Vanda Pharmaceuticals Inc (VNDA) 2015 Q3 法說會逐字稿

Welcome to the Q3 2015 Vanda Pharmaceuticals Inc., earnings conference call. My name is Anna 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 turn the call over to Jim Kelly, Vanda's Senior Vice President and Chief Financial Officer.

Mr. Kelly, you may begin.

All right, thank you Anna. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals third quarter 2015 performance. Our third quarter 2015 results were released this afternoon 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. Mihael Polymeropoulos, our president and CEO and Tom Gibbs our SVP and Chief Commercial Officer. Following my introductory remarks, Dr. Polymeropoulos will update you on our ongoing activities. Then I will comment on our financial results for the third quarter 2015 before opening the lines for your questions.

Before we proceed I would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meaning of federal securities laws. 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 and results of operations sections of our annual report on Form 10-K for the fiscal year ended December 31, 2014 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 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. Mihael Polymeropoulos.

Thank you Jim and good afternoon everyone. The third quarter was another strong revenue quarter for Vanda putting us on track for greater than $100.0 million revenue for the year, a significant milestone in the history of our company.

HETLIOZ revenue grew by 17% from the prior quarter to $11.7 million. We continued to see a steady addition of new prescriptions month after month and a steady rate of prescription refills over time. The response to our awareness campaign continues to be strong and unsaturated, suggesting potential for significant growth of the Non-24 franchise. In addition to the DTC campaign, we continued our ground effort with educational facilities for the blind further creating awareness and adding to our growing database of opt-ins.

We believe that the fundamentals of our HETLIOZ business are strong and have reaffirmed our revenue guidance for 2015 which includes $40.0 to $45.0 million in revenue from HETLIOZ and we look forward to further growth next year.

In the European Union, Gian Piero Reverberi has joined Vanda as the GM Vanda Europe and we are currently focusing our efforts on pricing and reimbursement activities in key countries such as Germany while we are refining our EU launch plan for 2016.

Fanapt was again a significant revenue contributor for the third quarter with $16.7 million. This revenue however, represents a 5% sequential decline consistent with a similar decline in underlying demand. We are seeking to stabilize the Fanapt revenue with active commercial efforts. Specifically, in early August we launched a 12-person team in pilot territories around the United States. Early analysis of the data suggests that in these 12 territories Fanapt revenue is beginning to stabilize. We are now in the process of further building out a small Fanapt dedicated sales force for a total of 50 territories around the country by the end of this year.

We are also vigorously defending our expanded Fanapt patent portfolio against a number of paragraph IV generic filers. We have submitted a supplemental New Drug Application to the FDA for a schizophrenia maintenance indication for Fanapt and the review is currently underway with an FDA PDUFA date in May of 2016. Additionally, we are preparing for a submission of a European Marketing Authorization Application for iloperidone for the treatment of schizophrenia in adults by early 2016.

As we are committed to the growth of our revenue producing assets, we are also excited about our near-term and longer-term pipeline opportunities.

We are especially excited with the initiation of our pivotal Phase III program in Jet Lag Disorder which is currently underway. After discussion with the FDA early in the summer, we now believe that one additional Phase III study in Jet Lag Disorder will be sufficient for filing a supplemental NDA for the use of HETLIOZ in the treatment of Jet Lag Disorder. HETLIOZ (tasimelteon) was previously shown in two clinical studies, Phase II and Phase III, in simulated Jet Lag Disorder to improve sleep/wake symptoms of Jet Lag Disorder in a statistically significant and clinically meaningful manner. Upon successful completion of the clinical program, we believe that Jet Lag Disorder represents a significant additional commercial opportunity for Vanda and the HETLIOZ franchise in the near future.

I will briefly update you on the rest of our clinical development efforts. For HETLIOZ we have initiated a pivotal clinical study in Smith-Magenis Syndrome and we are continuing the preparations for a clinical program for the pediatric indication of Non-24. On tradipitant, we plan to initiate a pharmacokinetic study and soon thereafter continue our Phase II confirmatory program in chronic pruritus. Finally, we are preparing our IND application for Trichostatin A for various oncology indications.

I will now turn the call back to Jim.

Thank you Mihael. You will see in our press release that Vanda is offering Non-GAAP financial information. We do so because we believe the Non-GAAP financial information can enhance an overall understanding of our financial performance when considered together with GAAP figures.

On a GAAP basis for the third quarter of 2015, Vanda recorded a net loss of $9.5 million, or $0.22 per share, as compared to a net loss of $1.4 million, or $0.04 per share, for the third quarter of 2014.

On a Non-GAAP basis for the third quarter of 2015, Vanda recorded a Non-GAAP net loss of $4.5 million, or $0.11 per share, as compared to a Non-GAAP net loss of $7.2 million, or $0.21 per share, for the third quarter of 2014.

Total net product sales for the third quarter of 2015 increased by 3% over the prior quarter to $28.3 million. On a Non-GAAP basis for the third quarter of 2015, Non-GAAP total revenues, which excludes non-cash Fanapt licensing revenue in prior periods, grew by $21.3 million, or over 300%, to $28.3 million as compared to $7.0 million for the third quarter of 2014. This is the result of significant growth in the year-to-date sales of HETLIOZ in the U.S. and the acquisition of the Fanapt product rights at the end of 2014.

HETLIOZ net product sales grew to $11.7 million in the third quarter of 2015, a 17% increase compared to $10.0 million in the second quarter of 2015. As of September 30, 2015, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand, although there was some de-stocking in the period as compared to inventory levels at the end of the second quarter.

Fanapt net product sales of $16.7 million in the third quarter of 2015 reflect a 5% decline as compared to $17.6 million in the second quarter of 2015. Sales into the channel for the period were consistent with underlying demand.

On a Non-GAAP basis for the third quarter of 2015, Vanda recorded Non-GAAP operating expenses excluding cost of goods sold, stock-based compensation and intangible asset amortization of $26.4 million compared to $13.6 million for the third quarter of 2014. The Non-GAAP operating expenses for the third quarter of 2015 were $4.0 million and 18% higher than for the second quarter of 2015. This was primarily driven by R&D expenses associated with the close out of the Fanapt long-term maintenance study and the related U.S. sNDA filing costs.

Vanda expects to see an increase in GAAP SG&A expenses in the fourth quarter of 2015 associated with our commercial activities including the fourth quarter 2015 HETLIOZ U.S. awareness campaign, the EU launch preparations for HETLIOZ and the expansion of the Fanapt U.S. field force from 12 to 50 representatives. At this time, we believe that our fourth quarter 2015 SG&A spend will be representative of our go-forward run rate for our commercial activities.

Vanda's cash, cash equivalents and marketable securities as of September 30, 2015 were $144.3 million compared to $146.6 million as of June 30, 2015. Year-to-date Vanda cash flow benefited from the timing of payments for the Fanapt gross to net liabilities and the final Fanapt royalty payments.

2015 Financial Guidance:

Vanda is affirming its prior 2015 financial guidance and expects to achieve the following financial objectives:

Combined net product sales from both HETLIOZ and Fanapt of between $100.0 million and $115.0 million. HETLIOZ net product sales of between $40.0 million and $45.0 million. Fanapt net product sales of between $60.0 million and $70.0 million.

Non-GAAP operating expenses excluding cost of goods sold of between $100.0 million and $110.0 million. At this time, it appears likely that our full-year Non-GAAP operating expenses will be towards the lower end of this guidance range. Third quarter and year-to-date 2015 Non-GAAP operating expenses were $26.4 million and $70.0 million, respectively. Reaching the lower end of our full-year 2015 guidance would require a sequential increase in spend of at least $3.6 million in the fourth quarter of 2015.

Our Non-GAAP operating expenses also exclude intangible asset amortization of $13.0 million and stock-based compensation of between $8.5 million and $10.5 million.

I will now turn the call back to Mihael.

Thank you Jim. At this time we'll be happy to answer any questions you may have.

Thank you, we will now begin the question and answer session. (Operator instructions.) And we have a question from Jason Butler from JMP Securities, please go ahead.

Hi, thanks for taking the questions. I guess I just want to start on the pipeline. Could you give us some more color about the Smith-Magenis development plans please?

Thank you Jason. The Smith-Magenis Study that has just begun is an interventional study that will be pivotal. It is a Phase III-type study. I cannot yet discuss all of the details of the design but the expectation is that the results of this study will be sufficient for NDA filing.

Given the rarity of the disorder, it's hard at this time to predict exactly the length of the study and when we should expect results but we should be able, in the future, to give better guidance from that. But the expectation would be a positive study to be sufficient for filing this NDA and pursing that indication.

Okay, great, then I guess just a follow-up, have you -- do you have agreement with FDA on the trial design and the end points that you'll be pursuing for approval?

No, we do not and, in fact, part of this pivotal study is a program to understand better the magnitude of effect and appropriate clinical parameters. As you know, no one has developed a drug for SMS yet and there's very little understanding of what are the key clinical outcomes that one can affect. We've done an observational study this year where we have better defined the sleep/wake cycle abnormality, not just the inversion of the circadian rhythm but also quantifying the sleep defect. So, we plan to use the early screening data of that study, an interventional version of the study, as grounds to discuss with the FDA the appropriateness of end points of the actual Phase III protocol.

And a similar path will be taken in Europe where we're pursuing, also an orphan designation but, again, in Europe they require that you have some experience with the drug in some patients before that application is done.

Okay, great. And then just a last question maybe on the HETLIOZ commercial progress. I'm just trying to put into context the guidance that you gave today versus the ongoing data that you're seeing in terms of patient growth as well as the price increases that you're taking for the product. Can you just help us understand a little bit more about how we should think about patient growth and, I guess, the simple question is, given the patient growth that you're seeing and the price increases that you've taken, I feel like I'm coming to a number that's above your current guidance range?

Well thanks for the question. We cannot, you know, give a 2016 guidance. We're reaffirming the $40.0 to $45.0 million. I think we're going to be in that range for the year. But to help you model better and answer the question, year-to-date the majority of the significant revenue growth that we have seen, the majority of this growth, comes from new patient growth and the rest of it is price.

And when I said earlier that we believe the fundamentals of the HETLIOZ business are strong, we directly mean the expectation that new patient growth that we have seen will continue in the foreseeable future. So, that is why we're optimistic about growth of the HETLIOZ franchise because the fundamental of growing the patient base exists and we believe that the dynamics are there to continue in the foreseeable future.

Okay, great, thanks for taking the questions.

Sure.

Our next question is from Chris Howerton from Jefferies, please go ahead.

Hey, thanks for taking the questions. The first one I had was just on the Fanapt sales and what we can kind of expect moving forward. You know, you had, I think the sales force behind it for a couple of months now or I guess one month or two months depending on exactly in August when they started. What can you tell us exactly about the promotional sensitivities and how we might expect that to change the dynamic to, again, kind of in line with Jason's questions relative to the price increases?

Yeah, I'll take the beginning of the question and I'll have Tom Gibbs, if he wants to, follow-up on that. On the timing, the 12 dedicated new sales force was actually put in place in the field beginning of August so clearly we have a little experience and given the cycle of business and expectation, it is early to know, however, with the early data looking at these 12 pilot territories, we are encouraged that the business is stabilizing and we do not see the clear decline that we saw in the overall market.

It is hard for me right now with this early data to set expectations. All we can say is that for the year the guidance we gave of $60.0 to $70.0 million will continue to be true and we feel confident it will be within that guidance.

Certainly there are a lot of things that we want to do with Fanapt; one is secure the long runway into the late 2020's and beyond based on our IP portfolio and second, grow the business. And just to remark before Tom comes in on that, the Fanapt market share is minimal now. It is less than 0.3%. So we believe there is definitely a lot of opportunity to continue to grow that presence and there are ways to grow it. Tom can address what we're doing now but I can speak of the future as well. Fanapt is indicated only for the treatment of schizophrenia in the acute setting. We're submitting an sNDA application with very strong maintenance data which hopefully will be reviewed and be on the label by mid-year next year. We're also looking to expand the label in other ways. As we're securing our runway on the patent exclusivity, of course there's some obvious and non-obvious things; obvious being able to expand the indication to additional bipolar disorder, bipolar depression, etc., but also explore the reinstitution of the clinical program of the long-term injectable. But I'll turn it over to Tom to give you a little bit more guidance on what we're thinking now.

Great. Thanks Mihael and Chris, thanks for the question. I think it's important just to provide a little bit of context in terms of what we've been doing with the sales force. If you recall we just had, in April we launched Fanapt with our 28-person account management team and they were spending about 25% of their time on promoting Fanapt and we did see, as we talked about, a slowing of the decline, the rate of decline, just with having the 28 account managers on there. In July/August we launched our pilot, the Fanapt 12 looking at creating a competitive share of voice in certain territories to determine the promotional responsiveness of Fanapt when we had a competitive share of voice.

And when we drilled down at the individual territory level we were able to measure the promotional response based upon reach and frequency and based upon the early data it provided a strong signal confirming the promotional sensitivity of Fanapt. Based upon those data, we have decided to expand the Fanapt 12 to Fanapt 50 where we're going to be populating 50 of the most productive territories creating a competitive share of voice which we think we will be able to replicate the results that we saw within the Fanapt 12 and stabilize the Fanapt business exiting 2015.

Yeah, great. Okay, that's helpful. Thank you. And then I guess, you know, along the same lines is there anymore color that you can give us in terms of the roadmap for the launch in Europe of HETLIOZ and maybe a little more granularity in terms of timing throughout the year in 2016 for that launch time?

Yes, first of all we're committed to finalize the launch plan now that we have Gian Piero leading this effort in Europe. We're going to be able to give more detail in the future. However, having said that, here is the early roadmap. The approval came at the beginning of the summer, we had already initiated activities to develop the dossier necessary for pricing and the reimbursement discussions in various countries in Europe. We have focused and expended significant effort with the German authorities and we think we're in a good path there to pursue the pricing and reimbursement cycle. In parallel, we are starting the awareness activity connecting with blind advocacy organizations around the continent and start to understanding patient flow in individual countries. So, I would say this is it for now and in the coming months hopefully we can talk in more detail of how the EU launch plan will be unfolded.

Okay, great. Thanks for taking my questions.

Thanks Chris.

And our next question is from Josh Schimmer from Piper Jaffray, please go ahead.

Thanks for taking the questions. A few housekeeping ones. One more strategic one. Jim you had mentioned, I think it was HETLIOZ, some de-stocking in the quarter, can you quantify the amount?

Well, I'm glad you brought it up because you're right, it's actually the first time since our launch that we actually saw a downtick in inventories at an end of the period and so that in and of itself is something that we monitor closely as we moved forward. We don't think that that's going to be something that we'll continue to see but more something that was specific to this quarter. I would not call it something that was too much beyond double digits in terms of the number of units but just the sheer fact that it was directionally down was worth noting.

Okay, and then R&D quarter-over-quarter was up fairly heavily, you indicated a few reasons for that. What do we think of as the run rate going forward for R&D - is it more reflective of Q2 or Q3?

Yeah, so the majority, the vast majority of the $4.0 million sequential uptick was the end of what is the long-term maintenance study and filing expenses in the U.S. So that is not something that, of course, you expect as a part of the go-forward run rate. And so what you're going to see us do on that in particular is we'll come back to you more so as a part of articulating the Jet Lag study parameters for 2016 where we're going to be able to better articulate how our run rate for R&D will change as you go from 2015 to 2016. But I would have an eye toward that as being the primary driver of year-over-year run rate, R&D change.

Got it and then there's -- you know, you highlighted a few drivers for a sequential increase in SG&A going into fourth quarter. Can you give us any sense of -- I mean, it sounds like there could be a meaningful step up in SG&A across all of these parameters and certainly spanning the U.S. Fanapt sales force and prepping for the EU launch so any added colors to the magnitude of that step-up would be most helpful.

Yeah, so I think there's two pieces to that. One is, you know, to hit the lower end of the range I highlighted that it would take at least $3.6 million sequential step up and then I went on to say that at this time it looks likely that we're going to be looking at the lower end of the guidance range for the full year so that would tell you that it's $3.6 million or something just above that as being the sequential change.

And then when you think about our SG&A spend year-to-date, one of the things that we've really been happy with so far is how much we've been able to see Fanapt deliver to our business without really putting a whole heck of a lot behind it. And we saw, and we're data driven with our Fanapt 12 pilot, and are taking some pretty quick action to really capitalize on what we're seeing as a promotional sensitivity in that area. So that's one of the important sequential changes. And then of course we'll begin to do some of our incremental work for the EU as well.

Got it and then as you think about the potential commercial opportunity in Jet Lag, maybe you can talk to us a little bit about willingness to pay either on the part of the payors or by travels and how do you capture travels at a time when they are ready and willing to pay and get a prescription recognizing that not everyone leaves time at the airport to check into an airport clinic or prescriber, just give us how that might work and what people would be willing to pay for jet lag?

Great question. I don't think that we're ready now to discuss the full business model but certainly we want to say a couple of things about that. The size of the opportunity, as most of the people understand, is vast. We're talking about 100 million travelers on flights that cross five or more time zones a year and therefore just imagining a very, very small fraction of that being treated with HETLIOZ because of their need and the significant impact of the Jet Lag Disorder symptoms can spell a significant opportunity. Now, your question of payors and pricing opportunities. I would say there are many parameters, you're mentioning some, and there are many potential solutions.

This does not have to be a classic payor model but rather there are many opportunities for innovation and we're in an active process of exploring them. A couple of things to keep in mind as we're working through that; our number one priority will be to ensure the continuous HETLIOZ Non-24 growth and that also means protecting the relative price sensitivity of that market versus the Jet Lag Disorder market and we believe, there again, many solutions to that. Then it comes the interplay of who the payors are, who the target population can be, to what extent and what is the effect of price elasticity and, again, many studies can be done. We are beginning this work and all we can find in front of us is actually a book of potential solutions that spell eventually only one thing; that if indeed HETLIOZ is proven to work in Jet Lag Disorder, there will be more than one model that can spell commercial success.

Okay, thank you.

Sure.

Our next question is from Difei Yang from Brean Capital, please go ahead.

Hi, good afternoon and thanks for taking my question. Just a couple; the first one is related to HETLIOZ. With the price increase, would you comment on how you're seeing gross to net adjustments over the past several -- I guess, over the past several months, let's say six months?

I'll take the front end and Jim can answer the gross to net trend question. So, again, as we said earlier, year-to-date we have made price adjustments, however, the majority of the revenue growth came from new patients and it was the minority of revenue growth that was supported by price. Now, onto the gross to net.

Yeah, so while we haven't gotten into a ton of specifics on gross to net quarter-to-quarter, here's some of the overarching guidance I've given to people throughout the year. You know a full year basis good rule of thumb for the HETLIOZ gross to net is it's about 10% and the highest quarter tends to be Q1 and that was due to the Medicare coverage gap liability and then as you think about the rest of the year, you of course see a step down on Q1 to Q2 in gross to net that for the most part carries pretty consistent throughout the rest of the year.

Okay, thank you. Then moving on to Fanapt, during the past quarter, so Q3, was there a price increase on Fanapt?

No, there was not.

No.

Oh, okay. Thank you and so the next question is on Jet Lag. When do you expect the readout for the Jet Lag study?

We're finalizing, Difei, those timelines. We're doing two things, we're running, in front of the Phase III interventional study, we're running an observational study to evaluate the details of the protocol and that will inform a little more about power in number of patients, etc., so for now I would say the results of the pivotal phase III study should be by early to mid 2017.

Okay, yeah, thank you that's helpful. So my final question is on the sales force. So now that you go from 12 reps to 50 reps, does that mean you would be looking for a second product for the sales force to sell?

I think we can keep them busy with Fanapt certainly there's a lot of training and a lot of focus. We want that sales force to do a good job. We're talking about stabilization of a decline that we've seen since the product was not really promoted very actively with the prior sponsor. We need to fix that first and that will take all of their focus.

Of course, if we have a sales force that becomes efficient and productive, we will certainly be always thinking of how to better leverage its existence.

Yeah, thank you, very helpful.

Thank you very much Difei.

And our last question is from Stefan Quenneville from Morningstar, please go ahead.

Hi, thanks for taking my question. I wanted to ask you guys about the Fanapt patents and the ongoing litigation if you could provide some sort of guidance on if and when we'll be hearing some potential decisions over the next year or so?

Yes, thank you very much. So, as you know, we have several now cases of Paragraph IV filers that we're litigating against. The lead case is against Roxane. There is a scheduled court hearing for a four-day bench trial starting February 29, 2016 and towards that hearing as we announced after the September Markman hearing, we had a successful hearing where our claim construction was adopted by the court which certainly is a good thing.

Of course, I want to remind you that in that trial we're litigating against two patents; the NCE patent and the 610 patent and that we have additional cases and cases that we've already brought as a lawsuit forward against Roxane and the others which include the more recently listed 432 patent for which there is no judicial calendar yet. So, I would say the most significant near-term milestone will be the February 2016 litigation against Roxane for the NCE and 610 patents.

Okay, great. Thanks for that color, it's very helpful. And while I have you, could you guys talk a bit about your direct to consumer spend and sort of any trends you're seeing there. Are there any plans for the program going forward just to get a sense of how it's been working as the launch progresses?

Yeah, all I can say Stefan is every time we don't run the DTC we regret it. Every time we run it, we see something very important that this spend, surprising, has remained steady per opt-in which is an amazing thing and speaks to the thousands of patients that are out there deciding to take the first step, opt-in and learn more. So, we're getting better at it of identifying when and how to advertise but Tom was discussing with us a few weeks ago an amazing number. That in some early study of market awareness that he did, he saw that aided awareness of Non-24 among the general U.S. public was about 45% which is an amazing number. Some, car brands don't have that but also it tells you that it is good that we've created the connection between Non-24 and blindness in the minds of consumers but the fact that we continue to enroll opt-ins at the same cost that we did a year ago it shows the unsaturated nature of this market.

This is what drives a lot of our optimism that new patient growth is to be had but also it requires patience. It is a new market. It's a market that started not with a 45% awareness but actually close to zero awareness a year and a half ago. And all of the cycles take a little time. We're satisfied that we're growing, of course we're anxious to see a lot more patients benefiting from the treatment. The simple math is that we have under a thousand patients, only several hundred patients on treatment and we all know that there are tens of thousands of them potentially out there that have not taken the first step of learning more and starting these discussions. That is what makes us optimistic that new patient growth should be forecasted in the future.

Great, thanks for the color.

Sure.

We have no further questions at this time. I would like to turn the call over to Dr. Polymeropoulos for closing remarks.

Thank you very much all for joining this call and thank you very much for the interest in Vanda. Thank you.

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