Vanda Pharmaceuticals Inc (VNDA) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Vanda Pharmaceuticals, Incorporated earnings conference call. My name is Jasmine and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Dr. Mihael Polymeropoulos, President and CEO. Please proceed.

Good morning and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2010 performance. Our third quarter results were released this morning and are available on the SEC's EDGAR system and 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 10, 2010.

Following introductory remarks, I will update you on our ongoing activities. Then I will comment on our financial results for the third quarter 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 expressions 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010, 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 on account of new information, future events or otherwise, except as required by law.

With that said, I would now like to discuss our operation update for the third quarter of 2010. Fanapt update. Year-to-date net sales of Fanapt were reported by Novartis to be approximately $26.3 million comprised of $20.7 million in the first quarter of 2010, $0.7 million in the second quarter of 2010 and $4.9 million in the third quarter of 2010.

Vanda is encouraged by the continued growth in the total number of monthly prescriptions as reported by IMF. According to IMF, monthly prescriptions of Fanapt increased from over 4000 in June of 2010 to over 6000 in September of 2010. We believe that Fanapt prescriptions will continue to grow as more physicians and patients become aware of this therapeutic option and as our partner Novartis continues its commercial campaign for this product.

I have two more updates to report on Fanapt regarding progress that we've made with respect to both the four-week injectable depot formulation, as well as with respect to our pursuit of regulatory approval for the oral formulation outside the US and Canada.

First, we had a significant development recently with respect to the four-week injectable depot formulation of Fanapt. As a reminder, on August 3, 2010, the US Patent and Trademark Office informed us that the patent has been issued, with a patent term adjustment of an additional 605 days, extending the patent expiration to June 27, 2023. On October 28, 2010, the US Patent and Trademark Office informed Vanda that it has granted an additional patent term adjustment of 59 days, making the total expansion 664 days and making the patent expiration date August 25, 2023.

Novartis is responsible for the further development of the depot formulation in the US and Canada, while we have retained the right for its development and commercialization outside of the US and Canada.

Secondly, Vanda continues to explore the regulatory path and commercial opportunity for Fanapt oral formulation outside of the US and Canada. On November 1, 2010, the Therapeutic Goods Administration of Australia's Department of Health and Ageing has accepted for evaluation Vanda's application for marketing approval of iloperidone in Australia.

I will now turn to our second compound, tasimelteon. Enrollment has begun in Study VP-VEC-162-3201, a 160-patient randomized controlled trial of tasimelteon versus placebo in the treatment of Non-24-Hour Sleep/Wake Disorder in blind individuals with no light perception. Top-line results are expected in late 2011. The trial has a 6-month treatment period and includes measures of both nighttime and daytime sleep, as well as laboratory measures of the synchronization between the internal body clock and the 24-hour environmental light/dark cycle.

Vanda has also initiated a one-year safety study of tasimelteon for the treatment of N24HSWD. This is an open-label safety study that will enroll approximately 140 patients with N24HSWD. Vanda plans to conduct additional clinical trials over the next one to two years to support US and European regulatory submissions. Tasimelteon was granted orphan drug designation by the FDA on January 19, 2010. The application for orphan designation for the European Medicines Agency is pending. We believe that tasimelteon can help Vanda create significant value for our shareholders by commercializing a product which addresses an unmet medical need in a differentiated manner and by affecting the mechanisms of the disorder and not just its symptoms.

Finally, on October 29, 2010, Vanda received certification for qualified research and development investments under the Internal Revenue Service's Therapeutic Discovery Project Credit Program of approximately $500,000 for expenses incurred in 2009, 2010.

Now I will address our financial results for the quarter ended September 30, 2010. We are very pleased to announce that Vanda continued to record positive earnings in the third quarter of 2010. Net income was $3.2 million for the third quarter of 2010 compared to net income of $1.3 million for the second quarter of 2010, and a net loss of $7.7 million for the third quarter of 2009.

Basic and diluted net income per common share for the third quarter of 2010 was $0.11 compared to basic and diluted net income per common share of $0.05 and $0.04 respectively for the second quarter of 2010 and net loss per common share of $0.28 for the third quarter of 2009. Approximately 28 million shares of Vanda's common stock were outstanding as of September 30, 2010.

Total revenue for the third quarter of 2010 was $7.2 million compared to $8.3 million in the second quarter of 2010. Third quarter 2010 revenue consisted of $6.7 million in licensing revenue due to the amortization of the upfront payment received from Novartis in the fourth quarter of 2009 under the amended and restated sublicense agreement and $0.5 million for royalty revenue based on third quarter 2010 net sales of Fanapt in the US by Novartis. The decrease in revenue from the second quarter is primarily due to an increase of $0.4 million in royalty revenue offset by a decrease of $1.5 million in product sales to Novartis. The remaining inventory was sold to Novartis in the second quarter of 2010.

Cost of sales for the third quarter of 2010 of $0.4 million consisted of amortization of the capitalized intangible asset related to the milestone payment to Novartis compared to cost of sales for the second quarter of 2010 of $1.9 million, which consisted of $0.4 million from the amortization of the capitalized intangible asset related to the milestone payment to Novartis and $1.5 million for inventory sold to Novartis.

Research and development expenses were $4.1 million for the third quarter of 2010 compared to $2.4 million for the second quarter of 2010 and $2.1 million for the third quarter of 2009. The increase in R&D expenses in the third quarter of 2010 relative to the second quarter of 2010 is primarily due to the cost incurred in connection with initiation of the Phase III trials for tasimelteon in non-24-hour sleep-wake disorder.

General and administrative expenses were $2.1 million for the third quarter of 2010 compared to $2.8 million for the second quarter of 2010 and $5.3 million for the third quarter of 2009. The decrease in G&A expenses in the third quarter of 2010 relative to the second quarter of 2010 is primarily due to lower noncash stock-based compensation costs in the third quarter of 2010.

Vanda recorded a tax benefit of $2.3 million in the third quarter of 2010. The tax provision is based on an annualized effective tax rate for 2010 applied to the third quarter's pretax book income, with the addition or subtraction of discrete items. The quarterly tax provision is not indicative of estimated quarterly cash tax payments.

Vanda's cash, cash equivalents and marketable securities as of September 30, 2010, totaled approximately $202.1 million, a decrease of $5 million compared to $207.1 million as of June 30, 2010.

We are encouraged by the early prescription data for Fanapt as reported by IMF. At this time, however, we cannot forecast future revenues based on sales milestones or royalties.

Our private letter ruling requests to the Internal Revenue Service in March of 2010 to clarify the application of certain code sections regarding the use of prior net operating losses that may offset some of the tax liability related to the $197.4 million of deferred revenue for the upfront payment received from Novartis, which will be recognized as income for tax purposes in 2010 is still pending.

At this time, we will be happy to address any questions.

(Operator Instructions). Your first question comes from the line of Corey Davis from Jefferies. Please proceed.

Hi Mihael, how are you?

Good. How are you?

Anything more you can say about the progress on the depot formulation whether or not you've picked the -- which of the two formulations, the things proceeding on track on time and when are we starting Phase III again here?

Yes. So as you recall, in the last quarterly call we said that the process was Novartis to manufacture material, which was both on the crystal formulation and the microsphere formulation. And then after they test it in animal proceeds with a human PK study to look at the profile and tolerability and after that study would be a Phase III. And the plan is proceeding as such, so that Novartis now have produced both crystals and microspheres. They have started the profiles of both formulations in animals and we are on track to begin soon the pharmacokinetic study to examine the comparability of the two formulations.

And do you have to do a couple of cycles of dosing for those PK studies given -- back at the depot?

Yes. So typically you have at least three injections for the three month, and just to remind you, Corey, that a similar pharmacokinetic study with microspheres produced by Novartis was run in the US for the length of six months invasive to schizophrenia. This result actually we have reported in the past, and the profile was quite acceptable and very well tolerated. So this pharmacokinetic study pretty much is a repeat of the older protocol, but this time it includes not only the microspheres, but also the crystal.

Okay. As far the IRS tax ruling goes, do they owe you an answer by the end of the year or is this something that could drag on indefinitely?

Unlike the FDA that has deadlines, well if they can move, the IRS does not have a deadline. So we hope that we're going to have a directional answer from them soon. The matter is quite complex concerning tax accounting based on 382 is not for those lighthearted, whether they are in IRS or the tax business.

So it is a complicated matter and I can understand why it takes some time, but I certainly would like to have a resolution sooner than later. It is our expectation that soon we should have at least an answer on the private letter ruling, which would set us on the course to prepare our tax statements for next year.

And then in thinking about the European market for the oral tablets eventually and then perhaps talking to potential partners, the idea of doing a bipolar study ever come up?

Certainly expanded indication beyond schizophrenia to bipolar disorder is an obvious consideration for the lifecycle management. But first things first is clarifying the regulatory path with [EMA]. And what I mean by that is the question is our current package as it's done and approved by the FDA acceptable to the European Agency for filing and review. We plan to address this question in a face to face meeting with the European regulators later this year. Our expectation is that Europeans have typically required maintenance data at the time of application. And as you may recall, we do have maintenance data. In fact, we have a successful non-inferiority study between iloperidone and Haldol for a year, a study that Novartis has done in the past.

We believe that this study should be adequate, but it is also quite possible that the European agency may do ask the placebo withdrawal maintenance study with, to remind you again this is a study that Novartis has committed to do as part of the FDA commitment. So the question is do we need to wait for the results of the study before we file in Europe, or can we file now? And I think to circle back to your question about partnership, the gate keeping here I think is in our mind the definition of the regulatory path and being able to obtain regulatory approval in Europe and after that the partnership strategy and the opportunities become a lot more clear.

Last question is, do you think you'll get an answer at that meeting or is that something they'll have to go back and think about and take another couple of months to give you a yes, no?

We all seek clarity in these few meetings as possible, but my personal experience says the likelihood of getting full clarity in one meeting especially with controversial issues is unlikely.

Okay. I suspected it. Okay, that's all I had, thanks Mihael.

Okay.

Your next question comes from the line of David Moskowitz from Madison Williams. Please proceed.

Thank you. Good morning, Mihael.

Good morning David.

Hi. A couple of questions. Let me start with the tasimelteon. So you guys introduced the safety study this quarter. Can you tell us a little bit about why the authorities are looking for that safety study?

Well, it is not specifically first looking for a safety study; it is that as you know for every drug that we'll seek approval, you have to have a safety database. So, this is part of the general requirements for any product to develop an additional safety database. The reason that we decided to do this study in Europe, actually this study is right in front now, is so we do not compete to patients with the efficacy study given the fact that it's an orphan indication and typically in orphan indication the recruitment is not as easy as it is with other indications. So, this safety study will provide additional safety experience for the budget.

Okay, very good. And in line with that, I noticed the R&D run rate looked a little bit heavy this quarter coming in $4 million range. Is that more of a one-time bump up or is that something we would expect to see going forward?

This is very consistent to what we forecasted in the first quarter and the second quarter and it is consistent with the R&D expenses we are incurring with the clinical trial. Just to remind everybody, our forecast was for approximately $12 million for the full year of expenses plus about $7 million of R&D expenses. So, a total of about $19 million for the year and we are on track with that as forecasted previously.

The only additional forecast was made in terms of expenses is a total of $30 million of expenses for the tasimelteon program between now and filing sometime in 2013. And the $30 million includes the $7 million forecasted for this year and also to remind everyone that this $30 million most probably will have the benefit of the orphan tax credit, which allows 50% recovery of 50% of these qualified R&D expenses.

Okay, very good. I do notice that on the G&A side, might as well hit that as well and that's a little lower than expected. So is that also at the -- and you had mentioned I think in your prepared remarks that there was lower stock compensation. So is that also a run rate that we should think about as we go forward and extrapolate?

In general terms, yes.

Okay. And in terms of the IRS ruling that you guys are seeking. It's my understanding that the NOLs that you had leading up to the Novartis payment, there was not a complete offset to the $197 million payment. So is there a min/max of what the tax liability would be, and if there is a min, are you accruing for that at this point?

We have reported our tax provisions, and as I said in prior calls, since the determination has been made by us and our tax creditors that's more likely than that of having a successful outcome in the determination of how we use this NOL, we have not taken a tax reserve for this yet.

On your question of whether there is a minimum, maximum, I will not certainly venture to say that we understand it yet. It is true that higher the potential (inaudible--background noise) sustained in 2008, the cumulative net operating losses were somewhat in excess of $120 million. But, since (inaudible), we have incurred additional net operating costs and if we can use the prior, to be honest with you changed NOL, plus the asset on these NOLs that will result in a significant reduction of the tax liability. That's as much as we can say now.

Okay, thanks. And one last question on the sales for Fanapt in the quarter. It looks like $4.9 million depending on what price we use may lag the actual demand for the product. Can you give us a little bit more color on the net pricing of the product so that we can better understand that $4.9 million and whether or not it was demand, sales or inventory reductions or price discrepancy? Thanks.

Well, all I can tell you is that $4.9 million is products that Novartis sold in the third quarter. Novartis does not sell directly to patients and pharmacists so you have to see that this is product that goes back to replenish inventory or product that constitutes new inventory from new orders. So I cannot breakdown what is demand and what's coming off the inventory. However, I think it is obvious that since the previous quarter was $0.7 million and this is $4.9 million that some of the old inventory that was stocked in the first quarter is beginning to be replenished by new orders.

But I think the important thing that we look for Fanapt scripts is the growth as anyone can see from the IMF. That is actually very encouraging, and while it has been a slow line, this growth continues and it is encouraging that this growth will continue.

And I think there is one key factor that drives this growth. The introduction of Fanapt on the states formularies continues to happen. This is a slow process and it's not because of the profile of the drug, it's a slow process because that's what the states want to have. But right now I can tell you that approximately 80% of the sales includes Fanapt on their preferred drug list or there is no restriction. And very recently a very large win for the Fanapt team was including the Fanapt in state of Florida. So you can see, as I have said before in June, we have the first time that California came online and you saw a significant growth because of that in other states. And now, in October, we see Florida coming along. So, with all these mechanics slowly growing in pace I think we are going to be in a position to start seeing the true growth of the product over the coming quarters.

So just to that end, are there any other states, big states that you are expecting post Florida?

I cannot tell you off the top of my head but the number is about 20% of the states still are into the decision making process.

Okay. Thanks for taking my questions, appreciate it.

This concludes our question-and-answer session for today. I will turn the call back to Dr. Mihael Polymeropoulos for any closing remarks.

Thank you. I would be happy to address all your questions at this time and let's conclude this conference call. We thank you very much for your interest and support for Vanda and we look forward to speaking with you again soon.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.