Vanda Pharmaceuticals Inc (VNDA) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the fourth quarter 2010 Vanda Pharmaceuticals Inc. earnings conference call. My name is Lisa, 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 Chief Executive Officer. Please proceed.

Thank you very much. Good morning everyone. We will start off with our CFO, James Kelly.

Good morning and thank you for joining us to discuss Vanda pharmaceuticals fourth quarter and full year 2010 performance. Our fourth quarter and full year 2010 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 February 17, 2011.

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 factors section of our annual report on Form 10K for the fiscal year ended December 31, 2009, and quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2010 which are available on the SEC's EDGAR system and on our website. We will 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 turn the call over to our CEO, Mihael Polymeropoulos .

Good morning again and thank you very much for joining us. 2010 has been an exceptional milestone year in the history of our Company. Our first product, Fanapt, reached the US market for the treatment of schizophrenia. We had our first profitable year, and we have advanced our second asset, Tasimelteon, in Phase 3 studies. We view 2011 as a foundation year for Vanda, as we begin to execute upon our vision of building a world-class neuroscience pharmaceutical company.

Fanapt (inaudible word). Full year 2010 net sales of Fanapt was reported by Novartis to be $31.4 million, which included $5.1 million in the first 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 over 6000 and September 2010 to over 8000 in December of 2010. For the full year 2010, more than 55,000 prescriptions were written. We believe that Fanapt prescriptions will continue to grow as more physicians and patients become aware of this therapeutic option and as our partner in Novartis continues its commercial campaign for this product.

I have additional updates to report on Fanapt regarding progress that we made with this Risperdal, the four week injectable or depot formulation. As well as with respect to our pursuit, a regulatory approval of the oral formulation outside of the US and Canada. First, we had a significant development recently with respect to the four week injectable or depot formulation of Fanapt. On October 28, 2010, the US Patent and Trademark office informed Vanda that it is granted an additional patent term adjustment of 59 days making the total extension 664 days and making the patent expiration date the, August 25, 2023. Novartis is responsible for further development of the depot formulation in the US and Canada, while we have retained the rights for its development and commercialization outside of the US and Canada.

Novartis has informed us that they expect to initiate a clinical study for the depot formulation in early 2011. Vanda continues to explore the regulatory path and commercial opportunity for Fanapt oral formulation outside of the US and Canada. We have initiated negotiations to establish distribution agreements for the world markets with a near-term emphasis on Latin America. The company has committed applications for market approval in both Australia and Singapore. We will communicate our (inaudible) plan later this year.

I will now turn to our second compound, Tasimelteon. Enrollment has begun in study VP-VAC-162-3201, a 160 patient randomized controlled trial of Tasimelteon verses placebo in the treatment of Non-24-hour Sleep/Wake Disorder in blind individuals with no light perception. The trial has a six-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 Non-24-hour Sleep/Wake Disorder. This is an open label safety study that will enroll approximately 140 patients with Non-24-hour Sleep/Wake Disorder.

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. On November 12, 2010, the Committee for Orphan Medicinal Products of the European Medicines Agency issued a positive opinion on the application for orphan drug designation for Tasimelteon. Final decision of the application for orphan designation for the EMA 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. Non-24-hour Sleep/Wake Disorder affects approximately 80,000 people in the US. Tasimelteon could also have applications in the treatment of Circadian Rhythm Sleep Disorders as a whole, which effects over 50 million people in the US. Tasimelteon, as a Circadian regulator, may also be useful in the treatment of major depression. In December 2009 IMF health report estimates the US and global anti-depressant market to be $10 billion to $19 billion respectively. Now, James will address our financial results for the quarter and year ended December 31st, 2010. Jim.

Thank you. We've are very pleased to announce that Vanda achieved positive earnings for the fourth quarter and full year 2010. Net income was $7.2 million for the full year 2010, compared to a net loss of $35.9 million for the full year 2009. Basic and diluted earnings per share for the full year 2010 were $0.26 and $0.25 respectively, compared to basic and diluted loss per share of $1.33 for the prior year.

Turning to our quarterly results, net income was $2.2 million for the fourth quarter 2010, compared to a net loss of $9.2 million during the same period in 2009. Basic and diluted earnings per share for the current quarter were $0.08 per share, as compared to a loss of $0.34 per share in the fourth quarter of 2009. As of December 31st, 2010, there were approximately 28 million shares of Vanda common stock outstanding.

Total revenue for the fourth quarter of 2010 was $7.3 million compared to $7.2 million in the third quarter of 2010 and $4.5 million in the fourth quarter of 2009. Fourth quarter 2010 revenue consisted of $500,000 of loyalty revenue based on the fourth quarter 2010 net sales of Fanapt in the US by Novartis. It also included $6.8 million due to the amortization of upfront payment received from Novartis for the US and Canadian commercial rights. The cost of sales for the fourth quarter of 2010 of $400,000 reflects the amortization of the capitalized and tangible asset related to the Fanapt market approval milestone payment to Novartis. Cost per sales for the fourth quarter of 2009 was $2.3 million. The year-over-year decrease is a result of the $1.9 million recognized in 2009 for inventory sold to Novartis.

Research and development expenses were $3.8 million for the fourth quarter of 2010, compared to $4.1 million in the third quarter of 2010, and $2.3 million for the fourth quarter of 2009. The increase in R&D expenses versus prior year was primarily due to the cost incurred in connection with the initiation of the Phase 3 trials for Tasimelteon in Non-24-hour Sleep/Wake Disorder. General and administrative expenses were $2.8 million for the fourth quarter 2010, compared to $2.1 million for the third quarter 2010, and $9.2 million in the fourth quarter of 2009. The decrease in G&A expenses in 2010 relative to 2009 was primarily due to the one-time nature of costs incurred related to the Novartis transaction, and a decrease in year-over-year stock-based compensation linked to department executives.

Other income for the fourth quarter was $600,000. This included a $500,000 grant received under the IRS' is therapeutic discovery project credit program. On November 15, 2010, Vanda received a private letter ruling from the Internal Revenue Service regarding certain income tax issues associated with the availability of Vanda's net operating loss carry forwards or NOLs for tax purposes. The private letter ruling was generally consistent with Vanda's stated tax position that is able to offset a portion of its 2010 taxable income with the Company's full NOL carry forwards. As you may recall, $197 million of deferred revenue for the upfront payment received from Novartis was recognized as income for tax purposes in 2010. Total NOLs were $123 million and $156 million as of year-end 2008 and 2009 respectively.

Vanda believes that the private letter ruling received from the IRS clarifies certain tax rules regarding the use of these net operating loss carry forwards and will support Vanda's position that it's December 31, 2009 NOL carry forwards can be fully utilized beginning in 2010. Vanda recorded a tax provision of $2.1 million for the full year 2010. Vanda's cash, cash equivalents, and marketable securities as of December 31st, 2010 totaled $190 million, a decrease of $7.3 million compared to $205.3 million as of December 31st, 2009.

Vanda is providing investors with the following financial guidance for the full year 2011. General and administrative expenses are expected to be between $10 million and $12 million. This is consistent with the 2010 general and administrative expense of $10.1 million. Research and development expenses are expected to be between $26 million to $29 million. This represents a $14 million to $17 million increase over 2010, and reflects our investment in the Phase 3 development of Tasimelteon in Non-24-hour Sleep/Wake Disorder. This is consistent with our prior guidance that we expect to spend between $30 million to $35 million, in total, to file an NDA. Total GAAP operating expenses are expected to be between $37 million to $42 million. This includes Fanapt cost of sales of $1.5 million related to amortization of intangible asset and $5 million to $6 million of stock based compensation. We are encouraged by the first full year prescription data for Fanapt as reported by IMF. At this time however, we are not providing guidance for future revenue based on sales, milestones, or royalties. I will now turn the call back to Mihael.

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

(Operator Instructions)

Your first question comes from the line of Owen Navnat, of Jefferies.

In the past you haven't been able to give us clarity on Novartis sales of Fanapt, but I'm looking at scripts this quarter and assuming, what I expect to be reasonable and discount and value per scripts, I would've expected about $10 million, almost $10 million in end user sales, and I guess they reported about $5 million. So, I'm trying to get a good sense of what actual demand might be. Even if you could just speculate. I'm wondering if this is still working through inventory of the original shipments and not reflective of demand. Or if I am way off on my value per script that we are assuming. Is there any color you can give us on this front?

Absolutely, good morning Owen.

Good morning.

You are absolutely correct. If you look at IMF demand, you would calculate an approximate $10 million to $12 million demand for the fourth quarter. The revenue that Novartis reports is revenue that they receive from orders. If you take the entire year of 55,000 scripts, you will see then that the demand was about $28 million. And the fact that they report, total year revenues of about $31 million, that would suggest that we now have worked almost through the entirety of the stock. Therefore, in the next quarter or so, the revenues reported will be very close to the demand generated. Just to recap, last quarter's estimated demand was not the $5 million revenue but rather a $10 million to $12 million revenue consistent with what you suggested.

Great, if I could just follow-up on the depot formulation. You say, quote, clinical trials to start in early 2011. Can you give us a sense of what kind of trials? Are we just talking about PK work, still at this point? If so, where do think we might be with further, more advanced clinical studies down the road?

I don't have a lot more detail, but these upcoming studies will be the pharmaceutical kinetics study that compares two depot formulations; the micro sphere formulation and the aqueous crystal formulation. Once a study is done, typically it involves two dozen patients or so, injected once a month for three or four months. The results will be analyzed and that would lead us to a Phase 3 efficacy study which is typically a 12 week study. If everything goes well and on time, we would expect the Phase 3 study to begin sometime in early 2012. That would be consistent with having the data to proceed with filing for an NDA approval in the US sometime in 2013.

Thanks so much.

David Moskowitz, Madison Williams and Company.

Good morning. I missed the beginning of the call, I apologize. Have you guys talked about the letter from the IRS? The tax situation. You guys ended the year with $198 million and you talked about in the press release $156 million of NOLs at the end of 2009. So, that would seem that there is $45 million to $50 million of potential tax to be paid, or tax on that amount. Can you clarify that, or do you believe the IRS is going to let you slide on that tax as well?

I don't think the IRS lets anybody slide, David, unless you have some inside information. Bottom line is, we estimate now we can use our P&L and plus other adjustments, we end up with a tax provision of $2 million. I will let James explain it.

Hi. Good morning, David. Here's how I would frame, at a high level, how we get to our tax position. You would see in our current year net income of $9.3 million we've got $26.8 million of deferred revenue from the upfront. So, as a starting point, you have $9.3 million of the pre-tax income. Then you have deferred revenue, which is taxable this year, of $170.6 million. You then have the NOLs of $156 million to put against that, which is just shy of $24 million. What happens from that point forward are numerous R&D credits and other adjustments, that I won't walk through all the detail, that get you to our tax liability and provision of just approximately $2 million.

Okay, so what you're saying to me is that there is a $2 million tax liability remaining per your calculations.

That's correct.

Okay, very good. And in terms of the Fanapt sales, Mihael. I'm plotting it out on the chart and there's no question the product is growing . But it does look like over the last several weeks we've had some volatility. And then, of course, there some holidays, but the overall trend looks like it certainly flattening at this point. Can you speak to that and can you talk about any initiatives to try and redirected that growth higher from here, from Novartis' perspective?

David, we do not agree with your flattening. I think it's very consistent that the product is growing, and all I can say is Novartis is extremely committed to the significant efforts behind it. And the fact that we've seen the quarter-to-quarter grow so far, is very encouraging. Now, if one looks day-by-day or week-by-week data, there would be volatility. Just to remind you and everyone that the Christmas holiday and the worst winter January in the country has affected scripts across the class. So fact, if you were to take your statement, you should apply it to every drug. We've seen the IMF scripts, almost every drug and the anti psychotic actually declined during Christmas and in January. I would say your interpretation of flattened scripts is not correct, that we continue to be very encouraged with the growth and the commitment of our partner on that.

Okay, so just to clarify, it's more seasonal at this point. Perhaps the holidays and snow, that's what we are seeing in the flattening of the curve?

I didn't say that. I don't know what flattening -- how you evaluate your curve--

It's simple, I plotted against time and scripts and I see the curve had a very good ramp towards the end of the year and I see it flattening.

Let me finish. I advised our shareholders to look at the overall picture, and wait until we have a quarterly data to see if there is growth or not. Thank you David.

Okay, very good.

And your last question comes from the line of Jim Lieberman with Wells Fargo advisors.

Yes, thank you very much. I am pleased with the progress that the Company is making and the broader-based that the Company is building with the Tasimelteon applications down the road. Can you comment on the development in Europe and the rest of the world for Fanapt and how that might play out?

Thank you very much for the question. Just a step back for a second, we didn't have much time to talk about the pipeline. Tasimelteon, in our minds, is a significant opportunity to present the first Circadian regulator in the category of Circadian Rhythm Sleep Disorders where we began to pursuing it with the orphan indication. We believe, despite the small number of patients 80,000 or so; the uniqueness of the asset has actually presented a tremendous opportunity for the Company to address a $0.5 billion market worldwide. We are also encouraged by continuous data that would suggest that Tasimelteon, a Circadian regulator, can address the multi billion dollar market of major depression as well.

Just to turn on your other pipeline question in Europe. Couple of things. For the rest of the world, we have begun filing, since we've said, in Australia and Singapore and we're in discussions with companies in Latin America for distribution agreements and filings in those countries. Europe, of course, is a big-ticket item. There, late last year we began discussions with the European Regulatory Authorities to develop the patent. We have now been assigned the [lot numbers] and continue the discussions on making a good decision on the time of the filing in Europe. As we discussed before, Vanda believes that we have a good packet for a submission and approval in Europe. And the discussions will have to do whether the European authorities agree with that completeness, especially on the maintenance side. We have a maintenance study and whether they want a placebo-result maintenance or not remains to be determined.

This speaks to the excitement around Europe, comes, of course, from cutting the oral with the depot formulation. What we have seen is that European doctors are very keen to prescribe this once-a-month formulation in patients with schizophrenia. So much that, Risperdal, the current leading product in the injectable market generated $1.3 billion in sales last year; $1 billion of which came from Europe. What we are planning to do here is file for the oral and obtain an approval, and do this in close sequences with the depot formulation. So, that we exercise the maximum marketed, specifically data protection in Europe of ten years after the first formulation approval. In summary, we believe there is a very large opportunity to be exercising ROW in Europe, which will start taking shape over the next coming years.

Thank you, that's for helpful. Thank you.

Thank you very much. Let us conclude the conference call. We thank you for all your interest and support for Vanda, and we look forward to speaking with you again soon.

Ladies and gentlemen that concludes today's conference.