Vanda Pharmaceuticals Inc.
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Hello and welcome to the Third Quarter 2018, Vanda Pharmaceuticals Incorporated Earnings Teleconference. My name is Michelle, 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 is being recorded. I will now turn the call over to Mr. Jim Kelly, Executive Vice President and Chief Financial Officer. Sir, you may begin.

[James Kelly:]

Great. Thank you Michelle. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals third quarter 2018 performance. Our third 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 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, 2017, and our quarterly report on Form 10-Q for the quarter ended June 30, 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 like to now turn our call over to our CEO, Dr. Mihael Polymeropoulos.

[Mihael Polymeropoulos:]

Thank you, Jim. Good afternoon. This quarter marks more than four years since the launch of Hetlioz for non-24 hours Sleep-Wake Disorder. At this time, we have identified more than 20,000 patients who have non-24 one of the various Circadian Rhythms Disorders. Our innovative approach to commercialize Hetlioz non-24 continues to drive significant revenue growth achieving a 34% year-over-year growth this quarter. We continue building on our success and have now submitted a supplemental New Drug Application to the FDA in order to market [indiscernible] disorder. In Smith-Magenis Syndrome, SMS, we have completed enrollment of the study and plan to have top-line results by end of the year. At the same time, we are now initiating investigations into delayed Sleep-Wake Disorder. One of the most common Circadian Rhythm Sleep Disorders effecting about 0.5% of the population for more than a million people. Now on Fanapt, with a conviction on the exclusivity of Fanapt through 2027, we are initiating two significant two clinical programs. We are currently designing and will soon announce the study in bipolar disorder in maniac and mixed episodes beginning next year. We have also initiated pharmacokinetic studies for our once a month injectable formulation of iloperidone and we planned to begin efficacy studies for this - formulation next year. We believe that the proposed indications of bipolar disorder and the further development of the once a month injectable formulation can significantly increase the commercial opportunities around our psychotic asset. Tradipitant. The most exciting clinical milestone for Vanda is coming up in the next few weeks and it will come from the top-line results of our first Phase II study of Tradipitant in gastroparesis. Gastroparesis is a common and poorly treated disorder with a significant unmet medical need affecting about six million people in the U.S. alone. Our Phase II study of which we will report results next month is 150 patient two arm, double blind Tradipitant placebo 85 milligram twice a day of Tradipitant to evaluate the ability of the drug to improve symptoms of gastroparesis over a period of four weeks. The design of the study includes four weeks of screening, followed by a four week double blind period. The primary endpoint will be improvement in the system of nausea is measured by patient reported outcomes with daily diaries. Our conviction around the efficacy of Tradipitant to improve symptoms of gastroparesis stems from its hypothesized dual mechanism of action in targeting NK1 receptors in areas of the brain responsible for nausea and vomiting as well as NK1 receptors in the summer is possible for gastric acne. The most commonly used agent today for gastroparesis is [indiscernible], which however is limited efficacy and significant safety concerns. More than 300,000 patients are being prescribed [indiscernible] every months suggesting two things. First, that a large of patients are seeking and receiving treatment and second an even large number of patients remain unfigured. We expect to report the results of our Phase II study sometime in December of this year. In the meantime, we are working on the design of open label studies in the Phase III efficacy program. On atopic dermatitis. Briefly the large 500 patient EPIONE, Phase III study of Tradipitant in atopic dermatitis is currently recruiting patients. We have not communicated the expected completion of the study, as we continue to understand the most efficient ways to improve recruitment. While we continue to be excited in pursuing the additional assets in our development pipeline including our Trichostatin A program and our early CFPR program. We are focused and excited the expectations of the results for our gastroparesis and SMS programs next month. Jim will review in detail our financial results, but I want to repeat and specifically highlight the important accomplishment of visualization in achieving a 34% year-over-year growth of our receptions revenue four years since the launch of the assets in the U.S. market. Finally, I want to briefly address the regulatory matter. We recently reported - received a warning letter from the FDA relating to a page of our corporate website. While we do not agree with either the agency's conclusion or the agency's action we have temporarily removed the material in question and we are seeking to resolve this issue with the agency. With that I will now turn the call over to Jim to discuss our third quarter financial results.

[James Kelly:]

Thank you Mihael. Before I review our third quarter 2018 financial results, I will remind listeners to refer to our third quarter press release issued this afternoon. On today's call we will be discussing non-GAAP financial information. The press release we issued this afternoon includes a description of these non-GAAP metrics, why we believe they provide additional insights into the financial aspects of our business and a full reconciliation of GAAP to non-GAAP financial information. In the third quarter of 2018 our strong financial performance was a result of a combination of continued revenue growth and expense control. Total revenue for the third quarter of 2018 was $49.1 million a 19% increase compared to $41.3 million in the third quarter of 2017. HETLIOZ net product sales grew to $29.9 million in the third quarter of 2018, a 34% increase compared to $22.3 million in the third quarter of 2017. The year-over-year growth seen for HETLIOZ reflects the strongest performance in two years. HETLIOZ patients on therapy continues to grow quarter-over-quarter with monthly new patient growth rates consistent with our full-year 2018 financial guidance. As of September 30, 2018, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand. Specialty Pharmacies inventory on hand at the end of the third quarter of 2018 was slightly higher when compared to the second quarter of 2018. Fanapt net product sales of $19.2 million and the third quarter of 2018 reflects a less than 1% increase compared to $91.1 million in the third quarter 2017. Wholesalers inventory on hand at the end of the third quarter of 2018 was down slightly when compared to the second quarter of 2018. Fanapt prescriptions as reported by IQVIA exponent were $27,216 in the third quarter of 2018, a 2% decrease compared to the third quarter of 2017. Prescription trends remain consistent with our full-year 2018 financial guidance. On a non GAAP basis for the third quarter of 2018 Vanda recorded non-GAAP net income of $10.4 million as compared to non-GAAP net loss of $1.3 million in the third quarter of 2017. The third quarter of 2018 results reflect the fourth consecutive quarter of growing non-GAAP net income and a year-to-date non-GAAP net income of $24.7 million. Vanda's non-GAAP operating expenses have been fairly stable over the past seven quarters ranging from $33 million to $39 million a quarter. While Vanda has continued to grow its top-line revenue over that period. For the third quarter of 2018, Vanda recorded Non-GAAP operating expenses of $34.6 million compared to $38.5 million in the third quarter of 2017. In the third quarter of 2018, we saw an increase of $1.5 million in Non-GAAP R&D expense as compared to the second quarter of 2018. This increase was associated with EPIONE the Phase III clinical study of Tradipitant in atopic dermatitis that was initiated in June 2018 and other clinical development activities. We expect Non-GAAP operating expenses to continue to rise in the fourth quarter of 2018, driven by both R&D and commercial activities. Vanda's cash and cash equivalents and marketable securities referred to as cash as of the September 30, 2018 were $240.6 million representing an increase of $9.4 million during the third quarter of 2018. On to financial guidance. Vanda reiterates its prior 2018 net product sales guidance and provides update to Non-GAAP operating expenses, intangible asset amortization and year-end 2018 cash guidance and expects to achieve the following financial objectives in 2018. Net product sales from both Hetlioz and Fanapt between $180 million and $200 million. Hetlioz net product sales of between $108 million and $118 million. Fanapt net product sales of between $72 million and $82 million, Non-GAAP operating expenses excluding cost-to-good sold of between $140 million and $150 million, this compares to prior guidance of between $153 million and $163 million. Non-GAAP operating expenses excluding intangible amortization expense of $1.5 million as compared to prior guidance of $1.7 million, and stock based compensation of between $11 million and $15 million. Year-end 2018 cash is expected to be between $240 million and $250 million as compared to prior guidance of $225 million and $235 million. So I will now turn the call back to Mihael.

[Mihael Polymeropoulos:]

Thank you Jim. At this time, we would love answer any questions you may have.

[Operator:]

Thank you sir. We will now begin the question-and-answer session. [Operator Instructions] The first question in the queue comes from Jason Butler with JMP Securities. Your line is open, sir.

[Jason Butler:]

Hi thanks for taking the questions. First one on Hetlioz. Can you give any more color on to the commercial dynamics in the quarter for example, you know is growth being more by higher rate of patient adds or lower rate of discontinuations or both. Are you seeing greater growth in the psychiatry assets versus the [pointations] (Ph). And then just if you can give us a sense today where you stand, what proportion of the revenue is in the blind versus the psychiatry setting? Thanks.

[Mihael Polymeropoulos:]

Thank you Jason. I will pass this question on to Jim and we can characterize without giving too much detail, a couple of significant things that patient growth continues and how does that compare to expectations and also try to give you a little color on the HPI versus the PDP side of the business. Jim?

[James Kelly:]

Yes certainly. Jason, we are saying book in the third quarter and year-to-date and that I find very impressive this contributions from both our core blind or as we call it PDP business for heavies plus a new patient scripts and new patient starts from HPI. Without question the HPI now that we are a full-year into it has been incredibly successful and has driven significant growth this year. It is fair to say we received more scripts for HPI than we do for our PDP business, but I would not want to lead you to believe that it is the sole contributor here. Our core business PDP is very strong. One other things that I found most impressive about this quarter Q3. Is that if you think back about prior years, Q3 has been a tough quarter for us and we were very impressed with our ability to maintain a momentum through the third quarter, which can be a quiet time just based on vacations and other.

[Mihael Polymeropoulos:]

And just to characterize HPI further, HPI now is a year out the program and what is impressive is the significant continues new demand, new scripts written by psychiatrists in the HPI initiative. Well, Jim is correct that the PDP parts of the business which is mostly blind individuals, these are people who have opted in the database continues to be a big driver and source. However, in new demand and that is definitive demand here is new scripts written. HPI continues to significantly outstrips the demand of PDP. So with that one would have expected to actually saw even bigger growth than the 34% which is nonetheless impressive. So why we have not seen even bigger growth? The HPI business as we characterized before typically the demand two to three times higher than the PDP. However, the resistances buy and serve on filling out the script, although it is only indication and there is not a drug available for these patients continues to be strong. We are working with our patients, we are working with the doctors to impress upon this ensures that the drag is necessary. We are making a lot of progress, but if we were to match the demand generated, we feel of course these numbers would have been much, much bigger.

[Jason Butler:]

Okay, that is great. Two more questions. First, can you just on Tradipitant give us a sense of how the patient population you have enrolled into this gastroparesis study compares to the AMEND trial, the AFREN trial?

[Mihael Polymeropoulos:]

Yes. Actually we are joined also hear by [indiscernible], who is in charge of the developing program and he can give you a little color, but the high level is that in our trial, we have enrolled both patients with idiopathic gastroparesis and diabetic gastroparesis. I will turn on to Gian Piero for the comparison within that.

[Gian Piero Reverberi:]

Yes. Absolutely thank you helping me house. So as with the AMEND study, we recruit as Mihael mentioned the similar mix of idiopathic and diabetic gastroparesis patients. In terms of some differences which we feel our improvements of finding a signal in a study of gastroparesis. We explicitly recruited patients who had an objective diagnosis of the gastroparesis. So the AMEND study had a mixed population of individuals who not only had gastroparesis as diagnosed by Scintigraphy, but also those who had suspected gastroparesis as some percentage of the population. For our study, we only recruited patients who have demonstrated delay at empting either via Scintigraphy gastric otherwise known as a gastric empting study and or a breadth test.

[Jason Butler:]

Okay great. And then just one last question. Mihael, wondering if you can give us any insights into what has driven this decision now to move into bipolar disorder with Fanapt. I know this is something that you have talked about a number of times since you clarified the IP durability a little over a year ago, but is there anything you are seeing in terms of the marketplace or progress with the LII for example that is triggering the decision - the go decisions today. Thanks.

[Mihael Polymeropoulos:]

Yes good decision is that now we have not only more of an year pass the district court decision, but we apply it on the Court of Appeals. So the only step that is left for our generic contender is to petition the Supreme Court of the United States. And I'm pretty sure they will do that, but we also recognized that Fanapt can potentially have a place in this psychiatry [indiscernible] beyond the already approved indication of schizophrenia. So the fact that we have a once a month injectable formulation is actually exceptional in that not all anti-psychotics can develop once a month injectables. A great example of that is very useful tag of AstraZeneca, [indiscernible] now Generic a great product that has healed a lot of patients in different indications cannot be formulated as a once a month injectable. So we are pursuing that. And the goal for bipolar is actually driven by the further conviction that we have exclusivity, we can make these investments and also our hypothesis that Fanapt should successfully treat patients with many [indiscernible] episodes.

[Jason Butler:]

Great. That is really helpful. Thanks for taking the questions and congrats on a great quarter. Thanks.

[Mihael Polymeropoulos:]

Of course. Thanks Jason.

[Operator:]

The next question in the queue comes from Joel Beatty with Citi. Your line is open.

[Unidentified Analyst:]

Hey guys, this is [Sean] (Ph) calling in for Joel. My first question was regarding Tradipitant. How will the Phase II study results roll out? How do you define success and if positive, what could a pivotal study look like in your view?

[Mihael Polymeropoulos:]

Yes, thank you. First of all on the timing, as we said it's going to be next month. The primary endpoint of the study is change from baseline in the contrast with placebo on the measure of nausea is measured on patients sleep guidance. We have not defined a cut off criterion for what constitutes clinically meaningful, but of course recent Phase II study, the most important is to see number one, whether the drug improves nausea, whether it affects any other of the secondary symptoms in gastroparesis and clearly learn what is that effect size. And again this being a Phase II study, we will learn quite a few things, the first time with replacing the contractual phases that can further define what the Phase III program can look like. We have discussed before that one of the designs we are thinking about in safety program is actually a randomized RESOLVE study where we stabilize patients with gastroparesis on [indiscernible] and then created randomize withdrawal period and measuring presenter patients relaxing and time to relapse. But of course, we are going to learn so much more once we un-blind this study. Both to answer your question of the size of the effect, the percent of patients responding to the five million point of nausea, but also as I said the secondary endpoints.

[Unidentified Analyst:]

Okay. and then just as a follow up for Hetlioz indication with potentially two new indications on the horizon, Smith-Magenis and Jet Lag, can you provide some color on commercial strategy launch expectations and any color on your the marks recently provided?

[Mihael Polymeropoulos:]

Yes, so I would say for Smith-Magenis syndrome is a little premature, given the fact that we will for the first time see results in December. However the preliminary long strategy on SMS is actually a more classic orphan indication studies where you begin with the advocacy organization, in this case is a wonderful organization prisms that represents quite a few of the families and they had worked diligently with us over the years to identify new faces. So that the more classic model of commercializing in an orphan indication and alongside some diagnostic center that eventually this patients get their DNA diagnosis, one of them being that [indiscernible] we believe we have very exciting launch plan that we are working vigorously in anticipation of an approval later next year. We are not going to be sharing today that plan and we will have to wait for later point.

[Unidentified Analyst:]

Thank you so much. I appreciate it.

[Mihael Polymeropoulos:]

Sure.

[Operator:]

Okay. The next question in the queue comes from Esther Rajavelu from Oppenheimer. Your line is open.

[Esther Rajavelu:]

Hi thank you for taking my questions. First can you talk about the R&D expense in the quarter, that are lower than what we would have expected given the ongoing clinical trial. So maybe if you can talk about what the trends are and where you spent the money that would be helpful?

[James Kelly:]

Hi Esther, thanks for asking. And what you saw in the quarter was a sequential uptick in R&D, it's not that $1.5 million from nine or so to about 11. And so what the underlying for those include completing the full enrollment of gastroparesis with Tradipitant plus the beginning of the Phase III program also for gastroparesis. So that is what is driving the uptick. Now with that said, there is been some other expenses that have rolled off. Jet Lag earlier in the year we have some activities there and so you see sort of some projects ending, new products coming online and it's our expectation that as we continue to head down the path of enrolling more and more patients in the atopic dermatitis study that you will see a continued increase in R&D in coming quarters as we execute that study.

[Esther Rajavelu:]

Got it thank you. And then following up on your comment regarding access for Hetlioz patients who are not blinded. What step that are you taking to increase assets and is pricing a consideration in these discussions with payers?

[Mihael Polymeropoulos:]

No actually, we are not having any discussions with payers and price is like a point of consideration. We need to recognize that Vanda has priced that appropriately. There are many insurance organizations that gladly provide the drug for those hat suffered from non-24. However, as you can imagine not everybody behaves the same way. The objection by insurance companies is not that the price is high, some of the objections are not very logical. For example, we have seen objection by insurance companies where they deny patients with non-24 the drug for the following reason. And I quote ‘you have been properly diagnosed with non-24. Hetlioz is a drug for non-24. You have non-24 and therefore we deny your coverage. I know it’s unfair, yes, but this is exactly what patients are suffering through. Unfortunately, very few people know the reality of how insurance companies behave, but as I said, we work diligently with the patients and doctors to overcome these objections and allow patients to get access to the drug.

[Esther Rajavelu:]

So, I would be curious to know who the insurance company is that I’m sure you won’t disclose that.

[Mihael Polymeropoulos:]

And of course I’m not going to tell you, and there are more than one. There is some bad actors, there is some great actors, but hopefully some logical people who [indiscernible] these organizations eventually will be prevent.

[Esther Rajavelu:]

So, but in terms of increasing access or working with patients and prescribers. Do you anticipate that you can actually increase access without compromising on price? Okay.

[Mihael Polymeropoulos:]

Absolutely. Yes, we are making continuous progress and the very important thing is for our patients and patients on any drugs to remember that on this one, the lawmakers, I think it guarded it right. People do not know necessarily the rights, but if insurance tells you know you have the right to appeal, you have the right to an external appeal, you have a right to go to an administrative law judge. And if you do this and if you need the drug, and the drug is good for you, or at least to try, you will get the insurance to cover the drug. Unfortunately with all these hurdles, the insurance provide some of the patients on major discourage just because they don't know. But more and more of our patients and doctors are actually are doing the check and those to do fix it.

[Esther Rajavelu:]

Got it. And then lastly on gastroparesis, have you seen any preliminary data on the Phase II study or is management completely blinded for the data yet?

[Mihael Polymeropoulos:]

The un-blind the study won’t be at the conclusion in December. So we cannot really give any insights. We all hope that it's going to be a good studying and we learn a lot.

[Esther Rajavelu:]

Alright. Thank you so much

[Mihael Polymeropoulos:]

Sure.

[Operator:]

Thank you. The next question in the queue comes from Derek Archila with Stifel. Your line is open.

[Derek Archila:]

Hey, thanks. I just have a one and I'm sorry if -. Yes, so, I said one, so I guess can you guys give some color on non-24 and then the rates of sale of different - I guess different patient groups there method? Thanks.

[Mihael Polymeropoulos:]

Yes, I will take that one. This is a question that we have gotten from time to time, which is when you think about the PDP or blind patience as compared to sighted patients with psychiatric co-morbidities who developed non-24 what might their differences look like whether it's fail rates or whether its persistency or even at the very front of the funnel will be intakes. And I will kind of be happy to walk you through each of the pieces. At the top of the funnel you heard us mentioned earlier that intake for cited patients with non-24 or orders of magnitude higher month in and month out than for our traditional TDP business. However, reimbursement is continuing to be a struggle with that crowd. That said we have seen very meaningful contributions from both parts of our business to our month in, month out in new patient starts. When you look at the persistency rates what we have seen is after adequate trial we have been impressed the ability the sited patients the benefit from Hetlioz is slightly lower than the blind patients in our study, but still very, very good.

[James Kelly:]

Yes to clarify when it gives us a percent of benefit. In fact we are using to say that what percent of people continue to refill that is fair.

[Mihael Polymeropoulos:]

That is exactly right, because there is no reason to believe that one group should benefit more or different than the other. And one of the reasons why that and then subsequent persistency becomes so important is that what we found is that for these patients that remain persistent on Hetlioz whether they are sited or blind they show a very high loyalty and that is critical, because these are foundational patients from which we will continue to grow our business.

[Derek Archila:]

Perfect. Thanks.

[Mihael Polymeropoulos:]

Alright.

[Operator:]

And the last question in the queue comes from Charles Duncan with Cantor Fitzgerald. Your line is open, sir.

[Pete Stavropoulos:]

Hi this is Pete Stavropoulos on for Charles. So one question about cash flow provisions. What would you expect the next steps to be and any specific patient population that you may chose to focusing in on?

[Mihael Polymeropoulos:]

Yes, thank you Pete. So what we have prepared and now we are preparing for success which means we are optimizing our ongoing open label study and we are in the final steps of designing a Phase II program. And as I discussed before, this program will likely include a randomized withdrawal type of design. In terms of patients to focus as Gian Piero explained earlier we have enrolled both patients with idiopathic gastroparesis and diabetic gastroparesis with no reason to expect that one group will behave differently than the other, but we will have to wait and see the results. And just to remind the audience that I mentioned earlier that gastroparesis today the approved drug is [indiscernible] can used only for three months because of potentially significant side effects of [indiscernible] symptoms. And that indication is for diabetic gastroparesis patients. Of course idiopathic a years in off label, but it is our hope not only that treatment can be effective, but can be effective regardless of the crystallite of gastroparesis , but we will have to wait and see.

[Pete Stavropoulos:]

Well thanks and the question for Hetlioz. So you had a study where it showed that do not cause driving impairment. Is there any way you can exploit this to sort of uniquely position Hetlioz in additional indication.

[Mihael Polymeropoulos:]

Yes thank you. So of course that was a positive surprise for us. Just to remind the rest of our audience here that in the course of submitting the sNDA for just jetlag disorder to the FDA, one of the requirements is to conduct a driving performance study. And that is required for any drug that is being given to treat any symptoms [indiscernible]. So patients are taking the drug before bedtime, and then nine hours later are doing a controlled driving simulator study to measure performance. This study is also have a control and the control is zopiclone, zopiclone is a mixture, and in the U.S. were more familiar with Eszopiclone Lunesta. That is used as a positive control, because zopiclone is known to have a significant impact on driving performance. The phase of surprise here was that [indiscernible] did not in their next phase driving performance on a number of measures that I have been predetermined. So we are actually will be proposing to include this information on our label and that is not specific of course the jetlag, but any indication that [indiscernible] has indicated. And we believe that is of extreme significance where the patients will take it. As to our knowledge, there is no other sleep aid or sleep promoting drug available today that does not impair driving performance next day. So we think it is a very, very important feature of [indiscernible]. But of course, these data have been submitted now to the FDA for review.

[Pete Stavropoulos:]

Thank you very much.

[Mihael Polymeropoulos:]

Of course. Thank you Pete.

[Operator:]

That was our last question. I will now turn the call back over to our CEO, Dr. Mihael Polymeropoulos. Sir.

[Mihael Polymeropoulos:]

Thank you very much for your questions and your attention. And I'm sure we will be talking again next month with the results from the two studies, SMS and gastroparesis. Thank you very much.

[Operator:]

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