Vanda Pharmaceuticals Inc (VNDA) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Vanda Pharmaceuticals, Inc. earnings conference call. My name is Tom and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Stephanie Irish. Please proceed.

Thank you, Tom. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals third-quarter 2009 performance. Our third-quarter results were released this morning 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 and a telephone replay of the call will be available through November 9, 2009.

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 for the third quarter 2009 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. Words such as but not limited to believe, expect, anticipate, estimate, intend, plan, target, likely, will, would and could, and similar expression or words will identify forward-looking statements.

Our forward-looking statements are based upon current expectations that involve changes in circumstances, assumptions, and uncertainties and other risks. These risks are described in the risk factors section of our quarterly reports on the Form 10-Q for the fiscal year ending June 30, 2009, which is available 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 or account of new information, future events, or otherwise, except as required by law.

With that being said, I would now like to turn the call over to our CEO, Mihael Polymeropoulos.

Thank you, Stephanie. Good morning and thank you for joining us. As we previously announced on October 12, 2009, Vanda entered into an amended and restated sublicense agreement with Novartis Pharma AG. Novartis had originally entered into a sublicense agreement on June 4, 2004 pursuant to which Vanda obtained certain worldwide exclusive licenses relating to Fanapt. The agreement is subject to and will become effective upon clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which is expected by the end of 2009.

Pursuant to that agreement, Novartis will have exclusive commercialization rights to all formulations of Fanapt in the US and Canada. Except for two post-approval studies started by Vanda prior to the execution date of the agreement, which Vanda is obligated to complete, Novartis will be responsible for the further clinical development activities in the US and Canada, including the development of a long acting injectable depot formulation of Fanapt.

Pursuant to the terms of the agreement, Vanda will be entitled to an upfront payment of $200 million, which it expects to receive within 30 days after the effective date of the agreement. Vanda will be eligible for additional payments totaling up to [$260] million (sic -- see press release) upon the achievement of certain commercial and development milestones for Fanapt in the US and Canada. Vanda will also receive royalties with as a percentage of net sales are in the low double digits on net sales of Fanapt in the US and Canada. In addition, Vanda will no longer be required to make any future milestone payments with respect to sales of Fanapt or a future royalty payment with respect to sales of Fanapt in the US and Canada.

Vanda retains exclusive rights to Fanapt outside the US and Canada and Vanda will have exclusive rights to use any of the Novartis' data for Fanapt for developing and commercializing Fanapt outside the US and Canada. At Novartis' option, the parties will enter into good faith discussions relating to the co-commercialization of Fanapt outside of the US and Canada or alternatively, Novartis will receive a royalty on net sales of Fanapt outside of the US and Canada.

Under our agreement, we will also pursue the development of the long-term injectable depot formulation of Fanapt. Development of the depot formulation is expected to extend the value proposition to patients and physicians by addressing the poor compliance to treatment among patients with schizophrenia. Another drug in the same class of antipsychotics with a depot formulation has also enjoyed substantial commercial success with recent annual revenues in excess of $1.3 billion worldwide and $1 billion of that came from sales in the European Union.

Vanda has retained the rights to the depot formulation outside the US and Canada and therefore the value of the depot formulation to Vanda can be very substantial. The depot formulation of Fanapt has already completed a Phase II clinical study in patients with schizophrenia in the US, where it demonstrated good release kinetics of a (inaudible) to [four] weeks and it was also well tolerated.

Under our agreement with Novartis, Novartis will be responsible for development and regulatory filings in the US, while Vanda will have rights to use the data for regulatory filings outside the US and Canada. In the coming months, Vanda's priority will be to assist Novartis with the launch of Fanapt in the US. At the same time, Vanda will evaluate the regulatory environment and commercial opportunities outside the US and Canada. We expect that filings for approval of Fanapt in the EU may be any time that both oral formulations and depot formulations can be presented to the regulators. Such a plan will maximize our market exclusivity under the EU laws of data exclusivity for both formulations for approximately 10 to 11 years post-approval.

We are also evaluating the regulatory requirements and opportunities outside the EU including emerging markets such as Brazil, Russia, India, and China. While over the next few months our priority will be around the support of the commercial launch of Fanapt in the US and evaluation of opportunities outside the US and Canada, we will also review the rest of our pipeline.

Vanda will continue the clinical regulatory and commercial evaluation for tasimelteon, a melatonin one melatonin two agonist currently in Phase III stage of development. We will be conducting a [solo] evaluation of the potential utility of the compound along with the commercial opportunity in the context of the progress of our Fanapt franchise.

As such, our activities over the next few months will allow Vanda to operate under a minimal cash burn. Under the current economic conditions, Vanda will also evaluate all its strategies with focus on maximizing preservation of its resources and their deployment in the context of maximizing shareholder value. We are very excited with the upcoming commercial launch of Fanapt and we will focus our efforts and resources to maximize the value of this important asset.

Now Stephanie will address our financial results for the quarter. I will then provide some concluding remarks prior to opening the call for your questions. Stephanie?

Thank you, Mihael. Over our Company's third-quarter results reflect the progress and the pre-launch commercial activities for Fanapt, which preceded the announcement of our partnership with Novartis. Vanda reported a net loss of $7.7 million for the third quarter of 2009 compared to $12.4 million for the second quarter of 2009 and $10.9 million for the third quarter of 2008. Total expenses for the third quarter 2009 were $7.7 million compared to $12.4 million for the second quarter of 2009 and $11.2 million for the third quarter of 2008.

Third-quarter 2009 R&D expenses consisted of $2.1 million, primarily -- third-quarter 2009 R&D expenses of $2.1 million consisted primarily of $500,000 of salaries and benefits; $700,000 of non-cash stock-based compensation costs for R&D personnel; $200,000 for the carcinogenic study; and $200,000 in consulting fees. This compares to $7.2 million for the second quarter of 2009 and $3.8 million for the third quarter of 2008. The decrease in R&D expenses in the third quarter of 2009 relative to the second quarter of 2009 is primarily due to the regulatory consulting fees accrued in the second quarter as a result of the approval of Fanapt by the FDA. The decrease in R&D expenses in the third quarter of 2009 relative to the third quarter of 2008 is primarily due to the completion of a Phase III clinical trial of tasimelteon in chronic primary insomnia in 2008.

General and administrative expenses of $5.3 million for the third quarter 2009 consisted primarily of $400,000 of salaries and benefits for G&A personnel and $2.6 million of non-cash stock-based compensation as well as $500,000 in legal fees, $700,000 of commercial costs, and $200,000 of insurance costs. This compares to $5 million for the second quarter of 2009 and $7.4 million for the third quarter of 2008. The decrease in G&A expenses in the third quarter of 2009 relative to the third quarter of 2008 is primarily due to the lower stock-based compensation and commercial expenses.

Employee stock-based compensation expense reported in the third quarter of 2009 totaled $3.3 million. Of these non-cash charges, $700,000 was reported as R&D expense and $2.6 million were reported as G&A expense. For the second quarter of 2009 and the third quarter of 2008, total stock-based compensation expense was $2.8 million and $3.6 million respectively. The increase in stock-based compensation expense in the third quarter of 2009 relative to the second quarter of 2009 is the result of the issuance of additional nonqualified stock options in 2009.

The decrease in stock-based compensation expense in the third quarter of 2009 relative to the third quarter of 2008 is primarily due to the lower stock-based compensation expense resulting from the workforce reduction in the fourth quarter 2008.

As of September 30, 2009, Vanda's cash, cash equivalents, and marketable securities totaled approximately $20.7 million. As of September 30, 2009, a total of approximately 27.2 million shares of Vanda common stock were outstanding. Net loss per common share for the third quarter of 2009 was $0.28 compared to $0.46 for the second quarter of 2009 and $0.41 for the third quarter of 2008.

Cash and marketable securities decreased by $8.3 million during the third quarter of 2009. Changes included $7.7 million of net losses, increases of $500 million and 0.5 million in inventory, decreases in accrued expenses and accounts payable of $2.9 million, increases in prepaid expenses of $1.5 million. This was offset by $3.9 million in non-cash depreciation, amortization, and stock-based compensation expense and $400,000 received in the proceeds from the exercise of Vanda's stock options.

As previously stated, Vanda is currently concentrating its efforts in the transition of the commercialization and development rights to Fanapt in the US and Canada to Novartis, and we expect to work closely on the joint steering committee to assist in the anticipated commercial launch of Fanapt in the first quarter of 2010. This transition includes all regulatory, manufacturing, and postmarketing commitments requested by the FDA. Under the terms of the agreement with Novartis, except for two small postapproval studies started by Vanda prior to the execution date of this agreement, Novartis will be responsible for the further clinical development activities in the US and Canada, including the development and commercialization of a depot formulation of Fanapt.

In addition, Vanda will also evaluate the regulatory path and commercial opportunities for Fanapt outside the US and Canada. We also will continue the clinical, regulatory, and commercial evaluation for tasimelteon. The Company plans to operate on a reduced spending plan with fixed overhead costs expected to be approximately $2.5 million to $3 million per quarter.

At this time, I will turn the call back over to Mihael.

Thank you. We will be happy to address any questions at this time.

(Operator Instructions) David Moskowitz, Caris & Co.

Thanks very much. Thanks for taking the question and good morning. So I guess the first question is activities that you guys have performed so far, I see there's a cost of goods running through the model. Can you talk about any activities that Novartis is going to be paying for going forward so we can eliminate that from the model? And is there any reimbursement for those activities thus far?

Thank you, Dave. So let me clarify a little bit. So of course we had some activities ongoing which were the two small studies under the first market commitments, I believe one refers to the P-glycoprotein in vitro study. The other one in the carcinogenicity study which is pretty much done.

The other more major expenses over the last quarter revolved around manufacturing of drug products. Now everything will transition to Novartis after the effective date of the agreement and yes, for drug products that we have already made and we have already paid a majority of it, the cost will be reimbursed at cost by Novartis. So going forward, Vanda will not have any expenses related to any additional studies or product manufacturing.

Just clarifying on those postapproval studies, it looks like you spent about $200,000 in the quarter. You just mentioned one is completed, so I would imagine that spend has to be pretty minimal at this point.

Yes, it's very minimal and while I'm not very clear the [intension] of our agreement may call for reimbursement even for those small amounts as well.

Okay, so just getting to the total overhead, the total burn that you guys expect going forward, you mentioned in the press release overhead going forward estimated at $2.5 million to $3 million per quarter. So that's overhead. I'm not sure if that includes R&D, but is that sort of -- are you trying to indicate at this point an annualized burn of around $10 million to $12 million? Is that what the $2.5 million to $3 million indicates?

Correct, let me address a little bit your question around what is the R&D aspect? The R&D spend is minimal. As I said earlier, reading from my script, that the intent of the Company and the priority in the next few months is to help have a very successful commercial launch of Fanapt and also understand the entire universe of opportunities around the regulatory filings ex US and of course the commercial opportunity associated with them.

While this is quite a bit of work that the team has to do, that does not require any R&D spend. So it is our intent to have a minimum or none R&D spend over the next few months as we support the launch of Fanapt. Again, we also have to be contextual. We know that economic circumstances in the country continue to be very challenging. Vanda is in the enviable position of having an approved drug, having to deal with a great partner, and having a large sum of money coming in as an upfront payment upon execution of the agreement.

We want be very prudent of the use of cash and our resources and we understand that the short-term and longer-term success of the Company will very much depend on the degree of success of Fanapt. We are very confident that the product will do to quite well, but of course first, we need to concentrate to help Novartis succeed with the launch and see how the project performs in the market before we commit ourselves or our resources to any other expenditures.

Okay and to just get a little specific or more granular on the activities that you guys are undertaking to help transition Fanapt to Novartis, can you give us a little bit more color on that?

Yes, so everything will be coordinated per the agreement through a joint steering committee, but of course it will be a transition pace with a lot of activity. It revolves primarily around drug product manufacturing so we can fill the supply lines very quickly. Novartis will take over eventually the manufacturing [contact] system Vanda has and also will very soon reimburse for the products that we will deliver to them.

On the clinical side, we have been working on all the gross market commitments prescribed by the FDA, developed drug [components] for a number of the studies that will now have to be transitioned to Novartis. And of course, part of the transition are the (inaudible) things, the relationships; Vanda's understanding of the market; key opinion leaders; needs of patients, etc.

Is it fair to say that every employee you have is working basically on this plan?

Pretty much.

Okay, and can you refresh us in terms of how many employees you have right now?

I believe the total headcount right now is 21.

And just last question is the level of NOLs that you guys have?

Yes, that's a good question. You know, as we have reported in our Qs in the past, that Vanda over the years has accumulated net operating losses in excess of $120 million or so. We are now in the mid of a study trying to understand is there any limitations to the use of these net operating losses, you can understand that these net operating losses can upset quite a bit if used of the tax that we would need otherwise to pay on the large upfront to receive. So I cannot give you a number now as the study is ongoing but remain optimistic that a large portion of these NOLs could be used to upset our tax requirements.

All right, thanks very much. I appreciate the answers.

Corey Davis, Jefferies.

Maybe I'll just follow on from your last comment there, but wouldn't the $200 million payment that you get from Novartis right up front just completely eat up those $120 million in NOL or is it not that simple?

So just to give -- of course I wish everything was that simple, Corey, but I did not write the regulations. So this is very complex regulation 382 that looks at the net operating losses in the context of ownership changes. Of course there has not been any ownership per se change of the Company as me and here most people would understand. But the regulation defines changes in shareholder, ownership with those shareholders with greater than 5% that these ownerships may affect and induce limitations of the amount of NOLs annually that a company can take. And as you know, there have been a lot of shareholder changes in the history of the Company since its inception and whether this will or will not impact in this utilization of the NOL is not clear yet. And that is the study that is ongoing.

Okay, I will leave that to the accountants then. The next question for Hart-Scott-Rodino, is approval of that just a technicality or not having that, not formally having the deal closed, does that in any way inhibit you and Novartis from working together on the launch right now?

There is a lot of activity that Novartis has to do on its own and I cannot speak what Novartis is doing right now. But during -- typically during the HSR agreement, companies typically avoid to make disclosures of any plans or more sensitive things about markets, etc. So -- and that's exactly what we are observing. On the other hand, there is very intense preparation from both sides for the transition.

On the HSR guidelines, typically HSR takes about 30 days from the day you file. We have requested -- both us and Novartis requested for an expedited review which takes about two weeks. If that is granted, that means that soon we will have a clearance.

Okay, next and just to be clear, a burn rate on an annualized basis of about $12 million is something you are encouraging people to think about, and that would not include any type of R&D activity on things like tasimelteon. Is that correct?

Right. The $2.5 million to $3 million per quarter cash burn that Stephanie talked about is pretty much our fixed overhead with our (inaudible) buildings, insurance etc. It does not include any R&D costs, but again, just to be clear, we do not anticipate in the next few months to have any substantial R&D costs.

All right. So I guess that begs the question, what are you going to do with all this cash?

Well, as I said, first of all is that the priority is to concentrate on the launch, identify the outside US opportunities and review the pipeline in terms of tasimelteon before we spend any money. We need to be very prudent with this cash as they pointed out to and you followed up with your question, one of the obvious things to make sure we preserve and maximize the cash value after taxes of these upfront payments.

As we go through this transition phase, I think we're going to be in a better position, Corey, over the next few months to give better guidance for the future strategic plans of the Company.

Okay. And then last questions, last question, could you describe assuming that you know and you mapped it all out more precisely what's required for European approval? Because it just feels to me like you are not getting credit for Europe and maybe that is -- maybe that's not appropriate. But how big an effort is there going to be --? How risky is it to do this one additional study and is it going to take as long as the three years to hit approval or is that gated just by the depot?

Okay, so let's describe a little bit regulatory requirements for approval of antipsychotic in the EU. Through the centralized procedure, a typical antipsychotic have been approved with the package, we already obtained approval by the FDA and in addition, the European require prior to approval a long-term maintenance study in the design of the placebo [results] study. This is exactly the study that the FDA has already asked us to do as a first market commitment and with Novartis, we will complete. I don't remember exactly the timeline. The timelines were set by the FDA, so it is publicly known.

Now that package would be complete for the review by the European authorities and hopefully for approval. Whether we pursue the oral formulations before we have the complete depot package, that is an interesting question.

Before I address that, let me address however the question about risk and what is the risk to the Europeans and what is the risk to that (inaudible)? So far, there has not been any antipsychotic that has not been able to obtain European approval with a package that the FDA approved plus this long-term maintenance study. In addition, any antipsychotic that has run this placebo withdrawal long-term maintenance study has succeeded in it, so past experience then from European authorities behavior coupled with the performance of every other antipsychotic in this last remaining study would suggest that the probability of success for regulatory approval could be very high.

We recognize however that the opportunities, the commercial opportunity in Europe may be very substantial around the depot formulation and one has to be very careful to maximize the time on the market in Europe with data exclusivity so we will protect the intellectual property of the formulations.

The European situation is different than the US. Instead of any patent term extension like we have here with the Hatch Waxman, the Europeans allow for approximately a 10 plus one, 11 years of data exclusivity upon the first -- after the first approval. So you can understand that we believe -- and we have every reason to believe so from the market analysis that the depot formulation may be the most important commercial asset in Europe. It is important to try to protect the depot formulation for as long as possible.

So for example, if we were ready to submit both the oral formulation and the depot formulation package for European approval sometime in early 2015, and obtain approval later last year, we would have exclusivity, data exclusivity running into 2024, 2025, 10 plus one, 11 years. And that will be for a very substantial year for Fanapt enjoyed some of the success that the current antipsychotic in Europe, Risperdal Consta, does.

As I mentioned earlier, Risperdal Consta, while it is a worldwide $1.3 billion in annual sales compound, the European portion of that is in about the $1 billion per year range.

So the short answer then is it appears today that the best strategy is to power together oral and depot formulations for regulatory approval in Europe. Now we will be over the next few months evaluating this strategy and quite possibly meeting with the European regulatory authorities to further confirm what I just said.

Okay, good. I lied, I have one more question. Just to be clear on this, with the caveat that you can't disclose the exact royalty and that you haven't finished the tax analysis yet, am I thinking about this the right way that if Fanapt were to do about $120 million in revenue and using a base like at worst case of 10% royalty giving you $12 million that that would at your current projected burn rate take you to break even? Back of the envelope, is that roughly correct?

That is roughly correct.

Fair enough, that's all I had. Thanks.

A follow-up from David Moscowitz, Caris & Co.

Yes, I'm sorry, that question was answered. It was basically on the activities for preparing depot for the international market. So thanks for your answers on that.

Thank you very much, Dave. Well, at this point, let's conclude this conference call. We thank you all for your interest and support for Vanda and we look forward to speaking with you again soon.

Thank you for your participation in this today's conference. This concludes the presentation. You may now disconnect. Have a great day.