in the clinical program. Let's see how the results are. We'll sit down with the FDA and design a path to NDA filing.

Our next question comes from Derek Archila from Oppenheimer.

Congrats on the quarter. So just first one on SG&A during the quarter; it came in pretty light, lighter than we were expecting. So I just wanted to confirm, so that reflects the full spend for the Fanapt sales force additions. And then, I know, Jim, you talked about kind of a step-up in the second half for SG&A for some promotional activities. Could you just maybe give us a little bit more color on the type of promotional activities you guys are looking to do? Is it for HETLIOZ or Fanapt or for both? And then I have one follow-up. Thanks.

Okay, great. Q2 does, in fact, reflect the full quarter impact of the complete field force. And so that component of our SG&A is as expected. As we look at the sequential change, now that we've got the field force in place, we do want to have along with them, numerous marketing programs that are going to help them in what they do. And so now that they are in the field fully trained and we've gotten past that phase of our effective relaunch, we'll now move to the next, which involves the supportive marketing programs. There could be some other incremental activities around the HETLIOZ piece, but I would say that that's operating at a more of a steady-state quarter-in/quarter-out level.

Okay, great. And then just one on the pipeline. I know you talked about some open-label data from the SMS trial for HETLIOZ. I mean, in what kind of fashion will you be kind of communicating that to investors? And is that more kind of 4Q-weighted?

Yes, most probably will be first a presentation at a conference. And in fact, if this work is accepted, we have submitted it to the World Sleep Congress coming up in October.

And are you waiting for that publication or this kind of data to bring that to the FDA to kind of finish off kind of the design of the Phase III and the endpoints that you need to hit for that study?

No. We're ongoing with the randomized study. The endpoints are going to be inclusive of measurements of sleep quality, but also measurements of daytime behavior, scales like the Aberrant Behavior Checklist Scale. So that is not gating the publication of these open-label data, does not gate our interactions with the FDA, but we do expect as the randomized study continues to enroll, to have an opportunity to talk to the FDA.

Our last question comes from Corey Davis from Wainwright.

Primary question is, Theravance had what seemed like good data at their lowest dose in gastroparesis in their drug. And curious as to your thoughts as to whether or not that's predictive or completely independent of whether or not tradipitant would be successful in gastroparesis.

Well, I cannot speak or characterize the -- you're referring to the Velusetrag Theravance data, yet. What I would say, that Velusetrag operates under a different mechanism of action as a 5-HT4 agonist. And all I can say is that this is significantly unmet medical need we speak of today to patients in this field and more than one treatments are needed. So we wish good luck to Theravance on this. But we're actually highly optimistic that the mechanism of action of tradipitant will be actually useful in treating gastroparesis.

And then with respect to tradipitant in pruritus with the success of some biologics in the space that are treating more eczema than the pruritus associated with atopic dermatitis, do you think that helps you or hurts you, assuming that your data are positive?

Yes, I think it is independent. Just to remind everyone that we're trying to treat the itch. And with that, if you're successful, you stop the scratching and you stop the lesions, which actually creates a vicious cycle in the pathology of the skin. Of course, we're aware of treatments that are coming along for atopic dermatitis that can improve the condition itself. But as it goes, there is a very large patients with atopic dermatitis and the condition of itch. And as we can suspect, many of them may not be candidates for treatments that may be altering the condition like biologic treatments or it may not work for them. However, the aim of the tradipitant program is to treat itch in any patient. So we believe actually that other treatments as biologics can actually be used alongside tradipitant.

And assuming that your Phase II data are positive, would the next step involve like a combination trial with some of these biologics? Or would you still go standalone in atopic dermatitis treating pruritus?

Yes. For now, the plan is the standalone treating the condition of itch in patients with atopic dermatitis. And the ideas of combination with other biologic or other treatments that are emerging needs to be understood once we also understand how these other treatments help patients with the condition.

Thank you. There are no further questions at this time, and I will now turn the call back over to Dr. Polymeropoulos.

Well, I thank you all for your support and participating on this call today. I will wish all a happy August and the rest of the summer, and we'll talk to you soon.

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