Vanda Pharmaceuticals Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Welcome to the Second Quarter 2018, Vanda Pharmaceuticals Incorporated Earnings Conference Call. My name is Adrianne, 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. [Operator Instructions] Please note this conference call is being recorded. I will now turn the call over to Jim Kelly, Executive Vice President and Chief Financial Officer. Please go ahead.

[James Kelly:]

Great. Thank you very much. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals second quarter 2018 performance. Our second quarter 2018 results were released this afternoon and are available on the SEC's EDGAR system and on our website www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website. Joining me on today's call is Dr. Mihael Polymeropoulos, our President and CEO. Following my introductory remarks, Mihael will update you on our ongoing activities. Then I will comment on our financial results, 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 Management's Discussion & Analysis of Financial Condition and Results of Operations sections of our annual report on Form 10-K for the fiscal year ended December 31, 2017, and quarterly report on Form 10-Q for the quarter ended March 31, 2018, which are available on the SEC's 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 our call over to our CEO, Dr. Mihael Polymeropoulos.

[Mihael Polymeropoulos:]

Thank you, Jim. Good afternoon and thank you very much for joining us today. We are pleased to share our second quarter 2018 performance. I will begin with an update on our HETLIOZ business. HETLIOZ delivered 10% sequential quarter and 25% year-over-year revenue growth in the second quarter. This performance underscores our conviction that we have found efficient means to identify new non-24 patients from multiple sources and drive growth during 2018 and beyond. While we are pleased with the existing HETLIOZ non-24 business trajectory, we continue to work on new lifecycle management activities to further support the long-term potential for HETLIOZ. These activities include our work in jet lag disorder, Smith-Magenis Syndrome or SMS and our European commercialization activities. In March, we announced results for the JET8 Phase III clinical study to treat jet lag disorder. This study saw significant and clinical meaningful effects of HETLIOZ on the primary endpoint of this study, as well as multiple secondary endpoints in the treatment of jet lag disorder. In May, we also released the results from the JET study, 2102 of transatlantic travel. The results of the JET study are supportive and add to the body of evidence of the effects tasimelteon on jet lag in the context of five and eight hour time zone, eastward transatlantic travel. We're in the process of preparing a supplemental NDA and plan to submit to the FDA by end of year. The HETLIOZ Smith-Magenis Syndrome pivotal clinical study is progressing and we expect to communicate top-line results by year-end. This will present a significant effect towards helping patients with this rare condition. Our experience with the SMS community has furthered our interest in the potential to develop HETLIOZ as a treatment for sleep problems associated with neurodevelopmental disorders. In Germany, the full commercial launch of HETLIOZ is proceeding, including the initiation of a pilot non-24 awareness campaign. This direct-to-consumer pilot has already increased awareness of non-24 and increased the number of potential patients who obtained in the German program for non-24 patients. The Fanapt commercial business appears to be stable, consistent with our expectation for [Technical Difficulty]. We'll continue to asset lifecycle management efforts for Fanapt. And we expect to initiate a pharmacokinetic study of our long-acting injectable formulation for the treatment of schizophrenia later this year. I will now turn to Tradipitant, our neurokinin-1 antagonist in late stage clinical development that has emerged as a significant driver of our clinical pipeline with two major indications, pruritus in atopic dermatitis and gastroparesis. After the successful end of Phase II meeting with the FDA in the second quarter, we have initiated EPIONE, our 500 patient Phase III clinical study of Tradipitant in atopic dermatitis. The equipment efforts in the Tradipitant gastroparesis clinical study are now working. We can now report that as of today, 110 patients have been randomize in this study. With the number of patients since screening, we are now on target to randomize approximately 150 patients and expect to report results by year-end. Gastroparesis is a gastrointestinal disorder of delayed gastric emptying that carries significant morbidity and mortality representing a significant unmet medical need. As there are few treatment options for these patients, the demonstration of the therapeutic effect by Tradipitant could represent a significant advance for patients with this disorder, as well as a large commercial opportunity for Vanda. We are progressing with our oncology program for Trichostatin A and HDAC inhibitor developed to treat hematologic and other malignancies and the first patients in this Phase I study are expected to begin in the third quarter. I will now turn the call back to Jim Kelly to discuss our second quarter 2018 financial results.

[James Kelly:]

Thank you, Mihael. Total revenue for the second quarter of 2018 was $47.4 million, a 9% increase compared to $43.6 million in the first quarter of 2018 and a 13% increase compared to $42.1 million in the second quarter of 2017. HETLIOZ net product sales grew to $28 million in the second quarter of 2018, a 10% increase compared to $25.4 million in the first quarter of 2018 and a 25% increase compared to $22.5 million in the second quarter of 2017. The HETLIOZ patients on therapy number continues to grow quarter-over-quarter with monthly new patient growth rates consistent with our full year 2018 financial guidance. As of June 30, 2018, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand. Specialty pharmacy's inventory on hand at the end of the second quarter of 2018 was approximately flat when compared to the first quarter of 2018. Fanapt net product sales of $19.3 million in the second quarter of 2018 reflect a 6% increase compared to $18.2 million for the first quarter of 2018 and a 1% decrease compared to $19.5 million in the second quarter of 2017. Wholesalers' inventory on hand at the end of the second quarter of 2018 was down slightly when compared with the first quarter of 2018. Fanapt prescriptions as reported by IQVIA exponent were 27,832 in the second quarter of 2018, a 2% increase compared to the first quarter of 2018. Prescription trends remained consistent with our full year 2018 financial guidance. You will see in our press release that Vanda is offering non-GAAP financial information. We do so, because we believe that the non-GAAP financial information can enhance an overall understanding of our financial performance when considered with GAAP figures. Vanda's non-GAAP net income and net loss excludes stock-based compensation and intangible asset amortization. On a non-GAAP basis during the second quarter of 2018, Vanda recorded non-GAAP net income of $7.7 million as compared to non-GAAP net income of $6.6 million in the first quarter of 2018 and non-GAAP net income of $1.6 million in the second quarter of 2017. On a non-GAAP basis, for the second quarter of 2018, Vanda recorded non-GAAP operating expenses excluding cost of goods sold, stock-based compensation and intangible asset amortization of $35.1 million compared to a $33.1 million in the first quarter of 2018 and $36.4 million for the second quarter of 2017. Vanda's non-GAAP operating expenses have been fairly stable over the past six quarters ranging between $33 million and $39 million a quarter. However, we do expect to see an increase beginning in the third quarter of 2018 associated with the Phase III clinical study for Tradipitant for pruritus and atopic dermatitis that was initiated in June of 2018. Vanda's cash, cash equivalents and marketable securities referred to as cash as of June 30, 2018 were $231.2 million compared to $248.8 million as of March 31, 2018, representing a decrease to cash of $17.8 million during the second quarter of 2018 and that included a $25 million milestone payment to Bristol-Myers Squibb. Vanda reiterate its prior 2018 net product sales guidance and provides an update to non-GAAP operating expenses in year-end 2018 cash guidance and expects to achieve the following financial objectives in 2018. Net product sales from both HETLIOZ and Fanapta between a $180 million and $200 million. HETLIOZ net product sales of between a $108 million and a $118 million. Fanapt net product sales of between $72 million and $82 million. Non-GAAP operating expenses excluding cost of goods sold of between a $153 million and a $163 million. This compares to prior guidance of between $163 million and $173 million. Non-GAAP operating expenses excludes intangible asset amortization expenses of $1.7 million and stock-based compensation of between $11 million and $15 million. Year-end cash is expected to be between $225 million and $235 million as compared to prior guidance of $215 million to $225 million and this includes a payment to Bristol-Myers Squibb of $25 million milestone obligation based on $250 million of cumulative HELTIOZ net product sales, which occurred during the second quarter of 2018. So, now I'll now turn the call back to Mihael.

[Mihael Polymeropoulos:]

Thank you very much, Jim. At this time, we would entertain your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jason Butler from JMP. Please go ahead.

[Jason Butler:]

Hi. Thanks for taking the questions, and congrats on the performance in the quarter. Two questions from me, first for HETLIOZ and Smith-Magenis. Could you give us a little bit more color on how you think - how we should think about the market here, the number of addressable patients and the commercial strategy, I guess how the commercial strategy will differ potentially from that for non-24?

[Mihael Polymeropoulos:]

Yes. Thank you very much, Jason. So, there are significant difference between the SMS community and the non-24 patients. As you recall four years ago when we started commercializing HETLIOZ for non-24, there was very little awareness in the blind or sighted community of non-24 and we had to do a lot of education around that. Now with the Smith-Magenis Syndrome, a disorder that is diagnosed through DNA testing subsequent to the clinical diagnosis, patients are already diagnosed and there is a community of patients that are organized around support groups, a significant support group is an organization called PRISMS that we have been working with over the last several years. So, the commercial launch around Smith-Magenis Syndrome will be more typical of an orphan disorder whether you work together with the families and the support organization and key investigators and physicians that are interested in this field. In terms of numbers, we know that the PRISMS organization has several hundred families in their membership and of course, there is a wider audience outside of membership. So, we believe that this is what will form the nucleus of the launch.

[Jason Butler:]

Okay, great. And then on Tradipitant and gastroparesis. Can you just remind us of the changes that you made to improve the enrolment rate? And just give us an overall sense of what the patient population is and potentially what kind of baseline patient characteristics we should be expecting in the enrolled population?

[Mihael Polymeropoulos:]

Yes. Just to remind everyone that this study aims to recruit patients with a prior diagnose of gastroparesis that in the vast majority of them was diagnosed through gastric emptying studies. If that was not performed, we have offered to conduct this study to confirm the diagnosis. However, the patients today, the vast majority of them already have that test done before coming to us. In terms of characteristics, the patients are balanced between idiopathic gastroparesis and diabetic gastroparesis where at least we attempt to balance them. In terms of what we did differently, and you all recall that couple of quarters back we're discussing how slow the recruitment was and difficult to recruit and that had to do in a fundamental change that the company did. We decided to advertise directly to consumers through national radio ads that we undertook during the spring and in fact some of them are ongoing. That allowed us to access thousands of interested patients who opted-in in our database, we connected them to our sites and some of them enrolled already in the study. As I said, a 110 of them now have been randomized and they are part of our study. So, I would say the largest change was the direct-to-consumer campaign we announced on the radio.

[Jason Butler:]

Okay, great. That's helpful. Thank you for taking the questions and congrats again on the quarter.

[Mihael Polymeropoulos:]

Thank you.

[Operator:]

And j next question comes from Joel Beatty from Citi. Please go ahead.

[Joel Beatty:]

Hi. Thanks for taking the questions. First one is one HETLIOZ and about the growth that you saw this quarter. Could you characterize amount that came from the blind versus sighted population?

[Mihael Polymeropoulos:]

Jim?

[James Kelly:]

Hey, Joel. I appreciate the question. While we're not necessarily going to give too much detail on the relative reading, what we do want to share is that beginning in the end of March, we took our field force that was uniquely focused on what we have traditionally called the PDP opportunity, patient-directed physicians and put them back to work uniquely focused on that opportunity. You might remember in the fourth quarter those 24 HETLIOZ representatives were helping our neuroscience reps with the HPI initiative. What we saw in the second quarter is when we were able to get those 24 HETLIOZ-focused reps back at their original task, we benefited from being able to source patients from both pools and that's critical to our go forward strategy that we are fully emphasizing strong execution on both paths.

[Mihael Polymeropoulos:]

And just to add on the mix, I want to remind everybody that we have now two sources of non-24 patients that could be categorized between the blind and sighted. While our sighted group of patients continues to rapidly increase, so does the blind. And at this time, the blind non-24 patients continue to be the majority of patients from treatment. However, as we move on with our sighted initiative, this balance may change in the future.

[Joel Beatty:]

Thanks for the information. Then another question on the jet lag indication, which you had additional data on a couple of months ago. Could you describe just at a high level maybe the discussions you've had with FDA and coming to agreement on the trial design that you used to help generate the data you have and whether that will support approval on the jet lag indication? And then also, what do you expect on [ph] Adcom given that this will be the first drug approved for this indication?

[Mihael Polymeropoulos:]

Yeah. A little bit on the summary of the program. This jet lag program indication will be supported by four studies. The studies are a small, but significant proof-of-concept study that was conducted and published in Lancet that showed the base phase-advance in properties of the drug both on circadian rhythms, Melatonin was measured at that time, but also improving the sleep-wake parameters. Then, two critical studies, the JET5 and JET8, these are studies where patients experienced a 5 hour and 8 hour phase-advance and this was a steep lab-based study. And finally, the JET study, which was a travelers' study. People travelled from U.S. point to the UK. Those that experienced significant jet lag, they travelled again, and they were randomized to drug or placebo. This was an exceedingly difficult study to run. So, it recruited only about 24 or so patients. The results of that study however, despite the small number of patients were positive, demonstrating again, the robustness of effect in treating jet lag even other traveller conditions. In our prior discussions, as under Phase II with the FDA, we had agreed that at that point we had conducted the small study in the JET5 study that only study would suffice and the proposal we had made was of this transatlantic flight. Now of course, we have that transatlantic flight and we have the JET8 study. So, we feel very confident that we have a very significant body of evidence that demonstrates the effect of tasimelteon in jet lag. And furthermore, I want to add that we viewed with everybody the JET8 study. And of course, not only we saw a very significant clinical effect, but the confidence around this data that was demonstrated by highly significant p values for this segment, the entire program. You asked about the potential of an advisory committee, and of course as you know, since it's the first time a drug will be approved in such an indication, this advisory committee may happen, and we would welcome it. The other thing that is important to keep in mind is, with the drug first in the indication, you would be typically eligible for a priority review. And of course, we will apply for a priority review of this indication. The clock we understand would be of six months from receipt of the application. And therefore, provided this review goes smoothly and the sNDA submission is planned before the end of the year, we could be in a position that this time next year we will be in the midst of the launch in the jet lag indication.

[Joel Beatty:]

Great. Thank you.

[Operator:]

And our next question comes from Matthew Andrews from Jefferies. Please go ahead.

[Matthew Andrews:]

Hey, good afternoon. I know the HPI is still early stages, roughly three quarters, three full quarters, can you talk about your thoughts relative to whether you expect any seasonality as we move through this summer and has there been seasonality with the blind business? It's my first question.

[Mihael Polymeropoulos:]

Thank you very much. I will avoid to make a prediction with less than a year on seasonality. What I can say about HPI that we have seen strong demand. And also, we have continued to see strong resistance by insurance companies who very often in our opinion inappropriately deny treatment, but eventually upon appeal, they do approve the treatment for patients. So, we expect to see this kind of resistance continuing. I'd also want to remind that in June we undertook a reorganization of the Fanapta sales force that promote HPI and that was a very significant reorganization and we're in the midst of hiring in full the sales force like up to a number of the 115 after we changed about 35 or so sales representatives. So, we do expect that this reorganization will affect the production of new script during that reorganization, but we do not expect the reorganization to affect the overall performance of the third quarter or beyond. And we believe that this will strengthen actually our presence in the psychiatry's office in the promotion of both Fanapt and HETLIOZ.

[Matthew Andrews:]

And Jim, did gross-to-net improve in Q2 for HETLIOZ?

[James Kelly:]

Of course, you're asking the sequential improvement as compared to the Q1.

[Matthew Andrews:]

Yes, that's right.

[James Kelly:]

The trend that we have seen in prior years where Q1 is the higher gross-to-net and then it drops down into Q2 and subsequent that certainly is continuing here. So, we did see an improvement in gross-to-net.

[Matthew Andrews:]

And then has Germany still been de minimis in terms of revenues or has that grown in the last couple of quarters?

[James Kelly:]

Well, while we do continue to grow in Germany as a portion of the total, it continues let's say fall into the de minimis category. But I believe you heard Mihael talk about some of the pilot work we're doing with direct-to-consumer advertising for non-24 awareness.

[Mihael Polymeropoulos:]

And just to underscore that, while there is some similarities with the U.S., there are differences as well. And the similarities, people with non-24, they want to learn more, and they want to try the treatment. And therefore, we have seen a very warm reception to the radio awareness ads in Germany. One of the differences that in the German system, while patients do want to go to their primary care doctors as Americans do, primary care doctors are very quick to refer patients to sleep doctors. And that's fine, however sleep doctors in Germany are booked a couple of months ahead of time or more. So, there will be a delay and lag of translating newly interested in diagnosed patients into treated patients and a lag that would be longer than we have seen in the U.S.

[Matthew Andrews:]

And then Jim for the SG&A trend, it's been flattish quarter-on-quarter. Should we expect a meaningful increase through the end of the year or a little less rapid growth as you continue to promote with HETLIOZ and the reorg with Fanapt?

[James Kelly:]

Yeah. Given the pace of our ability to find talented sales reps and backfill, I don't expect there to be any material impact on our SG&A trends linked to some of the change in reps. When we look at our operating expense trajectory, our expectation and my expectation is that you're going to continue to see a fairly stable SG&A quarter-to-quarter trend for the rest of the year. Where you will see a change in trajectory is really in the R&D space. We have been averaging over the past six quarters our GAAP OpEx number of about $10 million a quarter. And with the beginning of the Phase III program with Tradipitant, we are expecting an uptick beginning this quarter, representing that and of course the full pull through of the gastroparesis study this year as well along with Smith-Magenis.

[Matthew Andrews:]

Yeah. And then just lastly as it relates to the Phase III start for Tradipitant, can you share with us if there have been any meaningful changes with the protocol compared to what you communicated a quarter or so ago on what you thought the endpoint would be, length of dosing et cetera? Thanks.

[Mihael Polymeropoulos:]

No changes. So, the protocol is very consistent with what we talked about before.

[Matthew Andrews:]

Okay. Thank you, guys.

[Mihael Polymeropoulos:]

Sure, right. Thank you, Matt.

[Operator:]

And our next question comes from Corey Davis from Seaport.

[Corey Davis:]

Thanks very much. The first one is on the gastroparesis trial. I think you mentioned that a new DTC for the study resulted in like thousands of patients that came into see you. And so, what's the big reason between screened out [Technical Difficulty]

[Mihael Polymeropoulos:]

The last part of the sentence was a little muffled, there was some background noise. Would you mind repeating?

[Corey Davis:]

Yeah. What's the big reason patients get screened out?

[Mihael Polymeropoulos:]

Yeah. So, let me describe DTC campaign. So, in the DTC campaign, we explicitly are looking for patients that have experienced the symptoms of gastroparesis and they are diagnosed with gastroparesis. But of course, patients who are interested to learn more about this study are not necessarily interested to participate in this study and they are not necessarily meeting all the inclusion and exclusion criteria of this study and they are not available to participate in this study for a variety of reasons at the time of the study. So, I think what is very encouraging that there is a community of patients understanding the disorder, sensing the unmet medical need and wanted to interact with sponsors and learn more. So, we're very encouraged with that return of the radio ads.

[Corey Davis:]

Okay. And then on the pruritis study, any change in your thinking on the enrolment time and when you would have data?

[Mihael Polymeropoulos:]

Actually, we would like to have a little more experience with recruitment because we just started. Actually, only a fraction of our plant sites are up right now. So, in the midst of launching the study before we're able to calculate and communicate. But my initial thought and the internal thinking here is that business as usual waiting for sites to recruit patients is not going to be something that's going to work for us. So, you're going to see us actually very quickly taking on national radio ads. In fact, one of them is going to start on the week of August 13, trying to create awareness on the existence of the study and start actually using these new approaches that were discovered with gastroparesis in transplanting them into the atopic dermatitis study. Once we start seeing a little traction with the recruitment and more sites up, I think we're going to be in a better position to calculate the timeline.

[Corey Davis:]

Okay. Last question. Now that you have couple of profitable quarters and you have more cash in Jim's bank account, is there a chance that you might go back into the red and choose to spend more money if the right pipeline, product comes along?

[Mihael Polymeropoulos:]

I would let Jim answer this beautiful question, Corey.

[James Kelly:]

Well, Corey, when you look at the results to-date and the midpoint of guidance through the rest of the year, what you see is that as we ramp up the R&D spend beginning this third quarter, you do begin to put pressure on that profitability and it puts us at least for the rest of the year at a point where we're right around breakeven, maybe a little bit of a loss on the net income basis. Now we haven't guided to next year just yet, but you could imagine some of the things that could play into subsequent P&L profile. And they include everything from the results we get on gastroparesis and our plans there, the speed and size of our second atopic dermatitis study and other lifecycle management activities, plus our plans to launch in jet lag disorder. And so, as all those pieces come into clear focus, we'll of course come back and give you a feedback on the profile.

[Mihael Polymeropoulos:]

Right. But the overall intend is to continue to grow the top-line and our revenue and be able through that to make investments in our research and development. And of course, it is a balancing act. And as we know more, we'll let you know more.

[Operator:]

And this concludes our question-and-answer session. I'll now turn the call back over to Dr. Polymeropoulos for final remarks.

[Mihael Polymeropoulos:]

Thank you very much. And thank you all for joining. And we'll see you on this call next quarter. Thank you.

[Operator:]

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