Vanda Pharmaceuticals Inc (VNDA) 2014 Q1 法說會逐字稿

Welcome to the first-quarter 2014 Vanda Pharmaceuticals earnings conference call. My name is Larissa and I will be your operator for today's call. (Operator Instructions). Please note, this conference is being recorded. I will turn the call over to Jim Kelly, Senior Vice President and Chief Financial Officer. Mr. Kelly, you may begin.

Thank you, Larissa. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals' first-quarter 2014 performance. Our first-quarter 2014 results were released this morning and are available on the SEC 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.

Joining me on today's call is Dr. Mihales Polymeropoulos, our President and CEO. Following up my introductory remarks, Dr. Polymeropoulos will update you on our ongoing activities, then I will comment on our financial results for the first quarter of 2014 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 meanings of federal securities laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties.

These risks are described in the risk factors and MD&A sections of financial condition and results of operation sections of our annual report on Form 10-K for the fiscal year ended December 31, 2013 which is 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 no 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. I will first discuss the commercial launch of HETLIOZ for the treatment of Non-24. To remind you, Non-24 is a rare orphan disorder affecting primarily totally blind individuals with a prevalence of approximately 80,000 in the US and many more worldwide. Non-24 expresses itself as a cyclical sleep wake disorder which significantly impacts the social and occupational functioning of affected individuals. For many totally blind individuals it is the symptoms of Non-24 and not blindness that stand in their way for fully participating in a 24-hour society.

HETLIOZ received US market approval by the FDA on January 31 and is the first treatment ever approved to treat Non-24. Blind advocacy organizations were critical in this successful endeavor and the interactions with them has allowed Vanda to better understand the determination, bravery and commitment of this amazing community in overcoming hurdles. Vanda is proud and privileged to collaborate with the blind community in bringing HETLIOZ to the assistance of people who need it.

Over the years working on Non-24 Vanda also realized that low awareness of the disorder among the patient and the physician community would be a significant hurdle that would need to be addressed for successful commercialization of HETLIOZ.

Towards that goal Vanda has devoted significant resources to increase awareness for Non-24. Our early work, which includes significant interactions with the patient and physician community and a pilot awareness campaign has informed our launch strategy which I would like to characterize in more detail.

Blind individuals with Non-24 as members of our broad society, have the same aspirations, dreams, successes and failures as their sighted counterparts and seek and receive information through the diverse channels of communication that include radio, television, the internet and the written press. Vanda is using all these media to create awareness around Non-24. Radio and television have been the most successful in creating awareness and allowing the measurement of the impact of such awareness in directly engaging with the patient community.

During the first quarter of 2014, we launched a national radio awareness campaign that has effectively reached not just the blind community but more than 60% of the US population. Such broad awareness has placed Non-24 and blindness in the vocabulary of many average individuals but most importantly has piqued the interest of likely patients and their friends and family as well as the physician community. Thanks to this national radio campaign, Non-24 is no longer the obscure condition that it was just a few months ago and the broad community at large has made the connection between inability to perceive light and the sleep and wake symptoms of Non-24.

The results of this awareness campaign where thousands of calls to our call centers staffed by health educators and, more importantly, thousands of individuals that shared their contact information and opted in to continue to receive information on Non-24 and potential treatments.

In addition to our radio campaign we also piloted a TV Non-24 awareness campaign which was met with similar success. We are currently running a national TV campaign across the United States.

The combined results of our radio, TV and Internet campaigns are very encouraging. To date over 7,000 individuals have opted in to receive more information on Non-24 and its treatment. We have carefully assessed this campaign and if we can conclude that the response rates continue to be linear and directly proportional to the amount of resources that we devote towards these campaigns. This would suggest that although we have made contact with over 7,000 likely patients, friends and family, there are still many more to be identified, which is consistent with the epidemiological evidence which suggests the prevalence of 80,000 in the US.

While this is encouraging we want to caution that there is a significant amount of work to be done in order to further identify those individuals who will seek medical diagnosis and with appropriate treatment. To that effect, Vanda had recognized very early that identifying the correct physician group for targeted awareness is also paramount importance in success with the commercializing HETLIOZ.

Through pilot programs with many likely Non-24 patients who have opted in in our database we recognize that a Patient Directed Physician, or PDP, target approach is the most immediately effective way to identify likely prescribers and therefore focus our early sales force targeting efforts. By focusing our time with validated physicians with likely Non-24 patients we can better prepare the market to facilitate patient diagnostics and treatment. We have now begun an effort to identify a specific PDP, that's a patient directed physician, each associated with one of our opt-in self-identified likely patients, to call upon and prepare them with information on Non-24 and HETLIOZ. This effort is through our case management service and involves a continuous relationship with our engaged likely Non-24 patients. Per the direction of our opt-in patients our field force has now begun calling upon and creating awareness among these specific PDP targets.

We are now in our third week of our US launch and our field force has called upon approximately 500 PDP targets. The majority of these targets are primary care physicians who have established relationships with these patients and are very willing to help their patients be evaluated for Non-24 and be treated with HETLIOZ when appropriate.

While this is a very labor intensive process it forges strong relationships with the patients and the physicians and is likely to produce best outcomes for our patients. While the PDP target project is the first priority for Vanda during these early days of our launch, our field force is also establishing relationships with sleep specialists that could be involved in the treatment of patients with Non-24.

On the payor front our corporate accounts team is working with a full range of national, regional and local payors to establish reimbursement for HETLIOZ. This process will likely take three to six months to materially complete. Our early experience makes us believe that HETLIOZ will be broadly available, likely with a Prior Authorization requirement of blindness as we had expected.

In summary, we are encouraged by our awareness campaign, the early reception by physicians and payors, but we also recognize that significant efforts and resources will need to be devoted in order to make this great treatment a great commercial success as well.

I will now turn briefly on an update on our pipeline. On tasimelteon we are progressing with our EMA submission, where we expect successful filing later this year. We are also making progress in developing protocols for our pediatric Non-24 indication as well as working towards an observational study for Smith-Magenis syndrome.

On VLY-686, our Phase II NK1 antagonist, in the study with patients with chronic pruritus in the setting of atopic dermatitis we continue to enroll and we expect to complete enrollment later this year. With that I will turn it back to Jim. Jim?

Thank you, Mihales. Before continuing with the detailed results I would like to highlight a few accounting items for the quarter.

The first-quarter 2014 financial results include $10 million for milestone payments associated with the FDA approval of HETLIOZ in the US. A $2 million regulatory consultant milestone payment was expensed to R&D and an $8 million milestone payment was made to Bristol-Myers Squibb which is treated as an intangible asset. This $8 million intangible asset will be amortized over the expected patent life of HETLIOZ in the US which is December 2022 or approximately 9 years.

The second item is the election made to change our accounting method for stock options from the accelerated method of amortization to the straight-line method of amortization effective January 1, 2014. We made this change to better align with our peer group. Prior periods will reflect the change on a retrospective basis. Please see footnote 3 from our Form 10-Q filed this morning for a detailed bridge of the impact of this change on Q1 2013 financials.

The final item is a revision to our estimated useful life of Fanapt in the US. During the first quarter of 2014 we became aware that it is not likely that Novartis would complete a pediatric study in time to qualify for a six-month extension of exclusivity. As such we will prospectively adjust the amortization of the Fanapt intangible asset and the Fanapt licensing revenue over the shorter remaining period.

During the first quarter of 2014 Vanda recorded a net loss of $26.5 million as compared to a net loss of $4.5 million in the first quarter of 2013. On a diluted shares basis, this reflects a loss of $0.79 per share in the first quarter of 2014 as compared to a net loss per share of $0.16 for the prior year. As of March 31, 2014 there were approximately 33.9 million shares of Vanda common stock outstanding.

Total revenues for the first quarter of 2014 were $9.1 million as compared to $8.1 million for the first quarter of 2013. In these periods there were two sources of revenue. They are licensing revenue and royalty income each associated with Fanapt. First-quarter 2014 licensing revenue was $7.5 million as compared to $6.6 million during the first quarter of 2013. This higher amortization amount in the first quarter of 2014 resulted from the previously mentioned shortening of the expected life for Fanapt in the US. During each period Vanda recognized a 10% royalty on Novartis net sales for Fanapt. First-quarter 2014 Fanapt royalties received from Novartis were $1.7 million compared to $1.5 million in the first quarter of 2013.

Total operating expenses for the first quarter of 2014 were $35.7 million compared to $12.6 million in the first quarter of 2013. General and administrative costs of $27.9 million made up the majority of the first quarter 2014 spend and reflected an increase in commercial activity in preparation for the launch of HETLIOZ in the US. During the first quarter of 2014 we brought on board a full field sales, national accounts and medical affairs team. The single biggest G&A item for the first quarter of 2014 were the media costs associated with the Non-24 disease awareness campaign.

Research and development costs for the first quarter 2014 were $7.3 million and included a $2 million milestone payment associated with the HETLIOZ approval in the US. Excluding this onetime item first-quarter research and development expenses were 34% lower than prior year.

Cash, cash equivalents and marketable securities, which I'll refer to as cash, as of March 31, 2014, totaled $100.4 million. Cash decreased by $29.9 million in the first quarter of 2014 compared to decreases of $9.5 million in the first quarter of 2013 and $11.8 million in the fourth quarter of 2013.

Vanda is providing investors with the following financial guidance for the full year 2014. Total operating expenses are expected to be between $110 million and $120 million, this includes intangible asset amortization of $2.5 million and between $6 million and $8 million of non-cash stock-based compensation. Total 2013 operating expenses were $54.3 million.

For the full year 2014, expenses are expected to reflect lower research and development spending as compared to 2013 and an increase in commercial spending to support the commercial launch of HETLIOZ in the US. I will now turn the call back to Mihales.

Thank you, Jim. At this time I will be happy to address any questions you may have.

(Operator Instructions). Jason Butler, JMP Securities.

Congrats on launching HETLIOZ.

Thank you, Jason.

So first question, could you give us an indication either quantitatively or qualitatively as to whether you actually have -- whether there are patients receiving prescriptions today and actually patients receiving drug commercially?

Yes, so. Quantitatively we are not going to give any numbers of our prescriptions written or patients on treatment. It is very early and hopefully in the future we will be able to discuss in very good detail. Now also I want to remind everybody that the prescriptions go through specialty pharmacies so they are invisible to the regular data providers like IMS.

To answer qualitatively your question, Jason, is, yes, there are patients on commercial treatment and we have made significant progress in converting or are in the process of converting our clinical patients from this ongoing clinical study to commercial product. So both clinical to commercial conversion is going on and commercial patients first time on HETLIOZ are actually coming into the channel now.

Okay. Can you just remind us, Mihales, how many patients you had in the clinical studies and extension studies that you view as potentially low hanging fruit to convert in this -- early in this process?

Yes. In totality in the US there were about 70 patients in the extensions on treatment of HETLIOZ and we are making every effort to offer treatment to the majority or all of them.

Okay. And just wanted to follow-up with some clarity on the reimbursement process. You said three to six months to move through the process. Does that mean that none of the patients today on drug are being reimbursed or have you had early successes and you are getting reimbursement payments already?

Right. So let me be more elaborate on this. Three to six months is a typical process that our corporate accounts will meet and go through the initial round of discussions with most or all of the plans. This process typically will take up to 9 to 12 months for every fund to make formulary decisions. So let me explain how it works in the first days.

Scripts are written, the account is to the HUB services, they get triaged to the specialty pharmacy and insurance verification is ongoing. So payors get notified of the script, of course they don't have HETLIOZ on the formulary yet. A discussion happens with the corporate accounts managers and typically the funds will be -- the payors will request a prior authorization form to be filled out by the physician.

The prior authorization form is a certification on blindness. With that in, starts the second round of discussions with the payors and typically that is sufficient on a temporary basis to approve the script and triage it to the specialty pharmacy.

Now in some circumstances, medical -- letter of medical necessity will need to be filled out and once filled that allows again the processing through the payors. So for now, it is very early. We have not seen a complete hold or stop or block by a payor. What we have seen is the fully expected process of it is not in the formulary yet, here is my prior authorization requirement, signed, gets in, I allow the drug now to move on to the specialty pharmacy.

But again, I caution everybody that it needs go through the full cycle and understand then formulary, formulary physician, etc. It is important to point out that we facilitate all this process through HETLIOZSolutions.

HETLIOZSolutions has a dual function both for education awareness and facilitation of patient contact, but also the processing of the intake forms, the scripts, as they come in into the hub.

And that includes insurance verification, it includes, when appropriate, co-pay support, when appropriate, foundation support for those patients who require it and of course the discussions with the specialty pharmacy and it triggers the process that I was discussing with the payors. So today, no red flags in these early days with any of the payors.

Great, thanks for all the color. And just to confirm, that process you just reviewed, the temporary approval process, is that something that takes days, weeks, is that something that has already happened for multiple patients?

Yes, it is something that is going on. And it does take some time. But it is early and we hope that all of these processes will become optimized. One key part is looking in back to the act of filling the forms and faxing the prior authorization form. But we will be becoming efficient as time progresses.

At the beginning it will take more time and as we have gone through this process with the payor, once or twice, again think they are expected to be a lot smoother.

Okay, great. Thanks for taking the questions. I will jump back in the queue. Thanks and congrats again on the launch.

Thanks, Jason.

Thanks.

Kristina Cibor, Piper Jaffray.

Just a couple of quick questions. So as the radio ads and TV ads now switch to branded awareness, are you seeing the rate of new patient identification being sustained?

Yes, just to clarify, the majority of our awareness campaign today is a Non-24 awareness campaign. We do have a branded awareness campaign on HETLIOZ and we find that this is more useful to us today, patients that have already opted in the database and they are coming back to find out how to get hold of HETLIOZ, how to access it, and also new patients.

But the majority of our efforts and awareness is continuously identifying new patients. And to that effect I think it is very important to point out that what impresses us the most is that the continuous awareness campaign has not reached a saturation point. And that is we do see a direct proportionally relationship between the level of awareness and number of patients who opt in in the database.

And just to be even more explicit, we have done several pilot experiments with that where we either increase the resources on awareness on a week period of time or decrease the awareness. And proportionally and immediately to the increase or decrease of the awareness campaign resources we see a proportional increase or decrease of the opt-ins.

What's very impressive also is we have begun now a new wave of national TV awareness. And again, we can absolutely predict the rate of opt-ins based on the population and frequency and the gross rating points of TV advertisement that we buy suggesting again that with these very detailed metrics we are still in a linear phase of opt-in acquisition.

And of course just to caution everybody, we are talking about big numbers. But not everybody will go to treatment, not everybody will get a script and none of them will do this immediately. So it requires a lot of patience and there is a lot of hard work to move patients from the awareness phase to successful treatment.

Okay. And then of those 7,000 that have opted in to receive more information on HETLIOZ, so I noticed in the release that it was somewhere patients, others who were friends and family of blind individuals. Is it more heavily skewed towards blind individuals or is it -- so what is the proportion between those groups?

I will give you -- I will give you the exact breakdown. So out of the 7,000 about 60% our self-identified totally blind patients that are likely having Non-24. 20% identify themselves as friends and family of blind individuals with Non-24. And about 20% is a catch all other category, either they didn't specify or they are truly other like rehabilitation service specialists, physicians, etc.

That is helpful. And just last question. I know you said that you have been primarily reaching out to primary care physicians versus sleep specialists in the campaign. But is there a percentage of -- do you have a kind of breakdown of the primary care versus specialist and do you find these primary care physicians are comfortable writing and getting prior authorization for HETLIOZ?

Yes, thank you very much for that. So the vast majority, and I would say of the 500 patients about 80% or so are primary care and the 20% are other. And it doesn't mean sleep specialists. It means other non-primary care physicians that a patient had developed some trust and they want us to talk to.

So more than 80% are primary care. To your question of their level of comfort, we see actually a very good reception to do both. One, identify and characterize Non-24. And again, remember it all requires a totally blind individual with a sleep/wake complaint that is chronic and cyclical that impacts their social and occupational function.

Many physicians when we begin discussions would not discuss the name of the patient for HIPAA purposes, but themselves they have a mental image who that patient could be out of a group of a few patients that meet those characteristics in their practice.

So that diagnosis, very willing and very intrigued actually to do so. And prescription of HETLIOZ very comfortable. They understand how it should be used, very simply once a night. They know that the patient needs to stay on it for about three months before they receive the full results.

And also they are encouraged by the mild side effect profile. So, so far the vast majority, the primary care physicians that we go to and of course which the patients directed us to, are both willing to diagnose and treat with HETLIOZ.

Perfect. I do have one last question and it is just on the SG&A spend. I know you said it will increase this year for the launch. But do you see that -- so is it basically you are building up these resources to identify these patients, but would you see it after that point declining or is it something that it's more of a continuous effort on your end to be fully engaged with these individuals?

Yes. That is a very fair question and I would say it is very, very early to commit exactly what the spend should be. So let's talk about the two buckets that we see of activity. It is the resource intensive bucket of creating leads, the awareness campaign with the opt-ins. And that, as you expect and it reflects in our first quarter spend, it is a very significant cash resource.

The second bucket is the throughput. So once you have identified opt-in patients, how do you move them along the journey from awareness to treatment if and when they need the treatment? And that is very human resource labor intensive, but not as cash resource expensive as the direct-to-consumer advertising campaign.

So having said that, most probably we will be focusing, as we are now, on the throughput but being very mindful also not to shortchange the awareness campaign. And it is very important that we understand the return on investment and relative return on investment.

So one can calculate very quickly now, we can, the return on investment on having an awareness, DTC campaign in creating opt-ins. The more important number is the spend over scripts written or more importantly over patients successfully treated on chronic therapy. And that will take several months to know.

So in these early days of ambiguity of what this conversion factor will be, because it takes time for people to go to doctors, make these appointments and eventually come to treatment and successful treatment. You will see us to have a balanced approach where the campaign may continue in some pulsating version.

And summer is not a great time to do a TV and radio advertisement, but actually focus ourselves to the very labor intensive improving efficiency of throughput approach. So I know this does not fully answer your question. But expect a mixture, but expect a heavy emphasis on throughput versus DTC.

Perfect that is helpful, thank you very much.

Stefan Quenneville, Morningstar.

Hi, thank you for taking my question. I guess sort of a two-parter. The first question is can you give us some insight onto what portion of your SG&A is going towards this awareness campaign just so I have a sense of order of magnitude? And secondly, now that you have started your launch in the US and you are getting a sense of what is working and what is not, can you let me know how you are thinking about going after the European market once you get approval there? Thanks.

Yes, I will take the second part of the question. Jim on the first.

Yes. So here is how I would characterize the SG&A change from prior year. We expect if you look at the field force plus internal updates that the total headcount of the Company will move from call it 53 at year-end to a number that is closer to 100 at year end 2014. So we're talking about approximately 50 people added. Multiply that by your favorite FTE rate and you are going to get a sense of the cost structure change.

Then you layer on top of that just sort of your core marketing and, as Mihales put it, throughput and hub services. Without giving you the direct answer, the way we are characterizing it is that the awareness spend is the single biggest G&A line item from the first quarter.

And as I think he appropriately described it, it's continuing through the second quarter and then we are going to monitor exactly where we want to go from there with the recognition that perhaps summer time isn't the best time to be out there doing that. So without giving you too much more granularity I think that that helps you back into our cost structure.

Great.

Okay, on the EU question, the question was what have we learned good and bad that we can apply in Europe? First of all, Europe is a case study on the commercialization front of a rare orphan disorder with no prior treatment on itself. So we do not want to underestimate how different and potentially very challenging it can be. But we have learned a few things over the years that we are beginning to apply in Europe.

What we learned is you need to work with the blind advocacy organizations. It is not good enough to have a treatment that works on the science front and the regulators approve it. You need to have the people who watch and use it, want it and be supportive and tell others in their community.

So the blind organizations in Europe are strong, are diverse, they have different structures than they US organizations. But they are also very well aligned to our friends here in the US. We are extremely pleased and happy that our US partners and the blind advocacy organizations have begun introducing us to the worldwide leaders of the blind advocacy community and we are now beginning the process of establishing these relationships. So that is number one.

And I think the most important driver for successful commercialization in the EU. The second one is developing the relationships with the local key opinion leaders who will help us both with the regulatory process but also through the very elaborate discussions on pricing and reimbursement.

And the third is to fully understand patient physician flow in individual major countries which will be, by definition, different than it is in the US. In the US, we think we have identified a unique way to identify patient physician flow with the PDP approach, the patient directed physician targets, this may or may not work in Europe. And based on the individual relationships and attitudes in individual countries we will develop our tactics. Are there any more questions?

Jason Butler, JMP Securities.

Just one question on the 500 physicians. Can you give us a sense of what proportion of those physicians would treat a larger number of patients and maybe consider specialists first, even within the primary care setting, versus those that have maybe a small handful, a small number of patients?

Jason, that is a great question that of course we are keying because it makes the process even more efficient. Very early days but what we hear anecdotally from the physicians themselves when we approach them, and as I explained, our account managers do not have the names of patients. So we described an interested patient of that physician as a totally blind individual with sleep wake problems that are interested to be evaluated for Non-24.

The physicians then are trying to find through memory and charts who could that be. They usually refer to two or three individuals that meet that profile. So I would say as a broad stroke expectation we would expect that two or three individuals could fit that profile. So for all purposes the process of PDP will be for a while, single patient physician pairs identified through our PDP process.

Okay, great. That is very helpful. And then just a question on the pipeline and sorry if I missed this earlier. But can you talk about the plans for additional indications, specifically Smith-Magenis syndrome? And if that is an indication that you are going to pursue clinical development for, do you need to start or complete any pediatric work for tasimelteon in the currently approved Non-24 indication first?

Right. So the simple answer is, no. But let me explain. So we are in parallel progressively developing a formulation that will be compatible for use for both a pediatric Non-24 application and Smith-Magenis syndrome. We are developing now protocols for the pediatric Non-24.

And you can imagine these protocols typically include pharmacokinetic studies but also the necessary efficacy and safety studies and that plan we'll discuss with the FDA as we have begun discussing with our European regulators.

Now in parallel we have started the work on Smith-Magenis, the first protocol there is an observational study trying to better understand what is the true circadian underlying abnormality and what are the key symptoms that we should try to address. And we expect that this observational study will begin sometime this year.

So following that it will be if we are successful identifying what symptoms we could perhaps treat with HETLIOZ there will be an efficacy study. So the answer to your question is, there is not a requirement that we have a completed pediatric program before we moved to Smith-Magenis.

Okay, great. Thanks for taking the questions.

Thank you. I will now turn the call over to Dr. Polymeropoulos for final remarks.

Well, thank you very much for your interest in Vanda and your great questions and we will talk to you soon. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.