Vanda Pharmaceuticals Inc (VNDA) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Vanda Pharmaceuticals, Inc. earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's conference, Senior Vice President and Chief Financial Officer, Mr. Steve Shallcross. Please proceed, sir.

Thank you, Candace. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals fourth quarter and full year 2006 performance.

Our Q4 results were released this morning and are available on the SEC's Edgar system or on our website, www.vandapharma.com. In addition, we're providing live and archived versions of this conference call on our website and a telephone replay of the call will be available through February 14th.

Joining me on today's call is Dr. Mihales Polymeropoulos, our President and CEO. Following my introductory remarks, Dr. Polymeropoulos will summarize our significant accomplishments for 2006, comment on our recent follow-on equity offering and outline our key milestones for 2007, then I will comment on our financial results for the quarter and full year before opening your lines up to 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. Words such as, but not limited to, belief, expect, anticipate, estimate, intend, plan, target, likely, will, would and could and similar expressions and words will identify forward-looking statements.

Our forward-looking statements are based on current expectations that involve changes in circumstances, assumptions and uncertainties and other risks. These risks are described in the Risk Factor section of our registration statement on Form S-1 filed December 19, 2006, as amended, which is available also on the Edgar -- on the SEC's Edgar system and on our website.

We encourage all investors to read this report 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 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, Mihales Polymeropoulos.

Thank you, Steve. Good morning and thank you for joining us on our fourth quarter 2006 call. I am pleased to review our significant recent accomplishments. As you know, we met our clinical development objectives for our two lead compounds and successfully completed a follow-on equity offering.

With the strengthening of our balance sheet, we're well positioned to continue with our clinical development plans, our plans to obtain approval for and to launch iloperidone and our plans to pursue potential partnerships.

As has been our practice, I will focus my remarks on our most advanced compounds, the Phase III compounds iloperidone and VEC-162. I will start with iloperidone.

Iloperidone is our novel treatment for schizophrenia and other psychotic disorders which together represent a $16 billion-plus global market. We believe iloperidone offers efficacy with a differentiated safety profile, giving it substantial commercial promise. We also believe iloperidone may achieve further differentiation through two more features.

The first is a four-week injectable formulation to address a significant issue of poor compliance in the schizophrenia population. This formulation offers an improvement obviously on the available long acting atypical anti-psychotic [inaudible - highly accented language], which is only a two-week formulation.

The second is a simple blood test developed through our expertise in pharmacokinetics that identifies patients with genetic markers of iloperidone efficacy and safety. Our market research suggests that physicians will welcome using such a test to customize treatment for their patients. We expect both of these features to enhance the long term differentiation of iloperidone.

On December 7, 2006 we announced positive top line results from our Phase III trial, evaluating iloperidone in schizophrenia. Iloperidone demonstrated statistically significant improvement compared to placebo on the Positive and Negative Symptom Scale, the trial's primary endpoint.

Additionally, iloperidone achieved significant efficacy on the positive and negative symptom subscale of PANSS. Iloperidone also showed significant differences in efficacy and safety in patients with pre-specified genetic markers and appeared to be safe and well tolerated.

As planned, we recently had our pre-NDA meeting with the FDA. This meeting was largely procedural and focused on the structure and content of our NDA submission. Based on this meeting, we remain confident in our targeted filing date of Q4 this year. We will continue our discussions with the FDA as we approach this date and will provide you with further updates on our expected filing date.

Let us turn our attention now to VEC-162, our compound for the treatment of sleep and mood disorders. We believe the compound's novel mechanism of action has a unique clinical effect that will enable us to position it in a commercially unique way.

VEC-162 is a balanced melatonin receptor agonist that works by adjusting circadian rhythm. In other words, by resetting the body clock. This feature differentiates VEC-162 and allows it to provide sleep onset and maintenance benefits more naturally. Because it works through this natural sleep/wake cycle, VEC-162 also appears to lack the side effects associated with hypnotics and sedatives and should not be scheduled as a controlled substance.

VEC-162 may be able to compete effectively with approved drugs to treat primary insomnia and may also be able to treat sleep disorder patients for whom only sub-optimal options exist. These include patients with circadian rhythm sleep disorders which are difficulty sleeping due to misalignment of the circadian rhythm or where a person's internal sleep/wake cycle does not match the desired sleep time.

Examples of CRSD include shift worker's sleep disorder, delayed sleep [phase syndrome] and jet lag. We believe VEC-162 is the only compound with a proven ability to modify the sleep/wake cycle and could be the first choice for CRSD patients.

VEC-162 may also be a first line treatment for patients with insomnia secondary to depression and anxiety. This is because physicians prefer to avoid prescribing controlled substances for this patient class and therefore may welcome a compound with a safety profile of VEC-162, which we do not expect to be classified as a controlled substance.

On November 14, 2006 we announced positive top line results for the Phase III trial evaluating VEC-162 in transient insomnia. VEC-162 demonstrated statistically significant improvement versus placebo at all three tested doses in the primary endpoint of the trial, Latency to Persistent Sleep, a measure of sleep onset. VEC-162 also produced statistically significant improvement relative to placebo in Latency to Non-Awake, another measure of sleep onset, Wake After Sleep Onset, WASO, a measure of sleep maintenance, and Total Sleep Time.

VEC-162 was also demonstrated to be safe and well tolerated in the trial. We will need to conduct additional Phase III trials to receive FDA approval of VEC-162 and plan to initiate one of these trials in the second half of 2007.

Finally, I would like to touch on our recent financing before turning the call over to Steve. As you know, we raised over $110 million in net proceeds in our follow-on equity offering last month. We achieved two goals; we strengthened our balance sheet and expanded our investor base.

As explained in our recent public filing, we believe that the proceeds of this financing will allow us to achieve the following near term outcomes -- the preparation and filing of an NDA for iloperidone in schizophrenia by the end of 2007, further commercial development activity for iloperidone, restart of an additional Phase III trial for VEC-162 in chronic sleep disorders in the second half of 2007, and initiation of a Phase II trial for VSF-173 in excessive sleepiness in mid 2007.

[The fund] also enables us to pursue potential partnering deal or deals with the best possible terms. So with this partnership goal, we have hired JP Morgan to advise us on all potential strategic options around our portfolio of drugs.

Now Steve will address our financial results for the quarter and full year. I will then provide some concluding remarks prior to opening the call to questions. Steve?

Thanks, Mihales.

Overall, our company's fourth quarter and full year results reflect the exciting progress on our clinical development activities, the successful completion of our two Phase III clinical trials and the strengthening of our financial position.

Our R&D expenses for the quarter totaled $7.9 million compared to $9.5 million in the third quarter of 2006 and $5.2 million in the fourth quarter of 2005. The quarter-over-quarter decrease was primarily due to a reduction in our clinical trial expenses for iloperidone and VEC-162 and the Phase III trials that were completed in the fourth quarter.

For the full year of 2006 total R&D expenses were $52.1 million, up from $16.9 million in the full year of 2005. Higher R&D expenses in 2006 resulted from the clinical trial expenses related to our two Phase III trials that were conducted and completed primarily in 2006.

General and administrative expenses were $4.5 million in the fourth quarter, up from $3.3 million in the third quarter of 2006 and up from $1.8 million in the fourth quarter of 2005. The increase in G&A expenses in the fourth quarter relative to third quarter of 2006 is primarily due to increased business and commercial development expenses and higher professional fees.

For the full year of 2006 total G&A expenses were $13.6 million, up from $7.4 million in the prior year. The year-over-year increase in G&A expenses was primarily due to increased salaries, benefits, and stock-based compensation expense, increased business and commercial development expenses and higher insurance, legal and professional fees associated with being a public company.

We recorded non-cash stock-based compensation expenses of approximately $1.6 million in the fourth quarter of 2006. Of this $1.6 million, approximately $1.3 million was recorded as G&A expense and the remaining $300,000 was attributed to R&D.

For the full year of 2006 total stock-based compensation was $6.1 million, up from $5.1 million in the prior year. Our net loss applicable to common stockholders for the fourth quarter of 2006 was $11.9 million. This compares to a net loss of $12.1 million in the third quarter of 2006 and $21.8 million in the fourth quarter of 2005.

For the full year of 2006 net loss was $63.5 million, up from $57.4 million in 2005. Total cash, cash equivalents, and marketable securities decreased by approximately $11.1 million during the fourth quarter. This decrease is primarily attributable to our $11.9 million in operating losses, approximately $0.2 million for fixed asset purchases, and the reduction of accrued R&D expenses and accounts payable of about $0.9 million.

These numbers further reconcile with our net decrease in cash, cash equivalents, and marketable securities, with offsets for increases of $1.8 million of non-cash appreciation, amortization, and stock-based compensation charges and $0.1 million of other items.

Our December 31, 2006 balance sheet showed $31.9 million in unrestricted cash, cash equivalents, and marketable securities, down from $43.0 million at the end of the third quarter 2006 and $31.2 million at December 31, 2005. As of January 31, 2007 we had cash, cash equivalents, and marketable securities of approximately $140 million.

Before I turn the call back over to Mihales, let me briefly touch on our plans for providing financial guidance for 2007. We are currently evaluating our clinical development plans for 2007 and will finalize them shortly. Once we finalize these plans we will provide you detailed 2007 guidance.

At this time I'll turn the call back to Mihales.

Thank you, Steve.

Let me reemphasize my excitement over the continued progress our team has made. I'm extremely proud of our team and the results they have delivered and I look forward to working with them to achieve further progress.

We would be happy to address any questions at this time.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Our next question will come from the line of Corey Davis of Natexis. Please proceed.

Good morning. Thanks for the update from the FDA pre-NDA meeting. I assume -- can we assume that they gave you the green light to go ahead and file the NDA or more importantly if they noticed something that was maybe deficient for filing, would they have told you that at that meeting?

Thank you, Corey. First of all, the purpose of the pre-NDA meeting, if you understand, is to discuss the content and structure for NDA filings. And we have reached an agreement that the content and structure is adequate. However, we have engaged the FDA in continued discussions to [glide by] every item up until the time. The demeanor and content of that meeting allows us to be confident that we will be filing this NDA by end of 2007.

Okay. And then on 162, I think you briefly mentioned starting studies later this year and I know you've also thought about waiting for a partner to come onboard, but at some point if you -- if the partner doesn't materialize, when would you pull the trigger and just start the next series of Phase III studies?

Let us be very clear that we are continuing to build the company and will continue to advance the assets through development. What we have communicated is that we will start the next Phase III study by beginning of Q3 for VEC-162 in chronic sleep disorders. And for clarity, we have said that with a partner, additional studies could be started in parallel with that study. But we will be starting a VEC-162 study by Q3.

Okay. And maybe a similar question on the depo formulation. How quickly can you move that into the next series of studies, iloperidone?

Yes. The depo four-week injectable formulation for iloperidone, we are now in manufacturing technology [transfer] to produce supply that will lead into pharmacokinetic work by late end of 2007 and that will allow us to be in the clinic by 2008. And just for clarity that the projection for the entire depo formulation program is that it will be approximately two years behind the oral formulation.

Okay, great. Thanks, guys.

Thanks, Corey.

Our next question will come from the line of Adam Greene of JP Morgan. Please proceed.

Thanks. Good morning, everyone. Following up on Corey's question with the FDA meeting, was there any discussion there regarding pharmacogenomic testing? Is the FDA going to review that in parallel? Is that required or -- well, it's obviously not going to be required, but any discussion regarding that?

And then also for Steve, could you remind us if there's any upcoming milestone payments, outward payments for the filing and what those might be?

Thank you, Adam. So there was not a specific question at the pre-NDA meeting with the agency on pharmacogenetics but however there was a discussion. And it will be reviewed, the pharmacogenetics [package] in both efficacy and safety markers in parallel with the NDA.

And, Adam, to answer your question on upcoming milestone payments, the only one in the near future will be a $5 million payment due upon filing of the NDA of iloperidone. It'd be payable to Novartis.

Great. Thanks.

Our next question will come from the line of Donald Ellis of Thomas Weisel Partners. Please proceed.

Thanks and good morning. First question is regarding iloperidone. Looks like about two months ago, December 7, is when you released top line data, Phase III data. At what point do you plan on sharing the side effect profile that you saw on that trial, specifically with respect to weight gain and cardiovascular side effects?

Thank you very much, Don. First of all, let me remind you what we have discussed already. I will give you a little highlight of perhaps when additional data will be available. Let me start with the cardiovascular effects. In the top line results we did discuss the [QTC] prolongation seen in the trial and we reconfirmed that the overall prolongation is moderate of 11.4 milliseconds, similar to what has been observed in prior programs.

And also we noticed two things. One, that by the fourth week there was an adaptation with the overall prolongation going down to 7 milliseconds. And [we were concerned] that pharmacogenetic markers that identify the 75% of the population who are good metabolizers versus the 25% who are poor metabolizers can detect and predict the [inaudible - highly accented language] prolongation so that individuals who were good metabolizers had a lower QTC prolongation than poor metabolizers.

In regards to your question on weight gain, what we have observed in the overall program for iloperidone from the past Phase III studies, many of them extended out to one year duration, is a small increase in weight gain of approximately 2 to 3 kilograms in the short term six week study and up to four weeks for the total weight gain for 52 weeks. So, what the profile appears to be is a small increase in weight gain [inaudible - highly accented language] and does not increase much more than what you see in the four to six week studies.

For this kind of study we expected weight gain to be very similar. However, we are now compiling the tables and the clinical study board has not been finalized. And that most probably will happen within the next month or so and at the appropriate time we'll make updates.

I wanted also to tell you that according to our publication plans we are involved now in two upcoming meetings this year, the International Congress of Schizophrenia Research in late March, and the American Psychiatric Association later in the spring. And in both these meetings we'll have presentations of the profile of iloperidone and some of this data will become available.

However, our vision and plan is to have a more full discussion of the Phase III data in the 2008 American Psychiatric Association meeting consistent with our predicted launch by beginning of 2009.

Okay, thank you. And the second question I have and last question is regarding VEC-162 and the Phase III data that you released in November. Were those in normal healthy volunteers or patients with a diagnosis of insomnia? I can't remember.

Just to remind again the design, VEC-162 Phase III study was in transient insomnia, which is a design that every other hypnotic and sedative has used. And the setting is healthy volunteers brought into a laboratory and be subjected to a model of aberration of sleep of both onset and maintenance. And in that setting what we observed is a very significant effect on both improvements in sleep onset and sleep maintenance.

And just to tell you that transient insomnia models are very predictive of what happens with a similar compound in chronic insomnia settings in that if you do observe a benefit in onset or maintenance or both, this is exactly what you observe in the chronic setting. This is what we know on compounds already approved for these disorders.

Okay. Now, the last question I have is the Phase III trial for VEC-162 that you're planning on starting by the end of this year, those will be in insomnia patients or in normal healthy volunteers again?

All studies in the future clinical development plan will be in patient population with sleep disorders and we will be discussing the full development plan with the FDA later this spring.

Great. Thank you very much.

Thanks, Don.

Our next question will come from the line of Mike Rockefeller of Morgan Stanley. Please proceed.

Good morning, guys. Can you talk a little bit about your commercialization strategy for iloperidone and how you foresee the pharmacogenetic work being used as well as how you anticipate using your planned 150 to 200 person sales force to target what seems to be on the surface a large physician population?

I will make a very brief introductory comment and I will allow our Chief Business Officer, Chip Clark, to address the question. In that because of a concentrated number of physicians in this indication for schizophrenia, it is the rather small specialty sales force is applicable and we have discussed that Vanda could develop such a sales force.

However, in the overall picture, seeking an [inaudible - highly accented language] partner for iloperidone, a global partnership will be examined and evaluated as well. But I will let Chip address the more specific question.

Yes. So, Mike, on your first question on how we intend to use the pharmacogenetics, I'll make a couple of comments. First is that this is a test that we have already developed and operationalized with a national laboratory and therefore rollout is not something that we would expect to be a barrier.

I would also suggest that from our market research this is one of those rare therapeutic areas where patient-specific tailoring may actually increase the commercial opportunity of the compound. Physicians are flying blind here and what they've told us regularly in our market research is that they would be more inclined to use iloperidone in tandem with a marker that helps them tailor the therapy to their patients than they would with the already healthy share that they would ascribe to the base case iloperidone profile.

Now, you are right to suggest that given the large sales of the compound class that there would seem to be a large target physician base. But, in fact, we can segment it in order of priority. The schizophrenia market clearly drives the use of atypical anti-psychotics and very few even psychiatrists treat schizophrenia patients.

The top five deciles of physicians treating schizophrenia patients is a number less than 10,000 total. And it's on that basis that we've come up with our projected sales force size at launch of in that 150 person range. We're confident that that would allow us to more than adequately target those core schizophrenia treaters and that it would put us on equal footing with our competitors in that market.

As you can imagine, we are very busy in our pre-launch activities. The work this year is primarily internal and reaching out for assistance and it's not until '08, sort of six to nine months prior to launch, that we would incur the more significant expense of actually building these sales forces.

Okay. Can you just remind us, does Novartis have global rights to iloperidone? Are they going to get a royalty if you add a U.S. partner as well?

Yes. So, Novartis had the global rights to the compounds. They've given us exclusive world-wide rights to iloperidone and the royalty that we owe is to Novartis and that comes regardless of where the sales come from.

Got you. Thanks a lot.

Sure.

Our next question will come from the line of Jeff Kreick from Banc of America Securities. Please proceed.

Good morning. I have a couple of questions, first for Mihales. Could you give us a little bit more detail on what specifically in addition to regular data analysis that you'll have to accomplish in order to file the NDA? Is there anything in the CMC portion of the application that you need to work on?

And then the second question is for Chip afterwards.

Sure. As we have communicated before, what is on the clinical path is the stability data reporting from the CMC for commercial [batches]. And that report will be available to us by beginning of Q3. And following that is compiling the [CDD] for an on-time filing by end of 2007.

Great. And, Chip, question on the depo formulation. Could you give us a little bit of background on what Novartis may have used that technology for, why you think it's a valid technology? And then what's the patent life with and without the depo formulation of iloperidone?

Yes, so the formulation is something that Novartis has used previously. Their [sanvastatin LAR], which I think stands for long acting release, it's an approved product so it's a technology that the FDA is comfortable with and familiar with.

The patent on the depo formulation is actually a series of patents, the earliest of which expires in 2021.

Great. Thank you very much.

Thank you, Jeff.

Our next question will come from the line of Bill Tanner of Leerink Swann. Please proceed.

Thanks. A couple of questions, maybe first on iloperidone. Obviously talking about filing by the end of the year. Is there not then the need to conduct any additional -- any additional clinical testing either from a safety perspective or from the efficacy perspective before filing?

I'm not sure I fully heard the entire question, Bill. I thought you were asking whether any additional clinical safety work needs to be done. And the answer to that is no. We believe that we have the adequate safety database, the overall, and as it relates to the [inaudible - highly accented language] to file.

Okay. And then just thinking about 162, how should we be thinking about that in terms of -- I mean obviously your comments at the outset about not being scheduled and opportunities and whatnot in patients that have comorbidities like depression, just thinking about like with a Roserum, I think the LTM revenues are probably below $100 million. So how should we be thinking about -- or how are you guys thinking about the opportunity for that drug?

Let me first make a comment of why VEC-162 is differentiated from [inaudible - highly accented language] melatonin agonist, Roserum. It is differentiated by its ability, proven ability to help with both sleep onset and maintenance, which is in sharp contrast to Roserum's ability to help with onset, but no effect on maintenance.

And this is due to a number of factors, one critical one that includes the biological profile of the compound with good bioavailability, in contrast to Roserum, and a dual balance melatonin agonist, in contrast to the more melatonin one binding of Roserum.

But let me give you perhaps the vision of commercial positioning of this compound in sleep disorders. We understand that sleep disorders are three unique and separate entities -- primary insomnia, patients who have difficulty sleeping for an unknown reason; secondary insomnia, patients who have difficulty sleeping in the context of depression and anxiety; and CRSDs, circadian sleep disorders, patients who have difficulty sleeping because of aberrations and misalignment of the body clock.

What we have discussed is we believe that VEC-162 will be a very unique and first-line choice for CRSD and it will be a very important choice, perhaps first-line, for secondary insomnia in the context of depression and anxiety given the known controlled substance potential designation.

And while we are confident that we'll equally be a strong player in primary insomnia, we also understand that this is a market that Ambien and soon to be Ambien generics will have -- continue to have a very strong value proposition.

Okay, thanks.

Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn it back to the speakers for any closing remarks.

Let us conclude this fourth quarter investor call. We thank you for your interest in and support for Vanda and we look forward to speaking with you again next quarter.

Thank you for your participation, ladies and gentlemen. Have a great day.