Vanda Pharmaceuticals Inc (VNDA) 2013 Q2 法說會逐字稿

Welcome to the Q2 2013 Vanda Pharmaceuticals Incorporated earnings conference call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now to the call over to Jim Kelly, Senior Vice President and Chief Financial Officer. Mr. Kelly, you may begin.

All right. Thank you, Vanessa. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals' second-quarter 2013 performance. Our second-quarter 2013 results were released this morning and are available on the SEC's Edgar system and on our website. In addition, we are providing live and archived versions of this conference call on our website, and a telephone replay of this call will be available through August 7, 2013.

Joining me on today's call are Dr. Mihales Polymeropoulos, our President and CEO; Bob Repella, our Senior Vice President and Chief Commercial Officer; Dr. Paolo Baroldi, our Senior Vice President and Chief Medical Officer; and Gunther Birznieks, our Vice President of Business Development. Following my introductory remarks, Dr. Polymeropoulos and the management team will update you on our ongoing activities. Then I will comment on our financial results for the second quarter of 2013 before opening the line 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. Our forward-looking statements are based upon current expectations and involve risks, changes in circumstances, assumptions, and uncertainties. These risks are described in the Risk Factors in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and our subsequently filed quarterly reports on Form 10-Q, which are available on the SEC Edgar system and on our website.

We encourage all investors to read these reports and our other SEC filings. The information we provide on this call is provided only as of today, and we undertake an obligation to update or revise publicly any forward-looking statements we may make on this call on account of new information, future events, or otherwise, except as required by law.

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

Thank you very much, Jim. Good morning, everyone, and thank you very much for joining us. We were very pleased to announce on Monday that the FDA has accepted a filing and granted priority review classification to Vanda's New Drug Application for tasimelteon, a circadian regulator for the treatment of Non-24 in the totally blind. The FDA grants priority review status for a drug that treats a serious condition and if approved would provide a significant improvement in safety or effectiveness over current therapies. Currently there are no approved treatments for Non-24, and tasimelteon has the potential to address this unmet medical need.

The FDA determined the New Drug Application action target date under PDUFA-V to be January 31, 2014. The FDA has also tentatively scheduled an advisory committee meeting to discuss the tasimelteon application on November 14, 2015.

The NDA filing is a significant milestone for our Company, as well as it may represent a significant moment in the history of therapeutics for circadian disorders. Tasimelteon, if approved, could represent the first circadian regulator, potentially establishing an emerging class of chronotherapeutics, including modulators of the Rev-erb alpha transcription system, indicating kinase epsilon and delta molecules.

Over the next few months, our team will be focused on the regulatory activities related to this tasimelteon NDA filing and the premarket launch activities which Bob Repella will outline in a few minutes. Before a doing this, I wanted to take the opportunity to update you on our lifecycle management programs for tasimelteon as well as our activities with VLY-686.

Vanda is exploring a development path for the application of tasimelteon in the Smith--Magenis Syndrome. Smith--Magenis Syndrome is a rare genetic disorder due to mutations in the RAI1 gene on chromosome 17. Patients with SMS present with a number of developmental defects, but the most commonly occurring symptom is a severely disrupted circadian sleep pattern, which is believed to be caused by an inversion of the 24-hour circadian cycle.

This constellation of symptoms represent the most debilitating effect of the disorder and represent a significant unmet medical need. We are working closely with the SMS advocacy group and researchers to identify the best path forward for a development plan for tasimelteon in this disorder. SMS prevalence is estimated to be approximately 1 in 15,000 to 1 in 25,000 individuals worldwide.

Vanda is also considering the development of tasimelteon for younger blind patients with non-24, and specifically those born with a condition of anophthalmia or microphthalmia, which is a complete absence of eyes at birth or small and nonfunctional eyes. As such, these young patients will also experience Non-24 at a high rate, further compounding their disability. We are currently discussing with experts and family support organizations a potential program in this setting.

I will now turn to our activities on VLY-686, our Phase II-ready Neurokinin 1 receptor antagonist. Substance P is a neucleotide with immediate physiological functions through its activity at the NK1 receptor. Literature suggests that Substance P may play a significant role in the production of the symptoms of chronic itching, or pruritus, through its effects on neuroinflammatory skin pathways. Vanda is in the process of establishing an early Phase II proof of concept protocol to evaluate the effects of VLY-686 in treating chronic pruritus in patients with atopic dermatitis. We expect to initiate this program by end of 2013.

I will now turn the call to our Chief Commercial Officer, Bob Repella, who will provide an update on our commercial efforts in support of tasimelteon in the treatment of Non-24. Bob?

Thanks, Mihales. During the second quarter of 2013, the Vanda commercial team made significant progress in two key areas, achieving greater awareness and understanding of Non-24 Hour Disorder among potential patients, advocacy organizations, and professional groups; and continuing our preparations for a potential commercial launch of tasimelteon for Non-24 during the first half of 2014.

The second quarter provided numerous opportunities for direct interaction with the blind community for both the commercial team and our newly established Medical Affairs group. Vanda personnel actively engaged over 5,000 members of the blindness community last quarter, including general session presentations on Non-24 Hour Disorder at the annual national meetings of both the National Federation of the Blind, the NFB; and the American Council of the Blind, the ACB; support of the blind athletes representing the USA at the Pan American Games in Colorado; a day and a half patient advisory board that included totally blind individuals struggling with Non-24; and participation at the ICANN conference, the annual meeting of the families and healthcare professionals dedicated to supporting children with anophthalmia, those born without eyes, and microphthalmia, children born with underdeveloped eyes.

In addition to these examples of direct interaction with the blind community, we continue to engage many professionals who are members or employees of organizations that provide care or services to the blind. Through these individuals, we have the opportunity to indirectly engage and educate the blind community on Non-24.

For example, Vanda conducted an educational session highlighting the specific link between total blindness and Non-24 at the spring meeting of the American Society of Ocularists. Each year, tens of thousands of blind individuals visit an ocularist, the healthcare professionals that produce and help blind individuals care for their prosthetic eyes. Vanda is also working closely with the AER, the professional society of educators and rehabilitation specialists for the blind. AER members work with the blind community in a wide range of settings, and on behalf of organizations such as The Lighthouses, state agencies, and the Veterans Administration. The VA alone is estimated to have a population of approximately 8,000 totally blind individuals that utilize their facilities.

We believe that taken collectively, both directly and indirectly, across all regularly scheduled activities, events, and ongoing programs, Vanda has established a line of connectivity with approximately 20,000 to 30,000 totally blind individuals in the US. While this has served to substantially increase the level of awareness and understanding of Non-24, we also recognize it will take an expanded and sustained effort to connect with and educate the additional 45,000 to 65,000 individuals in the US with this disorder.

During the month of August, we will continue to engage the blind community both directly and indirectly. Vanda will be sponsoring a variety of programs focused on awareness of Non-24, including at the annual meeting of the Blind Veterans Association. Injuries resulting in blindness continue to be a devastating result of recent military conflicts. At the BVA meeting, Dr. Steven Lockley of Harvard University and Brigham and Women's Hospital will host an educational session on Non-24 in the totally blind.

In addition, Vanda will be participating at the 31st annual meeting of the American Society of Retinal Specialists, a group of physicians that play a significant role in complex disorders of the eye which at times can lead to blindness. All of these engagements continue to reinforce three key messages -- the direct link between total blindness and Non-24; the high prevalence of Non-24 among members of the totally blind community; and that Non-24 is a serious, chronic circadian rhythm disorder, the physiologic cause of which is a misalignment of the master body clock in the brain with the 24-hour day/night cycle.

Finally, while my comments today are focused primarily on our Non-24 educational and market development efforts, the team also continues to work diligently towards the goal of ensuring that tasimelteon is accurately characterized and appropriately differentiated in the marketplace as the first and only circadian regulator that can reset the master body clock and entrain the melatonin and cortisol rhythms to align with the 24-hour day/night cycle; and that a seamless process will exist in the marketplace for the diagnosis and treatment of Non-24, including an identified network of circadian specialists trained and ready to receive totally blind patients; and programs and services that support both access and reimbursement.

I look forward to keeping you updated on our activities and progress in the coming months as we track towards a potential launch of tasimelteon next year. I will now turn the call over to Jim Kelly, our Chief Financial Officer, to discuss our financial results for the second quarter.

Thanks, Bob. During the second quarter of 2013, Vanda recorded a net loss of $3.1 million as compared to a net loss of $8 million for the second quarter of 2012. On a diluted shares basis, this reflects a loss of $0.11 per share for the second quarter of 2013 as compared to a net loss of $0.28 per share on the prior year. As of June 30, 2013, there were approximately 28.4 million shares of Vanda common stock outstanding.

Total revenues for the second quarter of 2013 were $8.3 million as compared to $8.4 million for the second quarter of 2012, and these periods are with two sources of revenue -- they are licensing revenue and royalty income. Second-quarter 2013 and 2012 revenues each included $6.7 million of licensing revenue related to the amortization of the upfront payment received from Novartis for US and Canadian commercial rights to Fanapt.

Second-quarter 2013 revenues included $1.6 million in Fanapt royalties received from Novartis as compared to $1.7 million for the prior year. During each period, Vanda recognized a 10% royalty on Novartis net sales of Fanapt.

US Fanapt prescriptions as reported by IMS were approximately 41,400 for the second quarter of 2013. This represents an 11% increase over second quarter of 2012 prescriptions and a 7% increase versus the first quarter of 2013 prescriptions. Total operating expenses for the second quarter 2013 were $11.4 million compared to $16.5 million in the second quarter of 2012.

Research and development costs of $6 million in the second quarter of 2013 reflected a decrease of $6.5 million versus the $12.5 million for R&D spent in the second quarter of 2012. The primary reason for the lower expenses in the second quarter of 2013 was the completion of the tasimelteon Non-24 in major depressive disorder efficacy studies. As noted earlier, we are pleased with the speed of the appropriate decline in R&D expenses, as we believe this positions us well as we transition towards becoming a commercial stage company.

General and administrative expenses were $5.1 million for the second quarter of 2013 as compared to $3.6 million in the second quarter of 2012. Vanda's cash, cash equivalent, and marketable securities, which I will refer to as cash, as of June 30, 2013, totaled $103.6 million. Cash decreased by $7.3 million in the second quarter of 2013 compared to a decrease of $12.5 million in the second quarter of 2012 and $9.5 million in the first quarter of 2013.

In response to the important news that the FDA had accepted the tasimelteon NDA and granted priority review status, Vanda affirms its financial guidance for full-year 2013. 2013 expenses are expected to reflect lower research and development spending as compared to 2012 and an increase in commercial spending. Full-year 2013 decrease in cash is expected to be between $45 million and $50 million compared to $47.5 million for 2012.

Total 2013 operating expenses are expected to be between $57 million and $62 million. This includes Fanapt intangible asset amortization of $1.5 million and $4 million to $6 million in non-cash stock-based compensation. Total 2012 operating expenses were $61 million.

2013 operating expense guidance includes $3.5 million in milestone payments due upon the acceptance by the FDA of the tasimelteon NDA submission and assumes $4 million to $5 million in NDA-related filing expenses. I will now turn the call back to Mihales.

Thank you very much, Jim. At this time we will be happy to address any of your questions.

(Operator Instructions). Oren Livnat, Jefferies.

Good morning. I had a few questions. I'm just curious -- you guys disclosed a lot more safety information that we had seen previously in the last press release, and it looks pretty good to me. And I'm just curious, though. Could you comment at all on what looked like some anti-cholinergic effects that I guess you probably wouldn't expect to see with this, unless there was some wider receptor activity? And I can follow up afterwards.

Yes, thank you, Oren, for the question. Just for background, in the context of announcing the NDA filing acceptance, we did indeed give out the complete set of the integrated summary of safety data on tasimelteon from the placebo-controlled studies. Indeed, this confirms a mild safety profile, as we had reiterated.

To your specific question, in a very small percent of patients, we noted the occurrence of dry mouth. And yes, while it is true that this occurrence is an anti-cholinergic event in some drugs, we do not believe this is the case with tasimelteon.

Indeed, we believe that the dry mouth is not actually a true mechanistic signal, but rather a reflection of the relatively small size -- number of patients in this analysis. Indeed, we looked even more carefully to see if there is any evidence in the program that suggests the mechanistic connection.

There are two answers to that. One is that most likely this small signal comes from an elderly study that Bristol-Myers Squibb, the previous owner, had conducted some years ago. And con meds in that elderly population caused that signal. Number two, we have completed an extensive set of receptor affinity studies with tasimelteon. And indeed, there is no effect in any other receptors but the dual melatonin 1, melatonin 2 receptors, and certainly no effect in any cholinergic receptors.

And I guess while we're talking safety, on the vivid dreams front, can you just put our minds at ease that we shouldn't be surprised of any line of questioning down the psych route in AdCom? And also, with regards to the AdCom, do you have any idea what the FDA is thinking with regards to the makeup of this panel? Obviously, we are talking about the CNS crew, and they certainly have a lot of experience in insomnia. But this is obviously a new area for them. So do you have any indication that the FDA is going to be bringing in circadian experts per se, or even an endocrinologist or two, to talk to the master clock thesis?

I will take the vivid dream question first, the AdCom second. The vivid dreams were about 2% of our patients, small number, and 0.5% in placebo. But we do believe that this is a true mechanistic effect that tasimelteon, through ejection of melatonin 1 into receptors, produces.

Now, just to characterize further, those few patients that had these vivid dreams, I would say half of them liked the dreams and half of them did not. And, of course, we all suspect that content is unrelated to any drug, but rather a reflection of other things.

So in the mechanistic side, we actually believe that vivid dreams is a reflection of the collection of tasimelteon on REM density. So what happens in a normal sleep cycle, REM periods tend to be more frequent with the density towards the end of the night. That REM density sequence is disrupted in people with circadian disorders. And we have published before, in 2008 in Lancet, the confirmation that tasimelteon corrects this REM density.

So as a result, if you wake up right after you have the dream, which is normally happening, you will tend to remember this dream. So it is more of a reflection of the correction rather than something that you mentioned in the field of prior insomnias, of night terrors, or other things that you have seen with the unrelated class of other hypnotics or sedatives.

Now, on the advisory committee composition -- again, this will be the free-for-all nervous system committee, which is a standing committee for the FDA. In fact, this committee met last May to examine sub orexin, the orexin antagonist by Merck for the treatment of insomnia. So this is a well-versed committee on these issues -- drug development, regulatory-surrounding issues.

But we do expect that the FDA will attempt to supplement this committee with experts in circadian biology. And as you mentioned, they can come from different fields. They can be experts in circadian systems, circadian sleep medicine, circadian endocrinology. And of course, ophthalmologists that have played a significant role to elucidate the mechanism by which the light, transfigured through the eye, resets the clock in the suprachiasmatic nucleus.

So we expect that the standing final may be supplemented with experts. But just to underscore that Vanda is very excited with the opportunity to present in front of an advisory panel, because we believe this will mark the beginning of the in-depth appreciation of a couple of things. One, the significance of the disorder, the effect that it has in patients' lives; and then the potential corrective effects of tasimelteon as a circadian regulator; and, indeed, the in-depth scientific effort that Vanda has undertaken over this years to bring forward this treatment.

Thanks. I will get back in the queue.

Charles Duncan, Piper Jaffray.

Thanks, and thanks, guys, for taking my question. And congratulations on a good quarter of progress. Mihales, I know that you have answered this question in the past, but clearly the recent acceptance possibly reflects FDA's recognition of Non-24 as an important disorder. But I'm wondering if you could characterize the interactions you've had with the agency in terms of defining and accepting the primary endpoints for the Phase III, and really give us a sense of why you have confidence that the agency is on board with those endpoints?

Absolutely. Thanks for the question, Charles. Maybe I will give you a bit of a chronological sequence of events, and we will end up with a discussion of the primary endpoints. We recognized very early on that the regulatory agency, the FDA, de facto will not have an internal expertise in Non-24. No therapeutics have been developed before, and to be fair to the FDA, this is a rare and orphan indication with low awareness in the patient and the physicians in the community.

So we undertook an effort over the last three years to develop a common point of reference and understanding with the agency. So I would say we had numerous meetings and phone conversations with the FDA, and we are very grateful that -- the attention they paid on this project, which led, for both sides, to understand better the disorder and understand better what should be the correct regulatory path to arrive at development of a new treatment.

In the course of all these interactions, two things were very clear. The experts advised us and the FDA alike that for the prototypical circadian disorder, demonstrating entrainment of the circadian clock is a sine qua non of establishing efficacy. So that was absolutely clear. But also, it became very clear that the FDA wants to see more than just the corrective action in a matter that the patients may not directly feel. And therefore, they insisted that Vanda attempt to demonstrate at least some effect in key clinical parameters, which include sleep/wake measures for this disorder as well as functions of global functioning.

So that led us to work with the FDA quite closely, take their suggestions, and reach the conclusion that we reached beginning of December of last year, and confirm the statistical analysis plan to include the following -- a primary endpoint, appropriately, being entrainment in these patients; and a key step-down primary endpoint of clinical response, which was a combination of people must be both entrained and demonstrate significant improvements in this combined Non-24 clinical response care.

That scale was discussed with the FDA, and they did express that the proposed cutoffs within the scale of nighttime sleep improvements and daytime not improvements of 45 minutes before we classify somebody as a responder appeared to be highly clinically meaningful. Subsequently, we locked our statistical analysis plan and proceeded then to analyze the data, which we reported in December, and we did so for the reset study in January.

The FDA asked and had the opportunity to review the results of those studies before granting the NDA meeting, which they granted in the first quarter of 2013, where they answered in the affirmative that the body of evidence as presented for the results of these two studies and on the face of it will be adequate for filing. And of course, it is important to underscore filing the FDA will have to review before they conclude on the effectiveness and safety of the drug.

So that longitudinal interaction, the common point of understanding, the intense degree of collaboration, and the listening from both sides makes us very comfortable that we have arrived at the right solution and that the agency is on board that in order to develop a therapeutic for Non-24, one must examine both the entrainment of the circadian clock as well as key clinical parameters. Just to remind the audience of this call that Vanda was successful in both studies in demonstrating not only entrainment, but effects of the clinical response tables as defined -- but moreover, in the secondary endpoints, Vanda was also successful to show that tasimelteon affected significantly the clinical global impression scale as well as the subcomponents of the Non-24 clinical response care.

So the totality of this evidence, the reason that it gives us comfort that we have definitively established the efficacy and that the FDA, after they conclude their reviews will be convinced, is that all data point to the same direction -- that tasimelteon is an effective circadian regulator, resetting the clock in these patients; and beyond any doubt, establishing that any effects that we examine on sleep/wake measures and global functioning, all of them are consistently shown tasimelteon's effects for these patients.

That's helpful, Mihales. Thanks for the added color, as well as the reminder. I guess I can assume, then, that the sample sizes were never a point of debate or anything, at least your understanding?

Not at all. And also, to just underscore that this division, as they expressed to us -- and they have publicly expressed, and this is in fact the FDA's view -- that when it comes to orphan and rare disorders, there is an understanding of the challenges of recruiting large numbers of patients. And the FDA has been very clear that they have and they will exercise administrative flexibility, to the effect that for orphan indications -- including non-24 -- they would require one efficacy study. And just to remind this audience that Vanda has conducted 2 successfully.

Very good. Thanks for the added color, Mihales. I will hop back in the queue.

Josh Schimmer, Lazard Capital Markets. Please go ahead.

Good morning. Thanks for taking the question and for that very detailed response on the FDA dialogue. Just on that note, has the FDA given any indication, or do you have any expectations for what topics might be discussed or what questions might come up at the panel? And has the FDA identified any outstanding questions that they specifically mentioned or noted would be review issues?

Just to step back from this question, I want to be clear for our shareholders and audience that Vanda does not give incremental updates on the interactions during the review period. But let me try to answer your question.

The filing of the NDA actually comes after a 60-day review by the FDA of the entirety of the file. And what they determined there is that the data are adequate for a substantive review -- that is a letter of the law. But also, they had the opportunity to determine that this indeed is a serious disorder with an unmet medical need to grant a priority review.

We are not aware of any issues that the FDA may in particular want to address in the advisory committee. And just to remind, because we think there's a little confusion about advisory committees, the law requires the FDA to convene an advisory committee for every New Drug Application unless they deem that the development path, because they have other drugs with the same class, same mechanism of action, the same disorder -- if they don't have any questions, then they have to suggest why they did not convene a panel.

However, and as it was expressed verbally to us in the pre-NDA meeting, there is the expectation for an advisory committee for every drug that belongs in a new class of therapeutics for a new indication. And certainly this is true for tasimelteon. It's a new class of circadian regulators with a new indication of Non-24 Hour Disorder.

Now, just to underscore that our letter does say that the advisory committee panel is tentative; so it's up to the FDA whether they will eventually convene it or not. We think they will because of what they underscore as new class and new indication. And just to be very certain, Vanda welcomes the opportunity to have this stage, where we can begin developing the appreciation for the disorder and the effects of tasimelteon.

Do we know the timing of Rusty Katz's retiring and the vision ahead? And how does that -- and then if it does at all, how may that impact the filing and review?

Dr. Katz retired on June 28 of this year. Actually, he was instrumental in many of our discussions over the years, and we thank him for that.

We know that acting director of the division is Dr. Eric Bastings, a veteran at the FDA in this division, that has been instrumental in many of the recent approvals of drugs. And we can certainly expect a fair and thorough review.

Got it, thank you.

Jason Butler, JMP Securities.

Maybe I could ask Bob a question about the interactions you're having with patients right now. Can you talk about the feedback you get from those patients as to the debilitating nature of the disease, and specifically, what their experience with melatonin supplements has been?

Sure. Thanks for the question. You know, I think the best reference point is the day and a half patient advisory board that we had recently, where most of those individuals were struggling with Non-24. And you know, with their peers they did characterize how it impacts their activities of daily living; how it's affected their life over time. And it really became apparent that it impacts their opportunities for employment; relationships; participating in significant events, whether it be with friends or family. And you know, it really brought home for us how it is debilitating and it is a lifelong battle.

So it's clear that it impacts their functionality. And it was an interesting forum, because these individuals had a chance to really share in depth with their peers, you know, their personal experiences. And I can tell you that at different times during the meeting, they stopped, and they came together and huddled and talked to each other, and provided support and a level of comfort. Because of some of these experiences and stories are quite devastating.

So, you know, the more time you spend with the community, and when you get to know individuals that are struggling with Non-24, it becomes very clear that this is a circadian rhythm disorder; they are out of alignment with the day/night cycle more than they are in alignment, significantly more. And it impacts all elements of their life.

Great, thanks. And then just one on the FDA process. Is there anything in your interactions with the FDA so far that give you confidence or confirm that the FDA will or is classifying tasimelteon as a circadian regulator, specifically?

Before I answer this, I think Bob left out the second part of your question on melatonin supplements and their role in treating this disorder now.

Sure, sorry about that. Yes, so I would say that, staying with the context of the patient advisory board, all of the individuals there at some point had tried melatonin and were disappointed. That's how I would characterize it. And maybe it worked for a short period of time, but it wasn't sustained and it wasn't reliable.

And I think that's the key takeaway. You know, it's not reliable; they're not sure what dose. They don't know exactly when to take it.

And when they look at the available products, it's total confusion. There's immediate-releases, extended-releases, sublinguals, liquids. So I think the issues are there's no clear way to take it and get a reliable response. And then, again, we are talking about a dietary supplement, which just makes it even more confusing.

Just to go to -- your question was whether we have indication on FDA's take on circadian regulator. Certainly, all our discussions with them over the last few years have clearly established with the experts that in order to treat this disorder, you must have a circadian regulator that resets the body clock. And any clinical benefits that you get, they have to be connected to this fundamental effect in biology.

This is our proposal of how to be properly classified. The FDA does not have a current classification for a drug for this disorder. And just to remind everyone that the review guidance for the FDA suggests that in order to establish a new pharmaceutical class, there are 3 criteria -- and you have to meet -- you can use 1 of the 3 criteria as long as it is clinically meaningful. And these 3 criteria are mechanism of action -- and the mechanism of action is melatonin agonist, the duo. And these may or may not be, on itself, clinically meaningful.

The second one is physiologic effect, and that is the circadian regulation, and that is specific and meaningful. And the third one is chemical class, and the chemical -- structure, I'm sorry, is a melatonin-type analog. And again, on itself it is not informative and clinically meaningful.

And therefore we believe that the conclusion will be made by the FDA that the established pharmaceutical class or EPC for tasimelteon, the proper one, would be one that -- it will be based on the physiologic effect, because it is both scientifically sound and clinically meaningful. And these are both technical terms from the FDA's guidance.

Great, that's very helpful. Thanks a lot for taking the questions.

Of course.

And we have a follow-up question from Charles Duncan with Piper Jaffray. Please go ahead.

Thanks for taking the follow-up. Mihales, perhaps you could talk about this. I'm wondering if, over the course of that extensive interaction with the FDA, you engaged any outside consultants in this process. There is possibly some chatter out there that that might have been the case.

Yes, absolutely. In the course of our clinical development programs, we primarily work with outside organizations and consultants. As you know, the size of our Company is about 40 people, and we have to draw upon the direct expertise in order to be successful.

Just to remind everybody, all these clinical studies are extremely expensive. We are spending hundreds of millions of dollars in these clinical development programs, and it is imperative that we get the best advice and guidance in the world on clinical expertise; clinical design; conduct of clinical studies; regulatory design and approaches; and, of course, quite a bit of that on the commercial side as well. In that context, very early in the inception of the program we used a number of regulatory consultants, which we continue to use. And I would say this is ordinary course of practice, and in fact, the most prudent path for small companies as they pursue complex regulatory paths with the agency.

And then another follow-up I had is regarding Ramelteon. You know, I'm wondering -- and I know we've talked about this before, but I think perhaps more broadly people are wondering whether or not there's any data supporting the use of that drug in Non-24.

Yes, thank you. Just for the audience, for clarity, Ramelteon or Rozerem is Takeda Pharmaceuticals' sleep agent, which is a melatonin agonist with a preference of 10 to 1 binding on the melatonin 1 receptor. And as such it would be mechanistically predicted that it will not have significant phase shifting or circadian regulatory activities.

You asked if there was evidence that Ramelteon itself could be a circadian regulator. In fact, there is evidence that it is not a circadian regulator. There's a significant published study that Ramelteon, as the only approved 8-milligram dose, failed to adequately shift the circadian rhythm in a clinical trial, which was actually modeled after tasimelteon's successful clinical study that was published in Lancet in 2008.

So the summary is that for mechanistic research to binding regions, Ramelteon would be expected not to be a circadian regulator. And that was confirmed with a failed study at the 8-milligram dose that, in fact, Ramelteon is not.

And moreover, as Bob was talking about the ineffectiveness of melatonin supplements, we also hear from the patients that people who have tried Ramelteon as well as other sedative hypnotics, antidepressants, antipsychotics -- none of them has the required circadian regulatory effects that are necessary for developing an effective treatment.

I would just add, in addition -- when you look at the literature, in addition to the binding profile that Mihales mentioned, the other challenge is the active metabolite, the M2 metabolite for Ramelteon, makes the compound have a very long half-life. And when you talk about phase shifting, that's a problem. And I think that's another reason why, when you look again at the literature, you find that the 8-milligram, or the marketed dose, is ineffective as a circadian regulator.

That's helpful, Mihales and Bob. My last question is regarding SMS, the indication you kind of introduced earlier in the call. I'm not sure if I missed it, but the visibility on that -- what are the plans in terms of the evaluating that indication, potential indication further?

A couple of things. We are discussing now, throughout the few experts in the world that work on the Smith-Magenis Syndrome, both on the genetic effect and the clinical symptoms, and also are in touch with the international organization on Smith-Magenis Syndrome families. We are trying to understand the need; the description of the disorder; and then, third, to establish what exactly is the circadian defect. The literature appears to suggest the circadian inversion, but additional work needs to be done.

Now, the medical need there is very severe in that the disruption of the circadian pattern of these children results in significant disruption in the entire family unit. So families are very keen to work with us to try to identify a path forward. I would not expect a clinical study, per se, to begin this year, but rather preliminary work on better characterizing the clinical defects.

Thanks for the added information.

Sure.

We now have a follow-up question from Oren Livnat with Jefferies & Company. Please go ahead.

Thanks. I just want to follow up again with regards to -- I guess the first question about FDA buy-in or involvement in this decision. Can you -- I know you told us before, but can you just reiterate that this lower and upper quartile, or the worst quarter of your nights approach was in fact something that the FDA was at least on board on if not suggestive of themselves?

Yes, so just background for everybody -- the disorder is a cyclical disorder. When your circadian rhythm is in phase, you would be expected to sleep at night and be awake during the day, like most of us people tend to do.

When you're out of phase, then there would be a significant disruption of the nighttime sleep, and a sleep propensity and naps during the day. So you can imagine that in a circadian cycle that can last approximately 3 to 6 months in different individuals, you will have periods of relatively good sleep and periods of relatively bad sleep, and other periods of in between. In order to better study the effect of the drug in this cyclical disorder, it would be imperative to enhance for showing that the effect of the drug is indeed where patients need it. And that is during their worst nights and during their worst days.

I'm glad you said suggested for the FDA, because in fact we credit the FDA in one of these interactions, in suggesting that we study the worst nights and worst days. In fact, they had a suggestion that, for example, we can take the 10 worst nights. But we chose to do a quartile to be more equitable, given the fact that the circadian cycle can vary from person to person.

So this was an enrichment technique to make sure we address exactly the effects of the drug where the problem is. But having said that, I just want to make sure that everybody understands that if you were to look in an exploratory way on the entire nighttime sleep without quartiles, or the entire daytime sleep without quartiles, the results will be highly in line with the primary and the secondary endpoints.

And in fact, if you were to take every patient in the study -- the ITT principle -- that received one dose and had the one evaluation, the results for the totality of the sleep and the totality of the naps will actually be even statistically significant. So while the quartile is a proper analysis for the cyclical disorder, and in fact, it's an original technique that will be used and was suggested by the FDA, there's no question that even if you were to look in the totality of the evidence, you will get directionally the same effect -- and as I said, in the ITT population, even clinically significant for either parameter of nighttime and daytime sleep.

And if I may, just quickly, can you speak to some questions that may exist around the inclusion and screening criteria? You know, with regards to establishing whether a patient does or does not have some prototypical, Non-24 Hour Disease? I mean, obviously, I understand that there's still some lack of standardization around what this disease really is and what it really means, and everyone's patterns are different. But can you comment about what you saw with patients who you screened, and why you did or did not include certain patients?

Yes -- a couple of things. One, the inclusion criteria in regards to having Non-24 circadian pattern, measured by the melatonin (inaudible) metabolite and the expression of a clinical insomnia complaint were the same for every patient, and they never changed throughout the study. So that's about the inclusion.

But let me address a little bit about this variable expression of the disorder, and why it is very important that we did the study we did and we have published in several posters. There is very little experience in the world, even among experts, of what is the clinical expression when it comes to sleep/wake cycle for this disorder. Of course the definitional issue of the disorder is this Non-24 cycle of the circadian melatonin rhythm.

It is expected, as a result, that a sleep/wake cycle will be disrupted with sleep propensity at inappropriate times of the day, depending on where you are in the cycle. But there has not been, ever, a broad, large number of patient characterizations of the disorder. And we had the opportunity to conduct this in more than 300 patients during the screening, where we established that there are variable forms of the expression of the sleep/wake cycle in patients with confirmed Non-24.

So there's no question that every patient in our study, in screening and randomization, had Non-24 as it has been established with the melatonin rhythms. But the clinical expression of the disorder is very variable.

Now, that's not big news for any disorder. We all know that for any disease, from diabetes, to hypertension, to more esoteric like lupus, there is a variability of the clinical phenotype. So that was a -- one, an opportunity to further characterize the disorder, and has been widely appreciated by clinicians and experts in the field. But also, it informed our discussions with the FDA and the regulatory path and endpoints we chose, because we realized that this is not a one-pattern-fits-every-patient, and therefore a significant effort was placed in our interactions with the FDA to develop the clinical endpoint paradigm that were ultimately successful. And that includes the appreciation of the cyclical nature of the disorder, and also, the variability from patient to patient.

But, having said all that, at the end of the day what matters is that tasimelteon did show a significant effect in every clinical parameter studied, and even in exploratory parameters the results are highly consistent.

Thanks a lot.

And that was our final question. Thank you, ladies and gentlemen; this concludes today's conference. Thank you for participating; you may now disconnect.