Vanda Pharmaceuticals Inc.
Q4 2016 Earnings Call Transcript

Published: 16 Feb 2017

[Operator:]

Welcome to the Q4 2016 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Victoria and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. And I’ll now turn the call over to Jim Kelly, Vanda’s Senior Vice President and Chief Financial Officer. Jim, you may begin.

[Jim Kelly:]

Thank you, Victoria. Good afternoon and thank you for joining us to discuss Vanda’s Pharmaceuticals fourth quarter and full year 2016 performance. Our fourth quarter and full year 2016 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, Dr. Polymeropoulos 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 meaning of federal securities laws. Our forward-looking statements are based on 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 on Financial Condition and Results of Operations sections of our annual report on Form 10-K for the fiscal year ended December 31, 2015 and on our subsequently filed quarterly reports on Form 10-Q, 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 the call over to our CEO, Dr. Mihael Polymeropoulos.

[Mihael Polymeropoulos:]

Thank you, Jim. Good afternoon and thank you very much for joining us today. 2016 was an exceptional year for Vanda as we continue to demonstrate strong growth in our commercial business and secured long-term exclusivity for Fanapt. We entered 2017 with a conviction to return the U.S. Fanapt business to growth and expect top line results from three important clinical studies. Vanda full year revenues grew by 33% in 2016, highlighting the success Vanda has had commercializing both HETLIOZ and Fanapt over the past year. Compared to prior year, HETLIOZ grew by 62% and Fanapt grew by 13%. As you all know, in August 2016, the Delaware District Court ruled that Roxane Laboratories proposed genetic version of Fanapt infringe the asserted claims of the Fanapt 610 and 198 patents and issued an injunction barring Roxane for marketing its product until the expiration of the later expiring 610 patent on November 2, 2027. This event will now allow Vanda to establish and grow its Fanapt psychiatry franchise, building a solid engine of revenue growth. On Fanapt, we are making great progress on the expansion of our sales and marketing team. We expect to have our new sales team hired, trained and calling on psychiatrists by the end of the first quarter. This will allow for a broader reach into the prescriber base to drive new growth. On HETLIOZ, our U.S. commercial business is in its third year and continues to add new patients. Our HETLIOZ team is focused on driving growth by creating awareness about Non-24 and assisting patients to learn more about treatment options. In Germany, we are in the early stages of the HETLIOZ commercial launch. We have transitioned our initial clinical trial patients over the commercial HETLIOZ and are adding new non-clinical trial patients. The AMNOG reimbursement process is ongoing and we expect our final price to be in place in the third quarter. In other European markets, the preparation of the pricing and reimbursement dossiers are underway. Now, I will turn on the update in our pipeline. First, I would like to update you on clinical development activities ongoing and planned for both HETLIOZ and Fanapt and then discuss our tradipitant clinical studies. We believe that further clinical development with HETLIOZ beyond the current Non-24 indication in adults has the potential of driving significant revenue growth of this franchise over the coming years. Specifically, studies to develop a pediatric formulation and a randomized study in patients with Smith-Magenis syndrome are currently underway and we expect the results from each one of them in 2018. Development of a pediatric formulation of HETLIOZ will open new opportunities for indications that extend beyond Non-24 to a broad range of developmental disorders with circadian challenges, including autism spectrum disorders. Enrollment in the HETLIOZ Jet Lag Disorder study is progressing well and we expect to have results during the second half of 2017. Globally, each year, over 100 million passengers fly 5 or more Eastward time zones. We believe the market opportunity is very large for an effective treatment option for travelers who experience the severe symptoms from Jet Lag Disorder. On Fanapt, we are evaluating a broad lifecycle management plan under which a number of opportunities are under consideration. These opportunities include indications of bipolar and major depressive disorders, treatment of nightmares in posttraumatic stress disorder, irritability in patients with autism as well as the development of a once-a-month injectable formulation of Fanapt for treating schizophrenia. We plan to prioritize and select programs for further development. In Europe, the oral Fanaptum tablets Marketing Authorization Application is under review by the EMA and we expect the decision during the second half of 2017. Our clinical development pipeline work on tradipitant and trichostatin A is ongoing. A tradipitant study in patients with chronic pruritus is ongoing and is expected to be completed around the middle of the year. A second tradipitant study in gastroparesis started in the fourth quarter of 2016 and is expected to report the results in the fourth quarter of 2017. Gastroparesis affects as many as 1.8% of the U.S. population or approximately 6 million people and constitutes a significant unmet medical need. On trichostatin A, our histone deacetylase inhibitor for oncology indications were on track for filing an IND in mid-2017. In summary, 2016 was an exceptional year for Vanda and we look forward significant growth for our products over the quarters and years to come. Jim?

[Jim Kelly:]

Thank you, Mihael. I will now – so I will now update you on the fourth quarter and full year financial results. Total revenue for the full year 2016 was $146 million, a 33% increase compared to $109.9 million for 2015. Total revenue for the fourth quarter of 2016 was $38.2 million, a 1% decline compared to $38.5 million in the third quarter of 2016 and a 20% increase compared to $31.8 million in the fourth quarter of 2015. HETLIOZ net product sales grew to $71.7 million for the full year 2016, a 62% increase compared to $44.3 million for 2015. HETLIOZ net product sales grew to $19.3 million in the fourth quarter of 2016, a 3% increase compared to $18.7 million in the third quarter of 2016 and a 27% increase compared to $15.1 million in the fourth quarter of 2015. As of December 31, 2016, the specialty pharmacy channel held less than two weeks inventory is calculated based on trailing demand. Fanapt net product sales grew to $74.3 million for the full year 2016, a 13% increase compared to $65.6 million in 2015. Fanapt net product sales of $18.9 million in the fourth quarter of 2016 reflect a 4% decline compared to $19.8 million in the third quarter of 2016 and a 13% increase compared to $16.7 million in the fourth quarter of 2015. 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. During 2015 and ‘16, Vanda non-GAAP net income and net loss excludes stock-based compensation and intangible asset amortization. On a non-GAAP basis, during the full year 2016, Vanda recorded non-GAAP net income of $1.5 million, as compared to a non-GAAP net loss of $18.9 million for the full year 2015. During the fourth quarter of 2016, Vanda recorded non-GAAP net income of $3.6 million compared to a non-GAAP net loss of $10 million during the same period in 2015. On a non-GAAP basis for the full year 2016, Vanda recorded non-GAAP operating expenses, excluding cost of goods sold, stock-based comp and intangible asset amortization of $120.4 million compared to $105.7 million for 2015. Non-GAAP research and development expenses for the full year 2016 were approximately flat year-over-year. And non-GAAP SG&A grew by $14.5 million, as compared to the prior year. On a non-GAAP basis for the fourth quarter of 2016, Vanda recorded non-GAAP operating expenses of $29.4 million compared to $27.1 million in the third quarter of 2016 and $35.7 million for the fourth quarter of 2015. Vanda’s cash, cash equivalents and marketable securities, referred to as cash, as of December 31, 2016, were $141.3 million, representing a decrease to cash of $1.8 million during 2016. I will now provide you with our expected financial objectives that we expect to achieve in 2017, net product sales from both HETLIOZ and Fanapt of between $165 million and $175 million. HETLIOZ net product sales of between $88 million and $93 million. Fanapt net product sales of between $77 million and $82 million. Non-GAAP operating expenses excluding cost of goods sold of between $162 million and $172 million. Non-GAAP operating expenses, excludes intangible asset amortization expense of $1.7 million and stock-based compensation of between $9 million and $12 million. Year end 2017 cash is expected to be between $121 million and $141 million. So I will now turn the call back over to Mihael.

[Mihael Polymeropoulos:]

Thank you very much, Jim. We will be happy to answer any questions at this time.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Jason Butler from JMP Securities. Please go ahead.

[Harry Jenq:]

Hi, this is Harry on for Jason. Just three questions, so the first one on Fanapt, if you could just provide some initial feedback from the expanded sales force?

[Mihael Polymeropoulos:]

Yes, of course. So as we had previously communicated, the plan for this quarter is to expand the sales force from around 50 sales reps from around 50 sales reps last year to about 120, increasing therefore, both reach and ability of call frequency. And we believe that the new sales force will be trained and ready to detail physicians by the end of this quarter.

[Harry Jenq:]

Great. Second question is on the tradipitant pruritus trial what, I guess degree of benefit do you think would be considered clinically meaningful?

[Mihael Polymeropoulos:]

Well, that is still to be debated, as there is not a very good concordance in the literature of what constitutes a significant clinical benefit. But generally speaking, an improvement in the visual analog scale of approximately 3 points or about 20% to 30% from baseline would be considered generally clinically meaningful. Just to point out that in our clinical program, we have collected data both by physicians, collecting digital and analog scale at weekly intervals over the eight week period of the study, but also visual analog scale data on each and other parameters on a daily basis through daily diaries. So it is very likely that both of these scales will be used for endpoints.

[Harry Jenq:]

Okay, thanks. And last question on the SMS trial timelines, can you just clarify, when should we expect data from the Phase 2, 3 open label versus forces the Phase 3 placebo controlled trial?

[Mihael Polymeropoulos:]

Yes and just for clarity for everybody. Smith-Magenis syndrome is a rare disorder, due to a chromosomal deletion in chromosome 17 that affects approximately 15,000 people in the U.S. We present with fascial and developmental aberrations. And one of the cardinal symptoms is insomnia, typically presented with an inversion of the circadian cycle. So Vanda undertook a program over the last couple of years to understand whether tasimelteon could be applicable and useful to treating insomnia seen in patients with Smith-Magenis syndrome. Our clinical efforts involve three main programs. The first one was an observational study without any administration of tasimelteon to better characterize both the biochemical nature of the disorder, but also the sleep-wake cycle aberration, that study has completed and simultaneous observations have been previously published in abstracts in scientific meetings. The second portion was an open label study and this study has studied approximately a dozen individuals over a significant period of time. These results continued to be analyzed and it is our intent to publish that in upcoming suitable Sleep conference. And the third part is the randomized portion of the study, which aims to study individuals in a crossover fashion where some of the patients will start on drug, others on placebo and crossover to the next arm. That – the intent is to form the pivotal study for presentation to the FDA for approval. This study is slow enrolling, as we discussed before with a significant recruitment challenges, not for lack of willingness of families and patients to participate, but with the difficulty of the expression of the disorder participate in the clinical study is a very difficult proposition. That is why you have seen us over the last couple of quarters, we have moved the expectation of closing the study from sometime in 2017 and I will discuss in a year later in 2018. And of course, we will update you as recruitment progresses.

[Harry Jenq:]

Great, thank you very much for taking the questions.

[Mihael Polymeropoulos:]

Of course.

[Operator:]

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

[Matthew Andrews:]

Yes, thank you. Good afternoon. So I was wondering, Jim and Mihael, so if you could just talk about what the investment in the Fanapt sales reps and them coming onboard at the end of Q1. One would be reasonable to expect some sort of meaningful contribution from them on the revenue side. Is that a Q2 event, Q3, Q4, what are your hope and expectations on when that could potentially impact sales?

[Mihael Polymeropoulos:]

Yes. So with the full sales force coming on board, new territories created at the end of the quarter, it is very reasonable to expect that the first 3 months would be related to building. We are certain that the number of our new representatives will already have connections in the field, but nonetheless it will be introducing a new product. So typically that process will take about a quarter. And we believe that it will be a quarter later before we start seeing the effectiveness of that sales force. So for all purposes, we expect rather a continuous small decrease in the Fanapt TRxs in the first half of the year. And it is the latter half of the year and towards the end that we hope to see stabilization and recovery.

[Matthew Andrews:]

Okay, thank you for that. Just on the pediatric HETLIOZ study assuming that the PK data next year are favorable. What’s the actual next step as it relates to indications? Do you have to go to the FDA and layout your clinical program relative to autism spectrum disorder? Can you just talk through the thought process in that strategy?

[Mihael Polymeropoulos:]

Yes, we are actually formulating this strategy now. And there are a couple of options. First of all, we are very keen to make this liquid formulation, if possible, available to children with Non-24. And that is a discussion that we will have with the FDA. Of course, the pharmacokinetic data and what I am suggesting here, Matthew, is the path of bridging the pharmacokinetic data and make an extrapolation to the pharmacodynamic component in Non-24 for pediatric patients. At the same time, as we said, having a liquid formulation that now can be administered to a pediatric population allows us to venture into examining the application of tasimelteon in the treatment of insomnia, in patients with autism spectrum disorders both adult and pediatric alike. And just to remind listeners here that autism spectrum disorders is a rather common disorder in the United States, where alongside many other symptoms in behavioral and developmental arenas, the presence of insomnia is through for the majority of these patients. And it is frequently recorded by patients and their families as one of the very important symptoms to control. No specific treatment today exists for that component. So, we hope that tasimelteon may have an application. So to sum up, pediatric formulation study is ongoing for kids starting as young as age 3. And the first attempt is to develop an extrapolation strategy and discussion with the FDA for treating Non-24 and also begin work with this and the oral solid formulation in patients with insomnia in autism spectrum disorders.

[Matthew Andrews:]

And then I believe there was interim study with – for HETLIOZ with Jet Lag Disorder prior to this Phase 2, 3 that you have run – are running. Can we expect that those data will be presented potentially at a major insomnia meeting this year as well?

[Mihael Polymeropoulos:]

Just to clarify, first of all, again, background for our listeners, the jet lag program consist of, first of all, two early studies that were conducted and published in Lancet in 2008, 2009 and these were the proof-of-concept studies, not actual travelers, but in simulation conditions where we showed positive effects of tasimelteon both on by chemical markers of the circadian rhythm, but also demonstrated ability to improve nighttime sleep parameters and that was a 5-hour phase advance or a 5-hour jet lag simulation study. The current jet lag program has two components, an observational study, which allows to characterize better the sleep-wake aberration and the next day alertness, sleepiness component in actual travelers. There is some no open label intervention, but in continuation of this observational data, we go right into the randomization portion. So, the study today has two components; a laboratory screening than a flight to 5-hour or 8-hour time zone destination eastward [ph], a laboratory observation for 3 nights, a fly back, a washout and for those patients that meet certain criteria of severity of the jet lag expression, they fly again to repeat the same protocol with a 3-night and 3-day observation, now receiving drug or placebo in a randomized fashion. We do not have, Matthew, an immediate plan to publish the observational study data independently, but rather in conjunction with the outcome of the randomized portion of the study.

[Matthew Andrews:]

Okay, great. Thanks for the clarification.

[Operator:]

And our next question comes from Josh Schimmer from Piper Jaffray. Please go ahead.

[Josh Schimmer:]

Great. Thanks for taking the questions. First on cost of goods looks like it ticked down sequentially third quarter to fourth quarter, is there anything explaining that and what should we expect going forward?

[Jim Kelly:]

Hey, I will take that one. Josh thanks for the question. So, I see one of the most important events that happened in the fourth quarter was the reduction in royalty on Fanapt that is owed. So as of mid-November that royalty decreased from 23% to 9% and that’s because it was linked to the expiry of the composition of matter patent. And so on a go-forward basis, you should expect at least in the case of Fanapt, a cost of goods sold profile, which looks like the following, 9% – it will be a 9% royalty and then cost of the physical product, COGM, is about 4% or less than 4% for a total of about 13%. And then, if we turn in and think about HETLIOZ that royalty is 10% and the physical product is little less than 1% or for a total of 11%. And so on a blended basis, we are going to have about 12% plus or minus on a go forward for the next couple of years.

[Josh Schimmer:]

And then when does the royalty on Fanapt fully expire?

[Jim Kelly:]

Yes, a good question. We are working through the full forward-looking royalty trends. So we will be at 9% through the end of 2019 at which point it will downtick in 2020 to 6%. And then we will continue to pay 6% until 2026, at which point, it goes to zero.

[Josh Schimmer:]

Okay, got it. And then I guess you are projecting on the non-GAAP cost of goods are pretty steep inflection, is that primarily SG&A more so than R&D? Maybe you can give us a sense of the split as well as the cadence over the course of the year presumably that reflect the increase in the sales force or Fanapt or something else that’s going on that’s going to drive that?

[Mihael Polymeropoulos:]

Yes, that’s exactly right. So our guidance on non-GAAP OpEx and remind everybody that pulls out the non-cash items of the intangible amortization and also stock-based comp, but also excludes COGS, which is variable, of course linked to revenue. So with that said, the midpoint of the guidance is $167 million and that compares to we spent $120 million in 2016. So it got about $46 million step up. The largest component of that and this is over $20 million of it is the field force, exactly right. It’s the Fanapt field force. And then the remaining components are the following pieces; we have got R&D increasing by about $10 million and that reflects the full pull-through of the studies we initiated in 2016. And as you heard, as we went to the clinical update, many of these things are kicking off in the fourth quarter, gastroparesis, for example, just starting, so that’s your second piece. And then the remaining $10 million is split across; one, marketing programs to support the Fanapt field force and two, on HETLIOZ marketing programs, a combination of full year run rate for the German launch, which you might remember, we really kicked in, in the fourth quarter of last year and then some small incremental programs on the HETLIOZ front. Now your last piece was about cadence and so because our – you are going to see us reach this, our run rate on this likely in the second quarter and that’s because we are not bringing the full Fanapt field force on until mid to late-Q1. So on the SG&A front, you are going to see us hit our stride fully in Q2 forward. Now on the clinical trial front, we are going to have more activity front in the year than back. Although of course, there can always be some degree of lumpiness and that has to do with – of course, we are in the first quarter had everything going at the same time and then readouts as we move forward.

[Josh Schimmer:]

Got it. And then last question on the HETLIOZ, fourth quarter result and then outlook for the year, to what extent do either of those include contribution from Europe?

[Jim Kelly:]

Well, I would say that for 2016, fairly de minimis. I mean we did have unit sales. We had begun to transition our clinical trial patients over. And as you think about the guidance we gave for full year 2017, it’s small, it’s de minimis. It is the vast majority is the contribution from the U.S. business. And where we have got people focused in this year when it comes to HETLIOZ in Europe is on pricing and reimbursement. And we will be working through that process in Germany. It’s a critical part of building out our business.

[Josh Schimmer:]

Great. Thanks very much.

[Operator:]

And our next question comes from Difei Yang. Please go ahead.

[Difei Yang:]

Yes. Hi good afternoon. Thanks for taking my question, just a couple. The first one relates to how do you think about the European business opportunity for Fanapt, when it gets approval, especially relative to U.S. revenue?

[Mihael Polymeropoulos:]

Yes. Thank you, Difei. Well, first things first. We are working right now through the EMA process and hopefully, we have a positive outcome in the second half of this year. As you know, the atypical antipsychotic market is very tough in Europe commercially, given that generally reimbursement for atypical antipsychotics is at generic drug level. Having said that, still need is there and there is potential. Now there can be added potential. If for example, the Fanaptum which is the name in Europe indication is specific for certain profile of patients that could have the potential of allowing a premium pricing over the otherwise genericized drug market in Europe. The other opportunity, although not immediate is actually better reimbursement rate for long-term injectable formulations in Europe, but that will be something that we will have to wait.

[Difei Yang:]

Okay. And just a quick follow-up on the long-term injectable, do you think a monthly injectable is adequate enough or do you – sometimes, I hear people talk about once quarterly injection or even once every six months injection, what are your thoughts on those things?

[Mihael Polymeropoulos:]

Yes. As you know, in the atypical antipsychotics now, there are a few, not a lot options, some of them are once every two weeks. Most of them are once monthly and there is at least one formulation every three months. And of course the context of developing this formulations is the acknowledgment of poor compliance among patients with schizophrenia. So one may consider that a longer formulation is a better solution, but of course that is not always true. Doctors and patients always worry about a side effect that has not shown up or it’s a side effect in a combination with another drug and many of these patients are taking several medication different times of their treatment course. So I would say that once a month injectable is – continues to be very attractive for the silence in population. And therefore, the Fanapt once a month will certainly be competitive, of course if proven that it is both well tolerated and effective.

[Difei Yang:]

Okay, very helpful. So the second question is relative to HETLIOZ, I remember about a month ago, at JPMorgan you were talking about replacing the lowest performing specialty pharmacy with the better one and do you have any update on where the trend is going?

[Mihael Polymeropoulos:]

Well, you remember very well, we did make this in last quarter trying to of course keep the best performers and the primary driver there of course is that patients who need to continue their drugs we don’t want them ignored or not being treated in a most appropriate manner to ensure compliance. We made the change and hopefully, compliance now and persistence will change for that underperforming specialty pharmacy and go back to the performance that we have recognized of the better performing pharmacies. So we certainly expect that by this quarter, results will improve.

[Difei Yang:]

Okay, thank you.

[Mihael Polymeropoulos:]

Of course.

[Operator:]

And at this time, we have no further questions. And I would like to turn it call back over to Vanda for conclusion.

[Mihael Polymeropoulos:]

Thank you very much. I thank everybody for participating in this call. And we look forward talking to you soon. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This concludes today’s call. Thank you for participating. You many now disconnect.